Paylocity Holding Corp. Stock price
📊 Peer Group
📈 What is it?
The peer group consists of the companies with the most similar business model. They serve as a benchmark for putting a stock into context.
🧮 How is it selected?
Based on similarity of business model, meaning companies from the same industry with comparable products and a similar customer base. That's the only way to compare apples to apples.
🏛️ Why does it matter?
Whether a stock is cheap or expensive is best judged by comparison. A P/E of 18 or an EV/FCF of 20 can look cheap or expensive depending on the yardstick. The peer group gives you the most accurate one: companies with a similar business model that operate under the same conditions.
🎯 What does it mean for investors?
When a metric sits below the peer average, the stock is valued more cheaply relative to its competitors, and above the average more expensively. A discount to the peer group can be an opportunity, but it can also have a reason (for example lower growth). The comparison is a starting point, not a verdict.
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👉 More detailed insights
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👉 Clear answers to your questions
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👉 More detailed insights
👉 Exclusive perspectives on opportunities & risks
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Key metrics
📘 Market Capitalization
📈 What is it?
Market capitalization shows how much a company is currently worth on the stock market.
🧮 How is it calculated?
🏛️ Why is it important?
It helps classify companies by size (Large, Mid, Small Cap) and indicates their market presence and relative stability.
🧮 Calculation
🎯 What does this mean for investors?
- Large-cap companies tend to be more stable, often pay dividends, but may grow more slowly.
- Smaller firms may offer higher growth potential but come with more volatility.
- Market capitalization is a useful indicator of company size — but not a measure of whether a stock is undervalued or overvalued.
📘 Enterprise Value (EV)
📈 What is it?
Enterprise Value represents the total cost to acquire a company — including its debt and excluding its cash reserves.
🧮 How is it calculated?
(= Market Cap + Net Debt)
🏛️ Why is it important?
EV gives a more complete picture of a company's value than market cap alone and is used in key valuation ratios like EV/FCF or EV/Sales.
🧮 Calculation
🎯 What does this mean for investors?
- Enterprise Value shows the true cost of buying a company, including all financial obligations.
- It is more accurate than just looking at market cap, especially when comparing companies with different levels of debt or cash.
- Professional investors prefer EV-based multiples because they better reflect the company’s full financial footprint.
📘 Net Debt
📈 What is it?
Net Debt shows how much debt remains after subtracting a company’s available cash reserves.
🧮 How is it calculated?
🏛️ Why is it important?
It indicates how dependent a company is on borrowed money and how easily it can service its debt in the short term.
🧮 Calculation
🎯 What does this mean for investors?
- Low or negative net debt signals financial strength and flexibility.
- Companies with strong cash positions are better positioned in crises.
- High net debt increases financial risk — especially in environments with rising interest rates or economic downturns.
📘 Cash
📈 What is it?
Cash represents all liquid assets a company can access immediately — including cash, bank deposits, and short-term investments.
🧮 How is it calculated?
🏛️ Why is it important?
It reflects a company’s financial flexibility and resilience — enabling investments, buybacks, or buffer in downturns.
🧮 Calculation
🎯 What does this mean for investors?
- A strong cash position means greater room for maneuver and crisis resistance.
- Cash-rich companies can invest, pay down debt, or repurchase shares.
- But excess idle cash might indicate a lack of growth opportunities.
📘 Shares Outstanding
📈 What is it?
Shares outstanding represent the total number of a company’s shares currently held by investors — excluding treasury stock.
🧮 How is it calculated?
🏛️ Why is it important?
It’s the basis for key metrics like Earnings Per Share (EPS), Market Capitalization, or the Price/Earnings ratio (P/E).
🧮 Calculation
🎯 What does this mean for investors?
- Fewer shares in circulation typically increase earnings per share — making each share more valuable.
- Share buybacks reduce the number of shares and boost per-share metrics.
- Issuing new shares does the opposite — diluting shareholder value and lowering per-share figures.
📘 Price-to-Earnings Ratio (P/E)
📈 What is it?
The P/E ratio shows how many times a company's earnings per share are reflected in its current share price — in other words, how "expensive" the stock appears relative to its profits.
🧮 How is it calculated?
🏛️ Why is it important?
The P/E ratio is one of the most widely used valuation metrics. It helps investors assess whether a stock appears cheap or expensive compared to its earnings power.
🧮 Calculation
📊 P/E (TTM) = Based on earnings from the last 12 months (Trailing Twelve Months):🎯 What does this mean for investors?
- A low P/E may indicate undervaluation — or signal underlying issues.
- A high P/E may reflect strong growth expectations — or an overvalued stock.
📘 Price-to-Sales Ratio (P/S)
📈 What is it?
The P/S ratio shows how much investors are paying for $1 of the company’s revenue – regardless of profitability.
🧮 How is it calculated?
🏛️ Why is it important?
P/S is especially useful for evaluating growth companies or businesses not yet profitable. It reflects how the market values the company’s sales.
🧮 Calculation
Market Cap = $7.76b | Revenue (TTM) = $1.77b
Market Cap = $7.76b | Estimated Revenue = $1.93b
🎯 What does this mean for investors?
- A low P/S may indicate undervaluation — or low profitability.
- A high P/S can reflect strong growth expectations — or excessive optimism.
- Especially helpful when evaluating companies where profits are low, volatile, or negative.
📘 Enterprise Value to Sales (EV/Sales)
📈 What is it?
EV/Sales shows how much investors are paying for $1 of revenue — considering not just equity, but also debt and cash. It’s the capital structure–adjusted version of the P/S ratio.
🧮 How is it calculated?
🏛️ Why is it important?
It’s ideal for comparing companies with different levels of debt. It reflects a company's true cost relative to its revenue.
🧮 Calculation
Enterprise Value = $7.57b | Revenue (TTM) = $1.77b
Enterprise Value = $7.57b | Forward Revenue = $1.93b
🎯 What does this mean for investors?
- EV/Sales allows for capital structure–neutral company comparisons.
- A lower ratio may indicate undervaluation; a higher one may signal strong growth expectations or overvaluation.
- Especially helpful when evaluating high-growth companies with low or negative earnings.
📘 Enterprise Value to Free Cash Flow (EV/FCF)
📈 What is it?
EV/FCF shows how many years it would take for a company to "pay back" its enterprise value using its free cash flow.
🧮 How is it calculated?
🏛️ Why is it important?
It focuses on real cash generation, ignoring accounting noise — ideal for assessing profitability and value based on liquidity, not earnings.
🧮 Calculation
🎯 What does this mean for investors?
- A low EV/FCF may signal undervaluation and strong cash generation.
- A high EV/FCF might reflect weak recent cash flow or aggressive growth expectations.
- Best suited for stable, mature businesses with predictable free cash flows.
📘 Price-to-Book Ratio (P/B)
📈 What is it?
The P/B ratio compares a company’s market value to its book value — showing how much investors are paying for each dollar of net assets.
🧮 How is it calculated?
🏛️ Why is it important?
P/B is commonly used for asset-heavy industries like banks or industrials. It helps assess whether a stock is trading above or below its net asset value.
🧮 Calculation
🎯 What does this mean for investors?
- A P/B below 1 may signal undervaluation — or weak profitability.
- A P/B above 1 implies the market expects future value creation (e.g., brand, IP, growth).
- Best used for companies with tangible assets and strong balance sheets.
📘 Equity Ratio
📈 What is it?
The equity ratio indicates what portion of a company’s total assets is financed by shareholders’ equity – in other words, how much it relies on its own capital.
🧮 How is it calculated?
🏛️ Why is it important?
A high equity ratio reflects financial strength and stability, especially during downturns. It’s a key indicator of a company’s solvency and long-term risk profile.
🧮 Calculation
🎯 What does this mean for investors?
- Companies with high equity ratios are generally more resilient and less dependent on external debt.
- Low equity ratios can signal higher risk or aggressive financial strategies.
- Important: Always assess the equity ratio in combination with the return on equity (ROE). This shows not just how stable the company is – but also how efficiently it uses shareholder capital.
📘 Return on Equity (ROE)
📈 What is it?
Return on equity (ROE) shows how efficiently a company uses its shareholders’ equity to generate profit. In other words: how much net income is earned per dollar of equity.
🧮 How is it calculated?
🏛️ Why is it important?
ROE is a core profitability metric. It helps investors understand whether a company delivers attractive returns on the capital provided by its shareholders.
🧮 Calculation
🎯 What does this mean for investors?
- A high ROE indicates that the company is using its capital efficiently and profitably.
- It’s especially meaningful for capital-intensive businesses or firms with high equity bases.
- Important: A very high ROE can also result from high debt levels – always interpret it alongside the equity ratio to assess financial health.
📘 Return on Capital Employed (ROCE)
📈 What is it?
ROCE measures how efficiently a company generates profits from its total capital – including both equity and interest-bearing debt.
🧮 How is it calculated?
It evaluates the return on all capital employed, regardless of how it’s financed.
🏛️ Why is it important?
ROCE is ideal for comparing companies with different financing structures. It shows how well management uses capital to create value for both shareholders and creditors.
🧮 Calculation
🎯 What does this mean for investors?
- A high ROCE means the company uses its capital efficiently – regardless of whether it's funded by debt or equity.
- The higher the ROCE compared to peers, the more value the company creates with its invested capital.
- Especially relevant for capital-intensive sectors like industrials, energy, or infrastructure.
📘 Return on Invested Capital (ROIC)
📈 What is it?
ROIC measures how efficiently a company generates returns from the capital invested in its core operations – regardless of whether the capital comes from equity or debt.
🧮 How is it calculated?
- NOPAT = Net Operating Profit After Taxes
- Invested Capital = Operating assets minus non-interest-bearing liabilities
🏛️ Why is it important?
ROIC is one of the most accurate indicators of capital efficiency. Unlike return on equity, it is not distorted by leverage and shows how much value is created for all capital providers.
🧮 Calculation
🎯 What does this mean for investors?
- A high ROIC shows how effectively a company uses the capital that is truly invested in its core operations.
- Unlike ROCE, ROIC focuses only on the capital that is actively used to run the business – and that requires a return (i.e. interest-bearing).
- Especially useful when comparing companies with large amounts of excess cash or non-interest-bearing liabilities – giving a more realistic picture of capital efficiency.
📘 Leverage Ratio (Debt-to-Equity)
📈 What is it?
The leverage ratio indicates how much a company relies on interest-bearing debt (such as loans and bonds) relative to its shareholders’ equity.
🧮 How is it calculated?
🏛️ Why is it important?
This ratio helps assess a company’s financial structure and risk profile. High leverage can enhance returns – but also increases exposure to interest rate changes and financial stress.
🧮 Calculation
🎯 What does this mean for investors?
- A low leverage ratio signals financial strength and independence.
- A higher ratio can improve returns in good times but increases risk during downturns or rising interest rate periods.
- 👉 Always interpret in the context of industry, capital intensity, and interest rate environment.
📘 Revenue
📈 What is it?
Revenue shows how much a company earns in total from selling its products and services – the gross income before any costs are deducted.
🧮 How is it calculated?
🏛️ Why is it important?
Revenue is one of the key figures to assess a company’s size, market position, and growth potential.
🧮 Calculation
🎯 What does this mean for investors?
- Growing revenue indicates rising demand and can be an early signal of future earnings growth.
- Comparing actual and expected revenue reveals trends in the market environment and analyst sentiment.
- Note: Strong revenue alone isn’t enough – margins and profitability matter just as much.
📘 EBITDA
📈 What is it?
EBITDA stands for “Earnings Before Interest, Taxes, Depreciation, and Amortization.” It reflects a company’s operating profit before the effects of financing, taxes, and accounting depreciation.
🧮 How is it calculated?
🏛️ Why is it important?
EBITDA is widely used to evaluate a company’s operating performance – especially across capital-intensive sectors or international comparisons.
🧮 Calculation
🎯 What does this mean for investors?
- A high or growing EBITDA indicates strong operational profitability – independent of taxes, interest, or accounting methods.
- It’s especially useful for comparing companies across sectors or geographies.
- Important: EBITDA is not a net income figure – it excludes key costs like depreciation and interest.
📘 EBIT
📈 What is it?
EBIT stands for “Earnings Before Interest and Taxes.” It reflects a company’s operating profit after depreciation, but before interest and tax expenses.
🧮 How is it calculated?
🏛️ Why is it important?
EBIT is a core profitability metric that shows how well the company performs in its main business operations – independent of capital structure and tax environment.
🧮 Calculation
🎯 What does this mean for investors?
- A high EBIT indicates strong profitability from the company’s core business – before financial and tax effects.
- It allows better comparison between companies with different debt levels or tax structures.
- Compared to EBITDA, EBIT already accounts for depreciation and reflects capital intensity more clearly.
📘 Net Income
📈 What is it?
Net income is the company’s total profit – the amount left after all expenses, taxes, interest, and depreciation have been deducted.
🧮 How is it calculated?
🏛️ Why is it important?
Net income is the most comprehensive measure of a company’s profitability – showing how much actual profit remains after all business and financing costs.
🧮 Calculation
🎯 What does this mean for investors?
- Growing net income indicates that the company is managing all of its costs efficiently.
- It directly influences valuation metrics like P/E ratio and the company’s dividend capacity.
- Over time, net income trends reveal how resilient and profitable the business model really is.
📘 Free Cash Flow (FCF)
📈 What is it?
Free Cash Flow shows how much actual cash remains after a company covers its operating expenses and capital expenditures.
🧮 How is it calculated?
🏛️ Why is it important?
FCF reflects a company’s real financial strength – regardless of accounting profits. It shows how much flexibility a company has for dividends, share buybacks, or debt reduction.
🧮 Calculation
🎯 What does this mean for investors?
- High free cash flow means the company generates real, usable cash – independent of reported net income.
- It’s often the most reliable base for sustainable dividends and buybacks.
- Declining FCF can be an early warning sign – even when profits appear stable.
📘 Revenue Growth
📈 What is it?
Revenue growth shows how much a company’s sales have changed compared to the previous year – both on a trailing basis (TTM) and based on forward projections.
🧮 How is it calculated?
Forward = (Expected revenue ÷ Revenue in prior year − 1) × 100
Forward growth is based on analyst estimates for the current fiscal year.
🏛️ Why is it important?
Rising revenue signals growing demand, business expansion, and market share gains – especially important for growth-oriented companies.
🧮 Calculation
🎯 What does this mean for investors?
- Growth is the engine of long-term value creation – especially in tech and growth sectors.
- What matters is not just current growth, but its sustainability.
- Forward projections reflect whether analysts expect continued momentum – or a slowdown.
📘 EBITDA Growth
📈 What is it?
EBITDA growth shows how much a company’s operating profit (before interest, taxes, depreciation, and amortization) has increased or decreased compared to the previous year.
🧮 How is it calculated?
Forward = (Expected EBITDA ÷ EBITDA from prior year − 1) × 100
The forward estimate is based on analyst projections for the current fiscal year.
🏛️ Why is it important?
Growing EBITDA indicates improving operational profitability – regardless of financing or accounting effects.
🧮 Calculation
🎯 What does this mean for investors?
- Strong EBITDA growth signals operational efficiency and scalability – especially during growth phases.
- EBITDA growth can be an early indicator of margin and earnings expansion – but should be assessed alongside revenue and EBIT.
📘 EBIT Growth
📈 What is it?
EBIT growth shows how much a company’s operating profit (after depreciation, but before interest and taxes) has increased compared to the previous year.
🧮 How is it calculated?
Forward = (Expected EBIT ÷ EBIT from prior year − 1) × 100
The forward estimate is based on analyst projections for the current fiscal year.
🏛️ Why is it important?
EBIT growth is a direct indicator of a company’s business performance – taking into account capital intensity through depreciation.
🧮 Calculation
🎯 What does this mean for investors?
- Rising EBIT signals improving operating profitability – even after accounting for depreciation.
- It’s especially important for evaluating companies with significant capital expenditures.
- Combined with revenue and EBITDA growth, EBIT growth provides a well-rounded view of operational progress.
📘 Net Income Growth
📈 What is it?
Net income growth shows how much a company’s bottom-line profit has increased or decreased compared to the previous year – both on a trailing basis (TTM) and based on analyst projections.
🧮 How is it calculated?
Forward = (Expected net income ÷ Net income from prior year − 1) × 100
The forward estimate reflects analysts’ expectations for the current fiscal year.
🏛️ Why is it important?
Net income is the ultimate measure of profitability. Growing net income signals stronger efficiency, cost control, and sustainable earnings power.
🧮 Calculation
🎯 What does this mean for investors?
- Stronger net income boosts valuation, dividend potential, and investor confidence.
- If profits stall while revenue grows, it may signal margin pressure.
📘 Free Cash Flow Growth
📈 What is it?
Free cash flow (FCF) growth shows how a company’s available cash – after covering operating expenses and capital expenditures – has changed compared to the previous year.
🧮 How is it calculated?
🏛️ Why is it important?
Free cash flow reflects real financial strength. Growing FCF indicates more flexibility for dividends, share buybacks, and reinvestment.
🧮 Calculation
🎯 What does this mean for investors?
- Declining FCF may point to rising investments, increasing costs, or weaker operating performance.
- Especially for dividend investors, FCF growth is critical – since dividends are paid from actual available cash.
- A negative trend isn't always bad, but it deserves closer attention.
📘 Gross Margin
📈 What is it?
Gross margin shows how much of a company’s revenue remains after deducting the direct costs of goods sold (like materials and production). It represents the company’s “raw profit” before fixed costs, taxes, and interest.
🧮 How is it calculated?
Or simply: Gross Margin = Gross Profit ÷ Revenue × 100
🏛️ Why is it important?
Gross margin indicates how efficiently a company can produce or procure what it sells. It is a key measure of product-level profitability and pricing power.
🧮 Calculation
🎯 What does this mean for investors?
- A high gross margin suggests strong pricing power and efficient production.
- Falling margins may signal rising input costs or competitive pressure.
- Compared to peers, gross margin offers insights into the quality of a business model.
📘 EBITDA Margin
📈 What is it?
The EBITDA margin shows how much of a company’s revenue remains as operating profit before interest, taxes, depreciation, and amortization.It reflects operating efficiency without being distorted by financing or accounting factors.
🧮 How is it calculated?
🏛️ Why is it important?
The EBITDA margin reveals how much operating income a company generates per dollar of revenue – independent of capital structure and tax effects.
🧮 Calculation
🎯 What does this mean for investors?
- A high EBITDA margin reflects strong core profitability – before accounting distortions.
- It allows for effective comparisons across companies and sectors.
- A stable or growing margin signals efficient cost control and business scalability.
📘 EBIT Margin
📈 What is it?
The EBIT margin shows what percentage of revenue remains as operating profit after depreciation but before interest and taxes.
🧮 How is it calculated?
🏛️ Why is it important?
The EBIT margin reflects a company’s core profitability while accounting for capital intensity (e.g. machinery, infrastructure). It’s especially useful for comparing businesses with different levels of depreciation.
🧮 Calculation
🎯 What does this mean for investors?
- A high EBIT margin shows that the company remains efficient even after factoring in depreciation.
- It’s especially relevant for capital-intensive industries.
- Stable or rising EBIT margins over time are a strong indicator of pricing power and business quality.
📘 Net margin
📈 What is it?
Net margin shows how much of a company’s revenue remains as bottom-line profit after deducting all costs, interest, taxes, and depreciation.
🧮 How is it calculated?
🏛️ Why is it important?
Net margin reflects a company’s overall efficiency – across operations, financing, and taxation. It shows how much actual profit is generated from each dollar of revenue.
🧮 Calculation
🎯 What does this mean for investors?
- A high net margin means the company is not only strong operationally but also manages financing and taxes efficiently.
- Peer comparisons reveal business quality and competitiveness.
- Declining margins despite revenue growth can be a red flag for rising costs or inefficiencies.
📘 Free cash flow margin
📈 What is it?
The free cash flow (FCF) margin shows how much of a company’s revenue remains as actual free cash after covering all operating expenses and capital expenditures.
🧮 How is it calculated?
🏛️ Why is it important?
This margin reflects the true liquidity generated by the business – independent of accounting rules or depreciation. It’s especially relevant for dividends, buybacks, and reinvestment decisions.
🧮 Calculation
🎯 What does this mean for investors?
- A high FCF margin means a company consistently generates strong cash flow.
- It’s a positive signal for financial stability and shareholder returns.
- The long-term trend is key – a declining margin may indicate rising investments or weakening operating efficiency.
📘 Earnings per share (EPS)
📈 What is it?
Earnings per Share (EPS) shows how much profit is attributable to a single share – and is one of the most important metrics for evaluating a company's performance.
🧮 How is it calculated?
The diluted share count reflects potential new shares that could be issued through options, convertible bonds, or other rights.
🏛️ Why is it important?
EPS is the basis for many key valuation metrics like P/E ratio, PEG ratio, or payout ratio. It enables comparisons of profitability across companies, regardless of their size.
🧮 Calculation
🎯 What does this mean for investors?
- EPS captures per-share profitability and is especially useful for comparisons over time or with analyst estimates.
- Rising EPS may signal consistent growth or share buybacks.
- Important: Always use diluted EPS for more realistic valuations – especially in companies with stock-based compensation.
📘 Free cash flow per share (FCF per share)
📈 What is it?
Free Cash Flow per Share shows how much free cash flow a company generates per outstanding share – after investments, but before dividends or debt repayments.
🧮 How is it calculated?
Free cash flow is calculated as operating cash flow minus capital expenditures (CapEx).
🏛️ Why is it important?
FCF per Share reveals how much real cash is available per share – useful for dividends, buybacks, or reducing debt. Unlike net income, free cash flow is harder to manipulate and often seen as a more reliable metric.
🧮 Calculation
🎯 What does this mean for investors?
- High FCF per share signals strong financial flexibility.
- It shows how much capital the company can effectively reinvest or return to shareholders.
- Particularly relevant for dividend payers and capital-efficient businesses.
📘 Short interest
📈 What is it?
Short interest indicates how many shares of a company are currently sold short – that is, borrowed and sold by investors who expect the price to decline.
🧮 How is it calculated?
It reflects the percentage of a company’s shares that are being shorted relative to the total shares available.
🏛️ Why is it important?
Short interest serves as a sentiment indicator: A high value may signal skepticism or bearish expectations – but also increases the potential for a short squeeze if prices rise unexpectedly.
🧮 Calculation
🎯 What does this mean for investors?
- Low short interest usually indicates market confidence in the company.
- High short interest can be a warning sign – or an opportunity if sentiment shifts.
- Especially relevant in volatile markets or ahead of key earnings releases.
📘 Employees
📈 What is it?
The employee count shows how many people a company employs worldwide – offering insights into its size, structure, and business model.
🧮 How is it calculated?
🏛️ Why is it important?
It helps assess operational scale, labor intensity, and cost structure. Combined with revenue and profit, it enables key metrics like revenue per employee or productivity.
🧮 Calculation
🎯 What does this mean for investors?
- A high headcount can signal operational complexity – but also significant growth capacity.
- Revenue per employee is a key indicator of efficiency.
- Especially useful for comparing tech, industrial, or service-heavy companies.
📘 Turnover per employee
📈 What is it?
Revenue per employee indicates how much revenue a company generates on average per employee – a key measure of efficiency and productivity.
🧮 How is it calculated?
The employee count is typically taken from the most recent annual report.
🏛️ Why is it important?
This metric helps compare business models – especially between labor-intensive and technology-driven companies. A high value suggests automation, operational efficiency, or strong value creation per head.
🧮 Calculation
🎯 What does this mean for investors?
- A high revenue per employee indicates a scalable and margin-strong business model.
- A low figure may reflect labor-intensive operations or lower value-add.
- Especially helpful when comparing tech companies to industrial or service sectors.
Paylocity Holding Corp. Stock Analysis
Analyst Opinions
27 Analysts have issued a Paylocity Holding Corp. forecast:
Analyst Opinions
27 Analysts have issued a Paylocity Holding Corp. forecast:
Paylocity Holding Corp. Events
Past Events
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AUG
4
Q4 2026 Earnings Call
about 2 months ago
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MAY
7
Q3 2026 Earnings Call
4 months ago
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FEB
5
Q2 2026 Earnings Call
8 months ago
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DEC
10
Barclays 23rd Annual Global Technology Conference
9 months ago
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NOV
4
Q1 2026 Earnings Call
11 months ago
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StocksGuide Free
Paylocity Holding Corp. — Q4 2026 Earnings Call
1. Management Discussion
Good day, and thank you for standing by. Welcome to the Paylocity Holding Corporation Fourth Quarter 2026 Fiscal Year Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Ryan Glenn, Chief Financial Officer. Please go ahead.
Good afternoon, and welcome to Paylocity's earnings results call for the fourth quarter and fiscal '26, which ended on June 30, 2026. I'm Ryan Glenn, Chief Financial Officer; and joining me on the call today are Steve Beauchamp, Executive Chairman; and Toby Williams, President and CEO of Paylocity. Today, we will be discussing the results announced in our press release issued after the market closed. A webcast replay of this call will be available for the next 45 days on our website under the Investor Relations tab.
Before beginning, we must caution you that today's remarks, including statements made during the question-and-answer session, contain forward-looking statements. These statements are subject to numerous important factors, risks, and uncertainties, which could cause actual results to differ from the results implied by these or other forward-looking statements. Also, these statements are based solely on the present information and are subject to risks and uncertainties that can cause actual results to differ materially from those projected in the forward-looking statements. For additional information, please refer to our filings with the Securities and Exchange Commission for the risk factors contained therein and other disclosures. We do not undertake any duty to update any forward-looking statements.
Also during the course of today's call, we will refer to certain non-GAAP financial measures. We believe that non-GAAP measures are more representative of how we internally measure the business, and there is a reconciliation schedule detailing these results currently available in our press release, which is located on our website at paylocity.com under the Investor Relations tab and filed with the Securities and Exchange Commission. Please note that we are unable to reconcile any forward-looking non-GAAP financial measure to the directly comparable GAAP financial measure because the information which is needed to complete a reconciliation is unavailable at this time without unreasonable effort. With that, let me turn the call over to Steve.
Thanks, Ryan, and thanks to all of you for joining us on our fourth quarter and fiscal '26 earnings call. Our differentiated value proposition of providing the most modern platform in the industry continues to resonate in the marketplace and helped drive recurring revenue growth of 12.4% and total revenue growth of 11% in Q4. For fiscal '26, recurring revenue grew 12.2% and total revenue grew 11% as we ended the year with approximately $1.8 billion of revenue. Our sustained multi-year investment in R&D and commitment to driving innovation continues to fuel durable recurring revenue growth and expanded average revenue per client as the combination of HCM, finance, and IT in one single platform, all underpinned by our expanded AI capabilities and core employee record data represents the most comprehensive offering in the market.
A critical component of this strategy is the launch of Paylocity Ignite AI, which is designed to help accelerate productivity for HR, finance, and IT teams across companies of all sizes and industries. Our approach to AI remains focused on driving value for our clients rather than adding complexity through stand-alone features. Ignite AI is woven directly into core workflows to help clients complete the tasks faster, surface insights more quickly, and move from answers to action.
For example, within recruiting, our candidate agent uses job description analysis, recruiter-defined criteria, and candidate application data to help identify strong potential matches while giving recruiters the ability to review, audit, and adjust the criteria. Similarly, clients can leverage our talent rediscovery agent to scan their existing talent pool to identify candidates whose skills, experiences, education, and certifications align most closely with current job requirements and reengage qualified talent with personalized invitations to apply for open rules.
Given the demonstrated and measurable productivity improvements that the candidate fit and talent rediscovery agents will drive for our clients, we believe both agents represent an incremental opportunity for direct AI-driven monetization. Additionally, our Answer & Insight Agent makes HR and payroll teams more efficient. Rather than relying on spreadsheets or manual analysis to uncover data-driven insights, administrators can ask natural language questions and receive faster, client-specific answers in their flow of work.
As part of this continued evolution, we are also introducing our Ignite AI Hub, a centralized dashboard that gives clients greater visibility and control over how AI is used across their organization. The Ignite AI Hub helps close the visibility gap by measuring real productivity gains, including questions answered, tasks completed, and issues resolved across our payroll time and recruiting agent. It also allows leaders to see which agents are active, configure them based on their organization's needs, and identify opportunities for additional automation.
The early feedback from our clients reinforces the value proposition of Ignite AI. It is embedded in the workflows our clients already use, powered by the data they already trust, and designed to support people rather than replace them. As an auto dealer client with more than 600 employees told us, Paylocity's AI feels like another team member, while a non-profit client with over 500 employees described it as an extra set of hands that still preserves the human element of approval and decision-making. That combination of productivity, trust, and control is critical in HR and payroll where accuracy, transparency, and compliance are paramount.
This positive sentiment is similarly reflected in the growing utilization of our AI capabilities with the number of AI interactions nearly doubling quarter-over-quarter. Product expansion has been a key part of Paylocity's growth algorithm for over a decade, and we believe the launch of Paylocity Ignite AI, combined with the continued expansion of our broader HCM, finance and IT portfolio, will help to drive further growth in our average revenue per client, which reached roughly $37,200 in fiscal '26 compared to $35,300 in fiscal '25, an increase of more than 5%. We also continue to see significant growth in our client base in fiscal '26 to 44,400 clients, representing approximately 7% growth from fiscal '25.
Our commitment to product development also continues to be recognized in the market with Paylocity recently recognized by HR Tech Outlook Magazine as the Top Payroll Software for 2026. I would now like to pass the call to Toby to provide further color on the quarter.
Thanks, Steve. In Q4 and fiscal '26, our differentiated position in the market was reflected in solid sales and go-to-market execution, and we have continued investing in our go-to-market functions to carry this momentum into fiscal '27. We also saw another strong year of channel referral performance, primarily from benefit brokers who once again represented more than 25% of new business in fiscal '26. The sustained success of our broker channel continues to be driven by our modern platform, third-party integration, and API capabilities, and because we do not compete against our broker partners by selling insurance products.
We remain committed to investing in and supporting the broker channel with the goal of continuing to deliver real value and true partnership and support to our referring brokers and their clients. We have also continued to drive product innovation to meet client needs and bring to market meaningful new solutions that both create differentiation and drive ARPU.
In addition to our recent launch of our Elevate Solutions, in June, we also announced the launch of Paylocity Retirement, a new offering that brings plan administration and employee savings tools directly to the Paylocity platform. Retirement benefits are a critical component of an employee's long-term financial well-being, but many employers still manage these programs through disconnected systems, manual file transfers, and separate employee portals. This fragmentation creates additional administrative work for HR and payroll teams, increases the risk of errors, and can make it more difficult for employees to engage with their retirement savings.
As Steve highlighted, we are also excited about the continued evolution of our AI capabilities and the incremental value we expect to deliver to our more than 44,000 clients through the recent launch of Ignite AI. To further expand the AI capabilities across our platform, we also recently announced the acquisition of Aidora, which will enhance our leave of absence management capabilities through a fully automated AI native system that streamlines the full leave of absence life cycle from eligibility and planning to payroll coordination and compliance. This is one of the most complex areas of regulatory compliance in HR, which is typically also manual in nature for both HR teams and employees.
With Aidora as part of Paylocity, the full leave of absence process will be automated, leveraging Aidora's AI native product, delivering a seamless employee experience with clear time lines, personalized guidance, and transparent pay expectations, all through natural language interaction, and HR teams will be able to shift their focus from managing manual payroll and complicated compliance processes to supporting their people. We are excited by the opportunity to integrate Aidora's advanced capabilities into our existing suite, delivering incremental value to our clients that we can directly monetize in the form of a premium offering for incremental AI-driven capabilities.
Following our acquisition of Grayscale last year, we are also integrating Grayscale's AI-powered recruiting automation capabilities into our platform in the form of a premium offering, helping companies hiring at scale move faster through candidate matching, automated engagement, and continuous candidate check-ins. Collectively, the launch of Ignite AI, Elevate Solutions, Paylocity Retirement, and the ongoing integration of Grayscale and Aidora into the Paylocity platform highlights our dual focus on embedding AI into high-value workflows while continuing to broaden the platform with solutions that reduce manual work and help clients unlock more value from the Paylocity platform.
And this commitment to product innovation and world-class service continues to be reflected in our industry-leading revenue retention rates, which once again remained above 92% in fiscal '26. Our strong culture, industry-leading software innovation, and exceptional sales and operational execution would not be possible without the dedication and commitment of our employees.
As we close out a very strong fiscal '26, I'd like to thank all of our people and teams for a fantastic year, and we appreciate everything that you do. The strong culture at Paylocity also continues to be recognized externally as we recently were named by TIME as one of America's Best Companies 2026 and by Forbes as one of America's Best Employers for Women 2026. I would now like to pass the call to Ryan to review the financial results in detail and provide initial outlook on fiscal '27.
Thanks, Toby. Recurring revenue for the fourth quarter was $415.6 million, an increase of 12.4%, with total revenue up 11% from the same period last year. As Toby noted, our sales and operations team had another solid quarter, and we were pleased to come in $11.3 million above the top end of our revenue guidance with the majority of our Q4 revenue beat coming from recurring and other revenue. Adjusted EBITDA for the fourth quarter was $145.5 million or 32.7% margin and exceeded the top end of our guidance by $12.9 million. For fiscal '26, adjusted EBITDA was $654.9 million or 37% margin and an increase of 12.3% on a dollar basis from fiscal '25, resulting in leverage of 50 basis points.
Excluding the impact of interest income on funds held for clients, adjusted EBITDA margin for fiscal '26 was 32.4%, reflecting operating leverage of 120 basis points versus fiscal '25 and a year-over-year increase of 16.4% on a dollar basis. Additionally, we continue to show strong growth on free cash flow with fiscal '26 free cash flow margin of 24.2%, representing an increase of 24.8% on a dollar basis from fiscal '25. Excluding the impact of interest income on client-held funds, we expanded free cash flow by approximately 40% in fiscal '26, representing margin expansion of 370 basis points.
While fiscal '27 will be a difficult comparison due to the tax legislation that provided one-time benefits in fiscal '26, we continue to have confidence in our ability to further expand free cash flow margin on a multi-year basis. We continue to make significant investments in research and development and to understand our overall investment in R&D, it is important to combine both what we expense and what we capitalize. On a combined non-GAAP basis, total R&D investments were 14.5% of revenue in fiscal '26. And on a dollar basis, our year-over-year investment in total R&D increased by 12.6% in fiscal '26 when compared to fiscal '25.
On a non-GAAP basis, sales and marketing expenses were 21.9% of revenue in the fourth quarter and 20.3% of revenue in fiscal '26. On a non-GAAP basis, G&A costs were 8.9% of revenue in fiscal '26, and we remain focused on continuing to drive leverage in our G&A expenses on an annual basis. Briefly covering our GAAP results. For Q4, gross profit was $300.4 million, operating income was $84.4 million, and net income was $60.3 million. For the full year, gross profit was $1.2 billion, operating income was $386 million, and net income was $269.7 million.
In regard to funds held for clients and interest income, our average daily balance of client funds was $3.4 billion in Q4 and $3.3 billion for fiscal '26. We are estimating the average daily balance will be approximately $3.0 billion in Q1 of fiscal '27 with an average annual yield of approximately 340 basis points, representing approximately $25.5 million of interest income in Q1.
On a full year basis, we're estimating the average daily balance will be approximately $3.4 billion to $3.5 billion in fiscal '27 with an average yield of approximately 300 basis points, representing approximately $103 million of interest income. In regard to interest rates, our guidance assumes [ 2 25 ] basis point rate cuts in the back half of fiscal '27 with a cut in each of January and March reflected in our guidance. Additionally, given the confidence we have in our business and our strong cash flows, we repurchased approximately 466,000 shares for $48.1 million in aggregate repurchases during Q4.
In total for fiscal '26, we repurchased approximately 2.8 million shares for $398.1 million in aggregate repurchases, helping to drive our diluted share count down 3.1% in fiscal '26. As of June 30, we had approximately $1.3 billion remaining under the existing repurchase program, which we will opportunistically execute against on a go-forward basis while also maintaining flexibility in our capital allocation plan to invest for future growth. In regards to the balance sheet, we ended the fiscal year with $271.9 million in cash, cash equivalents and invested corporate cash, and $81.3 million outstanding on our credit facility.
Finally, I'd like to provide our financial guidance for Q1 and fiscal '27, which includes the impact of 2 25 basis point interest rate cuts in the back half of fiscal '27 and flat workforce levels in fiscal '27 versus fiscal '26. Note, beginning in fiscal '27, we will amortize deferred contract costs over an 8-year useful life, an increase from the current 7-year convention. This change is reflected in our guidance and will result in an increase to adjusted EBITDA margins in fiscal '27 of approximately 120 to 140 basis points, which is dependent on our overall business performance and timing and volume of sales and client implementations.
For the first quarter of fiscal '27, recurring and other revenue is expected to be in the range of $414 million to $419 million or approximately 10% growth over first quarter fiscal '26 recurring and other revenue. And total revenue is expected to be in the range of $439.5 million to $444.5 million or approximately 8% growth over first quarter fiscal '26 total revenue. Adjusted EBITDA is expected to be in the range of $152 million to $156 million and adjusted EBITDA, excluding interest income on funds held for clients, is expected to be in the range of $126.5 million to $130.5 million.
And for fiscal '27, recurring and other revenue is expected to be in the range of $1.777 billion to $1.792 billion or approximately 8% growth over fiscal '26 recurring and other revenue. Total revenue is expected to be in the range of $1.880 billion to $1.895 billion or approximately 7% growth over fiscal '26. Adjusted EBITDA is expected to be in the range of $690 million to $700 million, and adjusted EBITDA, excluding interest income on funds held for clients, is expected to be in the range of $587 million to $597 million, representing approximately 80 basis points of leverage at the midpoint.
In conclusion, as we kick off fiscal '27, we remain confident in our differentiated value proposition, go-to-market strategy, operational strength, and product road map and believe our predictable business model and execution, durable recurring revenue growth, and prudent approach to guidance sets us up for a strong fiscal '27. With a combination of industry-leading recurring revenue growth and free cash flow margin, a long track record of strong and consistent revenue retention and expanding both our client base and average revenue per client, we have a high level of confidence in our ability to continue to drive sustainable revenue growth and increase margin on a multi-year basis. Operator, we are now ready for questions.
[Operator Instructions] Our first question comes from the line of Brad Reback with Stifel.
2. Question Answer
It's now a couple of quarters in a row of accelerating subscription revenue growth. Can you maybe unpack what's driving the business higher here?
Brad, it's Toby. I mean, I think, I'll start with just -- I think there's solid execution around the business. So if you go through the backdrop of a stable demand environment, I think we've had really strong performance from a go-to-market standpoint across our sales and marketing teams. I think we've had really strong performance from a service perspective with our client retention. And then I think we've also had significant momentum, which you can see in all the product announcements and launches from Elevate to Retirement to Grayscale and recruiting to Aidora with leave of absence management and then everything that we've announced with Ignite AI. So I think you're seeing all the things come together in pretty balanced execution in every area of the business, again, against what I think is a stable backdrop from a demand environment standpoint.
That's great. And just a quick follow-up. With 7% unit growth in '26, how should we think about kind of the opportunity in '27? What type of sales force growth you need to achieve that? And maybe just wrapping that up, what type of efficiencies, especially with Gen AI, is the sales force seeing right now?
Yes. I think over the last few years, we've seen relative balance between the unit growth and then ARPU growth, and it wasn't quite 50-50, but it was pretty close as we came through '26. And so I think we had another very balanced year of performance from a unit and ARPU standpoint. And I think the comments that we've made over the last few years are we don't -- you don't plan it to the decimal, but I think it's a balanced approach that we take as we're putting together the plan for '27, and certainly as we're putting together the guidance for '27.
And so I think our approach as we come into '27 and the expectations are that we'll see that have more relative balance between units and ARPU than we may have seen in 5, 6 years ago, something like that. And then I think from an investment standpoint, as we looked at the investments across the go-to-market teams in the course of building the plan, the guidance for '27, I mean, I think we've been really happy with the execution that we've seen. We've focused on productivity, I think, more so over the last few years, and we've made the investments in both field and inside sales and across our marketing teams, including channels that have been able to produce, I think, the balance that you see. And I think our approach in terms of those investments is pretty similar and pretty consistent as we come into '27.
Our next question comes from the line of Brian Peterson with Raymond James.
This is Jessica on for Brian. Just a quick one. So as you -- I think I'm talking about the broader platform and all the investments you've done with your product innovation, are you starting to see -- in your go-to-market motion are customers coming to you more with considering Paylocity as -- with AI-first requirements? Are they seeing Paylocity as a partner for AI and other capabilities? And how is it influencing win rates in your sales cycles?
Yes. So I'll take the question. I would say that we do have more conversations with clients in the buying process around AI needs, what they're looking for from an AI perspective. I think many of our products require a fair amount of work on behalf of the clients, think of things like payroll, recruiting, time and labor management. And so inserting agentic capabilities in there where they feel like they are driving efficiencies, it's -- they're getting less errors, it's more seamless process. That's certainly a big part of the conversation and then demoing those capabilities for the customer so they can see that. I mean that's one avenue of innovation that we've seen.
I think a second thing that AI has unlocked is some newer product SKUs that maybe we wouldn't have imagined before. I think the Grayscale and Aidora acquisitions are really good examples of us being able to add on AI-native capabilities that allow us to really drive productivity back to the customers and then being able to kind of monetize that. And so that -- you put all of that together and you've got agents built through the platform driving efficiency. You've got new product SKUs that are AI-first. I think AI is certainly becoming a greater part of the conversation with our prospects and driving some results for us.
Really great to hear. And then following along your comment there. As you're thinking about capital allocation and everything you have on your balance sheet, how should we think about the stack rate of your priorities if you're thinking about M&A versus further organic investments versus buybacks? So what should we think about this?
Yes. I think we're really happy with how fiscal '26 played out, which allowed us to both repurchase a reasonable amount of stock, so $400 million bought back in fiscal '26, which combined with continued leverage on stock-based comp resulted in diluted share count down about 3%.
So I think you'll see us continue to opportunistically repurchase stock in '27. We still have about $1.3 billion available under our authorization. And on top of that, we're investing for growth. So the Grayscale and Aidora acquisitions that we made recently, both funded with cash on balance sheet are good examples of that. So I think we're in a position with strong cash flows, increasing profitability where we can reduce share count while also investing for future growth.
Our next question comes from the line of Mark Marcon with Robert W. Baird.
Congrats on the great year. When I take a look at the ARPU growth, I was wondering if you could comment to what extent is that being driven by some of your more established SKUs versus what you're seeing in terms of like Airbase and some of the newer products that you've just come out with and what you're seeing there? And then I've got a follow-up.
Sure. I think, Mark, if you kind of go back in time and you think of where we were coming out of COVID, we were in the process of launching a number of engagement products. So add-ons on the learning, surveys, Community Plus, and we are seeing really good traction with those products. And so those have continued to increase as long as -- as well as the core products, things like recruiting and benefits and time. And so those are probably a bigger driver if you looked at last year's performance just because they've been around longer, they're bigger, they're more established.
But we're really excited about the releases that we've had when you combine the Airbase acquisition and the entrance into finance and IT, combined with the product releases that we announced now, this has been as robust a new launch product road map that we've had in many, many years. And I think the other part that's exciting is we think the monetization opportunity for these, just from a PPM perspective, is relatively high. And so when you combine that with all the execution that we've had on top of it, I think that's what's produced the results.
That's great. And then can you talk about 2 other things. One, just what the retention rate was? And then in terms of looking at your guidance in terms of the margins, particularly taking into account the change in the amortization schedule, we've always noted that you're conservative with regards to your guidance, but it doesn't seem like it implies much margin expansion. And so I'm wondering how should we think about margins?
I know you're introducing all sorts of new products. Those probably don't have the same margin level as your established products. So I don't know if you were assuming or just being conservative with regards to what the contribution would be from those? Or how we should think about margin expansion for this year and then going on beyond this year, while acknowledging that you've always been really conservative as well.
Yes, Mark, I can take both of those. I think first on the retention, it continues to be at 92% plus. So really happy with the operations team's performance in fiscal '26. Relative to guidance, I think probably the context would be if you think about the leverage we drove on operating EBITDA in fiscal '26, 120 basis points of leverage. As a reminder, we started fiscal '26 from a guidance standpoint at 20 basis points. So as you saw the strong top line overperformance throughout the year, that fell to the bottom line, and we were able to increase margin every single quarter last year.
When you think about the last 2 years, we've driven about 350 basis points of organic operating EBITDA margin. And we continue to believe that on a go-forward basis over multiple years, we will see continued margin expansion. Specific to '27, I think we're in a period where we're absolutely investing in AI, specifically with Ignite AI, which both Steve and Toby talked about in their prepared remarks, seeing really nice momentum there, a number of new product releases between Paylocity Retirement, Elevate Solutions, and 2 new acquisitions with Grayscale and Aidora, both of which I think we're really excited about and are seeing nice momentum in. Both of those acquisitions are subscale from a margin standpoint and represent a slight headwind in '27 as well.
So as you combine each of those elements, I think we're starting '27 pretty similar to where we are -- we started '26 when you take into account each of those and the ASC 606 change. And again, I think similar to what we saw in '26, if we see continued momentum across the business, I think the expectation would be top line overperformance would fall to increased margin as we go throughout the year.
I think the only point I would add, Mark, is we don't feel that these new products are going to be margin dilutive over time. We feel like the products are going to drive great value to the clients, and we're going to be able to drive great value -- great margin out of them. So I would not consider that as a headwind.
Our next question comes from the line of Samad Samana with Jefferies.
This is Jordan on for Samad. Great to see the strong recurring growth. It seems like strength was largely attributable to execution. But based on the data that we've been seeing, it seems like employment growth stabilized a bit during the quarter. I'm curious, what did you see within your own base as we think about the initial fiscal '27 guidance? What are the employment assumptions baked within that outlook?
Yes, Jordan. So we continue to see very, very stable macro. So consistent with what our commentary was for the first 9 months of fiscal '26. We saw client workforce levels up in Q4, and that continues to be up year-over-year nicely. Consistent with the guidance philosophy, we're assuming flat workforce levels in '27, which would be a slight degradation from what we've seen recently.
Awesome. And then maybe a quick follow-up on the purpose-built agents automating and paying other administrative tasks within the Ignite platform, it seems like you can meaningfully reduce man hours for your clients. You've spoken to that. You've also spoken monetization. I'm curious, how are you thinking about the mechanism there? Could that be broader price increases? Or is that more so going to be maybe consumption-based pricing for those who are leveraging those agents more than others?
I think we're open to where the market goes from a pricing perspective. We're really focused on delivering value to the clients. And when we deliver enough value to the clients, we look to be able to monetize that value. And so with Grayscale and Aidora, those are great examples where we're going to take AI native products and monetize those. With our Ignite agents, they're going to make existing processes for our clients much more efficient. It's going to create differentiation in the marketplace and allow us to win more business. And if we see opportunities where we can package something up and we offered enough value to the clients, then we'll monetize it. So it's really kind of a two-pronged approach.
Our next question comes from the line of Siti Panigrahi with Mizuho.
Congrats on a good quarter. Just to extend Jordan's last question in terms of monetization. So you have done a few acquisitions as well as launch new products, add-on modules. So when you look at the opportunity for fiscal '27 in terms of monetization, how do you rank order all these add-on products based on your discussion with your customers?
Well, we're excited about all the products, I would say. We've got Elevate and Retirement in market right now, and we've got really good momentum behind those. So we're pretty excited about those. As you know, when we do an acquisition, it does take some time to really integrate that platform, their capabilities into our platform. We'll have Grayscale launch next, and we're actively working on Aidora. So I would probably put it kind of in that order of where we've launched them. Ignite is coming out with our clients this month, and so we're excited about that as well. But I think it's really the platform story as a whole that we really continue to strengthen, and that's what's really creating the differentiation and the momentum in the business.
Okay. And then another question, Ryan. I mean in terms of buyback, it was a strong year. And also, I think you still have $1.3 billion authorization probably left. How are you planning to balance in terms of capital allocation, in terms of buyback versus keeping some dry powder for future M&A?
Yes. I think consistent with my answer a few minutes ago, I think we can absolutely do both, and we've got the ability and the flexibility with the balance sheet and strong cash flows to be able to continue to repurchase stock. I would expect to continue to drive down diluted shares outstanding while also certainly being open from an acquisition standpoint. So I think the expectation consistent with what you saw us do in '26 is we've got the ability to do both in '27.
Our next question comes from the line of Jared Levine with TD Cowen.
I wanted to dig into Airbase cross-sell progress 1 year in. I guess, how would you characterize this first year in and the 10% to 20% penetration within 3 to 5 years. Is that still a reasonable target based on what you saw this first year?
Yes, I think it is. I mean, I go back to when we did the acquisition, that was certainly how we described, and that's also consistent with how we would have described what the targets would be for any new product that we launch, whether it's built or acquired. And I think that's how we talked about it at the time of the acquisition. I think as we sit a little over a year in, yes, I think we're very pleased with the process, progress that we've made and still believe that, that's the path that we're on from -- ultimately from a penetration standpoint. So I think we're really pleased with the progress that the team has made.
Got it. And then Ryan, I want to dig into free cash flow here. So you did have a pretty notable uptick in PP&E purchases in 4Q here. What's the outlook here as we think to '27 in terms of CapEx? And I guess, more broadly, free cash flow, just being mindful you don't formally guide to free cash flow, but just any puts and takes would be helpful here.
Yes. I mean, I think the big picture answer is we continue to expect to drive free cash flow margin forward on a multi-year basis. And we increased our targets in the early part of fiscal '26 and absolutely continue to believe those are the right multi-year targets. As I mentioned on the prepared remarks, we did have a one-time benefit in fiscal '26, which was a big part of the year-over-year increase we saw in addition to natural scale in the business. And I think the Q4 PP&E purchases are really timing. We were able to opportunistically pull forward some of the spend that would have likely occurred in the first half of '27 into '26.
I think what that looks like in '27 is PP&E is probably in the 1% to 1.5% of revenue range versus about 2% this year. So I would expect to get some leverage there. And then, again, a little bit of lumpiness relative to free cash flow. I would expect that to increase on a dollar basis in '27, might see a little bit of a headwind in margin specifically just given the challenge around grow over.
Our next question comes from the line of Daniel Jester with BMO Capital Markets.
Maybe just in terms of the product and sales enablement, you mentioned multiple times in the call sort of the amount of products relatively new that you're going to be giving to your sales force this year. So can we spend a moment about sort of how you're enabling your sales team to go out with this? And maybe in terms of engaging with customers, there's a lot obviously here. There's a lot of change happening in the world with regards to AI. How are you helping sort of customers get over the finish line?
Yes. Thanks, Dan. I mean I think, as you know, we've had a fairly robust history of launching products into the market, launching products to our sales teams, and preparing those teams from both a new logo acquisition to drive attach and then also back into our client base, driving penetration. And I think we've taken a similar approach with each of the launches that we've had over the last 9 months or so with the Elevate Solutions, with Aidora and Grayscale that we're working on now and everything that we've done from an Ignite standpoint and also Retirement.
So we've had a long string over the last 9 months of things that we've launched, and we've taken the same methodical approach in terms of working through the training and the preparation with -- from our product teams to our sales and go-to-market teams and our service teams as well. And so I think we've run the same playbook as we've gone through each and every one of those launches over the last 9 months as we have historically in the business. And I think the early indications are that we've seen really nice traction with each one of those products or offerings that we've launched.
And so I think sitting here today, we feel really good about the momentum that we have, the team's ability to consume all of that material and be effective in the market with our clients. And so I think sitting here coming into '27, yes, we -- I think we're really happy with the momentum that we've had in all of those launches. I think we're also really happy with the traction that we've seen early days still, but the traction that we've seen with the sales teams and with our clients.
That's great. And then, Ryan, maybe for you on -- as you're ramping all of these AI products, can you just help us think about sort of your cost structure and any implications for gross margins as we're considering our models for next year?
Sure. Yes. I mean I think on gross margins, there will be a little bit of a benefit from the useful life change that we noted. That's probably of the 120 to 140 basis points, about 60% of that will be seen in sales and marketing and about 40% will be seen in gross margin. Beyond that, I think we continue to have confidence in our ability to scale. We are certainly leveraging AI and broader automation efforts across our operations teams, and we are seeing some really positive signs, both from a margin standpoint as well as from a client and employee satisfaction perspective as well. And we would expect to be able to continue to leverage those throughout '27.
Our next question comes from the line of Terry Tillman with Truist.
Giancarlo on here for Terry. Congrats on the quarter. Just on the product road map, you mentioned a lot of progress moving forward. How do you actually train the sales force for new products? And how do they pitch the customers?
Well, we've got a number of different teams focused on either different market segments or different parts of our product portfolio as well as we've got teams focused on sales back to the client base. So it's really a matter of fitting that product into the right organization, training them on the value proposition, and then really supporting them. We've got a strong solution consultant team that are kind of product experts that work with them behind the scenes, so they don't have to know all the intricacies of the product. That allows them to ramp much faster.
And then just the content marketing and training teams to be able to launch that. I think as Toby said, we really have a strong playbook on doing this. We've been doing this for a lot of years, and we've had great success with doing that. And so we are really happy to have to run that playbook many times going into FY '27 and the sales force is super excited.
Our next question comes from the line of Ian Black with Needham & Company.
This is Ian Black on for Scott Berg. Brokers are obviously a key source of lead generation. Does the new Retirement offering enhance that sales channel?
Yes. I mean I think from an overall channel standpoint, I think we were really pleased with the performance that we saw, again, throughout not just Q4, but throughout fiscal '26. And I think part of that is benefit brokers and then part of that is financial advisers. And I think we've seen great receptivity from a financial adviser standpoint with the retirement offering. I think that fits well with how we've crafted the relationship with them. So overall, I think, channel performance was really strong throughout the course of '26. We continue to see momentum with both the financial advisers and brokers. And I think the Retirement solution is certainly a part of that.
Our next question comes from the line of Jason Celino with KeyBanc Capital Markets.
I just wanted to ask about the Q4 recurring performance. From a prior question, it sounds like it was more booking strength related. But what was the inorganic contribution? Because I think it was the first quarter that included Grayscale. Would recurring growth still have accelerated even when stripping out any M&A contribution?
Yes, it would have still accelerated. The impact of Grayscale was negligible in the quarter. We would have still accelerated even without Grayscale.
Okay. Perfect. And then maybe it was kind of glazed over another question, but can you speak to maybe the change in the useful life assumptions? Curious kind of what led to the process there? And then it would obviously be incremental to your 40% to 45% longer-term margin ambitions. I just wanted to ask that.
Yes. So I think for context on the useful life and deferred contract costs, ASC 606 was implemented for us in 2019. So we've had a 7-year convention for several years at this point. I think in the normal course of the business, annually, the team assesses both qualitative and quantitative factors to confirm that the 7-year life was accurate. And business, obviously, is much larger than it was in 2019. And I think we continue to see both very strong client retention. We see increasing client relationship life. We see increasing average clients -- average employees per client. So we go through that qualitative and quantitative assessment each year, and the facts were such that we're moving from 7 years to 8 years beginning in fiscal '27.
Our next question comes from the line of Raimo Lenschow with Barclays.
This is Shel McMeans on for Raimo. I have a 2-parter here on macro, and that's all. So it was nice to see the healthy 7% client growth for the year. And I'd love to hear how that growth trended throughout the year and just given the mixed macro backdrop, in particular, how did that look in the most recent June quarter? And I appreciate there's some seasonality there. So maybe comparing that to the prior Q4 quarter. And then related to that, if there's been any kind of changes in your conversations or any impact whatsoever regarding the situation in the Middle East or any other dynamics out there?
Yes. I think if you look at the overall client growth or unit growth over the course of the last 2 fiscal years, it's been fairly consistent year-to-year around that 7% level. And so I think for the last 24 months, you've seen relative consistency on a year-to-year basis in the unit growth. And then when you look at that quarter-to-quarter, I don't -- I think it was pretty fairly smooth through the course of fiscal '26 as it was relatively in fiscal '25, apart from, as you said, the seasonality that you see in the business, which again is primarily in Q3, having a larger onboarding of clients, which is in January.
So I think if you look at the last 2 years, you see relative consistency both in the total unit growth and in the quarter-to-quarter spread of those units, both within the year and on a year-to-year basis. So there's nothing that stands out to me in terms of anything in any of the quarters, certainly in '26 that I would point to.
Our next question comes from the line of George Kurosawa with Citi.
Okay. Great. I'm on for Steve Enders. I wanted to touch on the FY '27 guidance. You all have had a pretty consistent philosophy in setting yourselves up for a beat and raise cadence, which obviously delivered on in '26. Just when you think about the elements of conservatism or potential upside that are embedded into FY '27, it sounds like employment levels might be one of those. Any other areas that you would point out when you're putting the guide together?
Yes. I think the guidance philosophy that we've employed certainly in fiscal '26 and prior to that is exactly how we approach '27. So we feel like, obviously, the momentum across the business is strong from a product go-to-market and operational perspective. You saw the strong performance throughout fiscal '26 and the slight acceleration in revenue growth. So we feel like we're really well set up for a strong fiscal '27. And our hope and expectation would be if we continue to see that strong performance, we would be able to exceed our guidance and raise the guidance, both from a revenue and margin standpoint as we go throughout the year.
Okay. That's helpful. And then on AI, the AI products that you're rolling out, I think our sense is that primary approach to-date have been more indirect monetization of AI. It sounds like you are leaning more into some separately monetized SKUs. Maybe you could just talk about kind of what's driving that change in approach? And if there's anything different about maybe the commercialization approach, how you're thinking about pricing those products?
Yes, sure. I think when you apply AI to very specific use cases, you have an opportunity to drive efficiencies greater than you would have without AI. And so I think just look at our most recent acquisition with Aidora, lead management is a very complicated process. It's one where you have to really interact with employees and managers. They have a ton of back and forth questions. It's just a very -- traditionally, a fairly manual process. AI really allows you to build an AI-native first chatbot that can really automate so much of this interaction, have so much intelligence back and forth that you're taking a manual process and you're really driving a lot of value back to the customer, you're creating a much better employee experience. And when you do that, you have an opportunity to be able to monetize that.
And, yes, we're going to keep our options open from a monetization perspective. We have per user pricing, we have PPM pricing, and we're certainly open if we have to consider utilization-based pricing. It's really about trying to drive the right value equation back to the customer so that they win from a productivity perspective, and we can obviously get paid for the value we're delivering.
Our next question comes from the line of Allan Verkhovski with U.S. Bancorp BTIG.
Congrats on the strong finish to the year. Maybe first, just on future M&A. How are you prioritizing opportunities across your HR, finance, and IT verticals? And then I've got a quick follow-up.
Yes. I think if you look back over the course of our history, we've prioritized the areas that have the most strategic value where we think we're meeting the biggest client needs. And I think we've done -- we've certainly done deals in -- across the platform, whether that's in HCM or in the finance area. We certainly had partnerships along the way, too, that have helped add from a product capability standpoint. I think the approach is the same as we look through '27. I think we see areas of opportunity across each part of the platform and I think we've always taken a fairly balanced approach of building and adding to the portfolio where we could from an acquisition standpoint, where we thought we had an opportunity to buy something in the market that would accelerate the product road map and that we would stand a good chance of integrating really tightly into the platform. And I think that's the exact same lens that we're bringing forward into '27.
Got it. And then just double-clicking on an earlier question regarding gross margins. Given your comments about confidence in your ability to scale as you continue investing in AI capabilities across the platform, can you go a touch deeper in what gives you conviction that gross margins can improve from roughly 75% today to the 80% plus target you outlined at $3 billion in revenue?
Yes. I mean I think we obviously, one, have a long history of expanding gross margins on an annual basis, and we did that again in fiscal '26. And I think we've got the ability across a number of factors. One is natural scale as the business gets larger, as we continue to drive automation and leverage AI across those teams, we are seeing those benefits today, and I think we're still in the very early stages. So when you combine natural scale pricing power, I think, with some of the third-party vendors as well and then you layer on the AI and automation, I think that gives us the confidence that on a multi-year basis, the 80% plus increased gross margin target we have is the right one.
Our next question comes from the line of Jacob Smith with Guggenheim Securities.
On Elevate Solutions, when we look around across the SMB market, more and more vendors are going after the service layer, and it feels like that's where the industry is broadly headed. With that backdrop, given Elevate sits in direct adjacency to your core payroll and HCM motion, could the adoption curve and pace of revenue be faster than what we've seen with Paylocity for finance and IT? And any update you could give on the rollout of Elevate so far this quarter, that would be helpful.
Yes. So I think we're very happy with the early results from receptivity of Elevate in the marketplace. I think you did hit on one of the key points and why we launched those, which is Elevate Solutions, historically, solutions like that would be very, very service-intensive. And we really see an opportunity with both the strength of our platform and how broad our platform has become and the addition of many of the AI capabilities that we're adding to the platform that we can deliver, still with a service touch, which is certainly important to our customers and a relationship, but we can do that much more efficiently.
And so that's what gave us confidence to be able to kind of launch that product, and we're seeing great receptivity in the marketplace. Too early to tell where that's going to go from a long-term perspective, but it will definitely be a contributor into fiscal '27. And maybe more importantly, we see that as a long-term growth driver as we think about on a multi-year basis.
Great. And just a quick follow-up there. How are you thinking about the delivery build-out to service this managed services business at scale? Is that something that would be an investment area heading into FY '27?
All the new products require some level of investment when you first launch them. And then as you gain scale on those products, we're confident that we can get them to our gross margins and many of them, frankly, are incremental gross margins, and that's been a driver for us as we've launched new products. And so we feel good that we've got the right pacing for that. Some of that is investment in the product and tech. Some of that's in the teams that support it. Obviously, some of that's in the sales force.
But we've had a long history of being able to launch a number of products, while at the same time, always marching forward from an overall margin and a gross margin perspective. And we don't see any reason why we can't continue to do that with the grouping of products that we have announced for this fiscal year.
Our next question comes from the line of Craig Maurer with CT Partners.
This is [ Isabel ] on for Craig. I just wanted to get clarification on the accounting change and just how we get to the 120 to 140 bps. Can you clarify the timing of when this benefit will come? Is there a one-time true-up of all existing contracts that gets us to this magnitude? Or is this the level of ongoing benefit that we should expect going forward even beyond '27?
It's the latter. So there's a one-time true-up in the sense that '27 versus '26 will be benefited by 120 to 140 basis points, but it does not hit in Q1 specifically. Think of that as ratable over the course of '27. And just to clarify that, is 120 to 140 basis points additive to adjusted EBITDA, which is included in the margins -- sorry, in the guidance we provided today.
I'm showing no further questions at this time. I would now like to turn it back to management for closing remarks.
Thank you. I just want to say thanks, everybody, for your interest in Paylocity, and thanks to all of our people and teams for a great fiscal '26. Thanks for your interest. Have a good night.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Paylocity Holding Corp. — Q4 2026 Earnings Call
Paylocity Holding Corp. — Q4 2026 Earnings Call
Solid fiscal '26: recurring revenue and margins grew while Paylocity pushes integrated AI, new products, and continued buybacks into fiscal '27.
📊 Quarter at a Glance
- Recurring rev: $415.6M in Q4 (+12.4% YoY)
- Total revenue: ≈ $1.8B for fiscal '26 (+11% YoY)
- Adjusted EBITDA: $654.9M for FY'26 (37% margin); Q4 $145.5M (32.7% margin). Adjusted EBITDA refers to earnings before interest, taxes, depreciation and amortization, adjusted for items management excludes.
- Free cash flow: FY'26 margin 24.2%, up materially vs. FY'25; excluding client-interest effects free cash flow grew ~40%
- Clients & ARPC: ~44,400 clients (+7% YoY); average revenue per client ≈ $37,200 (+~5% YoY)
🎯 What Management Says
- AI-first workflow: Launched Ignite AI embedded in core workflows (recruiting, HR, payroll) to boost productivity and surface insights without separate complexity.
- Targeted M&A: Acquired Aidora (automated leave-of-absence) and Grayscale (recruiting automation) to add AI-native capabilities that can be monetized.
- Platform expansion: Introduced Paylocity Retirement and Elevate Solutions to reduce fragmentation for clients and create premium attach/ARPU opportunity.
🔭 Outlook & Guidance
- Q1 FY'27 guide: Recurring & other revenue $414M–$419M (~+10% YoY); total revenue $439.5M–$444.5M (~+8%); adjusted EBITDA $152M–$156M.
- FY'27 guide: Recurring $1.777B–$1.792B (~+8%); total $1.880B–$1.895B (~+7%); adjusted EBITDA $690M–$700M; ex-client interest $587M–$597M.
- Key assumptions & effects: Assumes two 25 bps Fed cuts in H2 FY'27; client funds yields ~$300 bps (~$103M interest). Accounting change: amortization of deferred contract costs moved 7→8 years, boosting FY'27 adjusted EBITDA margin ~120–140 bps.
- Risks: FY'26 included one-time tax benefits that make comps tougher; new products and M&A are initially subscale and require execution to drive margin upside.
❓ Analyst Q&A
- Growth drivers: Management credits balanced pickup from unit adds and ARPU gains, broker/referral channel strength, product launches and service execution for accelerating subscription growth.
- AI monetization: Company plans a mix of premium SKUs, attach pricing and possible usage/consumption models; intent is to monetize where AI delivers clear client productivity/value.
- Capital allocation: Repurchased ~2.8M shares ($398M) in FY'26, $1.3B left on buyback; plans to opportunistically buy back while funding strategic acquisitions and product investment.
⚡ Bottom Line
- Implication: Paylocity delivered durable recurring growth, margin expansion and strong cash generation while pivoting to embedded AI and selective M&A to create new monetization paths; guidance is conservative but contains clear upside if product adoption and macro remain favorable.
Paylocity Holding Corp. — Q3 2026 Earnings Call
1. Management Discussion
Good day, and thank you for standing by. Welcome to the Paylocity Q3 Fiscal Year Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your first speaker today, Ryan Glenn, Chief Finance Officer. Please go ahead.
Good afternoon, and welcome to Paylocity's earnings results call for the third quarter of fiscal '26, which ended on March 31, 2026. I'm Ryan Glenn, Chief Financial Officer. And joining me on the call today are Steve Beauchamp, Executive Chairman; and Toby Williams, President and CEO of Paylocity.
Today, we will be discussing the results announced in our press release issued after the market closed. A webcast replay of this call will be available for the next 45 days on our website under the Investor Relations tab.
During the call, we will use certain non-GAAP financial measures as defined in Regulation G. You can find the related reconciliations to GAAP in our press release, which is located on our website at paylocity.com under the Investor Relations tab. We will also make forward-looking statements. Actual events or results could differ materially from those projected in our forward-looking statements. Please refer to our press release and SEC filings, including our most recent 10-K which contain important factors that could cause actual results to differ materially from those in the forward-looking statements. We do not undertake any duty to update any forward-looking statements.
In regard to our current conference schedule, we will be attending the Baird Global Consumer Technology and Services Conference and the William Blair Growth Conference. Please let me know if you would like to schedule time with us at either of these events.
With that, let me turn the call over to Steve.
Thanks, Ryan, and thanks to all of you for joining us on our third quarter fiscal '26 earnings call. The momentum we saw in the first half of the year continued into Q3, which included a strong selling season performance by our sales and operation teams and helped to drive 11.6% recurring and other revenue growth in the quarter and increased guidance for fiscal '26. Our multiyear investment in R&D and commitment to driving innovation continues to fuel our growth as the combination of HCM and finance and IT in 1 single platform, all underpinned by expanded AI capabilities and our core employee record data represents the broadest and deepest offering in the market. A critical component driving our product strategy is the continued investment in embedding AI across our platform, such that AI capabilities are woven in, not bolted on and enabling the evolution from AI assistant to AI agents. Powered by automated workflows, leveraging our clients' core employee record data, these agents are embedded into our clients' daily processes, making everything they do more efficient by empowering our clients to move from answers to action. For example, our accounts payable agent leverages a combination of rules and generative AI to automatically populate invoice and purchase order details, which are then categorized by leveraging employee and ERP data, improving accuracy, reducing manual effort and speeding up the AP process by over 60%, with approximately 95% of transactions processed cleanly on the first pass.
To drive further expansion of our AI capabilities, last month, we announced the acquisition of Grayscale, an AI-powered recruiting automation company that builds upon our existing recruiting capabilities by helping companies hiring at scale move faster without compromising quality. This acquisition represents a continuation of our broader strategy to embed AI across our platform, delivering intelligence within core workflows.
By utilizing AI for candidate matching, automated engagement and continuous candidate check-ins, our clients and their recruiting teams will benefit from a reduction in manual administrative work and quicker time to hire. We are excited by the opportunity to integrate Grayscale's advanced capabilities into our existing suite, delivering incremental value to our clients that we can directly monetize in the form of a premium SKU for incremental AI-driven capabilities.
Alongside our investment in AI, we are also enhancing the strength and breadth of our platform, highlighted by the recent launch of Paylocity Elevate solutions. This new offering pairs our unified platform with dedicated payroll and HR teams that bring deep operational expertise to manage this work directly for our clients.
With offerings across implementation, payroll and HR, Paylocity Elevate solution helps clients streamline these core work streams, lighten administrative workload for internal teams and enables them to focus more time on strategic priorities while delivering measurable efficiencies.
As our product portfolio continues to expand in breadth and depth, clients remain focused on unlocking the full value across HCM, finance and IT offerings.
Given our team's extensive knowledge and expertise on the Paylocity platform, we deliver an elevated level of service efficiently today with a clear opportunity to drive even greater service and efficiency over time with AI-enabled capabilities. Our commitment to product development also continues to be recognized in the market with Paylocity recently being recognized across 5 categories in G2's 2026 Best Software Awards, and named a leader across 21 categories in the Spring 2026 G2 Grid reports.
I would now like to pass the call to Toby to provide further color on the quarter.
Thanks, Steve. Solid sales and operational execution continued in our busiest time of the year, helping to drive another quarter of strong recurring revenue growth and increased revenue and profitability guidance for fiscal '26. Recurring and other revenue of $469.9 million grew 11.6% over Q3 of last year and beat the high end of our guidance by $7.4 million. We remain pleased with our sales and operational execution, our strong competitive position in the market, and we continue to see our product strategy resonating with clients and prospects.
We continue to have a high degree of confidence in our ability to drive strong execution and differentiation in the market going forward with expanded AI capabilities across our platform.
ACM is a highly regulated, complex and dynamic industry where accuracy and compliance is paramount with 0 margin for error. Legislative changes such as the One Big Beautiful Bill and Secure 2.0 Act, are 2 recent examples that required thousands of system updates, work that demands deep domain expertise across our operations, product, tax, legal and compliance teams, all centered around the employee record.
Our more than 40,000 clients trust both our platform and people to help them manage through the impact these changes have on the most critical aspect of their business, their employees, airs processing payroll withholding taxes or administering benefits carry significant regulatory and reputational risk across the more than 5,700 tax jurisdictions that we support, which continues to drive demand for our most modern platform and world-class service model.
We also saw another strong quarter of channel performance as channel referrals, primarily from benefit brokers and financial advisers, once again represented more than 25% of new business for the third quarter as we continue to leverage this strong source of referrals.
The sustained success of our broker channel partnerships continues to be driven by our modern platform, third-party integration and API capabilities and because we do not compete against our broker partners by selling insurance products. We remain committed to investing in and supporting the broker channel going forward with the goal of continuing to deliver real value and true partnership and support to our referring brokers and clients.
Lastly, Q3 represents our busiest time of year as we work to support our clients through all of their year-end processing and annual tax form filing needs. In Q3, we moved over $100 billion on behalf of our clients. prepared and delivered to our clients several million W2 and 1095 forms and remitted funds to over 4,000 state, local and federal tax agencies.
I'd like to say a huge thank you to our roughly 6,700 employees who live and represent our values every single day and who work so hard to support our clients. The strong culture of Paylocity continues to be highlighted externally as we were recently recognized by Newsweek on America's Greatest Workplaces for Women in 2026.
I would now like to pass the call to Ryan to review the financial results in detail and provide updated fiscal '26 guidance.
Thanks, Toby. Q3 recurring and other revenue was $469.9 million, an increase of 11.6% and with total revenue up 10.5% from the same period last year. Our Q3 results were primarily driven by another solid quarter for our sales and operations team, allowing us to come in $10.3 million above the top end of our total revenue guidance and resulting in a race for our fiscal year guidance by more than our quarterly beat for the third consecutive quarter this year.
Our adjusted gross profit was 77.3% for Q3, an increase of 30 basis points from Q3 of last fiscal year, and through the first 9 months of fiscal '26, we have driven 60 basis points of adjusted gross profit leverage as we continue to focus on scaling our operational costs while maintaining industry-leading service levels. We continue to make significant investments in research and development and to understand our overall investment in R&D, it is important to combine both what we expense and what we capitalize.
On a dollar basis, our year-over-year investment in total R&D increased by 8.9% and when compared to the third quarter of fiscal '25, and we remain focused on making investments in R&D as we continue to build out the Paylocity platform to serve the needs of the modern workforce.
In regards to our go-to-market activities on a non-GAAP basis, sales and marketing expenses were 17.5% of revenue in the third quarter, and we remain focused on making investments in this area of business in fiscal '26 to drive continued growth.
On a non-GAAP basis, G&A costs were 8.2% of revenue in the third quarter versus 8.4% in the same period last year, representing 20 basis points of leverage. Through the first 9 months of fiscal '26, we have driven 50 basis points of G&A leverage versus the same period last fiscal year.
Briefly covering our GAAP results. For Q3, gross profit was $363.2 million, operating income was $157 million and net income was $111.3 million. Our adjusted EBITDA for the third quarter was $220.2 million or 43.8% margin and exceeded the top end of our guidance by $16.2 million resulting in increased margin guidance for fiscal '26.
Excluding the impact of interest income on funds held for clients, adjusted EBITDA margin for Q3 was up 110 basis points over Q3 of fiscal '25, and we continue to be pleased with our ability to drive both durable recurring revenue growth and expanded profitability.
We remain focused on driving leverage by improved operational scale and through improved efficiencies resulting from our ongoing investments in automation and AI across our business, which are helping us scale our teams and providing the ability to focus on more strategic work.
We are also pleased with our ability to drive expanded free cash flow through increased profitability and the benefits of recent tax legislation changes including a 27% increase in cash provided by operating activities in the first 9 months of fiscal '26, 25.4% growth in free cash flow over the last 12 months versus the comparative period and free cash flow margin of over 24% over the last 12 months as we execute against our recently increased financial targets.
Additionally, given the confidence we have in our business and our strong cash flows, in Q3 we purchased roughly 440,000 shares of common stock at an average price of $113.20 per share for approximately $50 million in aggregate purchases in the quarter.
Fiscal year-to-date, we have repurchased roughly 2.3 million shares of common stock at an average price of $152.10 per share for approximately $350 million in aggregate repurchases and helping to drive our diluted shares outstanding down 2.7% as of the end of Q3.
In April, our Board of Directors authorized an additional $1 billion share repurchase plan, which we will opportunistically execute against on a go-forward basis while also maintaining flexibility in our capital allocation plan to invest for future growth.
In addition to our expectations for continued growth in adjusted EBITDA and free cash flow, the scale we are demonstrating in stock-based comp expense and the reduction in diluted shares outstanding will help drive continued expansion of earnings per share on an annual basis.
Looking at the balance sheet. We ended the quarter with cash and cash equivalents of $299.7 million and $81.3 million in debt outstanding related to the funding of the Air Base acquisition.
In regard to client-held funds and interest income, our average diluted balance of client funds was $3.8 billion in Q3. The we're estimating the average real balance will be approximately $3.2 billion in Q4, with an average annual yield of approximately 330 basis points, representing approximately $26.2 million of interest income in Q4.
On a full year basis, we're estimating the average really balance will be approximately $3.25 billion with an average yield of approximately 360 basis points, representing approximately $117 million of interest income.
In regard to interest rates, our guidance reflects all Fed cuts to date with no additional rate cuts forecasted for this fiscal year.
Finally, I'd like to provide our financial guidance for Q4 and full fiscal '26. Note that as a result of continued momentum across both our sales and operations teams, we are increasing our fiscal '26 recurring and other revenue guidance by $15.5 million and our total revenue guidance by $20.5 million at the midpoint which includes the full impact of our guidance beat in Q3 and a further increase in Q4 revenue guidance.
With that said, for the fourth quarter of fiscal '26, recurring and other revenue is expected to be in the range of $402.2 million to $407.2 million or approximately 9% to 10% growth over fourth quarter of fiscal '25 recurring and other revenue. And total revenue is expected to be in the range of $428.4 million to $433.4 million or approximately 7% to 8% growth over fourth quarter of fiscal '25 total revenue.
Adjusted EBITDA is expected to be in the range of $128.6 million to $132.6 million and adjusted EBITDA, excluding interest income on funds held for clients is expected to be in the range of $102.4 million to $106.4 million.
And for fiscal year '26, we are increasing all aspects of our guidance as follows: recurring and other revenue guidance is now expected to be in the range of $1.638 billion to $1.643 billion or approximately 11% to 12% growth over fiscal '25 recurring and other revenue. Total revenue guidance is now expected to be in the range of $1.755 billion to $1.760 billion or approximately 10% growth over fiscal '25. Adjusted EBITDA is expected to be in the range of $638 million to $642 million. And adjusted EBITDA, excluding interest income on funds held for clients is expected to be in the range of $521 million to $525 million.
In conclusion, we are pleased with our Q3 results, the momentum we have across our sales and operations teams as we head into the final quarter of the year and the strong results we are seeing across our HCM, finance and IT solutions. Combined with continuing to drive competitive differentiation or AI strategy, we are confident in our ability to drive sustained durable revenue growth and improving leverage across the business to achieve our updated long-term financial targets in the coming years.
Operator, we're now ready for questions.
[Operator Instructions] Our first question comes from the line of Mark Marcon with Robert W. Baird.
2. Question Answer
Congratulations on the strong quarter. I was wondering if you could talk a little bit about just kind of the seasonal or the sequential variability that we ended up seeing during the third quarter with regards to like sales and marketing and R&D relative to prior patterns, it seems like you became more efficient as the quarter went on. And then I'm wondering if you can also dovetail that to the EBITDA guide for the fourth quarter? Because it seems like the fourth quarter basically after multiple quarters of the margins expanding on a year-over-year basis. On the EBITDA side, it looks like the guide basically implies a little bit of a decline. And so I'm wondering what's driving that? And then I've got a follow-up.
Yes, Mark, this is Ryan. I can take that question. I think from an operating expense standpoint, nothing that I would call out from a timing standpoint as far as onetime items in the third quarter. I think as we've talked about, we continue to invest in sales and marketing and R&D and did that once again in the third quarter. As you know, I think we continue to look closely at customer acquisition costs within our sales and marketing spend and have felt really good about those investments and what they've driven from a new sales standpoint as well as recurring revenue growth in the fiscal year.
As far as what that means for the fourth quarter, I think there's always a timing element there as you look at the increased guidance for the year. We raised EBITDA guidance by 30 basis points. We obviously over performed well in the third quarter. So I think there's always a little bit of timing within the fiscal year. And as we talked about, even dating back to last August when we provided our initial guidance for the year, we do want to invest back into R&D and broader automation efforts. And I think we continue to do that into the fourth quarter as well.
And so we'll end up seeing that in the R&D line and maybe also in terms of some sales and marketing, is that right?
Yes. And I think you've seen that as we've gone throughout the year as well. So I wouldn't call it any specific onetime items in the fourth quarter, but the bias is to invest back into those elements of the business while also increasing profitability, and we've done both.
Great. And then just as a follow-up. You mentioned Grayscale and being able to charge for the AI capabilities. Can you talk a little bit about what you're seeing there? I know it's really early. And then anything else on the office of the CFO?
Yes. We're excited about the Grayscale acquisition. And just like prior acquisitions that are product tuck-in and orientation, we'll take the time. We're going to integrate that experience and then we will launch that. We typically have done that. could be in the 12 month or so range. So we're looking at that as a similar opportunity to get that to market. But we're really excited about the AI capabilities in Grayscale really can fully automate all candidate engagement, so conversations and marketing, something that we think is really demanded in the market. And so that gives us an opportunity to have a bit of a premium skew in recruiting once we complete that integration and launch.
Our next question comes from Scott Berg of Needham & Company.
This is Ian Black on for Scott Berg. A couple of questions. First, on Grayscale, it looks like the company primarily targeted larger enterprises. How does the products convert to your kind of core customer demographic?
Yes. I wouldn't say that it is targeted to larger enterprises. I think when it comes to candidate engagement, I would say you see customers with maybe larger hourly populations as being really great fit or even companies with big salary populations that are in hiring mode. You basically are wanting to do a fair amount of recruiting and hiring, either because you naturally have turnover in your business or you're kind of in growth mode. And so we see a lot of our customers that fit that bill really nicely. And many customers that they have overlap perfectly within our average-sized target market of 150 employees. So that was actually 1 of the things that attracted us to the opportunity was felt like it was a really nice product market fit.
Awesome. And then how does the acquisition boost your overall AI strategy outside of the acquired technology?
Our AI strategy is really to embed AI across the suite in kind of everyday processes really driving an ROI to the customers and really saving them time, providing better insights, experience, intelligence. Grayscale is a great example when it comes to candidate interaction. So not only does it automate a bunch of that candidate interaction from a recruiter perspective, but it provides greater level of intelligence throughout that process. And so it's a good example of ways that sometimes we will build and organically launch agents that will operate in that capacity, and that could be like payroll and time or in some of our talent management suite like recruiting, where we were able to do a product tuck-in to go after a space that we're pretty excited about. Certainly, as we look outside and we think about opportunities, new product tuck-ins, is probably more important that those capabilities result in monetization. And so that's another element that we're excited about this. It's a great capability and functionality, and the AI interaction is very powerful, but it also gives us an opportunity to monetize it.
Our next speaker is Samad Samana with Jefferies.
This is Jordan Boretz on for Samad. It was great to see the strong double-digit recurring growth. It outperformed the guide by a wider margin than in recent quarters. So I know you haven't guided formally to fiscal '27. But as we think about setting an initial recurring growth estimate, is it fair to look at fiscal 4Q guidance for 9% to 10% growth and kind of extrapolate that out?
Yes, Jordan, I think as we said in the prepared remarks, we're really pleased with the results so far this fiscal year. You've seen, I think, a lot of consistency in recurring revenue growth. You've seen a lot of consistency in how we've guided each of the quarters. And obviously, there's been some over performance that has impacted the results each quarter and allowed us to raise the fiscal year by more than that quarterly beat. As you look at the fourth quarter, the recurring guide of 9% to 10%, that obviously is a data point as you think about next fiscal year, probably a little bit more so on the early part of the year. Our guidance philosophy has not changed. So as you think about the prudence that we would have typically in a full year guide, we would continue to have that level of prudence when we guide in August. And I think the other element that has been a bit of a tailwind this year is client workforce levels have continued to be up and be very resilient. And historically, we would not assume that level of increase year-over-year in our guidance. So that's been helpful this year. And as you think about from a guidance standpoint, likely would assume flat year-over-year, at least as a starting point.
Great color. I appreciate it. And then quickly on the capital allocation front, nice to see the strong cadence of buybacks, the incremental $1 billion increase to the repurchase authorization. When I think about how that's going to be funded on the balance sheet, I see $300 million in cash. So how are you thinking about funding that? And what cadence do you expect to deploy that on as we think about next year?
Yes. I would not think of our capital allocation policy changing. I think we've been really pleased with the ability to buy back stock so far this fiscal year. So $350 million in the first 9 months. Dating back 2 years, we've repurchased $650 million while also being able to fund acquisitions to drive future growth and product differentiation. That will continue to be our strategy going forward. I think this provides us incremental flexibility and we will continue to be opportunistic while maintaining dry powder from an M&A standpoint.
Our next question comes from the line of Jared Levine with TD Cowen.
I wanted to start in terms of your recent announcement of some of the managed service offerings. Can you discuss the revenue opportunity, whether that's TAM or potential PEPM uplift? And then Ryan, any kind of margin headwinds from more of a service offering versus your historical legacy and software?
Jared, it's Toby. I'll start and then Ryan can jump in. But if you think about how we serve our clients today, this is really just an extension of our platform to be able to buy it provide a higher level of service for our clients across payroll and HR. And I think a lot of that is borne out of the client experience that we have and a lot of the client feedback that we have I think it will really be a competitive offering for us in the market that will deliver a higher level of service and meet client needs. So I think ultimately, we're really excited about the TAM expansion opportunity, the revenue expansion opportunity. But at the heart of it, it's a need that our clients have, and I think we're really excited to be able to hit that. And I think the other part of this is we will be leveraging our platform to be able to provide that service. And so I don't think we expect any significant headwind from a margin opportunity perspective as we look at Q4 on and in '27.
Got it. And then in terms of Grayscale, Ryan, can you comment in terms of the impact of that ex guide raise there? And then any headwind related to that implied 4Q margin guide as well too?
Yes, completely immaterial on both the revenue and EBITDA front. So I think as we file our Q over the next few days, you'll see in the sub event what the purchase price was. But small acquisition, all cash acquisition and not material to the financial results.
Our next question comes from the line of Siti Panigrahi with Mizuho.
This is Phil on for Siti. Can you guys talk a little bit about what you're seeing the macro backdrop, specifically trends in employment and what's baked into your assumption for Q4?
Yes. I mean, I'll start. I mean I think from a macro standpoint, we've seen a relative -- we've seen relative stability both in the demand environment. And then as Ryan mentioned a few minutes ago, we've seen relative stability from an employment standpoint, too, with that being up through the first 9 months of the fiscal year against an assumption that we started with at the beginning of the fiscal of it being flat. And I think that's -- we have embedded that assumption across the full fiscal year. I think that's probably, as Ryan also mentioned a few minutes ago, the construct for how we're thinking about '27. But I think from a macro standpoint, for the first 9 months of the fiscal year, we probably pleased with the amount of stability we've seen. And I think that's what we're seeing as we go into Q4.
Our next question comes from the line of Patrick Walravens with Citizens.
Great. This is Kincaid on for Pat. When you guys look back at the quarter and the competitive environment, what was winning you the most deals with new customers? And when you look at renewals, why were customers stay?
Yes. I mean I think if I look back at the quarter, I think you saw a strong execution across the entirety of the business. I mean I think we had really anytime you have these types of results and that type of beat you have really strong sales and go-to-market execution. I think that's a mix of the value prop and the breadth of our platform. Obviously, you heard in the prepared remarks that the broker channel continued to perform for us, strong partnerships there, which I think we're really pleased with. We had strong service. I mean it's the busiest time of the year for our teams. And I think we performed really well. So I think the decline interactions and retention throughout the end of the calendar year and through January were really strong. And then I mean I think you saw really strong you were seeing really strong innovation from a product perspective, too. I mean, obviously, Grayscale is an acquisition that will now integrate but the launch of the Elevate solutions and -- so I think overall, the performance was really well balanced and strong across every area of the business.
Great. And just a quick follow-up on Elevate, where do you think that that's going to take the margins? What's the impact going to be?
I don't think we have any expectation that there's really any headwind associated with the margins. It's certainly a higher level of service for our clients. We'll be leveraging our teams and our platform. And I think as we look forward, there is an opportunity to scale that right in line with right in line with the rest of the business and certainly leveraging all of the internal and product-driven AI capabilities that we're starting to work through the platform. So I think our expectation is that this is a TAM expansion opportunity. It's an opportunity to serve our clients in an even higher way, meeting some of their needs. And certainly a revenue opportunity, and I don't think there will be any incremental headwind from a margin standpoint.
Our next question comes from the line of Brian Peterson with Raymond James.
This is Jessica on for Brian. Kind of keeping in line with the question so far today, as you're thinking about further M&A opportunities in the market, should we be thinking that you're looking at more AI-focused to deal or will there be more traditional applications that you think could also be broadly in your value proposition, the much you do air base? Just some high-level thoughts here.
Yes. I think from a product strategy perspective, when we look at M&A, we really want to make sure that it's accelerating the direction that we're already heading in. And so I think any software acquisition that would be kind of a product tuck-in that we would then be selling back to the customer would have to have some strength in AI. And we think that that's kind of a critical component in terms of offering great product to our customers. We're spending a lot of time embedding AI across our entire core suite. It doesn't mean that we wouldn't consider something outside of that, but it would have to fit into our existing product strategy, and we would have to have the ability to embed AI across anything that we launch to our customers.
Got it. And then also kind of all along with Elevate 2. So as you're talking about this TAM opportunities, revenue opportunity that this could bring. I know it just lost early days still, but how should we be thinking about the market fit, what kind of customers would be more inclined to be taking Elevate? Who will being best served by having increased service?
Yes. I would say it really goes after our core target market. So average customer size of 150 employees. And so in many ways, where the customers' perspective is they maybe have an HR team or payroll team that's really stretched in sometimes they have some turnover on that team, and they're looking for an elevated level of solutions. They're also looking for expertise, that they may not have as an organization. And so we know our products better than anybody. We have the ability to help them, whether that's from an implementation or HR or payroll capability. We also have to be able to automate a lot of this on their behalf. And so when we provide this extra level of service, we increase, obviously, the revenue opportunity for us. And in many cases, that customer can kind of redeploy that staff or other avenues or we can fill some of the shortfall that they might have from a staffing perspective. but they get a much better result because our level of expertise is naturally higher. One of the exciting things about this opportunity is, as we invest more in AI and things become more automated in our suite, we can do that in a way that doesn't have that margin impact, so we can provide the elated level of service and get the additional revenue and do that just as efficiently as we do with any of our other products.
Okay. And also just a quick follow-on. So I were talking about helping us redeploying Fillion. Can we also think of this as like helping with eventual cross-sell? Is that part of the thought process here?
Yes, it's a good question. I do think that as customers purchase Elevate solutions, there is an opportunity for us to help them drive utilization as they drive utilization easier to then get to those other products. It also helps them just from an implementation perspective, if they think -- well, I'd love to be able to take advantage of 1 of your additional products. I just don't have the time to implement it, Elevate can lower that barrier.
Our next question comes from the line of Terry Tillman with Truist.
It's [indiscernible] on for Terry. Just looking forward, how do you guys think your pricing model will change? And what have you been hearing from customers saying a potential hybrid pricing model?
Yes, I don't actually think we've heard a lot from clients so far in terms of asking or requesting a different pricing model. I think if you look across the industry, the industry has been fairly stable from a pricing model standpoint when you think about how all the solutions are priced by some of the larger competitors in the market. I don't think we've seen any shifts there. Yes, I think as we've talked about before, though, we think that in a situation where you have to think about a different pricing model. I think there's certainly different levers that we and folks in our industry will be able to pull, if needed, to be able to maintain revenue levels. I don't think we're at that point yet. And I think the important part of that question is thinking about how we go to market and thinking about what the actual client expectation is. And I think we continue to see strong engagement with clients and prospects and meeting them where they are right now, I think, is a really important thing from a go-to-market standpoint and meeting their expectations is exactly what we've done in terms of the consistency of our pricing conversation. So I don't think there's any big change there in the market, at least not right now.
Our next question comes from the line of Jason Celino with KeyBanc Capital Markets.
This is Devin on for Jason today. Congrats on the acquisition of Grayscale, it seems like a great addition to the portfolio. The -- it seems like the air recruiting space has kind of tracked a lot of attention lately. Would love to just get a sense of how competitive. Is that market, I noticed on the website of Grayscale, there's a few notable customers being highlighted. So would love to hear what's grayscale secret sauce in landing these customers?
Yes. I think recruiting has been a really good category for us overall. We really been able to attach that across the various market segments at a pretty attractive rate since we launched that many years ago. And of course, we make that better every single year. And part of our strategy will be to embed AI across that experience. Many of those agents that we will be launching will be our own agents. But Grayscale really ties nicely into the candidate engagement side of the equation, which we really didn't have. We had some capabilities there, but we didn't have some of the advanced capabilities that customers are looking for. And so when you combine some of our own AI investments with what they're doing, that's what gives us the confidence and be able to offer a kind of maybe a premium SKU for the customers that need that type of engagement the most and really provide competitive differentiation to many of the players that we see kind of on an ongoing basis.
Got it. No, that's helpful. And then maybe just a quick follow-up, maybe for 4Q recurring guidance. Are you still kind of assuming workforce level to be stable? And -- yes.
Yes, we are. I think as we've said earlier on the call, workforce levels have been up year-over-year, continue to be very resilient, but very consistent approach from a guidance standpoint, assuming those are flat year-over-year in the fourth quarter.
Our next question comes from the line of Daniel Jester with BMO Capital Markets.
Great. Maybe 1 on sales and go-to-market. So in the last 18 months, you've added sort of an office of the CFO product you've added IT asset management, access management, now managed solutions and premium SKUs. It seems like a lot to maybe digest from a sales enablement perspective. So I guess, how are you getting the sales force sort of position in the right direction to sell this expanded platform?
Yes. Dan, I mean so we -- I think if you look at the growth algorithm in our business over a multiyear period of time, going back, I mean, for the last decade, I mean, part of the growth algorithm for us has been the ability to effectively increase our ARPU by launching new solutions. So we have more than tripled the size of the portfolio since the time of the IPO. And that's been across moving from payroll all across the HCM category and now into finance and IT, as you pointed out. And I think 1 of the competencies that we've certainly developed over time with the sales force is not just launching the new technology, but successfully launching those products internally to our teams, training them on them and giving ourselves the ability to attach those products at the point of new sale for new logo acquisition and also sell back into the base. And I think this is just another example of the same cadence, the same playbook that we've run from a product launch standpoint for more than a decade at this point. And I think we're early days for certainly Elevate, but I think we've been really pleased with the traction that we've seen in some of those newer offerings over the last 18-plus months.
I think the other thing I would add, Toby, is that we've also developed during that time, a great way to look at do you surface those products to customers without overloading those sales folks so that you're not losing productivity. And so we evaluate the products from a complexity perspective. Sometimes our sales force that's out there selling payroll and HR sell the entire thing. Other times, we decide, okay, it's really a bit of a referral model. They're going to identify the need. They're going to pass that on to typically an internal person with much level of expertise, and they'll take that product SKU from initial discovery through to sale. And so having that 2-tier model that we have really been using for many, many years. It gives us even more capacity to be able to expand the product portfolio into the future.
Okay. That's really helpful. I appreciate it for both of you. And then maybe just as my follow-up, maybe any updated thoughts on the trajectory of headcount, either for the organization overall or for the sales force as we go into fiscal '27?
Yes. I think we'll look at that as we go through. I mean we're going through the planning period now. And then as we go through Q4, we'll finalize the plans for fiscal '27. But I think the theme remains the same as we've come into fiscal '26 and even as we came into fiscal '25, I think the effort has been to continue to be able to drive growth, recurring revenue growth across the business and to be able to do that as efficiently as possible giving our teams the capabilities, whether that's from a staffing or from a tools perspective, to continue to drive growth in new sales. And I think that will remain the focus as we go through Q4 and the planning process for '27.
Our next question comes from the line of Steve Enders with Citi.
Okay. Great. Maybe just on the I guess touching on both the financials product and the IT asset management products. Just I guess, what have you seen so far from an adoption perspective? And how is maybe the go-to-market around that translating on the cross-sell versus maybe what you were expecting there?
Yes. I think we've been pleased with the performance in each 1 of those categories. And I think the ability to convey to both new clients and coming on to the platform and then back into the client base, the value of the platform from payroll to HCM to some of the finance applications and then on into that value prop has really resonated both with new clients and selling back into the client base. And so I think we've been really pleased with the traction that we've seen in both of those areas. And I think it's been I think we've been pleased with the mix as well in terms of our ability to attach those products at the time of sale to new opportunities while also selling back into the client base. So overall, I mean, I think we've been really, really pleased with the traction that we've seen.
Okay. That's helpful. And then maybe just on the margin side of the equation. It seems like that you're finding more opportunities to automate and maybe get a little bit more leverage. Just maybe what sort of work so far in terms of putting those initiatives to work internally? And kind of where do you kind of view the next incremental areas where you feel like you can drive further leverage out of the business?
Yes. I mean, I think we've been very active across every single team in the business, whether that's in go-to-market or in our operations and service teams or even within product development and engineering to try and find ways to leverage AI leverage automation technology to take manual process out of the team's workload and be able to effectively provide a greater -- a higher degree of efficiency. I think we've found categories in every single area of the business where we either have captured an opportunity to do that or we believe we can as we look forward into Q4 and into fiscal '27. So I mean, I think going back to my comment a few minutes ago, I mean, I think a lot of the focus has been to be able to provide a higher level of efficiency and a higher level of productivity. And I think you ultimately have seen and we'll continue to see that flow through in terms of margin leverage over time.
I think just maybe to add on to that from a financial standpoint, I think across every financial metric, you've seen leverage, whether that is adjusted gross margin up 60 basis points this year. GAAP EPS is up almost 30% in the quarter. Free cash flow is up 25% over the last year. So to Toby's point, we're seeing it across the business. and we're seeing it very consistently quarter-to-quarter.
Our next question comes from the line of Raimo Lenschow at Barclays.
This is Sheldon McMeans on for Raimo. I wanted to take a step back on the new Paylocity Elevate solutions, which certainly seems like an exciting opportunity. You touched upon this a bit, but it would be helpful to hear more around what the impetus for this offering was, particularly in the context of AI as it interesting at this point to hear clients interested in higher touch services when there's some fear in the market that agents will be doing everything are absolutely wide coded in the future, which is certainly not something we subscribe to. Nonetheless, are you feeling more confident around kind of the AI disruption fears and which I would think so, given this offering, but would love to hear more on that front?
Yes. So I think to answer the last part first is I think we've always felt fairly confident that the moat that we have around our business, high-touch service, the money movement, the compliance, so on and so forth is very difficult to do simply coding an application. And so that is probably less of a concern. I think, though, where we are seeing great progress from an AI perspective is if you think of payroll HR time benefits, either a very step-by-step compliance complicated processes, a fair amount of training that's required on the clients. And as we more automated solutions, leveraging the intelligence in AI, it becomes easier to work through those processes. And so taking on some of those responsibilities on behalf of the clients that are absolutely higher touch become much more manageable in an environment where we have the confidence and the ability to deploy whether they're agents or intelligent or really automation across the platform and take some of that responsibility on. There still absolutely be a touch. I think that's really important to the customer. One of the things about payroll and HR is it's sensitive topics. It's people's pay as people time, it's got to be 100% accurate. It's their benefits. And so if we can insert ourselves, leverage the expertise that we have, continue to automate just like we are doing. It's a great time to be able to enter the market with that solution. And really, it came from demand from our customers. And where it often comes from is a customer might have some turnover, and they need some expertise. So they're having a hard time filling an existing role or they're adding a position and they can't find the expertise that they need, and they want to come to us and say, "Can you help me more than you've been able to help me from their perspective, it's kind of all services. But from our perspective, it's certainly more services, but it's also leveraging some of the full capabilities of the platform that maybe they haven't been able to do on their own. So I think it really is a win-win scenario.
That makes a lot of sense. And a quick follow-up. It was nice to see the recurring revenue acceleration in the quarter. Could you speak more to some of the driving factors around that, particularly when you look at your new customer wins, are you seeing larger land sizes from your growing portfolio? Maybe a little bit on any product categories that particularly resonated this quarter or a velocity versus land size?
Yes. I think it's more a reflection of all the things working well versus 1 specific thing in 1 specific area. I think you get to that result by the go-to-market teams producing really well, leading up to -- through the first 9 months of the year and also in the quarter. And then I think you also have a significant impact from the strength of our -- we had go-lives in January really strong. And then I think you also have a really strong performance from our services team, driving client satisfaction and driving retention through a really key part of the year. And I think all of those things have to come together in a solid mix to be able to produce that result, and I think they did.
Our next question comes from the line of Jacob Smith at Guggenheim Partners.
Brokerage channel has clearly become a bigger source of differentiation as the landscape has evolved, and this past selling season was potentially where you'd expect that to start showing up more pronounced in the numbers. Is the broker contribution actually accelerating and driving some of the real upside this quarter? Or was that more -- or was the beat more seasonal with form filings running stronger than expected and the broker benefit still building towards next year? And also just stepping back, as the conversation with brokers themselves actually changed over the last 12 to 18 months, are they bringing in deals earlier, maybe recommending Paylocity differently than they used to?
I'd probably lean in part on the answer I provided to the last question, which was just, I think the performance in the quarter was fairly well balanced from go-to-market production to implementation and service ultimately contributing from our retention to a new business start and then a retention standpoint. The broker channel is certainly a part of the success that we had going into the go-to-market category. And I think we -- I certainly think over the course of the last 18 months, to your question, I think we have seen more momentum over that period of time with brokers, and I think that certainly continued into year-end and into the third quarter. So I think we have always had a strong presence in the broker channel. I think we've had a differentiated set of relationships there. I think that continued into the quarter and for the first 9 months of the year.
Our next question comes from the line of Kevin McVeigh at UBS.
Great. Congratulations on the results. I wonder -- can you give us a sense of how the clients are absorbing the efficiencies that you're bringing to bear because it sounds like there's a tremendous amount of efficiency on your side, but even more so on the clients. So as they think about kind of the delivery model going forward, are you able to increase the pricing more? Is there going to be a shift in terms of the revenue, just given the efficiencies because it sounds like there's a pretty meaningful amount of cost savings for the client in addition to yourself?
Yes, I think we've always focused on delivering more value to the customers than trying to match that value with kind of an appropriate price point in the marketplace. There's times where we've invested in certain product segments. And as we've improved those products, then we've moved that price up over time. That's certainly a common occurrence. I wouldn't say that certainly, AI accelerated some of that innovation. We're still relatively early in adoption cycles for that from a customer perspective. So I think there's more to come and more opportunity in that category for sure. But we're getting great feedback from the customers that are using it. We're still driving utilization across many of the customers that is new to them. So I think we're really happy with where we're positioned.
Our next question comes from the line of Patrick [indiscernible] with William Blair.
Toby and Ryan, thanks for squeezing me in here. My first question, as you increasingly build out the breadth of this platform across HR, finance, IT and now a little bit of services as well. I just wanted to ask how meaningful do you feel those adjacent workflows can be over time? And how much more room do you feel there is to continue rounding out this platform at this point in time?
Yes. I mean I think made this comment earlier, too, I mean a big part of the growth algorithm over time has been our ability to expand our products and services. Ultimately, the chargeable suite, which we've grown to more than 3x what it was at the time of the IPO over a decade ago. So mean I think that has been a core part of the focus that we've had. And I think what you also see in that though is the evolution of the industry and clients availing themselves of either products or services that they wouldn't have had available before. And so I think you've seen an expansion of the overall needs that clients have and I think we've been right there to meet those needs with additional products and services, which has helped us drive the ARPU up over time, continuing into fiscal '26. So I mean I think I do not believe that we have reached the end of the additional ways that we can add value to our clients, either in terms of products or services as we look forward. And that certainly will continue to be a big focus for us. Ultimately, it's about being able to meet additional client needs as we look forward.
Okay. Very clear. And now that it's been roughly a year since you launched Paylocity for finance, just wanted to ask for an update on how your success has been selling a bit more into the office of the CFO. And when you're winning deals there, how often is it more of a greenfield land versus the displacement?
Yes. I think we've been really happy with the progress so far. So yes, it's been about a year or so. And I think we've had -- we have -- our expectations have been met in terms of what we thought we'd be able to do in terms of product attached both to new logos and back into the client base from a finance perspective. And I think that's been true across the set of products that we brought in-house with the Airbase acquisition. Ultimately, I think there's a -- the value prop of having those products on a single platform across payroll, HCM and finance and IT really resonates in the market, and we see that day in and day out in our go-to-market motion, both in terms of new logos coming out of the platform and then as we engage with our client base. So I think ultimately, really happy with how that acquisition has performed for us so far, still relatively early. But yes, I think we're pretty happy with the opportunity and how we've executed against that.
Thank you. This concludes the question-and-answer session. I would now like to turn it back over to management for closing remarks.
Yes. I just wanted to thank everybody for their interest in Paylocity. Thanks for joining the call. And I also wanted to provide a special thank you to all of our employees who served our clients so well through the course of year-end and help deliver a great quarter. So thanks, everybody, and I hope you have a great night.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Paylocity Holding Corp. — Q3 2026 Earnings Call
Paylocity Holding Corp. — Q3 2026 Earnings Call
Paylocity's AI-driven platform expansion supports a solid Q3 and higher FY26 targets.
📊 Quarter at a Glance
- Recurring & other revenue: $469.9M (+11.6% YoY), beat the high end of guidance by $7.4M.
- Adjusted EBITDA: $220.2M, 43.8% margin, beat guidance by $16.2M and raises FY26 margin targets.
- Total revenue: up 10.5% YoY; Q3 performance supports upgraded full-year guidance.
🎯 What Management Says
- AI integration: AI capabilities embedded across the platform, evolving from AI assistant to AI agents that automate workflows (e.g., accounts payable).
- Strategic moves: Grayscale acquisition to bolster recruiting automation; Paylocity Elevate launches to offer higher-touch payroll/HR services.
- Growth focus: Continued platform expansion, broker-channel strength, and ongoing R&D/automation investments to drive durable revenue and profitability.
🔭 Outlook & Guidance
- Q4 guidance: Recurring & other revenue $402.2M–$407.2M; total revenue $428.4M–$433.4M; adjusted EBITDA $128.6M–$132.6M (ex. client-funds interest $102.4M–$106.4M).
- Fiscal 2026 guidance: Recurring & other revenue $1.638B–$1.643B; total revenue $1.755B–$1.760B; adjusted EBITDA $638M–$642M; EBITDA ex client funds $521M–$525M.
- Assumptions & risks: No further Fed rate cuts this year; continued AI investment; opportunistic buybacks; macro stability.
❓ Analyst Q&A
- Grayscale monetization: Early, immaterial to near-term revenue/EBITDA; integration aims to enable premium AI-driven recruiting capabilities.
- Elevate margins & cross-sell: Elevate expands service tier without meaningful margin headwinds; potential TAM expansion via higher-value contracts and platform-wide cross-sell.
- Capital allocation & M&A: Buybacks remain opportunistic; AI-focused tuck-ins align with strategy and can be funded flexibly to support growth.
⚡ Bottom Line
Paylocity’s Q3 shows durable 11%+ recurring revenue growth, meaningful AI-driven product expansion through Grayscale and Elevate, and raised FY26 targets supported by strong cash flow and buybacks. The trajectory hinges on successful AI integration and cross-sell momentum to sustain margin expansion.
Paylocity Holding Corp. — Q2 2026 Earnings Call
1. Management Discussion
Good day, and thank you for standing by. Welcome to Paylocity Holding Corporation's Second Quarter 2026 Fiscal Year Results Conference Call. [Operator Instructions] Please be advised, today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Ryan Glenn, Chief Financial Officer. Please go ahead.
Good afternoon, and welcome to Paylocity's earnings results call for the second quarter of fiscal '26, which ended on December 31, 2025. I'm Ryan Glenn, Chief Financial Officer. And joining me on the call today are Steve Beauchamp, Executive Chairman; and Toby Williams, President and CEO of Paylocity. Today, we will be discussing the results announced in our press release issued after the market closed. A webcast replay of this call will be available for the next 45 days on our website under the Investor Relations tab.
During the call today, we will use non-GAAP financial measures as defined in Regulation G. You can find the related reconciliations to GAAP in our press release, which is located on our website at paylocity.com under the Investor Relations tab. We will also make forward-looking statements. Actual events or results could differ materially from those projected in our forward-looking statements. Please refer to our press release and SEC filings, including our most recent 10-K, which contain important factors that could cause actual results to differ materially from the forward-looking statements. We do not undertake any duty to update any forward-looking statements.
In regard to our upcoming conference schedule, we will be attending the Raymond James Annual Institutional Investors Conference and the Citizens Technology Conference. Please let me know if you'd like to schedule time with us at either of these events.
With that, let me turn the call over to Steve.
Thank you, Ryan, and thanks to all of you for joining us on our second quarter fiscal '26 earnings call. Our strong results continued in Q2 with recurring and other revenue growth of 11%, as our differentiated value proposition of providing the most modern software in the industry continues to resonate in the marketplace.
Total revenue was $416.1 million or 10% growth over Q2 of last year. Our multiyear investment in R&D and commitment to driving innovation continues to fuel our growth as the combination of HCM, finance and IT in one single platform, all underpinned by our core employee record data, represents the broadest and deepest comprehensive offering in the marketplace. This dynamic continues to be highlighted by the growing adoption and utilization of products across our suite, including new HCM offerings such as reward and recognition.
As the only provider with native reward system that automates the taxation of rewards payments and allows for the cash redemption of rewards, reward and recognition continues to serve as a point of competitive differentiation in the market and a driver of improved employee engagement and efficiency for our clients. For example, during calendar year-end, which is a popular time for companies to recognize employees, an existing client fully transitioned and automated their manual holiday reward program within our platform, successfully distributing gift cards to more than 750 employees located across multiple locations.
Our expanded AI capabilities, which we have continued to embed across the platform, also contributed to our strong financial results and increased guidance, including the recent release of our policies and procedures agent, which enables clients to leverage their own internal documentation, such as employee handbooks and standard operating procedures to provide employees with instant and accurate answers to questions around topics such as travel expense and sick leave policies.
Additionally, we recently extended our AI assistant into HR rules and regulations, tapping into more than 200 IRS and Department of Labor Knowledge sources to provide administrators with guidance on tax and labor regulations. Collectively, these new capabilities will help our clients simplify and automate employee support while also reducing risk and improving compliance outcomes, and we continue to see growing utilization of our AI capabilities with the average monthly usage of our AI assistant increasing over 100% quarter-over-quarter.
Our ongoing commitment to product innovation continues to be recognized by third parties as Paylocity was recently awarded the 2026 Buyers' Choice Award from TrustRadius, named a leader in 19 categories within the Winter 2026 G2 Grid reports and listed on Capterra's payroll shortlist.
I would now like to pass the call to Toby to provide further color on the quarter.
Thanks, Steve. As Steve mentioned, the momentum seen in Q1 continued into the second quarter and contributed to a strong selling season performance and increased revenue and profitability guidance for fiscal '26. Our results continue to be driven by the combination of strong sales, operational execution and product differentiation, including the addition of new functionality to core products such as video candidate screening, self-service scheduling and prescreening forms within our recruiting module.
As a result of these new capabilities, we are helping our clients improve their hiring process, drive a higher degree of automation and efficiency within their business, and better stand out in an otherwise competitive hiring environment as evidenced by an existing client with over 1,200 employees that has seen a roughly 50% reduction in their time to hire since adopting our new recruiting functionality.
We also continue to be pleased with the consistency of our referral channel, which once again delivered more than 25% of our new business in Q2. The sustained success of our broker channel continues to be driven by our modern platform, third-party integration and API capabilities, and because we do not compete against our broker partners by selling insurance products. We remain committed to investing in and supporting the broker channel with the goal of continuing to deliver real value and true partnership and support to our referring brokers and their clients through enhanced capabilities such as our Benefits Guided Setup.
Through self-service and intuitive tooling, Benefits Guided Setup allows brokers to directly build plans and rate structures and update rates on behalf of their clients directly within the Paylocity platform, enabling our partners to deliver a higher level of service to our mutual clients. We also saw another strong quarter of client retention, which helped contribute to our strong financial performance through the first half of fiscal '26. As highlighted last quarter, in addition to embedding AI capabilities within our product suite, we are also investing in AI and broader automation efforts internally to help drive greater efficiency and productivity across our business.
Specifically within the operations team, we continue to leverage AI to drive down client case volumes, automate client interactions and case routings and perform sentiment analysis to flag urgent cases for faster response, and we remain committed to continuing to evaluate new opportunities to help deliver world-class service and partnership. Overall, we are pleased with our Q2 results and believe we are well positioned heading into the back half of the year, which is reflected in our increased guidance for fiscal '26.
Finally, this time of year is a very busy time for all of our teams as they work closely with clients on year-end processing of payrolls, W-2s, 1095s, and annual tax form filings to federal, state and local agencies and on the implementation of new clients. I want to thank all of our employees for their hard work and dedication to our clients during this very busy time of the year.
In addition to our market-leading financial performance, our strong culture at Paylocity continues to be recognized externally as we were recently recognized by Newsweek on America's Greatest Workplaces for Culture, Belonging & Community 2026.
I would now like to pass the call to Ryan to review the financial results in detail and provide our increased fiscal '26 guidance.
Thanks, Toby. Q2 recurring and other revenue was $387 million, an increase of 11%, with total revenue of $416.1 million and up 10% from the same period last year. Our strong Q2 results were primarily driven by another solid quarter for our sales and operations team, allowing us to come in $8.1 million above the midpoint of our revenue guidance and allowing us to again raise our fiscal year guidance by more than our quarterly beat.
Our adjusted gross profit was 74.4% for Q2 versus 73.8% in Q2 of last fiscal, representing 60 basis points of leverage. And over the first 6 months of fiscal '26, our adjusted gross profit is up 80 basis points over the same period last year as we continue to focus on scaling our operational costs while maintaining industry-leading service levels.
We continue to make significant investments in research and development, and to understand our overall investment in R&D, it is important to combine both what we expense and what we capitalize. On a dollar basis, our year-over-year investment in total R&D increased by 10% when compared to the second quarter of fiscal '25, and we remain focused on making investments in R&D throughout fiscal '26, as we continue to build out the Paylocity platform to serve the needs of the modern workforce.
In regard to our go-to-market activities, on a non-GAAP basis, sales and marketing expenses were 21.1% of revenue in the second quarter, and we remain focused on making investments in this area of the business in fiscal '26 to drive continued growth. On a non-GAAP basis, G&A costs were 9% of revenue in the second quarter versus 9.8% in the same period last year, representing 80 basis points of leverage.
Briefly covering our GAAP results. For Q2, gross profit was $282.1 million, operating income was $70.4 million and net income was $50.2 million. Our adjusted EBITDA for the second quarter was $142.7 million or 34.3% margin and exceeded the top end of our guidance by $7.2 million, resulting in increased margin guidance for fiscal '26. Excluding the impact of interest income on funds held for clients, adjusted EBITDA margin for Q2 was up 140 basis points over Q2 of last year, and we continue to be pleased with our ability to drive both durable recurring revenue growth and expanded profitability.
We remain focused on driving leverage by improved operational scale and through improved efficiencies resulting from our ongoing investments in automation and AI across our business, which are helping us scale our teams and providing the ability to focus on more strategic work. We're also pleased by our ability to drive expanded free cash flow through increased profitability and the benefits of recent tax legislation changes, including a 40% increase in cash provided by operating activities in the first 6 months of fiscal '26, 26% growth in free cash flow over the last 12 months versus the comparative period, and free cash flow margin of nearly 24% over the last 12 months as we execute against our recently increased financial targets.
Additionally, given the confidence we have in our business and our strong cash flows, in Q2, we repurchased roughly 690,000 shares of common stock at an average price of $144.86 per share for approximately $100 million in aggregate repurchases in the quarter. Fiscal year-to-date, we have repurchased over 1.8 million shares of common stock at an average price of $162.66 per share for approximately $300 million in aggregate repurchases, helping to drive our diluted shares outstanding down more than 2% as of the end of Q2. As a reminder, we have approximately $400 million remaining under our share repurchase program, which we anticipate continuing to opportunistically execute against going forward. In addition to our expectations for continued growth in adjusted EBITDA and free cash flow, the scale we are demonstrating in stock-based comp expense and the reduction in diluted shares outstanding will help drive continued expansion of earnings per share on an annual basis.
Looking at the balance sheet. We ended the quarter with cash and cash equivalents of $162.5 million and $81.3 million in debt outstanding related to the funding of the Airbase acquisition. In regard to client-held funds and interest income, our average daily balance of client funds was approximately $3.2 billion in Q2. We're estimating the average daily balance will be approximately $3.7 billion in Q3 with an average annual yield of approximately 320 basis points, representing approximately $29.5 million of interest income in Q3. On a full year basis, we are estimating the average daily balance will be approximately $3.3 billion with an average yield of approximately 340 basis points, representing approximately $112 million of interest income. In regard to interest rates, our guidance reflects all Fed cuts to date with an additional 25 basis point rate cut assumed in each of March and April of this fiscal year.
Finally, I'd like to provide our financial guidance for Q3 and full fiscal '26. Note that as a result of continued momentum across both our sales and operations teams, we are increasing our fiscal '26 recurring and other revenue guidance by $12.5 million and total revenue guidance by $14.5 million, which includes the full impact of our guidance beat in Q2 and a further increase in back half fiscal '26 revenue guidance. Additionally, we continue to realize success driving increased profitability across our business, resulting in increased adjusted EBITDA guidance for fiscal '26.
With that said, for the third quarter of fiscal '26, recurring and other revenue is expected to be in the range of $457.5 million to $462.5 million or approximately 9% to 10% growth over third quarter fiscal '25 recurring and other revenue. And total revenue is expected to be in the range of $487 million to $492 million or approximately 7% to 8% growth over third quarter fiscal '25 total revenue. Adjusted EBITDA is expected to be in the range of $200 million to $204 million and adjusted EBITDA, excluding interest income on funds held for clients, is expected to be in the range of $170.5 million to $174.5 million.
And for fiscal '26, we are increasing all aspects of our guidance as follows: recurring and other revenue guidance is now expected to be in the range of $1.620 billion to $1.630 billion or approximately 10% to 11% growth over fiscal '25 recurring and other revenue. Total revenue guidance is now expected to be in the range of $1.732 billion to $1.742 billion or approximately 9% growth over fiscal '25. Adjusted EBITDA is expected to be in the range of $622.5 million to $630.5 million and adjusted EBITDA, excluding interest income on funds held for clients, is expected to be in the range of $510.5 million to $518.5 million.
In conclusion, we are pleased with our Q2 results, the momentum we have across our sales and operations teams as we execute the busiest time of the year and the strong results we are seeing across HCM, finance and IT solutions. Combined with continuing to drive competitive differentiation in our AI strategy, we are confident in our ability to drive sustainable, durable revenue growth and improve leverage across the business to achieve our updated long-term financial targets over the coming years.
Operator, we're now ready for questions.
[Operator Instructions] Our first question comes from Daniel Jester with BMO Capital Markets.
2. Question Answer
I guess maybe we'll start with the selling environment. I think the commentary was that it was pretty strong. I guess maybe double-click on that, if you could, please, maybe compare and contrast kind of how you exited this year compared to last? And any pockets of strength or weakness that you'd call out?
Dan, yes, I'll start off. I mean, I think overall, I would characterize the selling season as strong this year. I think the go-to-market teams performed really well across sales and marketing and our channel teams. And I think we saw a very stable demand environment. So I think similar commentary on the demand environment from last quarter carried through to this quarter. And I think our performance from a sales perspective through selling season was strong, and I think that's a good part of what allowed us to turn in the, I think, really strong results we did from a revenue growth and profitability perspective. And I think that's a lot of what carried into the raise of guidance for the rest of the year. I think on a relative basis to last year, to the other part of your question, I would characterize it as consistent and stable, and I think the performance of the team was really strong. So I think we were overall pretty happy with it.
Great. And then maybe just a follow-up on maybe sort of a bit of an obligatory AI question. I think you've commented a lot about how Paylocity is building tools and integrating AI into the platform. I guess how are you seeing your customers engage with AI? And are you seeing any trends about customers maybe building some of this functionality themselves? Appreciate the context there.
Yes. I think I'll grab that one. Steve, here. What I would say is, we have really been focused on embedding AI across the suite. As you know, our value proposition is being the most modern platform. And as we embed AI, the 2 use cases that we called out in the script, policies and procedures and allowing clients to be able to upload their own docs and answer employees' questions is certainly one of the big use cases that we've seen. We've seen a lot of interactions with our AI assistant with how do I do something, how can I accomplish this, asking for data in the application. And so I think from our perspective, we will continue to build templated agents for our customers to be able to use. We'll give them some flexibility, so that they can customize those for their use cases. And what we're seeing is really improved ease of use from our customer feedback. We're seeing more engagement in the platform, some more utilization. And then finally, it's really saving our customers' time.
Our next question comes from Brad Reback with Stifel.
Steve, so on that last point, saving your customers' time, that's great. Can you talk about how you're translating that into revenue for Paylocity?
Yes. So I think, as you know, Brad, one of the things about being in payroll and HR is we have the data in terms of being the system of record. So we know in real time when anything happens, whether somebody is getting a new job, new supervisor, new hires, terms. And many times, our customers then want to use those triggering events via APIs and marketplace to be able to connect to other systems. I think as the Agentic experience becomes more developed, we will see more, and we've already started seeing significantly more usage of our APIs, tying our data to other really key workflows within an organization. That's number one.
Number two is we're seeing people put more data and drive more utilization of our platform. So from a monetization perspective, that has an opportunity for us to sell more of our modules back to our clients. They're seeing more value. And they're able to customize more of that experience, so that it's purpose-built to really deliver on their individual use cases. So I think from a client perspective, it's less about us driving them away from the personal interaction that we have. As you also know, our clients call us very frequently. They're looking for advice. That relationship is really part of our strong retention. So we don't want to walk away from that. But we really want to be able to drive an easier-to-use experience, drive more utilization. When we do that, we get larger upsell on top of the opportunity in marketplace and APIs. That's where really where we see the near-term opportunity.
And on that upsell and the retention, is it still too early to have good metrics around customers with high AI engagement are spending 10% or 15% more than peers or retaining 2 or 3 points better?
I think it's a little early. I think you got to go back to our average sized customers, about 150 employees. And so this does happen on a gradual basis. And we have though seen in the past, as we've really expanded the number of modules, that the customers who are using more of our modules typically have a stronger retention, typically are more satisfied. And we see AI as another tool to be able to drive that same outcomes.
Our next question comes from Terry Tillman with Truist Securities.
Nice job on the quarter. I've decided to abstain from asking an AI question. I was going to ask 2 questions on kind of evolving products, which I'm very intrigued by. First, just an update on Airbase and just your play in the office of CFO and finance. And then secondly, I also wanted to ask what's developing? And what can you share around your ability to help in the area of IT operations?
Terry, it's Toby. I'll start and then Steve obviously jump in. I mean, I think, first on the Airbase update and all things in Paylocity for Finance, I think we continue to be pleased with the momentum we have there. We closed that acquisition last October (sic) [ October 2024 ]. So we're just over a year or so into it. And I think we're really pleased with what we've seen so far. We delivered V1 of the integrated product set in July. And I think that was an important factor from a differentiation standpoint as we came through selling season. So all across the spend management suite now as Paylocity for Finance, I think we are continuing to see lift there. We're continuing to get positive feedback from a client and prospect standpoint, and we're seeing, I think, a positive path as it relates to the attach and penetration and adoption and usage of those solutions.
And then I think we're in early days as it relates to all things IT oriented, but I think we continue to see positive progress there from an attach standpoint and from a use case perspective there. And that's another one where I think you see Steve's comment in relation to the last question was very focused on our ability as the system of record to leverage the data that we have in our system, to create automation against some really common use cases, whether that's onboarding or offboarding or system access or device management. I mean, I think all those things are triggered off of changes in the data that we see from a status perspective with respect to employees. And we continue to see a significant opportunity there to help create value for our clients from that product area.
That's great. Maybe just a quick follow-up. The cash flow was well above what we were looking for. Was there -- and maybe this is for Ryan, but anything timing there that may not reoccur in the second half of the year? Just anything more you can share on just the strong outperformance and comparing it to the second half?
Yes. Terry, this is Ryan. No, I think, obviously, you can see cash flow movement quarter-to-quarter. But when we look at it on an LTM basis, we're at nearly 24% free cash flow margin, up 26%. So we continue to execute against the same playbook that we've had for a number of years, which is driving leverage both in gross margin and G&A, and then continue to invest both in R&D and sales and marketing to drive future growth. So nothing that I would call out timing-wise. Obviously, there is some benefit from the recent tax legislation changes, but we're seeing a strong majority of that leverage in free cash flow coming from natural scale across the business.
Our next question comes from Mark Marcon with Robert W. Baird.
I was wondering if you could talk just a little bit more about the selling environment. Obviously, the stocks have all gotten hit based on concerns around the impact of AI. Can you just talk a little bit about like, from your clients' perspective, the average client size is 150. I imagine they're not thinking anything close to about using any sort of new tools. But are you seeing any sort of hesitation in terms of slowing down either at the core part of the market or even at the enterprise side? And how would you judge your sales force productivity given some of the noise that's out there?
Yes. So I think there's a few questions in that, Mark. I guess I would summarize it closer to where I started, which was selling season was strong. I think the team performed really well. I think we continue to be on a fairly consistent pace from a client growth perspective as we sit here halfway through the year, pretty consistent with last year. And I think our ability to perform with the level of revenue growth that we showed in Q2 and our ability to raise the remainder of the year comes from the strong performance that we saw from a new sales perspective in the first half of the year. And I think the confidence that we have in our ability to perform across all segments throughout quarters 3 and 4.
And so I think, you're right, with an average client size around 150 employees, and Steve mentioned this a minute ago, I mean, I think we've seen just a relative level of stability in our client base, in the demand environment, in our team's ability to sell and bring on new units. And I think absent all of the concern around AI or any of that conversation, particularly in the last 48 hours, I mean I think what we see is the continued really strong execution from both a sales and ops perspective as we've come through selling season performing really well, driving 11-plus percent recurring revenue growth in the quarter and I think performing really well from a retention perspective as well. I mean our ops team performed very well in the context of getting through year-end and getting through January. So I mean, overall, absent any other noise in the market, I think we sit here halfway through the year, having put in a really strong performance in Q1 and Q2 with a lot of confidence around our ability to be successful in Q3 and Q4.
Mark, I would just add one thing to that is -- and I know you've been in this industry a long time. There's a lot more conversation from prospects around our service levels, our ability to meet those customer needs and not necessarily replace all the interaction from an AI perspective. Certainly, when we automate things for them, they love that. When we make it easier for them, that's great. And they want to make sure that we're really pursuing the right modern technology. But our service organization, as Toby called out, is a big reason why it was a driver. So unlike other software spaces, we've got a pretty big moat around the service component of what we do, whether that's an implementation or ongoing service or taxes. And that is actually a much bigger conversation still today with prospects than AI, which is a conversation and is a growing conversation, but still a smaller part of the overall value prop.
That's great. And then I was wondering if we could flip to AI in terms of advantages. And wondering if you can just talk a little bit about like how much more efficient. I know it's early days. Claude Code just came out a little while ago. But if we think about like -- when we think about your R&D efforts, are there any early thoughts there? And then in addition to that, with all the fears around AI, from a capital allocation perspective, are there some opportunities for M&A in terms of valuations becoming more reasonable that you're starting to explore to a greater degree?
Yes. On the first part, Mark, I mean, I guess I hear that from you as a question just around the efficiencies that we're able to drive in the business from the use of automation or AI in areas like engineering, and we've talked about this a little bit before. But I guess I would start by saying, going back to Ryan's comments, with free cash flow up 26%, I mean what you're seeing across the business is our ability to drive a level of continued productivity and efficiency increases across the business, and you see it show up in the free cash flow.
And that comes from all kinds of different places. One of them is driving automation across the business, and part of that is utilizing AI in areas like engineering, but we're also using that from a broader operations perspective to help create a better, faster, more engaged client experience that is still driven by our service team. And so I think that's part of the story that you're seeing play out as it relates to our profitability increases in both adjusted EBITDA and free cash flow. So I think that's a significant part of the story.
M&A?
Yes. From a capital allocation standpoint, I mean, I think we have always been focused on looking for areas in M&A that would be able to drive our product road map faster, further speed time to market with critical solutions that we think are really strategic. And I think that opportunity continues to exist. We continue to focus on it. But I think our threshold for what makes sense for us has not changed. I mean I think you see valuations sort of ebb and flow in any given quarter from a target perspective. But I mean, I think our threshold for being able to find solutions that make sense for our platform that will add value to clients and that we can tightly integrate, those are still the things that we're focused on. And if we can find things that will add value and that will speed our time to market, then those are the things that we'll continue to be interested in.
Our next question comes from Siti Panigrahi with Mizuho.
I just wanted to ask about employment level. First, what you saw this quarter, I mean, in December quarter employment level? And what's baked into your guidance?
Siti, it's Ryan. Good to hear from you. A lot of stability in employment levels, very similar to what we called out in overall demand environment. So we continue to see year-over-year workforce levels up modestly in Q2, spot on to what we saw in the first quarter. So continue to watch and see those numbers on a weekly basis, but have seen a lot of stability and no real change, and I think that extends into January as well. We continue to have an assumption in the back half of the year of flat employment levels year-over-year, which would be a slight degradation from what we've seen in the first half of the year.
Okay. That's great. And then at a broader high-level question on employment. We keep hearing from people around saying that how AI is going to disrupt in terms of employment, more layoffs coming. How do you -- what's your view on that? How exposed or not exposed Paylocity is?
Well, I think just to give you a couple of thoughts. I mean, I think we don't have any specific vertical concentration. And so I don't think we have any particular exposure given any concern that anybody might have about a particular vertical being disrupted. And I then go back to Ryan's commentary that he just shared around us seeing things be relatively stable despite any of the commentary that's out in the market. I mean we've seen stability. And I think if you go back to the commentary most recently from any of the large providers, you hear the same thing. So I mean I think what we see in real time is stability across the employees in the platform in our business, and I think that's what you hear from others as well.
Our next question comes from Scott Berg with Needham & Company.
Nice quarter. I have 2 non-AI questions. I hope you're ready for them. The first one, I guess, is any commentary on win rates since you've had Paylocity for finance and asset management, IT asset management out in the market. I heard someone in the ecosystem tell me that they're seeing some at least chatter around it that people have some interest in it. And I just don't know, it's early, obviously, but didn't know if you're seeing any changes to your win rates based on having the availability of those modules.
Well, I think we've been -- going back to my prior comments, I mean, I think throughout the first half of the fiscal year, we've been really happy with how we've performed overall from a go-to-market standpoint. I think we've seen a relative level of consistency in win rates. I do think, though, that there's a few things in the market, Scott, that are helping. It's sometimes difficult to have perfect attribution as to what exactly those things are contributing and how much, but I think they're all positive. So I think the differentiation that we're able to create through things like Paylocity for finance, I think that is in the helpful column. And I also think it helps from an incremental ARPU standpoint.
I would say the same thing with respect to our IT solutions. I think it's helpful from a differentiation perspective, also helpful for ARPU in pretty early days for each of those. And then I think the other thing that we've seen momentum on is our relationship with brokers, which has always been strong, but I think we continue to see momentum with the broker channel. And so I think all of those things are positive in addition to just the overall value prop of the platform. And the execution from our teams, I think, was really strong in the quarter. So I think there's a lot of positive there against a fairly stable demand environment. It's tough sometimes to create perfect attribution on those things, but I think that's the overall picture.
Fair enough. And I guess from a follow-up perspective, now that we've kind of seen what the impact of the tax law changes were on the business in the last quarter, which I assume had some maybe catch-up for the year a little bit, was there any debate or any conversation around maybe taking some of those cash flows and trying to invest that in other aspects of the business versus just harvesting them? I know it's just accounting treatment and timing and et cetera. But you guys already generate plenty of cash. So my guess is probably there wasn't a lot of thought there, but I didn't know if there was anything that you thought of that you could maybe spend on that would be worthwhile in the short term.
Yes. I mean I think -- just echoing Ryan's commentary of free cash flow being up 26%. I mean, I think we're really happy with how we've been performing in driving that type of free cash flow leverage. I don't think though that, that is coming at the expense of the things that we think we can and should invest in across the business to create better client experiences and to drive future growth. So I think we're really happy with what we've been able to both drive down into free cash flow, but while also investing in the things that we need to and want to and think that there's great opportunity around in the course of the full year. And I think that includes a lot of the things we talked about, new product development focus in our product and tech teams, a lot of things within the existing core of the solution. So yes, I think overall, pretty excited about the investments that we're making across the business, not coming at the expense of also driving free cash flow.
Our next question comes from Samad Samana with Jefferies.
I guess one that I wanted to ask about is if you think about customers in a more muted hiring environment, presumably, if they're hiring less and/or there's less people to hire, what are they focused on? Like are they either redirecting within the HR tech budget and/or are they redirecting that HR tech budget somewhere else? And then I have a follow-up question.
Yes. I mean I think we've seen -- going back to Ryan's commentary, I think we've seen a relative level of stability across the market from an employees on the platform perspective. And I think the clients that we're serving today and that we're talking to from a prospect perspective are focused on, again, going back to the fact that we have average client size around 150 employees, they find significant value in a single vendor providing a broad swath of solutions on the platform.
And echoing some of Steve's comments earlier, they derive a lot of value about the actual service that we're offering, particularly as we come through this time of year. So December is certainly a high point from a client service interaction perspective. And you have a huge amount of volume coming through the system in January with new business coming on to the platform.
So I mean, I don't think there's a significant shift in terms of the value prop that clients in the core of our market are looking for. They're looking for a partner they can trust. They're looking for breadth of solution and a platform that will serve their needs and is purpose-built for their use cases. And I think we're continuing to deliver all of those things and focused on driving a level of automation and productivity and efficiency and usability to them that I think they value more and more by the day. So I think that's probably how I would characterize the overall state of engagement with clients.
Understood. And maybe just a follow-up in a different direction. Just as I think about the pricing environment, we've seen, with different software vendors either raising price, especially over the last couple of years. I know price increases are just a normal course of business. But how are you seeing customer reaction on renewal to either price increases and/or reduction of discounts? Any change in behavior versus prior renewal cycles and anything that we can extrapolate from that?
No, I don't think we've seen any change there whatsoever. I mean, it's been very, very stable from that perspective. Although we typically look at price in the springtime as we did last spring and as we will again this spring. And from the time that we would have looked at it last spring, I don't think we've seen any meaningful change.
Our next question comes from Brian Peterson with Raymond James.
This is John Messina on for Brian. Maybe a follow-up to Terry Tillman's question earlier. As you look to deepen the penetration of finance and IT over time, what are the key execution milestones we should look for over the next 18 to 24 months to measure success there? And how are sales cycles for those products either landing or expanding versus the traditional HCM modules? And then I have a quick follow-up.
Yes. So taking that apart, I mean, I think when we're talking about the addition of those solutions to new clients that are coming on to the platform, the sales cycles are right in line with what we would have typically seen from our average client size. I mean that could be in the 30- to 45-day window for the heart of our market and go-live times in the 4- to 6-week time frame or something in that ZIP code. So there's no meaningful deviation from those products with when they're included in new deals coming on to the platform.
And then from a back-to-base perspective, I mean it depends on what the specific product or company is, but those are usually fairly quick time to value in terms of a client buying those -- client within the client base buying those and being able to get them live on them. And depending on what it is, I mean, a lot of times, there's fairly limited implementation. So I think that's what we've seen so far. Remind me if there's other parts of your question that you want me to hit on.
It was just on measuring success from the outside there on the penetration rate of those products across the base.
Yes. I mean, I think from a -- what we've always described as targets for success for new clients or new products being launched is if you can get into that 10% to 20% penetration rate over a 3-, 4-, 5-year period of time. And I don't think it's any different from those. I think we're on track to get to those milestones with each one of those products or product areas. And so I think we're really pleased with the traction that we're seeing in the path that we're on. And I think what you see play out overall over time is our ability to continue to win new deals and continue to grow our client base in a fairly consistent fashion year-to-year, while also continuing to drive ARPU. So I think those are overall the results that we've been really targeted on.
Okay. Really helpful color there. And then with the announced consolidation in the industry, just can you share any impact the consolidation is having on pipeline, win rates or go-to-market efficiency? The execution seems really good. But just trying to get at what extent you're maybe benefiting as competitors are navigating that M&A activity.
Yes. I mean, again, some of the attribution is challenging probably. But I think overall, the execution -- I appreciate your comment. I think the execution has been very good across both our sales and ops teams in particular. And I think we see momentum in the business coming through selling season. And I think January, the same thing. I mean we saw momentum with new deals coming on to the platform. So overall, I think the business has executed well.
I think our go-to-market and ops teams have executed well. And I think overall, that's what we're really focused on to the extent that there's disruption in the market because of one company or another going through an M&A transaction. And I think we stand ready to perform for our clients and perform for the prospects that we're bringing on to the platform. And I think if we can maintain that focus in the case that others lose theirs, we'll be well positioned to take advantage of that. So overall, just really happy with the level of focus and the execution that we had in the quarter and year-to-date.
Our next question comes from Jared Levine with TD Cowen.
To start here, can you talk about Airbase upsell progress year-to-date versus expectations and your expectations for the second half of the year here?
Yes. I think they're right on pace with our expectations, both through the first half of the fiscal year and from what we can see for the back half. So I just commented on that a few minutes ago. I think overall, pretty happy with the progress that we've made. V1 of the integrated solution was launched in July, so not all that long ago, but I think we're pretty pleased with what we've seen and believe that overall, I mean, it's a story that helps with differentiation, believe that, that's a meaningful area of differentiation for prospects that we're pitching. And I think it's been part of the reason that we've had such a successful first half of the fiscal year.
Got it. And then, Ryan, for a follow-up here. In terms of the adjusted EBITDA guide, you didn't pass through all the 2Q beat here. Anything to call out in terms of timing? Because I think there was a similar dynamic with 1Q, there was some timing call out in terms of not passing through all the beat with the prior print. But just with this print, what would you call out here?
Yes. I mean I think as we set up the year, on the August earnings call, I think the context we provided is if you look back to the last 24 months specific to adjusted EBITDA, we have driven several hundred basis points of leverage, definitely ahead of where we would have expected to be and have been really happy with those results. And as we guided in August and have now updated in November and here in February, we've increased margin each quarter. But the bias, I think, is to continue to drive some reinvestment back into the business. So you're seeing us reinvest some of those dollars back into R&D, back into sales and marketing, because as you've heard on the call, we feel really good about the progress in each of those teams, and we want to reinvest in upside that will drive continued growth in the back half of this year and on to '27. So I think that's the context, and that is how we're operating this year.
Obviously, you are seeing outsized performance from a free cash flow standpoint, as we've talked about. So that is not something that we have historically guided to. But when you think about free cash flow specifically and the updated target of 25% to 30% free cash flow margin against a TTM number of 24%, we are quickly moving to the high end of the prior range and not too far away from the updated range. So continue to believe like we have the ability to balance reinvestment, but also continue to take margins up on a multiyear basis.
Our next question comes from Raimo Lenschow with Barclays.
This is Sheldon McMeans on for Raimo. I just have one here. The perceived AI risks in the market have been brought up multiple times on the call. And as you mentioned, things are relatively stable for you. However, we're seeing announcements from AI companies that are moving software stock significantly. And to that point, can you speak a little bit more to some of the specific ideas on why AI advancements are not as big of a risk for your company compared to what maybe some of the recent price action may suggest.
And you talked about the moat around your service org. And are there a couple of other areas you could point out to? For example, the banking relationships and payment rails are not -- you can't buy a code, something like that. Payroll companies need a certain scale from a balance sheet perspective on the float side, or that simply just throwing a bunch of expensive GPUs at a payroll run just isn't efficient and doesn't make sense. And yes, as I mentioned, you touched upon this already, but I think we need some more handholding here.
Sure. So I think you hit some of the points. Let me start with, I think AI can certainly improve our client experience in a number of ways, make the software easier to navigate, make the data more accessible, provide additional use cases where we have an opportunity to be able to expand our footprint and drive ARPU. All those things, I think, are opportunities in front of us.
I think on the concept that some company is going to quickly kind of build a replacement product, there's challenges to that. And so you mentioned one, there is a lot of interaction with the customer. And so they call us, we e-mail interaction. There's projects that we do on their behalf. Implementation is largely a handheld process where we lose money on implementation, right, to be able to bring the customer on board, which is well worth it when we think of how long we retain them for. So the service is absolutely an element.
The other thing is we interface with thousands of agencies on the back end from a tax filing perspective. So local agencies, state, federal agencies, those formats change, the rules change, you're constantly changing your engine. And those are all deterministic calculations. They're not something that you can do and be probably right. And they require a fair amount of investment in testing. And so another example of where AI at least today is really not necessarily suited to be able to solve that problem most efficiently.
And you even got into a little bit of the capital structure behind that. To do that with an AI model and to be able to make the capital investments, it's much easier to be able to have deterministic algorithms to get you to that answer. And so as we think of this in a layered approach, the service capability that we have, the fact that we've got the data from a system of record perspective that allows us to continually expand our use cases, AI making those even better. And then the fact that we're moving billions of dollars through banks and to thousands of tax agencies across, we believe all are natural moats that we have and certainly many of our competitors have.
And again, I'll just end with, we see AI as a big opportunity. And we certainly see an opportunity to be able to drive utilization, make our products easier to use, even integrate broader use cases into other applications. And so we're excited about that opportunity. And we certainly understand the nature of the question, but I think there's more complexity behind the scenes in our business.
Our next question comes from Patrick Walravens with Citizens.
This is Austin Cole on for Pat. A lot of questions here have been asked. I wanted to ask 2 on the new offerings in HCM, maybe rewards and recognitions and some of the other offerings there. What is kind of the upsell motion? How has that performed recently? And what's the opportunity around some of those new offerings?
Yes. I think Toby summarized it, I think, best. If you look at our historical formula and average revenue per customer growth versus unit growth, those have moved a little bit year-by-year. But we've been fairly consistent on a year-over-year basis where unit growth is. And so you can see we're getting broader product adoption across the board that's really driving that incremental difference in terms of our unit growth versus our overall revenue growth.
And I would not call out a singular product. I think to be able to move the needle at our size and scale, our goal is we want to get to 10% or 20% penetration for early products, things like reward and recognition. And then we want to move that to 30% and 40%. And then you've got products in our portfolio where we're seeing 70% and 80% adoption. And for those products, we think about what's the opportunity to be able to potentially add plus offerings or get more value from product enhancements that allow us to be able to continue to increase that average revenue per customer from those modules.
So we see a ton of opportunity within the HCM category. Those continue to be probably because they're generally bigger and been around longer, the bigger driver today. And then you've got earlier in that product portfolio, things like IT and finance, still being relatively small, but off to a really good start. And so I think we're really happy with seeing our product strategy resonate in the market and see the adoption across our client base.
Great. And then just as a quick follow-up, there was a comment made about the AI assistant monthly usage increasing 100% quarter-over-quarter. How should we think about that metric and maybe how it compares to your guys' expectations and that going forward and as a catalyst for some of that upsell as well?
Yes. So our strategy is to continue to embed AI across the suite, really adding additional use cases, increasing flexibility and making the assistant more powerful over time. So certainly, part of that utilization increase is the features that we've added. We talked about the policies and procedures. We talked about third-party content, whether that's Department of Labor, IRS or state websites, and really helping our clients not only answer their questions, but in many cases, save them time by answering a bunch of their employee questions. And so that's been really positive.
We see an opportunity to continue investing in AI, adding additional use cases and really driving agents experiences that are going to really embed multistep processes into single clicks that's going to be able to drive insights and anticipate what their next steps are going to be, all of which is part of our goal, which is to be able to save our customers' time, so that they can really spend time with people versus spend time on administrative tasks. And so we're really happy with where we are, how that's really resonated with our customers, and we would anticipate that, that single kind of text box interaction that you see in AI assistant is going to allow customers to do an increasing number of things over time.
Our next question comes from Jason Celino with KeyBanc Capital Markets.
This is Zane Meehan on for Jason Celino. Just 2 quick ones for me. One of your peers noted that they had been seeing slightly smaller lands for the initial lands for new customers, maybe due to macro or increased budget scrutiny. Is that anything you saw in the quarter? Anything new there?
No. We haven't seen that at all. I think we've seen a huge amount of consistency from a go-to-market standpoint and new business being brought in during selling season and really happy with the performance that we've seen there. And I wouldn't call out any difference that we've seen from that standpoint.
Great. Good to hear. And secondly, I believe last year, second quarter, you noted seeing a little bit of pull forward. Did that dynamic reoccur this quarter? Just anything that might have pushed or pulled out of the quarter?
No. I don't think we saw anything this quarter. And what we mentioned last year was extraordinarily small, which we noted at the time.
Our next question comes from Steve Enders with Citi.
I guess just to start, it sounds like you had a good strong selling season. I guess what are you seeing kind of in the forward pipeline? And maybe how are kind of the new appointment requests or kind of the other forward leading indicators kind of looking for pipeline development?
Yes, I think they've been really stable. So I mean, I think going back to prior comments, I mean, really, really happy with the team's execution from a go-to-market sales perspective in Q1 and then through selling season. I think we've seen the demand environment maintain as stable. And there's nothing that I would really call out in terms of changes there. And I think that's also -- so I think that is a big part of what allowed us to overperform relative to expectations for both Q2 and the first half. And I think that's also what gives us the confidence to carry that through from a raise perspective on the year. And I think to your question on activity and pipelining, I mean, I think our confidence in that carrying forward from selling season is also what gives us the ability to take the year up. So I think we feel pretty good in that respect.
Okay. Great. And then just on the broker channel side of it, I guess, have you seen kind of any changes in terms of the number of opportunities or maybe the share of opportunities that you've been able to capture within that channel? And then how does kind of the new solutions and capabilities that you're releasing here to the broker side, how does that maybe impact how you're thinking about that kind of go-forward opportunity? And I guess, how it could change the number of opportunities coming from the brokers?
Yes. I mean I think we've always had a great relationship from a broker standpoint with that channel. It's consistently been more than 25% of our new business referred from that channel, and that continued through the course of the first half of the year and through selling season in Q2. Just directionally, I think we've had great momentum over the last year with the brokers in particular. And I think there's been some disruption from a market perspective with certain other competitors that have played in that space before. But I think we've gotten the benefit of some of that. I think we have great momentum. And I think part of that is our execution and focus and value-added delivery to that channel, and part of that is also focus there from a product perspective.
So Benefits Guided Setup is a product that we've launched. And I think that is certainly one that accrues to the benefit of brokers being able to give more help and service to their clients. So I think we continue to focus on that channel in every respect, whether it's from a go-to-market standpoint, from a service standpoint, being able to partner with them and service their clients, and from a product perspective, launching new products that are not just useful to clients, but also helpful to the brokers.
Our next question comes from Matt VanVliet with Cantor.
Just looking towards the rest of the year and even into fiscal '27, curious where you feel you are from a sales capacity and overall market coverage, especially with the addition of Paylocity for finance and IT there and just kind of how you think you can continue to meet the demand in the market?
Yes. I think overall, we feel pretty good about our coverage. I mean, I think as we've said for probably the last 18 months or so, we've been really focused on making sure that we have adequate coverage across the opportunity set, but also that we're continuing to focus on driving productivity across those teams. And I think we're really happy with what we've seen so far this fiscal year from a sales productivity standpoint.
And I think that's also a big part of what helped us perform well in Q2 and through selling season. And that's also a big part of, I think, what gives us confidence to take the year up for quarters 3 and 4 as we're looking ahead. I feel pretty good with where we sit today in terms of go-to-market investment and the productivity that we're seeing from those teams.
And then a quick follow-up on the broker channel. You've obviously seen better momentum there, and you highlighted some disruption from competitors. But in terms of resource allocation, is there still more to be done in terms of total broker coverage? Or is it now just kind of leaning into those that have greater, I guess, success of selling through Paylocity and how you do that -- kind of how you leverage that relationship there? And within that, have win rates gone up at all given some of that disruption in the market?
Well, I think from an execution standpoint, it's all of the above. I mean it's always been an important part of our selling motion. And it's an important part of the selling motion in the field with our reps and building those relationships at the ground level, also managing them from a corporate perspective. But a lot of that work is in a lot of the partnership and a lot of that success is driven in the field with and through our reps. And I think it is continuing to drive that focus from an execution standpoint, it is continuing to invest in the things that the brokers find the most value in.
That's in part the relationship in the field. That is in part the service that we provide to our clients, to our mutual clients and the clients they refer to us. And it's in part being a good partner to them as clients go through implementation and service. And it's continuing to also drive the delivery of a platform and a solution set, including new product launches like Benefits Guided Setup that add value to them and give them the ability to add more value to their clients. So it's all of the above.
Our next question comes from Jacob Smith with Guggenheim Securities.
Retention has been consistently around 92% over the past couple of years. But as you look at the elements from cross-selling Paylocity for finance, expanding IT offerings, getting greater AI adoption across the platform, how do you see that retention rate evolving over the next few years? There's structural reason it should move higher as customers become more embedded across HCM finance and IT? Or are there any offsetting factors we should be mindful of? And maybe related to that, too, are you seeing any early evidence that customers who adopt multiple modules have different churn characteristics than single product customers?
Yes. Our retention rate has been north of 92% for over a decade. And I think we are very, very happy with being able to maintain that level of client retention. Huge shout out to our operations and service teams that work really hard to maintain those relationships with our clients and partner with them, and particularly coming through this time of year when December and January is the biggest 2 months that we have for client engagement and client interaction.
So I think overall, our belief has been and has played out that the more value that you can add to clients, whether that's through the adoption of a broader part of the platform and coupled with our service model and our service teams, that's the recipe for success. And I think that's a large part of the reason we've been able to maintain those retention rates for such a long period of time. And I think that is a reflection of the value that's added from an overall platform and service perspective. So really pleased with our ability to maintain those levels over a long period of time.
And I'm not showing any further questions at this time. I'd like to turn the call back to management for any further remarks.
Well, thank you very much. I really appreciate everybody joining the call and your interest in Paylocity. And I want to send a special shout out to all of our teams and all of our employees helping our clients through year-end and onboarding in January. Great job. Very much appreciate all the effort. And I hope everybody has a great night. Thank you.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect. And have a wonderful day.
Paylocity Holding Corp. — Q2 2026 Earnings Call
Paylocity Holding Corp. — Barclays 23rd Annual Global Technology Conference
1. Question Answer
All right. I see the time has started. I -- can everyone hear me Okay? Great. Yes. Good morning, and thank you for joining us here today. For those of you who don't know me, my name is Sheldon McMeans, and I help support Raimo with our software equity research effort here at Barclays. I'm pleased to be joined with Ryan Glenn, CFO of Paylocity, on stage with us today. Ryan, thank you for being here.
Absolutely. Yes. Thanks for having me today.
Yes. Great. So to get started, I think investors are largely familiar with the Paylocity story, if not, reach out to us, and we can get you up to speed. But to get right into it, you recently just announced your Q1 fiscal year '26 results. Could you share some of the highlights in the quarter and how it played out for you?
Sure. Yes. We were really pleased with our first quarter fiscal year results. We had strong recurring revenue growth of about 14%, total revenue growth of 12%. We raised our guidance by more than our beat across revenue and profitability. We continue to both drive durable revenue growth as well as increase profitability. We continue to be active with share repurchases. So we were both active in Q1 as well as planning to do so over the balance of the year. So really good start to the first quarter. I think top of mind for investors is always a macro and demand environment, and both of those have been stable. So we see client workforce levels up a touch year-over-year, slightly better than expectations. Demand environment continues to be stable. So good start to the year. We're really pleased with the team's execution and feel like we're positioned as we head into the busiest part of our year with January being the biggest month of new client starts. We feel like the teams are very well positioned for the balance of fiscal '26.
And another thing was with the quarter results, you came out with some new long-term targets and not only performance in the quarter, but also maybe something you're seeing broader in the environment that's giving you confidence to raise those targets. So I would love to hear a little bit about that and what underpinned some of those decisions?
Yes, absolutely. So we had set our prior financial targets in August of '23, so just over 2 years ago. And we made really significant progress, I think, across each of those key targets. We've driven several hundred basis points of EBITDA and free cash flow leverage. We continue to expand adjusted gross margin, continue to drive strong and durable revenue growth. And I think as we looked at the start we had the fiscal '26 with over 110 basis points of operating EBITDA leverage, strong gross margin leverage and I think, starting to see the early benefits of both AI and automation benefits to our operational teams as well as efficiencies within our broader business. I think we looked at the trends that we're seeing and where we were relative to the prior targets and I think increase those, really an acknowledgment of the progress we've made as well as the opportunity and optimism we have around what the profile of this business can look like over the next several years. So we're really pleased with the start to the year and feel like we have a line of sight over a several year basis to continue to improve the financial profile of the business.
Yes. Understood. And going back to what you said earlier, macro certainly remains a key point of interest for investors. One of the things that we get a lot is a lot of questions on employment growth and how that affects your business and peers in the industry. You talked about how you saw client workforce levels up a touch. And I think maybe people put too much weight into that than maybe we should. And so maybe asking the question a little bit differently. It seems like macro was stable. You talked about that, but the employment data has been a little weaker in the last few months. When we're in an environment like that, maybe not as much robust hiring, how does that affect just more of the normal HR payroll buying decisions and kind of the activity there. Can you speak to that?
Yes. As I mentioned earlier, we continue to see a very stable demand environment. Our average client has about 150 employees. We've continued to move upmarket and have success with larger clients. But for the most part, we see a lot of stability over time in the demand environment. As you know, HCM and broader HR offerings are -- keep the lights on software. So these are not really decisionable related, decisions that companies are making within their HCM product suite. So we see a lot of durability in the demand environment. And I think equally so, we've been pleased with not only the team's execution, but our ability to tell a differentiated story. So across HCM and now finance and IT, being able to go to market with a collective set of offerings with powerful workflows across each of those products, deep integrations. I think we're able to tell a very different story and that has accrued to our benefit in the first quarter. And as I mentioned earlier, I think one of the elements that gives us a lot of optimism as we head into the back half of the year.
Yes. Speaking of that, we're certainly in the big buying, end of year selling season right now, and you recently had your big Elevate Conference. I think you hosted thousands of businesses at that virtual event. As you think about maybe some of the activity or demand signals that came off from the back of that, can you speak to that generally and how that gives you confidence in this part of the selling season and into next year?
Sure. So we had a virtual Elevate Conference, which is what we've had for the last several years, really strong engagement from both clients and prospects, really strong attendance at those events. I think those are opportunities both for us to really educate clients around the product as well as talk specifically around what the product road map could look like, features and functionality, both with new products as well as the existing base as well. So a lot of energy, a lot of momentum and great opportunity to have conversations with our clients around where the business is going.
Got it. And so maybe just -- is that more of an existing company opportunity for you, new client opportunity? Is it -- maybe sometimes a little harder to get a new client to join -- like recognize and join that event. How do you...
It's a mix of both. We do have strong participation, both from the existing 40,000-plus clients that we have today. as well as an increasing number of prospects that engage with us at that event. We also have several other events throughout the year in ways to be able to talk with prospects either in person or virtually. So it's a combination of both. And I think the outcome or message that I saw from that event is a lot of energy and interest across what we're doing, whether that is within the AI or automation side within the HCM side of the business. Some of the early offerings across finance and IT as well.
And you've alluded to it there, and you continue to take market share in the HCM payroll space. First, how do you think about industry growth? Is that high single-digits. How -- like what's the level that you about if you grow faster, you take share in the market? And then you did allude to it a little bit, but what are some of the driving factors that allow you to keep taking share? And what gives you confidence to be able to keep doing that going forward?
Yes. I think the HCM market continues to grow. I think there's been a multiyear tailwind there. We see that both with our existing clients as well as prospects continuing to drive not only unit growth, which we've been able to drive in the mid- to high single digits for the last several years, really high single-digits as well as increasing average revenue per client, and that is coming from both new and existing clients buying a broader array of our product suite. So as we continue to expand the HCM offering, we're able to go back to existing clients and upsell them. As we continue to expand the product suite, likewise, we're able to go to larger clients as well and land larger deals. And as you think about -- early stages, but as you think about the offerings across finance and IT, that is another opportunity for us, not only differentiate against the competitive set, but also go back to that client base as well as prospects and sell them those collective offerings.
And I believe you've grown sales head count about 8% in the last 2 years entering the year, and I talked about in the most recent quarter, 14% recurring growth, which is great to see. You -- from that perspective, you're seeing revenue per rep continue to climb higher. And so why not expand sales head count more aggressively? That's always a question. And how are you thinking about the letting that efficiency fall or territory expansion? Are there any limiting factors like I can only expand so quickly in a certain ZIP code to let that digest. How do you think about that?
We've been really pleased with the start to the year for our sales team. You saw that, as we talked about earlier in our Q1 results, the -- I think confidence and momentum we have in the business to be able to raise the year by more than the beat and then I think, yet still feel good about the guidance we have over the balance of the year, such that if that team continues to perform well, we'd be in a spot to be able to have really good results over the balance of the fiscal year as well. So it's always a little bit of a balance I think for us, the bias is towards driving revenue growth. We continue to invest back into that sales team, whether that is people, process or technology investments to put our reps in the best position possible to win. You see us continue to invest back into the product. So we grew R&D investment larger than revenue growth in Q1. I think that continues to be an area that we will invest in over the balance of the year. And as you think about attracting and retaining the top reps in the industry, you've got to have the best product, right? You've got to have not only the best product, you have to have strong operations as well, and you have to have a really good go-to-market motion. And we feel good about across the board, the ability for those teams to execute and the momentum that they have.
Yes. Understood. And maybe getting towards the last end of the macro demand type questions. But you talked about solid unit growth, that high single-digit that you've had. When you think about this industry, it's certainly, a lot of growth, but maturing. You've been around since, I think, '97. '98, and then you also have some newer entrants in the market, kind of the rippling Augustus of the world. When you think about those client wins, are they coming from different sources? Are you increasingly winning from kind of those Gen 2 players at all got a lot of their client wins from the legacy players in the past? Or how should we think about that?
Well, I think as you look at the revenue growth, the recurring revenue growth that we had last year and the guidance this year, I think to be able to drive that level of durable growth, it's a combination of growth, unit growth and ARPU. So not over relying on one or the other. And we've been able to strike that balance pretty well, which is adding clients on an annual basis amidst very strong client retention as well, but also being able to drive increasing average revenue per client. And the market is competitive for sure. It has always been the case. We see a lot of stability across the competitive set. Win rates are stable. I think who we're taking business from has been stable as well. So you do see probably some changes in the industry as you look out over the last 7 to 10 years. But in the short term, it's been not only a stable demand environment. But I think the competitors that we're seeing in the win rates, we haven't seen any real changes there.
Yes. Understood. And one of the biggest debates right now for software investors is how AI is going to affect the overall space. And there's certainly some fears that on the AI application side, there are some areas that are going to be roadkill, certainly don't see that for your space. But when you think about that idea, how should we think about the defensibility of your business in the moat against newer AI technologies. I'm sure you can't just vibe code a payroll engine that complies with 16,000 different tax jurisdictions in the U.S. But is there -- could you help us with that debate? And certain -- are there certain areas of your platform that you can call out, maybe such as payroll compliance that would be difficult for a theoretical AI start-up to come in and start taking share.
Sure. So I think for context, we continue to invest, as I mentioned earlier, at a significant level back into the product. And we have elements of AI embedded in every single one of our products today. We've talked about this year, incremental investment back into the product. A lot of that is to drive AI and broader automation efforts. So it's certainly embedded in what we do today. We're seeing the benefits of that within the product suite we're seeing. As I mentioned earlier, strong client retention as well, all of those accruing to our benefit. I think to your point, there is a significant amount of defensibility across the HCM market. As you had referenced, payroll is highly complex. So you've got 10,000-plus taxing jurisdictions. If you want to be a vendor across the U.S., you have to be able to process payroll in all 50 states. There is highly complex regulatory elements as well. And remember, as you think about the growth that we've had over several years, it is not just a payroll story. So we've been able to grow the business by expanding deeper into traditional HCM functionality, now beyond traditional HCM functionality and clients in our target market of 10,000 to 5,000 employees, they are not looking for individual best-of-breed point solutions. They're not just looking for a payroll provider or an HR or benefits provider, they want a collective platform with a single vendor that is fully integrated as well. So there's a real differentiator there in being able to have the full suite. I think the other key element that is not always appreciated is this is a high-touch service and implementation business as well. So with an average client of 150 employees, they are interacting with you on a regular basis. They are consulting with you on different things that they're doing across their business. They are processing payroll with you, right? So we have relationships with several banks who're processing billions of dollars of client transaction on an annual basis. So there is a significant amount of back-office and scale required to be able to do that beyond just sort of your core payroll engine, which in and of itself has significant complexities as well.
Right. Yes. Understood them. I feel like that's underappreciated a little bit here. So sticking on that AI topic, you recently rolled out your next-gen AI assistant. Would love to hear -- I know it's early there, but would love to hear a little bit about how the reception has been? And any early usage trends or anecdotes on how that's affecting client engagement and helping your solution?
Absolutely. Yes, we called out on the earnings call last month, significant year-over-year increase in adoption and usage within clients of our AI assistant able. They're able to leverage the AI assistant to both from the administrative standpoint as well as the client employees to be able to get answers to their questions more efficiently. So they don't have to engage with their HR Director and they don't have to engage with Paylocity. They're able to get questions answered in a more efficient way. And I think beyond the AI assistant, as I mentioned, there are elements of AI across every single product that we think, over time, absolutely will accrue to our benefit within the overall client experience as well as client retention. So we're absolutely seeing increased adoption and usage. I think it is one of the key elements that has and allows us to continue to differentiate as far as providing the most modern set of products. And we continue to see week-over-week and month-over-month increase adoption, usage and activity across the AI elements of the platform.
Interesting. And so one thing -- I did want to go a little bit deeper here. So it does seem like AI is changing how we consume software and it seems like that's only going to accelerate in the future. For example, with your AI assistant, instead of going through a drop-down list of the different modules, why don't I just ask the AI assistant for whatever answers and your solution is allowing that. How do you see that changing either the industry or maybe the monetization strategy that you have? And how do You think about that?
Yes. I mean I think for us, we, as I said, are investing across AI. And we think beyond navigation-related benefits, we think there are agentic capabilities over time as well. So real true business or strategic recommendations for clients. As an example, within our time and attendance module, being able to recommend the clients the right way to schedule their shifts for the hourly employees to reduce over time or to make sure that they have the right staff from a safety or compliance perspective to be able to curate learning paths within our Learning Management product based on time enroll or recent promotions or other performance-related feedback. So I think it is real benefits within the workflow across the product set, but also agenetic capabilities across each of the products that improves not only the workflows, but the ability for clients to get work done within our product and to be able to really provide a strategic set of HR and HCM products for those clients. So that is, I think, the path that we're focused on.
Got it. Got it. And you -- we talked about it a little bit, but you launched Paylocity for Finance Paylocity for Finance in July. Similar question there. What's been the early reception? Where are you in kind of your integration level there, selling it as like a combined Paylocity solution? And yes...
Sure. So we completed the Airbase acquisition. We're just past 1 year. The integration, I think, has gone really well. We're probably ahead of schedule and certainly realize the intended cost synergies at a higher level than we would have expected. So I think the integration has gone well. That is now in the hands of our sales reps for the last kind of 90 to 120 days. So still very early, but as we called out on the earnings call last month, that is trending as we would have expected. We see and continue to believe there's a lot of opportunity on a multiyear basis, not only with prospective clients, but being able to go back to the 40,000-plus clients we have today. And we think over multiple years, being able to get to 10% to 20% adoption is absolutely the right target. And in addition to the revenue or monetization opportunity, we think being able to tell a really differentiated story around not only what we can do across HCM, but now finance and IT, being able to offer in a single pane of glass, all of your labor and nonlabor spend. There's really nobody else in our target market that has that offering. And likewise, early days, just starting to go GA now, but what we can do from an IT standpoint across asset and access management, being able to leverage the employee system of record. We think there's certainly monetization opportunity there, but absolutely continues to be a way that we differentiate our story.
Understood. And so you have been seeing a trend of being increasingly pulled upmarket over the last few years. And it does seem like -- one, I would love to hear like oftentimes when we move upmarket, maybe especially to get 1,000 employees and above, like those type customers, there's more willingness for integrating best-of-breed solutions. You typically have more of a complex IT stack. You might have a different finance solution that's stand-alone, a different HR solution, et cetera. How does that comprehensive solution play up into that market strategy? It seems like the value proposition is resonating very well in kind of your core market, but how repeatable is that upmarket? Maybe let's just start there.
Sure. So we have definitely been pulled incrementally upmarket over the last handful of years. That has been one of the key drivers of success. I think our downmarket and mid-market teams have performed really well. But over the last handful of years, we've continued to expand and build out our enterprise team that's really focused on that 500-plus employee segment of the market. We increased our target market up to 5,000 employees. We have always had some number of clients in that 5,000 employee range and continue to have clients with greater than 5,000 employees. But as we've built out the entirety of the HCM suite, as we've moved beyond traditional HCM functionality, we have been pulled upmarket. So we've seen significant success there. The value proposition continues to resonate. So clients of that size absolutely realize and see the benefits of an integrated product suite across a single vendor. And over time, as you expand and add capabilities and features and functionality across that product set, I think that allows you to continue to have success. So as I think about going forward, that continues to be not only an area of growth for us, but certainly an opportunity over time within the finance and IT side, where we continue to increase attach rates.
Yes. Interesting. And one thing, I go to HR Tech every year. And I think there was 470 vendors there this year, 420 or 430 last year, 460, which is a lot of vendors. And when you just think about the general willingness for -- on the customer side for vendor consolidation, this is probably more of an upmarket type question. Are you seeing just more willingness like before I wanted these best-of-breed solutions. Now Paylocity has that solution, and I can just bring that together. And then does AI change that at all? Because when I think if I want a AI layer, if I have a bunch of different databases, that's going to slow that down.
Yes. I think we're still very early on the AI side. Our average client has 150 employees. So they're certainly seeing the benefits within the product set. But I think we're still very early relative to where AI specifically ranks in order of decision-making. But no question across our target market, clients see the benefit of having a unified platform. So whether that is a 50-person company, a 500-person company or a 5,000-person company, as you're able to expand features and functionality, as you're able to offer a set of products with fully integrated and tight workflows across those product set, they see the benefits of the offering. And I think that has been accruing to our benefit both with the increased success up market, but also driving increasing average revenue per client across the target market.
Understood. And so you've driven really strong margin expansion over the last several years, the last couple of years in particular. And you did raise the long-term targets as well. We talked about that earlier. How should we think about margin expansion going forward? And what are some of the key drivers for margin expansion? And within that specifically, when you're talking about -- I'll combine the next question -- when you think about AI and you're using that internally, it does seem like there's opportunity on the support side for that. But we also hear that you have best-in-class service levels and like that's something that you're known for, a differentiator. So how should we think about the balance of the AI efficiencies versus kind of maintaining that white glove type service that...
It's a balance for sure. And I think we have successfully and will continue to do thread the needle, meaning you got to do both. So you have to maintain high levels of client satisfaction. We mentioned on the earnings call, it continues to be the case, really pleased with client retention to start the year. So that team has executed really well. At the same time, we did talk about investments we're making across AI and automation to reduce case volumes, to be able to improve user experience, to be able to not only improve the overall product but be able to reduce the clients' need to actually engage with us to ask questions. And as you think about the benefits that we have seen in gross margin, the opportunity and optimism we have around being able to expand gross margin going forward, certainly, some of that is tied to AI automation as well as broader scale and pricing power as well as vendor consolidation. So we are really optimistic around the ability to expand profitability. As I mentioned earlier, I think the progress that we've made and the path we see over the next several years really gave us that confidence that now is the right time to increase those targets. And we think that we will have a very programmatic instruction approach over multiyears to be able to thread that needle, where you can still invest back into the client base, have that really high-touch service and implementation experience, but at the same time, be able to drive efficiencies and increase profitability.
Understood. And how do those interest rate trends influence that? Certainly, we -- and the subsequent impact on float revenue there? Certainly in a declining rate environment, that's going to be a little bit of a headwind to your profitability given that high-margin revenue. Should we think -- or how do you think about in terms of -- do you think about a certain level of ex float expansion per year and I'm going to ignore what happens in the interest rate environment if interest rates are going to be a headwind, do I -- would I be more willing to lean into a little bit more margin expansion and tapping areas of efficiency. Sure it's not as cut and dried and it depends on [indiscernible].
Yes. I mean, I think from a guidance standpoint, we have multiple rate cuts assumed in our guidance for this fiscal year. So we feel covered from a guidance standpoint relative to what may happen with interest rates over the balance of our fiscal year. And day-to-day, we run the business ex-float. And our expectation has and continues to be that there is scale and profitability ex-float within the business, which we have continued to demonstrate it. And to the extent you see a declining or increasing rate environment on a multiyear basis, I think those are elements that we consider. But at the same time, I think running the business ex-float allows us to invest back in the business to drive growth on a go-forward basis. So you don't want to be in a position where you're making very short-term decisions and stopping investments in R&D or stopping investment back in the go-to-market team that you look back and regret in 12 months. So it's a balance for sure, and we're certainly focused on overall profitability as well as probability ex-float. But day to day, we do run the business with float to the side. And with that, I feel like there is more profitability to increase and try to have a pretty prudent approach relative to where the rate environment may go.
And you've conducted significant buybacks recently. You talked about that earlier today. So how do you think about that? You've got a healthy cash position. You're generating a lot of free cash flow. It seems like you're able to finance a lot of the AI R&D and different things that you need through your strong margin profile. Is there -- how do you think about that capital returns and levels there? Are you targeting a certain payout ratio, dividend, how do you think about that broader decision?
Yes. I think at the highest level, we have plan to utilize the share repurchase program to offset dilution from annual equity grants. We have opportunistically been much more aggressive with buybacks more recently. So we've repurchased $500 million of stock dating back to May of 2024. As of the end of Q1, we had $500 million remaining under our current authorization, and we did call out the expectation that we'll be active to some extent going forward. So I would view it as table stakes to our capital allocation policy on a go-forward basis. We will have some level of buybacks embedded in our annual plan. And have the ability to sort of scale up or down based on stock price and overall movement in the market.
I'd just love to ask about M&A philosophy. You made the Airbase acquisition a little bit bigger than some of the tuck-ins that you've made in the past. How are you thinking about that in that build versus buy decision? And then when you think maybe a little bit on your ambitions on the IT side, like certainly, you have a great stronghold in HR, you've Airbase. IT, it seems like a little bit more organic development. So is there certain opportunities there? Or...
Yes. I think we approach the product set with a build, buy and partnership framework. The bias is obviously to build the vast majority of our products that we have built. But certainly, to the extent there are products that speed our go-to-market that we think our capabilities that fit really well with our -- whether that is our tech stack or the culture of our business and high-quality software, we are absolutely in a position across our balance sheet as well as cash flows to be able to be opportunistic. And that continues to be the case. So we are looking across each of our products as well as adjacency on a continuous basis. And we continue to be picky. So we've only done a handful of acquisitions over the last several years. But to the extent there's something of interest, we feel like we've got the team to be able to execute as well as integrate an acquisition going forward.
Maybe last question for me. I see we have a minute left here. Just an update on international. I know it seems like a large part of that strategy there is to be able to serve the larger multinational corporations that have some employees overseas. It does seem like we're also seeing a trend and I would say, maybe the last 5 years, post-COVID maybe accelerated this of smaller business being more willing to have the disparate [ workshops ], not everyone in the same ZIP code. So just an update there and how that's playing into your broader customer acquisition strategy?
Yes. So we made the acquisition of Blue Marble going back several years ago. That continues to be a differentiator for us. We've been pleased with not only how that business has performed, but also the capabilities that it provides because I think the trend that you're referencing is accurate. You are seeing, over time, even smaller businesses having interest. War for talent continues to be a struggle finding the right fits for certain roles has resulted in some clients turning to international hiring. And I think we feel good about the capabilities that, that offers. And I think over time, international more broadly would be something that we would look at potentially even closer.
Okay. Great. We'll end it there. We're out of time. Thank you very much.
Thank you.
Paylocity Holding Corp. — Q1 2026 Earnings Call
1. Management Discussion
Good day, and thank you for standing by. Welcome to the Paylocity Holding Corporation First Quarter 2026 Fiscal Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Ryan Glenn, Chief Financial Officer. Please go ahead.
Good afternoon, and welcome to Paylocity's earnings results call for the first quarter of fiscal '26, which ended on September 30, 2025. I'm Ryan Glenn, Chief Financial Officer. And joining me on the call today are Steve Beauchamp, Executive Chairman; and Toby Williams, President and CEO of Paylocity. Today, we will be discussing the results announced in our press release issued after the market closed. A webcast replay of this call will be available for the next 45 days on our website under the Investor Relations tab.
During the call, we will use certain non-GAAP financial measures as defined in Regulation G. You can find the related reconciliations to GAAP in our press release, which is located on our website at paylocity.com under the Investor Relations tab. We will also make forward-looking statements. Actual events or results could differ materially from those projected in our forward-looking statements. Please refer to our press release and SEC filings, including our most recent 10-K, which contains important factors that could cause actual results to differ materially from the forward-looking statements.
We do not undertake any duty to update any forward-looking statements. In regard to our upcoming conference schedule, we will be attending the Annual Needham Tech Week, the Cowen Virtual Human Capital Management Summit, the Barclays Global Tech Conference, the Raymond James Tech Conference and the Needham Growth Conference. Please let me know if you'd like to schedule time with us at any of these events.
With that, let me turn the call over to Steve.
Thank you, Ryan, and thanks to all of you for joining us on our first quarter fiscal '26 earnings call. We started off fiscal '26 with strong financial results with Q1 recurring and other revenue growth of 14% as our differentiated value proposition of providing the most modern software in the industry continues to see success in the marketplace. Total revenue was $408.2 million or 12% growth over Q1 of last year.
Our growth continues to be led by our ongoing commitment to driving innovation and providing the most modern AI-driven platform for business, highlighted by the recent launch of Paylocity for Finance, which expanded our market-leading workforce platform for HCM into the office of the CFO, which we have further expanded across IT. We are very pleased with the early response from both existing clients and prospects to the value proposition of managing all spend and key business workflows in a single AI-driven platform across critical company functions, HR, finance and IT, all driven by employee data, which contributed to our strong results in the quarter and the increased confidence reflected in our updated fiscal '26 guidance.
Our AI strategy is also setting us apart in the market and contributing to our strong financial results and increased guidance as we expand and deepen AI capabilities throughout our platform to deliver the next level of business impact and user experience. For example, at HR Tech in September, we announced the next generation of our AI assistant, which now turns everyday questions into instant action by providing users the answer, data or the workflow needed across both desktop and mobile.
With our AI assistant, users can now ask how many vacation days do I have left this year and immediately see their up-to-the-minute vacation balance with a direct link to submit a new request or a manager may say, "Show me open headcount for my department." And the AI assistant will show real-time openings for their specific teams or department and provide direct links for planning new hires, backfills or role transfers.
We believe these enhancements will help to further increase the value proposition of our platform and is beginning to drive wider product adoption across our client base by enabling an even more simplified user experience with direct access to answers and actions. To this point, in the past year, usage of our AI-powered features has more than doubled, including over 1.2 million questions answered by our AI assistant.
Our innovation also continues to be recognized by third parties as Paylocity was recently named as an overall leader across 10 HCM product categories in the latest G2 Fall 2025 Grid reports. I would now like to pass the call to Toby to provide further color on the quarter.
Thanks, Steve. As Steve noted, we continue to see strong demand for our platform across our target market, and we're pleased with the momentum of our sales team as we enter the heart of selling season as evidenced by our strong Q1 recurring revenue performance. We also continue to be pleased with the consistency of our referral channel, which once again delivered more than 25% of our new business in Q1.
The sustained success of our broker channel continues to be driven by our modern platform, third-party integration and API capabilities and because we do not compete against our broker partners by selling insurance products. We remain committed to investing in and supporting the broker channel with the goal of continuing to deliver real value and true partnership and support to our referring brokers and their clients. We also saw strong client retention in the quarter, which contributed to our strong financial performance and reflects our commitment to world-class client service and client partnership.
As Steve noted, our AI strategy has continued to progress, delivering predictive and actionable insights, generative AI functionality, the Paylocity AI assistant and a growing number of autonomous agents across the platform to drive productivity through task and workflow automation that goes beyond the basic search capabilities that are considered table stakes in today's evolving AI landscape.
Our continued investment in AI across our platform is driving increased adoption of our broader product suite with these new features resulting in simplified and connected user experience across HCM, finance and IT use cases, driving higher utilization and increased business value for our clients. While still in the early days, we are seeing this translate to stronger product penetration, higher average revenue per client and improving client satisfaction and retention. In addition to embedding AI capabilities within our product suite, we are also investing in AI and broader automation efforts internally to help drive greater efficiency and productivity across our business. For example, our engineering teams are now using AI coding assistants on a daily basis for code generation, testing and design mockups and are realizing increased productivity and code quality through these investments.
Similarly, our operations teams have seen a reduction in client case volumes, and our sales teams are investing in AI tools to drive efficiencies in our go-to-market motion to automate rep day-to-day activities. We will continue to invest in AI and broader automation and believe these investments will drive further efficiencies and provide for more time to focus on strategic and value-added work for all of our teams while also driving continued leverage in our business over time.
Next week, we will hold our annual Elevate Client Conference, where we will host thousands of business leaders representing HR, finance, IT and operations across dozens of sessions over the course of 2 days. At Elevate, we will highlight the continued investments in our differentiated AI strategy and our expanding platform capabilities, delivering automated workflows and seamless user experiences across the platform enabled by AI. In addition to our market-leading financial performance, our strong culture at Paylocity continues to be recognized externally as we were recently named to Times America's Growth Leaders 2026 list.
I would now like to pass the call to Ryan to review the financial results in detail and provide updated fiscal '26 guidance.
Thanks, Toby. Total revenue for the first quarter was $408.2 million, an increase of 12%, with recurring and other revenues up 14% from the same period last year. Our sales team had a solid start to the year across both our HCM and finance suites, and we were pleased to come in $5.7 million above the top end of our revenue guidance, with the majority of our revenue beat once again coming from recurring and other revenue, allowing us to raise our fiscal year guidance by more than our beat in Q1.
Our adjusted gross margin was 75.1% for Q1 versus 74% in Q1 of last year, representing 110 basis points of leverage as we continue to focus on scaling our operational costs while maintaining industry-leading service levels. We continue to make significant investments in research and development and to understand our overall investment in R&D, it is important to combine both what we expense and what we capitalize.
On a dollar basis, our year-over-year investment in total R&D increased by 16.4% when compared to the first quarter of '25, and we remain focused on making investments in R&D throughout fiscal '26 as we continue to build out the Paylocity platform to serve the needs of the modern workforce. In regards to our go-to-market activities, on a non-GAAP basis, sales and marketing expenses were 21.3% of revenue in the first quarter, and we remain focused on making investments in this area of the business in fiscal '26 to drive continued growth.
On a non-GAAP basis, G&A costs were 8.8% of revenue in the first quarter versus 9.5% in the same period last year, representing 70 basis points of leverage. Briefly covering our GAAP results. For Q1, gross profit was $279.8 million, operating income was $74.2 million and net income was $48 million. Our adjusted EBITDA for the first quarter was $146.4 million or 35.9% margin and exceeded the top end of our guidance by $11.4 million, resulting in increased margin guidance for fiscal '26. Excluding the impact of interest income on funds held for clients, adjusted EBITDA margin for Q1 was up 110 basis points over Q1 of fiscal '25, and we continue to be pleased with our ability to drive both durable recurring revenue growth and expanded profitability.
To this end, we remain focused on driving leverage by improving operational scale and through improved efficiencies resulting from our ongoing investments in automation and AI across our business, which are helping us scale our teams and providing the ability to focus on more strategic work, which is ultimately helping to drive increased adjusted gross margin, adjusted EBITDA and free cash flow.
Additionally, given the confidence we have in our business and our strong cash flows, in Q1, we repurchased nearly 1.2 million shares of common stock at an average price of $172.30 per share for $200 million in aggregate repurchases. Since May of '24, we have repurchased approximately $500 million or 3 million shares and with $500 million remaining under the current repurchase program, we anticipate continuing to be active going forward.
In addition to our expectations for continued growth in adjusted EBITDA and free cash flow, the combination of increased profitability and reduced diluted shares outstanding will drive continued expansion of earnings per share on an annual basis.
In regard to cash flows, we expect the impact of the recent tax legislation changes to benefit fiscal '26 free cash flow by approximately $65 million as a result of a reduction in our fiscal '26 cash tax payments, primarily driven by changes to tax deductibility rules for domestic R&D costs, and we continue to be pleased by our ability to drive the best combination of recurring revenue growth and free cash flow margin in the industry.
Looking at the balance sheet. We ended the quarter with $165.2 million in cash, cash equivalents and invested corporate cash and $81.3 million outstanding on our credit facility related to the Airbase acquisition with approximately $81.3 million repaid on our outstanding balance in Q1. In regard to client-held funds and interest income, our average daily balance of client funds was approximately $2.9 billion in Q1. We're estimating the average daily balance will be approximately $3 billion in Q2 with an average annual yield of approximately 360 basis points, representing approximately $27 million of interest income in Q2.
On a full year basis, we are estimating the average daily balance will be approximately $3.25 billion with an average annual yield of approximately 340 basis points, representing approximately $110 million of interest income.
In regard to interest rates, our guidance reflects the recent 25 basis point rate cuts in each of September and October with additional 25 basis point rate cuts in each of December, March and April. Note, our guidance reflects an additional 25 basis point rate cut during fiscal '26 versus our initial expectations for the year we provided on our August earnings call.
Before I provide our updated financial guidance, as a result of the confidence we have in our ability to drive durable growth, the significant profitability increases we've realized over the last several years, the long-term opportunity we see in AI and automation benefits and natural scale in our business, we are increasing our long-term financial targets as follows: Our revenue target increases from $2 billion to $3 billion; our adjusted gross margin target increases from 75% to 80% to 80% plus; our non-GAAP total R&D target remains at 10% to 15% of revenue; our sales and marketing spend target decreases from 20% to 25% to 15% to 20% of revenue; our G&A spend target decreases from 5% to 10% to 5% to 7% of revenue; our adjusted EBITDA margin target increases from 35% to 40% to 40% to 45%; our free cash flow margin target increases from 20% to 25% to 25% to 30%; and our stock-based comp target decreases from less than 10% of revenue to 5% of revenue, and we expect to make progress against these updated financial targets on a go-forward basis, and there is a table in our earnings press release that provides our prior and updated financial targets for reference.
In regards to our financial guidance for Q2 and full fiscal '26, for the second quarter of fiscal '26, recurring and other revenue is expected to be in the range of $378.5 million to $383.5 million or approximately 10% growth over second quarter fiscal '25 recurring revenue. And total revenue is expected to be in the range of $405.5 million to $410.5 million or approximately 8% growth over second quarter fiscal '25 total revenue.
Adjusted EBITDA is expected to be in the range of $131.5 million to $135.5 million and adjusted EBITDA, excluding interest income on funds held for clients is expected to be in the range of $104.5 million to $108.5 million. And for fiscal '26, as a result of the strong results we are seeing across our HCM, finance and IT solutions and our confidence in our ability to continue to drive competitive differentiation in our AI strategy, we are increasing all aspects of our guidance as follows. Recurring and other revenue is expected to be in the range of $1.605 billion to $1.620 billion or approximately 10% growth over fiscal '25 recurring and other revenue. And total revenue is expected to be in the range of $1.715 billion to $1.730 billion or approximately 8% growth over fiscal '25 total revenue.
Adjusted EBITDA is expected to be in the range of $615 million to $625 million and adjusted EBITDA, excluding interest income on funds held for clients is expected to be in the range of $505 million to $515 million, which represents approximately 40 basis points of leverage at the midpoint.
In conclusion, we are pleased with our Q1 results, the early success of Paylocity for Finance and the continued momentum we have across our sales and operations teams as we enter the busiest time of the year. Operator, we're now ready for questions.
[Operator Instructions] Our first question comes from Brad Reback of Stifel.
2. Question Answer
Can you all give us an update on the macro, maybe how things were trending over the course of the quarter into October and your headcount assumptions in the updated guide?
Yes. Brad, it's Ryan. I think, what we saw in the quarter was continued stability. So workforce levels at our clients were up a touch year-over-year, very consistent with what we saw in Q4, a little bit better than expectations. And from a guidance standpoint, continue to have the same philosophy. So we've assumed flat workforce levels over the balance of the fiscal year.
That was our experience, as I said, not only in the quarter, but through October as well and continue to run the same playbook relative to guidance. So I feel like if we continue to see strong execution, we have the ability to beat and raise and continue to feel like we've got a level of prudence embedded in guidance as well.
That's great. And then switching to the updated long-term guidance, and I appreciate it may not be able to perfectly parse the answer on this. But if you think about the natural scale of the business driving the upside versus AI benefit helping to drive the upside, does it skew more one way than the other?
Yes. I think, still early days from AI and automation. But I think, where we sit today, that gives us certainly incremental confidence on a multiyear basis. to be able to continue to drive leverage. We've always had confidence that this business will continue to scale. That continues to be the case.
You heard in the prepared remarks, Toby referenced reduced case volume we're seeing in our operational teams, all of our engineers using coding assistance. My teams are using it from a back-office standpoint as well. So not sure I'd parse out how to break out the leverage we'll see on a go-forward basis, but certainly seeing the early benefits both from a margin expansion standpoint as well as the ability for the teams to really focus on the most important elements of the business.
And our next question comes from Mark Marcon of Robert W. Baird.
Really nice quarter. Wondering if you can talk a little bit about the office of the CFO and the Airbase acquisition. Can you give us a little bit more dimensions with regards to like number of clients approach, what the go-to-market motion is? Any -- I know it's early, but still any sort of reading on the sales trajectory, who is it appealing to the most, et cetera. We demoed it at HR Tech, and we thought it was really slick. And it sounds like it's got a really good ROI for users to take it up. So I'm just trying to get a little bit more color there.
Mark, it's Toby. Thanks for your question. I'm glad you got the chance to actually check the product out at HR Tech. We're pretty proud of what we've been able to launch so far. And I think, I would start with just a few comments on the quarter. I think, to your beginning part of your question, I think it was a strong quarter really across the board for the business. And we had mentioned in the prepared remarks that the launch, which we did in July of B1 of the finance product, I think, has really been well received in the market.
I think we are starting to see early days still, of course, just with the launch in July, but I think starting to see traction in the market, both from a new client perspective and back into the client base, which is an important part of the motion. To the part of your question on the go-to-market piece, those are both avenues for us, both with new clients coming on to the Paylocity platform and then being able to add that value through our platform back into the client base. So I think early days, but I think we're pleased with the momentum and the trajectory that we're seeing. I think the thesis has very much been validated in terms of the value of having that product set and that category on the platform and the value that, that can add to clients. So I think overall, we're pretty happy in the early days.
The one additional comment I would make, Mark, is the feedback we get from our field who we've got fully trained on the product, they're identifying prospects. They're really telling the broader story upfront. It's certainly helping from an overall differentiation perspective.
And then we've got an inside sales team that can take those spend management opportunities and take them over the finish line. And so we're seeing really good partnership across our organization, and we're getting really good feedback that this is really resonating with prospects in our overall platform differentiation.
That's great. And then really nice performance for the quarter. The EBITDA ended up beating roughly by $13.4 million, but you raised the guide by less than the beat. What would be the driver for that in terms of -- for the -- what you ended up doing in terms of the full year guide for adjusted EBITDA?
Yes, Mark, I think similar thoughts relative to a level of prudence in guidance. I think really happy with Q1, as you said, strong performance versus our expectations. We're certainly seeing some of the benefits of the investments we've made to continue to scale the business. There's always some timing elements, certainly one quarter into the year, want to maintain a level of flexibility to make the investments that we've talked about to drive continued growth. But at the same point, we are expecting increased profitability for fiscal '26. We're guiding to leverage again in Q2 as well.
So probably some timing elements of that. And I think as you've seen historically, to the extent we continue to see overperformance, then that would accrue to increased margin as we go over the balance of the fiscal year.
And our next question comes from Daniel Jester of BMO Capital Markets.
Maybe Steve or Toby, you've been talking about the opportunity in the IT department of your customers a little bit more recently. So I'd love if you can maybe expand on sort of the opportunity you see there? And how should we view that relative to Paylocity for finance?
Yes. I think just from a product perspective, we have the opportunity to really leverage the employee record data that we have to be more comprehensive in terms of the tasks we can help our customers accomplish when they onboard and offboard employees. We know who they work for. We know the department they need. And now in our product, we can store the equipment that they need. We can track all of the devices. We can really -- through partnership and API, we can really help them get the equipment delivered right on site.
So it's both asset management as well as identity management, really leveraging the employee record data. So that's also kind of in the early innings. So similar comments to city for finance. But I would make the same comment I made earlier, which is it's really helping from an overall platform differentiation. We're seeing great feedback from clients that are on the service already.
And so when you combine a leading HCM modern platform with the ability to scale across finance and IT, we think we have a more unique value proposition than we had a year ago prior to the launch of those 2 categories.
Great. And then on the updated financial targets that you provided today, I guess, why was this the right time to update them? If I remember correctly, I think you just updated the $2 billion revenue target, not even 2 years ago. So maybe a little more context would be helpful in terms of why you decided to make these adjustments to the long-term model today.
Dan, it's Ryan. I think we've obviously been really pleased with the progress we've made across those prior targets, which we did set in August of 2023. Since that time, we've driven several hundred basis points of EBITDA leverage, free cash flow leverage as well. We've reduced stock-based comp.
So I think these updated targets are really just an acknowledgment of what we see as continued confidence in the ability to scale the business, having made a lot of progress against those prior targets, it felt like the right time to acknowledge the fact that we continue to have a lot of confidence in driving durable revenue growth across the business, being able to scale from a profitability standpoint. And I think this is that natural extension.
When you start to layer on the early benefits we're seeing broader AI. I think that is another element that as we looked at where we are from a financial standpoint, gave us incremental confidence, and as you think about that $3 billion target, 25% to 30% free cash flow, this is a very attractive opportunity for us and one that we think when you look at $3 billion of revenue, 30% free cash flow margin, what we're really excited about what that can be on a multiyear basis.
And our next question comes from Terry Tillman of Truist Securities.
This is Connor Passarella on for Terry. I just wanted to follow up on the previous one, looking at the long-term targets, specifically around the updated $3 billion of total revenue. So I guess just as you look at FY '26 here, maybe what are the 1 or 2 execution milestones, whether it's cross penetration of Paylocity for finance, attach rates on newer modules or even partner productivity that you kind of view as the highest confidence drivers towards driving towards that $3 billion long-term target?
Yes, sure. So I'll start. So first of all, I think I'd like to mention that we've got a huge TAM. And so we're still relatively low penetration in terms of the total addressable opportunity in front of us. And so we think there's a ton of runway just in the HCM category. So by no means extending into these other categories, does that mean we don't think we're excited about what we can do in HCM. And then I think when you add on top of that, the ability for us to expand that TAM, HCM TAM by moving into the office of the CFO as well as IT, it gives us even greater confidence and be able to scale this business from under $2 billion today to that $3 billion target. And then to Ryan's point, hitting all of those other profitability metrics at the same time.
The only thing I'd add is I think there's all of the above element to your question in terms of continuing to drive the unit growth consistently that we have been able to drive. and also increasing the overall ARPU on a go-forward basis. And that's, I think part of what Steve said is what gives us the opportunity to do that on the ARPU element. But I think as we look at '26 in particular, I think we're taking, again, same as we did last year, a pretty balanced view of the ability to continue to drive new client acquisition, drive unit growth while also expanding the ARPU, which has been, I think, a key part of the growth algorithm for years. And I think we see that same opportunity as we look forward to that $3 billion mark.
Yes, that's great. That's really helpful. Maybe just as a follow-up. So as you continue to take Paylocity for Finance to market, how are you kind of thinking about the pricing? Are you kind of thinking about this more testing on a stand-alone versus bundled approach? Or what do you guys -- what I guess, are you learning about the willingness to pay from the early adoption of clients?
Most of what -- the way that we price across the suite is really ends up being on a bundled basis, and that's not anything new for us. So that's a consistent approach that we have taken with whether it's things in the office of the CFO from a finance and spend management perspective or from an IT perspective. So pretty consistent strategy as we have looked to extend into those areas and the bundled approach that we've taken, whether that's from a new client perspective or otherwise.
I think the only thing I would add is we have the flexibility with some of these newer product offerings. If we think that a per user model is more attractive to the market, we can easily pivot to that. To Toby's point, we kind of sell it as a bundle and here's what your whole overall annual spend would be, here's the ROI you're going to get on that investment. So no real change in the sales motion, but we definitely see some of our products being priced on a per user basis, obviously, a higher price point, lower number of users, whereas the HCM products are largely on a per employee basis.
I think the interesting thing about what we've seen so far as we've gone to market still in the early days is the fact that there is a willingness to pay based on the value that's being delivered. So I think that's certainly a part of the traction that we've seen is clients and prospects are finding value in it. They're willing to invest in it. And that has not been a challenge from a value perceived and price perspective.
And our next question comes from Siti Panigrahi of Mizuho.
I just want to drill into the comments, strong demand environment. Can you talk about the demand you're seeing in a different employee segment? And specifically, now that your platform you offer finance, HR and IT, what kind of feedback you are hearing from different segment -- employee segment base about the value you offer versus your competitors?
Yes. I think through the course of Q1, we've seen a very stable demand environment. I think really pleased with the results overall in Q1. And I think that's part of what's reflected in that is the strength of the execution in our go-to-market teams, and that was really well balanced across the entirety of the target market that we're focused on. So I wouldn't call out any specific difference whether it's in HCM or the finance area in any segment that we have, I think it's pretty broad-based. And I think the demand environment was stable throughout the course of the quarter. And I think our teams did a really good job from an execution perspective in go-to-market across the segments that we're in.
Okay. And as you talk about efficiency gain from all the AI uses in engineering, sales, marketing and operation, it's early stage at this point. But as you gain efficiency, are you planning to invest back that more into your go-to-market and sales to drive growth? Or are you going to offer more efficient margin?
Yes. So I think we've had a pretty consistent approach of driving margin expansion across most of the line items. We also see a big opportunity to continue to invest in products so that we can fuel that growth. And so you can see R&D spend was up nicely, while at the same time, we were able to get margin across the board everywhere else more than make up for that. And so we're always making that balance of decisions.
We're confident in the long-term prospects of the business. We think there's great opportunities to continue to invest in R&D, while at the same time, getting leverage in all the other parts of the business. And so I think you see that kind of reflected in the long-term guidance that we -- the new long-term guidance that we just launched today.
And our next question comes from Raimo Lenschow of Barclays.
This is Sheldon McMeans on for Raimo. I would love to ask, you have your upcoming Elevate conference. Is there any insight from sign-ups for the event or broadly from your top of funnel metrics that you're seeing? And can you speak to how that plays into your thinking entering the large end of your selling season?
Well, I think so far, I mean, you can see what I think we believe were pretty strong results in Q1. So I think we're pretty happy with how our go-to-market motion has progressed through the course of the fiscal year. You're right, we're definitely in the heart of selling season.
And I think I would just give you that same commentary. I think we've been really pleased with our go-to-market initiatives and efforts throughout the course of the year so far to date. And I think we're certainly excited about Elevate. That's always a great opportunity for us to spend time with our existing clients and really excited about the registration levels that we've seen so far.
So I feel like we have had year-to-year positive momentum with Elevate, and I think we do again this year. And I think we are, again, just excited to be able to spend time with clients. It's always, I think, a valuable set of days for us.
Got it. Understood. And so I would love to ask on the new generation of the AI assistant. Just any color on -- sometimes it's great when your salespeople have a new nice product to sell. I know you're not explicitly monetizing it. But is there an opportunity to go back to your customer base, show off that new product and potentially drive more platform expansion? Because from my understanding, you need to have all of the underlying modules to extract the most value from the AI solution.
Yes. I think you heard us say in the prepared remarks that some of our investments in AI are driving broader product adoption and kind of sale back to the client base. And so I think you're absolutely correct. The more products you use, the more value you can get out of these integrated AI experiences where something that might be more difficult to use, I might have to take 3 or 4 different steps to figure that out, it's pretty seamless certainly from an employee and manager perspective, I can use natural language.
I can interact with the software, really simplifies the user experience, and it really makes that value proposition much easier for a customer to implement and use. I think we're still in the early innings of that, but we are definitely seeing that trend early on. And I think if you really talk to the customers, that's where they're getting a ton of value. My employees are going to be asking me less questions because it's super easy for them to get things done. I myself as an administrator, you've reduced the number of steps that it takes for me to accomplish the task.
You're automating from an agent experience, things that I used to have to do manually. And so that's the concept really where we see the differentiation opportunity. And the simpler we can make that user experience, the more product adoption. And I think that it's also true as you start to extend beyond HCM and think about the integrated experience across IT and finance.
And our next question comes from Jared Levine of TD Cowen.
I first want to start on your IT offerings. So with the Airbase acquisition, you called out an ARPU comparable to HCM somewhere in the neighborhood of like $25,000 to $30,000. Can you talk about the ARPU opportunity your IT offerings present?
Yes. I would say it's a little bit smaller. We're a little bit earlier in the launch of that cycle. We certainly have clients on it. We are actively selling it in the market. But we're probably just from a timing perspective, a couple of quarters behind where we were with the Airbase offering. I don't think we're prepared to give you kind of the exact number.
What I would say is it's larger than most of our HCM modules. And so I think we're excited about that. So it's a good sized revenue opportunity. And again, some of this is a little bit of pricing mix. Some of you had to price on a per user basis versus per employee. So there's a mix there. But think about it as somewhere between one of our larger HCM modules and that Airbase number.
Got it. And then, Ryan, in terms of -- heard you in terms of the $65 million of expected tax benefit this year from OBBA. -- but any headwinds to be mindful of as we think about FY '27?
Well, I think we're calling that out as a onetime benefit in fiscal '26. So you'd have to adjust the model as that benefit would not be recurring. I think there are likely some other tailwinds from the new tax legislation that will help in '27, but that big element, that $65 million is onetime. So I would adjust that out in '27. Outside of that, there's nothing at this time that I would call it on free cash flow other than the fact that we would expect to continue to drive leverage certainly in '26, but on a go-forward basis as well.
And our next question comes from Jake Roberge of William Blair.
Just wanted to follow up on the demand environment. Can you talk more about how the start to the end of the year selling season has gone thus far? And just how the pipeline you're seeing this year may compare to some of those prior year periods?
Yes. I think it's been good so far. I mean we've described the demand environment as being stable. I think from a quarter-to-quarter perspective, throughout the course of last year, we would have called out stability in the demand environment and then strong execution from our go-to-market teams, which is really what gave us, I think, a great performance in the course of fiscal '25. And I think that has really carried through into Q1 and as we've really gotten into the heart of selling season. I think the demand environment has continued to be stable, and our teams have executed really well. So I think we have -- we're pleased with the momentum that we've seen so far from both a pipeline and a conversion standpoint.
Okay. That's helpful. And then just on the sales side, now that you're selling a bigger platform into a few different departments, are you seeing any changes to the time it takes you to close a deal just given you may need more signatures? Or have those remained fairly consistent since the launch of Paylocity for finance?
Yes. I would say, no, we have not. We've been very conscious of that fact. And I think our go-to-market strategy really mitigates the potential to have elongated sales cycles. So we're very comfortable getting them up and running on any of the products first and foremost, and it typically happens with HCM since that's obviously the bigger part of our suite today. And then they may take a little bit longer to implement any of the additional modules. That's a motion we're very used to that happens sometimes even within the HCM products. And so we try to get them up and running, deal with the decision-makers that are ready to move.
I think it's important that they understand the breadth of the platform. And then sometimes they implement at the same time, sometimes they implement a little bit later, and sometimes we got to go back and sell them the additional products, which is a very consistent motion with finance, IT, just as it was with the additional HCM module. So no elongated sales cycles.
I would also say that it is the usual occurrence that in the context of selling HCM, you are also talking to someone from one of the other areas. So the idea that this is a totally new motion with a totally new buyer is just not right.
It is very -- it is usually the case that we are talking to the Head of HR, someone from the finance area and someone from the IT area, which could be the CIO, the CFO and the Head of HR. It could be someone on their teams, but it is usually the case that we're dealing with someone in all 3 of those areas.
And our next question comes from Scott Berg of Needham & Company.
This is Ian Black on for Scott Berg. Does the Paylocity for Finance solution impact your long-term financial targets at all? Is there an impact on gross margin specifically?
Yes. We've had that question in the past that we were pretty comfortable that over time, we can get the Paylocity for Finance Solution to be similar margins to the rest of our portfolio. And I think you see that kind of reflected in our confidence in increasing the target for long-term gross margin. So we don't necessarily see that as being a headwind at all.
And our next question comes from Samad Samana of Jefferies.
This is Jordan Boretz on for Samad. Congrats on the strong results. I wanted to touch on the competitive front for a second. You called out product differentiation in your own platform driving kind of key strength. I'm curious with some noise of consolidation in the market, both at the high end and the lower end, obviously, with Dayforce and Paycor, are you seeing any notable changes in win rates against those competitors more so on the lower end of the market as that product -- excuse me, that company segment kind of navigates the changing landscape there?
Yes. I would say we've always felt like we've got a differentiated product portfolio, and it has been a competitive environment and remains a competitive environment. I do think that the value proposition, as Toby mentioned in his prepared remarks, of really being broker-neutral and broker-friendly has been a key part of our go-to-market motion for many, many years. And so I think there's some uniqueness to that, and we have been a leader in that space for a while.
So I think some of the consolidation is certainly helpful in that category. And -- but I will just go back to the fact that you've got to win based off of your product, your service that you provide every single day. It's a competitive market, and we're really proud of the results that our sales team were able to generate in the first quarter.
Awesome. And then on the go-to-market side, I was wondering if you can maybe parse out how sales rep productivity is trending versus hiring and how hiring is trending versus your initial expectations into the year?
Yes. I think we came into the fiscal year with around an 8% increase in headcount. And obviously, you can see where we landed the quarter and where we've guided the year. So I think our focus going into fiscal '25 and then coming into fiscal '26 again was to be able to drive the type of performance that we've actually delivered and to be able to do that focused on our sales rep and go-to-market productivity, which, again, I think by looking at the headcount increase versus the amount of growth we've been able to deliver in Q1, I think we've done that again in Q1 of fiscal '26. So overall, I think we continue to focus on the productivity of the teams, including our go-to-market teams, and I think that's what we've delivered again in Q1.
Congrats on the strong start to the year...
And our next question comes from Brian Peterson of Raymond James.
This is Jessica on for Brian. I was just thinking a bit of a follow-up to earlier discussions we've had at comments is as you have this increasingly differentiated value of your platform, are you seeing customers trying to trend towards landing with more products than prior cohorts were? Or has this been more of a benefit of saying like Pay, you guys have more places that customer can land on and then from there building out to expanding later?
I think we've seen both. I mean I think we've seen -- to Steve's comments, we've seen differentiation gains that we've had from the broader platform that I think help us from an overall client acquisition and unit growth standpoint. I think we have, over a very long period of time, continued year-to-year to see the amount we realize out of the total amount that's chargeable on the platform increase.
And I think that reflects the fact that year after year after year, clients are taking a larger amount of product from us. And then I think you also get the benefit of being able to sell those products back into the customer base. So I think you see it in differentiation. I think you see it in driving higher ARPU at the time of client acquisition. And I think you see it in the ability to drive an overall higher ARPU as you sell back into the customer base over time.
And our next question comes from Pat Walravens of Citizens.
This is Kim Kate on for Pat. You guys highlighted your sales reps are going to be using some AI tools to automate parts of their go-to-market. Is there any specific tools that you could call out there?
Yes. I think when we look across all of the tech that our go-to-market teams in sales and marketing are using, I think our effort has been to try and find -- and this is true across the business. You're trying to find opportunities to automate the processes that everyone is going through day-to-day, including our sales reps.
And you're looking at what AI tools each one of those pieces of technology has available to them and making sure that we're leveraging each one to the fullest extent while also, again, trying to take the lens of what can we automate in the process. And I think that's what my comments in the prepared remarks were referring to. So I think this is broad-based commentary across all the tech that we're using from a go-to-market standpoint.
And then on the brokerage channels, it's more than 25% of your new business in Q1. Is there a level that you'd like to see that get to? Or is it around where you hope it is?
Well, I mean, I think we've been saying for a very long time, making the same comment that we've been able to drive more than 25% of new business coming from the broker channel. And Steve made the comment before that when the business went public in 2014, looking at the size and scale of it then and now as you see us guiding towards just under $2 billion in revenue for this fiscal year, our ability to continuously for the last decade plus, deliver 25% of our new business coming from the broker channel, I think, is a testament to the focus that we put on it, the investments from a technology perspective that we've made that well serve the broker channel and their clients.
And then I think ultimately, the investment that we have made to build those relationships over that period of time. And I think it reflects the fact that they see real value and real partnership in how we approach business with them. And I think overall, I think we're really pleased at what we've been able to deliver in Q1, the part that the broker channel has played in that and look forward to continuing to partner with our broker channel throughout the course of the rest of the year.
And our next question comes from Alex Zukin of Wolfe Research.
I think most of the questions have been asked, but maybe just help us think about the impact to retention rates. I think they're still 92% at this time. As you look at the elements from selling more AI functionality into the base or monetizing that functionality, getting greater usage, monetizing Airbase, or cross-selling that functionality. How does that retention rate evolve, if at all?
Does it go up over time, particularly as you approach that long-term target? And then how do you think about kind of organic versus inorganic going forward? Now we're 1 year past Airbase. It seems like it's going really well, and it's meaningfully increasing the addressable market opportunity. Maybe just comment on kind of your view on organic versus inorganic innovation at this time.
Yes. I mean I think you're right. I think we're pleased with how the Airbase acquisition has gone. We're pleased with, based on the prior commentary, the level of traction that we're seeing at least in the early days with the spend management and finance part of the suite.
And I don't think our -- I think that is a proof point of what we've been able to do from an acquisition standpoint, but I don't think our -- I don't think we've fundamentally changed our mindset around capital allocation or the role that M&A plays in the business. I think if you look back over time, we've been able to build out an awful lot of new products organically, that's certainly still an important part of how we view innovation when we found extraordinary opportunities to acquire something that would speed up our product roadmap and was really strategic, and we thought that we could integrate really well. We've had really good luck there with, again, Airbase being the most recent data point on that.
With respect to your question on retention, I mean, I think our view has been for a long time that if you continue to broaden out what you're able to deliver from a product perspective while also providing world-class service, that's a recipe for being able to deliver against the expectations of clients, and that will provide a positive result from a retention standpoint over time. That's exactly what I think we've seen. Again, your reference is 92% plus is our -- how we've described retention continues to be the case. And I think that is very much what we see the opportunity as we look forward.
I guess just one additional point on the M&A strategy. I completely agree with Toby. There's no strategic shift here, but I think it's probably important to note that is the largest acquisition that we have made kind of in our history. And so the ability to integrate that product portfolio, get it to launch, see the early success that we're having in go-to-market certainly gives us more confidence in our ability to do things like that on a go-forward basis.
And our next question comes from Matt VanVliet of Cantor.
I guess, first, on the comment you made earlier about growing revenue per customer, curious how much of that is being driven by the cross-sell of whether it's the finance or IT modules or just some of the expansions of the product versus the AI and usage component being monetized already?
Yes. I would just say from a product perspective, some of that's a little bit challenging to differentiate. As Toby mentioned earlier, you're kind of selling a bundled package. And even when you're cross-selling back to the client base, you sometimes can get an uplift of not just a singular product, you may get 1 or 2 as you're kind of evaluating that. And so I think they're both in the mix. I think we're in the early innings still for finance and IT.
So a lot of that cross-sell is being driven by our HCM suite currently. But we're really excited about the early feedback that we've got and particularly because those products are a little bit more on an average revenue per customer. So we think that, that opportunity is certainly there. But I think we've always talked about this as really an extension of our product strategy that will allow us to continue to have a mix in our growth algorithm of unit growth, which we expect to continue to drive as well as average revenue per customer growth, which will be enabled by IT and finance expansion.
All right. Helpful. And then as we look at the long-term financial targets, curious if you can give us a little update on what the original $2 billion target of primarily the HCM business, what that looks like as part of the $3 billion? And then the obvious other part is sort of the TAM expansion, platform expansion. How much of that $1 billion raise in the revenue target is almost exclusively from finance and IT?
Yes. I'm not sure we would have thought about it the same way that you asked the question. I think if you step back and you look at how we have driven growth every single year, it has been a mix of client growth, so new client acquisition and client growth and then ARPU expansion from a both new client and existing client standpoint. And I think that's really -- and a lot of that ARPU growth comes from our ability to continue to innovate and continue to expand the product set.
And so if you look back over the course of the last decade plus that we've been public, that's what we've delivered every single quarter and every single year is a fairly consistent. Yes, it's changed depending on what's going on in any given year, but that there's been consistency in the mix of both new unit growth, new unit acquisition, client growth and ARPU expansion over time. And I think that's really how we thought about the formula of how we get to $3 billion. You've got to be able to continue to drive client growth. You've got to be able to continue to drive ultimately ARPU expansion that comes with the TAM expansion of adding on things like finance and IT, but I think you get there through that, that's the execution formula.
And with respect to the product pieces, I think there is an opportunity to continue to grow the product set from an HCM perspective, there's certainly an opportunity to grow the product set from a finance perspective, and we're in the earliest days of product from an IT standpoint. So I think you've got growth across all those 3. And if we can continue to drive that growth, continue to drive ARPU, continue to drive client growth, I think that's the formula, and that's a consistent formula that we've executed against for the last 10-plus years.
And our next question comes from Jason Celino of KeyBanc Capital Markets.
Just one follow-up on Paylocity for IT. Obviously, a very complementary area. When I think about your customers today, what are they hypothetically using for asset management, identity management? Do you see yourself competing more with like the traditional ITSM players?
Yes. So I think from an asset management perspective, and a lot of it is fairly manual. And so whether they're tracking that in spreadsheet or frankly, at the lower end of our market, whether they're really not tracking it very effectively at all. And so being able to automate that as people are going on board, when they're changing positions, when they're coming off board and then being able to manage that for an IT user is really, I think, critical for organizations. And so I think that's something that we've been really happy with the receptivity.
I think for the identity management the strategy is a combination of our own capabilities as really -- as well as really integrating from a marketplace and API perspective. And so you can get some value out of really leveraging the data in the employee record and not actually have to change your identity provider, or you can leverage our solution to be able to take on some of those capabilities for you. And so we see opportunities to be able to grow the category for sure, but we really are trying to help customers with that use case, both from an access and identity of really offboarding, changing positions and onboarding.
Okay. And then this is more of a philosophical question. But at this point, it looks like you're touching the HCM part of the business, the finance part of the business and now the ID part. Long, long term, when we think about unified platform, could you ever see Paylocity expanding into more front office areas? Or is it just too early?
I think we're pretty excited about the size of the TAM that we have in front of us. Again, I go back to HCM, we still have very low penetration in our core marketplace, and we're having good success driving that. We're pretty early in IT and finance.
I think if you were to take a broader point of view, really, when you think about having that employee record, having the workflows across the organization, I think you've got a real opportunity to power much of the back office over time, and we can continue to stay focused on that. I think to think about getting into maybe front office solutions that are often more vertically based, it's probably not on the horizon.
And our next question comes from George Carisala of Citi.
I'm on for Steve Enders. Maybe just a high-level question. A lot of discussion about the impact of AI on labor markets more broadly. It sounds like headcount in your customers was a touch better than expected this quarter. Is there anything you guys have seen or heard that might indicate that your customers might be changing the way they're thinking about hiring based off of use of AI?
No, not at this point. I think we obviously are able to track workforce levels as well as a host of additional elements across our client base. And we continue to see stable data points. We look at those certainly on a weekly basis. But to date, there's nothing that I would call out that would suggest a different experience than what we have seen.
Okay. Great. And then a question on the back half of the year and seasonal trends, form filings. I think you've said in the past, Airbase is maybe a bit less seasonal of a business than the core HCM side? Just anything to help us think through what that pattern will look like seasonally relative to typical historical patterns?
Yes, nothing onetime that I would call out at this point. I think you're right, Airbase would not necessarily have the same seasonal cadence that the HCM side, although obviously, that is a very small part of our business today. So not sure I would discretely adjust for that. Outside of that small item, everything else, I think so far, nothing I'd call out as far as onetime or different seasonal impacts as we think about the back half of the year.
And our next question comes from Zachary Gunn of FT Partners.
Can you hear me?
We can hear you now.
I just wanted to follow up on one of the earlier questions around Airbase and the longer-term financial targets. And just thinking about -- you've talked in the past about the 10% to 20% kind of cross-sell opportunity. Is there a way to think about what cross-sell is embedded within that $3 billion? I recognize it's still a small portion of volume, but just any context on have the long-term goal shifted there?
Yes. So, I think, Toby, kind of answered this question. I'll maybe take a different tack at it. It's really about unit growth and average revenue per customer growth for us. And so that formula for us historically has moved around year-by-year, but we've been pretty consistent. Roughly half the growth has come from units and the other half from average revenue per customer. That has shifted a little bit as we've had certain product launches and they've moved up the adoption curve. But we're not fundamentally thinking that the launch of IT and finance changes that equation materially.
You may see some shifts in that over time. But we feel more confident having that opportunity to expand in those areas that we can absolutely continue that ARPU expansion. And certainly, it is a factor in giving us confidence to be able to not only look towards $2 billion, which is kind of around the corner, but look beyond that to $3 billion.
And our next question comes from Madeline Brooks of Bank of America.
Just a quick one for me, guys. Looking at your long-term targets and how they've changed, it looks like the updated target for sales and marketing as a percent of revenues actually went down a little bit. And I'm just curious as to why because if we look at the opportunity ahead of you, both in the businesses that you operate in, but then largely in the market in terms of AI and broader technological shifts, most other companies are ramping up investment in their go-to-market. And I understand efficiencies from AI.
However, I think, the trend that we've seen is that those efficiencies kind of more supplement versus are used for total OpEx reduction. And so I'm just wondering why not invest a little bit more heavy handedly at a time when the opportunity seems so right?
Yes, I think, we feel like we've rightsized our investments across go-to-market against the opportunity that we have. And the change in the target, I mean, if you look at where we closed last year, I think, we were at 21.6% from a sales and marketing perspective, that's basically at the top end of the range that we have adjusted to. So I wouldn't -- I don't -- I wouldn't make more of that than is actually reflected in the data.
So, I think, we have a pretty consistent approach from a go-to-marketing spend perspective. We've talked about being able to drive more productivity there, but I don't think we're underinvesting in what we see as a significant opportunity. I think, we are appropriately invested in it. We're looking for productivity and efficiency, but we're also looking for delivery. And so I feel really good about the productivity of that team throughout the course of '25, and we've been in a great spot as the fastest-growing HCM provider. And, I think, that's what looks -- that's what we have in front of us, too. And, I think, we're invested to be able to produce that.
And our next question comes from Jacob Smith of Guggenheim Securities.
I want to ask another about the broker channel and Paylocity's right to win new referral business, especially in situations where brokers book may have previously referred a lot of business to an acquired competitor. We understand this is a very competitive landscape with large public and private companies all leaning in pretty heavily into the channel, all going after the same opportunity. But most of them compete directly with brokers, as you guys point out, whereas Paylocity does not.
Can you talk about what you're doing both at the leadership level with brokers in terms of strategic alignment and at the micro level with individual producers to deepen vendor trust and buy-in to win new referral business that might be up for grabs. And also, is there any way to frame the benefit you've seen so far from any disruption in the channel? That would be helpful.
Yes, sure. I think, as you indicated, it is a key part of our go-to-market motion has been even prior to going public. And, I think, as you also indicated, a lot of this happens at the field level. So these are individual relationships between our salespeople who are interacting with the brokers in their offices, going out on calls together, sharing leads and getting referrals and those referrals obviously get translated into new business sales. I think, the other thing I would say is we consistently have been above the 25%.
We don't give the exact specific number, but I think, we've given you the color that we've been excited about the momentum in the broker channel, and that has definitely been a contributor to our overperformance, both in the back half of FY '25 and into FY '26. So no change to the strategy. It's really the same strategy.
We also have relationships with the biggest brokers at a corporate level, and those are enabling factors. And so when you've got a little bit less competition out there, we certainly see that as an opportunity. We're going after that opportunity, and we think that has been a contributor to the strong start this fiscal year.
I show no further questions at this time. I'd like to turn it back to Toby Williams for closing remarks.
Yes. I just want to thank everybody for their interest in Paylocity. Thanks for your time tonight. And certainly, a large thank you to all of our employees who helped make Q1 great. Thank you again. Have a good night.
This concludes today's conference call. Thank you for participating, and you may now disconnect.
Paylocity Holding Corp. — Q1 2026 Earnings Call
Financial data from Paylocity Holding Corp.
Revenue
Revenue is the sum of all sales generated by a company, e.g. for its products or services.
Revenue (TTM) metric explainedDirect Costs
Direct costs are the costs incurred directly in connection with the manufacture of the product or service.
Gross Profit
Gross Profit indicates how much of the revenue remains in the company after deducting direct production costs. If the percentage share of sales is calculated, this is referred to as the gross margin.
Gross Profit metric explainedSelling and Administrative Expenses
Selling, general and administrative expenses (SG&A) include all expenses for marketing and sales as well as the general administration of the company.
Research and Development Expense
Research and development costs (R&D) provide information on how much the company invests in the research and development of its products. The costs are particularly interesting as a percentage of revenue and in comparison to direct competitors.
EBITDA
EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is the company's earnings before interest, taxes, depreciation and amortization. The EBITDA margin is calculated as a percentage of sales.
Depreciation and Amortization
Depreciation represents reductions in the value of the company's assets (e.g. due to wear and tear on machinery).
EBIT (Operating Income)
EBIT (Earnings Before Interest and Taxes) is the company's profit before interest and taxes, also known as the operating income. The EBIT Margin is calculated as a percentage of sales at
.
Net Profit
Net Profit represents the profit or loss after deduction of all costs.
Net Profit metric explainedStocksGuide Premium
| Jun '26 |
+/-
%
|
||
| Revenue | 1,771 1,771 |
11%
11%
100%
|
|
| - Direct Costs | 546 546 |
10%
10%
31%
|
|
| Gross Profit | 1,226 1,226 |
12%
12%
69%
|
|
| - Selling and Administrative Expenses | 618 618 |
5%
5%
35%
|
|
| - Research and Development Expense | 221 221 |
8%
8%
12%
|
|
| EBITDA | 498 498 |
23%
23%
28%
|
|
| - Depreciation and Amortization | 112 112 |
12%
12%
6%
|
|
| EBIT (Operating Income) EBIT | 386 386 |
27%
27%
22%
|
|
| Net Profit | 270 270 |
19%
19%
15%
|
|
In millions USD.
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Paylocity Holding Corp. Stock News
Company Profile
Paylocity Holding Corp. engages in the development and provision of cloud-based software solution. It offers cloud-based payroll, human capital management applications, time labor tracking, benefits administration, and talent management. The company was founded on November 6, 2013 and is headquartered in Arlington Heights, IL.
StocksGuide Premium
| Head office | United States |
| CEO | Mr. Williams |
| Employees | 6,700 |
| Founded | 1997 |
| Website | www.paylocity.com |


