This Payroll Processing Company Is Growing Like a Weed

Payroll and human resources tasks are mission-critical back-office functions for every business that has employees. However, legacy solutions that are offered by Paychex and ADP are not always flexible enough to meet the needs of small-business owners.

Paylocity (PCTY -1.71%) is looking to change all of that. The company's cloud-based platform was built from the ground up to provide users with an easy-to-use, mobile-focused solution. Paylocity has been grabbing market share away from the industry giants ever since.

In this episode of The Motley Fool's Industry Focus: Technology, host Dylan Lewis is joined by Motley Fool contributor Brian Feroldi to discuss why Paylocity's turbo-charged growth should continue for the foreseeable future.

A full transcript follows the video.

This video was recorded on April 20, 2018.

Dylan Lewis: Another smaller player here is Paylocity. This company, I think it's about a $1.7 billion market cap business, what do they do?

Brian Feroldi: Paylocity does cloud-based human resources software. As you might have guessed from their name, their bread and butter is payroll. They go after small businesses that have a few employees, just to get them on a platform for doing payroll. But they also offer a number of other services on top of that. Payroll is kind of how they get their foot in the door, but they also offer things like benefits management, you can do time and attendance on there, you can do employee reviews, a whole bunch of general HR functions, on their platform.

As you can imagine, this is a very old business. When you think about your ADPs and your Paychexs of the world, those guys have existed for years. What Paylocity does that's a little bit different is, they were founded on a mobile-first strategy. Their software is 100% based in the cloud, and it's really designed to be used on a phone, a tablet, or PC kind of last. That's how they set themselves apart from the big boys.

Lewis: Yeah. Hearing you talk about this company, I'm reminded, in a way, a little bit, of another business that I really like, and that's Square. You think about how it's mobile-first, it seems like it's very oriented toward small shops and making the getting-setup very simple for small business owners.

Feroldi: That's exactly right.

Lewis: HR stuff, one, it's a space that you want to have your stuff together. You want to be organized. But it's something that a lot of people don't have training doing. And having organized systems coming into, this is what this should look like, and picking up that template from a business, is really helpful. It's also stuff that a lot of people don't really want to do. So, having a company that can take care of some of the messier or maybe less-sexy parts of your business is always going to be a good opportunity, if you're looking for places to serve customers.

Feroldi: Absolutely. Payroll is boring, but it's absolutely mission-critical. I don't know about you, I like getting a paycheck every week.

Lewis: Yeah. I only get paid every two weeks, but every two weeks, I look forward to it. [laughs]

Feroldi: Absolutely. And when you take on an employee, there are some things that they just naturally expect from the business. They expect you to have your 401(K) set up, they expect you to have your payroll act together, they expect to be able to have some kind of system for logging their hours if they're hourly. So, what I like about Paylocity is, once they get their teeth into a business, they can then layer on services on top of that to bring in more functionality. These guys recently just acquired a small company that provides flexible spending accounts and health savings accounts, so they're starting to get into the health insurance side of it. And with that acquisition, they can then take this thing that they built and offer it out to all of their clients to grow their revenue within their client base, let alone when they add on new customers.

So, this is a repeat purchase business. Their top line is growing very quickly, 25% annually. 97% of their revenue is recurring. They did about $300 million in revenue last year, which was high enough to get them to profitability. They're cash flow positive. And management sees an opportunity in the U.S. of about $26 billion.

Now, these guys are facing much more competition, I would say, than the other two, because, again, they'll eventually butt heads with the likes of ADP and Paychex, but I think that they have a solution that's unique enough that they can still continue to grow quickly.