Paylocity (PCTY)

HR and payroll software provider Paylocity (NASDAQ:PCTY) reported Q3 CY2025 results exceeding the market’s revenue expectations, with sales up 12.5% year on year to $408.2 million. The company expects next quarter’s revenue to be around $408 million, close to analysts’ estimates. Its non-GAAP profit of $1.75 per share was 11.3% above analysts’ consensus estimates.

Company Overview

Operating in a field where companies traditionally juggled multiple disconnected systems, Paylocity (NASDAQ:PCTY) provides cloud-based human capital management and payroll software solutions that help businesses manage their workforce and HR processes.

Modern HR software has two powerful benefits: cost savings and ease of use. For cost savings, businesses large and small much prefer the flexibility of cloud-based, web-browser-delivered software paid for on a subscription basis rather than the hassle and complexity of purchasing and managing on-premise enterprise software. On the usability side, the consumerization of business software creates seamless experiences whereby multiple standalone processes like payroll processing and compliance are aggregated into a single, easy-to-use platform.

Paylocity competes in the human capital management and payroll software market against larger players like ADP (NASDAQ:ADP), Paychex (NASDAQ:PAYX), Workday (NASDAQ:WDAY), and UKG (Ultimate Kronos Group), as well as growth-focused competitors such as Paycom (NYSE:PAYC) and Paycor (NASDAQ:PYCR).

Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Paylocity grew its sales at a solid 23.5% compounded annual growth rate. Its growth beat the average software company and shows its offerings resonate with customers.

Long-term growth is the most important, but within software, a half-decade historical view may miss new innovations or demand cycles. Paylocity’s annualized revenue growth of 15.1% over the last two years is below its five-year trend, but we still think the results were respectable.

This quarter, Paylocity reported year-on-year revenue growth of 12.5%, and its $408.2 million of revenue exceeded Wall Street’s estimates by 1.9%. Company management is currently guiding for a 8.2% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 6.6% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and implies its products and services will see some demand headwinds.

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

Paylocity’s ARR came in at $378.9 million in Q3, and over the last four quarters, its growth slightly lagged the sector as it averaged 14.7% year-on-year increases. This performance mirrored its total sales and suggests that increasing competition is causing challenges in securing longer-term commitments.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

Paylocity is extremely efficient at acquiring new customers, and its CAC payback period checked in at 21.3 months this quarter. The company’s rapid recovery of its customer acquisition costs means it can attempt to spur growth by increasing its sales and marketing investments.

For software companies like Paylocity, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Paylocity’s gross margin is worse than the software industry average, giving it less room than its competitors to hire new talent that can expand its products and services. As you can see below, it averaged a 69% gross margin over the last year. Said differently, Paylocity had to pay a chunky $31.04 to its service providers for every $100 in revenue.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Paylocity has seen gross margins decline by 0.1 percentage points over the last 2 year, which is slightly worse than average for software.

In Q3, Paylocity produced a 68.5% gross profit margin, in line with the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Paylocity has been a well-oiled machine over the last year. It demonstrated elite profitability for a software business, boasting an average operating margin of 19.1%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Looking at the trend in its profitability, Paylocity’s operating margin might fluctuated slightly but has generally stayed the same over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q3, Paylocity generated an operating margin profit margin of 18.2%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Paylocity has shown impressive cash profitability, driven by its cost-effective customer acquisition strategy that gives it the option to invest in new products and services rather than sales and marketing. The company’s free cash flow margin averaged 20.5% over the last year, better than the broader software sector.

Paylocity’s free cash flow clocked in at $67.2 million in Q3, equivalent to a 16.5% margin. The company’s cash profitability regressed as it was 3.9 percentage points lower than in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

Over the next year, analysts predict Paylocity’s cash conversion will improve. Their consensus estimates imply its free cash flow margin of 20.5% for the last 12 months will increase to 24.5%, it options for capital deployment (investments, share buybacks, etc.).

Businesses that maintain a cash surplus face reduced bankruptcy risk.

Paylocity is a profitable, well-capitalized company with $165.2 million of cash and no debt. This position is 2.1% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly Paylocity blew past analysts’ EBITDA expectations this quarter. We were also glad its full-year EBITDA guidance slightly exceeded Wall Street’s estimates. On the other hand, its EBITDA guidance for next quarter slightly missed. Overall, this print had some key positives. The stock remained flat at $139.33 immediately after reporting.

Updated: December 4, 2025 at 9:13 PM EST

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Paylocity, you should also grasp the company’s longer-term business quality and valuation.

Paylocity isn’t a terrible business, but it isn’t one of our picks. Although its revenue growth was solid over the last five years, it’s expected to deteriorate over the next 12 months and its operating margin hasn't moved over the last year. And while the company’s impressive operating margins show it has a highly efficient business model, the downside is its gross margin is below our standards.

Paylocity’s price-to-sales ratio based on the next 12 months is 4.6x. While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $194.16 on the company (compared to the current share price of $145.84).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.