Company Reports

We lower our fair value estimate for narrow-moat Paylocity to $205 per share from $215 following the release of mixed second-quarter results and underwhelming full-year guidance. Paylocity reported reasonable revenue and profitability performance during the quarter, however, decelerating employment growth, poor upmarket sales execution, and macroeconomic pressures have soured the near-term outlook. Following the result, we have lowered our full-year revenue growth forecasts to account for a weaker-than-previously anticipated second half and to align with updated guidance. Despite our tempered outlook, shares continue to screen as attractive relative to our updated valuation.

Paylocity's unified platform appeals to clients who prefer an all-in-one payroll and human capital management, or HCM, solution. Clients can customize through add-on modules, including talent management and benefits administration, alongside core payroll functionality, and integrate with over 400 third-party providers, including referral partners such as benefit brokers. A unique feature of Paylocity's platform is the complementary inclusion of communication and engagement tools, including social collaboration platform Community, and video, survey, and learning management tools. These features aim to drive higher employee engagement and satisfaction, benefiting the client as well as Paylocity by entrenching the software into the business.

We maintain our $215 fair value estimate for Paylocity following a reasonable start to fiscal 2024. We believe payroll and human capital management firms have been unfairly hammered in recent days over concerns that automation will materially hinder industry growth as fewer payroll errors cannibalize nonrecurring revenue for payroll corrections. Paylocity allayed investor fears by confirming that revenue is derived from bundled per employee per month subscription fees, rather than from a legacy fee per payroll model. In this context, we believe investors have an attractive opportunity to gain exposure to this narrow-moat firm, which is trading at a sizable discount to our fair value estimate.

Narrow-moat Paylocity rounded out fiscal 2023 with strong fourth-quarter results that tracked our top line growth and profitability expectations. Despite macroeconomic headwinds, the firm continues to clock impressive growth and take share of the expansive payroll and HCM software market. Following the result, we maintain our longer-term assumptions, however, we raise our fair value estimate to $215 from $210 due to time value of money. At current prices, we view Paylocity shares as fairly valued.

Paylocity's unified platform appeals to clients who prefer an all-in-one payroll and human capital management, or HCM, solution. Clients can customize through add-on modules, including talent management and benefits administration, alongside core payroll functionality, and integrate with over 400 third-party providers, including referral partners such as benefit brokers. A unique feature of Paylocity's platform is the complementary inclusion of communication and engagement tools, including social collaboration platform Community, and video, survey, and learning management tools. These features aim to drive higher employee engagement and satisfaction, benefiting the client as well as Paylocity by entrenching the software into the business.

Paylocity's unified platform appeals to clients who prefer an all-in-one payroll and human capital management, or HCM, solution. Clients can customize through add-on modules, including talent management and benefits administration, alongside core payroll functionality, and integrate with over 400 third-party providers, including referral partners such as benefit brokers. A unique feature of Paylocity's platform is the complementary inclusion of communication and engagement tools, including social collaboration platform Community, and video, survey, and learning management tools. These features aim to drive higher employee engagement and satisfaction, benefiting the client as well as Paylocity by entrenching the software into the business.

Narrow-moat Paylocity remains on track to report impressive growth in fiscal 2023 following its solid third-quarter result. Top-line growth and profitability came in marginally ahead of our forecasts due to a sharper-than-expected increase in ultra-high margin interest income. While we have revised our near-term assumptions upwards, our longer-term forecasts and valuation remain intact. At current prices, Paylocity shares are trading at an attractive 12% discount to our unchanged $210 fair value estimate.

Despite macroeconomic uncertainty, narrow-moat Paylocity continued to clock impressive growth and capture greater share of the human capital management software market during the second quarter. We’ve lifted our full-year fiscal 2023 revenue and operating margins slightly due to ongoing benefits from rising interest rates, but our longer-term forecasts are unchanged. We raise our fair value estimate 5% to $210 due to time value of money. At present shares are trading about in line with our valuation.

Paylocity's unified platform appeals to clients who prefer an all-in-one payroll and human capital management, or HCM, solution. Clients can customize through add-on modules, including talent management and benefits administration, alongside core payroll functionality, and integrate with over 400 third-party providers, including referral partners such as benefit brokers. A unique feature of Paylocity's platform is the complementary inclusion of communication and engagement tools, including social collaboration platform Community, and video, survey, and learning management tools. These features aim to drive higher employee engagement and satisfaction, benefiting the client as well as Paylocity by entrenching the software into the business.

Narrow-moat Paylocity delivered a solid result to start fiscal 2023 despite continuing macroeconomic headwinds. The first quarter featured robust revenue growth of 39% year on year, driven by a combination of strong sales and a further skew upmarket. However, operating margin declined roughly 330 basis points year on year to about 3% because of higher investment in sales, marketing, and product innovation to support growth, partly offset by greater contribution from ultra-high margin interest income revenue.

Paylocity's unified platform appeals to clients who prefer an all-in-one payroll and HCM solution. Clients can customize their solution through add-on modules including talent management and benefits administration, alongside core payroll functionality and integrate with over 400 third party providers, including referral partners such as benefit brokers. A unique feature of Paylocity's platform is the complimentary inclusion of communication and engagement tools including social collaboration platform, Community, and video, survey and learning management tools. These features aim to drive higher employee engagement and satisfaction, benefiting the client as well as Paylocity by entrenching the software further into the business.

We raise our fair value estimate for narrow-moat Paylocity 11% to $200 due to an improved profitability outlook, lower expected capital expenditures, and time value of money following the fourth quarter fiscal 2022 result.

Paylocity's unified platform appeals to clients who prefer an all-in-one payroll and HCM solution. Clients can customise their solution through add-on modules including talent management and benefits administration, alongside core payroll functionality and integrate with over 400 third party providers, including referral partners such as benefit brokers. A unique feature of Paylocity's platform is the complimentary inclusion of communication and engagement tools including social collaboration platform, Community, and video, survey and learning management tools. These features aim to drive higher employee engagement and satisfaction, benefiting the client as well as Paylocity by entrenching the software further into the business.

Narrow-moat Paylocity delivered robust third-quarter fiscal-year 2022 results, with group revenue increasing 32% on the prior year supported by strong sales execution and resilient retention. While we expect top-line growth was aided by greater module uptake and a skew to larger businesses, we anticipate the company outpaced industry growth, resulting in modest market share gains. We think the strong performance was underpinned by continued demand for solutions to engage and retain employees amid sustained dispersed workforces and fierce competition for labor. Paylocity’s adjusted EBITDA margin of 34.8% during the quarter exceeded our expectations as improved operating leverage from increased scale and solid retention offset the dilutive impact of recent bolt-on acquisitions.

Paylocity's unified platform appeals to clients who prefer an all-in-one payroll and HCM solution. Clients can customise their solution through add-on modules including talent management and benefits administration, alongside core payroll functionality and integrate with over 400 third party providers, including referral partners such as benefit brokers. A unique feature of Paylocity's platform is the complimentary inclusion of communication and engagement tools including social collaboration platform, Community, and video, survey and learning management tools. These features aim to drive higher employee engagement and satisfaction, benefiting the client as well as Paylocity by entrenching the software further into the business.

Paylocity delivered strong second-quarter fiscal 2022 results underpinned by a continued normalization of employment levels and growing demand for solutions to attract, manage, and retain employees amid fierce competition for labor and dispersed workforces. Following strong sales activity during the quarter and robust client retention, we have marginally lifted our full-year revenue and adjusted EBITDA forecasts 1% and 4%, respectively, to align with updated near-term guidance. Our medium-term forecasts and $212 fair value estimate remain unchanged. We expect EPS to increase 14% to $1.48 in fiscal 2022, before growing at a CAGR of 32% to fiscal 2031 as Paylocity continues to grow scale and achieves operating leverage. After a market pullback in recent weeks, Paylocity screens as fairly valued trading in line with our valuation.

Paylocity's unified platform appeals to clients who prefer an all-in-one payroll and HCM solution. Clients can customise their solution through add-on modules including talent management and benefits administration, alongside core payroll functionality and integrate with over 400 third party providers, including referral partners such as benefit brokers. A unique feature of Paylocity's platform is the complimentary inclusion of communication and engagement tools including social collaboration platform, Community, and video, survey and learning management tools. These features aim to drive higher employee engagement and satisfaction, benefiting the client as well as Paylocity by entrenching the software further into the business.

Paylocity's unified platform appeals to small and midsize clients who prefer an all-in-one payroll and HCM solution. Clients can customise their solution through add-on modules including talent management and benefits administration, alongside core payroll functionality and integrate with over 400 third party providers, including referral partners such as benefit brokers. A unique feature of Paylocity's platform is the complimentary inclusion of communication and engagement tools including social collaboration platform, Community, and video, survey and learning management tools. These features aim to drive higher employee engagement and satisfaction, benefiting the client as well as Paylocity by entrenching the software further into the business.

We maintain our $212 fair value estimate for Paylocity following a transfer of coverage. While dominant legacy payroll providers have invested heavily over the past decade to remain competitive on functionality, Paylocity has capitalized on their shortfalls to capture share through the appeal of its cloud based, unified, and user-friendly platform. We expect the company is well placed to capture further share of the expansive and growing payroll and human capital management market aided by industry consolidation and a greater uptake of outsourced solutions.

Narrow-moat Paylocity kicked off fiscal 2021 with top and bottom lines surpassing our estimates. Paylocity's target market consists of businesses with 20 to 1,000 employees, a segment that has been more highly affected by the pandemic. We expect the economic recovery underway to help Paylocity return to form this fiscal year. Like previous quarters, channel partner referrals continue to make up over 25% of new business for the firm. We expect that Paylocity's focus on developing its platform and introducing new modules should enable the firm to continue to gain market share and experience healthy long-term growth. While we think Paylocity has a long runway for growth, we believe the market has factored in even greener pastures. As a result, we maintain our $212 fair value estimate and view the shares as overvalued at current levels.