Paylocity Holding Corporation — Fiscal 2018 Form 10-K Summary
Reporting period: The supplied filing is the annual report for the fiscal year ended June 30, 2018, filed August 10, 2018. The request metadata references “2017 Q4,” but the filing contains fiscal 2018 annual and quarterly data, including the quarter ended June 30, 2018.
Business context
Paylocity provides cloud-based payroll and human capital management software to U.S. medium-sized organizations, generally those with 20 to 1,000 employees. The company operates as a single reporting segment and served approximately 16,700 clients as of June 30, 2018, excluding clients acquired through BeneFLEX. Annual revenue retention exceeded 92% in fiscal years 2016, 2017 and 2018.
Financial performance and key metrics
| Metric | FY2017 | FY2018 | Change |
|---|---|---|---|
| Total revenue | $300.0 million | $377.5 million | 26% |
| Recurring revenue | $288.4 million | $363.5 million | 26% |
| Implementation and other revenue | $11.6 million | $14.0 million | 21% |
| Gross profit | $176.0 million | $228.3 million | 30% |
| Gross margin | 58.7% | 60.5% | Improved |
| Operating income | $7.3 million | $15.9 million | 119% |
| Net income | $6.7 million | $38.6 million | 474% |
| Diluted EPS | $0.12 | $0.70 | Increase |
| Adjusted EBITDA | $56.2 million | $81.3 million | 45% |
| Net cash from operating activities | $62.0 million | $97.9 million | 58% |
Recurring revenue represented 96% of total revenue in both fiscal years. Recurring gross margin increased from 70% to 71%; total gross margin increased from 59% to 60% on a rounded basis. Adjusted EBITDA margin was approximately 18.7% in fiscal 2018 versus 18.7% in fiscal 2017.
Fiscal 2018 fourth-quarter revenue was $96.6 million, gross profit was $57.9 million, operating loss was $5.2 million and net loss was $1.6 million. Results are seasonal, with the third fiscal quarter generally benefiting from calendar-year client implementations and higher payroll and year-end activity.
Liquidity, cash flow, debt and balance sheet
- Cash and cash equivalents increased to $137.2 million at June 30, 2018 from $103.5 million at June 30, 2017.
- Working capital increased to $107.4 million from $88.0 million.
- Funds held for clients were $1.226 billion, matched by $1.226 billion of client fund obligations; these balances are not corporate liquidity.
- Operating cash flow was $97.9 million. Capitalized internal-use software costs were $15.6 million, property and equipment purchases were $21.7 million, and net cash used for the BeneFLEX acquisition was $8.3 million.
- The filing does not disclose outstanding corporate debt or borrowings as of June 30, 2018. Principal contractual commitments were operating leases of $112.5 million and unconditional purchase obligations of $6.0 million.
- Management stated that cash and expected operating cash flow should fund working capital, capital expenditures and other investment needs for at least the next 12 months.
Material changes versus fiscal 2017
- Client count increased approximately 15%, from 14,550 to 16,700, excluding BeneFLEX-acquired clients.
- Recurring fees increased 24%, principally from new and existing clients. Interest income on client funds increased 150% to $9.1 million because of higher rates, larger average client-fund balances and investment of a portion of client funds in marketable securities.
- Sales and marketing expense increased 23%, research and development increased 29%, and general and administrative expense increased 28%, reflecting continued hiring, product investment, occupancy costs and public-company infrastructure.
- The company acquired substantially all assets of BeneFLEX in March 2018 for $9.3 million, including contingent consideration of up to $1.0 million. The acquisition added benefit-administration capabilities and increased goodwill and intangible assets.
- General and administrative expense included $2.3 million of early lease-exit costs related to the relocation to the new Schaumburg headquarters.
- Net income benefited materially from a $22.6 million deferred-tax valuation allowance release and $10.5 million of excess tax benefits from employee stock exercises. These benefits were partly offset by $8.6 million of tax expense associated with the Tax Cuts and Jobs Act.
Guidance, outlook, risks and unusual items
The filing does not provide specific fiscal 2019 revenue, earnings or margin guidance. Management expects to continue investing in sales, marketing, research and development, personnel, data centers and infrastructure, with the expectation of longer-term operating leverage and margin improvement.
- Most customer agreements remained cancellable on 60 days’ notice or less, although the company began entering into generally two-year term agreements in fiscal 2018.
- Payroll processing involves substantial client funds; the company processed more than $110 billion of payroll transactions in fiscal 2018. Reversed or failed client payments could require the company to advance funds and obtain additional short-term liquidity.
- Key operating risks include competition, execution of rapid growth, customer retention, sales-force productivity, service outages, cybersecurity and data breaches, regulatory and tax changes, privacy and HIPAA compliance, and dependence on banking, data-center and other third-party providers.
- The company began investing client funds in available-for-sale securities. A 25-basis-point rate increase was estimated to reduce their market value by approximately $0.2 million, before tax.
- Revenue recognition changed beginning July 1, 2018 under ASC 606. Implementation fees are expected to be deferred and amortized rather than recognized upon completion, and certain contract-acquisition and fulfillment costs are expected to be deferred and amortized over an estimated seven-year benefit period.
- The company expected the lease standard adoption in fiscal 2020 to have a material effect on the balance sheet. No material litigation or off-balance-sheet arrangements were reported.
Most important facts for investors to verify
- Whether recurring revenue growth and retention remain strong as the client base expands and competition intensifies.
- The sustainability of fiscal 2018 profitability after excluding the substantial tax valuation allowance release and stock-based compensation-related tax benefits.
- The effect of ASC 606 on reported revenue, margins, deferred revenue and contract-cost assets beginning fiscal 2019.
- Progress integrating BeneFLEX and the financial impact of the acquisition and contingent consideration.
- Actual corporate debt, borrowing capacity and liquidity available separately from restricted client funds.
- Growth in stock-based compensation, share dilution and unrecognized equity-award expense.
- Exposure to client-fund investment, interest-rate, ACH settlement, banking-partner and cybersecurity risks.
- Implementation of the $35 million share-repurchase authorization announced August 9, 2018; the plan was subsequent to the balance-sheet date and actual repurchases were not yet clear from the filing.