Yahoo Finance Paylocity (NASDAQ:PCTY) Posts Better-Than-Expected Sales In Q2 But Full-Year Guidance Underwhelms
Payroll and human resources software provider, Paylocity (NASDAQ:PCTY) reported Q2 CY2024 results topping analysts' expectations , with revenue up 15.8% year on year to $357.3 million. On the other hand, next quarter's revenue guidance of $328 million was less impressive, coming in 7.2% below analysts' estimates. It made a non-GAAP profit of $1.48 per share, improving from its profit of $1.32 per share in the same quarter last year.
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Paylocity (PCTY) Q2 CY2024 Highlights:
Revenue: $357.3 million vs analyst estimates of $350 million (2.1% beat)
EPS (non-GAAP): $1.48 vs analyst estimates of $1.29 (14.9% beat)
Revenue Guidance for Q3 CY2024 is $328 million at the midpoint, below analyst estimates of $353.3 million
Management's revenue guidance for the upcoming financial year 2025 is $1.52 billion at the midpoint, missing analyst estimates by 2.2% and implying 8.3% growth (vs 19.7% in FY2024)
Gross Margin (GAAP): 67.3%, down from 68.7% in the same quarter last year
Free Cash Flow of $12.78 million, down 91.3% from the previous quarter
Annual Recurring Revenue: $324.7 million at quarter end, up 15.1% year on year
Market Capitalization: $8.47 billion
“Our position as the most modern HCM provider drove strong financial results in fiscal 24, as we ended the year with 19% total revenue growth, 17% recurring & other revenue growth, and a significant increase in profitability. Our financial performance in fiscal 24 was supported by 8% year-over-year client growth to 39,050 clients, and 8% growth in average revenue per client – while also focusing on efficiency and productivity across our organization. We continue to attach more product at time of sale, and have realized increased success selling back into existing clients as our modern workforce products continue to resonate across our entire client base, with Learning Management, Recognition & Rewards, and Employee Voice seeing particular success. In addition to healthy revenue and profitability growth in fiscal 24, in Q4 we also returned capital to shareholders by repurchasing $150 million of our stock. As we close fiscal 24, I would like to thank all of our employees for their efforts supporting our clients, and congratulate our teams for another successful year. We enter fiscal 25 with a high degree of confidence in our ability to execute against our multi-year goal of $2 billion in total revenue,” said Toby Williams, President and Co-Chief Executive Officer of Paylocity.
Founded by payroll software veteran Steve Sarowitz in 1997, Paylocity (NASDAQ:PCTY) is a provider of payroll and HR software for small and medium-sized enterprises.
HR Software
Modern HR software has two powerful benefits: cost savings and ease of use. For cost savings, businesses large and small much prefer the flexibility of cloud-based, web-browser-delivered software paid for on a subscription basis rather than the hassle and complexity of purchasing and managing on-premise enterprise software. On the usability side, the consumerization of business software creates seamless experiences whereby multiple standalone processes like payroll processing and compliance are aggregated into a single, easy-to-use platform.
Sales Growth
As you can see below, Paylocity's revenue growth has been impressive over the last three years, growing from $167.5 million in Q4 2021 to $357.3 million this quarter.
This quarter, Paylocity's quarterly revenue was once again up 15.8% year on year. However, the company's revenue actually decreased by $43.99 million in Q2 compared to the $74.92 million increase in Q1 CY2024. This situation is worth monitoring as Paylocity's sales have historically followed a seasonal pattern but management is guiding for a further revenue drop in the next quarter.
Next quarter's guidance suggests that Paylocity is expecting revenue to grow 3.3% year on year to $328 million, slowing down from the 25.4% year-on-year increase it recorded in the same quarter last year. For the upcoming financial year, management expects revenue to be $1.52 billion at the midpoint, growing 8.3% year on year compared to the 19.4% increase in FY2024.
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Gross Margin & Pricing Power
Software is eating the world. It's one of our favorite business models because once you develop the product, it usually doesn't cost much to provide it as an ongoing service.
These costs include servers, licenses, and certain personnel, and leverage on them can decide the winners in competitive markets because they determine how much can be invested into new products, sales, and talent.
Paylocity's gross margin is slightly worse than the broader software industry, giving it less room to invest in areas such as engineering and sales to grow its product portfolio. As you can see below, it averaged a 68.5% gross margin over the last year.
This quarter, Paylocity's gross profit margin was 67.3%, down 1.4 percentage points year on year. Zooming out, the company's full-year margin has been consistent over the past 24 months, suggesting its input costs have been stable and it isn't under pressure to lower prices.
Key Takeaways from Paylocity's Q2 Results
It was good to see Paylocity beat analysts' revenue expectations this quarter. On the other hand, both its Q3 and full-year revenue guidance were below expectations. Full year revenue guidance for the following year suggests a slowdown in demand. Overall, this was a weak quarter for Paylocity. The stock remained flat at $148.23 immediately after reporting.
Paylocity may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.
