Paylocity Addressing the Growing HCM Market

According to an IDC research report, the US market for Human Capital Management (HCM) applications and payroll outsourcing services is expected to be worth $22.5 billion this year. Another research report by Aberdeen Group published in 2012 estimated that nearly 38% of HCM related investment was being made in cloud computing initiatives. It is not just the big organizations that are wanting to deploy cloud based offerings, but the smaller organizations are also realizing the benefits of a cloud-based HCM offering.

Paylocity’s Offerings
Arlington Heights, Illinois-based Paylocity (Nasdaq: PCTY) is a leading provider of cloud-based payroll and HCM offerings in the country. Paylocity was founded in 1997 by Steve Sarowitz with the mission to provide Payroll and Human Resource functions of an organization with cloud-based solutions that were as capable as those “found in other critical areas such as Sales, Finance, and Operations.” Paylocity has focused its efforts on providing these offerings to mid-sized companies and as of June last year, Paylocity was servicing over 6,850 clients.

Paylocity’s core product is the Web Pay product, which initially began as a payroll solution. Since its inception, Web Pay has evolved significantly. Today it includes a multi-tenant software platform that can be customized to the organization’s requirements to offer payroll and HR related services such as time tracking, benefits administration, compensation services including tax and payroll management, and talent management. More recently, it was developed to even cater to the requirements of the Patient Protection and Affordable Care Act (PPACA) by providing employers with advanced information that helps with Employer Shared Responsibilities.

Paylocity’s Financials
Paylocity operates on a subscription-based model for their SaaS offerings. They have seen strong financial performance in recent years. Their annual revenues have grown 40% annually over the period 2011 through 2013. Revenues increased from $39.5 million in 2011 to $77.3 million in 2013. Recurring revenues have grown from $37.5 million in 2011 to $72.8 million in 2013. Paylocity does not have long term contracts with their clients, but they have still displayed strong customer retention rates. Customer retention has been more than 92% over the last three years.

During the last few years, Paylocity has been investing in sales and R&D efforts. Sales and marketing expenses have almost doubled in the last two years to $18.7 million and R&D expenses grew from $1.6 million in 2011 to $6.8 million in 2013. But, despite such investments, Paylocity has managed to report positive earnings. In 2011, Paylocity had suffered a loss of $130,000 and since then earnings have improved to an income of $617,000 last year.

Last month, Paylocity went public and raised $120 million by offering 7 million shares at $17 each. The stock was listed on the Nasdaq under the ticker PCTY. Their stock is trading at $19.50 with a market capitalization of $953.96 million. It touched a high of $31.00 soon after listing.

Paylocity is operating in a fast-paced industry and the growing importance of cloud-based HCM solutions can be gauged from the not so distant acquisitions in the industry. Leading IT players including SAP and Oracle made multi-billion acquisition deals to add players like SuccessFactors and Taleo to their portfolio. In the payroll segment, ADP and Paychex dominate, with a significant challenge from PayCycle, now part of Intuit, in the very small business category. It would be interesting to see how Paylocity succeeds in disrupting this market.