Paylocity (PCTY)

Payroll and human resources software provider, Paylocity (NASDAQ:PCTY) reported revenue ahead of Wall Street’s expectations in Q1 CY2025, with sales up 13.3% year on year to $454.5 million. Guidance for next quarter’s revenue was better than expected at $388 million at the midpoint, 1.5% above analysts’ estimates. Its non-GAAP profit of $2.43 per share was 14.8% above analysts’ consensus estimates.

Company Overview

Founded by payroll software veteran Steve Sarowitz in 1997, Paylocity (NASDAQ:PCTY) is a provider of payroll and HR software for small and medium-sized enterprises.

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.

A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Luckily, Paylocity’s sales grew at a solid 25.2% compounded annual growth rate over the last three years. Its growth beat the average software company and shows its offerings resonate with customers.

This quarter, Paylocity reported year-on-year revenue growth of 13.3%, and its $454.5 million of revenue exceeded Wall Street’s estimates by 2.9%. Company management is currently guiding for a 8.6% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 7.9% over the next 12 months, a deceleration versus the last three years. This projection is underwhelming and implies its products and services will face some demand challenges.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

Paylocity is very efficient at acquiring new customers, and its CAC payback period checked in at 23.1 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a highly differentiated product offering and a strong brand reputation. These dynamics give Paylocity more resources to pursue new product initiatives while maintaining the flexibility to increase 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 slightly below the average software company, giving it less room than its competitors to invest in areas such as product and sales. As you can see below, it averaged a 68.8% gross margin over the last year. Said differently, Paylocity had to pay a chunky $31.24 to its service providers for every $100 in revenue.

In Q1, Paylocity produced a 71.4% 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 19.4%. 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.

Analyzing the trend in its profitability, Paylocity’s operating margin rose by 1.2 percentage points over the last year, as its sales growth gave it operating leverage.

In Q1, Paylocity generated an operating profit margin of 27.9%, up 1.5 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

If you’ve followed StockStory for a while, you know 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 has shown terrific cash profitability, driven by its cost-effective customer acquisition strategy that enables it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the software sector, averaging 26.9% over the last year.

Paylocity’s free cash flow clocked in at $248.5 million in Q1, equivalent to a 54.7% margin. This result was good as its margin was 18.1 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends trump fluctuations.

Over the next year, analysts predict Paylocity’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 26.9% for the last 12 months will decrease to 23.6%.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

Paylocity is a profitable, well-capitalized company with $477.8 million of cash and no debt. This position is 4.5% 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 trumped Wall Street’s estimates. Zooming out, we think this was a solid print. The stock traded up 1.5% to $197.17 immediately after reporting.

Updated: June 14, 2025 at 10:13 PM EDT

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

Paylocity doesn’t top our investment wishlist, but we understand that it’s not a bad business. First off, its revenue growth was solid over the last three years. And while Paylocity’s gross margin is below our standards, its impressive operating margins show it has a highly efficient business model.

Paylocity’s price-to-sales ratio based on the next 12 months is 6x. Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $221.15 on the company (compared to the current share price of $176.09).