SaaS HCM Solutions to Drive Paylocity's (PCTY) Q1 Earnings

Paylocity Holding CorporationPCTY is set to report first-quarter 2018 earnings results on Nov 2.

In the last reported quarter, the company posted a positive earnings surprise of 800%. The company surpassed earnings estimates in the trailing four quarters, generating an average beat of 339.3%.

We believe that regular investments in technological upgrades (SaaS technology), along with product innovations, will continue to boost the company's top-line. Moreover, higher adoption of Paylocity's Affordable Care Act (ACA) dashboard application will act as a tailwind.

Let's see how things are shaping up prior to this announcement.

Expect What?

The Zacks Consensus Estimate for the quarter is pegged at 11 cents, reflecting a year-over-year increase of 57.1%. Further, the earnings estimate has trended upward in the last 30 days. Further, analysts polled by Zacks expect revenues of $81 million, up roughly 24.6% from the year-ago quarter.

Aspects to Influence Q1 Results

Q2 Earnings Highlight

The company reported stellar fourth-quarter 2017 results. Paylocity's both the top and bottom line for the fourth quarter also increased year over year. The company also provided an encouraging guidance for the first quarter and fiscal 2018.

For first-quarter fiscal 2018, Paylocity expects revenues in the range of $80.3-$81.3 million. The Zacks Consensus Estimate at that time was pegged at $80.3 million. Non-GAAP earnings per share are anticipated to be in the range of 10-12 cents. The Zacks Consensus Estimate was pegged at a loss of 2 cents.

For fiscal 2018, Paylocity anticipates revenues in the range of $368-$370 million. The Zacks Consensus Estimate was pegged at $369.5 million. Non-GAAP earnings per share are expected within 78-80 cents. The Zacks Consensus Estimate is peggedat 31 cents.

Aided by these factors, its shares have surged 71.9% in the year-to-date period, outperforming the industry 's gain of 29.3%.

SaaS HCM Solutions: Key Catalysts

Paylocity offers end-to-end SaaS HCM solution that minimizes data-integrity issues across applications. In the last quarter, a significant portion of revenues was generated from clients moving from traditional payroll service providers to the company's SaaS-based services. We are also positive on the company's continued investment in SaaS technology and mobile applications. Paylocity's SaaS-based solution reduces time, risk and headcount related to installing and maintaining applications for on-premise products. Growth of cloud computing has supported the SaaS delivery model. With its SaaS-based applications, we think that Paylocity is well positioned to lead the market. These factors are likely to positively impact the to-be-reported quarter.

Paylocity also holds a dominant position in the payroll processing and human capital management market, primarily due to its robust product portfolio. The company continues to frequently upgrade existing product portfolio as well as launch new products. Additionally, the Affordable Care Act compliance which was launched in fiscal year 2016 is a positive for the business as it makes it mandatory for companies to buy additional HCM solutions. Hence, higher traction of Paylocity's ACA dashboard application is likely to have positive impact on forthcoming results.

Recurring Revenues & Client Base: Other Positive Factors

Paylocity has grown significantly over the years by providing industry-leading service and technology solutions to its clients and their employees. Revenue growth seems to be steady and is positively impacted by higher recurring revenues as well as higher traction in cloud-based offerings. In the last reported quarter, recurring revenues (96% of total revenues) increased 27% year over year. Its solid business model, diversified products and services, and strategic acquisitions have bolsteredtop-line growth.

The Zacks Consensus Estimates for recurring fees is pegged at $77 million.

Furthermore, Paylocity expands its client base with the help of direct sales force. The company is gaining market share over the most critical client demand area of HCM, which in turn, supports its growth. As a result, the company has a huge client base. The number of clients for fiscal 2017 increased 16% to 14,550. Notably, continued focus on client retention, on the basis of high client satisfaction, has helped the company to maintain its average annual revenue retention rate of 92% for fiscal 2017.

Why a Likely Positive Surprise?

Our proven model shows that Paylocity is likely to beat earnings because it has the right combination of two important ingredients.

Zacks ESP : Paycom Software's Earnings ESP is +14.71%. This is because the company's Most Accurate estimate is 13 cents, while the Zacks Consensus Estimate is pegged lower at 11 cents. A favorable ESP serves as a meaningful and leading indicator of a likely positive surprise. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Zacks Rank : Paylocity currently has a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 has a significantly higher chance of beating earnings estimates. Conversely, Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.

The combination of Paylocity's Zacks Rank #3 and +14.71% ESP makes us reasonably optimistic of an earnings beat.

Other Stocks With Favorable Combination

Here are some companies you may want to consider as our model shows that these too have the right combination of elements to post an earnings beat:

NVIDIA Corporation NVDA has an Earnings ESP of +0.53% and a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here .

HubSpot, Inc. HUBS has an Earnings ESP of +26.53% and a Zacks Rank #1.

AMTEK, Inc. AME has an Earnings ESP of +0.18% and a Zacks Rank #3.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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