Paylocity Earnings: Firm Posts Stellar Result Amid Macro Challenges

Narrow-moat Paylocity PCTY 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.

Fourth-quarter revenue increased 35% year on year, or 24% when excluding the hefty contribution from float income, reflecting a slight moderation from full-year growth of 38% and 30%, respectively. This result was aided by strong client retention surpassing 92%, and healthy high-single-digit client base growth as of year-end. The firm also enjoyed improving module adoption and an ongoing skew upmarket throughout the year, underpinning 19% growth in average revenue per client year on year.

Encouragingly, Paylocity continues to achieve improving profitability in tandem with rapid top line growth, with the firm achieving 330 basis points of GAAP operating margin expansion to 13.2% year on year in fiscal 2023. This sizable expansion was supported by greater contribution from ultrahigh margin interest income, higher module adoption and improved operating leverage on a larger client base. This is despite elevated investment in product innovation to expand platform functionality, and sales and marketing to drive new leads.