Payroll and human resources software provider, Paylocity (NASDAQ:PCTY) announced better-than-expected results in Q4 FY2023, with revenue up 34.7% year on year to $308.5 million. The company also expects next quarter's revenue to be around $316.1 million, roughly in line with analysts' estimates. Paylocity made a GAAP profit of $37.3 million, improving from its profit of $15.1 million in the same quarter last year.
Paylocity (PCTY) Q4 FY2023 Highlights:
- Revenue: $308.5 million vs analyst estimates of $301.6 million (2.29% beat)
- EPS (non-GAAP): $1.32 vs analyst estimates of $1.13 (16.7% beat)
- Revenue Guidance for Q1 2024 is $316.1 million at the midpoint, roughly in line with what analysts were expecting
- Management's revenue guidance for the upcoming financial year 2024 is $1.41 billion at the midpoint, in line with analyst expectations and implying 19.8% growth (vs 37.9% in FY2023)
- Free Cash Flow of $40.4 million, down 67.7% from the previous quarter
- Gross Margin (GAAP): 68.6%, up from 66.2% in the 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 very strong over the last two years, growing from $167.5 million in Q4 FY2021 to $308.5 million this quarter.
Unsurprisingly, this was another great quarter for Paylocity with revenue up 34.7% year on year. However, the company's revenue actually decreased by $31.4 million in Q4 compared to the $66.8 million increase in Q3 2023. Regardless, we aren't too concerned because Paylocity's sales seem to follow a seasonal pattern and management is guiding for revenue to rebound in the coming quarter.
Next quarter's guidance suggests that Paylocity is expecting revenue to grow 24.8% year on year to $316.1 million, slowing down from the 39.4% year-on-year increase it recorded in the same quarter last year. For the upcoming financial year, management expects revenue to be $1.41 billion at the midpoint, growing 19.8% year on year compared to the 37.8% increase in FY2023.
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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 68.6% in Q4.
That means that for every $1 in revenue the company had $0.69 left to spend on developing new products, sales and marketing, and general administrative overhead. Paylocity's gross margin is poor for a SaaS business and it's dropped significantly since the previous quarter. This is probably the exact opposite of what shareholders would like to see.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Paylocity's free cash flow came in at $40.4 million in Q4, down 13.9% year on year.
Paylocity has generated $227.8 million in free cash flow over the last 12 months, an impressive 18.2% of revenue. This high FCF margin stems from its asset-lite business model and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a cash cushion.
Key Takeaways from Paylocity's Q4 Results
With a market capitalization of $11.9 billion, a $288.8 million cash balance, and positive free cash flow over the last 12 months, we're confident that Paylocity has the resources needed to pursue a high-growth business strategy.
It was good to see Paylocity beat analysts' revenue expectations this quarter and raise its long-term adjusted EBITDA and free cash flow targets. That really stood out as a positive in these results. On the other hand, next year's revenue guidance, despite being in line with analysts' estimates, suggests a significant slowdown in demand. Overall, this was a mediocre quarter for Paylocity. The company is down 3.15% on the results and currently trades at $206 per share.
Is Now The Time?
When considering an investment in Paylocity, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. We think Paylocity is a solid business. We'd expect growth rates to moderate from here, but its revenue growth has been strong 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 and its bountiful generation of free cash flow empowers it to invest in growth initiatives.
The market is certainly expecting long-term growth from Paylocity given its price to sales ratio based on the next 12 months is 8.6x. There are definitely things to like about Paylocity and looking at the tech landscape right now, it seems that it doesn't trade at an unreasonable price point.
Wall Street analysts covering the company had a one year price target of $251.7 per share right before these results, implying that they saw upside in buying Paylocity even in the short term.To get the best start with StockStory check out our most recent Stock picks, and then sign up to our earnings alerts by adding companies to your watchlist here. We typically have the quarterly earnings results analyzed within seconds of the data being released, and especially for the companies reporting pre-market, this often gives investors the chance to react to the results before the market has fully absorbed the information.