UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

________________________________________________________________________

Form 10-Q

________________________________________________________________________

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2022

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission file number 001-36348

________________________________________________________________________

PAYLOCITY HOLDING CORPORATION

(Exact name of registrant as specified in its charter)

________________________________________________________________________

Delaware	46-4066644
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

1400 American Lane Schaumburg, Illinois	60173
(Address of principal executive offices)	(Zip Code)

(847) 463-3200

(Registrant’s telephone number, including area code)

________________________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	PCTY	The NASDAQ Global Select Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer	x	Accelerated Filer	o
Non-Accelerated Filer	o	Smaller Reporting Company	o
		Emerging Growth Company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 55,673,889 shares of Common Stock, $0.001 par value per share, as of October 28, 2022.

Paylocity Holding Corporation

Form 10-Q

For the Quarterly Period Ended September 30, 2022

TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited Consolidated Balance Sheets	2
Unaudited Consolidated Statements of Operations and Comprehensive Income	3
Unaudited Consolidated Statement of Changes in Stockholders’ Equity	4
Unaudited Consolidated Statements of Cash Flows	5
Notes to the Unaudited Consolidated Financial Statements	6
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	29
ITEM 4. CONTROLS AND PROCEDURES	30
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS	31
ITEM 1A. RISK FACTORS	31
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	31
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	31
ITEM 4. MINE SAFETY DISCLOSURES	31
ITEM 5. OTHER INFORMATION	31
ITEM 6. EXHIBITS	31
SIGNATURES	33

1

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Balance Sheets

(in thousands, except per share data)

	June 30, 2022		September 30, 2022
Assets
Current assets:
Cash and cash equivalents	$	139,756	$	65,484
Accounts receivable, net	15,754		21,519
Deferred contract costs	59,501		64,058
Prepaid expenses and other	28,896		29,122
Total current assets before funds held for clients	243,907		180,183
Funds held for clients	3,987,776		2,299,437
Total current assets	4,231,683		2,479,620
Capitalized internal-use software, net	61,985		66,693
Property and equipment, net	62,839		60,943
Operating lease right-of-use assets	49,210		47,614
Intangible assets, net	45,475		42,704
Goodwill	101,949		102,054
Long-term deferred contract costs	229,067		244,554
Long‑term prepaid expenses and other	7,746		7,624
Deferred income tax assets	19,060		43,303
Total assets	$	4,809,014	$	3,095,109
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	8,374	$	6,235
Accrued expenses	124,384		105,907
Total current liabilities before client fund obligations	132,758		112,142
Client fund obligations	3,987,776		2,299,437
Total current liabilities	4,120,534		2,411,579
Long-term operating lease liabilities	69,119		67,040
Other long-term liabilities	3,681		3,427
Deferred income tax liabilities	2,217		2,217
Total liabilities	$	4,195,551	$	2,484,263
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000 authorized, no shares issued and outstanding at June 30, 2022 and September 30, 2022	$	—	$	—
Common stock, $0.001 par value, 155,000 shares authorized at June 30, 2022 and September 30, 2022; 55,190 shares issued and outstanding at June 30, 2022 and 55,664 shares issued and outstanding at September 30, 2022	55		56
Additional paid-in capital	289,843		259,245
Retained earnings	325,868		356,220
Accumulated other comprehensive loss	(2,303)		(4,675)
Total stockholders' equity	$	613,463	$	610,846
Total liabilities and stockholders’ equity	$	4,809,014	$	3,095,109

See accompanying notes to unaudited consolidated financial statements.

2

PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Statements of Operations and Comprehensive Income

(in thousands, except per share data)

	Three Months Ended September 30,
	2021		2022
Revenues:
Recurring and other revenue	$	180,824	$	245,406
Interest income on funds held for clients	873		7,874
Total revenues	181,697		253,280
Cost of revenues	63,249		84,543
Gross profit	118,448		168,737
Operating expenses:
Sales and marketing	49,885		71,063
Research and development	23,076		40,093
General and administrative	35,235		50,492
Total operating expenses	108,196		161,648
Operating income	10,252		7,089
Other expense	(117)		(163)
Income before income taxes	10,135		6,926
Income tax benefit	(20,797)		(23,426)
Net income	$	30,932	$	30,352
Other comprehensive loss, net of tax	(75)		(2,372)
Comprehensive income	$	30,857	$	27,980
Net income per share:
Basic	$	0.56	$	0.55
Diluted	$	0.55	$	0.54
Weighted-average shares used in computing net income per share:
Basic	54,810		55,453
Diluted	56,506		56,664

See accompanying notes to unaudited consolidated financial statements.

3

PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Statement of Changes in Stockholders’ Equity

(in thousands)

	Three Months Ended September 30, 2021
	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity
	Shares	Amount
Balances at June 30, 2021	54,594	$	55	$	241,718	$	235,091	$	66	$	476,930
Stock-based compensation	—	—		21,106		—		—		21,106
Stock options exercised	151	—		1,429		—		—		1,429
Issuance of common stock upon vesting of restricted stock units	524	—		—		—		—		—
Net settlement for taxes and/or exercise price related to equity awards	(250)	—		(62,749)		—		—		(62,749)
Unrealized losses on securities, net of tax	—	—		—		—		(75)		(75)
Net income	—	—		—		30,932		—		30,932
Balances at September 30, 2021	55,019	$	55	$	201,504	$	266,023	$	(9)	$	467,573

	Three Months Ended September 30, 2022
	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Stockholders’ Equity
	Shares	Amount
Balances at June 30, 2022	55,190	$	55	$	289,843	$	325,868	$	(2,303)	$	613,463
Stock-based compensation	—	—		43,471		—		—		43,471
Stock options exercised	235	—		2,832		—		—		2,832
Issuance of common stock upon vesting of restricted stock units	549	1		(1)		—		—		—
Net settlement for taxes and/or exercise price related to equity awards	(310)	—		(76,900)		—		—		(76,900)
Unrealized losses on securities, net of tax	—	—		—		—		(2,372)		(2,372)
Net income	—	—		—		30,352		—		30,352
Balances at September 30, 2022	55,664	$	56	$	259,245	$	356,220	$	(4,675)	$	610,846

See accompanying notes to the unaudited consolidated financial statements.

4

PAYLOCITY HOLDING CORPORATION

Unaudited Consolidated Statements of Cash Flows

(in thousands)

	Three Months Ended September 30,
	2021		2022
Cash flows from operating activities:
Net income	$	30,932	$	30,352
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Stock-based compensation expense	19,559		39,813
Depreciation and amortization expense	11,322		14,267
Deferred income tax benefit	(20,827)		(23,415)
Provision for credit losses	38		266
Net accretion of discounts and amortization of premiums on available-for-sale securities	90		(842)
Amortization of debt issuance costs	44		94
Other	27		125
Changes in operating assets and liabilities:
Accounts receivable	(173)		(6,020)
Deferred contract costs	(11,114)		(19,328)
Prepaid expenses and other	(9,807)		614
Accounts payable	1,567		(1,805)
Accrued expenses and other	(25,790)		(17,734)
Net cash provided by (used in) operating activities	(4,132)		16,387
Cash flows from investing activities:
Purchases of available-for-sale securities	(135,849)		(118,926)
Proceeds from sales and maturities of available-for-sale securities	9,648		42,850
Capitalized internal-use software costs	(9,159)		(9,953)
Purchases of property and equipment	(3,220)		(3,447)
Acquisitions of businesses, net of cash acquired	(59,581)		—
Net cash used in investing activities	(198,161)		(89,476)
Cash flows from financing activities:
Net change in client fund obligations	1,425,782		(1,688,339)
Taxes paid related to net share settlement of equity awards	(60,809)		(74,071)
Payment of debt issuance costs	(9)		(855)
Net cash provided by (used in) financing activities	1,364,964		(1,763,265)
Net change in cash, cash equivalents and funds held for clients' cash and cash equivalents	1,162,671		(1,836,354)
Cash, cash equivalents and funds held for clients' cash and cash equivalents—beginning of period	1,945,881		3,793,453
Cash, cash equivalents and funds held for clients' cash and cash equivalents—end of period	$	3,108,552	$	1,957,099
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Purchases of property and equipment, accrued but not paid	$	3,079	$	—
Liabilities assumed for acquisitions	$	2,165	$	117
Supplemental Disclosure of Cash Flow Information
Cash paid for interest	$	63	$	62
Cash paid for income taxes	$	13	$	19
Reconciliation of cash, cash equivalents and funds held for clients' cash and cash equivalents to the Consolidated Balance Sheets
Cash and cash equivalents	$	66,431	$	65,484
Funds held for clients' cash and cash equivalents	3,042,121		1,891,615
Total cash, cash equivalents and funds held for clients' cash and cash equivalents	$	3,108,552	$	1,957,099

See accompanying notes to unaudited consolidated financial statements.

5

PAYLOCITY HOLDING CORPORATION

Notes to the Unaudited Consolidated Financial Statements

(all amounts in thousands, except per share data)

(1) Organization and Description of Business

Paylocity Holding Corporation (the “Company”) is a cloud-based provider of human capital management and payroll software solutions that deliver a comprehensive platform for the modern workforce. Services are provided in a Software-as-a-Service (“SaaS”) delivery model. The Company’s comprehensive product suite delivers a unified platform that helps businesses attract and retain talent, build culture and connection with their employees, and streamline and automate HR and payroll processes.

(2) Summary of Significant Accounting Policies

(a) Basis of Presentation, Consolidation and Use of Estimates

These unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Future events and their effects cannot be predicted with certainty; accordingly, accounting estimates require the exercise of judgment. Accounting estimates used in the preparation of these consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the operating environment changes.

(b) Interim Unaudited Consolidated Financial Information

The accompanying unaudited consolidated financial statements and notes have been prepared in accordance with GAAP and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the Company’s financial position, results of operations, changes in stockholders’ equity and cash flows. The results of operations for the three months ended September 30, 2022 are not necessarily indicative of the results for the full year or the results for any future periods. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended June 30, 2022 included in the Company’s Annual Report on Form 10-K.

(c) Income Taxes

Income taxes are accounted for in accordance with ASC 740, Income Taxes, using the asset and liability method. The Company’s provision for income taxes is based on the annual effective rate method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize its deferred tax assets in the future in excess of their net-recorded amount, it would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

6

(d) Recently Issued Accounting Standards

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of other recently issued standards that are not yet effective will not have a material impact on the Company’s consolidated financial statements upon adoption.

(3) Revenue

The Company derives its revenue from contracts predominantly from recurring and non-recurring service fees. While the majority of its agreements are generally cancellable by the client on 60 days’ notice or less, the Company also offers term agreements to its clients, which are generally two years in length. Recurring fees are derived from payroll, timekeeping, and HR-related cloud-based computing services. The majority of the Company’s recurring fees are satisfied over time as services are provided. The performance obligations related to payroll services are satisfied upon the processing of the client’s payroll with the fee charged and collected based on a per employee per payroll frequency fee. The performance obligations related to time and attendance services and HR related services are satisfied over time each month with the fee charged and collected based on a per employee per month fee. For subscription-based fees which can include payroll, time and attendance, and other HCM related services, the Company recognizes the applicable recurring fees over time each month with the fee charged and collected based on a per employee per month fee. Non-recurring service fees consist mainly of nonrefundable implementation fees, which involve setting the client up in, and loading data into, the Company’s cloud-based modules. These implementation activities are considered set-up activities. The Company has determined that the nonrefundable upfront fees provide certain clients with a material right to renew the contract.

Disaggregation of revenue

The following table disaggregates revenue by Recurring fees and Implementation services and other, which the Company believes depicts the nature, amount and timing of its revenue:

	Three Months Ended September 30,
	2021		2022
Recurring fees	$	174,697	$	236,819
Implementation services and other	6,127		8,587
Total revenues from contracts	$	180,824	$	245,406

Deferred revenue

The timing of revenue recognition for recurring revenue is consistent with the timing of invoicing as they occur simultaneously based on the client payroll processing period or by month. As such, the Company does not recognize contract assets or liabilities related to recurring revenue.

The Company defers and amortizes nonrefundable upfront fees related to implementation services generally over a period up to 24 months based on the type of contract. The following table summarizes the changes in deferred revenue (i.e., contract liability) related to these nonrefundable upfront fees as follows:

	Three Months Ended September 30,
	2021		2022
Balance at beginning of the period	$	8,734	$	12,233
Deferral of revenue	4,353		8,232
Revenue recognized	(4,370)		(6,270)
Balance at end of the period	$	8,717	$	14,195

Deferred revenue related to these nonrefundable upfront fees are recorded within Accrued expenses and Other long-term liabilities on the Unaudited Consolidated Balance Sheets. The Company expects to recognize these deferred revenue balances of $10,462 in fiscal 2023, $3,518 in fiscal 2024 and $215 in fiscal 2025 and thereafter.

7

Deferred contract costs

The Company defers certain selling and commission costs that meet the capitalization criteria under ASC 340-40. The Company also capitalizes certain costs to fulfill a contract related to its proprietary products if they are identifiable, generate or enhance resources used to satisfy future performance obligations and are expected to be recovered under ASC 340-40. Implementation fees are treated as nonrefundable upfront fees and the related implementation costs are required to be capitalized and amortized over the expected period of benefit, which is the period in which the Company expects to recover the costs and enhance its ability to satisfy future performance obligations.

The Company utilizes the portfolio approach to account for both the cost of obtaining a contract and the cost of fulfilling a contract. These capitalized costs are amortized over the expected period of benefit, which has been determined to be over 7 years based on the Company’s average client life and other qualitative factors, including rate of technological changes. The Company does not incur any additional costs to obtain or fulfill contracts upon renewal. The Company recognizes additional selling and commission costs and fulfillment costs when an existing client purchases additional services. These additional costs only relate to the additional services purchased and do not relate to the renewal of previous services.

The following tables present the deferred contract costs and the related amortization expense for these deferred contract costs:

	Three Months Ended September 30, 2021
	Beginning balance		Capitalized costs		Amortization		Ending balance
Costs to obtain a new contract	$	145,718	$	11,737	$	(8,233)	$	149,222
Costs to fulfill a contract	69,175		10,940		(3,330)		76,785
Total	$	214,893	$	22,677	$	(11,563)	$	226,007

	Three Months Ended September 30, 2022
	Beginning balance		Capitalized costs		Amortization		Ending balance
Costs to obtain a new contract	$	182,543	$	18,912	$	(10,367)	$	191,088
Costs to fulfill a contract	106,025		16,862		(5,363)		117,524
Total	$	288,568	$	35,774	$	(15,730)	$	308,612

Deferred contract costs are recorded within Deferred contract costs and Long-term deferred contract costs on the Unaudited Consolidated Balance Sheets. Amortization of deferred contract costs is recorded in Cost of revenues, Sales and marketing, and General and administrative in the Unaudited Consolidated Statements of Operations and Comprehensive Income.

Remaining Performance Obligations

The balance of the Company’s remaining performance obligations related to minimum monthly fees on its term-based contracts was approximately $52,591 as of September 30, 2022, which will be generally recognized over the next 24 months. This balance excludes the value of unsatisfied performance obligations for contracts that have an original expected duration of one year or less and contracts for which the variable consideration is allocated entirely to wholly unsatisfied performance obligations.

(4) Business Combinations

On January 18, 2022, the Company acquired all of the shares outstanding of Cloudsnap, Inc., ("Cloudsnap") through a merger for cash consideration of $50,002, which was paid upon closing. Cloudsnap is a provider of a flexible, low-code solution for integrating disparate business applications. This transaction enables the Company to deliver modern integrations and seamless data sharing between critical systems more efficiently and effectively, while helping to unify and automate business processes across clients' HR, finance, benefits, and other systems.

8

The allocation of the purchase price for Cloudsnap is as follows:

	January 18, 2022
Proprietary technology	$	15,800
Goodwill	33,628
Other assets acquired	3,398
Liabilities assumed	(2,824)
Total purchase price	$	50,002

The Company did not record any material purchase accounting adjustments for Cloudsnap during the three months ended September 30, 2022. The Company accounts for business combinations in accordance with ASC 805, Business Combinations. The Company applied the acquisition method of accounting and recorded the assets acquired and liabilities assumed at their respective estimated fair values as of the date of the acquisition with the excess consideration paid recorded as goodwill.

The results from this acquisition have been included in the Company’s consolidated financial statements since the closing of the acquisition and are not material to the Company. Pro forma information is not presented because the effects of the acquisition are not material to the Company’s consolidated financial statements. The goodwill related to this acquisition is primarily attributable to the assembled workforce and growth opportunities from the expansion and enhancement of the Company’s product offerings. The goodwill associated with this acquisition is not deductible for income tax purposes. Direct costs related to the acquisition were immaterial and were expensed as incurred as General and administrative.

(5) Balance Sheet Information

The following tables provide details of selected consolidated balance sheet items:

Activity in the allowance for credit losses related to accounts receivable was as follows:

Balance at June 30, 2022	$	841
Charged to expense	266
Write-offs	(48)
Balance at September 30, 2022	$	1,059

Capitalized internal-use software and accumulated amortization were as follows:

	June 30, 2022		September 30, 2022
Capitalized internal-use software	$	193,156	$	204,906
Accumulated amortization	(131,171)		(138,213)
Capitalized internal-use software, net	$	61,985	$	66,693

Amortization of capitalized internal-use software costs is primarily included in Cost of revenues and amounted to $6,128 and $7,042 for the three months ended September 30, 2021 and 2022, respectively.

9

The major classes of property and equipment, net were as follow:

	June 30, 2022		September 30, 2022
Office equipment	$	4,365	$	4,365
Computer equipment	55,495		56,157
Furniture and fixtures	12,791		12,801
Software	8,785		8,518
Leasehold improvements	47,521		47,722
Time clocks rented by clients	6,711		7,039
Total	135,668		136,602
Accumulated depreciation	(72,829)		(75,659)
Property and equipment, net	$	62,839	$	60,943

Depreciation expense amounted to $3,842 and $4,454 for the three months ended September 30, 2021 and 2022, respectively.

The following table summarizes changes in goodwill during the three months ended September 30, 2022:

	September 30, 2022
Balance at June 30, 2022	$	101,949
Measurement period adjustments	105
Balance at September 30, 2022	$	102,054

Refer to Note 4 for further details on current year acquisition activity.

The Company’s amortizable intangible assets and estimated useful lives were as follows:

	June 30, 2022		September 30, 2022		Weighted average useful life (years)
Proprietary technology	$	43,129	$	43,129	6.0
Client relationships	22,200		22,200		7.8
Non-solicitation agreements	1,600		1,600		3.1
Trade names	1,640		1,640		5.0
Total	68,569		68,569
Accumulated amortization	(23,094)		(25,865)
Intangible assets, net	$	45,475	$	42,704

Amortization expense for acquired intangible assets was $1,352 and $2,771 for the three months ended September 30, 2021 and 2022, respectively, and is included in Cost of revenues and General and administrative.

Future amortization expense for acquired intangible assets as of September 30, 2022 is as follows:

Remainder of fiscal 2023	$	8,177
Fiscal 2024	9,943
Fiscal 2025	8,888
Fiscal 2026	7,269
Fiscal 2027	4,893
Thereafter	3,534
Total	$	42,704

10

The components of accrued expenses were as follows:

	June 30, 2022		September 30, 2022
Accrued payroll and personnel costs	$	84,897	$	61,104
Operating lease liabilities	8,399		8,365
Deferred revenue	13,548		16,810
Other	17,540		19,628
Total accrued expenses	$	124,384	$	105,907

(6) Corporate Investments and Funds Held for Clients

Corporate investments and funds held for clients consisted of the following:

	June 30, 2022
Type of Issue	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
Cash and cash equivalents	$	139,756	$	—	$	—	$	139,756
Funds held for clients' cash and cash equivalents	3,653,699		—		(2)		3,653,697
Available-for-sale securities:
Commercial paper	58,166		—		(126)		58,040
Corporate bonds	59,568		—		(1,715)		57,853
Asset-backed securities	9,843		2		(141)		9,704
Certificates of deposit	31,879		—		(43)		31,836
U.S. treasury securities	167,566		12		(591)		166,987
U.S government agency securities	8,000		—		(451)		7,549
Other	2,181		—		(71)		2,110
Total available-for-sale securities	337,203		14		(3,138)		334,079
Total investments	$	4,130,658	$	14	$	(3,140)	$	4,127,532

	September 30, 2022
Type of Issue	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
Cash and cash equivalents	$	65,484	$	—	$	—	$	65,484
Funds held for clients' cash and cash equivalents	1,891,615		—		—		1,891,615
Available-for-sale securities:
Commercial paper	47,318		1		(112)		47,207
Corporate bonds	67,696		—		(2,428)		65,268
Asset-backed securities	18,875		—		(327)		18,548
Certificates of deposit	28,184		6		(20)		28,170
U.S. treasury securities	239,246		—		(2,656)		236,590
U.S government agency securities	8,000		—		(612)		7,388
Other	4,784		—		(133)		4,651
Total available-for-sale securities	414,103		7		(6,288)		407,822
Total investments	$	2,371,202	$	7	$	(6,288)	$	2,364,921

All available-for-sale securities were included in Funds held for clients at June 30, 2022 and September 30, 2022

Cash and cash equivalents and funds held for clients’ cash and cash equivalents included demand deposit accounts, money market funds, commercial paper and certificates of deposit at June 30, 2022 and September 30, 2022.

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Classification of investments on the Unaudited Consolidated Balance Sheets was as follows:

	June 30, 2022		September 30, 2022
Cash and cash equivalents	$	139,756	$	65,484
Funds held for clients	3,987,776		2,299,437
Total investments	$	4,127,532	$	2,364,921

Available-for-sale securities that had been in an unrealized loss position for a period of less and greater than 12 months as of June 30, 2022 and September 30, 2022 had fair market value as follows:

	June 30, 2022
	Securities in an unrealized loss position for less than 12 months				Securities in an unrealized loss position for greater than 12 months				Total
	Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value
Commercial paper	$	(126)	$	53,756	$	—	$	—	$	(126)	$	53,756
Corporate bonds	(1,715)		57,853		—		—		(1,715)		57,853
Asset-backed securities	(141)		7,354		—		—		(141)		7,354
Certificates of deposit	(43)		27,086		—		—		(43)		27,086
U.S. treasury securities	(591)		129,943		—		—		(591)		129,943
U.S. government agency securities	(451)		7,549		—		—		(451)		7,549
Other	(71)		2,110		—		—		(71)		2,110
Total available-for-sale securities	$	(3,138)	$	285,651	$	—	$	—	$	(3,138)	$	285,651

	September 30, 2022
	Securities in an unrealized loss position for less than 12 months				Securities in an unrealized loss position for greater than 12 months				Total
	Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value
Commercial paper	$	(112)	$	46,207	$	—	$	—	$	(112)	$	46,207
Corporate bonds	(1,849)		52,213		(579)		13,055		(2,428)		65,268
Asset-backed securities	(314)		16,871		(13)		1,419		(327)		18,290
Certificates of deposit	(20)		16,913		—		—		(20)		16,913
U.S. treasury securities	(2,656)		236,590		—		—		(2,656)		236,590
U.S. government agency securities	(34)		966		(578)		6,422		(612)		7,388
Other	(78)		3,732		(55)		864		(133)		4,596
Total available-for-sale securities	$	(5,063)	$	373,492	$	(1,225)	$	21,760	$	(6,288)	$	395,252

The Company regularly reviews the composition of its portfolio to determine the existence of credit impairment. The Company did not recognize any credit impairment losses during the three months ended September 30, 2021 or 2022. All securities in the Company’s portfolio held an A-1 rating or better as of September 30, 2022.

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The Company did not make any material reclassification adjustments out of accumulated other comprehensive income for realized gains and losses on the sale of available-for-sale securities during the three months ended September 30, 2021 or 2022. There were no realized gains or losses on the sale of available-for-sale securities for the three months ended September 30, 2021 or 2022.

Expected maturities of available-for-sale securities at September 30, 2022 were as follows:

	Amortized cost		Fair value
One year or less	$	275,556	$	274,072
One year to two years	74,836		72,546
Two years to three years	61,708		59,442
Three years to five years	2,003		1,762
Total available-for-sale securities	$	414,103	$	407,822

(7) Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

•Level 1—Quoted prices in active markets for identical assets and liabilities.

•Level 2—Quoted prices in active markets for similar assets and liabilities, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

•Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The Company measures certain cash and cash equivalents, accounts receivable, accounts payable and client fund obligations at fair value on a recurring basis using Level 1 inputs. The Company considers the recorded value of these financial assets and liabilities to approximate the fair value of the respective assets and liabilities at June 30, 2022 and September 30, 2022 based upon the short-term nature of these assets and liabilities.

Marketable securities, consisting of securities classified as available-for-sale as well as certain cash equivalents, are recorded at fair value on a recurring basis using Level 2 inputs obtained from an independent pricing service. Available-for-sale securities include commercial paper, corporate bonds, asset-backed securities, certificates of deposit, U.S. treasury securities, U.S. government agency and other securities. The independent pricing service utilizes a variety of inputs including benchmark yields, broker/dealer quoted prices, reported trades, issuer spreads as well as other available market data. The Company, on a sample basis, validates the pricing from the independent pricing service against another third-party pricing source for reasonableness. The Company has not adjusted any prices obtained by the independent pricing service, as it believes they are appropriately valued. There were no available-for-sale securities classified in Level 3 of the fair value hierarchy at June 30, 2022 or September 30, 2022.

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The fair value level for the Company’s cash and cash equivalents and available-for-sale securities was as follows:

	June 30, 2022
	Total		Level 1		Level 2		Level 3
Cash and cash equivalents	$	139,756	$	139,756	$	—	$	—
Funds held for clients' cash and cash equivalents	3,653,697		3,640,427		13,270		—
Available-for-sale securities:
Commercial paper	58,040		—		58,040		—
Corporate bonds	57,853		—		57,853		—
Asset-backed securities	9,704		—		9,704		—
Certificates of deposit	31,836		—		31,836		—
U.S. treasury securities	166,987		—		166,987		—
U.S government agency securities	7,549		—		7,549		—
Other	2,110		—		2,110		—
Total available-for-sale securities	334,079		—		334,079		—
Total investments	$	4,127,532	$	3,780,183	$	347,349	$	—

	September 30, 2022
	Total		Level 1		Level 2		Level 3
Cash and cash equivalents	$	65,484	$	65,484	$	—	$	—
Funds held for clients' cash and cash equivalents	1,891,615		1,887,494		4,121		—
Available-for-sale securities:
Commercial paper	47,207		—		47,207		—
Corporate bonds	65,268		—		65,268		—
Asset-backed securities	18,548		—		18,548		—
Certificates of deposit	28,170		—		28,170		—
U.S. treasury securities	236,590		—		236,590		—
U.S government agency securities	7,388		—		7,388		—
Other	4,651		—		4,651		—
Total available-for-sale securities	407,822		—		407,822		—
Total investments	$	2,364,921	$	1,952,978	$	411,943	$	—

Assets and Liabilities Recorded at Fair Value on a Non-Recurring Basis

The Company records assets acquired and liabilities assumed in business combinations at fair value. Refer to Note 4 for further details on the fair value measurements of certain assets and liabilities recorded at fair value on a non-recurring basis.

(8) Debt

In July 2019, the Company entered into a revolving credit agreement with PNC Bank, National Association, and other lenders, which is secured by substantially all of the Company’s assets, subject to certain restrictions. In August 2022, the Company entered into a first amendment to the aforementioned credit agreement to increase the borrowing capacity of our revolving credit facility ("credit facility") to $550,000, which may be increased up to $825,000, subject to obtaining additional lender commitments and certain approvals and satisfying other requirements. The amended credit agreement extends the maturity date of the credit facility to August 2027 and replaces the interest rate based on London Interbank Offered Rate with an interest rate based on secured overnight financing rate ("SOFR"). The Company had no borrowings at June 30, 2022 or September 30, 2022.

The proceeds of any borrowings are to be used to fund working capital, capital expenditures and general corporate purposes, including permitted acquisitions, permitted investments, permitted distributions and share repurchases. The

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Company may generally borrow, prepay and reborrow under the credit facility and terminate or reduce the lenders’ commitments at any time prior to revolving credit facility expiration without a premium or a penalty, other than customary “breakage” costs.

Any borrowings under the credit facility will generally bear interest, at the Company’s option, at a rate per annum determined by reference to either the Term SOFR rate plus the SOFR Adjustment or an adjusted base rate, in each case plus an applicable margin ranging from 0.875% to 1.500% and 0.0% to 0.500%, respectively, based on the then-applicable net total leverage ratio. Additionally, the Company is required to pay certain commitment, letter of credit fronting and letter of credit participation fees on available and/or undrawn portions of the credit facility.

The Company is required to comply with certain customary affirmative and negative covenants, including a requirement to maintain a maximum net total leverage ratio of not greater than 4.00 to 1.00, (with a step up to 4.50 to 1.00 for the 4 consecutive fiscal quarters following a fiscal quarter in which certain permitted acquisitions are consummated), and a minimum interest coverage ratio of not less than 2.00 to 1.00. As of September 30, 2022, the Company was in compliance with all of the aforementioned covenants.

(9) Stock-Based Compensation

The Company maintains a 2008 Equity Incentive Plan (the “2008 Plan”) and a 2014 Equity Incentive Plan (the “2014 Plan”) pursuant to which the Company has reserved shares of its common stock for issuance to its employees, directors and non-employee third parties. The 2014 Plan serves as the successor to the 2008 Plan and permits the granting of restricted stock units and other equity incentives at the discretion of the compensation committee of the Company’s board of directors. No new awards have been or will be issued under the 2008 Plan since the effective date of the 2014 Plan. Outstanding awards under the 2008 Plan continue to be subject to the terms and conditions of the 2008 Plan. The number of shares of common stock reserved for issuance under the 2014 Plan may increase each calendar year, continuing through and including January 1, 2024. The number of shares added each year may be equal to the lesser of (a) four and five tenths percent (4.5%) of the number of shares of common stock of the Company issued and outstanding on the immediately preceding December 31, or (b) an amount determined by the Company’s board of directors.

As of September 30, 2022, the Company had 13,827 shares allocated to the plans, of which 1,909 shares were subject to outstanding options or awards. Generally, the Company issues previously unissued shares for the exercise of stock options or vesting of awards; however, shares previously subject to 2014 Plan grants or awards that are forfeited or net settled at exercise or release may be reissued to satisfy future issuances.

The following table summarizes changes in the number of shares available for grant under the Company’s equity incentive plans during the three months ended September 30, 2022:

	Number of Shares
Available for grant at July 1, 2022	12,393
RSUs granted	(702)
MSUs granted	(78)
Shares withheld in settlement of taxes and/or exercise price	310
Forfeitures	63
Shares removed	(68)
Available for grant at September 30, 2022	11,918

Shares removed represents forfeitures of shares and shares withheld in settlement of taxes and/or payment of exercise price related to grants made under the 2008 Plan. As noted above, no new awards will be issued under the 2008 Plan.

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Stock-based compensation expense related to restricted stock units (“RSUs”), market share units (“MSUs”) and the Employee Stock Purchase Plan is included in the following line items in the accompanying unaudited consolidated statements of operations and comprehensive income:

	Three Months Ended September 30,
	2021		2022
Cost of revenues	$	2,607	$	4,041
Sales and marketing	5,159		9,559
Research and development	3,702		8,802
General and administrative	8,091		17,411
Total stock-based compensation expense	$	19,559	$	39,813

In addition, the Company capitalized $1,547 and $2,942 of stock-based compensation expense in its capitalized internal-use software costs in the three months ended September 30, 2021 and 2022.

There were no stock options granted during the three months ended September 30, 2022. The table below presents stock option activity during the three months ended September 30, 2022:

	Outstanding Options
	Number of shares	Weighted average exercise price		Weighted average remaining contractual term (years)	Aggregate intrinsic value
Balance at July 1, 2022	548	$	18.34	1.6	$	85,515
Options exercised	(235)	$	12.07
Balance at September 30, 2022	313	$