Paylocity Holding Corporation
/ (PCTY-NASDAQ) / $57.59Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: 3Q18 Earnings Update
Prev. Ed.: Mar 13, 2018; Estimate Revision
Firms’ Recommendations: Positive: 66.7% (10 firms); Neutral: 33.3% (5); Negative:0.0% (0) Prev. Ed: 11;4;0
Firms’ Target Price: $60.36 (↑$4.96 from last edition; 11 firms) Firms’ Avg. Expected Return: 4.8%
Note: Although dated May 17, 2018, tables are as of May 9, 2018.
Note: A Flash Update on 3Q18 Earnings was done on May 3, 2018.
Note: The tables below (Revenues, Margins and Earnings per Share) contain material from fewer brokers than in the Valuation table. The extra figures in the Valuation table are taken from reports that did not have accompanying spreadsheet model.
Portfolio Manager Executive Summary
Paylocity Holding Corporation (PCTY) is a provider of entirely cloud-based comprehensive payroll and integrated human resource and employee benefits outsourcing solutions to medium-sized businesses in the United States.
Key factors for determining an investment in Paylocityare as follows:
- One of the key secular growth drivers for Paylocityis the demand for outsourcing.
- The market still provides ample opportunitiesfor Paylocityto grow its core payroll business substantially, which makes up the majority of the company’s total revenues.
Competition:While the payroll-processing sector faced limited competition in the past, several potential entrants and existing competitors such as Automatic Data Processing, Inc. (ADP), Intuit, H&R Block, Inc., Broadridge Financial Solutions, Inc., DST System, Inc., etc. have become more aggressive in their approach to the business.
Of the 15firms in the Zacks Digest group covering the stock, 66.7% were positive, 33.3% were neutral,whilenone werenegative.The firms’ target prices range from $50-$66, with the average being $60.36. The average expected return on the current share price is 4.8%.
Bullish (Equivalent Ratings: Buy or Outperform or Overweight) — 10 firms or 66.7% —The positive firms are optimistic about the company’s 25% revenue growth for three consecutive quarters. The company’s strong recurring revenue is also a tailwind. The firms believe that the company’s target market is still underpenetrated, which gives it scope for improvement. Penetration into the upper segment of the middle market will also aid the topline. Additionally, the recently completed acquisition of BeneFLEX is also a positive, which has helped the company enrich its portfolio. Additionally, the company’s cash flow potential also keeps the firms optimistic.
Neutral – (Equivalent ratings: Hold) — Five firms or 33.3% —These firms are positive about the company’s financial performance. However, they are slightly apprehensive about the average client size becoming smaller with the shift in customer mix toward the lower end of the market. Nevertheless, they believe that the recently completed acquisition of BeneFLEX will aid in increasing the PEPM value for the company via cross selling of the products. This will in turn aid revenue growth going ahead.
General Outlook on Paylocity:Given its exceptional long-term trackrecord and strong profitability returns, thefirms believe that the company's premium valuation is warranted.However, given the macro headwinds and low interest rate pressures, they expect the stock toremain range-bound in the near term.
May 17, 2018
Overview
Key investment considerations as identified by the firms are as follows:
Key Positive Arguments / Key Negative ArgumentsStable Core:Paylocity is expanding both its HR services offering as well as the addressable market.
Client Base:The company expands its client base through direct sales force. To maintain its client base, the company continues to deliver improved services.
Recurring Revenue Model:The company earns revenues through recurring fees for services performed.
Healthy Balance Sheet: The company has a healthy cash balance with no debt. / Competition: Competition in the outsourcing space is intensifying, which could lead to pricing pressure and affect the company’s margins.
Dependency:The company’s revenue growth is dependent on the number of employees served. Hence, an increase in unemployment rate may adversely impact revenue growth.
Declining Interest Rates: Lower or falling interest rates generally decrease the company’s float income.
Volatility in Economic Environment: The company is affected by weak economic conditions as employment levels tend to decline and interest rates may become more volatile.
Illinois-based Paylocity Holding Corporation,founded in 1997,offers cloud-based payroll and human capital management (HCM) software solutions to medium-sized organizations across the United States. The company defines medium-sized organizations as those with employee strength between 20 and 1,000. Paylocity served approximately 8,500 clients across the country at the end of fiscal 2014. The company through its broad product portfolio helps organizations to make strategic human capital decision, enhance their human resource, payroll, and finance capabilities.
The company’s key products include Paylocity Web Paythat provides enterprise-grade payroll processing and administration; Paylocity HR, a set of HR capabilities that improvises HR compliance, reporting capabilities, and management of employee information; Paylocity Information,an advanced social media feature that integrates peer-to-peer collaboration and recognition in employees; Performance Management, which is used for employee performance appraisal process; Self-Service HR Portalsdesigned to provide employees and managers access to critical payroll and HR information; Paylocity Web Onboarding that enables new employees to acquire necessary knowledge, skills and behaviors and events management; Paylocity Web Time, a time and attendance solution; and Paylocity Web Benefits and Paylocity Enterprise Benefits, powered by swift, which per the company “benefit management solutions that integrate with insurance carrier systems to provide automated administrative processes”.
For more information about the company, please visit its website
Note: Paylocity’s fiscal year ends on Jun 30; fiscal year references differ from the calendar year.
May 17, 2018
Long-Term Growth
One of the key secular growth drivers of Paylocityis the demand for outsourcing. Human Resource Services outsourcing is a large, less-than-half-penetrated market that offers significant potential for cost savings. Moreover, the growing regulatory burden on small companies signifies that the need to outsource non-core activities is growing. The company seeks to capitalize on this opportunity by periodically introducing new products and services, which it can upsell to the existing client base and by moving into the mid-market arena.
The firmsare of the opinion that the company’s sustained focus on revamping its product portfolio along with a strong sales team and differentiated distribution model will continue to drive its top-line performance over the long run.
Jan 20, 2014
The firms are positive about the acquisition of BeneFLEX, which is expected to enrich the company’s solution suite, thereby increasing PEPM value via cross selling of the solutions.
The firms are also positive on Paylocity’scontinued investment in SaaS technology and mobile applications. SaaS solutions are easier and affordable to implement and operate than those offered by traditional software providers. It helps organizations update software faster, without the need for any new hardware investments, thereby allowing them to react better to changes in their business environment. As a result, many organizations are transitioning to SaaS solutions for front office business applications, which the firms believe will benefit Paylocity.
May 17, 2018
Target Price/Valuation
Provided below is a summary of rating and valuation as per Zacks Research Digest:
Rating DistributionPositive / 66.7%↓
Neutral / 33.3%↑
Negative / 0.0%
Avg. Target Price / $60.36↑
Digest High / $66.00
Digest Low / $50.00↑
No. of Firms with Target Price/Total / 11/15
Risks to the target price include aggressive pricing pressure, inflation in healthcare and benefit costs, and dilutive acquisition pressure.
Recent Events
OnMay 3, 2018, Paylocity announced3Q18results. Highlights are as follows:
- Revenues were $113.4million, up 25.6%y/y.
- Non-GAAPearningswere 52cents per share, up 30% from the year-ago period.
Revenues
According to the 3Q18 press release, the company’s revenues came in at $113.4 million, reflecting an increase of 25.6% year over year and beating the Zacks Consensus Estimate of $111 million.
The top line was also driven by a 25.8% rise in recurring revenues (95.7% of total revenues) and a 23.3% increase in implementation and other revenues.
Provided below is a summary of revenues as compiled by Zacks Digest:
Revenues($ in million) / 3Q17A / 2Q18A / 3Q18A / 4Q18E / 2017A / 2018E / 2019E / 2020EZacks Consensus
Total Revenue / $90.3 / $90.3 / $90.3 / $90.3 / $300.0 / $374.1 ↑ / $454.1 ↑ / $556.8↑
Digest High / $90.3 / $86.0 / $113.4 / $93.4 / $300.0 / $374.3 ↑ / $460.5 ↑ / $568.6↑
Digest Low / $90.3 / $86.0 / $113.4 / $93.1 / $300.0 / $374.0↑ / $447.0↑ / $549.8 ↑
Y/Y Growth / 27.9% / 25.3% / 25.6% / 22.6% / 30.0% / 24.7%↑ / 21.4%↓ / 22.6%↑
Sequential Growth / 31.5% / 5.5% / 31.9% / -17.8%
Guidance
For the fourth quarter, Paylocity expects revenues in the range of $92.6-$93.6 million.
The company raised guidance for fiscal 2018. Paylocity now anticipates revenues in the range of $373.5-$374.5 million (previous guidance $369-$371 million).
Firms’ Outlook
The firms are positive as Paylocity continues to invest in SaaS technology. They believe that regular investments in technological upgrade along with product innovation will continue to boost the company’s topline over the longrun.
However, the customer mix shifting toward a lower average client size seems to be a headwind for the topline. Some of the firms are of the opinion that increasing competition from ADP is a major concern for the company and that might be a reason for the shift in the mix with ADP taking up a larger share of the mid-market.
Nevertheless, the firms are banking on the recently completed acquisition of BeneFLEX. They believe cross selling of the solutions will drive PEPM, thus benefiting the topline.
Please refer to the Zacks Research Digest spreadsheet on PCTY for more details on revenue estimates.
Margins
Per the 3Q18 press release, non-GAAP gross profit came in at $79.6 million, up 29.1% year over year. Non-GAAP gross margin expanded 190 basis points (bps) year over year to 68.3%
Adjusted EBITDA increased 33.3% from the year-ago quarter to $35.8 million.
Provided below is a summary of margins as compiled by Zacks Research Digest:
Margins / 3Q17A / 2Q18A / 3Q18A / 4Q18E / 2017A / 2018E / 2019E / 2020EGross / 68.0% / 61.7% / 69.5% / 62.5% / 62.7% / 64.3%↑ / 65.0%↑ / 65.2%↑
Operating / 24.0% / 10.1% / 25.3% / 7.7% / 12.2% / 14.1%↑ / 14.8%↑ / 15.9%↑
Pre-Tax / 24.0% / 10.3% / 25.5% / 7.8% / 12.2% / 14.2%↑ / 14.9%↑ / 16.0%↑
Net / 23.9% / 10.5% / 41.8% / 7.7% / 12.0% / 19.2%↑ / 15.0%↑ / 16.3%↑
Guidance
For 4Q18, Paylocity expects adjusted EBITDA to be in the band of $14-$15 million.
The company raised guidance for fiscal 2018.Adjusted EBITDA is now projected in the range of $79.6–$80.6 million (previous guidance $76-$77 million).
Firms’ Outlook
The firms believe that the company’s continuous investments,intense competition from peers and expansion of sales force will put pressure in the near term, but will benefit Paylocityover the long term.The firms also believe that the company’s upgraded technology and user interfaces will boost client retention rate and client satisfaction thereby resulting in margin expansion.
Please refer to the Zacks Research Digest spreadsheet on PCTY for detailed margin estimates.
Earnings per Share
According to the 3Q18 press release, the company deliverednon-GAAPearnings of 52 cents per share, which surged 30% from the year-ago quarter.
Provided below is a summary of EPS as compiled by Zacks Research Digest:
EPS / 3Q17A / 2Q18A / 3Q18A / 4Q18E / 2017A / 2018E / 2019E / 2020EZacks Consensus
Digest Average / $0.40 / $0.16 / $0.73 / $0.11 / $0.67 / $1.16 ↑ / $1.02 ↓ / $1.35 ↑
Digest High / $0.40 / $0.16 / $0.88 / $0.13 / $0.67 / $1.31 ↑ / $1.21 ↓ / $1.58↑
Digest Low / $0.40 / $0.16 / $0.52 / $0.10 / $0.67 / $0.95 ↑ / $0.91 ↓ / $1.11 ↓
Y/Y Growth / 89.0% / 60.0% / 83.0% / 26.2% / 123.8% / 73.0%↑ / -12.3%↓ / 32.9%↑
Sequential Growth / 298.6% / 7.0% / 355.8% / -84.4%
Guidance
The company did not provide any bottom line guidance this time.
Firms’ Outlook
The majority of the firmsbelieve that Paylocityis likely to generate meaningful earnings growth over several years driven by sustained focus on developing differentiated product, differentiated distribution model, continued investment in technological upgrades and enhancing marketing capabilities.
Please refer to the Zacks Research Digest spreadsheet on PCTY for detailed EPS estimates.
Research Analyst: / Sreeparna RayCopy Editor:
Content Ed:
QCA / Aniruddha Ganguly
Lead Analyst / Anirudh Bhagat
Reason for Update / 3Q18 Earnings Update
Zacks Investment Research Page 1