pcty-20230930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

________________________________________________________________________

Form 10-Q

________________________________________________________________________


x			Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2023


o			Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission file number 001-36348

________________________________________________________________________

PAYLOCITY HOLDING CORPORATION

(Exact name of registrant as specified in its charter)

________________________________________________________________________


Delaware						46-4066644
(State or other jurisdiction of incorporation or organization)						(IRS Employer Identification No.)


1400 American Lane Schaumburg, Illinois						60173
(Address of principal executive offices)						(Zip Code)

(847) 463-3200

(Registrant’s telephone number, including area code)

________________________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

PCTY

The NASDAQ Global Select Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

Smaller Reporting Company

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 56,176,891 shares of Common Stock, $0.001 par value per share, as of October 27, 2023.

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Paylocity Holding Corporation

Form 10-Q

For the Quarterly Period Ended September 30, 2023

TABLE OF CONTENTS


			Page

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Unaudited Consolidated Balance Sheets			2

Unaudited Consolidated Statements of Operations and Comprehensive Income			3

Unaudited Consolidated Statement of Changes in Stockholders’ Equity			4

Unaudited Consolidated Statements of Cash Flows			5

Notes to the Unaudited Consolidated Financial Statements			6

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			18

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			28

ITEM 4. CONTROLS AND PROCEDURES			29

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS			30

ITEM 1A. RISK FACTORS			30

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			30

ITEM 3. DEFAULTS UPON SENIOR SECURITIES			30

ITEM 4. MINE SAFETY DISCLOSURES			30

ITEM 5. OTHER INFORMATION			31

ITEM 6. EXHIBITS			32

SIGNATURES			33

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PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Balance Sheets

(in thousands, except per share data)


	June 30, 2023		September 30, 2023
Assets
Current assets:
Cash and cash equivalents	$	288,767	$	305,031

Accounts receivable, net	25,085		30,111
Deferred contract costs	78,109		82,438
Prepaid expenses and other	35,061		36,971
Total current assets before funds held for clients	427,022		454,551
Funds held for clients	2,621,415		2,528,353
Total current assets	3,048,437		2,982,904
Capitalized internal-use software, net	86,127		95,522
Property and equipment, net	64,069		63,341
Operating lease right-of-use assets	44,067		42,890
Intangible assets, net	34,527		31,991
Goodwill	102,054		102,054
Long-term deferred contract costs	294,222		305,788
Long‑term prepaid expenses and other	6,331		5,925
Deferred income tax assets	15,846		16,362
Total assets	$	3,695,680	$	3,646,777

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	6,153	$	8,749
Accrued expenses	143,287		131,693
Total current liabilities before client fund obligations	149,440		140,442
Client fund obligations	2,625,355		2,531,789
Total current liabilities	2,774,795		2,672,231

Long-term operating lease liabilities	62,471		60,584
Other long-term liabilities	3,731		3,584
Deferred income tax liabilities	11,820		17,739
Total liabilities	$	2,852,817	$	2,754,138
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000 authorized, no shares issued and outstanding at June 30, 2023 and September 30, 2023	$	—	$	—
Common stock, $0.001 par value, 155,000 shares authorized at June 30, 2023 and September 30, 2023; 55,912 shares issued and outstanding at June 30, 2023 and 56,167 shares issued and outstanding at September 30, 2023	56		56
Additional paid-in capital	380,632		395,771
Retained earnings	466,690		501,207
Accumulated other comprehensive loss	(4,515)		(4,395)
Total stockholders' equity	$	842,863	$	892,639
Total liabilities and stockholders’ equity	$	3,695,680	$	3,646,777

See accompanying notes to unaudited consolidated financial statements.

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PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Statements of Operations and Comprehensive Income

(in thousands, except per share data)


	Three Months Ended September 30,
	2022		2023
Revenues:
Recurring and other revenue	$	245,406	$	291,685
Interest income on funds held for clients	7,874		25,901
Total revenues	253,280		317,586
Cost of revenues	84,543		101,467
Gross profit	168,737		216,119
Operating expenses:
Sales and marketing	71,063		80,403
Research and development	40,093		44,605
General and administrative	50,492		49,922
Total operating expenses	161,648		174,930
Operating income	7,089		41,189
Other income (expense)	(163)		3,225
Income before income taxes	6,926		44,414
Income tax expense (benefit)	(23,426)		9,897
Net income	$	30,352	$	34,517
Other comprehensive income (loss), net of tax	(2,372)		120
Comprehensive income	$	27,980	$	34,637

Net income per share:
Basic	$	0.55	$	0.62
Diluted	$	0.54	$	0.61

Weighted-average shares used in computing net income per share:
Basic	55,453		56,037
Diluted	56,664		56,881

See accompanying notes to unaudited consolidated financial statements.

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PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Statement of Changes in Stockholders’ Equity

(in thousands)


	Three Months Ended September 30, 2022
	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Stockholders’ Equity
	Shares	Amount
Balances at June 30, 2022	55,190	$	55	$	289,843	$	325,868	$	(2,303)	$	613,463
Stock-based compensation	—	—		43,471		—		—		43,471
Stock options exercised	235	—		2,832		—		—		2,832
Issuance of common stock upon vesting of restricted stock units	549	1		(1)		—		—		—

Net settlement for taxes and/or exercise price related to equity awards	(310)	—		(76,900)		—		—		(76,900)
Unrealized losses on securities, net of tax	—	—		—		—		(2,372)		(2,372)

Net income	—	—		—		30,352		—		30,352
Balances at September 30, 2022	55,664	$	56	$	259,245	$	356,220	$	(4,675)	$	610,846


	Three Months Ended September 30, 2023
	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Stockholders’ Equity
	Shares	Amount
Balances at June 30, 2023	55,912	$	56	$	380,632	$	466,690	$	(4,515)	$	842,863
Stock-based compensation	—	—		43,964		—		—		43,964
Stock options exercised	14	—		223		—		—		223
Issuance of common stock upon vesting of equity awards	387	—		—		—		—		—

Net settlement for taxes and/or exercise price related to equity awards	(146)	—		(29,048)		—		—		(29,048)
Unrealized gains on securities, net of tax	—	—		—		—		120		120

Net income	—	—		—		34,517		—		34,517
Balances at September 30, 2023	56,167	$	56	$	395,771	$	501,207	$	(4,395)	$	892,639

See accompanying notes to the unaudited consolidated financial statements.

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PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Statements of Cash Flows

(in thousands)


	Three Months Ended September 30,
	2022		2023
Cash flows from operating activities:
Net income	$	30,352	$	34,517
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense	39,813		39,005
Depreciation and amortization expense	14,267		17,121
Deferred income tax expense (benefit)	(23,415)		5,391
Provision for credit losses	266		181
Net accretion of discounts on available-for-sale securities	(842)		(1,392)
Amortization of debt issuance costs	94		65
Other	125		124
Changes in operating assets and liabilities:
Accounts receivable	(6,020)		(4,801)
Deferred contract costs	(19,328)		(14,985)
Prepaid expenses and other	614		(1,669)
Accounts payable	(1,805)		1,569
Accrued expenses and other	(17,734)		(12,984)
Net cash provided by operating activities	16,387		62,142
Cash flows from investing activities:
Purchases of available-for-sale securities	(118,926)		(92,567)
Proceeds from sales and maturities of available-for-sale securities	42,850		101,216
Capitalized internal-use software costs	(9,953)		(14,193)
Purchases of property and equipment	(3,447)		(3,454)

Other investing activities	—		(406)
Net cash used in investing activities	(89,476)		(9,404)
Cash flows from financing activities:
Net change in client fund obligations	(1,688,339)		(93,566)






Taxes paid related to net share settlement of equity awards	(74,071)		(28,825)
Payment of debt issuance costs	(855)		(11)
Net cash used in financing activities	(1,763,265)		(122,402)
Net change in cash, cash equivalents and funds held for clients' cash and cash equivalents	(1,836,354)		(69,664)
Cash, cash equivalents and funds held for clients' cash and cash equivalents—beginning of period	3,793,453		2,421,312
Cash, cash equivalents and funds held for clients' cash and cash equivalents—end of period	$	1,957,099	$	2,351,648
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Purchases of property and equipment and internal-use software, accrued but not paid	$	—	$	1,803
Liabilities assumed for acquisitions	$	117	$	—
Supplemental Disclosure of Cash Flow Information
Cash paid for interest	$	62	$	124
Cash paid for income taxes	$	19	$	6,207
Reconciliation of cash, cash equivalents and funds held for clients' cash and cash equivalents to the Consolidated Balance Sheets
Cash and cash equivalents	$	65,484	$	305,031
Funds held for clients' cash and cash equivalents	1,891,615		2,046,617
Total cash, cash equivalents and funds held for clients' cash and cash equivalents	$	1,957,099	$	2,351,648

See accompanying notes to unaudited consolidated financial statements.

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PAYLOCITY HOLDING CORPORATION

Notes to the Unaudited Consolidated Financial Statements

(all amounts in thousands, except per share data)

(1) Organization and Description of Business

Paylocity Holding Corporation (the “Company”) is a cloud-based provider of human capital management and payroll software solutions that deliver a comprehensive platform for the modern workforce. Services are provided in a Software-as-a-Service (“SaaS”) delivery model. The Company’s comprehensive product suite delivers a unified platform that helps businesses attract and retain talent, build culture and connection with their employees, and streamline and automate HR and payroll processes.

(2) Summary of Significant Accounting Policies

(a) Basis of Presentation, Consolidation and Use of Estimates

These unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Future events and their effects cannot be predicted with certainty; accordingly, accounting estimates require the exercise of judgment. Accounting estimates used in the preparation of these consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the operating environment changes.

(b) Interim Unaudited Consolidated Financial Information

The accompanying unaudited consolidated financial statements and notes have been prepared in accordance with GAAP and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the Company’s financial position, results of operations, changes in stockholders’ equity and cash flows. The results of operations for the three months ended September 30, 2023 are not necessarily indicative of the results for the full year or the results for any future periods. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended June 30, 2023 included in the Company’s Annual Report on Form 10-K.

Income taxes are accounted for in accordance with ASC 740, Income Taxes, using the asset and liability method. The Company’s provision for income taxes is based on the annual effective rate method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize its deferred tax assets in the future in excess of their net-recorded amount, it would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

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(d) Recently Issued Accounting Standards

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard-setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of other recently issued standards that are not yet effective will not have a material impact on the Company’s consolidated financial statements upon adoption.

(3) Revenue

The Company derives its revenue from contracts predominantly from recurring and non-recurring service fees. While the majority of its agreements are generally cancellable by the client on 60 days’ notice or less, the Company also offers term agreements to its clients, which are generally two years in length. Recurring fees are derived from payroll, timekeeping, and HR-related cloud-based computing services. The majority of the Company’s recurring fees are satisfied over time as services are provided. The performance obligations related to payroll services are satisfied upon the processing of the client’s payroll with the fee charged and collected based on a per employee per payroll frequency fee. The performance obligations related to time and attendance services and HR related services are satisfied over time each month with the fee charged and collected based on a per employee per month fee. For subscription-based fees which can include payroll, time and attendance, and other HCM related services, the Company recognizes the applicable recurring fees over time each month with the fee charged and collected based on a per employee per month fee. Non-recurring service fees consist mainly of nonrefundable implementation fees, which involve setting the client up in, and loading data into, the Company’s cloud-based modules. These implementation activities are considered set-up activities. The Company has determined that the nonrefundable upfront fees provide certain clients with a material right to renew the contract.

Disaggregation of revenue

The following table disaggregates total revenues from contracts by Recurring fees and Implementation services and other, which the Company believes depicts the nature, amount and timing of its revenue:


	Three Months Ended September 30,
	2022		2023
Recurring fees	$	236,819	$	279,899
Implementation services and other	8,587		11,786
Total revenues from contracts	$	245,406	$	291,685

Deferred revenue

The timing of revenue recognition for recurring revenue is consistent with the timing of invoicing as they occur simultaneously based on the client payroll processing period or by month. As such, the Company does not recognize contract assets or liabilities related to recurring revenue.

The Company defers and amortizes nonrefundable upfront fees related to implementation services generally over a period up to 24 months based on the type of contract. The following table summarizes the changes in deferred revenue (i.e., contract liability) related to these nonrefundable upfront fees as follows:


	Three Months Ended September 30,
	2022		2023
Balance at beginning of the period	$	12,233	$	22,617
Deferral of revenue	8,232		10,644
Revenue recognized	(6,270)		(9,121)
Balance at end of the period	$	14,195	$	24,140

Deferred revenue related to these nonrefundable upfront fees are recorded within Accrued expenses and Other long-term liabilities on the Unaudited Consolidated Balance Sheets. The Company expects to recognize these deferred revenue balances of $18,695 in fiscal 2024, $5,035 in fiscal 2025 and $410 in fiscal 2026 and thereafter.

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Deferred contract costs

The Company defers certain selling and commission costs that meet the capitalization criteria under ASC 340-40. The Company also capitalizes certain costs to fulfill a contract related to its proprietary products if they are identifiable, generate or enhance resources used to satisfy future performance obligations and are expected to be recovered under ASC 340-40. Implementation fees are treated as nonrefundable upfront fees and the related implementation costs are required to be capitalized and amortized over the expected period of benefit, which is the period in which the Company expects to recover the costs and enhance its ability to satisfy future performance obligations.

The Company utilizes the portfolio approach to account for both the cost of obtaining a contract and the cost of fulfilling a contract. These capitalized costs are amortized over the expected period of benefit, which has been determined to be over 7 years based on the Company’s average client life and other qualitative factors, including rate of technological changes. The Company does not incur any additional costs to obtain or fulfill contracts upon renewal. The Company recognizes additional selling and commission costs and fulfillment costs when an existing client purchases additional services. These additional costs only relate to the additional services purchased and do not relate to the renewal of previous services.

The following tables present the deferred contract costs and the related amortization expense for these deferred contract costs:


	Three Months Ended September 30, 2022
	Beginning Balance		Capitalized Costs		Amortization		Ending Balance
Costs to obtain a new contract	$	182,543	$	18,912	$	(10,367)	$	191,088
Costs to fulfill a contract	106,025		16,862		(5,363)		117,524
Total	$	288,568	$	35,774	$	(15,730)	$	308,612


	Three Months Ended September 30, 2023
	Beginning Balance		Capitalized Costs		Amortization		Ending Balance
Costs to obtain a new contract	$	218,965	$	17,760	$	(12,316)	$	224,409
Costs to fulfill a contract	153,366		18,455		(8,004)		163,817
Total	$	372,331	$	36,215	$	(20,320)	$	388,226

Deferred contract costs are recorded within Deferred contract costs and Long-term deferred contract costs on the Unaudited Consolidated Balance Sheets. Amortization of deferred contract costs is primarily recorded in Cost of revenues and Sales and marketing in the Unaudited Consolidated Statements of Operations and Comprehensive Income.

Remaining Performance Obligations

The balance of the Company’s remaining performance obligations related to minimum monthly fees on its term-based contracts was approximately $72,578 as of September 30, 2023, which will be generally recognized over the next 24 months. This balance excludes the value of unsatisfied performance obligations for contracts that have an original expected duration of one year or less and contracts for which the variable consideration is allocated entirely to wholly unsatisfied performance obligations.

(4) Balance Sheet Information

The following tables provide details of selected consolidated balance sheet items:

Activity in the allowance for credit losses related to accounts receivable was as follows:


Balance at June 30, 2023	$	1,620
Charged to expense	181
Write-offs	(49)
Balance at September 30, 2023	$	1,752

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Capitalized internal-use software and accumulated amortization were as follows:


	June 30, 2023		September 30, 2023
Capitalized internal-use software	$	248,738	$	267,668
Accumulated amortization	(162,611)		(172,146)
Capitalized internal-use software, net	$	86,127	$	95,522

Amortization of capitalized internal-use software costs is primarily included in Cost of revenues and amounted to $7,042 and $9,535 for the three months ended September 30, 2022 and 2023, respectively.

The major classes of property and equipment, net were as follows:


	June 30, 2023		September 30, 2023
Office equipment	$	2,508	$	2,743
Computer equipment	58,670		59,339
Furniture and fixtures	12,958		13,024
Software	11,127		11,336
Leasehold improvements	48,159		48,643
Time clocks rented by clients	8,533		8,921
Total	141,955		144,006
Accumulated depreciation	(77,886)		(80,665)
Property and equipment, net	$	64,069	$	63,341

Depreciation expense amounted to $4,454 and $5,050 for the three months ended September 30, 2022 and 2023, respectively.

There were no changes to goodwill between the year ended June 30, 2023 and September 30, 2023. The Company’s amortizable intangible assets and estimated useful lives are as follows:

SEC Form 10-Q filed by Paylocity Holding Corporation