Payroll and human resources software provider, Paylocity (NASDAQ:PCTY) beat analyst expectations in Q4 FY2021 quarter, with revenue up 28.2% year on year to $167.4 million. Paylocity made a GAAP profit of $11.8 million, improving on its profit of $4.95 million, in the same quarter last year.
Paylocity (PCTY) Q4 FY2021 Highlights:
- Revenue: $167.4 million vs analyst estimates of $162 million (3.33% beat)
- EPS (non-GAAP): $0.46 vs analyst estimates of $0.30 ($0.16 beat)
- Revenue guidance for Q1 2022 is $173.5 million at the midpoint, above analyst estimates of $168.4 million
- Management's revenue guidance for upcoming financial year 2022 is $792.5 million at the midpoint, predicting 24.6% growth (vs 16.9% in FY2021)
- Free cash flow of $30.8 million, down 46% from previous quarter
- Gross Margin (GAAP): 64.7%, down from 69.1% previous quarter
Founded by 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 solid over the last year, growing from quarterly revenue of $130.5 million, to $167.4 million.
This quarter, Paylocity's quarterly revenue was up a very solid 28.2% year on year, which is above average for the company. But the revenue actually decreased by $18.6 million in Q4, compared to $39.7 million increase in Q3 2021. However, Paylocity's sales do seem to have a seasonal pattern to them, and since management is guiding for revenue to rebound in the coming quarter we wouldn't be too concerned.
Analysts covering the company are expecting the revenues to grow 22.1% over the next twelve months, although we would expect them to review their estimates once they get to read these results.
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, licences, technical support and other necessary running expenses was at 64.7% in Q4.
That means that for every $1 in revenue the company had $0.64 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 it has dropped significantly from the previous quarter, which is probably the opposite of what shareholders would like it to do.
Key Takeaways from Paylocity's Q4 Results
Sporting a market capitalisation of $11.6 billion, more than $206.7 million in cash and with positive free cash flow over the last twelve months, we're confident that Paylocity has the resources it needs to pursue a high growth business strategy.
We were impressed that Paylocity guided for revenue growth to accelerate next year. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. On the other hand, it was less good to see the deterioration in gross margin. Overall, we think this was a strong quarter, that should leave shareholders feeling very positive. The company is up 2.62% on the results and currently trades at $225.16 per share.
Is Now The Time?
When considering Paylocity, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. 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 15.9. There are definitely things to like about Paylocity and looking at the tech landscape right now, it seems that the company trades at a pretty interesting price point.