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Paylocity (NASDAQ:PCTY) Delivers Impressive Q1, Provides Optimistic Full Year Guidance


Full Report / November 03, 2022
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Payroll and human resources software provider, Paylocity (NASDAQ:PCTY) reported results ahead of analyst expectations in the Q1 FY2023 quarter, with revenue up 39.3% year on year to $253.2 million. Guidance for next quarter's revenue was $259 million at the midpoint, which is 1.93% above the analyst consensus. Paylocity made a GAAP profit of $30.3 million, down on its profit of $30.9 million, in the same quarter last year.

Paylocity (PCTY) Q1 FY2023 Highlights:

  • Revenue: $253.2 million vs analyst estimates of $239.7 million (5.65% beat)
  • EPS (non-GAAP): $0.98 vs analyst estimates of $0.64 (52.3% beat)
  • Revenue guidance for Q2 2023 is $259 million at the midpoint, above analyst estimates of $254 million
  • The company lifted revenue guidance for the full year, from $1.08 billion to $1.12 billion at the midpoint, a 3.21% increase
  • Free cash flow of $2.98 million, down 93.6% from previous quarter
  • Gross Margin (GAAP): 66.6%, up from 65.1% 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.

HR software benefits from dual trends around costs savings and ease of use. First is the SaaS-ification of businesses, large and small, who much prefer the flexibility of cloud-based, web-browser delivered software paid for on a subscription basis than the hassle and expense of purchasing and managing on-premise enterprise software. Second is the consumerization of business software, whereby multiple standalone processes like payroll processing and compliance are aggregated into a single, easy to use platforms.

The major competitors in the mid-market for HCM software include ADP (NASDAQ:ADP) and Paychex (NASDAQ:PAYX).

Sales Growth

As you can see below, Paylocity's revenue growth has been strong over the last two years, growing from quarterly revenue of $135.7 million in Q1 FY2021, to $253.2 million.

Paylocity Total Revenue

This was a standout quarter for Paylocity, with the quarterly revenue up 39.3% year on year, which is above the trend for the company. On top of that, revenue increased $24.3 million quarter on quarter, a strong improvement on the $17 million decrease in Q4 2022, and a sign of acceleration of growth, which is very nice to see indeed.

Guidance for the next quarter indicates Paylocity is expecting revenue to grow 32.1% year on year to $259 million, in line with the 33.9% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 23.5% over the next twelve months.

Profitability

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 66.6% in Q1.

Paylocity Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.66 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.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Paylocity's free cash flow came in at $2.98 million in Q1, turning positive year on year.

Paylocity Free Cash Flow

Paylocity has generated $147.3 million in free cash flow over the last twelve months, a solid 15.9% of revenues. This strong FCF margin is a result of Paylocity asset lite business model and provides it plenty of cash to invest in the business.

Key Takeaways from Paylocity's Q1 Results

Sporting a market capitalization of $11.6 billion, more than $65.4 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 enjoyed seeing Paylocity’s impressive revenue growth this quarter. And we were also excited to see that guidance outperformed Wall St’s expectations. Overall, we think this was a really good quarter, that should leave shareholders feeling very positive. The company is flat on the results and currently trades at $210.95 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. Although we have other favorites, we understand the arguments that Paylocity is not a bad business. We would expect growth rates to moderate from here, but its revenue growth has been solid, over the last two years. And 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.

Paylocity's price to sales ratio based on the next twelve months of 10.5x indicates that the market is definitely optimistic about its growth prospects. There are things to like about Paylocity and there's no doubt it is a bit of a market darling, at least for some. But we are wondering whether there might be better opportunities elsewhere right now.

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