Edgar Filing: Paylocity Holding Corp

pcty_Current_Folio_10Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

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

For the quarterly period ended March 31, 2019

☐ 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 ☒ No ☐

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 ☒ No ☐

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. (Check one):

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. ☐

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 52,973,817 shares of Common Stock, $0.001 par value per share, as of April 26, 2019.

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Paylocity Holding Corporation

Form 10-Q

For the Quarterly Period Ended March 31, 2019

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		24

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		39

ITEM 4. CONTROLS AND PROCEDURES		39

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS		41

ITEM 1A. RISK FACTORS		41

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		59

ITEM 3. DEFAULTS UPON SENIOR SECURITIES		61

ITEM 4. MINE SAFETY DISCLOSURES		61

ITEM 5. OTHER INFORMATION		61

ITEM 6. EXHIBITS		61

SIGNATURES		63

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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,		March 31,
	2018		2019
Assets
Current assets:
Cash and cash equivalents	$	137,193	$	90,856
Corporate investments		732		48,159
Accounts receivable, net		3,453		5,137
Deferred contract costs		—		19,765
Prepaid expenses and other		11,248		21,922

Total current assets before funds held for clients		152,626		185,839
Funds held for clients		1,225,614		1,722,309

Total current assets		1,378,240		1,908,148
Capitalized internal-use software, net		21,094		24,584
Property and equipment, net		62,029		64,893
Intangible assets, net		13,002		11,314
Goodwill		9,590		9,590
Long-term deferred contract costs		—		73,701
Long-term prepaid expenses and other		1,504		2,766
Deferred income tax assets, net		22,140		—

Total assets	$	1,507,599	$	2,094,996

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	2,990	$	5,344
Accrued expenses		42,241		48,396

Total current liabilities before client fund obligations		45,231		53,740
Client fund obligations		1,225,614		1,722,309

Total current liabilities		1,270,845		1,776,049
Deferred rent		22,812		29,907
Other long-term liabilities		1,118		1,925
Deferred income tax liabilities, net		—		890

Total liabilities	$	1,294,775	$	1,808,771
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000 authorized, no shares issued and outstanding at June 30, 2018 and March 31, 2019	$	—	$	—
Common stock, $0.001 par value, 155,000 shares authorized at June 30, 2018 and March 31, 2019; 52,758 shares issued and outstanding at June 30, 2018 and 52,964 shares issued and outstanding at March 31, 2019		53		53
Additional paid-in capital		219,588		196,574
Retained earnings (accumulated deficit)		(6,678)		89,576
Accumulated other comprehensive income (loss)		(139)		22
Total stockholders’ equity	$	212,824	$	286,225
Total liabilities and stockholders’ equity	$	1,507,599	$	2,094,996

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				Nine Months Ended
	March 31,				March 31,
	2018		2019		2018		2019
Revenues:
Recurring fees	$	105,857	$	129,976	$	264,443	$	326,012
Interest income on funds held for clients		2,719		6,197		6,119		14,164

Total recurring revenues		108,576		136,173		270,562		340,176
Implementation services and other		4,831		3,379		10,349		7,084

Total revenues		113,407		139,552		280,911		347,260
Cost of revenues:
Recurring revenues		26,982		32,365		76,711		92,802
Implementation services and other		11,670		7,380		33,740		20,955

Total cost of revenues		38,652		39,745		110,451		113,757
Gross profit		74,755		99,807		170,460		233,503
Operating expenses:
Sales and marketing		26,004		27,699		68,782		80,687
Research and development		9,058		12,688		27,227		36,886
General and administrative		19,228		23,208		53,338		68,915

Total operating expenses		54,290		63,595		149,347		186,488
Operating income		20,465		36,212		21,113		47,015
Other income		215		540		465		1,155

Income before income taxes		20,680		36,752		21,578		48,170
Income tax expense (benefit)		(18,497)		8,726		(18,573)		4,588

Net income	$	39,177	$	28,026	$	40,151	$	43,582

Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities, net of tax		(61)		161		(171)		161
Total other comprehensive income (loss), net of tax		(61)		161		(171)		161
Comprehensive income	$	39,116	$	28,187	$	39,980	$	43,743


Net income per share:
Basic	$	0.74	$	0.53	$	0.77	$	0.82
Diluted	$	0.71	$	0.51	$	0.73	$	0.79


Weighted-average shares used in computing net income per share:
Basic		52,615		52,934		52,334		52,880
Diluted		55,030		55,465		54,717		55,280

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 March 31, 2018
						Retained		Accumulated
				Additional		Earnings		Other		Total
	Common Stock			Paid-in		(Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Capital		Deficit)		Loss		Equity
Balances at December 31, 2017	52,590	$	53	$	202,512	$	(44,302)	$	(110)	$	158,153
Stock-based compensation	—		—		8,017		—		—		8,017
Stock options exercised	103		—		1,422		—		—		1,422
Issuance of common stock upon vesting of restricted stock units	11		—		—		—		—		—
Net settlement for taxes and/or exercise price related to equity awards	(55)		—		(2,160)		—		—		(2,160)
Unrealized losses on securities, net of tax	—		—		—		—		(61)		(61)
Net income	—		—		—		39,177		—		39,177
Balances at March 31, 2018	52,649	$	53	$	209,791	$	(5,125)	$	(171)	$	204,548


	Nine Months Ended March 31, 2018
						Retained		Accumulated
				Additional		Earnings		Other		Total
	Common Stock			Paid-in		(Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Capital		Deficit)		Loss		Equity
Balances at June 30, 2017	51,738	$	52	$	192,837	$	(45,276)	$	—	$	147,613
Stock-based compensation	—		—		23,345		—		—		23,345
Stock options exercised	772		1		7,161		—		—		7,162
Issuance of common stock upon vesting of restricted stock units	425		—		—		—		—		—
Issuance of common stock under employee stock purchase plan	53		—		2,045		—		—		2,045
Net settlement for taxes and/or exercise price related to equity awards	(339)		—		(15,597)		—		—		(15,597)
Unrealized losses on securities, net of tax	—		—		—		—		(171)		(171)
Net income	—		—		—		40,151		—		40,151
Balances at March 31, 2018	52,649	$	53	$	209,791	$	(5,125)	$	(171)	$	204,548


	Three Months Ended March 31, 2019
						Retained		Accumulated
				Additional		Earnings		Other		Total
	Common Stock			Paid-in		(Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Capital		Deficit)		Loss		Equity
Balances at December 31, 2018	52,887	$	53	$	189,473	$	61,550	$	(139)	$	250,937
Stock-based compensation	—		—		9,972		—		—		9,972
Stock options exercised	117		—		1,483		—		—		1,483
Issuance of common stock upon vesting of restricted stock units	19		—		—		—		—		—
Net settlement for taxes and/or exercise price related to equity awards	(59)		—		(4,354)		—		—		(4,354)
Unrealized gains on securities, net of tax	—		—		—		—		161		161
Net income	—		—		—		28,026		—		28,026
Balances at March 31, 2019	52,964	$	53	$	196,574	$	89,576	$	22	$	286,225


	Nine Months Ended March 31, 2019
						Retained		Accumulated
				Additional		Earnings		Other		Total
	Common Stock			Paid-in		(Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Capital		Deficit)		Loss		Equity
Balances at June 30, 2018	52,758	$	53	$	219,588	$	(6,678)	$	(139)	$	212,824
Cumulative effect of change in accounting policy (adoption of Topic 606)	—		—		—		52,672		—		52,672
Stock-based compensation	—		—		30,817		—		—		30,817
Stock options exercised	329		—		4,140		—		—		4,140
Issuance of common stock upon vesting of restricted stock units	623		—		—		—		—		—
Issuance of common stock under employee stock purchase plan	58		—		2,824		—		—		2,824
Net settlement for taxes and/or exercise price related to equity awards	(362)		—		(25,804)		—		—		(25,804)
Repurchases of common shares	(442)		—		(34,991)		—		—		(34,991)
Unrealized gains on securities, net of tax	—		—		—		—		161		161
Net income	—		—		—		43,582		—		43,582
Balances at March 31, 2019	52,964	$	53	$	196,574	$	89,576	$	22	$	286,225

See accompanying notes to the unaudited consolidated financial statements.

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PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Statements of Cash Flows

(in thousands)


	Nine Months Ended
	March 31,
	2018 (1)		2019
Cash flows from operating activities:
Net income	$	40,151	$	43,582
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense		21,891		28,837
Depreciation and amortization expense		20,640		25,213
Deferred income tax expense (benefit)		(18,603)		4,584
Provision for doubtful accounts		149		220
Net accretion of discounts and amortization of premiums on available-for-sale securities		(234)		(1,607)
Net realized losses on sales of available-for-sale securities		2		—
Loss on disposal of equipment		160		399
Changes in operating assets and liabilities:
Accounts receivable		(1,278)		(1,904)
Deferred contract costs		—		(25,359)
Prepaid expenses and other		(1,678)		(1,485)
Accounts payable		429		596
Accrued expenses		1,762		5,299
Tenant improvement allowance		5,952		784
Net cash provided by operating activities		69,343		79,159
Cash flows from investing activities:
Purchases of available-for-sale securities and other		(126,065)		(210,374)
Proceeds from sales and maturities of available-for-sale securities		51,292		161,306
Capitalized internal-use software costs		(11,442)		(14,706)
Purchases of property and equipment		(9,374)		(9,621)
Lease allowances used for tenant improvements		(7,086)		(784)
Acquisition of business, net of cash and funds held for clients' cash and cash equivalents		(6,658)		—
Net cash used in investing activities		(109,333)		(74,179)
Cash flows from financing activities:
Net change in client fund obligations		403,375		496,695
Repurchases of common shares		—		(34,991)
Proceeds from exercise of stock options		—		85
Proceeds from employee stock purchase plan		2,045		2,824
Taxes paid related to net share settlement of equity awards		(9,060)		(21,749)
Net cash provided by financing activities		396,360		442,864
Net change in cash, cash equivalents and funds held for clients' cash and cash equivalents		356,370		447,844
Cash, cash equivalents and funds held for clients' cash and cash equivalents—beginning of period		1,045,927		1,239,731
Cash, cash equivalents and funds held for clients' cash and cash equivalents—end of period	$	1,402,297	$	1,687,575
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Purchase of property and equipment and internal-use software, accrued but not paid	$	2,832	$	3,529
Supplemental Disclosure of Cash Flow Information
Cash paid for income taxes, net of refunds	$	17	$	375
Reconciliation of cash, cash equivalents and funds held for clients' cash and cash equivalents to the Consolidated Balance Sheets
Cash and cash equivalents	$	129,530	$	90,856
Funds held for clients' cash and cash equivalents		1,272,767		1,596,719
Total cash, cash equivalents and funds held for clients’ cash and cash equivalents	$	1,402,297	$	1,687,575

⁽¹⁾

Certain amounts have been reclassified to reflect the adoption of Accounting Standards Update (“ASU”) No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force).”

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 payroll and human capital management software solutions for medium-sized organizations. Services are provided in a Software-as-a-Service (“SaaS”) delivery model utilizing the Company’s cloud-based platform. Payroll services include collection, remittance and reporting of payroll liabilities to the appropriate federal, state and local authorities.

(2) Summary of Significant Accounting Policies

(a) 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 change as new events occur, as more experience is acquired, as additional information is obtained and as the operating environment changes.

The Company began investing corporate funds in available-for-sale securities during the first quarter of fiscal 2019 and as a result, reclassified $732 as of June 30, 2018 from prepaid expenses and other on the unaudited consolidated balance sheets to corporate investments for comparability purposes in order to conform to the current year’s presentation.

(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 and nine months ended March 31, 2019 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, 2018 included in the Company’s Annual Report on Form 10-K filed with the SEC on August 10, 2018.

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The Company adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“Topic 606”) effective as of July 1, 2018. Topic 606 requires revenue to be recognized when an entity transfers control of goods or services to a customer in an amount that reflects the consideration to which a company expects to be entitled to for those goods or services. To achieve this core principle, the Company recognizes revenue from contracts with customers based on the following five steps:

Identify the contract with a customer;

Identify the performance obligations in the contract;

Determine the transaction price;

Allocate the transaction price to performance obligations in the contract; and

Recognize revenue when or as the Company satisfies a performance obligation.

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 began entering into term arrangements in fiscal 2018, which are generally two years long. Recurring fees are derived from payroll, timekeeping, and HR-related cloud-based computing services as follows:

Payroll processing and related services, including payroll reporting and tax filing services are delivered on a weekly, biweekly, semi-monthly, or monthly basis depending upon the payroll frequency of the client and on an annual basis if a client selects W-2 preparation and processing services,

Time and attendance reporting services, including time clock rentals, are delivered on a monthly basis, and

Cloud-based HR software solutions, including employee administration and benefits enrollment and administration, are delivered on a monthly basis.

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 HR 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. The Company has certain optional performance obligations that are satisfied at a point in time including the sales of time clocks and W-2 services.

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 applications. 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. Implementation fees are deferred and amortized generally over a period up to 24 months.

Sales taxes collected from clients and remitted to governmental authorities where applicable are accounted for on a net basis and therefore are excluded from revenues in the statements of operations and comprehensive income.

Interest income collected on funds held for clients is recognized in recurring revenues when earned as the collection, holding and remittance of these funds are components of providing these services.

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The following table, consistent with the presentation of its unaudited consolidated statements of operations and comprehensive income, disaggregates revenue by recurring fees and implementation services and other, which it believes represents the major categories of revenue:


	Three Months Ended		Nine Months Ended
	March 31, 2019		March 31, 2019
Recurring fees	$	129,976	$	326,012
Implementation services and other		3,379		7,084
Total revenues from contracts	$	133,355	$	333,096

Deferred revenue

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

The nonrefundable upfront fees related to implementation services are invoiced with the client’s first payroll period. The Company defers and amortizes these nonrefundable upfront fees 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		Nine Months Ended
	March 31, 2019		March 31, 2019
Balance at beginning of period	$	3,623	$	—
Deferral of revenue		4,730		10,243
Revenue recognized		(2,354)		(4,244)
Balance at end of period	$	5,999	$	5,999

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 $2,142 in fiscal 2019, $2,876 in fiscal 2020, $881 in fiscal 2021 and $100 thereafter.

Deferred contract costs

The Company defers certain selling and commission costs that meet the capitalization criteria under ASC 340-40, which were expensed as incurred prior to the adoption of Topic 606. 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. As discussed in Note 2(e), the Company determined that implementation services related to its proprietary products are not separate performance obligations for contracts entered into after July 1, 2018. 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.

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

For the Three Months Ended March 31, 2019