Paylocity Holding Corp Q1 FY2022 earnings

Paylocity opened fiscal 2022 with total revenue of $181.7 million for the quarter ended September 30, 2021, up 33.8% from the prior-year quarter. Management credited sales execution and improved macroeconomic conditions for the gain, with new and existing clients both contributing. Gross profit rose 37.1% to $118.4 million and gross margin was 65.2%, up 1.6 percentage points. Operating income climbed 197.2% to $10.3 million, lifting operating margin to 5.6%, up 3.1 percentage points. Net income was $30.9 million, up 148.3%, and diluted earnings per share were $0.55, up $0.33. A large income tax benefit, tied largely to excess tax benefits on employee stock-based compensation and research and development tax credits, held net income well above operating income.

Non-GAAP results show the same trend at a different scale. Non-GAAP operating income was $36.2 million, adjusted EBITDA was $46.1 million, adjusted gross profit was $128.1 million, and non-GAAP net income per share was $0.59. Most of the gap between GAAP and non-GAAP operating income comes from stock-based compensation, employer payroll taxes tied to stock releases and option exercises, and amortization of acquired intangibles. Management presents these figures as a supplement to GAAP results and cautions that other companies define them differently.

Cash flow was the soft spot. Operating cash flow was negative $4.1 million, down 163.7% from the prior-year quarter. Capital expenditures were $3.2 million, up 57.5%. Management said the larger use of cash in operations came mainly from changes in operating assets and liabilities, partly offset by better operating results once non-cash items such as stock-based compensation, depreciation and the deferred tax benefit are stripped out. Investing activities swung to a heavy net use of cash, reflecting purchases of available-for-sale securities, the Blue Marble acquisition and lower proceeds from sales and maturities of investments. Financing activities brought in cash largely from the timing of client fund collections and remittances.

Two metrics that feed future revenue look different from the headline growth. Deferred revenue was $8.7 million, up 13.7%, while remaining performance obligations of $45.5 million were flat against the prior-year quarter, down 0.4%. Interest income on funds held for clients fell 5%, which management tied to the low interest rate environment after the Federal Reserve's pandemic response cuts; higher average client fund balances only partly offset that pressure. Seasonality also matters here. The fiscal third quarter, which ends in March, is the strongest period because of W-2 preparation, so the September quarter is not a clean read on the full year.

Guidance covers the second quarter of fiscal 2022 and the full fiscal year. For the second quarter, total revenue is expected in the range of $185.5 million to $189.5 million, which the company says represents roughly 27% to 30% growth, and adjusted EBITDA is expected in the range of $39.0 million to $42.0 million. For the full fiscal year 2022, revenue is guided to $815.0 million to $820.0 million, roughly 29% growth, with adjusted EBITDA of $216.0 million to $220.0 million. Paylocity says it cannot reconcile forward-looking adjusted EBITDA to the comparable GAAP measure without unreasonable effort.

Risks in the filings are familiar and mostly macro. COVID-19 continues to affect client headcounts and the pace of recovery, and the company warns that fluctuations in client employee counts, client losses, a low interest rate environment and a slower recovery could weigh on growth. Most client agreements can be cancelled on 60 days' notice or less, a reminder that the revenue base is not fully contracted. Blue Marble, the global payroll provider acquired during the quarter, adds international capability but also integration and synergy risk. Paylocity also cites competition, reliance on referral partners, cybersecurity and customer data risk, and regulatory uncertainty. On liquidity, the company says cash, corporate investments, future operating cash flow and an undrawn $250.0 million revolving credit facility should cover requirements for at least the next 12 months.