Paylocity reported an 18.1% total revenue growth for Q3 2024, reaching $401.3 million.
Adjusted EBITDA for the quarter was $167.9 million, representing a 41.8% margin.
The company exceeded its Q3 guidance by $2.3 million in revenue and $11.4 million in adjusted EBITDA.
Year-over-year investment in total R&D increased by 13.4%.
For fiscal 2024, total revenue is expected to be between $1.393 billion to $1.397 billion, approximately 19% growth over fiscal ‘23. Adjusted EBITDA is anticipated to be between $489.5 million to $492.5 million.
Product Development and Market Position
Paylocity continues to invest in product enhancements, particularly in its talent acquisition suite, to meet the needs of the modern workforce, including Gen Z.
New features include text to scan, 2-way texting for recruiters, and AI-driven smart groups within the community for new hires.
The company’s mobile app provides employees with the ability to stay connected and access essential information from anywhere.
Paylocity was recognized as an overall leader in 10 product categories in the G2 Spring 2024 grid reports and ranked #2 on TrustRadius’s 2024 Most Loved List.
Strategic Initiatives and Future Outlook
Paylocity’s go-to-market strategy and sales execution remain strong, with channel referrals accounting for more than 25% of new business in Q3.
The company announced a $500 million share repurchase program, reflecting confidence in its business and focus on driving shareholder value.
Paylocity aims to achieve $2 billion in revenue as the next key milestone, aligning all aspects of the organization towards this goal.
Financial targets reconfirmed, including adjusted gross margin of 75% to 80%, R&D of 10% to 15% of revenue, sales and marketing of 20% to 25% of revenue, G&A of 5% to 10% of revenue, adjusted EBITDA margin of 35% to 40%, free cash flow margin of 20% to 25%, and stock-based comp target of less than 10% of revenue.
Client and Market Engagement
Paylocity’s new product features aim to enhance recruiter communication with candidates and support new hires’ integration, reflecting the company’s focus on meeting the evolving needs of the workforce.
The company’s strong culture and focus on values were highlighted by being named one of Forbes’ best large employers for America in 2024.
Question and Answer
Demand Environment and New Sales
Question
How was the overall demand environment for net new sales in the quarter, and how does it compare to expectations and the previous quarter?
Answer
The demand environment for net new sales was in line with expectations, with the company’s value proposition and strategy continuing to resonate.
Channel contribution remained strong, with new business coming from the channel exceeding 25%.
Top of funnel activity and talent acquisition for the go-to-market team were as expected.
Sales Force Expansion and Productivity
Question
Given the current growth rate, how will the company approach hiring and expanding the sales force for the rest of the year?
Answer
The company will focus on driving productivity improvements in the sales force rather than hiring at the same rate as the previous year.
The exact percentage of hiring for the next year will be provided in the next earnings call, but the emphasis will be on balancing growth with profitability targets.
Back-to-Base Motion and Sales Efforts
Question
Does now potentially feel like the right time to focus more on the back-to-base motion and sales efforts?
Answer
The company has made improvements in its ability to go back to the base, and that opportunity is still ahead.
The focus will be on gradually adding products, ensuring client adoption, and maintaining a scalable approach to gradually increasing the back-to-base sales efforts.
Share Repurchase Authorization
Question
Why is the company implementing a $500 million share repurchase authorization at this time, and is there any update on the potential M&A strategy?
Answer
There is no update on the M&A strategy, which remains focused on product-oriented or technology-oriented deals.
The timing of the share repurchase is due to the company’s strong cash position, free cash flow progress, and low trading multiples, which present an opportunity to drive shareholder value through buybacks.
The buyback also helps offset stock-based compensation dilution.
Long-Term Growth Target and Profitability
Question
Can you clarify the long-term outlook and the 20% long-term growth target? Is it still comparable to the previous $2 billion target?
Answer
The current growth rate is below the 20% target, and the company recognizes that 20% growth may not be the right target at this time.
The focus remains on growth as the top priority, but with an increased emphasis on profitability targets.
Setting a $2 billion milestone seems to be a more appropriate way to focus on growth rather than the 20% target.
Replacement of Cloud Solutions and Competitive Landscape
Question
Are you starting to see more replacements of other cloud solutions in the pipeline or deals won?
Answer
The competitive landscape is a function of the company’s and other cloud competitors’ growth, with a relatively low market share leading to most sales being replacements for existing methods.
As the company and other cloud players grow, they start to encounter each other more frequently in deals, but the take rate between competitors is still relatively low.
Fourth Quarter Guidance and Fiscal 2025 Expectations
Question
Are there any hints you can provide about factors that could impact growth in fiscal 2025, and how is the company thinking about the long-term growth outlook?
Answer
The company is pleased with the mix of growth and profitability achieved in the current fiscal year.
Initiatives around productivity, innovation, and the share repurchase authorization have been successful.
The company is taking into consideration factors such as elongated sales cycles with larger clients and the macroeconomic environment when setting expectations for fiscal 2025.
Talent Solutions and Go-to-Market Strategy
Question
Can you provide more details about the talent solutions you’re rolling out and how they will impact the go-to-market motion, including back-to-base, upselling, and cross-selling?
Answer
The talent category has seen increased penetration rates, and new recruiting features are driving higher adoption and competitiveness in the upper end of the market.
Features like community and collaboration tools are available to all clients and contribute to the company’s differentiation as the most modern platform in the industry.
The company will continue to add additional modules and features based on client feedback and market needs to drive strong win rates across all customer segments.
AI in HR and Sales Cycle Dynamics
Question
Can you discuss the role of AI in HR and whether it presents an opportunity or hindrance in the current environment?
Answer
AI presents many opportunities in HR, and the company has embedded AI capabilities across its product suite, including personalization, recommendations, writing assistance, and forecasting models.
The company is also investing in AI to improve the serviceability of its products and assist customers in navigating the various modules they purchase.
While elongated sales cycles have been observed, the company attributes this more to macroeconomic uncertainty and initiatives are in place to address these challenges.
Linearity of Demand and Fourth Quarter Guidance
Question
Was there consistent demand linearity throughout the quarter, and did you observe any incremental pressure towards the end that informed the deceleration in Q4 guidance?
Answer
Bookings exhibit natural seasonality, with clients typically starting at the beginning of each quarter, resulting in larger start months like January.
No abnormal seasonality was observed in the quarter, and the Q4 guidance reflects the performance seen in the third quarter.
Fourth Quarter Guidance - Rate Cut Assumptions and Gross Margin
Question
Can you clarify the assumptions regarding a rate cut in the Q4 guidance, and can you discuss the gross margin trends and outlook?
Answer
The Q4 guidance no longer assumes a rate cut, which was previously included in the February guidance.
Gross margin can vary quarter-to-quarter, and while it was relatively flat year-over-year in the third quarter, the company expects to drive leverage over the long term across the entire P&L.
Significant leverage has been achieved in G&A, and the company is confident in its ability to continue delivering strong financial performance and returning value to shareholders.
Customer Uptake of New Products
Question
Can you provide an update on the customer uptake of the new products launched in the past year and compare it to previous product launches?
Answer
The company is pleased with the reception of new products, with features like Scheduling Plus, Employee Voice, and Rewards and Recognition being well-received and on track to achieve market penetration targets.
These products not only drive incremental PEPY but also contribute to the company’s differentiated story and value proposition.
Modern Platform and Gen Z Workforce
Question
How is the company’s focus on being a modern platform resonating with Gen Z customers, and is this a trend that others are also pursuing?
Answer
The company’s focus on being a modern platform resonates with Gen Z customers, who have unique demands on HR departments, such as a desire for transparency, communication, and understanding of organizational culture and values.
Many of the products developed by Paylocity in recent years address these challenges and provide HR departments with capabilities to manage a multigenerational workforce in a tight labor market.
The company’s features, including its mobile app and communication tools, have received positive feedback for their effectiveness in managing the growing Gen Z population.
Upmarket Expansion and Competitive Dynamics
Question
How are competitive dynamics evolving as the company expands upmarket, particularly with companies like Workday moving downmarket?
Answer
The company has successfully expanded upmarket in recent years and has seen strong receptivity and win rates in the 1,000+ employee segment.
While it took some time for new reps to ramp up and elongated sales cycles were observed, the company is confident in its ability to compete and succeed in the upmarket segment.
Recurring Revenue Growth and Workforce Levels
Question
Can you clarify the drivers of the Q3 recurring revenue growth and whether there were any assumptions that came in below expectations?
Answer
Q3 saw solid performance across the board, with incremental upside in recurring revenue driven by strong sales execution and workforce levels coming in as expected.
Recurring Revenue Growth and Workforce Levels - Clarification
Question
Can you clarify whether there were any one-time or unexpected sources of revenue in Q3 that contributed to the sequential growth rate?
Answer
There were no one-time or unexpected sources of revenue in Q3 that significantly impacted the sequential growth rate.
Recurring Revenue Growth and Form Filing
Question
Can you clarify whether there were any one-time or unexpected sources of form filing revenue in Q3 that need to be considered when looking at Q3 growth rates for next year?
Answer
Form filing revenue is based on the number of employees on the platform and typically grows at a slower rate than other revenue streams due to the company’s focus on cross-selling and upselling additional products.
Go-to-Market Strategies and Headcount Planning
Question
How are the progress of go-to-market strategies impacting headcount planning, especially on the sales front, for the rest of the year and fiscal 2025?
Answer
The company’s approach to headcount planning remains consistent, with a focus on productivity opportunities and a balanced approach to growth and profitability.
The company recognizes the longer time period between driving initiatives, seeing improvements, and recognizing revenue, particularly in the upper end of the market where clients may commit several months ahead of time.
The company is focused on driving improvements throughout the year and preparing for a strong January, which is typically a key period for large client starts.
Customer Uptake of Additional Products
Question
Are there any differing trends in customer willingness to adopt additional products, depending on whether they are downmarket or upmarket?
Answer
The company has not observed any significant shifts in customer willingness to adopt additional products, with consistent levels of PEPY realization across different market segments.
