Paylocity Earnings: Interest Income Upside Is the Cherry on Top of an Impressive Growth Trajectory

Narrow-moat Paylocity PCTY 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.

Third-quarter revenue increased 38% year on year, or 28% when excluding the contribution from float income, reflecting a normalization towards prepandemic growth. While the result was aided by a continued skew upmarket and stable employment within the base, we assume Paylocity continues to comfortably outpace industry growth and take share of the expansive HCM software market.

Paylocity’s profitability during the quarter surprised to the upside, with the firm achieving operating margins of 24% relative to 19% in the prior period. This gain was primarily due to greater contribution from interest income, and partly due to 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.

For full-year fiscal 2023, we forecast revenue growth of 37%, in line with management’s guidance and up 120 basis points from our prior expectations. For the remainder of the year and into fiscal 2024, we assume net new client additions, a gradual skew to larger clients and greater module uptake to be partly offset by softening employment within the base as contractionary monetary policy curbs economic activity. Despite macroeconomic headwinds and ongoing investment in product development and sales, we expect interest income revenue to boost operating margins year on year to 14%, up from our prior forecast of 12%, and 10% in 2022.