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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Paylocity Holding Corp    PCTY

PAYLOCITY HOLDING CORP

(PCTY)
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Delayed Quote. Delayed Nasdaq - 05/24 04:00:00 pm
101.42 USD   +1.85%
05/02PAYLOCITY : Fiscal 3Q Earnings Snapshot
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05/02Paylocity Announces Third Quarter Fiscal Year 2019 Financial Results
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05/01Paylocity to Attend Upcoming Investor Conferences
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PAYLOCITY : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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05/03/2019 | 01:09pm EDT
The statements included herein that are not based solely on historical facts are
"forward looking statements." Such forward-looking statements are based on
current expectations and assumptions that are subject to risks and
uncertainties. Our actual results could differ materially from those anticipated
by us in these forward-looking statements as a result of various factors,
including those discussed below and under Part II, Item 1A: "Risk Factors."



Overview



We are a cloud-based provider of payroll and human capital management ("HCM")
software solutions for medium-sized organizations, which we define as those
having between 20 and 1,000 employees. Our comprehensive and easy-to-use
solutions enable our clients to manage their workforces more effectively. Our
solutions help drive strategic human capital decision-making and improve
employee engagement by enhancing the human resource, payroll and finance
capabilities of our clients.



Effective management of human capital is a core function in all organizations
and requires a significant commitment of resources. Medium-sized organizations
operating without the infrastructure, expertise or personnel of larger
enterprises are uniquely pressured to manage their human capital effectively.



Our solutions were specifically designed to meet the payroll and HCM needs of
medium-sized organizations. We designed our cloud-based platform to provide a
unified suite of applications using a multi-tenant architecture. Our solutions
are highly flexible and configurable and feature a modern, intuitive user
experience. Our platform offers automated data integration with over 300 related
third-party systems, such as 401(k), benefits and insurance provider systems.



Our Paylocity Web Pay product is our core payroll solution and was the first of
our current offerings introduced into the market. We believe payroll is the most
critical system of record for medium-sized organizations and an essential
gateway to other HCM functionalities. We have invested in, and we intend to
continue to invest in, research and development to expand our product offerings
and advance our platform.



We believe there is a significant opportunity to grow our business by increasing
our number of clients, and we intend to invest in our business to achieve this
purpose. We market and sell our solutions primarily through our direct sales
force. We have increased our sales and marketing expenses as we have added sales
representatives and related sales and marketing personnel. We intend to continue
to grow our sales and marketing organization across new and existing geographic
territories. In addition to growing our number of clients, we intend to grow our
revenue over the long term by increasing the number and quality of products that
clients purchase from us. To do so, we must continue to enhance and grow the
number of solutions we offer to advance our platform.



We believe that delivering a positive service experience is an essential element
of our ability to sell our solutions and retain our clients. We seek to develop
deep relationships with our clients through our unified service model, which has
been designed to meet the service needs of mid-market organizations. We expect
to continue to invest in and grow our implementation and client service
organization as our client base grows.



We believe we have the opportunity to continue to grow our business over the
long term, and to do so, we have invested, and intend to continue to invest,
across our entire organization. These investments include increasing the number
of personnel across all functional areas, along with improving our solutions and
infrastructure to support our growth. The timing and amount of these investments
vary based on the rate at which we add new clients, add new personnel and scale
our application development and other activities. Many of these investments will
occur in advance of experiencing any direct benefit from them, which will make
it difficult to determine if we are effectively allocating our resources. We
expect these investments to increase our costs on an absolute basis, but as we
grow our number of clients and our related revenues, we anticipate that we will
gain economies of scale and increased operating leverage. As a result, we expect
our gross and operating margins will improve over the long term.



As our business has grown, we have become increasingly subject to the risks arising from adverse changes in domestic and global economic conditions. If general economic conditions were to deteriorate, including declines in private sector employment growth and business productivity, increases in the unemployment rate and changes in interest

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rates, we may experience delays in our sales cycles, increased pressure from
prospective customers to offer discounts and increased pressure from existing
customers to renew expiring recurring revenue agreements for lower amounts.



Paylocity Holding Corporation is a Delaware corporation, which was formed in
November 2013. Our business operations, excluding interest earned on certain
cash holdings and expenses associated with certain secondary stock offerings,
have historically been, and are currently, conducted by its wholly owned
subsidiaries, and the financial results presented herein are entirely
attributable to the results of such wholly owned subsidiaries' operations.



Key Metrics



We regularly review a number of metrics, including the following key metrics, to
evaluate our business, measure our performance, identify trends affecting our
business, formulate financial projections and make strategic decisions.



Recurring Revenue Growth



Our recurring revenue model and high annual revenue retention rates provide
significant visibility into our future operating results and cash flow from
operations. This visibility enables us to better manage and invest in our
business. Recurring revenue, which is comprised of recurring fees and interest
income on funds held for clients, increased from $108.6 million for the three
months ended March 31, 2018 to $136.2 million for the three months ended
March 31, 2019, representing a 25% year-over year increase. Recurring revenue
increased from $270.6 million for the nine months ended March 31, 2018 to $340.2
million for the nine months ended March 31, 2019, representing a 26%
year-over-year increase. Recurring revenue represented 96% of total revenue
during both the three and nine months ended March 31, 2018 and 98% of total
revenue during both the three months and nine months ended March 31, 2019.



Adjusted Gross Profit, Adjusted Recurring Gross Profit and Adjusted EBITDA




We disclose Adjusted Gross Profit, Adjusted Recurring Gross Profit and Adjusted
EBITDA because we use them to evaluate our performance, and we believe Adjusted
Gross Profit, Adjusted Recurring Gross Profit and Adjusted EBITDA assist in the
comparison of our performance across reporting periods by excluding certain
items that we do not believe are indicative of our core operating performance.
We believe these metrics are used in the financial community, and we present
them to enhance investors' understanding of our operating performance and cash
flows.



Adjusted Gross Profit, Adjusted Recurring Gross Profit and Adjusted EBITDA are
not measurements of financial performance under generally accepted accounting
principles in the United States ("GAAP"), and you should not consider Adjusted
Gross Profit as an alternative to gross profit, Adjusted Recurring Gross Profit
as an alternative to total recurring revenues, or Adjusted EBITDA as an
alternative to net income or cash provided by operating activities, in each case
as determined in accordance with GAAP. In addition, our definition of Adjusted
Gross Profit, Adjusted Recurring Gross Profit and Adjusted EBITDA may be
different than the definition utilized for similarly-titled measures used by
other companies.



We define Adjusted Gross Profit as gross profit before amortization of
capitalized internal-use software costs, stock-based compensation expense and
employer payroll taxes related to stock releases and option exercises. We define
Adjusted Recurring Gross Profit as total recurring revenues after cost of
recurring revenues and before amortization of capitalized internal-use software
costs, stock-based compensation expense and employer payroll taxes related to
stock releases and option exercises. We define Adjusted EBITDA as net income
before interest expense, income tax expense (benefit), depreciation and
amortization expense and stock-based compensation expense and employer payroll
taxes related to stock releases and option exercises. The table below sets forth
our Adjusted Gross Profit, Adjusted Recurring Gross Profit and Adjusted EBITDA
for the periods presented.

















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                                     Three Months Ended        Nine Months Ended
                                         March 31,                 March 31,
                                     2018         2019         2018         2019
                                       (in thousands)            (in thousands)
Adjusted Gross Profit              $  79,567    $ 105,300    $ 184,299    $ 250,541
Adjusted Recurring Gross Profit    $  86,012    $ 108,844    $ 206,462    $ 263,009
Adjusted EBITDA                    $  35,765    $  54,816    $  65,602    $ 104,179





                                                         Three Months Ended        Nine Months Ended
                                                             March 31,                 March 31,
                                                         2018         2019         2018         2019
                                                           (in thousands)            (in thousands)
Reconciliation from Gross Profit to Adjusted
Gross Profit
Gross profit                                           $  74,755    $  99,807    $ 170,460    $ 233,503
Amortization of capitalized internal-use software
costs                                                      3,655        4,224       10,358       12,854
Stock-based compensation expense and employer
payroll taxes related to stock releases and option
exercises                                                  1,157        1,269        3,481        4,184
Adjusted Gross Profit                                  $  79,567    $ 105,300    $ 184,299    $ 250,541





                                                         Three Months Ended        Nine Months Ended
                                                             March 31,                 March 31,
                                                         2018         2019         2018         2019
                                                           (in thousands)            (in thousands)
Reconciliation from Total Recurring Revenues to
Adjusted Recurring Gross Profit
Total recurring revenues                               $ 108,576    $ 136,173    $ 270,562    $ 340,176
Cost of recurring revenues                                26,982       32,365       76,711       92,802
Recurring gross profit                                    81,594      103,808      193,851      247,374
Amortization of capitalized internal-use software
costs                                                      3,655        4,224       10,358       12,854
Stock-based compensation expense and employer
payroll taxes related to stock releases and option
exercises                                                    763          812        2,253        2,781
Adjusted Recurring Gross Profit                        $  86,012    $ 108,844    $ 206,462    $ 263,009





                                                         Three Months Ended         Nine Months Ended
                                                             March 31,                 March 31,
                                                          2018         2019         2018         2019
                                                           (in thousands)            (in thousands)
Reconciliation from Net Income to Adjusted EBITDA
Net income                                             $   39,177    $ 28,026    $   40,151    $  43,582
Income tax expense (benefit)                             (18,497)       8,726      (18,573)        4,588
Depreciation and amortization expense                       7,202       8,412        20,640       25,213
EBITDA                                                     27,882      45,164        42,218       73,383
Stock-based compensation expense and employer
payroll taxes related to stock releases and option
exercises                                                   7,692       9,652        23,193       30,796
Acquisition-related costs                                     191           -           191            -
Adjusted EBITDA                                        $   35,765    $ 54,816    $   65,602    $ 104,179




Basis of Presentation



Revenues



Recurring Fees



We derive the majority of our revenues from recurring fees attributable to our
cloud-based payroll and HCM software solutions. Recurring fees for each client
generally include a base fee in addition to a fee based on the number of client
employees and the number of products a client uses. We also charge fees
attributable to our preparation of W-2 documents and annual required filings on
behalf of our clients. Over the past three years, our client size has been on
average over 100 employees. We derive revenue from a client based on the
solutions purchased by the client, the number

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of client employees as well as the amount, type and timing of services provided
with respect to those client employees. As such, the number of client employees
on our system is not a good indicator of our financial results in any period.
Recurring fees attributable to our cloud-based payroll and HCM solutions
accounted for 94% and 93% of our total revenues during the three months ended
March 31, 2018 and 2019, respectively, and 94% of our total revenues during both
the nine months ended March 31, 2018 and 2019, respectively.



While the majority of our agreements with clients are generally cancellable by
the client on 60 days' notice or less, we began entering into term arrangements
in fiscal 2018, which are generally two years long. Our agreements do not
include general rights of return and do not provide clients with the right to
take possession of the software supporting the services being provided. We
recognize recurring fees in the period in which services are provided and the
related performance obligations have been satisfied.



Interest Income on Funds Held for Clients




We earn interest income on funds held for clients. We collect funds for employee
payroll payments and related taxes in advance of remittance to employees and
taxing authorities. Prior to remittance to employees and taxing authorities, we
earn interest on these funds through demand deposit accounts with financial
institutions with which we have automated clearing house, or ACH, arrangements.
We also earn interest by investing a portion of funds held for clients in highly
liquid, investment-grade marketable securities.



Implementation Services and Other




Implementation services and other revenues primarily consist of implementation
fees charged to new clients for professional services provided to implement our
payroll and HCM solutions. Implementations of our payroll solutions typically
require only three to four weeks at which point the new client's payroll is
first processed using our solution. We implement additional HCM products as
requested by clients and leverage the data within our payroll solution to
accelerate our implementation processes. With the adoption of Topic 606, we
defer and amortize implementation fees related to our proprietary products over
a period generally up to 24 months, which previously were recognized upon
completion. Refer to Note 2 of the Notes to the Unaudited Consolidated Financial
Statements for additional information regarding the adoption of Topic 606.



Cost of Revenues



Cost of Recurring Revenues



Cost of recurring revenues is generally expensed as incurred, and includes costs
to provide our payroll and other HCM solutions primarily consisting of
employee-related expenses, including wages, stock-based compensation, bonuses
and benefits, relating to the provision of ongoing client support, payroll tax
filing and distribution of printed checks and other materials. These costs also
include amortization of capitalized internal-use software costs, delivery costs
and computing costs, as well as bank fees associated with client fund transfers.
We expect to realize cost efficiencies over the long term as our business
scales, resulting in improved operating leverage and increased margins.



We capitalize a portion of our internal-use software costs, which are then all
amortized as a cost of recurring revenues. We amortized $3.7 million and $4.2
million of capitalized internal-use software costs during the three months ended
March 31, 2018 and 2019, respectively, and $10.4 million and $12.9 million of
capitalized internal-use software costs during the nine months ended
March 31, 2018 and 2019, respectively.



Cost of Implementation Services and Other




Cost of implementation services and other consists primarily of employee-related
expenses, including wages, stock-based compensation, bonuses and benefits
involved in the implementation of our payroll and other HCM solutions for new
clients. With the adoption of Topic 606, cost of implementation services related
to our proprietary products are capitalized and amortized over a period of 7
years, which previously were expensed as incurred. We intend to grow our
business through acquisition of new clients, and doing so will require increased
personnel to implement our solutions. Therefore, our cost of implementation
services and other is expected to increase in absolute dollars for the
foreseeable

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future. Refer to Note 2 of the Notes to the Unaudited Consolidated Financial Statements for additional information regarding the adoption of Topic 606.



Operating Expenses



Sales and Marketing



Sales and marketing expenses consist primarily of employee-related expenses for
our direct sales and marketing staff, including wages, commissions, stock-based
compensation, bonuses and benefits, marketing expenses and other related costs.
With the adoption of Topic 606, we capitalize certain selling and commission
costs related to new contracts or purchases of additional services by our
existing clients, which were previously expensed as incurred. Commissions are
typically paid within two months after the start of service. Bonuses paid to
sales staff for attainment of certain annual performance criteria are accrued in
the fiscal year and are subsequently paid annually in the first fiscal quarter
of the following year. We generally recognize these costs over a period of 7
years. Refer to Note 2 of the Notes to the Unaudited Consolidated Financial
Statements for additional information regarding the adoption of Topic 606.



We will seek to grow our number of clients for the foreseeable future, and therefore our sales and marketing expense is expected to continue to increase in absolute dollars as we grow our sales organization and expand our marketing activities.




Research and Development



Research and development expenses consist primarily of employee-related expenses
for our research and development and product management staff, including wages,
stock-based compensation, bonuses and benefits. Additional expenses include
costs related to the development, maintenance, quality assurance and testing of
new technologies and ongoing refinement of our existing solutions. Research and
development expenses, other than internal-use software costs qualifying for
capitalization, are expensed as incurred.



We capitalize a portion of our development costs related to internal-use
software. The timing of our capitalized development projects may affect the
amount of development costs expensed in any given period. The table below sets
forth the amounts of capitalized and expensed research and development expenses
for the three and nine months ended March 31, 2018 and 2019.


                                                          Three Months Ended        Nine Months Ended
                                                              March 31,                March 31,
                                                           2018         2019        2018         2019
                                                            (in thousands)           (in thousands)
Capitalized portion of research and development         $    4,871    $  5,645    $  12,966    $ 16,344
Expensed portion of research and development                 9,058      12,688       27,227      36,886
Total research and development                          $   13,929    $ 18,333    $  40,193    $ 53,230




We expect to grow our research and development efforts as we continue to broaden
our product offerings and extend our technological leadership by investing in
the development of new technologies and introducing them to new and existing
clients. We expect research and development expenses to continue to increase in
absolute dollars but to vary as a percentage of total revenue on a
period-to-period basis.



General and Administrative



General and administrative expenses consist primarily of employee-related costs,
including wages, stock-based compensation, bonuses and benefits for our
administrative, finance, accounting, and human resources departments. Additional
expenses include consulting and professional fees, occupancy costs, insurance
and other corporate expenses. We expect our general and administrative expenses
to continue to increase in absolute dollars as our company continues to grow.



Other Income


Other income generally consists of interest income related to interest earned on our cash and cash equivalents and corporate investments, net of losses on disposal of property and equipment.

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Results of Operations



The following table sets forth our statements of operations data for each of the
periods indicated.




                                                         Three Months Ended         Nine Months Ended
                                                             March 31,                 March 31,
                                                          2018        2019          2018         2019
                                                           (in thousands)            (in thousands)
Consolidated Statements of Operations Data:
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




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The following table sets forth our statements of operations data as a percentage of total revenues for each of the periods indicated.




                                                         Three Months Ended          Nine Months Ended
                                                             March 31,                   March 31,
                                                         2018          2019          2018         2019
Consolidated Statements of Operations Data:
Revenues:
Recurring fees                                               94 %          93 %          94 %         94 %
Interest income on funds held for clients                     2 %           5 %           2 %          4 %
Total recurring revenues                                     96 %          98 %          96 %         98 %
Implementation services and other                             4 %           2 %           4 %          2 %
Total revenues                                              100 %         100 %         100 %        100 %
Cost of revenues:
Recurring revenues                                           24 %          23 %          27 %         27 %
Implementation services and other                            10 %           5 %          12 %          6 %
Total cost of revenues                                       34 %          28 %          39 %         33 %
Gross profit                                                 66 %          72 %          61 %         67 %
Operating expenses:
Sales and marketing                                          23 %          20 %          24 %         23 %
Research and development                                      8 %           9 %          10 %         10 %
General and administrative                                   17 %          17 %          19 %         20 %
Total operating expenses                                     48 %          46 %          53 %         53 %
Operating income                                             18 %          26 %           8 %         14 %
Other income                                                  - %           - %           - %          - %
Income before income taxes                                   18 %          26 %           8 %         14 %
Income tax expense (benefit)                               (17) %           6 %         (6) %          1 %
Net income                                                   35 %          20 %          14 %         13 %



Comparison of Three Months Ended March 31, 2018 and 2019



Revenues

($ in thousands)




                                               Three Months Ended
                                                   March 31,                Change
                                               2018         2019           $         %
Recurring fees                               $ 105,857    $ 129,976    $  24,119      23 %
Percentage of total revenues                        94 %         93 %

Interest income on funds held for clients $ 2,719 $ 6,197 $ 3,478 128 % Percentage of total revenues

                         2 %          5 %
Implementation services and other            $   4,831    $   3,379    $ (1,452)    (30) %
Percentage of total revenues                         4 %          2 %




Recurring Fees


Recurring fees for the three months ended March 31, 2019 increased by $24.1 million, or 23%, to $130.0 million from $105.9 million for the three months ended March 31, 2018. Recurring fees increased primarily as a result of incremental revenues from new and existing clients.

Interest Income on Funds Held for Clients




Interest income on funds held for clients for the three months ended
March 31, 2019 increased by $3.5 million, or 128% to $6.2 million from $2.7
million for the three months ended March 31, 2018. Interest income on funds held
for clients increased primarily as a result of higher average interest rates,
increased average daily balances for funds held

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due to the addition of new clients to our client base and interest income from investing a larger portion of our funds held for clients in marketable securities.

Implementation Services and Other




Implementation services and other revenue for the three months ended
March 31, 2019 decreased by $1.5 million, or 30%, to $3.4 million from $4.8
million for the three months ended March 31, 2018. Implementation services and
other revenue decreased primarily due to the change in the treatment of
implementation fees related to our proprietary products. Historically, we have
recognized implementation fees upon completion. Starting July 1, 2018, we
concluded that implementation fees related to our proprietary products are not
separate performance obligations, and as a result, the related implementation
fees are deferred and amortized generally over a period up to 24 months. Refer
to Note 2 of the Notes to the Unaudited Consolidated Financial Statements for
additional information.



Cost of Revenues

($ in thousands)




                                                     Three Months Ended
                                                         March 31,                 Change
                                                      2018         2019          $          %
Cost of recurring revenues                         $   26,982    $ 32,365    $   5,383       20 %
Percentage of recurring revenues                           25 %        24 %
Recurring gross margin                                     75 %        76 %

Cost of implementation services and other $ 11,670 $ 7,380

  $ (4,290)     (37) %
Percentage of implementation services and other           242 %       218 %
Implementation gross margin                             (142) %     (118) %




Cost of Recurring Revenues




Cost of recurring revenues for the three months ended March 31, 2019 increased
by $5.4 million, or 20%, to $32.4 million from $27.0 million for the three
months ended March 31, 2018. Cost of recurring revenues increased primarily as a
result of the continued growth of our business, in particular, $2.4 million in
additional employee-related costs resulting from additional personnel necessary
to provide services to new and existing clients, $2.3 million in delivery and
other processing-related fees and $0.6 million in increased internal-use
software amortization. Recurring gross margin was 75% and 76% for the three
months ended March 31, 2018 and 2019, respectively.



Cost of Implementation Services and Other




Cost of implementation services and other for the three months ended
March 31, 2019 decreased by $4.3 million, or 37%, to $7.4 million from
$11.7 million for the three months ended March 31, 2018. The decrease in cost of
implementation services and other was primarily due to the deferral and
amortization of certain implementation costs over a period of 7 years related to
our proprietary products upon the adoption of Topic 606 on July 1, 2018,
partially offset by additional employee-related costs resulting from additional
personnel. Refer to Note 2 of the Notes to the Unaudited Consolidated Financial
Statements for additional information regarding the adoption of Topic 606.



Operating Expenses

($ in thousands)



Sales and Marketing




                                  Three Months Ended
                                      March 31,              Change
                                   2018         2019         $       %
Sales and marketing             $   26,004    $ 27,699    $ 1,695     7 %
Percentage of total revenues            23 %        20 %




Sales and marketing expenses for the three months ended March 31, 2019 increased
by $1.7 million, or 7%, to $27.7 million from $26.0 million for the three months
ended March 31, 2018. The increase in sales and marketing

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expense was primarily the result of additional employee-related costs from the
expansion of our sales team (including management, sales engineers, direct
sales, sales administration and sales lead generation support), partially offset
by the deferral and amortization of certain selling and commissions costs over a
period of 7 years related to the adoption of Topic 606 on July 1, 2018. Refer to
Note 2 of the Notes to the Unaudited Consolidated Financial Statements for
additional information regarding the adoption of Topic 606.



Research and Development




                                  Three Months Ended
                                      March 31,              Change
                                  2018          2019         $       %
Research and development        $   9,058     $ 12,688    $ 3,630    40 %
Percentage of total revenues            8 %          9 %




Research and development expenses for the three months ended
March 31, 2019 increased by $3.6 million, or 40%, to $12.7 million from
$9.1 million for the three months ended March 31, 2018. The increase in research
and development expenses was primarily the result of $3.4 million of additional
employee-related costs related to additional development personnel and $0.5
million in additional stock-based compensation associated with our equity
incentive plan, partially offset by higher period-over-period capitalized
internal-use software costs of $0.8 million.



General and Administrative




                                  Three Months Ended
                                      March 31,              Change
                                   2018         2019         $       %
General and administrative      $   19,228    $ 23,208    $ 3,980    21 %
Percentage of total revenues            17 %        17 %




General and administrative expenses for the three months ended
March 31, 2019 increased by $4.0 million, or 21%, to $23.2 million from
$19.2 million for the three months ended March 31, 2018. The increase in general
and administrative expense was primarily the result of $2.0 million of
additional employee-related costs and $1.1 million in additional stock-based
compensation associated with our equity incentive plan.



Other Income




                                   Three Months Ended
                                       March 31,               Change
                                  2018           2019         $       %
Other income                    $     215      $     540    $ 325    151 %
Percentage of total revenues            - %            - %




Other income  for the three months ended March 31, 2019 increased by $0.3
million as compared to the three months ended March 31, 2018.  The increase in
other income was primarily due to interest income earned on our cash and cash
equivalents and corporate investments.



Income Tax Expense (Benefit)




                                  Three Months Ended
                                      March 31,              Change
                                   2018         2019         $        %
Income tax expense (benefit)    $  (18,497)    $ 8,726    $ 27,223    *
Percentage of total revenues           (17) %        6 %

--------------------------------------------------------------------------------

*Not Meaningful




The difference in income tax expense for the three months ended March 31, 2019
as compared to the benefit for the three months ended March 31, 2018 was
primarily due to the release of substantially of our valuation allowance in the
three months ended March 31, 2018.

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Comparison of Nine Months Ended March 31, 2018 and 2019



Revenues

($ in thousands)




                                               Nine Months Ended
                                                   March 31,                Change
                                               2018         2019           $         %
Recurring fees                               $ 264,443    $ 326,012    $  61,569      23 %
Percentage of total revenues                        94 %         94 %

Interest income on funds held for clients $ 6,119 $ 14,164 $ 8,045 131 % Percentage of total revenues

                         2 %          4 %
Implementation services and other            $  10,349    $   7,084    $ (3,265)    (32) %
Percentage of total revenues                         4 %          2 %




Recurring Fees


Recurring fees for the nine months ended March 31, 2019 increased by $61.6 million, or 23%, to $326.0 million from $264.4 million for the nine months ended March 31, 2018. Recurring fees increased primarily as a result of incremental revenues from new and existing clients.

Interest Income on Funds Held for Clients




Interest income on funds held for clients for the nine months ended
March 31, 2019 increased by $8.0 million, or 131% to $14.2 million from $6.1
million for the nine months ended March 31, 2018. Interest income on funds held
for clients increased primarily as a result of higher average interest rates,
increased average daily balances for funds held due to the addition of new
clients to our client base and interest income from investing a larger portion
of our funds held for clients in marketable securities.



Implementation Services and Other




Implementation services and other revenue for the nine months ended
March 31, 2019 decreased by $3.3 million, or 32%, to $7.1 million from $10.3
million for the nine months ended March 31, 2018.  Implementation services and
other revenue decreased primarily due to the change in the treatment of
implementation fees related to our proprietary products. Historically, we have
recognized implementation fees upon completion. Starting July 1, 2018, we
concluded that implementation fees related to our proprietary products are not
separate performance obligations, and as a result, the related implementation
fees are deferred and amortized generally over a period up to 24 months. Refer
to Note 2 of the Notes to the Unaudited Consolidated Financial Statements for
additional information.



Cost of Revenues

($ in thousands)




                                                     Nine Months Ended
                                                        March 31,                 Change
                                                     2018         2019          $           %
Cost of recurring revenues                         $  76,711    $ 92,802    $   16,091       21 %
Percentage of recurring revenues                          28 %        27 %
Recurring gross margin                                    72 %        73 %

Cost of implementation services and other $ 33,740 $ 20,955 $ (12,785) (38) % Percentage of implementation services and other 326 % 296 % Implementation gross margin

                            (226) %     (196) %




Cost of Recurring Revenues




Cost of recurring revenues for the nine months ended March 31, 2019 increased by
$16.1 million, or 21%, to $92.8 million from $76.7 million for the nine months
ended March 31, 2018. Cost of recurring revenues increased primarily as a result
of the continued growth of our business, in particular, $7.9 million in
additional employee-related

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costs resulting from additional personnel necessary to provide services to new
and existing clients, $5.2 million in delivery and other processing-related fees
and $2.5 million in increased internal-use software amortization. Recurring
gross margin was 72% and 73% for the nine months ended March 31, 2018 and 2019,
respectively.


Cost of Implementation Services and Other




Cost of implementation services and other for the nine months ended
March 31, 2019 decreased by $12.8 million, or 38%, to $21.0 million from
$33.7 million for the nine months ended March 31, 2018. The decrease in cost of
implementation services and other was primarily due to the deferral and
amortization of certain implementation costs over a period of 7 years related to
our proprietary products upon the adoption of Topic 606 on July 1, 2018,
partially offset by additional employee-related costs resulting from additional
personnel.  Refer to Note 2 of the Notes to the Unaudited Consolidated Financial
Statements for additional information regarding the adoption of Topic 606.



Operating Expenses

($ in thousands)



Sales and Marketing




                                  Nine Months Ended
                                     March 31,               Change
                                  2018         2019         $        %
Sales and marketing             $  68,782    $ 80,687    $ 11,905    17 %
Percentage of total revenues           24 %        23 %




Sales and marketing expenses for the nine months ended March 31, 2019 increased
by $11.9 million, or 17%, to $80.7 million from $68.8 million for the nine
months ended March 31, 2018. The increase in sales and marketing expense was
primarily the result of additional employee-related costs from the expansion of
our sales team (including management, sales engineers, direct sales, sales
administration and sales lead generation support), partially offset by the
deferral and amortization of certain selling and commissions costs over a period
of 7 years related to the adoption of Topic 606 on July 1, 2018. Refer to Note 2
of the Notes to the Unaudited Consolidated Financial Statements for additional
information regarding the adoption of Topic 606.



Research and Development




                                  Nine Months Ended
                                     March 31,              Change
                                  2018         2019         $       %
Research and development        $  27,227    $ 36,886    $ 9,659    35 %
Percentage of total revenues           10 %        10 %



Research and development expenses for the nine months ended March 31, 2019 increased by $9.7 million, or 35%, to $36.9 million from $27.2 million for the nine months ended March 31, 2018. The increase in research and development expenses was primarily the result of $10.4 million of additional employee-related costs related to additional development personnel and $1.8 million in additional stock-based compensation associated with our equity incentive plan, partially offset by higher period-over-period capitalized internal-use software costs of $3.3 million.



General and Administrative



                                  Nine Months Ended
                                     March 31,               Change
                                  2018         2019         $        %
General and administrative      $  53,338    $ 68,915    $ 15,577    29 %
Percentage of total revenues           19 %        20 %




General and administrative expenses for the nine months ended March 31, 2019
increased by $15.6 million, or 29%, to $68.9 million from $53.3 million for the
nine months ended March 31, 2018. The increase in general and administrative
expense was primarily the result of $7.0 million of additional employee-related
costs and $5.3 million in additional stock-based compensation associated with
our equity incentive plan.

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Other Income




                                  Nine Months Ended
                                     March 31,              Change
                                  2018         2019        $       %
Other income                    $    465     $  1,155    $ 690    148 %
Percentage of total revenues           - %          - %




Other income  for the nine months ended March 31, 2019 increased by $0.7 million
as compared to the nine months ended March 31, 2018.  The increase in other
income was primarily due to interest income earned on our cash and cash
equivalents and corporate investments, partially offset by loss on the disposal
of property and equipment.



Income Tax Expense (Benefit)




                                  Nine Months Ended
                                     March 31,              Change
                                   2018        2019         $        %
Income tax expense (benefit)    $ (18,573)    $ 4,588    $ 23,161    *
Percentage of total revenues           (6) %        1 %

--------------------------------------------------------------------------------

*Not Meaningful




The difference in income tax expense for the nine months ended March 31, 2019 as
compared to the benefit for the nine months ended March 31, 2018 was primarily
due to the release of substantially all of our valuation allowance in the nine
months ended March 31, 2018.


Quarterly Trends and Seasonality




Our overall operating results fluctuate from quarter to quarter as a result of a
variety of factors, some of which are outside of our control. Our historical
results should not be considered a reliable indicator of our future results of
operations.



We experience fluctuations in revenues and related costs on a seasonal basis,
which are primarily seen in our fiscal third quarter, which ends on March 31 of
each year. Specifically, our recurring revenue is positively impacted in our
fiscal third quarter as a result of our preparation of W-2 documents for our
clients' employees in advance of tax filing requirements. The seasonal
fluctuations in revenues also positively impact gross profits during our fiscal
third quarter. Our historical results for our fiscal third quarter should not be
considered a reliable indicator of our future results of operations. Our
interest income earned on funds held for clients is also positively impacted
during our fiscal third quarter as a result of our increased collection of funds
held for clients. Certain payroll taxes are primarily collected during our
fiscal third quarter and subsequently remitted.



Critical Accounting Policies and Estimates




Our management's discussion and analysis of our financial condition and results
of operations is based on our consolidated financial statements, which have been
prepared in accordance with GAAP. The preparation of these consolidated
financial statements requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the consolidated financial statements, and the
reported amounts of revenue and expenses. In accordance with GAAP, we base our
estimates on historical experience and on various other assumptions that we
believe are reasonable under the circumstances. Actual results might differ from
these estimates under different assumptions or conditions and, to the extent
that there are differences between our estimates and actual results, our future
financial statement presentation, financial condition, results of operations and
cash flows will be affected. We changed our significant accounting policy for
revenue recognition related to our adoption of Topic 606 on July 1, 2018. Refer
to Note 2 of the Notes to the Unaudited Consolidated Financial Statements for
additional detail around our revenue recognition policy. Our critical accounting
policies and use of estimates are disclosed in our audited consolidated
financial statements for the year ended June 30, 2018 included in our Annual
Report on Form 10-K filed with the SEC on August 10, 2018.



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Liquidity and Capital Resources




Our primary liquidity needs are related to the funding of general business
requirements, including working capital requirements, research and development,
and capital expenditures. The share repurchase program completed during the
first quarter of fiscal 2019 was funded by our cash flows from operations. As of
March 31, 2019, our principal sources of liquidity were $90.9 million of cash
and cash equivalents and $49.1 million of total corporate investments. In July
2018, we started investing portions of our excess cash and cash equivalents in
highly liquid, investment-grade marketable securities. These investments consist
of commercial paper, asset-backed debt securities, corporate debt issuances and
U.S. Treasury securities with credit quality ratings of A-1 or higher. We
believe that our investments in unrealized loss positions as of March 31, 2019
were not other-than-temporarily impaired, nor has any event occurred subsequent
to that date that would change that conclusion.



In order to grow our business, we intend to increase our personnel and related
expenses and to make significant investments in our platform, data centers and
general infrastructure. The timing and amount of these investments will vary
based on the rate at which we can add new clients and new personnel and the
scale of our application development, data centers and other activities. Many of
these investments will occur in advance of our experiencing any direct benefit
from them, which could negatively impact our liquidity and cash flows during any
particular period and may make it difficult to determine if we are effectively
allocating our resources. However, we expect to fund our operations, capital
expenditures and other investments principally with cash flows from operations,
and to the extent that our liquidity needs exceed our cash from operations, we
would look to our cash on hand and corporate investments and seek to establish
borrowing capacity to satisfy those needs.



Funds held for clients and client fund obligations will vary substantially from
period to period as a result of the timing of payroll and tax obligations due.
Our payroll processing activities involve the movement of significant funds from
accounts of employers to employees and relevant taxing authorities. Though we
debit a client's account prior to any disbursement on its behalf, there is a
delay between our payment of amounts due to employees and taxing and other
regulatory authorities and when the incoming funds from the client to cover
these amounts payable actually clear into our operating accounts. We currently
have agreements with eleven banks to execute ACH and wire transfers to support
our client payroll and tax services. We believe we have sufficient capacity
under these ACH arrangements to handle our transactions for the foreseeable
future.



We believe our current cash and cash equivalents, corporate investments and cash
flow from operations will be sufficient to meet our working capital, capital
expenditure, share repurchases, if any, and other investment requirements for at
least the next 12 months.



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The following table sets forth data regarding cash flows for the periods indicated:

© Edgar Online, source Glimpses

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Sales 2019 465 M
EBIT 2019 97,8 M
Net income 2019 49,1 M
Finance 2019 163 M
Yield 2019 -
P/E ratio 2019 110,64
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NameTitle
Steven R. Beauchamp Chief Executive Officer & Director
Michael R. Haske President & Chief Operating Officer
Steven I. Sarowitz Chairman
Toby J. Williams Chief Financial Officer
Edward W. Gaty Senior Vice President-Product & Technology
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