Payroll software specialist Paylocity leads Chicago’s tech race – Crain’s Chicago Business


You won’t find Chicago’s best-performing technology company among the digerati in converted lofts and warehouses on the Near West Side. It’s out in Schaumburg, occupying the kind of traditional suburban office building so many companies have fled for downtown digs in recent years.

Paylocity’s name likely rings no bells with most people who drive by its glass high-rise every day. Payroll software doesn’t generate that kind of buzz. That’s OK with CEO Steve Beauchamp.

“In many ways, we think of ourselves as a hidden secret. We’re in the suburbs, focused on (small and midsize businesses).”

Paylocity’s steadily rising sales and profits have lifted the stock 84 percent this year, the best of any Illinois public company. It went public five years ago, just before Grubhub. Since then, Paylocity’s stock has outpaced its better-known peer nearly 3-to-1. Paylocity shares debuted at $17 and closed Aug. 29 at $110.87.

Companies, especially small ones, are eager to offload the hassles of payroll. They’re willing to dump other headaches, too, such as onboarding new workers, tracking performance and training.

Paylocity’s sweet spot is small companies, typically with 100 employees or fewer. A big part of its growth lately is coming from customers half that size. While there are more of them, smaller companies generate less revenue if you sell software based on headcount, as Paylocity does. If Beauchamp wants to maintain Paylocity’s steady climb, he’ll have to keep pedaling faster. So far, he has proven to be a skilled rider.

“We’ve had 10 straight quarters of mid-20 percent growth,” says Beauchamp, 47. “Our long-term goal is to get to $1 billion in the next four fiscal years.”

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Unlike some fast-growing tech companies, 22-year-old Paylocity hasn’t struggled to generate consistent profits. Net income rose 39 percent to $54 million last year as revenue climbed 26 percent to $468 million.

Over the past three years, Paylocity has increased the number of customers and their average spending with the company at the same rate—about 40 percent.

“It’s a boring business but in a good way,” says Corey Greendale, who follows Paylocity at First Analysis in Chicago. “There’s nothing particularly extraordinary that’s happened: They keep chugging along, putting points on the board. It’s a good industry with relatively low risk, good growth.”

Giants ADP and Paychex dominate payroll processing. Ultimate Software, which plays more in the midmarket and has about $1 billion in annual revenue, was taken private this year in an $11 billion buyout. Paylocity competes with Oklahoma-based Paycom Software for smaller customers.

There’s plenty of room, says Brian Peterson, an Atlanta-based analyst at Raymond James. “ADP churns 10 percent of a $9.9 billion business every year. Paylocity only needs a fraction of that.”

Beauchamp plans to keep adding customers and more services for them to buy. “We have a lot of new customers to the platform and customers adopting more of our products,” he says. The company has grown its client base from about 15,000 to 20,000 in the past three years. Their annual spending per employee has grown from $285 to $400.

“We figure there are 600,000 businesses between 20 and 1,000 employees, so there’s lots of runway.”

Beauchamp forecasts 21 percent revenue growth in the coming year, compared with 26 percent last year. But Paylocity has a history of beating its targets.

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People and products are key to maintaining growth. Paylocity’s sales force grew 23 percent last year to 382. “There are only so many good, experienced payroll sales reps out there, so there’s always some execution risk,” Greendale says. “But 25 percent of their business comes from benefits brokers, which has been a great driver.”

The company also spends about 14 percent of revenue on research and product development, nearly double that of Paycom, which is about 20 percent bigger by revenue.

One new Paylocity product enables employers to give workers some of their accrued pay before formal pay periods. Paylocity also added an employee-survey tool and a dashboard that uses machine learning to predict whether employees might be at risk of leaving. The newest product is a learning-management tool that allows companies to create and share training content with employees.

Paylocity has been willing to buy as well as build, acquiring BeneFlex HR Resources, a maker of health-spending software, for $6.7 million in 2018.

“It was a purely transactional product five or 10 years ago,” says Beauchamp, who was hired in 2007 to take over for founder Steven Sarowitz, who remains chairman. “It’s more content and analytics now.”

The evolution puts Paylocity in position to benefit from another trend, says Arvind Ramnani, an analyst at KeyBanc Capital Markets. “The next generation of cloud spending will be on back-end apps like payroll. That’s where the action is at.”

But as Paylocity focuses on more sophisticated products, it needs more tech talent. Finding it is Beauchamp’s biggest challenge. “It’s competitive to find great software engineers and salespeople,” though he says it’s not hard to recruit workers to the suburbs.

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So far Paylocity seems to be winning. The company recently hired Adam McElhinney from Uptake Technologies, where he was head of data science, machine learning and artificial intelligence strategy.

“The question I get from investors is, ‘How can it last?’ ” Greendale says. “But people were asking that two years ago.”



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