Paylocity Holding Corporation Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2014, representing the second quarter and first six months of fiscal 2015. The financial statements are unaudited and presented under U.S. GAAP.
Business Context
Paylocity provides cloud-based payroll and human capital management software to medium-sized organizations, generally those with 20 to 1,000 employees. Its revenue is primarily recurring and includes payroll, HCM, implementation and related services.
Financial Performance and Position
| Metric | Three Months Ended Dec. 31, 2014 | Six Months Ended Dec. 31, 2014 |
|---|---|---|
| Total revenue | $34.3 million | $65.4 million |
| Recurring revenue | $32.4 million | $62.0 million |
| Gross profit | $16.3 million | $31.9 million |
| Gross margin | 47% | 49% |
| Operating loss | $(6.5) million | $(11.4) million |
| Net loss | $(6.4) million | $(11.3) million |
| Net loss per share | $(0.13) | $(0.23) |
| Adjusted EBITDA | $(0.2) million | $0.1 million |
| Operating cash flow | $0.8 million for the six months |
- Recurring revenue represented 95% of total revenue in the quarter and increased 44% year over year; six-month recurring revenue increased 42%.
- Recurring gross margin improved to 63% in the quarter and 64% for the six months, primarily due to lower reseller expenses and, for the six-month period, lower amortization expense.
- Implementation services remained loss-making, with an implementation gross margin of negative 226% for the quarter and negative 231% for the six months.
- Cash and cash equivalents were $89.5 million at December 31, 2014, compared with $78.8 million at June 30, 2014.
- Funds held for clients were $858.1 million, matched by client fund obligations of $858.1 million; these funds are restricted for client payroll and related obligations.
- The company had no notes payable outstanding at December 31, 2014. Contractual obligations included $18.0 million of operating lease obligations, $2.4 million of unconditional purchase obligations and $0.4 million of acquisition-related consideration.
- Total assets were $982.4 million and stockholders’ equity was $105.1 million at December 31, 2014.
Cash Flow and Liquidity
- Six-month operating cash flow was $0.8 million, compared with $0.9 million in the prior-year period.
- Excluding client funds, investing cash outflows were $8.3 million, including $4.2 million of property and equipment purchases, $1.6 million of capitalized software costs and $2.6 million paid toward the reseller acquisition.
- The company raised $18.4 million of net proceeds from issuing 750,000 primary shares in a December 2014 follow-on offering. Existing shareholders sold an additional 3.85 million shares and received no proceeds from those sales.
- Management stated that existing cash and operating cash flow should be sufficient to meet working capital, capital expenditure and other investment requirements for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 44%, from $23.9 million to $34.3 million; six-month revenue increased 41%, from $46.3 million to $65.4 million.
- Quarterly recurring fees increased 45%, and six-month recurring fees increased 43%, driven primarily by new clients and increased revenue per client.
- Gross margin improved from 44% to 47% for the quarter and from 46% to 49% for the six months.
- Operating expenses increased substantially as the company expanded its sales force, research and development organization and administrative infrastructure. Six-month sales and marketing, research and development, and general and administrative expenses increased 74%, 116% and 70%, respectively.
- The operating loss widened from $2.4 million to $6.5 million for the quarter and from $2.8 million to $11.4 million for the six months.
- Net loss widened from $1.5 million to $6.4 million for the quarter and from $1.6 million to $11.3 million for the six months. The change also reflected the loss of prior-year tax benefits and a valuation allowance against most deferred tax assets.
- Stock-based compensation increased to $7.1 million for the six months, compared with $0.3 million in the prior-year period, and was a significant add-back in adjusted EBITDA.
- The company completed a reseller-related acquisition in fiscal 2014 and paid an additional $2.6 million of acquisition consideration during the six months ended December 31, 2014.
Guidance, Outlook, Risks and Unusual Items
- No quantitative financial guidance was provided. Management expects continued investment in personnel, product development, data centers and infrastructure, with potential long-term operating leverage and margin improvement as the client base scales.
- Management expects sales and marketing, research and development and general and administrative expenses to continue increasing in absolute dollars.
- Results are seasonal, with the fiscal third quarter typically benefiting from W-2 processing, year-end implementations and higher client funds. Quarterly results may therefore not be indicative of full-year performance.
- Interest income on client funds is exposed to historically low interest rates. Client funds and related obligations fluctuate significantly with payroll cycles.
- Key risks include continued losses, the need to achieve sufficient scale, rapid-growth execution, competition, client cancellations generally permitted on 60 days or less notice, cybersecurity and data privacy incidents, service outages, reliance on banking and data-center providers, regulatory and tax changes, and possible future capital requirements.
- The remaining reseller agreement could require the company to acquire the reseller’s assets upon termination. The purchase price would equal 3.3 times the reseller’s preceding 12-month net revenue.
- The company adopted no early application of ASU 2014-09 and planned adoption beginning July 1, 2017; the potential financial statement effect was still under evaluation.
- Management reported effective disclosure controls and procedures and no material changes to internal control over financial reporting during the quarter. No material litigation was disclosed.
Investor Verification Checklist
- Verify whether rapid recurring-revenue growth is translating into sustainable operating leverage, given the widening GAAP losses and substantial stock-based compensation.
- Reconcile reported cash with restricted client funds and client fund obligations when assessing corporate liquidity.
- Evaluate sales-force productivity, client retention and implementation capacity, since client contracts are generally cancellable on short notice and implementation margins are substantially negative.
- Monitor interest-rate sensitivity and the yield earned on funds held for clients.
- Review the remaining reseller agreement and any potential acquisition obligation.
- Assess the effect of ASU 2014-09 adoption and the company’s deferred tax asset valuation allowance.
- Consider dilution and share-supply risks from equity compensation, follow-on offerings and potential sales by existing stockholders.