Paylocity Holding Corporation — Form 10-Q Summary
Business context and reporting period
Paylocity provides cloud-based payroll and human capital management software to medium-sized organizations, generally those with 10 to 1,000 employees. The filing covers the three and nine months ended March 31, 2021, Paylocity’s fiscal third quarter and first nine months of fiscal 2021. The filing was signed May 7, 2021. The supplied request metadata refers to “2020 Q3,” but the filing itself reports fiscal 2021 results compared with the periods ended March 31, 2020.
Financial performance and key metrics
| Metric | Three months ended Mar. 31, 2021 | Year-over-year change | Nine months ended Mar. 31, 2021 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $186.1 million | 8% | $468.2 million | 9% |
| Recurring and other revenue | $184.9 million | 11% | $465.2 million | 12% |
| Interest income on client funds | $1.1 million | (75%) | $3.0 million | (78%) |
| Gross profit | $128.7 million | 4% | $307.9 million | 5% |
| Gross margin | 69% | Down from 72% | 66% | Down from 68% |
| Operating income | $39.1 million | (18%) | $48.9 million | (18%) |
| Net income | $36.8 million | (8%) | $58.9 million | (1%) |
| Diluted EPS | $0.65 | Down from $0.72 | $1.05 | Down from $1.07 |
| Adjusted EBITDA | $66.9 million | (2%) | $132.8 million | 3% |
Recurring and other revenue represented 99% of total revenue in both the quarter and nine-month period, compared with 97% in the comparable prior periods. Management attributed growth primarily to new and existing clients, partially offset by lower client employee counts related to COVID-19.
Operating expenses increased to $89.6 million in the quarter and $259.0 million for the nine months. Quarterly sales and marketing, research and development, and general and administrative expenses increased 6%, 18%, and 39%, respectively. General and administrative expense was affected by higher stock-based compensation and employee-related costs.
Cash flow, liquidity, debt, and balance sheet
- Net cash provided by operating activities was $85.8 million for the nine months ended March 31, 2021, compared with $86.8 million in the prior-year period.
- Net cash provided by investing activities was $37.7 million, versus net cash used of $183.3 million in the prior-year period. The change primarily reflected investment purchases and maturities.
- Capitalized internal-use software costs were $21.7 million, and purchases of property and equipment were $8.2 million, for the nine months.
- Cash and cash equivalents were $175.5 million and corporate investments were $6.8 million at March 31, 2021.
- Funds held for clients were $2.052 billion, matched by client fund obligations of $2.052 billion. These balances primarily reflect payroll and tax funds held temporarily for clients and are not equivalent to unrestricted corporate liquidity.
- The company repaid its $100.0 million revolving credit facility borrowing during the third quarter. No amounts were drawn at March 31, 2021. The facility provides commitments of up to $250.0 million, expandable to $375.0 million, and matures in July 2024.
- Paylocity was in compliance with all credit facility covenants at March 31, 2021.
- Total assets were $2.664 billion and stockholders’ equity was $454.6 million at March 31, 2021.
- Contractual obligations totaled $116.8 million, consisting primarily of operating leases of $92.4 million and unconditional purchase obligations of $24.3 million.
Material changes versus the prior comparable period
- Recurring revenue grew, but sharply lower interest rates reduced interest income on client funds by $3.4 million in the quarter and $10.8 million for the nine months.
- Cost of revenues grew faster than total revenue, increasing 19% in the quarter and 18% for the nine months. Additional personnel and higher internal-use software amortization were principal drivers.
- Gross margin declined three percentage points in the quarter and two percentage points for the nine months.
- Operating margin declined from 28% to 21% in the quarter and from 14% to 11% for the nine months, reflecting increased operating investment and expenses.
- Stock-based compensation increased to $16.0 million in the quarter and $46.9 million for the nine months, compared with $9.5 million and $34.3 million, respectively.
- In November 2020, Paylocity acquired Samepage Labs Inc. for approximately $15.0 million in cash. Samepage provides digital collaboration tools. The preliminary purchase price allocation included $11.5 million of goodwill and $3.2 million of proprietary technology and other assets.
- Goodwill increased from $21.7 million at June 30, 2020 to $33.2 million at March 31, 2021, primarily due to the Samepage acquisition.
- Deferred contract costs increased to $197.7 million from $140.9 million at March 31, 2020, reflecting higher capitalized costs to obtain and fulfill contracts.
Guidance, outlook, management commentary, risks, and unusual items
Management did not provide quantitative financial guidance in the supplied filing text. It expects continued investment in personnel, research and development, sales and marketing, infrastructure, data centers, and capital expenditures. Management expects long-term economies of scale and improved gross and operating margins, but acknowledges that investments may precede related revenue benefits.
- COVID-19 continued to affect client employee counts, sales starts, client activity, and demand. Future effects remain uncertain and may include lower employee counts, client losses, reduced spending, and slower macroeconomic recovery.
- Interest-rate reductions materially reduced interest income earned on client funds and corporate cash. Management identified further rate changes as a continuing risk.
- The fiscal third quarter is seasonally stronger because of W-2 preparation and related filings; therefore, quarterly results are not necessarily indicative of full-year performance.
- The company recorded $1.8 million of stock-based compensation in the quarter and $4.6 million for the nine months related to modified performance-based restricted stock units.
- A potential class action complaint filed in November 2020 alleges violations of the Illinois Biometric Information Privacy Act. The matter is in an early stage, and the company cannot estimate a reasonably possible loss or range of loss.
- Management stated that there were no material changes to the risk factors disclosed in the fiscal 2020 Form 10-K and that no material off-balance-sheet arrangements existed.
- The company adopted credit-loss, fair-value disclosure, and income-tax accounting standards during fiscal 2021; management reported no material impact from adoption.
Most important facts for investors to verify
- Confirm the period designation: the filing is for the quarter ended March 31, 2021, not March 31, 2020.
- Assess whether recurring revenue growth can continue despite COVID-19-related client employee reductions and whether cost growth normalizes.
- Monitor the effect of sustained low interest rates on interest income from client funds and corporate investments.
- Review the reconciliation and limitations of Adjusted EBITDA, including substantial stock-based compensation and other excluded items.
- Evaluate the growth and recoverability of deferred contract costs, which reached $197.7 million.
- Review the Samepage acquisition’s final purchase price allocation and integration results.
- Track the Illinois biometric privacy litigation and any subsequent estimate of potential exposure.
- Distinguish unrestricted cash and corporate investments from the $2.052 billion of client funds held against equal client fund obligations.