PCTY Forensic Analysis

Executive Summary

Analysis Date: 2025-12-09 | Ticker: PCTY | Price: $146.98

Paylocity presents a compelling short opportunity driven by a confluence of negative factors. Revenue growth has decelerated to 12%, yet the stock retains a premium valuation that prices in ~14.5% FCF growth for a decade. Coordinated and significant insider selling by the entire executive team, coupled with aggressive accounting practices like capitalizing over $41M in costs quarterly and massive stock-based compensation (79% of Net Income), signals a fundamental disconnect between perception and reality.

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💰 Recent Material Events (8-K Analysis)

• •2025-12-05: Standard corporate filing, no material adverse event disclosed.
• •2025-11-04: Filing associated with the Q1 2026 earnings release (for the quarter ended Sep 30, 2025).
• •2025-08-05: Filing associated with the Q4 2025 earnings release and authorization of a $500M increase to the share repurchase program.

The most significant recent action is the aggressive share repurchase. The company bought back $200M in stock last quarter at an average price of $173.30, which is ~18% above the current price. This represents poor timing and inefficient capital allocation.

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🔴 Insider Trading Activity

Recent Form 4 filings and the 10-Q (Item 5) reveal a clear and coordinated pattern of insider selling through newly adopted Rule 10b5-1 plans. This is a major red flag.

This is not routine diversification. The entire senior leadership team, including the Chairman and CFO, established plans to systematically sell large blocks of stock within weeks of each other. This signals a strong belief that the stock is at or near a peak.

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Business Model Analysis

### Revenue Mix

• •Recurring Fees (93% of Total Revenue): Generated from cloud-based payroll and HCM software solutions, priced on a per-employee-per-month (PEPM) basis. This provides high visibility but is sensitive to client employment levels.
• •Interest on Client Funds (7% of Total Revenue): Earned on client funds held for payroll and tax payments. This 'float' income is a high-margin contributor but is vulnerable to interest rate fluctuations. Notably, this revenue stream decreased 2% YoY despite higher client fund balances, indicating a headwind from lower rates.

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Financial Health

### Revenue Quality & Growth

• •Revenue Growth: Total revenue grew 12.4% YoY to $408.2M, a significant deceleration from historical 20%+ growth rates.
• •Accounts Receivable: AR remains low and stable at $41.7M, indicating strong collection practices. ✅

### Profitability & Cash Flow

• •Net Income: Decreased 3.2% YoY to $48.0M, primarily due to a jump in the effective tax rate from 28% to 36%. 🔴
• •Operating Cash Flow (OCF): Decreased 5.5% YoY to $86.5M. Declining OCF alongside decelerating revenue is a significant warning sign. ⚠️
• •Capital Allocation: The company spent $200M on share buybacks and $81.3M on debt repayment, leading to a $233M drop in corporate cash in a single quarter.

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Valuation Analysis

### Reverse DCF

• •Enterprise Value: $8.13B
• •Estimated TTM FCF: ~$320M
• •Implied Growth: To justify its current $8.13B enterprise value, PCTY must grow its free cash flow by approximately 14.5% annually for the next 10 years (assuming a 9% WACC and 2.5% terminal growth).

This implied growth rate is well above the current revenue growth of 12.4% and starkly contrasts with the negative YoY growth in both Net Income and Operating Cash Flow. The valuation appears disconnected from current fundamentals.

### Comparables

PCTY trades at a premium to legacy players like ADP and PAYX, but its growth is now decelerating towards their levels without their scale or consistent cash generation. Its valuation is rich for a company showing signs of maturation.

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🔴 Forensic Accounting Flags

1. •Aggressive Cost Capitalization ⚠️: In Q1, PCTY capitalized $22.3M of sales commissions and $18.9M of fulfillment costs. These costs are amortized over 7 years. This practice boosts current-period operating income and margins by deferring significant operating expenses.
2. •Extreme Stock-Based Compensation (SBC) 🔴: Quarterly SBC was $37.8M, equivalent to a staggering 79% of GAAP Net Income. This creates massive shareholder dilution and indicates that cash profits are significantly lower than headline non-GAAP figures suggest.
3. •Divergence of GAAP & Non-GAAP ⚠️: Adjusted EBITDA was $146.4M, while GAAP Operating Income was only $74.2M. The $72.2M gap is primarily driven by SBC and amortization, masking the true cost structure of the business.

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Short Thesis

PCTY is a maturing growth story priced for perfection. The combination of decelerating top-line growth, declining cash flow, massive insider selling, and aggressive accounting creates a compelling asymmetric short opportunity as the market reprices the company based on its new, slower-growth reality.

1. •Valuation Disconnect: The stock is priced for 14.5% FCF growth, but fundamentals show 12% revenue growth and declining cash flow.
2. •Insider Capitulation: The C-suite is systematically selling shares, signaling a lack of faith in the company's future stock performance at these levels.
3. •Poor Earnings Quality: Profits are flattered by capitalizing significant operating costs. SBC is eroding 79% of net income, indicating a massive transfer of value from shareholders to employees.
4. •Inefficient Capital Allocation: Management is destroying value by repurchasing shares at prices ~18% higher than the current market price, while insiders are simultaneously selling.

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Catalysts & Timeline

• •Next Earnings Report (Q2'26): Expected around February 5, 2026. A miss on revenue or downward revision to full-year guidance would be a primary catalyst.
• •Macro Headwinds: Further softening in the labor market could impact client employee counts, directly pressuring PEPM revenue.
• •Insider Selling Disclosures: Ongoing Form 4 filings from the executive 10b5-1 plans will serve as a constant negative signal to the market.

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Price Targets

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Investment Recommendation

SHORT with a High Conviction (8/10). The evidence of a broken growth story, coupled with clear signals from insiders and aggressive accounting, provides a strong foundation for a short position. The risk/reward is highly favorable for a significant correction as the narrative shifts from high-growth tech to a mature, lower-margin service provider.

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One-Liner Thesis

Aggressive insider selling, decelerating growth, and questionable accounting make PCTY a compelling short as its premium valuation unwinds.