Paylocity Holding Corporation (NASDAQ:PCTY) Q4 2023 Earnings Call Transcript

Paylocity Holding Corporation (NASDAQ:PCTY) Q4 2023 Earnings Call Transcript August 3, 2023

Paylocity Holding Corporation beats earnings expectations. Reported EPS is $1.32, expectations were $1.08.

Operator: Hello, and thank you for standing by. Welcome to Paylocity Holding Corporation Fourth Quarter 2023 Fiscal Year Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to your speaker, Mr. Ryan Glenn. Sir, you may begin.

Ryan Glenn: Good afternoon, and welcome to Paylocity’s Earnings Results Call for the Fourth Quarter and Fiscal Year ’23, which ended on June 30, 2023. And 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.

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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 therein 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 their 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 be attending the Stifel Tech Executive Summit in Deer Valley on August 29 and the Citi Global Tech Conference in New York on September 7, and I will be attending the HR Tech Conference in Las Vegas in mid-October. 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.

Steven Beauchamp: Thank you, Ryan, and thanks to all of you for joining us on our fourth quarter and fiscal ’23 earnings call. Our differentiated value proposition of providing the most modern software in the industry continues to resonate in the marketplace and help drive total revenue growth of 34.7% in Q4. For fiscal ’23, we reached a key financial milestone for the company with total revenue crossing the $1 billion threshold and finishing at just under $1.2 billion or 37.8% growth over fiscal ’22. Our solid results were once again driven by both adding new clients and employees and increasing average revenue per client. We ended fiscal ’23 with 36,200 clients compared to 33,300 at the end of last fiscal year, an increase of 9%.

While total employees on the platform grew by mid-teens, consistent with the historical growth trends and in part driven by the success, we’re seeing up market as larger clients realize the benefits of our sustained investment in product development and the most modern platform in the industry. Revenue retention also remained strong at greater than 92%. Average recurring revenue per client was over $30,000 in fiscal ’23 compared to just over $25,000 in fiscal ’22. An increase of 19% as a result of increased employees on the platform, rising product attach rates across our client base and success with larger clients. We continue to attach more product at the time of sale and have realized increased success selling back into existing clients as our products focused on the most modern workforce resonate across our entire client base.

Our sustained investment in product development allows us to continue to expand our product suite, evidenced by the recent announcement of several new premium offerings and feature enhancements, including Advanced Scheduling, Learning Management and Market Pay. Advanced Scheduling is built upon our existing scheduling capabilities by adding advanced features, such as the ability to match scheduling needs with employees based on job function or role, skill set and certifications as well as swap claim, manage shifts directly via our mobile device. Similarly, new enhancements to our Learning Management module allows users to easily create and share new training via community, including a new safety training bundle of 20 courses to help clients ensure on-the-job safety and compliance.

Lastly, the most recent addition to our suite of modern workforce solutions, Market Pay allows our clients to easily explore, track, manage and compare market pay data across different job families and positions to help make better compensation decisions, evaluate specific roles accurately and comply with pay and equity job posting requirements in multiple states. Collectively, these 3 new product offerings, along with continued investment across our product suite has increased our PEPY to $500, achieving the target we set 4 years ago. As a result, we are now raising our PEPY target to $600 and are confident in our ability to achieve this goal in the coming years as we continue to develop and deliver market-leading new products. Our commitment to product development continues to be recognized in the market with Paylocity recently being named an overall leader in 10 HCM product categories in G2’s Summer 2023 Grid Reports.

Additionally, Paylocity was recognized as TrustRadius top-rated HR management software platform for 2023; won the 2023 Best Human Capital Technology Solution in the SIAA Business Technology CODiE Awards; and achieved the leader ranking in NelsonHall’s 2023, Next-Gen HCM Technology NEAT Report for both the SMB and mid and large market segments. Our strong culture, industry-leading software and exceptional sales and operational execution would not be possible without the dedication and commitment of our employees. As we close out a very strong fiscal ’23, I’d like to thank all of our employees for a fantastic year. I would now like to pass the call to Toby to provide further color on the quarter and fiscal ’23.

Toby Williams: Thanks, Steve. As Steve highlighted, we continue to build upon our differentiated value proposition of providing the most modern software in the industry with the introduction of new premium products and feature enhancements. While still early, the value proposition of these new capabilities is clearly resonating in the market as evidenced by one of our professional services clients, with over 300 employees, already leveraging market pay to analyze compensation for comparable positions to ensure its payer remains competitive and to help attract and retain high-quality talent in an increasingly tight labor market. In Q4 and fiscal ’23, this dynamic was reflected in solid sales execution across our entire target market, and we plan to continue investing in go-to-market initiatives to carry this momentum forward into fiscal ’24.

We’ve expanded our sales force for fiscal ’24 by 18% from 694 sales reps in fiscal ’23 to 820 reps in fiscal ’24, and I’m pleased that we’re fully staffed heading into the new fiscal year. We also continue to invest in our channel initiatives, and we remain pleased with the consistency in our referral channel, which continued to deliver more than 25% of our new business in Q4 and full fiscal ’23. In addition to an 18% increase in sales reps for fiscal ’24, we remain committed to continuing our investments in digital marketing and digital lead generation to support our go-to-market motion. As a result of our strong financial performance, including our adjusted EBITDA margin of 31.9% and free cash flow margin of 18.4% in fiscal ’23, which puts us well into the range of our current financial targets.

We are increasing certain of our targets beginning in fiscal ’24. This is a reflection of our strong financial performance in fiscal ’23, and I’m very pleased with our ability to continue to grow while demonstrating the scalability and leverage in our business model. While Ryan will provide additional detail, we’re pleased to continue to target 20%-plus total revenue growth with an increased adjusted EBITDA margin target of 35% to 40% of revenue and an increased free cash flow margin target of 20% to 25% of revenue. The strong culture of Paylocity continued to be recognized externally this fiscal year as we were named to Built In’s Best Places to Work and among the best and brightest companies to work for in the nation. Additionally, for the second year in a row, we also earned placement on the Forbes list for best companies for diversity and best employers for women.

Echoing Steve’s comments, I would like to thank all of our more than 6,000 employees for a fantastic fiscal ’23, which would not have been possible without their dedication and commitment to our clients. I would now like to pass the call over to Ryan to review the financial results in detail and provide fiscal ’24 guidance.

Ryan Glenn: Thanks, Toby. Total revenue for the fourth quarter was $308.5 million, an increase of 34.7% and with recurring and other revenue up 24.3% from the same period last year. As Toby noted, our sales team had another solid quarter, and we were pleased to come in $5.3 million above the top end of our guidance range. Adjusted EBITDA for the fourth quarter was $100.6 million or 32.6% margin and exceeded the top end of our guidance by $4.1 million. For fiscal ’23, adjusted EBITDA was $375.2 million or 31.9% margin, resulting in leverage of 400 basis points versus fiscal ’22. Additionally, we made significant progress on free cash flow with fiscal ’23 margin of 18.4%, up nearly 650 basis points and an increase of 111% on a dollar basis from fiscal ’22.

We remain confident in our ability to continue expanding free cash flow margin in fiscal ’24 and beyond. 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 combined non-GAAP basis, total R&D investments were 15.2% of revenue in the fourth quarter. And on a full year basis, total R&D investments were 14.5% of revenue. On a dollar basis, our year-over-year investment in total R&D increased by 45.7% in fiscal ’23 when compared to fiscal ’22. We continue to believe our investments in R&D provide us with valuable product differentiation and the ability to drive future growth. On a non-GAAP basis, sales and marketing expenses were 22% of revenue in the fourth quarter and fiscal ’23.

On a non-GAAP basis, G&A costs were 10.7% of revenue in the fourth quarter versus 13.2% in the same period last year. Full year G&A costs were 11% of revenue as compared to 12.9% in fiscal ’22, and we remain focused on consistently leveraging our G&A expenses on an annual basis. Briefly covering our GAAP results, for Q4, gross profit was $211.7 million; operating income was $49.4 million; and net income was $37.3 million. For the full year, gross profit was $807.6 million. Operating income was $155 million and net income was $140.8 million. In regard to client health funds and interest income, our average daily balance of client funds was $2.5 billion in Q4 and $2.4 billion for fiscal ’23. We are estimating the average daily balance will be approximately $2.3 billion to $2.4 billion in Q1 of fiscal ’24, with an average annual yield of approximately 410 basis points.

On a full year basis, we are estimating the average daily balance will be $2.5 billion to $2.6 billion in fiscal ’24, with an average yield of approximately 420 basis points. Our guidance includes last week’s 25 basis point increase, but does not currently include any other changes to interest rates in fiscal ’24. Before I provide our financial guidance, as Toby mentioned, we’re updating certain of our key financial targets. Since setting our current targets in August of 2018, our adjusted EBITDA has increased from 21.5% of revenue to 31.9% of revenue, an improvement of over 1,000 basis points. And our free cash flow margin has increased from 12.9% of revenue to 18.4% of revenue, a 550 basis point improvement. As a result of our strong financial performance and the scalability of our business model, we are revising certain key financial targets, which we expect to make progress against beginning in fiscal ’24.

In regards to total revenue, our goal of 20%-plus growth remains our target, and we continue to be confident in our ability to achieve this goal. Our adjusted total gross margin target has increased to 75% to 80% from 70% to 75%. Our general and administrative spend target is reduced from 10% to 15% of revenue to 5% to 10% of revenue. Our adjusted EBITDA target has increased to 35% to 40% from 30% to 35%. And our free cash flow margin target is increased to 20% to 25% from 15% to 20%. Please refer to our earnings press release for additional details. Finally, I’d like to provide our financial guidance for Q1 and full fiscal ’24. For the first quarter of fiscal ’24, total revenue is expected to be in the range of $314.1 million to $318.1 million or approximately 25% growth over first quarter fiscal ’23 total revenue.

And adjusted EBITDA is expected to be in the range of $89.5 million to $92.5 million, which represents approximately 250 basis points of leverage over Q1 of fiscal ’23. And for fiscal year ’24, Total revenue is expected to be in the range of $1.405 billion to $1.410 billion or approximately 20% growth over fiscal ’23. And adjusted EBITDA is expected to be in the range of $464 million to $468 million, which represents approximately 120 basis points of leverage over fiscal ’23. As it relates to the broader macro environment, workforce levels continue to be roughly flat in all material respects. This is contrary to what we have historically experienced in a normalized business environment, with recurring revenue typically benefiting from 2 to 3 points of growth driven by broader GDP expansion and workforce levels.

Our guidance assumes this trend of flat workforce levels continues in Q1 and fiscal ’24 and thereby representing an equivalent of 2- to 3-point headwind to recurring revenue growth. After crossing the $1 billion threshold in fiscal ’23 and with continued investments in our go-to-market motion and product road map, we enter fiscal ’24 with a high level of confidence in our ability to continue to drive strong revenue growth while simultaneously scaling our business and driving continued adjusted EBITDA and free cash flow leverage. Operator, we are now ready for questions.

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Q&A Session

Operator: [Operator Instructions]. Our first question comes from the line of Brad Reback with Stifel.

Brad Reback: Steve, if we think about the 18% increase in sales force headcount entering the year as well as the success you’re having driving higher ARPU into the base, any reason we shouldn’t think of 18% is the absolute bottom and in fact, not being able to do a little better than that on the subscription side?

Steven Beauchamp: I think if you look at our guidance, it hasn’t changed from a philosophy perspective. So we’re at the front end of the year and there’s a lot of execution in front of us, being able to guide to total revenue of 20% revenue growth, we feel really good about. We’ve got all the heads on board and up and running, which is always a goal for us at the start of the year. We’ve got a product suite that we have enhanced pretty significantly. And so we feel pretty good about the momentum. Certainly, our guidance wouldn’t contemplate us being below the 18% on a recurring basis. So I think that’s a reasonable way to think about it. But we feel confident in our ability to hit the goals. And I think we have a history of being able to do even better than our initial guidance.

Operator: Our next question comes from the line of Raimo Lenschow with Barclays.

Sheldon McMeans: This is Sheldon on for Raimo. As your product portfolio grows with adding the new capabilities and talking about the $600 per employee per year target, how are you thinking about revisiting your installed base and kind of the installed base opportunity particularly as we enter a more normalized growth environment? Is there any opportunity to lean more into the upsell motion in ’24?

Steven Beauchamp: Sure. We really started selling back to the client base back in 2018. So we’ve been doing that for a number of years. And we’ve been increasing that inside sales team at a much faster rate than the rest of our sales force, really since we started back in 2018. So that team did really well this past fiscal year. We’re really happy with their success. We are certainly increasing that team, be on the average 18% headcount, and so it will have a more material impact going into next fiscal year. But it still represents a small portion of our overall revenue growth. We are still focused on primarily landing new customers and then continuing to enhance our product portfolio, therefore, giving more products for our inside sales team to sell back to the client base. So yes, it’s the right way to think about it. That will gradually continue to get bigger, and it is growing faster than our outside sales team.

Sheldon McMeans: Great. And a quick follow-up, if I may. It’s nice to see the, I would say, faster than peer generative AI road map. I was just wondering, how are you feeling about AI/ML talent, engineering talent at your organization? And just more broadly thinking about R&D headcount investment.

Steven Beauchamp: Yes. So I think I’ll take the second part first. So from an R&D headcount investment, we’ve been pretty consistent when you look at what we expense and capitalized being around that 15% of R&D. This is definitely a competitive space. It’s a pretty dynamic workforce environment where we have lots of product ideas that we get from our customers and that we feel we can add to the product suite. So we’ve maintained a pretty steady level of R&D investment when you look at it as a percentage of revenue. And I think that philosophy is what we have going forward. There’s lots of things that we think we can do to enhance our portfolio. On the first part of your question, we really started a data practice team about 4 years ago.

And so if you go back, we’ve had predictive capabilities in our platform around who might leave a customer. We’ve got our MWI based off algorithms. And so we’ve had a team that’s been investing in that space for a while. I think that’s what allowed us to get to market relatively quickly with the generative AI capabilities, both in community and now in job descriptions. And we’ve got a long list of places where we think we can continue to add those capabilities for our customers.

Operator: Our next question comes from the line of Bryan Bergin with TD Cowen.

Bryan Bergin: I wanted to kick off with kind of a fiscal ’24 growth cadence question. So as we think about what you guided to here in the first Q guide relative to the fiscal ’24 growth guide, particularly on recurring. Can you give us a sense where about you anticipate the recurring growth cadence to kind of trough out at?

Toby Williams: Yes. I mean maybe I’ll start and Ryan can jump in, too. I mean I think when you look at the first half of the year, obviously, that’s where the hardest comps are relative to last year. And I think overall, we feel very good about the guide that we provided going back to Steve’s comments a few minutes ago, just getting — guiding to that 20% mark for the fiscal year. And I think, obviously, like I said, I think the first half is the toughest from a comps perspective. But I think we feel pretty good about the momentum that we have across the business from a recurring perspective. I’m certainly excited about a lot of the product announcements that we’ve made and feel pretty good about the adoption that we’ve seen across the portfolio in the products that we had announced.