Payroll and human resources software provider, Paylocity (NASDAQ:PCTY) announced better-than-expected results in the Q1 FY2022 quarter, with revenue up 33.8% year on year to $181.6 million. Guidance for next quarter's revenue was $187.5 million at the midpoint, which is 1.45% above the analyst consensus. Paylocity made a GAAP profit of $30.9 million, improving on its profit of $12.4 million, in the same quarter last year.
Paylocity (PCTY) Q1 FY2022 Highlights:
- Revenue: $181.6 million vs analyst estimates of $173.9 million (4.43% beat)
- EPS (non-GAAP): $0.59 vs analyst estimates of $0.38 (53.8% beat)
- Revenue guidance for Q2 2022 is $187.5 million at the midpoint, above analyst estimates of $184.8 million
- The company lifted revenue guidance for the full year, from $792.5 million to $817.5 million at the midpoint, a 3.15% increase
- Free cash flow was negative $16.5 million, down from positive free cash flow of $30.8 million in previous quarter
- Gross Margin (GAAP): 65.1%, up from 63.6% same quarter last year
Founded by payroll software veteran Steve Sarowitz in 1997, Paylocity (NASDAQ:PCTY) is a provider of payroll and human resources software for small and medium-sized enterprises.
Managing payroll may seem like an easy thing to do from the outside, but it is actually one of the most difficult administrative functions of a company. There are tax compliance issues, employees are eligible for different benefits based on contract type, local and national laws, and even a small mistake can ruin the whole process.
Using Paylocity software, organizations can schedule interviews with job candidates, manage employee attendance, learning, payroll, and benefits. Paylocity also integrates with other software platforms to help employees with tasks such as compliance, tax and insurance management.
The company developed its software for small businesses in search of intuitive and affordable HR solutions, as enterprise HR software is often too expensive and too complex to use for smaller businesses and their employees.
With employees distributed across multiple geographies, payroll compliance is getting more complicated, and as the digitization of HR functions trickles down from the enterprise market to small and medium businesses, the demand for modern HR software platforms is expected to grow.
The major competitors in the mid-market for HCM software include ADP (NASDAQ:ADP) and Paychex (NASDAQ:PAYX).
As you can see below, Paylocity's revenue growth has been strong over the last year, growing from quarterly revenue of $135.7 million, to $181.6 million.
This was a standout quarter for Paylocity, with the quarterly revenue up an absolutely stunning 33.8% year on year, which is above average for the company. On top of that, revenue increased $14.2 million quarter on quarter, a strong improvement on the $18.6 million decrease in Q4 2021, and a sign of acceleration of growth, which is very nice to see indeed.
Analysts covering the company are expecting the revenues to grow 22.9% over the next twelve months, although estimates are likely to change post earnings.
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Paylocity's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 65.1% in Q1.
That means that for every $1 in revenue the company had $0.65 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and we would like to see it start improving.
Key Takeaways from Paylocity's Q1 Results
With a market capitalization of $16.4 billion, more than $69.5 million in cash and with positive free cash flow over the last twelve months, the company is in a very strong position to invest in growth.
It was positive to see Paylocity's solid revenue guidance for the full year. And we were also excited to see the really strong revenue growth. Overall, we think this was a really good quarter, that should leave shareholders feeling very positive. The company is up 4.55% on the results and currently trades at $304 per share.
Is Now The Time?
Paylocity may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We think Paylocity is a solid business. Its revenue growth has been mediocre, but at least that growth rate is expected to increase in the short term. But on a positive note, while its gross margins show its business model is much less lucrative than the best software businesses, the good news is its very efficient customer acquisition hints at the potential for strong profitability, and its strong free cash flow generation gives it re-investment options.
The market is certainly expecting long term growth from Paylocity given its price to sales ratio based on the next twelve months is 19.6x. There are definitely things to like about Paylocity and there's no doubt it is a bit of a market darling, at least for some.
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