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Paylocitys Momentum in the Market Poised to Accelerate

Paylocitys Momentum in the Market Poised to Accelerate

We came away from management s presentation and breakout meetings with increased conviction in Paylocity s large market opportunity, its differentiated offering, and its ability to continue growing revenue in excess of 30% for several years to come. The company s organically built, multitenant suite of payroll, HR/talent, and workforce management applications are in stark contrast to the legacy service bureau providers, which either lack functionality or have acquired products to stitch together a somewhat confusing and disparate set of applications.

As more middle-market companies look to take a strategic and modern approach to their HR and payroll processes, Paylocity s momentum in the market should only accelerate, and as the company continues to invest aggressively in its development initiatives, it should further distance itself from the competition. In addition, its decision six years ago to build out a large referral network of brokers and financial advisors provides it a much larger and more efficient distribution model than many of its competitors, and management indicated that the contribution of new business from the channel has slightly increased from last fiscal year s 25%.

Although a few recent IPOs in the payroll/HR market have created the investor perception that the competitive landscape is becoming increasingly crowded, there are only a handful of SaaS providers we are aware of that have scaled their payroll businesses in excess of $50 million in revenue: Paylocity, Paycom (PAYC $13.97), Ultimate Software (ULTI $129.21; Outperform), and Paycor.

In sum, these companies represent well under $1 billion in revenue, and probably represent a similar (if not smaller) revenue size as the annual churn coming from service bureau providers such as ADP (ADP $78.25; Market Perform), Paychex (PAYX $40.82; Outperform), and Ceridian. Management sees a long runway of opportunity ahead; with $106 million-$107 million in guided fiscal 2014 revenue, it has just 1% share of the $8 billion middle-market opportunity that it targets.

Further, the company believes that over the long term it can increase this addressable market by as much as 50% through adding other products in areas such as talent management (e.g., onboarding, recruiting). The company is hiring sales reps ahead of the new fiscal year (which begins July 1), and although it will not communicate its official plans until its fiscal fourth-quarter earnings call (likely held in August), management indicated that it will likely increase its reps at a rate consistent with the last few years. This aggressive pace of sales headcount growth (mid-30% to 40%) is a bullish signal on the demand environment, in our view.

Paylocitys Momentum in the Market Poised to Accelerate

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