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Paylocity Acquires VidGrid For E-Learning & Employee Engagement (NASDAQ:PCTY)

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Via SeekingAlpha.com

Quick Take

Paylocity (PCTY) has announced the acquisition of VidGrid for an undisclosed amount.

VidGrid has developed peer-to-peer video learning course system for business environments.

With the deal, Paylocity brings in-house a community and employee engagement asset that it has been using for some time.

I’m bullish on PCTY over the medium due to growing trends in distributed workforce management tools especially in light of minimizing business disruption from major events such as the Covid19 pandemic.

Target Company & Market

Minnesota City, MN-based VidGrid was founded to create a digital video platform for peer-to-peer video creation and distribution in the enterprise.

Management is headed by co-founder and CEO Nick Stokman, who was previously a Mentor at technology company incubator Techstars.

Below is an overview video of using the VidGrid system:

Source: Jennifer Ray

VidGrid’s primary offerings include:

Primary uses cases for the system include:

  • Enterprise

  • Training

  • Support

  • Sales

  • API

According to a 2019 market research report by 360 Market Updates, the market for e-learning services and technologies is expected to reach $115 billion by 2023.

This represents a forecast CAGR (Compound Annual Growth Rate) of 13.6% from 2020 to 2023.

The main drivers for this expected growth continued need for workforce and personal education and increased investment in technologies for online learning on a global basis.

Acquisition Terms & Financials

Paylocity didn’t disclose the acquisition price or terms and didn’t provide a change in financial guidance as a result of the transaction.

A review of the firm’s most recently published financial results indicate that as of December 31, 2019 Paylocity had $145.7 million in cash and short-term investments and $1.99 billion in total liabilities with no long-term debt.

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Free cash flow for the twelve months ended December 31, 2019 was $93.4 million.

In the past 12 months, Paylocity’s stock price has dropped 0.2% vs. the U.S. Software industry’s rise of 8.6% and the U.S. overall market index’ fall of 10.0%, as the PCTY chart indicates below:

Source: Simply Wall St.

Earnings surprises versus analyst consensus estimates have been positive in ten of the last twelve quarters, as the chart shows here:

Source: Seeking Alpha

Valuation Metrics

Below is a table of relevant capitalization and valuation figures for the company:

Measure

Amount

Market Capitalization

$4,620,000,000

Enterprise Value

$4,560,000,000

Price / Sales

8.83

Enterprise Value / Sales

8.78

Enterprise Value / EBITDA

59.88

Free Cash Flow [TTM]

$93,400,000

Revenue Growth Rate

24.25%

Earnings Per Share

$1.04

Source: Company Financials

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:

Assuming the above generous DCF parameters, the firm’s shares would be valued at approximately even with its current price of $100, indicating they are potentially currently fully valued, with the given earnings, growth and discount rate assumptions of the DCF.

Commentary

PCTY acquired VidGrid for its e-learning, community and employee engagement functionalities.

As Paylocity CEO Steve Beauchamp stated in the deal announcement,

As a leading modern workforce platform, we are constantly looking for opportunities to make our product suite even more useful for our clients. We believe video will play a critical role in transforming workplace communication. As part of our product expansion, we introduced our Learning Management System [LMS] and worked with VidGrid to provide learning opportunities that the modern workforce expects.

So, the deal enables PCTY to further add to its value propositions for its workforce platform.

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The two companies have been partners for some time, so integration risk should be nonexistent.

Management sees the trend toward remote work as driving continued need for on-demand learning from video platform offerings.

PCTY has been moving down market, below the 50-employee company size so a self-serve peer-to-peer video platform such as VidGrid’s would appear to fit neatly into that part of its growth strategy for the lower end of the addressable market.

As for PCTY, the generous DCF pegs the company’s shares currently as fully valued based on forward earnings guidance.

However, I’m more optimistic than those numbers allow, as I see a significant acceleration of work arrangements moving toward more distributed models as businesses seek to reduce disruption risk from events like the current Covid19 pandemic.

Even though short-term pandemic effects may be negative and management has guided flat adjusted EBITDA for 2020, my current bias is Bullish on PCTY over the medium term.

I research IPOs and technology M&A deals.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.




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