Paylocity Holding Corporation — Form 10-Q Summary
Business Context and Reporting Period
Paylocity provides cloud-based payroll and human capital management software to primarily medium-sized organizations. This quarterly report covers the three and six months ended December 31, 2020, representing fiscal 2021 second-quarter and year-to-date results. The financial statements are unaudited and prepared under U.S. GAAP.
Key Financial Metrics
| Metric | Three Months Ended Dec. 31, 2020 | Year-over-Year Change | Six Months Ended Dec. 31, 2020 | Year-over-Year Change |
|---|---|---|---|---|
| Total revenue | $146.3 million | 11% | $282.1 million | 9% |
| Recurring and other revenue | $145.4 million | 14% | $280.3 million | 12% |
| Interest income on client funds | $0.9 million | (79%) | $1.9 million | (80%) |
| Gross profit | $92.8 million | 7% | $179.2 million | 5% |
| Gross margin | 63% | Down from 66% | 64% | Down from 66% |
| Operating income | $6.4 million | 4% | $9.8 million | (19%) |
| Net income | $9.6 million | 76% | $22.1 million | 14% |
| Diluted EPS | $0.17 | Up from $0.10 | $0.39 | Up from $0.35 |
| Adjusted EBITDA | $35.0 million | 16% | $65.8 million | 8% |
| Cash flow from operations | Not separately disclosed for the quarter | $19.7 million | Down from $36.1 million |
As of December 31, 2020, cash and cash equivalents were $218.7 million, corporate investments were $13.6 million, and funds held for clients were $2.204 billion, matched by client fund obligations of the same amount. Total assets were $2.851 billion and stockholders’ equity was $408.2 million.
Paylocity had $100.0 million outstanding under its $250.0 million senior secured revolving credit facility, which can be increased to $375.0 million subject to conditions. The facility matures in July 2024, and the company was in compliance with all covenants at December 31, 2020. Management stated that available liquidity and expected operating cash flow should fund requirements for at least the next 12 months and thereafter for the foreseeable future.
Material Changes Versus the Prior Comparable Period
- Recurring and other revenue grew from new and existing clients, partially offset by lower client employee counts associated with COVID-19.
- Interest income fell sharply because Federal Reserve rate cuts reduced yields; higher average client-fund balances provided only partial offset.
- Cost of revenues increased 18% in the quarter and 17% year to date, driven primarily by personnel growth, higher internal-use software amortization, and increased stock-based compensation. Gross margin declined to 63% for the quarter and 64% year to date.
- Research and development expense increased 25% in the quarter and 27% year to date as the company added development personnel and increased investment in its platform.
- Operating cash flow declined year to date, primarily because of changes in accrued expenses, including sales incentive payouts, and higher prepaid expenses.
- The company acquired Samepage Labs in November 2020 for approximately $15.0 million in cash. Samepage provides digital collaboration tools. Preliminary purchase accounting included $11.5 million of goodwill and $3.2 million of proprietary technology.
- Net income benefited from income tax benefits of $3.7 million in the quarter and $12.9 million year to date. Effective tax rates were negative 61.5% and negative 141.2%, respectively, primarily reflecting excess tax benefits from stock compensation, partially offset by a valuation allowance increase.
Outlook, Commentary, Risks, and Unusual Items
- Management expects COVID-19 to continue adversely affecting revenue growth through lower client employee counts, potential client losses, delayed sales and starts, and reduced business activity.
- Management expects continued investment in personnel, product development, infrastructure, data centers, sales and marketing, and client service. It expects long-term operating leverage and margin improvement as the business scales, but provides no specific numerical guidance in this filing.
- Interest-rate declines remain a material risk to interest income on client funds and corporate cash. A hypothetical 100-basis-point rate change was not expected to materially affect the value of available-for-sale securities or operating results.
- At December 31, 2020, remaining performance obligations under applicable term contracts were approximately $42.9 million, generally to be recognized over the next 24 months.
- A potential Illinois Biometric Information Privacy Act class action was filed in November 2020. The company cannot estimate a reasonably possible loss or range of loss and intends to defend the matter.
- Stock-based compensation expense was $16.7 million in the quarter and $30.9 million year to date. The company also modified performance targets for certain performance-based restricted stock units in connection with its COVID-19-adjusted fiscal 2021 operating plan.
- The company reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and effective disclosure controls as of December 31, 2020.
Investor Verification Priorities
- Verify whether recurring revenue growth and client retention remain resilient as COVID-19 affects client employment levels and business viability.
- Monitor the recovery or further deterioration of interest income as short-term rates and client-fund balances change.
- Assess whether personnel, research and development, software amortization, and stock-based compensation growth is translating into sustainable margin expansion.
- Review operating cash flow conversion, including the effect of accrued expense timing, sales incentive payments, capitalized contract costs, and capital expenditures.
- Evaluate the integration and performance of Samepage and VidGrid, including any future purchase-accounting adjustments or impairment risk.
- Track covenant compliance, variable-rate debt costs, and remaining liquidity under the revolving credit facility.
- Monitor the Illinois biometric privacy litigation and any developments that could create a material financial exposure.