Paylocity Holding Corporation (NASDAQ:PCTY) Q1 2024 Earnings Call Transcript

Paylocity Holding Corporation (NASDAQ:PCTY) Q1 2024 Earnings Call Transcript November 2, 2023

Operator: Good day and welcome to the Paylocity Holding Corporation First Quarter 2024 Fiscal Year Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Ryan Glenn, Chief Financial Officer. The floor is yours.

Ryan Glenn: Good afternoon, and welcome to Paylocity’s earnings results call for the first quarter of fiscal ’24 which ended on September 30 2023. I’m Ryan Glenn, Chief Financial Officer and joining me on the call today are Steve Beauchamp and Toby Williams Co-CEOs of Paylocity. Today, we will be discussing the results announced in our press release issued after the market closed. A webcast replay of this call will be available for the next 45 days on our website under the Investor Relations tab. Before beginning, we must caution you that today’s remarks including statements made during the question-and-answer session contain forward-looking statements. These statements are subject to numerous important factors, risks and uncertainties, which could cause actual results to differ from the results implied by these or other forward-looking statements.

Also, these statements are based solely on the present information and are subject to risks and uncertainties that can cause actual results to differ materially from those projected in the forward-looking statements. For additional information please refer to our filings with the Securities and Exchange Commission for the risk factors contained herein and other disclosures. We do not undertake any duty to update any forward-looking statements. Also, during the course of today’s call we will refer to certain non-GAAP financial measures. We believe that non-GAAP measures are more representative of how we internally measure the business and there is a reconciliation schedule detailing these results currently available in our press release which is located on our website at paylocity.com, under the Investor Relations tab and filed with the Securities and Exchange Commission.

Please note that we are unable to reconcile any forward-looking non-GAAP financial measure to the directly comparable GAAP financial measure, because the information which is needed to complete a reconciliation is unavailable at this time without unreasonable effort. In regard to our upcoming conference schedule Toby will attend the Stifel Conference in Chicago on November 9, Steve will attend the Needham Virtual Conference on November 16, I will attend the D.A. Davidson Tech Summit in New York on November 16 and the UBS Conference in Scottsdale on November 28, Toby will attend the Raymond James Conference in New York on December five and I will attend the Barclays Conference in San Francisco on December seven and the Needham Conference in New York on January 18.

Please let me know if you’d like to schedule time with us at any of these events. With that, let me turn the call over to Steve.

Steve Beauchamp: Thank you, Ryan and thanks to all of you for joining us on our first quarter fiscal ’24 earnings call. Our solid results continued into fiscal ’24, with total revenue growth of 25% as a differentiated value proposition of providing the most modern software in the industry continues to resonate in the marketplace. Recurring and other revenue was $291.7 million or 19% growth over Q1 of last year. Our growth continues to be fueled by our ongoing commitment to driving innovation and revolutionizing the way organizations engage with their employees as highlighted by the recent announcement of two new product releases, Rewards & Recognition and Employee Voice. Embedded throughout the Paylocity platform Rewards & Recognition is designed to help clients improve employee retention by automating and customizing both peer and manager feedback across work anniversaries, birthdays and every moment of achievement through personalized recognition and rewards programs.

Similarly, Employee Voice combines AI with our proprietary statistically validated engagement model to improve upon our existing survey functionality and help clients aggregate analyze and act on employee feedback at a much larger scale and ultimately a driver of greater employee engagement and talent retention. Following the release of these solutions, our PEPY opportunity now sits at 550 and we remain confident in our ability to achieve our target of 600, as we continue to develop the most modern product suite in the industry. Our innovation continues to be recognized by third parties, as Paylocity was recently named an overall leader in 10 product categories in the G2 Quarterly Bridge Reports for the 20th consecutive quarter across multiple segments.

One, the Brandon Hall Group HCM Excellence Award and bank’s Top five Vendor across 14 User Experience and Vendor Satisfaction Categories in safe Annual HR System Report. I would now like to pass the call to Toby to provide further color on the quarter.

Toby Williams: Thanks, Steve. In October, we held our annual Elevate Client Conference, where we hosted several thousand business leaders, representing HR, finance, IT and operations across dozens of sessions over the course of two days. At Elevate, attendees had the opportunity to earn shim credits, in addition to partnering with our product and service teams to help influence our future road map through our client as co-creator philosophy. This dynamic was exemplified by the 10 organizations that won our inaugural Elevate award honoring forward-thinking HR teams that are solving business challenges through innovative use of technology. And a big thank you to our employees, clients and partners for helping create the best Elevate conference we’ve had to-date.

While at Elevate, we also have the opportunity to connect with several clients that are leveraging our new solutions, including an engineering firm with over 300 employees that is utilizing market pay to make data-driven decisions around employee compensation and ensure that they remain competitive in the recruitment of new talent, while also maintaining fair compensation for their existing employees. In addition to Rewards & Recognition and Employee Voice, we also announced the launch of our next-generation mobile application, which continues to redefine how our clients’ employees are able to interact with key HR functions regardless of whether they are in the office working from home or on the go. Today’s workforce is more distributed and reliant on mobile devices than ever before and we continue to see increasing mobile versus desktop usage.

This growing demand for modern employee-driven solutions continues to be reflected in solid demand across our target market, and we’re pleased with the momentum in our sales team heading into selling season. We’re similarly happy with the consistency of our referral channel, which once again delivered more than 25% of our new business in Q1. The strong culture of Paylocity continues to be recognized externally, as we recently were named to Fortune’s list of Best Employers for Women. Echoing Steve’s comments, I would like to thank all of our more than 6,000 employees for a strong start to fiscal 2024. I would now like to pass the call to Ryan to review the financial results in detail and provide updated fiscal 2024 guidance.

Ryan Glenn: Thanks Toby. Total revenue for the first quarter was $317.6 million, an increase of 25% with recurring and other revenues up 19% from the same period last year. Our adjusted gross profit was 73.4% for Q1 versus 72.1% in Q1 of last year, representing 130 basis points of leverage, as we continue to focus on scaling our operational costs, while maintaining industry-leading service levels. We continue to make significant investments in research and development and to understand our overall investment in R&D, it is important to combine both what we expense and what we capitalize. On a dollar basis, our year-over-year investment in total R&D increased by 21% when compared to the first quarter of fiscal 2023 and we remain focused on making incremental investments in R&D throughout fiscal 2024 as we continue to build out the Paylocity platform to serve the needs of the modern workforce.

In regard to our go-to-market activities on a non-GAAP basis sales and marketing expenses were 22.2% of revenue in the first quarter and we remain focused on making incremental investments in this area of the business in fiscal 2024 to drive continued growth. On a non-GAAP basis, G&A costs were 10.3% of revenue in the first quarter versus 12% in the same period last year and we remain focused on consistently leveraging our G&A expenses on an annual basis. Our adjusted EBITDA for the first quarter was $104.9 million, or 33% margin and exceeded the top end of our guidance range by $12.4 million and represented nearly 700 basis points of leverage versus Q1 of fiscal 2023. Briefly covering our GAAP results. For Q1, gross profit was $216.1 million, operating income was $41.2 million, and net income was $34.5 million.

In regard to the balance sheet, we ended the quarter with cash and cash equivalents of $305 million and no debt outstanding. In regard to client-held funds and interest income, our average daily balance of client funds was approximately $2.3 billion in Q1. We are estimating the average daily balance will be approximately $2.4 billion to $2.5 billion in Q2, with an average annual yield of approximately 435 basis points. On a full year basis, we are estimating the average daily balance will be approximately $2.5 billion to $2.6 billion with an average yield of approximately 420 basis points. While the demand environment for new business remains solid, year-over-year employees on the platform growth came in below our expectations for Q1 providing a headwind to the quarter and the fiscal year.

Finally, I’d like to provide our financial guidance for Q2 and full fiscal 2024. For the second quarter of fiscal 2024, total revenue is expected to be in the range of $322.5 million to $326.5 million, or approximately 19% growth over second quarter fiscal ’23 total revenue and adjusted EBITDA is expected to be in the range of $100 million to $103 million. And for fiscal year 2024, total revenue is expected to be in the range of $1.405 billion to $1.410 billion, or approximately 20% growth over fiscal 2023 and adjusted EBITDA is expected to be in the range of $474 million to $478 million, which represents approximately 200 basis points of leverage over fiscal 2023. In conclusion, we are pleased with our Q1 results and the momentum we have across our sales and operations teams as we enter our busiest time of the year.

Operator, we are now ready for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question will come from the line of Scott Berg with Needham & Co. Your line is open.

Scott Berg: Hi, everyone. Thanks for taking my questions. I guess first question is the follow up on Ryan’s comments around seats count here for preexisting customers and expectations there. How much below your expectations both in the quarter and your forecasting guidance for the year? Are you expecting seat count to be I guess relative to that initial expectation?

Ryan Glenn: Hey, Scott. It’s Ryan. So I think what we saw in the quarter was a little bit of softness in August and September which as we had talked about we did not assume a decline there in Q1. So a little bit light versus expectations. That obviously weighed a bit on the recurring revenue in Q1. And I think we factored that in as we looked at maintaining guidance for the full fiscal year. So probably didn’t put a full dollar amount on it, but certainly a headwind in the quarter and we did factor that in as I said over the balance of the fiscal year.

Scott Berg: Knowing that you have a pretty large customer base, are you able to target any one thing in particular or vertical or kind of customer segment that might be driving some of the weakness there? Because I think the overall employment numbers are reasonably healthy, but there certainly are pockets of weakness out there?

Ryan Glenn: Yeah. Nothing that I’d highlight from a vertical or geographic perspective. I think the workforce levels are up a touch year-over-year. So similar to what you had seen some of the other players call out as far as year-over-year, but sequentially still down a little bit.

Scott Berg: Got it. Helpful. And then from a follow-up question perspective is, how should we think about your cross-sell cadence for the year? I know you all have had a pretty strong emphasis last couple of years. But cadence in the quarter kind of similar to what you’ve seen in the last couple of years? Or is there any notable change on how your existing customers are buying new modules? Thank you.

Steve Beauchamp: Yeah. I would say no noticeable change at all. We have accelerated investments over the last several years and the inside sales team that is selling client – or products back to existing customers. At the same time, you can see we’ve accelerated our road map and we’ve added a lot of new product SKUs as well. And so those are being received really well within the customer base and we were pleased with the performance of that team in Q1.

Operator: Thank you. One moment for our next question. That will come from the line of Brian Peterson with Raymond James. Your line is open.

Brian Peterson: Thanks for taking the question. So I just maybe wanted to focus on the linearity and thinking about the recurring revenue guidance for the second quarter, because it seems like the full year implies an acceleration into the back half of the year. Is there anything in terms of enterprise mix or implementation or backlog that kind of drives that? I know we’re seeing some moving parts in employment. But just kind of want to understand how you guys are thinking about linearity over the course of the year?

Ryan Glenn: Yes, Brian. I think as we called out on the August earnings call, we did say that the first half of the year probably had incrementally harder comps when you look at the recurring revenue growth that we saw in the first two quarters of last fiscal year and the normalization of workforce levels in the back half of this year and obviously some softness in the first quarter. So I think we took all that into account. Not anything else I’d call out relative to macro or the sales environment, but Steve anything you want to add there?

Steve Beauchamp: No. I think from our perspective execution was pretty much down the middle in terms of what we expected with the exception of seeing a little bit of the softness as Ryan described kind of sequentially month-over-month with a couple of the months in the quarter. But from a demand environment and activity levels, we feel pretty good about where we’re positioned. This is obviously a really important time of the year for us, because you get a lot of starts in January. It’s really the biggest time of the year. This is just the first quarter obviously. And so there’s a lot of execution in front of us but we feel good with the start we got off to.

Brian Peterson: Great. And maybe just as a follow-up. Obviously, this has been a big focus on the space this week. But just understanding kind of the revenue mix in any revenue streams that may not be tied to sort of a PPEY dynamic that are more transactional or onetime in nature. I don’t think you guys have broken that out previously but any your help on kind of sizing that impact? I know, it’s come up a lot this week. Thanks, guys.

Steve Beauchamp: Yeah. I know. I understand the context of the question. So I think if you go back many years ago, the industry was highly payroll-centric and it was very transactionally fee-based and that ends up being billed on a per payroll basis. That was very common. As we move to modernize our suite in many, many years ago we made the transition to really be cloud-first provider and charge on a PEPM basis and so regardless of how many payrolls a customer runs they pay us the same amount on a per employee per month basis. And so we don’t necessarily see any revenue variance from that model. That is something that was pretty common in some of the providers that have been around for a longer period of time. But I think from a customer experience perspective, it’s much better to know exactly what your bill is going to be.

It’s based off a per employee per month. And the other thing, I would note is less than half of our revenue is payroll-based today. And so it’s a bundled billing situation for our customers. So, no impact.

Operator: Thank you. One moment for our next question. And that will come from the line of Brad Reback with Stifel. Your line is open.

Brad Reback: Great. So a couple of things on the employees on the platform comment. Any sense on where that was in October?

Steve Beauchamp: I would just say, we would provide you more color at the end of the quarter what that looks like but we obviously have factored that into the guidance on a go-forward basis. So we were able to look at the first quarter and kind of have an early look at October and factor that into the guidance but we’ll give you better color when we have the quarter behind us.

Brad Reback: Okay. And Steve on that latter point there, can you give us any directional sense on the guide if you just assumed sort of the trends you’re seeing right now if you’ve seen things get worse? Any way to size that up just so as we see the economy we can understand how it impacts you?