Paylocity Holding Corp

Previous wording

We are a leading cloud-based provider of human capital management, or HCM, and payroll software solutions that deliver a comprehensive platform for the modern workforce. Our HCM and payroll platform offers an intuitive, easy-to-use product suite that helps businesses attract and retain talent, build culture and connection with their employees, and streamline and automate HR and payroll processes.

Current wording

We are a leading cloud-based provider of human capital management, payroll and spend management software solutions that deliver a comprehensive platform for the modern workforce. Our platform offers an intuitive, easy-to-use product suite that helps businesses attract and retain talent, build culture and connection with their employees, and streamline and automate HR, payroll and spend management processes. We are expanding the spend management capabilities of our platform beyond expense management to include bill pay and accounts payable automation, corporate cards, and procurement capabilities through the acquisition of Airbase Inc. in October 2024. This integrated platform will enable HR and finance leaders to manage all their spend, including payroll, on a single platform.

Previous wording

We continue to invest across our entire organization as we continue to grow our business over the long term. These investments include increasing the number of personnel across all functional areas, along with improving our solutions and infrastructure to support our growth. The timing and amount of these investments will vary based on the rate at which we add new clients and personnel and scale our application development and other activities. Many of these investments will occur in advance of experiencing any direct benefit from them, which will make it difficult to determine if we are effectively allocating our resources. We expect these investments to increase our costs on an absolute basis, but as we grow our number of clients and our related revenues, we anticipate that we will gain economies of scale and increased operating leverage. As a result, we expect our gross and operating margins will improve over the long term.

Current wording

We continue to invest across our entire organization as we grow our business over the long term. These investments include increasing the number of personnel across all functional areas, along with improving our solutions and infrastructure to support our growth. The timing and amount of these investments will vary based on the rate at which we add new clients and personnel and scale our application development and other activities. Many of these investments will occur in advance of experiencing any direct benefit from them, which will make it difficult to determine if we are effectively allocating our resources. We expect these investments to increase our costs on an absolute basis, but as we grow our number of clients and our related revenues, we anticipate that we will gain economies of scale and increased operating leverage. As a result, we expect our gross and operating margins will improve over the long term.

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 $317.6 million for the three months ended September 30, 2023 to $363.0 million for the three months ended September 30, 2024, representing a 14% year-over-year increase. The increase in year-over-year revenue growth was driven by the strong performance by our sales team. 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 $326.4 million for the three months ended December 31, 2023 to $377.0 million for the three months ended December 31, 2024, representing a 16% year-over-year increase. Total revenues increased from $643.9 million for the six months ended December 31, 2023 to $739.9 million for the six months ended December 31, 2024, representing a 15% year-over-year increase. The increase in year-over-year revenue growth was driven by the strong performance by our sales team. 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.

Previous wording

We define Adjusted Gross Profit as gross profit before amortization of capitalized internal-use software costs, amortization of certain acquired intangibles, stock-based compensation expense and employer payroll taxes related to stock releases and option exercises, and other items as defined below. We define Adjusted EBITDA as net income before interest expense, income tax expense (benefit), depreciation and amortization expense, stock-based compensation expense and employer payroll taxes related to stock releases and option exercises and other items as defined below.

Current wording

We define Adjusted Gross Profit as gross profit before amortization of capitalized internal-use software costs, amortization of certain acquired intangibles, stock-based compensation expense and employer payroll taxes related to stock releases and option exercises, and other items as described below. We define Adjusted EBITDA as net income before interest expense, income tax expense (benefit), depreciation and amortization expense, stock-based compensation expense and employer payroll taxes related to stock releases and option exercises and other items as described below.

Previous wording

(1)Represents severance cost adjustments related to certain roles that have been eliminated. We exclude one-off severance costs that we incur as part of the normal course of our business operations.

Current wording

(1)Represents acquisition-related costs and severance cost adjustments related to certain roles that have been eliminated. We exclude one-off severance costs that we incur as part of the normal course of our business operations.

Previous wording

(2)Represents acquisition and nonrecurring transaction-related costs and severance costs related to certain roles that have been eliminated. We exclude one-off severance costs that we incur as part of the normal course of our business operations.

Current wording

(2)Represents acquisition and nonrecurring transaction-related costs, lease exit activity and severance costs related to certain roles that have been eliminated. We exclude one-off severance costs that we incur as part of the normal course of our business operations.

Previous wording

We generate substantially all of our recurring and other revenue from ongoing subscriptions to our cloud-based HCM and payroll software solutions, which are recurring in nature. Recurring fees for each client generally include a base fee in addition to a fee based on the number of client employees and the number of products a client uses. We also charge fees attributable to our preparation of W-2 documents and annual required filings on behalf of our clients. We charge implementation fees for professional services provided to implement our HCM and payroll solutions.

Current wording

We generate substantially all of our recurring and other revenue from ongoing subscriptions to our cloud-based HCM and payroll software solutions, which are recurring in nature. Recurring fees for each client generally include a base fee in addition to a fee based on the number of client employees and the number of products a client uses. We also charge fees for our preparation of W-2 documents and annual required filings on behalf of our clients. We charge implementation fees for professional services provided to implement our HCM and payroll solutions.

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 necessarily a good indicator of our financial results in any given period. Recurring and other revenue accounted for 92% of our total revenues for both the three months ended September 30, 2023 and 2024.

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 necessarily a good indicator of our financial results in any given period. Recurring and other revenue accounted for 91% and 92% of our total revenues for the three months ended December 31, 2023 and 2024, respectively, and 92% of our total revenues for the both the six months ended December 31, 2023 and 2024.

Previous wording

We also capitalize a portion of our internal-use software costs, which are then primarily amortized as Cost of revenues. We amortized $9.5 million and $13.8 million of capitalized internal-use software costs during the three months ended September 30, 2023 and 2024, 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 $10.7 million and $14.8 million of capitalized internal-use software costs during the three months ended December 31, 2023 and 2024, respectively, and $20.2 million and $28.6 million of capitalized internal-use software costs for the six months ended December 31, 2023 and 2024, respectively.

Previous wording

Sales and marketing expenses consist primarily of employee-related expenses for our direct sales and marketing staff, including wages, commissions, stock-based compensation, bonuses, benefits, marketing expenses and other related costs. Our sales personnel earn commissions and bonuses for attainment of certain performance criteria based on new sales throughout the fiscal year. We capitalize certain selling and commission costs related to new contracts or purchases of additional services by our existing clients and amortize them over a period of 7 years.

Current wording

Sales and marketing expenses consist primarily of employee-related expenses for our direct sales and marketing staff, including wages, commissions, stock-based compensation, bonuses, benefits, as well as marketing expenses and other related costs. Our sales personnel earn commissions and bonuses for attainment of certain performance criteria based on new sales throughout the fiscal year. We capitalize certain selling and commission costs related to new contracts or purchases of additional services by our existing clients and generally amortize them over a period of 7 years.

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 months ended September 30, 2023 and 2024.

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 six months ended December 31, 2023 and 2024.

Previous wording

Recurring and other revenue for the three months ended September 30, 2024 increased by $41.4 million, or 14%, to $333.1 million from $291.7 million for the three months ended September 30, 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.

Current wording

Recurring and other revenue for the three months ended December 31, 2024 increased by $49.3 million, or 17%, to $347.7 million from $298.4 million for the three months ended December 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 September 30, 2024 increased by $4.0 million, or 15%, to $29.9 million from $25.9 million for the three months ended September 30, 2023. Interest income on funds held for clients increased primarily due to 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 December 31, 2024 increased by $1.3 million, or 5%, to $29.3 million from $27.9 million for the three months ended December 31, 2023. Interest income on funds held for clients increased primarily due to 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, partially offset by lower interest rates.

Previous wording

Cost of revenues for the three months ended September 30, 2024 increased by $13.5 million, or 13%, to $115.0 million from $101.5 million for the three months ended September 30, 2023. Cost of revenues increased primarily as a result of the continued growth of our business, in particular, $6.4 million in additional employee-related costs, $4.2 million in additional amortization of internal use software, and $3.2 million in additional processing and delivery related costs. Gross margin remained consistent at 68% for both the three months ended September 30, 2023 and 2024.

Current wording

Cost of revenues for the three months ended December 31, 2024 increased by $17.1 million, or 16%, to $124.5 million from $107.4 million for the three months ended December 31, 2023. Cost of revenues increased primarily as a result of the continued growth of our business, in particular, $6.4 million in additional employee-related costs, $4.2 million in additional amortization of internal use software, $3.8 million in additional processing and delivery related costs and $2.9 in additional amortization of certain intangible assets. Gross margin remained consistent at 67% for both the three months ended December 31, 2023 and 2024.

Previous wording

Sales and marketing expenses for the three months ended September 30, 2024 increased by $8.0 million, or 10%, to $88.4 million from $80.4 million for the three months ended September 30, 2023. The increase in sales and marketing expense was primarily due to $7.9 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 December 31, 2024 increased by $13.4 million, or 17%, to $93.1 million from $79.8 million for the three months ended December 31, 2023. The increase in sales and marketing expense was primarily due to $12.3 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 September 30, 2024 increased by $2.7 million, or 6%, to $47.3 million from $44.6 million for the three months ended September 30, 2023. The increase in research and development expenses was primarily due to $3.2 million of additional employee-related costs related to additional development personnel.

Current wording

Research and development expenses for the three months ended December 31, 2024 increased by $10.0 million, or 22%, to $56.2 million from $46.1 million for the three months ended December 31, 2023. The increase in research and development expenses was primarily due to $8.3 million of additional employee-related costs related to additional development personnel.

Previous wording

Our effective tax rate was 22.3% and 28.0% for the three months ended September 30, 2023 and 2024, respectively. Our effective tax rate for the three months ended September 30, 2023 was higher than the federal statutory rate of 21% primarily due to state and local income taxes, partially offset by federal research and development credits. Our effective tax rate for the three months ended September 30, 2024 was higher than the federal statutory rate of 21% primarily due to state and local income taxes.

Current wording

Our effective tax rate was 28.8% and 20.0% for the three months ended December 31, 2023 and 2024, respectively. 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 in state and local income taxes. Our effective tax rate for the three months ended December 31, 2024 was lower than the federal statutory rate of 21% primarily due to excess tax benefit from stock-based compensation.

Previous wording

General and administrative expenses for the three months ended September 30, 2024 decreased by $1.8 million, or 4%, to $48.2 million from $49.9 million for the three months ended September 30, 2023. General and administrative expenses decreased primarily due to a $4.9 million reduction in stock-based compensation expense attributable to executive award forfeitures, partially offset by $1.9 million in additional employee-related costs.

Current wording

General and administrative expenses for the six months ended December 31, 2024 increased by $11.4 million, or 12%, to $104.7 million from $93.3 million for the six months ended December 31, 2023. General and administrative expenses increased primarily due to $7.0 million in additional employee-related costs during the six months ended December 31, 2024 and a $4.3 million gain related to lease exit activity during the six months ended December 31, 2023, partially offset by a $5.2 million reduction in stock-based compensation expense attributable to executive award forfeitures.

Previous wording

Other income for the three months ended September 30, 2024 increased by $1.5 million as compared to the three months ended September 30, 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 average daily balances of those corporate cash and cash equivalents.

Current wording

Other income for the six months ended December 31, 2024 decreased by $2.1 million as compared to the six months ended December 31, 2023. The change in other income was primarily due to $4.9 million in additional interest expense related to borrowings under our revolving credit facility to fund the October 2024 acquisition of Airbase Inc., partially offset by a $2.7 million increase in interest income earned on our cash and cash equivalents as a result of higher average daily balances of those corporate cash and cash equivalents.

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 September 30, 2024, our principal source of liquidity was$453.5 million of cash and cash equivalents, excluding the proceeds drawn from our credit facility further described below. We maintain a credit agreement that provides for a$550.0 million revolving credit facility, which may be increased up to$825.0 million. In September 2024, we borrowed $325.0 million under this credit facility to fund the acquisition of Airbase Inc. in October 2024, which remained outstanding at September 30, 2024. Refer to Notes 8 and 13 of the Notes to the Unaudited Consolidated Financial Statements for additional detail on the credit agreement and Airbase acquisition, respectively.

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 December 31, 2024, our principal source of liquidity was $482.4 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. In September 2024, we borrowed $325.0 million under this credit facility to fund the acquisition of Airbase Inc. in October 2024, which remained outstanding at December 31, 2024. Refer to Notes 4 and 8 of the Notes to the Unaudited Consolidated Financial Statements for additional detail on the Airbase acquisition and credit agreement, respectively.

Previous wording

In April 2024, our board of directors authorized the repurchase of up to $500.0 million of our common stock (the "Repurchase Program"). The extent to which we repurchase shares, the number and price of any shares repurchased and the timing of any repurchases depends on the market price of our common stock, trading volume, general market conditions and other corporate and economic considerations. As of September 30, 2024, approximately $350.0 million remains authorized for repurchases under the Repurchase Program, and there were no repurchases of our common stock during the three months ended September 30, 2024.

Current wording

In April 2024, our board of directors authorized the repurchase of up to $500.0 million of our common stock (the "Repurchase Program"). The extent to which we repurchase shares, the number and price of any shares repurchased and the timing of any repurchases depends on the market price of our common stock, trading volume, general market conditions and other corporate and economic considerations. During the six months ended December 31, 2024, we repurchased an aggregate of 44 thousand shares for approximately $8.6 million at an average cost per share of $197.90 under the Repurchase Program. As of December 31, 2024, approximately $341.4 million remains authorized for repurchases under the Repurchase Program.

Previous wording

Net cash provided by operating activities was $62.1 million and $91.5 million for the three months ended September 30, 2023 and 2024, respectively. The change in net cash provided by operating activities from the three months ended September 30, 2023 to the three months ended September 30, 2024 was primarily due to net changes in operating assets and liabilities, accompanied by improved operating results after adjusting for non-cash items including stock-based compensation expense, depreciation and amortization expense and deferred income tax expense (benefit) during the three months ended September 30, 2024 as compared to the three months ended September 30, 2023.

Current wording

Net cash provided by operating activities was $137.2 million and $145.7 million for the six months ended December 31, 2023 and 2024, respectively. The change in net cash provided by operating activities from the six months ended December 31, 2023 to the six months ended December 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 (benefit) and other, partially offset by changes in operating assets and liabilities during the six months ended December 31, 2024 as compared to the six months ended December 31, 2023.

Previous wording

Net cash used in investing activities was $9.4 million and $13.3 million for the three months ended September 30, 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.

Current wording

Net cash used in investing activities was $62.2 million and $301.0 million for the six months ended December 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 $76.2 million in less proceeds from the sales and maturities of available-for-sale securities, partially offset by a $72.4 million decrease in purchases of available-for-sale securities during the three months ended September 30, 2024 as compared to the three months ended September 30, 2023.

Current wording

The change in net cash used in investing activities was primarily due to $266.0 million in additional amounts paid for acquisitions, net of cash and funds held for clients acquired, and $70.8 million less in proceeds from the sales and maturities of available-for-sale securities, partially offset by $98.7 million less in purchases of available-for-sale securities during the six months ended December 31, 2024 as compared to the six months ended December 31, 2023.

Previous wording

Net cash used in financing activities was $122.4 million and $318.3 million for the three months ended September 30, 2023 and 2024, respectively. The change in net cash used in financing activities was primarily the result of an increase in the net change in client fund obligations of $528.2 million due to the timing of client funds collected and related remittance of those funds to client employees and taxing authorities, partially offset by $325.0 million in borrowings under our credit facility during the three months ended September 30, 2024 as compared to the three months ended September 30, 2023.

Current wording

Net cash provided by financing activities was $629.9 million and $835.5 million for the six months ended December 31, 2023 and 2024, respectively. The change in net cash provided by financing activities was primarily due to $325.0 million in borrowings under our credit facility, partially offset by a decrease in the net change in client fund obligations of $97.0 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, 2024 as compared to the six months ended December 31, 2023.

Previous wording

At September 30, 2024, our principal commitments consisted of $325.0 million in borrowings on our revolving credit facility, which is contractually not due in the next twelve months, and related interest payments, as well as $62.5 million in operating lease obligations, of which $9.8 million is due in the next twelve months. We also had $70.9 million in purchase obligations, of which $41.7 million is due in the next twelve months.

Current wording

At December 31, 2024, our principal commitments consisted of $325.0 million in borrowings on our revolving credit facility, which is contractually not due in the next twelve months, and related interest payments, as well as $66.8 million in operating lease obligations, of which $10.5 million is due in the next twelve months. We also had $70.9 million in purchase obligations, of which $44.8 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 $3.5 million and $2.3 million for the three months ended September 30, 2023 and 2024, respectively, exclusive of capitalized internal-use software costs of $14.2 million and $15.2 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 $6.1 million and $5.3 million for the six months ended December 31, 2023 and 2024, respectively, exclusive of capitalized internal-use software costs of $29.5 million and $29.6 million for the same periods, respectively.