Paylocity Holding Corporation – August 25, 2022

Organizations are facing an ever-changing employment landscape. Companies are required to deal with numerous federal, state, and local regulations across multiple jurisdictions, as the complexity of increasingly geographically dispersed employees accelerates, all whilst managing hybrid workplaces. In addition, employees’ expectations are rapidly evolving and rising, and organizations need to prioritize communication, connection, and collaboration among their employees to differentiate how they attract and retain talent.

Paylocity is a leading cloud-based provider of human capital management (HCM) and payroll software solutions that deliver a comprehensive platform for the modern workforce. The platform offers an intuitive, easy-to-use product suite that helps businesses not only attract and retain talent, but build culture and connections with employees, whilst streamlining and automating HR and payroll processes.

It provides a single system of record that supports the complete employee lifecycle including Talent, Payroll, Core HR, Workforce Management, and Benefits, and centralizes both payroll and HCM data, Furthermore, it minimizes inconsistent and incomplete information that can be produced when using multiple databases.

Despite HCM requiring a significant commitment of resources, many companies operate without the infrastructure, expertise, or personnel to implement or support large and complex systems in today’s dynamic environment. As a result, Paylocity’s software-as-a-service has rapidly grown to serve over 33,000 clients across the U.S.

Looking ahead, the company expects this momentum to continue as it strengthens and extends its position as a leading provider of cloud-based HCM and payroll solutions through expanded product offerings to both new and existing clients, continued technological innovation, and the expansion of its already comprehensive network of third-party referral participants.

After working at several other payroll firms, Steven Sarowitz founded Ameripay Payroll in 1997. He had taught himself to customize software he was reselling for another company called MPAY and was soon looking to spearhead his own software project. Sarowitz set out to create his online payroll software in 2002, aiming to provide a cutting-edge, money-saving new service for his customers. He hoped the service would challenge the giants in the industry, notably ADP and Paychex, which were pulling in billions of dollars in revenue but had not yet succeeded in offering a strong web-based product.

After some initial teething issues, the company started rolling out the first version of its software in 2004, which saw payroll data transfers that normally took hours, down to a matter of minutes. Over the next decade, as new capabilities were introduced and with a name change to Paylocity, it was repeatedly named as one of the fastest growing private companies according to Inc. Magazine and the Deloitte Fast 500, before going public in a $120 million IPO in 2014.

Now reaching over half a billion dollars in annual revenue with its diverse suite of cloud-based HCM and payroll products, the company has carved out a solid share of a relatively fragmented and highly competitive market.

Steve Beauchamp is co-CEO of Paylocity, responsible for articulating the company’s vision and driving its go-to-market strategy, including oversight of sales, marketing, and product development. Steve’s experience in the industry spans more than 25 years, having spent several years at Paychex as VP of Product Management, responsible for all product strategy and development as well as all corporate acquisitions. He was also VP of Payroll Operations for Advantage Payroll, the fourth-largest payroll company in America at that time, managing 21 offices and serving more than 50,000 clients across the country.

Steve became co-CEO In 2022 alongside Toby Williams who previously served as chief financial officer for over four years. This structure has enabled both executives to concentrate on key areas of the business and position the company for its next phase of growth.

Williams is responsible for driving operational excellence by focusing on clients, staff, and teams, whilst delivering on growth opportunities and the company’s vision of a modern HCM platform. He has a breadth of software operating experience, most recently serving as chief product and strategy officer at global higher education software leader, Ellucian. He also has significant payroll and HCM industry experience, having led mergers, acquisitions, and corporate development at Paychex and within his career as a securities and M&A lawyer.

As organizations take a more modern approach to Human Resources, HR departments are increasingly using technology to improve engagement with employees. Paylocity is helping to modernize HR for a new generation of workers that are looking for more consumer-like, mobile-first experiences when dealing with employers. The company’s products offer core payroll, for which all customers have this solution, along with a range of talent management add-on modules covering everything from recruiting and onboarding to compensation management and employee surveys.

Paylocity’s HCM and payroll software solutions provide a single, yet flexible end-to-end platform that supports the complete employee lifecycle. In addition to centralizing data and minimizing errors, the platform provides tools to communicate, focus on career development and growth, as well as drive HR automation and digital transformation. It aims to embed functionality throughout the platform that helps employees feel connected to their work whether they are on-site, remote, hybrid, or even do not have computers or email addresses.

Clients have access to their data for reporting and compliance needs; however, the company also provides prescriptive recommendations on how to interpret the data. These recommendations advise customers where to focus to achieve organizational goals, as dashboards make use of advanced AI to deliver actionable steps to improve efficiency and build a healthier workforce.

As the ability to offer unique benefits as part of remuneration packages becomes more and more important for employers, Paylocity also provides seamless integration with an extensive ecosystem of partners, automating data integration with hundreds of third-party partner systems, such as 401(k) providers, benefits administrators, and insurance brokers. This ecosystem along with other HR consultants also helps generate sales leads in conjunction with a variety of marketing initiatives to support the company’s direct sales force efforts.

While Paylocity does have some smaller accounts as well as larger customers with greater than 500 employees, the company’s sweet spot when it comes to customer size is organizations with 10 to 100 employees, with the average customer having a little over 100 employees. Clients are diversely spread across both for-profit and non-profit organizations and industries including business and financial services, healthcare, manufacturing, restaurants, retail, and technology, among others. Furthermore, no client accounts for more than 1% of the company’s revenues.

A key element in Paylocity’s strategy and success in providing a competitive advantage over alternative solutions has been its organically developed cloud-based approach, coupled with its unified database architecture. These factors have enhanced the experience and usability of products. In particular, providing a modern and intuitive user interface that utilizes features found in many popular consumer application experiences, has enabled users to adopt the company’s solutions with limited training. Paylocity plans to continue its focus on innovation, across its suite of mobile applications, social features, and analytics capabilities to maintain and extend its technological leadership.

Paylocity’s current client base represents only a small portion of the organizations that could benefit from its solutions. Its 33,000 clients typically have between 10 to 5,000 employees, yet there are over 1.3 million businesses in the U.S. with employee numbers in this range, ultimately employing over 70 million people. Even based on conservative estimates assuming clients do not purchase the entire suite of available products, the company’s realized target addressable market exceeds $18 billion.

However, as the company continues to expand its product offerings, it is expected that this addressable market opportunity will further increase the amount clients spend on HCM solutions per employee. As a result, it plans to continue to invest in development efforts that will broaden its selection of products to new and existing clients.

Paylocity has developed a strong network of participants that recommend the company’s solutions. The platform’s automated data integration with hundreds of related third-party partner systems is valuable to these referral participants, as they can access payroll and HR data through a single system which decreases complexity, cost, and complements their own product offerings. Efforts to increase integration with third-party providers and expand the company’s referral network to grow the client base and lower client acquisition costs will also continue to be a key strategic priority.

Since going public in 2014, Paylocity has maintained an outstanding record of consistent revenue growth every year. That trend has continued in 2022 with total revenue hitting $852.7 million, up 34% year over year as the company’s value proposition continues to resonate in the marketplace. Products focused on the Modern Workforce have all seen significant increases in utilization, including Community, the company’s employee engagement module, where monthly users grew more than 40% and collaboration through video creation increased by over 80% in the last year.

Impressively, both operating and net income growth trends have also maintained a positive trajectory over the years, reaching $84.7 million and $90.8 million in 2022, respectively. The results were achieved as both sales and marketing, and general and admin expenses all reduced marginally as a percentage of revenue year-on-year.

Looking ahead, total revenue for 2023 is expected to be in the range of $1.087 billion to $1.092 billion, in line with consensus estimates, representing approximately 28% growth over FY22. While earnings per share estimates are forecasted to increase 13% to $3.67 per share, up from $3.25 in 2022.

The market for HCM and payroll solutions is both fragmented and highly competitive. Challengers vary for each of Paylocity’s solutions and primarily include payroll and HR service and software providers, such as Automatic Data Processing, Paychex, Paycom Software, and Paycor, along with other local and regional providers. Yet with principal competitive factors that are important within the market including the ability to connect with modern workforces on a single platform, ease of implementation, along with access to a wide variety of complementary third-party service providers, Paylocity is comprehensively differentiated.

In many cases, existing solutions offered by third-party payroll service providers have limited capabilities and configurability, while other enterprise-focused software vendors can be prohibitively expensive and time-consuming to implement and manage.

Paylocity has a robust solution that is effectively performing in the fierce competition. Furthermore, the payroll and HCM solutions industries look set to grow at a solid pace as continuing digitalization trends and the need to engage employees more effectively in a remote world only become more in focus for all organizations. An impressive performance to date coupled with a large addressable market certainly bodes well for the company’s future prospects.