Paylocity Holding Corporation — Form 10-Q Summary
Business Context and Reporting Period
Paylocity provides cloud-based payroll and human capital management software through a SaaS platform. The filing covers the three months ended September 30, 2021, the first quarter of fiscal 2022, and is compared with the three months ended September 30, 2020. The financial statements are unaudited and prepared under U.S. GAAP.
Financial Performance and Position
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Total revenue | $181.7 million | $135.8 million | +34% |
| Recurring and other revenue | $180.8 million | $134.9 million | +34% |
| Interest income on client funds | $0.9 million | $0.9 million | -5% |
| Gross profit | $118.4 million | $86.4 million | +37% |
| Gross margin | 65% | 64% | +1 percentage point |
| Operating income | $10.3 million | $3.4 million | +197% |
| Net income | $30.9 million | $12.5 million | +148% |
| Diluted earnings per share | $0.55 | $0.22 | +150% |
| Adjusted EBITDA | $46.1 million | $30.9 million | +49% |
Operating expenses increased to $108.2 million from $83.0 million, including sales and marketing expense of $49.9 million, research and development expense of $23.1 million, and general and administrative expense of $35.2 million. Operating margin improved to approximately 6% from 2%, while net margin increased to approximately 17% from 9%.
Net cash used in operating activities was $4.1 million, compared with $1.6 million used in the prior-year quarter. Investing activities used $198.2 million, primarily for $135.8 million of available-for-sale securities purchases, $59.6 million for the Blue Marble acquisition, $9.2 million of capitalized internal-use software, and $3.2 million of property and equipment. Financing activities provided $1.365 billion, largely reflecting a $1.426 billion increase in client fund obligations, partially offset by $60.8 million of taxes paid on net share settlements.
At September 30, 2021, cash and cash equivalents were $66.4 million, corporate investments were $3.2 million, and funds held for clients were $3.186 billion. Total stockholders’ equity was $467.6 million. Client fund obligations equaled funds held for clients and are not available for general corporate purposes.
Paylocity had no borrowings under its $250 million senior secured revolving credit facility, which may be increased to $375 million and expires in July 2024. The company was in compliance with its financial covenants.
Material Changes Versus the Prior Comparable Period
- Revenue growth of 34% was attributed to new and existing clients, strong sales execution, and improved macroeconomic conditions.
- Gross margin improved by one percentage point as revenue growth outpaced the 28% increase in cost of revenues.
- Operating leverage improved despite higher investment in personnel, sales capacity, research and development, and infrastructure.
- Interest income declined 5% because of the low interest-rate environment, partly offset by higher average client fund balances.
- Stock-based compensation expense increased to $19.6 million from $14.3 million, and taxes paid for net share settlements increased to $60.8 million from $33.4 million.
- The company acquired Blue Marble Payroll on August 31, 2021, for cash consideration of $60.3 million. The acquisition expanded international payroll capabilities and added $34.4 million of preliminary goodwill.
- Deferred contract costs increased to $226.0 million from $168.5 million at the end of the prior-year quarter, reflecting continued contract acquisition and fulfillment investment.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management expects continued investment in personnel, product development, data centers, infrastructure, and client service. It expects long-term economies of scale and improved gross and operating margins, but investments may precede related benefits and pressure liquidity or cash flow.
- Management stated that available cash, corporate investments, expected operating cash flow, and borrowing capacity should be sufficient for ongoing requirements for at least the next 12 months and the foreseeable future. The filing does not provide quantitative revenue or earnings guidance.
- COVID-19 effects remain uncertain. Potential impacts include changes in client employee counts, client closures or delays, reduced spending, weaker business confidence, and a slower macroeconomic recovery.
- Low interest rates may continue to reduce interest income on client funds. Higher rates could reduce the fair value of fixed-rate investments, although management reported that a 100-basis-point immediate rate change would have had an immaterial effect on the portfolio’s market value at September 30, 2021.
- A putative Illinois Biometric Information Privacy Act class action remains in its early stages. The company cannot estimate a reasonably possible loss or range of loss and intends to defend the matter.
- The effective tax rate was an unusual negative 205.2%, producing a $20.8 million income tax benefit. The result primarily reflected excess tax benefits from stock-based compensation and research and development credits, partially offset by an increased valuation allowance.
- The Blue Marble transaction involved an entity affiliated with Steven I. Sarowitz, the company’s chairman and largest shareholder, as the target’s largest equity holder. An independent Audit Committee evaluated and negotiated the transaction.
- The company reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and effective disclosure controls as of September 30, 2021.
Important Facts for Investors to Verify
- Whether the 34% revenue growth and improved operating margin are sustained after the comparison benefits from COVID-19-related disruption in the prior period.
- The contribution, integration costs, and future performance of Blue Marble Payroll, including the provisional purchase-price allocation and goodwill.
- The effect of continued low interest rates and changing client fund balances on interest income.
- The sustainability of cash generation, given that operating cash flow was negative while capitalized software investment and stock-based compensation remained significant.
- The size and potential outcome of the Illinois biometric privacy litigation.
- The impact of stock-based compensation, equity award settlements, and related dilution on per-share results.
- The realization of deferred tax assets and the potential volatility of the company’s effective tax rate.