Paylocity Holding Corporation (NASDAQ:PCTY) Q3 2024 Earnings Call Transcript May 2, 2024
Paylocity Holding Corporation misses on earnings expectations. Reported EPS is $1.5 EPS, expectations were $1.94. Paylocity Holding Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to the Paylocity Holding Corporation Third 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 today, Ryan Glenn. Please go ahead.
Ryan Glenn: Good afternoon, and welcome to Paylocity’s earnings results call for the third quarter of fiscal 2024, which ended on March 31, 2024. 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 in 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’s 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 be attending the Cowen Annual Technology Media and Telecom Conference in New York on May 29. I will be attending the Jefferies Software Conference in Newport on May 30. Toby will be attending the Baird Global Consumer Technology & Services Conference in New York on June 6. Steve will be attending the William Blair Growth Conference in Chicago also on June 6, and I will be attending the BMO Virtual Software Conference on June 11.
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: Thanks, Ryan, and thanks to all of you for joining us on our third quarter fiscal 2024 earnings call. Q3 represented another quarter of solid results with total revenue growth of 18.1%, driven by our differentiated value proposition of providing the most modern software in the industry, continuing to resonate in the market, particularly among the next generation of workers. With Gen Z set to overtake baby boomers as the dominant generation in the workforce this year, we have continued to invest in meeting the needs and expectations of the modern workforce to deliver the most integrated and intuitive experience in the industry. Most recently, we released a number of new enhancements to our talent acquisition suite to help our clients recruit, train and retain members of the next-generation workforce.
In particular, our new text to scan and two-way texting features will better enable recruiters to directly communicate with candidates and receive key metrics on engagements, visits, application rates and higher data in real time. Additionally, new AI-driven smart groups within community will help new hires automatically integrate into their teams, promoting collaboration and integration. All of these new features are accessible directly via our top-rated mobile app, which enables employees to stay connected, access essential information and contribute effectively from anywhere. Our commitment to product development also continues to be recognized in the market with Paylocity recently placing as an overall leader in 10 product categories in the G2 Spring 2024 Grid reports.
Additionally, Paylocity ranked number two overall on TrustRadius’ 2024 Most Loved List. And once again, listed as top 10 HR Solution in G2’s 2024 Best Software Awards. I would now like to pass the call to Toby to provide further color on the quarter.
Toby Williams: Thanks, Steve. Solid sales and operational execution in Q3 helped drive our total revenue to $401.3 million or 18.1% growth over Q3 of last year, beating the high-end of our guidance by $2.3 million. We remain confident in our sales team and go-to-market motion as well as our strong competitive position in the market, and we continue to be pleased with our top of funnel activity and how – are resonating in the market. While we continue to see elongated sales cycles at the high-end of our market during the quarter, we remain focused on driving sales rep and go-to-market productivity in Q4 and into fiscal 2025. We also saw another strong quarter of channel performance as channel referrals, primarily from benefit brokers and financial advisers, once again represented more than 25% of new business for the third quarter as we continue to leverage the strong source of referrals.
Our topline performance, coupled with continued operational efficiency helped drive adjusted EBITDA of $167.9 million or 41.8% margin, which exceeded the high-end of our guidance by $11.4 million. Lastly, Q3 represents our busiest time of year as we work to support our clients through other year-end processing and annual tax form filings. I’d like to say a huge thank you to our more than 6,000 employees who live and represent our values every day and who work so hard to support our clients. The strong culture at Paylocity continues to be recognized externally as we were recently named one of Forbes best large employers for America in 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 Q3 was $401.3 million, an increase of 18.1% with recurring other revenues up 16.8% from the same period last year, and we were pleased to come in $2.3 million above the high-end of our Q3 revenue guidance. Our adjusted gross profit was 75.9% for Q3 as we continue to drive focus on scaling our operational costs on an annual basis 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 13.4% when compared to the third quarter of fiscal 2023 and we remain focused on making incremental investments in R&D as we continue to build out the Paylocity platform to serve the needs of the modern workforce.
In regards to our go-to-market activities. On a non-GAAP basis, sales and marketing expenses were 19.2% of revenue in Q3, and we also remain focused on making incremental investments in this area of the business to drive growth going forward. On a non-GAAP basis, G&A costs were 8.5% of revenue in the third quarter versus 10.4% in the same period last year, representing 190 basis points of leverage in Q3. Our adjusted EBITDA was $167.9 million or 41.8% of revenue for the quarter, which exceeded our guidance by $12.9 million at the midpoint and represented 340 basis points of leverage versus Q3 of fiscal 2023. Briefly covering our GAAP results. For Q3, gross profit was $285.3 million. Operating income was $106.3 million and net income was $85.3 million.
In regard to the balance sheet, we ended the quarter with cash, cash equivalents and invested corporate cash of $492.7 million and no debt outstanding. We continue to be pleased by our ability to drive increased profitability through leverage and adjusted gross margin, adjusted EBITDA and free cash flow while also maintaining strong revenue growth. Our increased adjusted EBITDA guidance for fiscal 2024 represents 35.2% margin, implying 330 basis points of margin expansion over fiscal 2023 or 190 basis points of margin expansion when excluding interest income and client-held funds. As we look forward and acknowledging the uncertain interest rate environment, we also remain confident in our ability to drive continued margin expansion when excluding interest income on client-held funds in fiscal 2025 and beyond.
As a result of our strong profitability and cash flows, the confidence we have in our business and our focus on driving shareholder value, our Board of Directors has authorized a $500 million share repurchase program. In addition to managing dilution through our newly authorized $500 million share repurchase program, we are also increasingly focused on driving leverage and stock-based compensation expense on an annual basis with a target stock-based comp level of less than 10% of revenue, which we expect to achieve in the coming years. In regard to client-held funds and interest income, our average daily balance of client funds was $3 billion in Q3, and we are estimating the average daily balance will be approximately $2.8 billion in Q4 with an average annual yield of approximately 450 basis points to 455 basis points.
Please note that our fiscal 2024 guidance does not include the impact of any future interest rate changes. In regard to client workforce levels, year-over-year employees in the platform growth was in line with our expectations in Q3. And given continued macro uncertainty, we are taking a measured approach to Q4 expectations. With that said, I’d like to provide our financial guidance for Q4 and full fiscal 2024. For the fourth quarter of fiscal 2024, total revenue is expected to be in the range of $347.8 million to $351.8 million or approximately 13% growth over fourth quarter fiscal 2023 total revenue. And adjusted EBITDA is expected to be in the range of $104.1 million to $107.1 million. And for fiscal 2024, total revenue is expected to be in the range of $1.393 billion to $1.397 billion or approximately 19% growth over fiscal 2023.
And adjusted EBITDA is expected to be in the range of $489.5 million to $492.5 million, implying an adjusted EBITDA margin of approximately 35.2% and representing leverage of 330 basis points versus last fiscal year. Based on the interest income assumptions provided earlier in my prepared remarks and our total revenue guidance, our implied recurring revenue growth for Q4 is approximately 13%. Our focus remains on driving strong revenue growth, increasing productivity and profitability levels on an annual basis and continuing to drive shareholder value. Against an uncertain macroeconomic environment and with guidance of nearly $1.4 billion of revenue this fiscal year, our focus is aligning all aspects of our organization towards achieving $2 billion of revenue as the next key milestone of our evolution as the most modern HCM provider in the industry.
In addition to aligning our focus on achieving $2 billion of revenue, we are reconfirming our other current financial targets as followed. Our adjusted gross margin target of 75% to 80%, our total research and development target of 10% to 15% of revenue, our sales and marketing target of 20% to 25% of revenue, our general and administrative target of 5% to 10% of revenue, our adjusted EBITDA margin target of 35% to 40% of revenue, our free cash flow margin target of 20% to 25% and our newly added stock-based comp target of less than 10% of revenue. Operator, we are now ready for questions.
Operator: Thank you. [Operator Instructions] Our first question is going to come from the line of Scott Berg with Needham & Company. Your line is open. Please go ahead.
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