Business Context and Reporting Period
Paylocity Holding Corporation provides cloud-based payroll and human capital management software through a SaaS platform. This Form 10-Q covers the three and six months ended December 31, 2021, Paylocity’s fiscal second quarter and first six months of fiscal 2022. The financial statements are unaudited and prepared under U.S. GAAP.
Key Financial Metrics
| Metric | Q2 FY2022 | Q2 FY2021 | Six Months FY2022 | Six Months FY2021 |
|---|---|---|---|---|
| Total revenue | $196.0 million | $146.3 million | $377.7 million | $282.1 million |
| Recurring and other revenue | $195.0 million | $145.4 million | $375.9 million | $280.3 million |
| Gross profit | $125.2 million | $92.8 million | $243.7 million | $179.2 million |
| Gross margin | 64% | 63% | 65% | 64% |
| Operating income | $8.1 million | $6.4 million | $18.4 million | $9.8 million |
| Net income | $9.9 million | $9.6 million | $40.8 million | $22.1 million |
| Diluted EPS | $0.17 | $0.17 | $0.72 | $0.39 |
| Adjusted EBITDA | $46.6 million | $35.0 million | $92.7 million | $65.8 million |
Six-month net cash provided by operating activities increased to $26.9 million from $19.7 million. Investing activities used $218.3 million, primarily reflecting $190.0 million of available-for-sale securities purchases and $60.2 million for acquisitions, including Blue Marble. Financing activities provided $100.4 million, including a $160.3 million increase in client fund obligations, partly offset by $67.1 million of taxes paid for net share settlements.
At December 31, 2021, cash and cash equivalents were $84.1 million, funds held for clients were $1.92 billion, and total assets were $2.59 billion. Client fund obligations were $1.92 billion. The company had no borrowings under its $250 million revolving credit facility, expandable to $375 million, and was in compliance with its covenants. Contractual obligations totaled $111.7 million, consisting primarily of operating leases and purchase obligations.
Material Changes Versus the Prior Comparable Period
- Total revenue increased 34% in both the quarter and six-month period, driven by new and existing clients, sales execution, and improved macroeconomic conditions.
- Gross margin improved by one percentage point in both comparison periods as revenue growth exceeded growth in cost of revenues.
- Operating income increased 28% in the quarter and 88% for the six months, although operating expenses grew substantially to support sales, product development, and corporate expansion.
- Sales and marketing expense increased 38% in the quarter and 35% for the six months; research and development increased 31% and 27%, respectively; general and administrative expense increased 35% and 34%.
- Stock-based compensation expense increased to $26.2 million in the quarter and $45.8 million for the six months, compared with $16.7 million and $30.9 million, respectively.
- Blue Marble Payroll was acquired on August 31, 2021 for cash consideration of approximately $61.0 million. The acquisition added $34.7 million of goodwill and $21.2 million of proprietary technology; its operating impact was not material to consolidated results.
- Cash declined from $202.3 million at June 30, 2021 to $84.1 million at December 31, 2021, primarily because of securities purchases, acquisitions, capital investment, and equity-award tax settlements.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide specific numerical revenue, earnings, or margin guidance. Management expects to continue investing in personnel, sales and marketing, research and development, the platform, data centers, and infrastructure. Management expects operating expenses to rise in absolute dollars but anticipates longer-term economies of scale, improved operating leverage, and higher gross and operating margins.
- Management believes available cash, operating cash flow, and borrowing capacity will be sufficient for ongoing needs for at least the next 12 months and thereafter for the foreseeable future.
- COVID-19 remains a risk through potential effects on client headcount, business activity, sales cycles, demand, and interest income. Management also identified a continued low-interest-rate environment as a constraint on interest income from client funds.
- Results are seasonal, with the fiscal third quarter generally benefiting from preparation of employee W-2 forms and higher client fund balances. Historical quarterly results may not predict future performance.
- Interest-rate changes may reduce interest income or lower the value of fixed-rate available-for-sale securities. A modeled immediate 100-basis-point rate change would have had an immaterial effect on securities’ market value at December 31, 2021.
- A potential Illinois Biometric Information Privacy Act class action remains pending. The company cannot estimate a reasonably possible loss or range of loss, although management currently does not expect outstanding litigation to materially affect the company.
- The effective tax rates were unusually negative, at (26.9)% for the quarter and (127.8)% for the six months, primarily because of excess tax benefits from employee stock compensation and other tax items.
- On January 18, 2022, Paylocity acquired Cloudsnap for approximately $50.0 million and subsequently borrowed $50.0 million under its revolving facility to fund the acquisition.
Important Facts for Investors to Verify
- Whether 34% revenue growth and the 65% six-month gross margin are sustainable after seasonal effects and the post-pandemic recovery.
- The impact of elevated sales, research and development, and general and administrative spending on future operating leverage.
- The economic dilution and cash-tax impact of stock-based compensation, including $45.8 million of six-month expense and $67.1 million of equity-award tax settlements.
- The effects of interest rates on client-fund interest income and available-for-sale securities.
- The final purchase-price accounting for Blue Marble and the financial contribution and integration risks of Blue Marble and Cloudsnap.
- The liquidity implications of cash declining to $84.1 million, subsequent $50.0 million borrowing, planned investment, and acquisition spending.
- The potential exposure and resolution of the Illinois biometric privacy litigation.
- The filing’s statement that no material changes occurred in previously disclosed risk factors and that disclosure controls were effective as of December 31, 2021.