Paylocity Holding Corp

Previous wording

Our recurring revenue model and high annual revenue retention rates provide significant visibility into our future operating results and cash flow from operations. This visibility enables us to better manage and invest in our business. Total revenues increased from $273.0 million for the three months ended December 31, 2022 to $326.4 million for the three months ended December 31, 2023, representing a 20% year-over-year increase. Total revenues increased from $526.3 million for the six months ended December 31, 2022 to $643.9 million for the six months ended December 31, 2023, representing a 22% year-over-year increase. The increase in year-over-year revenue growth was driven by the strong performance by our sales team and growth in interest income on funds held for clients attributable to rising interest rates and higher average daily balances for funds held for clients due to the addition of new clients as compared to the prior fiscal year. Uncertainties around market and economic conditions may impact revenue growth, which we have recently experienced and may continue to experience, through fluctuations in client employee counts, elongated sales cycles, client losses, and a changing interest rate environment, among other factors.

Current wording

Our recurring revenue model and high annual revenue retention rates provide significant visibility into our future operating results and cash flow from operations. This visibility enables us to better manage and invest in our business. Total revenues increased from $339.9 million for the three months ended March 31, 2023 to $401.3 million for the three months ended March 31, 2024, representing a 18% year-over-year increase. Total revenues increased from $866.1 million for the nine months ended March 31, 2023 to $1,045.2 million for the nine months ended March 31, 2024, representing a 21% year-over-year increase. The increase in year-over-year revenue growth was driven by the strong performance by our sales team and growth in interest income on funds held for clients attributable to rising interest rates and higher average daily balances for funds held for clients due to the addition of new clients as compared to the prior fiscal year.

Previous wording

Adjusted Gross Profit and Adjusted EBITDA are not measurements of financial performance under generally accepted accounting principles in the United States (“GAAP”), and you should not consider Adjusted Gross Profit as an alternative to gross profit or Adjusted EBITDA as an alternative to net income or cash provided by operating activities, in each case as determined in accordance with GAAP. In addition, our definition of Adjusted Gross Profit and Adjusted EBITDA may be different than the definition utilized for similarly-titled measures used by other companies.

Current wording

Adjusted Gross Profit and Adjusted EBITDA are not measurements of financial performance under generally accepted accounting principles in the United States (“GAAP”), and you should not consider Adjusted Gross Profit as an alternative to gross profit or Adjusted EBITDA as an alternative to net income, in each case as determined in accordance with GAAP. In addition, our definition of Adjusted Gross Profit and Adjusted EBITDA may be different than the definition utilized for similarly-titled measures used by other companies.

Previous wording

The number of client employees on our platform and the mix of products purchased by a client as well as the timing of services provided with respect to those client employees can vary each period. As such, the number of client employees on our system is not a good indicator of our financial results in any given period. Recurring and other revenue accounted for 94% and 91% of our total revenues for the three months ended December 31, 2022 and 2023, respectively, and 95% and 92% of our total revenues for the six months ended December 31, 2022 and 2023, respectively.

Current wording

The number of client employees on our platform and the mix of products purchased by a client as well as the timing of services provided with respect to those client employees can vary each period. As such, the number of client employees on our system is not a good indicator of our financial results in any given period. Recurring and other revenue accounted for 92% and 91% of our total revenues for the three months ended March 31, 2023 and 2024, respectively, and 94% and 92% of our total revenues for the nine months ended March 31, 2023 and 2024, respectively.

Previous wording

We also capitalize a portion of our internal-use software costs, which are then primarily amortized as Cost of revenues. We amortized $7.5 million and $10.7 million of capitalized internal-use software costs during the three months ended December 31, 2022 and 2023, respectively, and $14.5 million and $20.2 million of capitalized internal-use software costs for the six months ended December 31, 2022 and 2023, respectively.

Current wording

We also capitalize a portion of our internal-use software costs, which are then primarily amortized as Cost of revenues. We amortized $8.0 million and $12.3 million of capitalized internal-use software costs during the three months ended March 31, 2023 and 2024, respectively, and $22.5 million and $32.5 million of capitalized internal-use software costs for the nine months ended March 31, 2023 and 2024, respectively.

Previous wording

We capitalize a portion of our development costs related to internal-use software. The timing of our capitalized development projects may affect the amount of development costs expensed in any given period. The table below sets forth the amounts of capitalized and expensed research and development expenses for the three and six months ended December 31, 2022 and 2023.

Current wording

We capitalize a portion of our development costs related to internal-use software. The timing of our capitalized development projects may affect the amount of development costs expensed in any given period. The table below sets forth the amounts of capitalized and expensed research and development expenses for the three and nine months ended March 31, 2023 and 2024.

Previous wording

Recurring and other revenue for the three months ended December 31, 2023 increased by $42.0 million, or 16%, to $298.4 million from $256.4 million for the three months ended December 31, 2022. Recurring and other revenue increased primarily as a result of incremental revenues from new and existing clients due to the strong performance by our sales team.

Current wording

Recurring and other revenue for the three months ended March 31, 2024 increased by $52.7 million, or 17%, to $366.8 million from $314.2 million for the three months ended March 31, 2023. Recurring and other revenue increased primarily as a result of incremental revenues from new and existing clients due to the strong performance by our sales team.

Previous wording

Interest income on funds held for clients for the three months ended December 31, 2023 increased by $11.4 million, or 69%, to $27.9 million from $16.6 million for the three months ended December 31, 2022. Interest income on funds held for clients increased primarily due to higher interest rates and higher average daily balances for funds held due to the addition of new clients to our client base as compared to the prior fiscal year.

Current wording

Interest income on funds held for clients for the three months ended March 31, 2024 increased by $8.8 million, or 34%, to $34.4 million from $25.7 million for the three months ended March 31, 2023. Interest income on funds held for clients increased primarily due to higher interest rates and higher average daily balances for funds held due to the addition of new clients to our client base as compared to the prior fiscal year.

Previous wording

Cost of revenues for the six months ended December 31, 2023 increased by $34.2 million, or 20%, to $208.9 million from $174.6 million for the six months ended December 31, 2022. Cost of revenues increased primarily as a result of the continued growth of our business, in particular, $21.7 million in additional employee-related costs resulting from additional personnel necessary to provide services to new and existing clients, $5.6 million in additional amortization of internal use software and $5.8 million in additional delivery and other processing costs. Gross margin increased from 67% for the six months ended December 31, 2022 to 68% for the six months ended December 31, 2023.

Current wording

Cost of revenues for the three months ended March 31, 2024 increased by $20.3 million, or 21%, to $116.0 million from $95.7 million for the three months ended March 31, 2023. Cost of revenues increased primarily as a result of the continued growth of our business, in particular, $11.1 million in additional employee-related costs resulting from additional personnel necessary to provide services to new and existing clients, $4.3 million in additional processing and delivery related costs and $4.3 million in additional amortization of internal use software. Gross margin decreased from 72% for the three months ended March 31, 2023 to 71% for the three months ended March 31, 2024.

Previous wording

Sales and marketing expenses for the three months ended December 31, 2023 increased by $4.1 million, or 5%, to $79.8 million from $75.7 million for the three months ended December 31, 2022. The increase in sales and marketing expense was primarily due to $3.9 million of additional employee-related costs, including those incurred to expand our sales team.

Current wording

Sales and marketing expenses for the three months ended March 31, 2024 increased by $12.7 million, or 17%, to $86.8 million from $74.1 million for the three months ended March 31, 2023. The increase in sales and marketing expense was primarily due to $9.2 million of additional employee-related costs, including those incurred to expand our sales team.

Previous wording

Research and development expenses for the three months ended December 31, 2023 increased by $5.1 million, or 12%, to $46.1 million from $41.0 million for the three months ended December 31, 2022. The increase in research and development expenses was primarily due to $8.6 million of additional employee-related costs related to additional development personnel, partially offset by $4.8 million in higher period-over-period capitalized internal-use software costs.

Current wording

Research and development expenses for the three months ended March 31, 2024 increased by $1.1 million, or 3%, to $43.4 million from $42.3 million for the three months ended March 31, 2023. The increase in research and development expenses was primarily due to $6.9 million of additional employee-related costs related to additional development personnel, partially offset by $3.9 million in higher period-over-period capitalized internal-use software costs.

Previous wording

Other income for the three months ended December 31, 2023 increased by $3.8 million as compared to the three months ended December 31, 2022. The change in other income was primarily due to higher interest income earned on our cash and cash equivalents as a result of higher interest rates and higher average daily balances of those corporate cash and cash equivalents.

Current wording

Other income for the three months ended March 31, 2024 increased by $3.2 million as compared to the three months ended March 31, 2023. The change in other income was primarily due to higher interest income earned on our cash and cash equivalents as a result of higher interest rates and higher average daily balances of those corporate cash and cash equivalents.

Previous wording

Our effective tax rate was 14.3% and 28.8% for the three months ended December 31, 2022 and 2023, respectively. Our effective tax rate for the three months ended December 31, 2022 was lower than the federal statutory rate of 21% primarily due to a decrease to the valuation allowance, partially offset by non-deductible stock-based compensation under Internal Revenue Code Section 162(m). Our effective tax rate for the three months ended December 31, 2023 was higher than the federal statutory rate of 21% primarily due to an increase to state and local income taxes.

Current wording

Our effective tax rate was 29.3% and 22.9% for the three months ended March 31, 2023 and 2024, respectively. Our effective tax rate for the three months ended March 31, 2023 was higher than the federal statutory rate of 21% primarily due to an increase to non-deductible stock-based compensation under Internal Revenue Code Section 162(m) and state and local income taxes. Our effective tax rate for the three months ended March 31, 2024 was higher than the federal statutory rate of 21% primarily due to state and local income taxes.

Previous wording

Recurring and other revenue for the six months ended December 31, 2023 increased by $88.3 million, or 18%, to $590.1 million from $501.8 million for the six months ended December 31, 2022. Recurring and other revenue increased primarily as a result of incremental revenues from new and existing clients due to the strong performance by our sales team.

Current wording

Recurring and other revenue for the nine months ended March 31, 2024 increased by $140.9 million, or 17%, to $956.9 million from $816.0 million for the nine months ended March 31, 2023. Recurring and other revenue increased primarily as a result of incremental revenues from new and existing clients due to the strong performance by our sales team.

Previous wording

Interest income on funds held for clients for the six months ended December 31, 2023 increased by $29.4 million, or 120%, to $53.8 million from $24.4 million for the six months ended December 31, 2022. Interest income on funds held for clients increased primarily due to higher interest rates and higher average daily balances for funds held due to the addition of new clients to our client base as compared to the prior fiscal year.

Current wording

Interest income on funds held for clients for the nine months ended March 31, 2024 increased by $38.2 million, or 76%, to $88.3 million from $50.1 million for the nine months ended March 31, 2023. Interest income on funds held for clients increased primarily due to higher interest rates and higher average daily balances for funds held due to the addition of new clients to our client base as compared to the prior fiscal year.

Previous wording

Cost of revenues for the three months ended December 31, 2023 increased by $17.3 million, or 19%, to $107.4 million from $90.1 million for the three months ended December 31, 2022. Cost of revenues increased primarily as a result of the continued growth of our business, in particular, $11.9 million in additional employee-related costs resulting from additional personnel necessary to provide services to new and existing clients and $3.1 million in additional amortization of internal use software. Gross margin was 67% for both the three months ended December 31, 2022 and three months ended December 31, 2023.

Current wording

Cost of revenues for the nine months ended March 31, 2024 increased by $54.5 million, or 20%, to $324.8 million from $270.3 million for the nine months ended March 31, 2023. Cost of revenues increased primarily as a result of the continued growth of our business, in particular, $32.8 million in additional employee-related costs resulting from additional personnel necessary to provide services to new and existing clients, $10.1 million in additional processing and delivery related costs and $10.0 million in additional amortization of internal use software. Gross margin was 69% for both the nine months ended March 31, 2023 and 2024.

Previous wording

Sales and marketing expenses for the six months ended December 31, 2023 increased by $13.4 million, or 9%, to $160.2 million from $146.8 million for the six months ended December 31, 2022. The increase in sales and marketing expense was primarily due to $10.7 million of additional employee-related costs, including those incurred to expand our sales team.

Current wording

Sales and marketing expenses for the nine months ended March 31, 2024 increased by $26.1 million, or 12%, to $246.9 million from $220.8 million for the nine months ended March 31, 2023. The increase in sales and marketing expense was primarily due to $19.9 million of additional employee-related costs, including those incurred to expand our sales team.

Previous wording

Research and development expenses for the six months ended December 31, 2023 increased by $9.6 million, or 12%, to $90.7 million from $81.1 million for the six months ended December 31, 2022. The increase in research and development expenses was primarily due to $17.2 million of additional employee-related costs related to additional development personnel, partially offset by $10.8 million in higher period-over-period capitalized internal-use software costs.

Current wording

Research and development expenses for the nine months ended March 31, 2024 increased by $10.7 million, or 9%, to $134.1 million from $123.4 million for the nine months ended March 31, 2023. The increase in research and development expenses was primarily due to $24.0 million of additional employee-related costs related to additional development personnel, partially offset by $14.6 million in higher period-over-period capitalized internal-use software costs.

Previous wording

General and administrative expenses for the six months ended December 31, 2023 decreased by $5.2 million, or 5%, to $93.3 million from $98.5 million for the six months ended December 31, 2022. General and administrative expenses decreased primarily due to a $4.3 million gain related to lease exit activity during the six months ended December 31, 2023. Excluding the gain on lease exit activity, General and administrative expenses remained relatively flat year over year as we continue to focus on achieving cost efficiencies as our business scales.

Current wording

General and administrative expenses for the nine months ended March 31, 2024 decreased by $3.7 million, or 3%, to $142.1 million from $145.9 million for the nine months ended March 31, 2023. General and administrative expenses decreased primarily due to a $4.3 million gain related to lease exit activity during the nine months ended March 31, 2024. Excluding the gain on lease exit activity, general and administrative expenses remained relatively flat year over year as we continue to focus on achieving cost efficiencies as our business scales.

Previous wording

Other income for the six months ended December 31, 2023 increased by $7.2 million as compared to the six months ended December 31, 2022. The change in other income was primarily due to higher interest income earned on our cash and cash equivalents as a result of higher interest rates and higher average daily balances of those corporate cash and cash equivalents.

Current wording

Other income for the nine months ended March 31, 2024 increased by $10.4 million as compared to the nine months ended March 31, 2023. The change in other income was primarily due to higher interest income earned on our cash and cash equivalents as a result of higher interest rates and higher average daily balances of those corporate cash and cash equivalents.

Previous wording

21% primarily due to excess tax benefits from employee stock-based compensation, state and local income taxes, and a decrease in the valuation allowance. Our effective tax rate for the six months ended December 31, 2023 was higher than the federal statutory rate of 21% primarily due to state and local income taxes.

Current wording

Our effective tax rate was 2.9% and 24.3% for the nine months ended March 31, 2023 and 2024, respectively. Our effective tax rate for the nine months ended March 31, 2023 was lower than the federal statutory rate of 21% primarily due to excess tax benefits from employee stock-based compensation, research and development tax credits, and a decrease in the valuation allowance. Our effective tax rate for the nine months ended March 31, 2024 was higher than the federal statutory rate of 21% primarily due to state and local income taxes.

Previous wording

Our primary liquidity needs are related to the funding of general business requirements, including working capital requirements, research and development, and capital expenditures. As of December 31, 2023, our principal source of liquidity was $366.9 million of cash and cash equivalents. We maintain a credit agreement that provides for a$550.0 million revolving credit facility, which may be increased up to$825.0 million. No amounts were drawn on the revolving credit facility as of December 31, 2023. Refer to Note 8 of the Notes to the Unaudited Consolidated Financial Statements for additional detail on the credit agreement.

Current wording

Our primary liquidity needs are related to the funding of general business requirements, including working capital requirements, research and development, and capital expenditures. As of March 31, 2024, our principal source of liquidity was $492.7 million of cash and cash equivalents. We maintain a credit agreement that provides for a$550.0 million revolving credit facility, which may be increased up to$825.0 million. No amounts were drawn on the revolving credit facility as of March 31, 2024. Refer to Note 8 of the Notes to the Unaudited Consolidated Financial Statements for additional detail on the credit agreement.

Previous wording

Net cash provided by operating activities was $78.8 million and $137.2 million for the six months ended December 31, 2022 and 2023, respectively. The change in net cash provided by operating activities from the six months ended December 31, 2022 to the six months ended December 31, 2023 was primarily due to improved operating results after adjusting for non-cash items including stock-based compensation expense, depreciation and amortization expense and deferred income tax expense (benefit), partially offset by net changes in operating assets and liabilities during the six months ended December 31, 2023 as compared to the six months ended December 31, 2022.

Current wording

Net cash provided by operating activities was $206.1 million and $304.7 million for the nine months ended March 31, 2023 and 2024, respectively. The change in net cash provided by operating activities from the nine months ended March 31, 2023 to the nine months ended March 31, 2024 was primarily due to improved operating results after adjusting for non-cash items including stock-based compensation expense, depreciation and amortization expense and deferred income tax expense during the nine months ended March 31, 2024 as compared to the nine months ended March 31, 2023.

Previous wording

Net cash used in investing activities was $132.2 million and $62.2 million for the six months ended December 31, 2022 and 2023, respectively. The net cash used in investing activities is significantly impacted by the timing of purchases and sales and maturities of investments as we invest portions of funds held for clients in highly liquid, investment-grade marketable securities. The amount of funds held for clients invested will vary based on timing of client funds collected and payments due to client employees and taxing and other regulatory authorities.

Current wording

Net cash used in investing activities was $298.8 million and $76.4 million for the nine months ended March 31, 2023 and 2024, respectively. The net cash used in investing activities is significantly impacted by the timing of purchases and sales and maturities of investments as we invest portions of funds held for clients in highly liquid, investment-grade marketable securities. The amount of funds held for clients invested will vary based on timing of client funds collected and payments due to client employees and taxing and other regulatory authorities.

Previous wording

The change in net cash used in investing activities was primarily due to $131.2 million in fewer purchases of available-for-sale securities, partially offset by $39.4 million in fewer proceeds from the sales and maturities of available-for-sale securities, $12.0 million in additional amounts paid for acquisitions, net of cash acquired and $9.7 million in additional capitalized internal-use software costs during the six months ended December 31, 2023 as compared to the six months ended December 31, 2022.

Current wording

The change in net cash used in investing activities was primarily due to a $325.7 million decrease in purchases of available-for-sale securities, partially offset by $75.4 million less proceeds from the sales and maturities of available-for- sale securities, $12.0 million in additional amounts paid for acquisitions, net of cash acquired and $13.8 million in additional capitalized internal-use software costs during the nine months ended March 31, 2024 as compared to the nine months ended March 31, 2023.

Previous wording

Net cash provided by (used in) financing activities was $(993.9) million and $629.9 million for the six months ended December 31, 2022 and 2023, respectively. The change in net cash provided by (used in) financing activities was primarily the result of an increase in the net change in client fund obligations of $1,564.5 million due to the timing of client funds collected and related remittance of those funds to client employees and taxing authorities during the six months ended December 31, 2023 as compared to the six months ended December 31, 2022.

Current wording

Net cash provided by (used in) financing activities was $(862.0) million and $927.5 million for the nine months ended March 31, 2023 and 2024, respectively. The change in net cash provided by (used in) financing activities was primarily the result of an increase in the net change in client fund obligations of $1,749.4 million due to the timing of client funds collected and related remittance of those funds to client employees and taxing authorities during the nine months ended March 31, 2024 as compared to the nine months ended March 31, 2023.

Previous wording

At December 31, 2023, our principal commitments consisted of $70.1 million in operating lease obligations, of which $10.6 million is due in the next twelve months. We also had $59.6 million in purchase obligations, of which $40.4 million is due in the next twelve months.

Current wording

At March 31, 2024, our principal commitments consisted of $67.2 million in operating lease obligations, of which $10.3 million is due in the next twelve months. We also had $56.0 million in purchase obligations, of which $36.9 million is due in the next twelve months.

Previous wording

We expect to continue to invest in capital spending as we continue to grow our business and expand and enhance our operating facilities, data centers and technical infrastructure. Future capital requirements will depend on many factors, including our rate of sales growth. In the event that our sales growth or other factors do not meet our expectations, we may eliminate or curtail capital projects in order to mitigate the impact on our use of cash. Capital expenditures were $6.7 million and $6.1 million for the six months ended December 31, 2022 and 2023, respectively, exclusive of capitalized internal-use software costs of $19.7 million and $29.5 million for the same periods, respectively.

Current wording

We expect to continue to invest in capital spending as we continue to grow our business and expand and enhance our operating facilities, data centers and technical infrastructure. Future capital requirements will depend on many factors, including our rate of sales growth. In the event that our sales growth or other factors do not meet our expectations, we may eliminate or curtail capital projects in order to mitigate the impact on our use of cash. Capital expenditures were $8.8 million and $11.7 million for the nine months ended March 31, 2023 and 2024, respectively, exclusive of capitalized internal-use software costs of $30.7 million and $44.5 million for the same periods, respectively.