Paylocity Holding Corp Q1 FY2021 earnings

Paylocity's first quarter of fiscal 2021 delivered solid recurring revenue growth and a thinner bottom line. Total revenue was $135.79 million for the quarter ended September 30, 2020, up 7.2% from $126.72 million in the prior-year quarter. Recurring and other revenue rose 11% and made up 99% of total revenue, up from 96% a year earlier. The drag came from interest income on funds held for clients, which fell 81% to $0.9 million from $4.8 million as the Federal Reserve's rate cuts took hold. Management expects the pandemic to keep pressuring both recurring revenue growth and that interest income in future periods.

Profitability moved in the opposite direction. Gross profit rose 2.8% to $86.41 million, but gross margin fell to 63.6% from 66.4%, down 2.7 percentage points. Cost of revenues rose 16% to $49.4 million from $42.6 million, including $5.3 million of additional employee-related costs and $0.9 million of higher internal-use software amortization. Operating income dropped 42.5% to $3.45 million from $6.00 million, and operating margin narrowed to 2.5% from 4.7%, down 2.2 percentage points. Research and development expense climbed 30% to $18.6 million as Paylocity added development personnel. Sales and marketing rose 2% to $37.7 million, and general and administrative expense was essentially unchanged at $26.6 million.

Net income fell 10.4% to $12.46 million from $13.91 million, and diluted earnings per share declined to $0.22 from $0.25, down $0.03. The net line held up better than the operating line largely because of tax benefits tied to employee stock-based compensation. Non-GAAP results strip out stock-based compensation, amortization of acquired intangibles and other items: Adjusted EBITDA was $30.9 million, non-GAAP operating income was $21.4 million, non-GAAP net income was $21.2 million and non-GAAP net income per share was $0.38. Adjusted gross profit was $94.2 million, compared with $90.3 million a year earlier.

Cash flow is worth watching. Operating cash flow came in at -$1.57 million for the quarter, down from $8.26 million a year earlier, a 119% decline. The MD&A ties the swing to changes in operating assets and liabilities, mostly accrued expenses from a higher payout of sales incentives, plus prepaid expenses and other items. Capital expenditures fell 74.5% to $2.04 million from $8.03 million, while capitalized internal-use software costs rose to $7.9 million from $6.7 million. The balance sheet carried $221.5 million of cash and cash equivalents, $21.1 million of corporate investments and $100 million outstanding under the revolving credit facility, with management citing $242.7 million of cash, cash equivalents and invested corporate cash. Deferred revenue rose 16.6% to $7.67 million from $6.58 million, and remaining performance obligations rose 5.8% to $45.65 million from $43.14 million.

Guidance for the second quarter of fiscal 2021 covers total revenue and Adjusted EBITDA, with management pointing to continued growth over the fiscal 2020 second quarter. The company cannot reconcile that forward-looking non-GAAP figure to GAAP without unreasonable effort. On the product side, Premium Video, announced at the September Elevate client conference, lifts PEPY to $420 from $400, and management still points to a $500 target.

Risks remain concentrated around the pandemic. Reduced client headcount, business closures and delayed sales starts all feed into revenue, and a low rate environment keeps pressure on funds held for clients. The disclosure also flags client retention and new client acquisition, competition, regulatory and judicial uncertainty including potential repeal or replacement of the Affordable Care Act, and the risk that security measures are compromised or customer data is accessed without authorization. Seasonality matters too: the fiscal third quarter brings W-2 preparation work and typically higher revenue and gross profit, so this quarter's margin profile is not a clean read on the full year.