- Paylocity recently reported its FQ3 financial results.
- The firm provides a suite of payroll, tax and employee management software to companies of all sizes.
- PCTY produced strong results in the first three months of 2022 and raised guidance.
- However, the firm faces a neutral or negative employment environment as companies announce hiring freezes or start to lay off workers.
- I'm on Hold for PCTY until we gain additional visibility into the effect of the downturn on its business.
A Quick Take On Paylocity
Paylocity Holding Corporation ( PCTY ) recently reported its FQ3 2022 financial results on May 5, 2022, beating expected revenue and earnings estimates.
The company operates a cloud-based payroll, tax, and related HR services platform for companies of all sizes.
While the firm performed well in the first three months of 2022, I’m concerned about its near-term future prospects given a slowing U.S. economy that may be in recession.
For that reason, I’m on Hold for PCTY in the short-term.
Paylocity Overview
Schaumburg, Illinois-based Paylocity was founded in 1997 to provide organizations with payroll, tax and HR services via a software platform.
The firm is headed by Chief Executive Officer Steve Beauchamp, who was previously Vice President of Product Management at Paychex and VP of Payroll Operations at Advantage Payroll Services.
The company’s primary offerings include:
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Payroll
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Tax
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Workforce Management
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Recruiting
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Human Resources
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Benefits
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Employee Experience
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Data Insights
The firm acquires customers through a direct sales team, broker referrals and through its website.
Paylocity’s Market & Competition
According to a 2022 market research report by IMARC Group, the global market for payroll outsourcing was an estimated $8.6 billion in 2021 and is forecast to reach $11.5 billion by 2027.
This represents a forecast CAGR of 5.11% from 2022 to 2027.
The main drivers for this expected growth are continued digitization of services into cloud-based environments and a growing remote workforce.
Also, continued integration of payroll with other HR-facing service bundles is a trend that clients are seeking in order to reduce vendor bloat.
Major competitive or other industry participants include:
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ADP
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Paychex
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Workday
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Zalaris
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Paycor
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Paycom
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Zoho
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Infor
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Others
Paylocity’s Recent Financial Performance
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Total revenue by quarter has grown unevenly over the past 5 quarters, likely due to seasonality:
5 Quarter Total Revenue (Seeking Alpha)
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Gross profit by quarter has followed roughly the same trajectory as total revenue:
5 Quarter Gross Profit (Seeking Alpha)
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Selling, G&A expenses as a percentage of total revenue by quarter have varied with a relatively narrow range:
5 Quarter Selling, G&A % Of Revenue (Seeking Alpha)
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Operating income by quarter has fluctuated considerably in recent quarters:
5 Quarter Operating Income (Seeking Alpha)
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Earnings per share (diluted) have remained positive but highly variable in the past 5 quarters:
5 Quarter Earnings Per Share (Seeking Alpha)
(All data in above charts is GAAP)
In the past 12 months, PCTY’s stock price has dropped 0.4% vs. the U.S. S&P 500 index’ fall of around 6.8%, as the chart below indicates:
52 Week Stock Price (Seeking Alpha)
Valuation And Other Metrics For Paylocity
Below is a table of relevant capitalization and valuation figures for the company:
Measure | Amount |
Enterprise Value | $11,160,000,000 |
Market Capitalization | $11,180,000,000 |
Enterprise Value / Sales [TTM] | 14.11 |
Price / Sales [TTM] | 14.07 |
Revenue Growth Rate [TTM] | 32.13% |
Operating Cash Flow [TTM] | $144,480,000 |
CapEx Ratio (Op C.F./CapEx) | 8.65 |
Earnings Per Share (Fully Diluted) | $1.55 |
(Source - Seeking Alpha)
The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.
PCTY’s most recent GAAP Rule of 40 calculation was 44% as of FQ3 2022, so the firm has performed well in this regard, per the table below:
Rule of 40 - GAAP | Calculation |
Recent Rev. Growth % | 32% |
GAAP EBITDA % | 12% |
Total | 44% |
(Source - Seeking Alpha)
Commentary On Paylocity
In its last earnings call (Source - Seeking Alpha ), covering FQ3 2022’s results, management highlighted increasing usage from its customer base who are communicating with their employees in a digital fashion to a greater degree.
The firm recently launched its premium Community Plus product which introduced new upgradeable capabilities to its existing Community product.
As to its financial results, total revenue grew by 32.2% year-over-year, exceeding top of the guidance range slightly. Management said it was "pleased with our success in go-to-market hiring and attracting talented sales reps and we are very confident in our ability to hit our staffing targets to start next fiscal year as we head into the heart of sales staffing season."
Also, channel referrals, from benefit brokers and financial advisors, accounted for over 25% of new revenue.
FQ3 adjusted EBITDA exceeded the top end of its previous guidance at $85.7 million.
Notably, sales and marketing effort will be the focus of ‘incremental investments’ going forward.
For the balance sheet, the firm finished the quarter with cash, equivalents and invested corporate cash of $96.5 million while it generated impressive free cash flow of $73.7 million during the quarter.
Looking ahead, management guided for FQ4 revenue growth of 30% year-over-year and adjusted EBITDA margin of approximately 27.3%, or an increase of 60 basis points. Fiscal year 2022 revenue growth guidance was raised to 33%.
Regarding valuation, the market is valuing PCTY at an EV/Sales multiple of around 14.1x.
The SaaS Capital Index of publicly held SaaS (software as a service) companies showed an average forward EV/Revenue multiple of around 7.5x at June 30, 2022, as the chart shows here:
SaaS Capital Index (Seeking Alpha)
So, by comparison, PCTY is currently valued by the market at a considerable premium to the SaaS Capital Index, at least as of June 30, 2022.
The primary risk to the company’s outlook is a macroeconomic slowdown or recession, which may slow sales cycles and reduce its revenue growth trajectory.
A potential upside catalyst would be a reduction in interest rate increases by the U.S. Federal Reserve, which would lead to a potentially higher valuation multiple being assigned by investors to the stock.
However, companies in a variety of industries have recently begun to announce employee layoffs or hiring freezes, which would have a direct and negative impact on PCTY’s growth outlook.
While the firm performed well in the first three months of 2022, I’m more cautious about its near-term future prospects given a slowing U.S. economy that may be already in recession.
For that reason, I’m on Hold for PCTY in the short-term.
For further details see:
Paylocity Ups Guidance As Employers Freeze New Hiring Or Shed Workers