Paylocity Holding Corporation — Fiscal Q1 2023 Form 10-Q
Reporting period: Three months ended September 30, 2022, compared with the three months ended September 30, 2021. Paylocity provides cloud-based human capital management and payroll software on a SaaS basis. The interim financial statements are unaudited and should be read with the fiscal 2022 Form 10-K.
Financial performance and position
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Total revenue | $253.3 million | $181.7 million | +39% |
| Recurring and other revenue | $245.4 million | $180.8 million | +36% |
| Interest income on client funds | $7.9 million | $0.9 million | +802% |
| Gross profit | $168.7 million | $118.4 million | +42% |
| Gross margin | 66.6% | 65.2% | +1.4 percentage points |
| Operating income | $7.1 million | $10.3 million | -31% |
| Operating margin | 2.8% | 5.6% | 下降 |
| Net income | $30.4 million | $30.9 million | -2% |
| Diluted EPS | $0.54 | $0.55 | -2% |
| Adjusted EBITDA | $66.6 million | $46.1 million | +44% |
| Adjusted EBITDA margin | 26.3% | 25.4% | +0.9 percentage points |
| Net cash from operating activities | $16.4 million | $(4.1) million | Improved |
Balance sheet and liquidity: Cash and cash equivalents were $65.5 million at September 30, 2022, compared with $139.8 million at June 30, 2022. Funds held for clients were $2.299 billion, matched by client fund obligations of the same amount; these balances fluctuate substantially with payroll and tax-processing timing and are not ordinary corporate liquidity. Total assets were $3.095 billion and stockholders’ equity was $610.8 million.
The company had no borrowings under its revolving credit facility. In August 2022, the facility was amended to increase capacity to $550.0 million, with potential expansion to $825.0 million, and maturity was extended to August 2027. Paylocity was in compliance with its covenants at September 30, 2022.
Material changes versus the prior comparable period
- Recurring revenue increased primarily from new and existing clients, higher client workforce levels and strong sales execution.
- Interest income rose sharply because of higher interest rates and higher average client-fund balances.
- Gross margin improved as revenue growth exceeded the increase in cost of revenues.
- Operating income and GAAP operating margin declined because sales and marketing, research and development, and general and administrative expenses grew faster than revenue.
- Operating expenses increased to $161.6 million from $108.2 million. Research and development grew 74%, sales and marketing 42%, and general and administrative 43%.
- Stock-based compensation expense increased to $39.8 million from $19.6 million and was a significant contributor to the difference between GAAP and adjusted results.
- Operating cash flow improved to $16.4 million, while investing cash use declined to $89.5 million from $198.2 million, largely because the prior-year period included $59.6 million of business acquisitions.
- Cash used in financing activities was $1.763 billion, primarily reflecting a $1.688 billion decrease in client fund obligations and $74.1 million of tax payments related to net share settlement of equity awards.
Outlook, commentary, risks and unusual items
- Management expects to continue investing in personnel, sales and marketing, research and development, platform capabilities, data centers and infrastructure. Expenses are expected to increase in absolute dollars, with long-term margin improvement dependent on scale and operating leverage.
- The filing does not provide specific quantitative revenue, earnings or margin guidance.
- Management believes cash, operating cash flow and available credit capacity will fund working capital, capital expenditures, acquisitions and other requirements for at least the next 12 months and thereafter for the foreseeable future.
- Interest income is sensitive to interest rates and client-fund balances. A 100-basis-point rate increase or decrease was estimated to change the fair value of available-for-sale securities by approximately $3.4 million in the opposite direction. No credit impairment losses had been recorded.
- Available-for-sale securities had $6.3 million of gross unrealized losses at September 30, 2022, recorded in accumulated other comprehensive loss; the filing states there were no realized gains or losses.
- The effective tax rate was an unusual negative 338.2%, producing a $23.4 million tax benefit on $6.9 million of pretax income. The benefit primarily reflected excess tax benefits from stock compensation, state and local taxes, and a decrease in the valuation allowance.
- Paylocity acquired Cloudsnap in January 2022 for $50.0 million in cash. The acquisition was not material to consolidated results and was intended to enhance application integration and data sharing.
- A potential Illinois Biometric Information Privacy Act class action remains outstanding. The company cannot estimate a reasonably possible loss or range of loss and intends to defend the matter.
- Management reported no material changes to previously disclosed risk factors. Key disclosed risks include client employee-count fluctuations, client losses, economic and inflationary conditions, interest-rate movements, investment losses, execution of growth investments, litigation and seasonality.
- The company implemented a new client billing module during the quarter and modified certain revenue-process controls; management concluded disclosure controls were effective as of September 30, 2022.
Important facts for investors to verify
- Reconcile reported revenue growth and adjusted EBITDA growth with the substantially higher stock-based compensation and other non-GAAP adjustments.
- Assess the sustainability of the $7.9 million of quarterly interest income, given its sensitivity to rates and client-fund balances.
- Separate client funds and client-fund obligations from corporate cash when evaluating liquidity and cash generation.
- Monitor operating-margin trends as sales, research and development, and administrative investments continue.
- Review the revolving-credit facility’s SOFR-based terms, covenant requirements and potential borrowing capacity.
- Evaluate the potential exposure from the Illinois biometric privacy litigation, for which no loss estimate is currently available.
- Consider seasonal effects, particularly the historically stronger fiscal third quarter associated with W-2 preparation and related activity.