Paylocity Earnings: Client Wins and Interest Income Upside Offset Soft Employment; Shares Attractive

We maintain our $215 fair value estimate for Paylocity PCTY 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.

Top-line growth of 25% during the quarter, or 19% when excluding interest income, was in line with our expectations. Consistent with our forecasts, Paylocity experienced early signs of labor market weakness during the quarter, with slight sequential declines in the employee base between August and September and elongated sales cycles at the margin. Despite these headwinds, the firm continues to post healthy growth, aided by new client wins and taking greater wallet share.

This top-line growth, including a greater contribution from ultra-high-margin interest income, offset by ongoing investment to expand the module suite and attract new clients, supported impressive GAAP operating margin expansion to 13% from 3% in the prior period.