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Paylocity (PCTY) Beats on Q3 Earnings; Raises FY16 View

Paylocity Holding Corporation PCTY reported better-than-expected third-quarter fiscal 2016 results. The company reported earnings of 13 cents per share, which beat the Zacks Consensus Estimate of 6 cents and came in higher than the year-ago quarter earnings of 3 cents.

Quarter Details

Paylocity reported revenues of $70.6 million, which increased 49.3% year over year and came ahead of the Zacks Consensus Estimate of $67 million. The year-over-over increase was driven by solid sales and operational implementation.

According to Steve Beauchamp, President and Chief Executive Officer of Paylocity “We posted a strong quarter, driven by a combination of strong year-to-date sales performance combined with high penetration rates of our ACA Enhanced product in our existing client base”.

Moreover, revenues were impacted positively by a 53% surge in recurring revenues and a 4.6% jump in implementation and other revenues on a year-over-year basis.

The company’s gross margin increased 220 basis points (bps) year over year to 61.4%. Higher revenue base coupled with ACA enhanced product drove margin expansion.

Paylocity reported operating income of $6.2 million, which increased from $1.7 million reported in the year-ago quarter. Operating results mainly benefitted from increased gross profit, partially offset by a 41.4% increase in operating expenses.

The company reported net income of $6.2 million or 13 cents per share compared with $1.8 million or 3 cents per share in the year-ago period.

Balance Sheet & Cash Flow

Paylocity exited the quarter with cash and cash equivalents of $81.3 million compared with $79 million in the previous quarter. Receivables were $1.1 million compared with $1.5 million in the prior quarter.

Paylocity has no long-term debt. The company generated $10.2 million of cash flow from operational activities.

Guidance

Buoyed by the strong third-quarter results, Paylocity raised its fiscal 2016 outlook. The company now expects revenues in a range of $227.9 million to $228.9 million (previously $223 million to $225 million). The Zacks Consensus Estimate is pegged at $224 million.

EBITDA is expected in a range of $26.1 million to $27.1 million (previously $22 million to $23 million). Non-GAAP net earnings per share are expected within 25 cents to 27 cents (previously 18 cents to 19 cents). The Zacks Consensus Estimate is pegged at a loss of 13 cents per share.

For the fourth quarter of fiscal 2016, Paylocity expects revenues in a range of $57 million to $58 million with a mid-point $57.5 million, which is higher than the Zacks Consensus Estimate of $57 million. Adjusted EBITDA is projected in a range of $1 million to $2 million. Non-GAAP loss per share is expected within 3 cents to 5 cents. The Zacks Consensus Estimate is pegged at a loss of 12 cents.

Our Take

Paylocity reported better-than-expected third-quarter results, with both the top and bottom lines surpassing the Zacks Consensus Estimate. Also the company raised its fiscal 2016 guidance and provided an encouraging fourth quarter outlook.

We remain positive about Paylocity’s regular investments in SaaS technology. Notably, over the past few quarters, clients moving from traditional payroll service providers to the company’s SaaS-based services generated a significant portion of the revenues. Therefore, we believe that regular investments in technological upgrades, along with product innovations, will continue to boost the company’s top line over the long run. Such initiatives are also likely to have a positive impact on the upcoming results.

Furthermore, higher adoption of Paylocity’s ACA dashboard application that tracks employee count, employee status and health care plan affordability will act as a tailwind over the long run.

However, competition in the payroll processing sector from new entrants as well as existing players such as Automatic Data Processing, Inc. ADP, Oracle Corporation ORCL and SAP SE SAP remains a headwind.

Currently, Paylocity has a Zacks Rank #3 (Hold).

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