Paylocity Holding Corp. Aktie

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.

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.

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.

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.

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.

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.

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.

Good day, and thank you for standing by. Welcome to the Paylocity Holding Corporation Fourth Quarter 2025 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 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 year '25, which ended on June 30, 2025. I'm Ryan Glenn, Chief Financial Officer. And joining me on the call today are Steven 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 and 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 their directly comparable GAAP financial measure because the information, which is needed to complete a reconciliation is unavailable at this time without unreasonable effort.

In regard to our upcoming conference schedule, we will be attending the KeyBanc Technology Leadership Forum and the Stifel Technology Executive Summit. 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.

Thanks, Ryan, and thanks to all of you for joining us on our fourth quarter and fiscal '25 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 14% and total revenue growth of 12% in Q4. For fiscal '25, recurring revenue growth grew 15% and total revenue grew 14% as we ended the year with $1.6 billion of revenue. Our sustained multiyear investment in R&D has resulted in continued product differentiation and a significant expansion of our product suite, which has helped drive durable recurring revenue growth and continued expansion of our average revenue per client.

Most recently, we announced the launch of Paylocity for Finance, expanding our market-leading modern workforce platform for HCM and into the Office of the CFO and bringing both finance and HR together through a unified system grounded in the employee record.

With the addition of Airbase and our previously launched [ Head Count Planning Solution ], Paylocity for Finance delivers a comprehensive suite of tools that connects day-to-day spend management with strategic workforce planning, reflecting our vision to equip leaders with modern AI power solutions that bridge the gap between HR and finance on our single unified platform. Going forward, our clients can now manage both payroll and nonpayroll spend in a single platform and eliminate disconnected systems, manual processes and approval bottlenecks. Product expansion has been a key part of Paylocity's growth algorithm for over a decade, and we believe Paylocity for Finance, together with the continued expansion of our HCM portfolio, will drive further growth over time in our average revenue per client, which reached just over $35,300 in fiscal '25 compared to $32,800 in fiscal '24, an increase of approximately 8%. We believe Paylocity for Finance represents a significant multiyear opportunity for both new clients and to cross-sell back into our 41,650 existing client base, which grew 7% from fiscal '24. Our commitment to product development also continues to be recognized in the market with Paylocity recently winning a TrustRadius Top-rated Award in HR management software for the third year in a row.

I would now like to pass the call to Toby to provide further color on the quarter.

Thanks, Steve. In Q4 and fiscal '25, our differentiated position in the market was reflected in solid sales execution and we have continued investing in our go-to-market functions to carry this momentum into fiscal '26 across sales, marketing and channel referrals. Coming into fiscal '26, we expanded our sales force by 8% to 952 sales reps and will be focused on continuing to drive productivity and efficiency across our teams. Consistent with prior years, we are pleased to be fully staffed to begin fiscal '26, and we continue to successfully attract the best sales talent in the industry, positioning us well for durable recurring revenue growth. We also saw another strong year of channel performance, primarily from benefit brokers who once again represented more than 25% of new business in fiscal '25. 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 of our referring brokers and their clients.

Revenue retention also remained consistent at greater than 92% in fiscal '25, and we remain committed to investing in our operations teams to deliver world-class service to our clients. As Steve highlighted, we are excited about the opportunity with the recent launch of Paylocity for Finance, which represents the natural evolution of our mission to simplify work through innovation and empowers finance teams with AI-powered automated solutions seamlessly integrated into the Paylocity platform, including head count planning, expense management, AP automation, corporate cards and guided procurement. By unifying data and connecting critical workflows, we're delivering enhanced visibility, improved efficiency and an exceptional user experience that drives increased value across HR and finance teams and their employees. Employees will now be able to submit expense reports and spend requests in the same system they already use for payroll, time tracking and benefits, while managers will benefit from a single centralized task list for all approvals, whether for time-off, expenses or purchases. This unified experience minimizes friction, accelerates financial processes, provides better controls and ultimately drives increased value from a single platform. For example, an early adopter has consistently struggled to manage approvals and spend requests across multiple disconnected systems, leading to bottlenecks and delayed decisions sometimes taking up to 45 days to complete a purchase. After implementing Paylocity for Finance, including AP automation and guided procurement, the client was able to streamline their approval cycle by eliminating numerous manual steps and integrating seamlessly with their existing critical systems, driving greater efficiency and generating time savings for their finance teams. With features like invoice matching, they now have full confidence that incoming invoices align with preapproved spend, ensuring every purchase is backed by clear accountability and real-time visibility.

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 '25, I'd like to thank all of our people and teams for a fantastic year. The strong culture at Paylocity also continues to be recognized externally as we recently were named by Newsweek as one of America's Greatest Workplaces for Gen Z, listed by Times as one of America's Best Midsized Companies and included in the Association for Talent Development's 2025 Best Award Winners List.

I would now like to pass the call to Ryan to review the financial results in greater detail. provide an initial outlook on fiscal '26.

Thanks, Toby. Recurring revenue for the fourth quarter was $369.9 million, an increase of 14% with total revenue up 12% from the same period last year. As Toby noted, our sales team had a -- another solid quarter, and we were pleased to come in $10.2 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 $130.7 million or 32.6% margin and exceeded the top end of our guidance by $8 million. For fiscal '25, adjusted EBITDA was $583 million or 36.5% margin and an increase of 15% on a dollar basis from fiscal '24, resulting in leverage of 50 basis points. Excluding the impact of interest income on funds held for clients, adjusted EBITDA margin for fiscal '25 was 31.2%, reflecting operating leverage of 120 basis points versus fiscal '24 and approximately 220 basis points of organic operating leverage when excluding the impact of Airbase. Additionally, we continue to show strong growth on free cash flow with fiscal '25 free cash flow margin of 21.5% and representing an increase of 12% on a dollar basis from fiscal '24 despite facing material headwinds as we transition to full cash taxpayer status, the impact of lower interest rates and the headwinds from the Airbase acquisition. Excluding the impact of interest income on client-held funds, we expanded free cash flow by approximately 19% in fiscal '25, representing margin expansion of 50 basis points. We continue to have confidence in our ability to further expand free cash flow on a go-forward 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 14.3% of revenue in fiscal '25. And on a dollar basis, our year-over-year investment in total R&D increased by 14% when compared to fiscal '24. We continue to believe our investments in R&D provide us with valuable product differentiation and the ability to drive future growth as we deliver the most modern platform in the industry.

On a non-GAAP basis, sales and marketing expenses were 23.1% of revenue in the fourth quarter and 21% of revenue in fiscal '25. On a non-GAAP basis, G&A costs were 9.7% of revenue in the fourth quarter, and on a full year basis, G&A costs were 9.3% of revenue, 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 $271.9 million, operating income was $66.2 million and net income was $48.6 million. For the full year, gross profit was $1.1 billion, operating income was $304 million, and net income was $227.1 million.

In regard to funds held for clients and interest income, our average daily balance of client funds was $3.1 billion in Q4 and $3 billion for fiscal '25. We are estimating the average [ July ] balance will be approximately $2.85 billion in Q1 of fiscal '26 with an average annual yield of approximately 390 basis points, representing approximately $27.5 million of interest income in Q1. On a full year basis, we are estimating the average [indiscernible] balance will be $3.15 billion in fiscal 2016 with an average yield of approximately 350 basis points, representing approximately $110 million of interest income.

In regard to interest rates, our guidance assumes 425 basis point rate cuts during fiscal '26 with a cut in September, December, March and April reflected in our guidance. Additionally, given the confidence we have in our business and our strong cash flows, we repurchased approximately 315,000 shares of common stock at an average price of $178.21 per share for $56 million in aggregate repurchases during Q4. In total for fiscal '25, we repurchased approximately 800,000 shares of common stock at an average price of $190.16 per share for roughly $150 million in aggregate repurchases. In July, our Board increased our share repurchase authorization by an additional $500 million. In addition to the increased authorization, as of June 30, we had approximately $200 million remaining under the existing repurchase program and anticipate continuing to execute against the repurchase program going forward.

In fiscal '25, we also drove 140 basis points of leverage in stock-based comp expense and achieved our target of less than 10% of revenue as stock-based comp expense was down year-over-year on a dollar basis for the second consecutive year.

In regards to the balance sheet, we ended the fiscal year with $398.1 million in cash, cash equivalents and invested corporate cash and $162.5 million outstanding on our credit facility related to the Airbase acquisition with approximately $81 million repaid on our outstanding balance in Q4.

Finally, I'd like to provide our guidance for Q1 and full fiscal year '26, which includes the impact of 100 basis point interest rate cuts in fiscal '26 and flat workforce levels in fiscal '26 versus fiscal '25. For the first quarter of fiscal '26, recurring and other revenue is expected to be in the range of $370 million to $375 million or approximately 12% growth over first quarter of fiscal '25 recurring and other revenue. And total revenue is expected to be in the range of $397.5 million to $402.5 million or approximately 10% growth over first quarter of fiscal '25 total revenue.

Adjusted EBITDA is expected to be in the range of $131 million to $135 million and adjusted EBITDA, excluding interest income on funds held for clients is expected to be in the range of $103.5 million to $107.5 million. And for fiscal '26, recurring and other revenue is expected to be in the range of $1.597 billion, to $1.612 billion or approximately 9% growth over fiscal '25 recurring and other revenue. Total revenue is expected to be in the range of [ $1.7 billion to $1.72 billion ], or approximately 8% growth over fiscal '25. Adjusted EBITDA is expected to be in the range of $608.5 million to $618.5 million and adjusted EBITDA, excluding interest income on funds held for clients, is expected to be in the range of $498.5 million to $508.5 million, representing approximately 20 basis points of leverage at the midpoint.

In conclusion, as we kick off fiscal '26, 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 '26. 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 increased margin on a multiyear basis as we execute against our goal of surpassing $2 billion in total revenue. Operator, we're now ready for questions.

[Operator Instructions] And our first question will be coming from Scott Berg of Needham & Company.

Really nice quarter. A couple of them, don't know who wants to take this between probably Steve and Toby, but how do we think about the demand environment right now? I kind of look at your results and ARPU growth remained really strong in the year, customer growth is normalizing towards mainly prepandemic level, maybe a little bit elevated from that but a really consistent number right now. Is this how we should view the environment, it's kind of baked in your guidance into '26. So are there any puts and takes with the ability to maybe move that customer acquisition kind of number may be up or down in the year?

Again, ladies and gentlemen, we do appreciate your patience. Please stand by. And please stand by.

Operator, can you hear us now?

Loud and clear. Our first question will come from Scott Berg.

I -- for some reason, I thought you didn't like my question that was in the call but...

We can hear you. You couldn't hear us. So we can pick up from your question and jump to the answer if that's helpful. .

That works great.

Yes. I appreciate the patience, and thanks for the question, Scott. So I mean I think relative to the demand environment, I think we saw a fairly stable demand environment across the course of the year, and that's what we continue to see in Q4 as well. And to your comment or part of your question, I think we saw relative stability in the year-to-year growth in units in through '25. And then the same thing with respect to ARPU, with ARPU growth and unit growth being fairly evenly distributed through the course of '25. And so ultimately, with all those things, really happy with the execution from a go-to-market, from a sales team perspective, throughout the course of '25, which is where I think you saw some of the overage come from.

Understood. And then, Ryan, if I look at the financials pretty much in line with my expectations, what we heard in the quarter, but your sales and marketing expense had a kind of significant jump quarter-over-quarter. Maybe kind of help us understand what the difference there is? I don't know if it's bonus payments or some new investments in some programs here going in this year, but any color there would be helpful.

Yes, Scott, I think it's your typical Q4 year-end timing where you have a little bit of movement of bonus payments and some additional programs that we may try to get into the end of the year. Obviously, as Toby mentioned, we came into the year fully staffed as well. So [indiscernible] amount of hiring in the fourth quarter as well. So it's really just timing within the year, I would say, as we look at the sales and marketing spend over the course of '25 and headed into '26, we came in consistent with expectations. .

And our next question will be coming from Daniel Jester of BMO Capital Markets.

Great. Maybe we'll go with Paylocity for Finance. I appreciate all the context there. Does this mean that the integration of Airbase is basically complete? Or is there more work to be done on that part, that's part number one. And then number 2 is, are you shifting any more resource in your sales organization to attack sort of the back-to-the-base opportunity here? Seems pretty large relative to maybe just adding another module or 2 on the HR side.

Sure. I think as we've mentioned after we had made that acquisition that we would anticipate doing the integration in phases. We certainly put out the press release indicating we've completed the first phase of that integration, which is certainly probably the most meaningful step. However, we do view opportunities to continue to integrate that platform over time. And we're excited about that opportunity in getting user feedback and continue to look for the leverage that we believe we can drive from employee record perspective across HCM and finance. And so product is in the market full -- I would say, a fully integrated version with new opportunities coming, and we'll probably see enhancements to that realistically every quarter is our goal. I think on the second point within our go-to-market motion, we are just in the process with that product just being released, getting our field sales organization up to speed and knowledgeable with the integrated product offering as such that can refer an inside sales team of experts to then be able to take those opportunities across the finish line. And we've also got that inside sales team of experts looking at back to the base opportunities. And all that has just been launched with the press release that you saw from an integration perspective.

That's really helpful. And maybe, Ryan, I know you don't guide to free cash flow, but I'd appreciate it. Are there any puts and takes as we think about the free cash flow outlook for fiscal '26? Obviously, [ slowed ] is going to change. Maybe there's some R&D tax credits we should consider. But anything you'd share on that would be very helpful.

Yes. Dan, I think to your point, as I said in my prepared remarks, we're really pleased with where we've taken profitability as a whole, and that includes both adjusted EBITDA and free cash flow. I think we've expanded free cash flow margin by, call it, 400 basis points over the last 2 years. And continue to have a lot of confidence that we'll be able to do so in '26 and on a go-forward basis. I think probably the only note I would make is, you do have the likelihood of some tailwind relative to the new tax legislation. We're still working through what that impact would look like specifically, but a high likelihood that, that will reduce our federal taxes in fiscal '26, and that will have a knock-on effect or a tailwind to free cash flow. So we'll be able to provide more details as we get more clarity, but that's probably the 1 item I would [indiscernible]. We're now full cash taxpayer status outside of that new legislation and have a lot of confidence that, that free cash flow margin and EBITDA will continue to move forward in '26 and beyond.

And our next question will be coming from Mark Marcon of Baird.

Great quarter. So 2 questions. One, just on Paylocity for Finance. Can you tell us a little bit about -- I know it's extremely early, but what sort of expectations are you kind of building in for that? And can you talk a little bit about the pricing, the types of clients that would probably be the most likely to adopt the experiences of the clients that you've talked to thus far, remember during our conference, Toby was very optimistic about how things were going there.

Yes. So I think early on, we are getting good feedback from customers. They see the value in the integrated platform, the ability to leverage the employee data that we have so that it's easy to request spend, easy to put in rules around spend, make sure that approval process happens relatively quickly. All of that leads to a much faster close process on the back end. And so I think the integration is getting us a really good feedback. We're also very pleased with the stand-alone product capabilities that we purchased and our ability to be able to continue to move those forward and enhance those based off client feedback. So I think that has gone up pretty well. As you mentioned, we are still early. We are setting up our first clients on the integrated offering kind of as we speak. And so we're excited about that opportunity. But I think what I would say is 1 of the questions we get a lot of is, how is that sales process going to translate from a decision-maker capability? That's another area that I would say we're pretty happy with. The CFO is definitely involved in a payroll and HR purchase, although sometimes they're not the primary decision-maker, but we have certainly had opportunities, either via referrals or back-to-base conversations to have pretty easy access into that conversation from a CFO perspective. And they've got appreciation for what the integration offers as well as the opportunity to get a singular support structure as well. And so early on, good success. I would say we -- our expectations are that it takes a little bit longer than maybe an additional module from a sales process because it is a bigger purchase price, as you mentioned. So it might take us a little bit longer to get to the same penetration rate as additional HCM modules, but we feel confident that our over 40,000 customers represent a great opportunity to sell back into.

I mean do you think, Steve, that we can still get to somewhere in the 15% to 25% penetration rate over time? And can you remind us of how your pricing this solution because obviously, it's going to end up adding a lot more than typical $1 to $2 per month.

That's correct. So I think over time, we've always talked about modules getting into that 10% to 20% penetration rate. That would still be the goal with this. As I mentioned, it may take a little bit longer. However, the revenue per client is much higher. And so it can certainly be more impactful than most of our HCM modules that we've launched. It will also provide us additional capabilities from an expense management perspective. So we had an expense management solution embedded in our suite. I would call that a more basic version, they have much more advanced capabilities. And so I think that represents an opportunity. That is priced generally on a PEPM basis. And the rest of the modules are really per employee per user.

Our next question, which will be coming from Terrell Tillman of Truist Securities.

This is Dominique [indiscernible] on for Terry. So just looking at AI innovation like the policy answering system assistant that you all mentioned last quarter. Are there any new AI on features or client adoption trends that you want to call out in the quarter? And how the adoption rates or client feedback shaping your view on AI as a differentiator now as you're heading into fiscal year '26?

It's a great question. We definitely see AI coming up in the conversation with prospects at an increased rate. At the same time, we are seeing our current customers take advantage of the embedded AI capabilities across various modules in the suite. And we've got certainly a long list of opportunities that we're working on to be able to continue to embed AI. I think we talked a little bit about -- and you mentioned kind of the chatbot interactions and how that sources data both from client data as well as our knowledge management and then our ability to a third-party data to be able to answer a wider variety of questions. We see that growing as we continue to grow the data set and the capabilities that chat interaction. So we've been really happy with the innovation we've put into the platform so far from an [ AR ] perspective, and we're excited about what the road map looks like. .

And our next question will be coming from Brian Peterson of Raymond James. Brian?

This is [ Jonathan McKervey ] on for Brian this evening. Just 1 for me here. So I wanted to ask on the thinking on M&A now that Airbase is in the early stages of being integrated and launched. I'm curious, how does that impact your appetite for M&A? And are there some strategic product areas you point us to that you find particularly interesting at the moment from here?

Yes. Thanks, John. I mean I think we are, first of all, just really, I think, happy with our ability to get the air-based deal done, certainly an area of strategic interest for us and to be able to get the integration accomplished with the success that we have and then the launch with just recently of Paylocity for Finance. And so I think overall, have been very happy with our ability over time, not just to do that deal, but do a few others that have been strategic to us that have really added to the product set and helped drive our differentiation over time and drive more value to clients. So I think the strategy around M&A has been fairly consistent and will continue to be in terms of being open to areas where we can accelerate the road map through M&A. I think the focus from our teams generally is to be able to continue to build out products that drive more value for clients and to address key needs and when we can augment that from an M&A standpoint that with -- in areas that will accelerate the product road map, I think those are the things that are interesting to us. But I think it's a fairly high bar from the standpoint of really being focused on the ability to take any acquired product and integrated so tightly into the platform that a user can't tell whether you built it or bought it. And I think that's what we're doing with Airbase which is one of the reasons I think we're so excited about the experience that we're creating from that integrated product set.

Our next question will be coming from Jared Levine of TD Cowen.

In terms of your AI investments for internal operations, what stage would you say you're at currently? And any sense on how long until you could potentially be in a net benefit position from AI?

Well, I think 1 of the things that we've called out in the past is that there is a tremendous amount of opportunity from AI across the business. And so whether that's in our operation, whether that's in our product development team and building new features for our customers or really a lot of our teams that support individuals talking to clients or even in G&A. And so I think we're still in the relatively early innings. I also think this happens gradually over time. And so we look at this as an opportunity to continue to invest in that category. That becomes one of the ways that we can drive both a better client experience, but also margin enhancements over time. And so as we continue to identify use cases, make investments and realize the benefits from it, that becomes part of our long-term model and the way that we think about driving efficiency in the business. .

Got it. And then, Ryan, in terms of retention, directionally, can you give us some color on if that was up or down here for FY '25, including any differences on controllable versus uncontrollable churn?

Yes, nothing I'd particularly note. I think as we said in the prepared remarks, at 92% plus again in fiscal '25. So really pleased with those results. And I think when you look at the results we put up on recurring revenue in fiscal '25, obviously, strong execution from a sales standpoint, but really strong execution from an operational standpoint. And I think that goes both to our implementation teams as well as our service teams. So really pleased with where we are for retention, always a key focal point for us. But outside of that, nothing I would call out that would have materially changed in '25.

And our next question will be coming from Patrick Walravens of Citizens Bank.

This is [indiscernible] on for Pat. I just had 2 questions about incentives. First off, if I'm a Paylocity sales rep, what am I making the most money selling? And number two, with the launch of Paylocity for Finance, is there going to be a shift in those incentives?

Yes. So I think our Paylocity sales reps are really focused on new business and new recurring revenue that get added to the platform. And so I don't think those incentives are changed at all. We also have a system where if you're going to refer an expert, they're going to be able to collect some part of that commission from that referral. So if I'm a sales rep, I see a great opportunity. I've created a relationship with the Head of HR as well as CFO, I realized they could benefit from the Airbase modules. I can refer them over to an expert. We can do that all as part of 1 sales, we could actually go back to them after they've already started or start them first from a finance perspective. And so the incentives are absolutely there. And as we mentioned earlier, fairly robust from an annual recurring revenue, which creates even a higher incentive for our field sales force of over 900 people to be able to refer our team of experts in.

And our next question will be coming from Raimo Lenschow of Barclays.

Perfect. A quick question on Paylocity for Finance as well. Obviously, now you can have like a joint offering. How does it change the competitive selling motion that you have there? And does it change your competitive feel? Does it increase the win rate? What are the early experiences there?

Yes. Thanks, Raimo. I mean, I think we're still early, for sure. But I think part of there's incremental value that we're delivering to clients from the ability to have a finance solution on the same platform. And that's a different strategy that I think you see with the vast majority of our competitors in the HCM space. So we definitely view it as a point of differentiation. And I think to Steve's earlier comments, yes, we're very early, but I think we're really pleased with what we've been able to do in terms of the integration of the Airbase products and solutions into a single platform that is real value that is significant value prop for clients, both new clients coming on to our platform and back into the client base. So I think we're optimistic, early days, but optimistic with the traction, we'll be able to get with that value prop.

And does it kind of bring you into certain verticals because like finance is obviously not [ financed ] in every single vertical. Is there something that kind of gets you into some other verticals?

Well, I mean, I think the offering being on 1 platform gives us the ability to go across verticals, the same way that we do with the payroll and HCM parts of our suite. So I think part of the attraction was this was another horizontally interesting area that we think we can also take into different verticals the same way that we have Paylocity for Payroll in HCM. So I think is a great fit for the platform. And I think the -- going back to Steve's comments early days, but I think the early traction that we're seeing is positive. I think we're pretty excited about it. .

Our next question will be coming from Siti Panigrahi of Muziho.

I just want to ask about the Airbase. It's been more than a year. Wondering what kind of feedback you have got from customer at least those customers who are using -- Paylocity customer using Airbase? What sort of revenue uplift you're seeing? And 1 clarification in terms of sell rep growth 8%. Is this mostly the Paylocity sales or the combined one?

Sure. On the first part, it's been 10 months since we made the acquisition. And we're just now in the last couple of weeks, launching Paylocity for Finance. And so we're really just now at a point where we have the Airbase products integrated into the Paylocity platform. And so I think we're really at the point now where we can be I think, more focused and more aggressive from a sales team and from a go-to-market standpoint, now that we really have, I think, a key part of the part of the value prop, we're able to deliver as a key part of the value prop in terms of the whole set of solutions on a single platform, which is I think really important to clients and prospects. So we're in the early days, but I think the feedback so far from a just product perspective has been very strong. That was part of our attraction to -- the Airbase business was the strength of the product side. It's been well regarded in things like G2. So I think our view was we could take a really strong product to create significant integration on a single platform and bring that to market and that, that would be valuable to clients. And I think that's what we're seeing, albeit in the early days of launch.

I think your question on head count growth. That is total head count growth across all of our sales forces, including Airbase, which, as you know, when we bought that was relatively small. We're excited about the opportunity in front of us, but the bulk of those additions are really in our HCM sales forces.

And our next question will be coming from Aleks Zukin of Wolfe Research.

I guess maybe on -- sticking with the theme of [indiscernible], any features that you're seeing seeing drive the most kind of interest and intense cross-sell conversations? Is it head count planning, expense management, corporate card? And maybe just comment on the gross margin tailwinds potentially around kind of as the mix evolves with those deals relative to the core? And then I've got a quick follow-up.

Yes. So I think if you look at module adoption, expense management probably has the greatest adoption in some cases, that ends up being the entry product, although we absolutely see full suite purchases because once you have all your employees using that and making approvals, you can then really take advantage of that utilization on that single platform to drive spend management, more complex rules, all the reporting on the back end. And ultimately, if you use all of their products, we've got all the data that they spend on people as well as on their business items. And so there's analytics on the back end that are valuable to the customers. And so -- but if I had to call 1 out, I think that's probably the expense management in terms of the most penetrated module they offer. Ryan, any comments?

Yes. I guess, Alex, this is the other part of your question on gross margins. I wouldn't say that the Airbase product has materially different margin profile than the core Paylocity business. I think we will -- going forward, as we did in '25, look to expand gross margin, both within Airbase as well as the core product set. And we have confidence that we're go to do so while still investing in the Airbase opportunity.

Perfect. And then maybe just dimensionalized potential contribution for fiscal '26. I know I think last time you guys talked about revenue contribution. It was on the order of maybe 1% for fiscal '25. Is it fair to assume something similar to fiscal '26? Or could it be a little bit above that?

Yes. I mean I think you're still in that range. That business has grown faster than our core business. So that probably becomes a higher percentage over time, although it is still a very very small portion. So I wouldn't I wouldn't sort of overstate that, but I think that business continues to grow at a healthy rate and will continue to increase in '26.

And our next question will come from Jason Celino of KeyBanc Capital Markets.

Just a couple of questions for Ryan. That's okay. Looking at the recurring revenue guide for this year, I know Q1 still has some inorganic benefit. But how should we think about the shape of the rest of the decel heading into 2026?

Sure. Yes. I think to your point, Q1 is the fourth quarter of the Airbase impact, and I think you see a little bit of that in the guide. And I think you also see the strong momentum we had to end fiscal '25. If you look at what's implied for Q2 to Q4, I think it's sort of 8% to roughly 8.5% recurring. And I think as I said in the prepared remarks, got an approach, guidance approach will likely be similar in fiscal '26, which is to say if we continue to see strong execution. We obviously have closer and better visibility into the near-term quarter, and that's typically where you see probably slightly higher revenue growth and guidance and then a level of prudence as you think about probably the back half of the year. But feel good about the momentum, feel good about the Q1 and full year guide. And I think if we continue to execute well, I hope to be able to take that number up as we go throughout '26, very similar to what we did in '25.

Okay. Great. And then just following up with Dan's very first question on the OBBA potential benefit. I know there's a difference between R&D expensing in the U.S. and international. But for you, the majority of your R&D operations are in the U.S., correct?

The majority are, yes, we would have a small portion, that would be foreign-related, but the majority are going to be U.S. That's correct.

And our next question will be coming from Jacob Roberge of William Blair.

Yes. And congrats on the solid results. You referenced continued strength in the broker channel. I know it's still fairly early days, but have you started to see any incremental changes in that channel following just the recent M&A in the space? Or have things been fairly consistent with what you've seen in prior years?

Yes. I mean, I think to your question, Jake, we've been really happy with what we've seen in the broker channel and being able to continue to drive 25% plus of new business referred from that channel is, I think, a testament to the effort there. And I think it's also a testament to the value props that we've been able to provide to brokers over a long period of time. And I think that continued clearly through the course of '25. And I think what I'd say is our message, I think, has resonated in the market. I think it continues to, I think that continued through the course of '25 and into Q4. And so I think that continues to be strong for us. And I certainly think to your question, our value prop that we have always stood behind including not competing with brokers from a market standpoint is a really important point that we've certainly leaned on and I think has continued to resonate. So feel good about where we finished in '25 with respect to broker relationships, in the broker channel. I think we're teed up for continued momentum there as we go to Q1.

Okay. That's helpful. And then just wanted to follow up on the demand environment. I know last quarter, you called out a little bit of noise in the last week of April. Did that noise continue throughout the quarter? Or was it just a week or 2 blip? And then, Ryan, helpful commentary on your head count and rate cut expectations in the guide. But just any sense of what you're assuming for the health of broader HR budgets when compared to prior years?

Yes. I mean, I think maybe going back to my earlier comments on the demand environment overall. I mean I think we -- if you look back at fiscal '25 in its entirety, I think what we would say is that we saw a fairly steady and healthy demand environment. And I think that's what we continue to see in Q4. And I think that's what sits underneath our guide as we've come into Q4, develop the guide and as we looked across '26. I think we're making a similar assumption relative to the demand environment. And I think our sales and go-to-market team did a great job of executing throughout the course of '25. And I think that is what allowed us to produce the results that we've reported.

Yes. I would just add, I think we feel really good about the initial guide. We took a similar approach as we did in fiscal '25, so comfortable with, I think, all assumptions across each of the variables, whether that is HR budgets, workforce levels, obviously, interest rate impact as well and feel good about where we are from a guidance standpoint. And then to Toby's point, I think we feel really good about the momentum we have exiting '25 into '26.

And our next question will come from George Kurosawa of Citi.

Great. I'm on for Steve Anders. Just on that point about hiring activity, head count hiring for FY '26 and maybe the flip side of that productivity. I understand FY '25, you guys are quite focused on go-to-market productivity. Can you just talk about what seems to have been working there and how you're thinking about improving that metric into FY '26?

Yes. I mean I think coming into fiscal '25, we increased our sales head count by right around 8%. And the goal coming into '25 was to be able to continue to drive productivity and I think that's what we saw throughout the course of the year quarter-to-quarter and then looking back on the full fiscal year, I think we continue to have access to best talent in the industry from a go-to-market, from a sales perspective. And that's always been the goal to be, I think, the destination in the industry for the best talent. I think that continues to be the case. And I think we're really fortunate we were able to come into fiscal '26, fully staffed again with right around 8% head count growth again this year coming into '26. And I think looking out across the year, I think the goal and the focus will be exactly the same as it was in '25 to be able to take that 8% head count lift and to be able to continue to drive productivity. And I think that's exactly what you saw us be able to do throughout the course of '25. So I think we're pretty happy overall with the setup that we think we have for '26.

Okay. Great. And then just 1 on Paylocity for Finance. It sounds like you've alluded to it being a bit of a bigger purchase decision. Maybe if you could talk about what you've seen or what you expect in terms of trigger points for adoption, what causes someone to purchase?

Well, I think it varies by organization. But I think the value prop -- you've got people in our kind of mobile app every day using all of our products on the web. And so when we talk to a CFO and present the opportunity to be able to manage expenses, spend cards all in a single place. with incremental rules that match the organizational policies and then be able to accumulate all that data on the back end for a faster close. It's a pretty interesting value proposition that we find most customers are at least willing to entertain the conversation, and then it's about differentiating versus other competitive offerings that they can have. And so overall, I think it really starts with the integrated platform that's the point I'm really trying to make. And the value that it is from a service and implementation and how easy all that really is to use. And then we've got the finance capabilities that they're looking for with a very rich product in the Airbase capabilities. But as I said, it's probably not going to scale quite as fast as simply add-on because it's a higher price point, it's probably a bigger commitment from an organizational implementation, but early signs, we feel really good about that. We feel good about the referrals that we've gotten back to the client base as well as new prospects. And we were only a few weeks in, as Toby mentioned, into the launch. So we're going to keep making this better over time and take advantage of the opportunity.

And our next question will be coming from Zachary Gunnecessary of FT Partners.

Just 1 for me. As other companies have looked to build out their accounts payable products, there's always a lot of focus on the supplier side of the network as much as the customer side. And those companies like Bill have also pushed up market, they've stressed the need for building the supplier side of the network. So can you just talk a little bit about with Airbase and with the finance products, how you're addressing the kind of supplier and customer sides of the network?

I think there's different parts of that supplier question, then -- that we do provide capabilities for. So certainly managing the who the supplier is, there's a PO process that maybe a larger organization might have to be able to make sure that purchase is approve at that supplier, obviously, making those payments on the back end. But I think the greater the payment volume that you've got, then big greater opportunity is to have that broad supplier network. And so we certainly will see that, I think, opportunity become more interesting as we scale this solution over time and we drive volume through the platform. If you look at the average customer size being roughly similar to ours, around 150 employees, you probably, in general, are not necessarily highly sophisticated in terms of that supplier network, but it's an area that we're investing in and that we feel as we scale and drive volume to, we'll create incremental opportunity.

And I show no further questions at this time. I would now like to turn the call back to management for closing remarks.

Yes. I just wanted to thank everybody for joining. I appreciate your interest in Paylocity, and I wanted to say a special thank you to all of our employees for a strong fiscal '25. Thanks, and have a good night.

And this concludes today's conference call. Thank you for participating. You may now disconnect.

All right. Well, good afternoon, everybody. Dan Jester, BMO Software Research with our next session today, where we have Paylocity. We have Toby Williams, who's the CEO. So Toby, thank you so much for joining with us today. I appreciate it.

Yes. Happy to be here. Thanks for having us.

Pleasure. So in terms of logistics for the folks who are listening in, if you have a question for Toby, shoot me an e-mail, and I'll do my best to get an answer for you.

And with that, Toby, why do I turn it over to you, and you can just give us an introduction of Paylocity to the group of folks on the line.

Sure. Thanks, Dan. So Paylocity is a software company that provides payroll, HCM and finance applications for mid-market clients. So our average client size is around 150 employees, but our target market is businesses that have between 10 and 5,000 employees. We have over 40,000 clients on our platform.

And I think we have been delivering a pretty balanced mix of growth and profitability over time and will end up being -- we're just in the last month of our fiscal year, so we're in the middle of closing the year strong and haven't provided our fiscal '26 guidance yet, but we'll end up this year somewhere in the mid-teens from a growth perspective and certainly focused on driving use of our free cash flow leverage over time. So I think you've seen a mix of high growth from us balanced with strong profitability, but that's the place where we've been focused in the market.

From a payroll and HCM standpoint, a broad set of applications across both of those areas. And then we've -- in the last about 8 months ago, acquired a business called Airbase that has given us a full set of finance applications, really focused on spend management.

So I think for us, a big growth has not just been acquiring new clients to do logos to the business, year in year out, which we've done, but also continuing to broaden the application set to be able to drive ARPU both in terms of new clients, demand and back into the client base sales. So that's really on the short term of where we've been focused over time.

That's fantastic. And it gets me right to my first question. So thank you for shadowing it perfectly. So fiscal year-end is going to end at the end of June. If you go back a year ago, you had suggested to investors that you're going to grow recurring flow by 10%. And at the midpoint of your guidance, you're going to grow 14% and you take Airbase away, maybe it's 13%. So you definitely outperformed your guidance.

So I guess I want to start with what went well for you this year? Like what played out better than you had expected?

Well, I guess I would start by just giving maybe a quick overview of the guidance philosophy because I think that is a consistent over time and be as impactful to where you start the guidance for the year. Yes, I think our philosophy -- our guidance philosophy over time has been very consistent. It has been grounded in a desire to be raised over the course of the year and to overperform where we start.

And I think for any given year, we start, I think, in a more prudent place as we come into the year Part of that is because you just have limited visibility and deal cycles are still relatively short and timeline, so you start in a more prudent place with a view towards being able to overperform during the course of the fiscal year, all things equal.

And I think that's really what we saw in this fiscal year so far. So the demand environment has been fairly stable. Employee in the platform has been fairly stable. We've assumed that, that would be flattish through the course of this year, and that's exactly what we've seen.

And I think the execution of the business has been really strong, both from a go-to-market and from an operations perspective through the course of the first 3 quarters of the year, looking to close strong right now as we're already in June.

So I think that's really the perspective on '25. And I think the TS for '26, while we haven't finalized the plan, we certainly haven't provided guidance yet. I think that's what we see in front of us is hopefully a continued stability in the demand environment. And certainly, all the focus is on how we execute.

So that's I think where we sit today. Things that have gone right have really good execution oriented in fiscal '25. I think the demand environment has been stable. I don't think it's gotten better, but also we don't think it's gotten worse. And I think throughout that, it's been just really, really good, strong execution from the teams.

Okay. So you don't give midterm growth targets. You have the $2 billion aspiration that you're driving the business forward. But when I listen to your answer for sort of what happened last year. It is pretty replicatable, like the macro is stable, retention was stable. You added sort of 8% growth in sellers and you add -- you gave a lot of new products to sell.

So I guess as I think about the business is this past fiscal year, is this the playbook that we should be expecting velocity to deploy? And if not, like what are some of the variables that you're -- you should be considering that may be different in the future versus today?

Well, I think if you go back over the last decade, just the playbook that we've run has been focused on thinking about the growth algorithm, the growth algorithm has really been focused on driving new unit growth in the business, which we continue to do is delivering more products on the platform so that it has been measured but we have moved into the office of the CFO, I think we're talking about this more from an ARPU growth perspective over time.

So if you think about new unit growth being one, ARPU growth being 2 and then is providing a really good client experience and driving retention to world-class levels, which we have has been -- those are sort of the, I think, the key parts of the growth algorithm and continuing to grow sales rep headcount as part of driving new unit growth and going back in the base to drive ARPU growth over time.

So I think that's been the playbook that we've run very consistently and fairly successfully over the last decade or so. And I think as we come into '25, it was the focus on those same fundamentals. And I think it will be your same focus on those fundamentals as we go into '26 and beyond.

I think -- the reason I say it that way is there's a ton of consistency in the play that gets run. And I think while this business is much bigger now than it was, I mean I've been here for 8 years now, we had $300 million of revenue on the guide here and we'll do close to $1.6 billion this year. So it's a much, much bigger business.

And so the growth rate may over time and certainly, there's macro impacts in any given year that will affect that, too. But I think the focus is on continuing to run that lay book, develop delivering a really compelling balance of revenue growth with profitability that I think is -- compared to really favorably to both our industry and software more broadly and continuing to deliver consistently over time.

And whatever the growth rate is, if that ends up being in any given fiscal year, that -- our focus is on that execution and beating the competition every single day and being the highest growth in our space, which we have done. So that's really the formula that we're focused on delivering.

Okay. So I want to come back to some more financial stuff maybe towards the end of the conversation. But maybe for now, I think it would be helpful for people to kind of break down the growth story a little bit more. And so maybe we just start with sort of the new logo opportunity and where you've been capturing new customers for.

One of the things that you're saying looking at Paylocity over the years is that some years you kind of hit your numbers because you can move down market -- some years, you hit your numbers because you've got a lot of big wins sort of in the upper market. There's been a lot of flexibility in terms of being able to navigate the target market in which you set out.

So I guess my question is, as I think about the go-forward opportunity for Paylocity, as you get bigger, you mentioned the $1.6 billion of revenue does that flexibility to be able to hit new logos? Does that flexibility go away? Are you inherently to drive sort of growth at scale naturally being pulled more upmarket or do you think you can continue to manage in that diverse set of new logo opportunity?

Well, I mean, over time -- so our average client size hasn't changed that dramatically over time. I mean it's around 150 employees, and it's been between 100, 150 for a long time. So it hasn't made huge swings. I think the reference, though, to targeting different parts of the market, I think if you go back by a handful of years, we were seeing traction in the lower end of the market, and that was both in terms of the units and clients in the sub-50 employee segment of the market, buying more product.

And so we put some incremental go-to-market resource there because we're seeing the traction. And I think that's worked really well for us. And then as you referenced, over the last kind of 3.5 years-or-so, we've seen traction in the upper end of the market. And that's largely been the sales team being successful there and part of that as a product that has been built out comparing and competing really favorable there from a larger client perspective.

And as that has happened, we have periodically increased the higher end of our target market. So that was a 1,000, 1,500, and we've ultimately taken that up to 5,000. We certainly have clients that are larger than that. But it's more at an approach that's been thoughtful based on where we were seeing opportunity, where we were seeing success and then building on those initial elements of traction or those initial elements of success in a thoughtful and way that broadens us out both at the bottom end and at the top end.

And that I think that helps drive new logo, new unit growth, and I think that's given us the ability to also take full advantage of the expanded platform to drive ARPU growth over time, too. So that's really been the best been strategy. And I think as we look forward, that same opportunity exists. I think we have the opportunity to fully serve the market that we're in, that may expand a little bit around the edges over time. And certainly have the opportunity to continue to expand the product set that we're bringing to market to be able to drive ARPU over time as well.

Okay. Okay. So if you go back and we're able to do this sort of the time period again. If you go back a few years, a big chunk of your customer takeaways were from ADP and Paychex. And if you look at that mix today, built a predominant mix, but it's gotten a little bit smaller in terms of the overall share. And so I guess I wonder as the mix changes and maybe you go head-to-head with more modern solution providers. Does the sales tip switch do you have to focus on different parts of the market.

I guess, as -- so maybe just like from who you're taking customers away from is that changes, do you have to change your go-to-market motion significantly as a result?

So if I start with the core of your question on the mix, what that looks like today. So the biggest bucket of source of business for us today is the mix of ADP and Paychex, which has been the case for a long, long time, going back by a decade. So that is still true today.

That percentage of the overall total slowing downward a little bit, but I think that's the natural sort of solution of us broadening out from a go-to-market perspective. So as you do that, you start to take more business away from local and regional providers. And then the point you made is also impactful, which is there's other companies out there that are now bigger.

And so you see them more frequently and you have an opportunity to take clients from them as well, which I think is exactly how that has unfolded for us. I think we still have our biggest source of business is the mix of ADP and Paychex. And that's dimensionally, that's probably 1/3 or so, maybe a little bit more.

And then you have 15%, 20% that is in-house, 15% to 20% is local and regionals. And then you have the rest is the other probably larger players and then the long tail of other providers that are out there. That's really how that's trended over time.

And I don't think that there's not a sort of a hard pivot in the go-to-market motion or the value prop that we're communicating. I think a big part of the the value prop for us over time has been that we have a differentiated product set and better service. And I think that's -- those are the 2 reasons why people tend to in our industry is either because of service, and we try to differentiate the product set and the product strategy, provide a broader and deeper portfolio of payroll and HCM and now finance products than anybody else in the market.

I think that's been a big part of our success story. And then I think the service piece is really important, too. Our clients depend on us for great service. And I think we've been able to differentiate on the service we provide as well. So that's really

Okay. And as I think about the different ways you build pipeline, one of them is your direct sellers, but you also great relationships with brokers. So as I think about sort of the go-forward -- what are the different variables you're considering maybe broker channel, maybe there's some evolution there, may put some more resource to drive the imbalance from there? Like how are you thinking about those dynamics?

Yes. I mean, I think -- so the broker channel has been an important part of our go-to-market motion for a long time, going back more than a decade. And that continues to be really important for us today. So we have gotten consistently over the course of time as the business has continued to grow and scale, more than 25% of our new business comes referred to us from the broker channel, which is primarily insurance brokers.

So the deals are still sold directly by our sales team, but they're partnering with brokers in their local community for these. And that's been a really important and higher closing a source of business for us. So we've put a lot of focus on that with our sales team, a lot of focus on that from a technology investment perspective.

So our value prop for brokers is it's really threefold. One is we build the relationships with them in the field in their communities. That's the first part. We have a broader and deeper coverage set there than anybody else in our industry.

Second piece is actually delivering the value from a technology perspective. There's 2 parts to that. One is making sure that we need to have the easiest integration possible to our products through our solutions so that there is free flowing data into those benefit systems that the brokers care about and that they need to actually deliver their benefits with carriers to their clients.

We're also giving -- we also give brokers the ability to see their books of business in our platform and be able to look at the benefit utilization and engagement with the employees to their clients. It gives them a sense of the stability of their revenue base.

That's -- so there's a significant, I think, technology differentiation that we offer brokers versus anybody else in the industry. And the third part is we don't compete with them for their insurance business. And that's meaningful because we're a partner to them to help deliver the experience to their clients.

But by partnering with us, they're not putting in risk their the commissions that they rely on -- and I think I mentioned that because they're some of the largest competitors in the industry, and Paychex both have PEO businesses, Paychex is one of the largest insurance brokers in the U.S.

And I think that presents a certain couple of channel conflict for referrals. And I think we want to be really well positioned and have built a substantial partnership across the U.S. with brokers that if there is any destruction to that, we want to be the ones that are positioned to help them with their clients and with their referrals.

So that's really been, I think, a key part of our focus over time with respect to that channel. And then I think otherwise, from a go-to-market perspective, we continue to grow rep headcount year-over-year. We grew sales rep heads by 8% coming into fiscal '25. And I think we've been able to be successful with those bringing those reps on and drive a significant level of productivity and go-to-market through the course of '25.

And we still -- we haven't closed this fiscal year, but I think that's really where generally where our mindset would be as we start to think about '26.

Okay. So can we talk a little bit about the product portfolio? Because I think it's been -- it's very clear that over the last 18 months, you've had a lot of new product out there. I think goes down the list, like rewards recognition, employee voice, scheduling plus, learning plus, headcount planning, like it kind of goes on on which, one, I think, indicates sort of the velocity of innovation on the philosophy platform is very impressive.

And so I guess I want to know kind of like what have you -- what have you built internally that it allows you to drive that pace of innovation?

And then secondly, what customer adoption has been like for this plate set of tools you brought to market?

Yes. So you're right. I think it's been a rapid delivery cycle for the last 18 months-or-so, which I'm really proud of. I mean, team has done a great job of bringing those solutions to market. And it's also early days. So I think those solutions are all ramping.

I'm really happy with the ramp we're seeing in those solutions, but it's still early days. I think the lens that we would typically apply to, if we're going to invest in a solution, it would be to solutions to drive 10% to 20% penetration over a handful years, and that's really been the benchmark that we've used over the course of time, continues to be.

And I think those -- all of those solutions are tracking well on that sort of glide-path, so really happy with what we've -- what team has been able to deliver and the adoption that we've seen so far.

Airbase is -- so headcount planning is one that falls into the CFO, starting into the domain of finance-oriented solutions. Airbase acquisition, obviously, is a big cushion to that from our standpoint. That will take a little bit longer from an integration perspective because the goal is to be able to fully integrate that solution set on the Paylocity platform, deliver seamless integration, seamless user experience, and that will take us well into fiscal '26, but that's another big opportunity I see in front of us.

Okay. Yes. So I mean, maybe this is the appropriate time to talk about Airbase then. So you still have some integration left you just acknowledged. So as you go into this fiscal year, though, are your reps to have specific Airbase quota? Like how are you thinking about selling Airbase why you're still on the back end integrating all the pieces?

Yes. So we have continued to sell Airbase on a stand-alone basis, that's been -- I think that's continued well since the closing. We're only the date or so months into the close. But I think that's continued to go well. as you develop the tighter and tighter integration to our platform, that gives you the ability to deliver the value prop that clients really want.

And when you can do that, you have the ability to in even more from a go-to-market standpoint. So I think as we get into first half of '26, we'll be in a better position from an actual platform integration perspective and I think that's when we will get to the place that will allow us to lean and hire from a go-to-market standpoint.

But yes, I think the goal is as quickly as we can, but I would say broadly in the first half of '26 to put that in the hands of our all of our sellers so that we can potentially attach to new business and also sell back into the customer base. And the way that we would do that is very similar to what we've done with other solutions that we brought to market.

You would have our field reps having the ability to sell that at the point of sale from a new client standpoint, but you also have a group that has of inside sellers that have a higher degree of subject matter expertise and they can support the new logo and teams with a higher degree of subject matter knowledge on the spend management platform and applications.

And that's how -- that's very similar to what we've done with other applications that we brought into the business. So I think the -- the strategy there is to pursue the same execution that we have with other things. So I think we're on the to be able to do that.

Okay. And as you think about the year ahead, can you -- will you consider sort of flexing investments, maybe more inside sellers and maybe less hunters? Because you have so much more product to sell or maybe it's an uncertain macro and so you want to sort of drive that part of the motion? Or should we expect continued balance between how you divide resource between the 2 target ways to go to market?

It's always a balance, and I think that will be the case as we go into '26 as well. I mean I think the ultimately you have to be able to do both things. You have to be able to drive new logo acquisition and you have to be able effectively back the customer base. And we've been, I think, fairly balanced in making investments in both of those parts of the business over time.

And I think that will be the same thing in '26. We'll figure out what the right balances to be able to both that headcount overall, but to be able to go after effectively new unit growth, new logo growth and grow our capabilities to sell back in the customer base. So it gets you both.

Okay. And when you're selling into a customer that has 100, 150, 250 employees, is the buyer for an Airbase-type products similar to sort of the core Paylocity buyer? I guess, how do you envision navigating the fact that you're selling into maybe a slightly different part of the back office function as you historically have been?

Yes. I mean when we're selling -- so to put the finance application aside. Typically, when we're selling payroll and HCM solutions. A part of the finance team is involved in that buying cycle. It could be that the CFO is directly involved. And is the buyer could be that the HR team works for the CFO organization.

It could be that is the CHRO buyer, but the VP of Finance is at the table as well because it's an investment that they're making and the finance team, the CFO often is either involved or has visibility into it. So it certainly, I think our perspective would be highly relatable from a persona that we're dealing with perspective, meaning somebody in the finance team.

And -- so I mean it's no doubt it's a different application set. But at the same time, a lot of the value prop that you're delivering in terms of automating manual tasks, providing greater visibility, delivering a full solution set on a single platform, a lot of the value prop is very similar that we would be describing.

And we have a significant amount of experience in dealing with that first persona set. So -- there's certainly some difference there, but I think there's more probably commonality that we would see that we would see any difference in the motion.

Okay. And you and others have AI as an opportunity to impact your customers' workflows and bring new products that are powered by AI to the market for your potential customers or current customers looking to expand, what's their perception of AI? Are they pulling you for new things? Are you pushing it to them? Just give us a lay of the land in terms of how you think buyers are approaching the AI buy here in '25?

Yes. I think buyers of all sizes, but certainly in our market with an average customer size of 150 employees-or-so. I mean everyone is looking for efficiency, and they're looking for ways that they can leverage technology to make their jobs easier, to create a better experience for their workforces and that is no different for us.

I think that's consistently what we see across full application set that we offer, across all the buyer personas and I think that's what people are really focused on. And I think there's a mix of ways that we think we can deliver a better experience for clients, leveraging AI technology.

And one is incremental functionality that leverages AI that makes jobs easier. So a very easy example of that is if you are a hiring manager and you are going to create a new jobs being able to leverage the AI capabilities in our platform to not start sheet of paper, but we start with something that you can react to that makes your job easier.

I think that's that functionality that is value-added to people from an efficiency standpoint. That's sort of one bucket. And I think that's very real, and we're in the early days of all of these things, but we're in an early days of this one.

So there's also, I think, how do we make jobs efficient, more efficient or processes more efficient. So the extent to which we can look at workflows and say, hey, there's 10 steps in a workflow, I think we can take 3 of those out because they're largely exception-based I think that is a way that you can streamline in process, streamline workflows and therefore, thereabout generate efficiency for users.

I think that's a very real opportunity that, again, I think we're all in the early days of, but there's the potential to differentiate the more we can do that. And the last part is, I think there's an element of being able to understand customer experience and understand where in the application they would have questions, what those questions are and what's the seasonal element if there is one for those questions to come out and be able to foresee those questions coming up, address those and deliver those answers in the application before someone has to pick up the phone or send you e-mail chat you with with whatever that question might be. I think that will fundamentally create a better customer experience.

I think that will also take load over time of our service teams. And so I think that's another bucket of opportunity. But those are all the things that we're focused on delivering, which will add real value to clients and create a better client experience over time.

And internal use of AI, how is it progressing relative to what you had thought? And any sort of areas of interesting wins or efficiencies that have emerged?

Yes. Well, I think we're in the early days, but I think there's more of this to come over time. But the example that I just gave with being able to create efficiencies for users in the application and address questions that you know that you're going to get in the application in an automated fashion that definitely takes load off service providers.

And I think that is 1 of the things that we're seeing in the early days. And I think that will be the case over the course of time as well. I think we'll see more of that in the future.

Okay. So I want to ask a few kind of big picture questions, but I'd be certainly remiss if I didn't ask you, we touched a little bit about sort of fiscal '26 and your philosophy, are there any other variables investors should be considering with regards to either sort of new business or float or margin that you're considering as you're putting the guidance together to deliver in August?

Well, how we are going to expand out in any of those areas. I think this is a -- if you think about where we were coming into fiscal '25, I think we were our commentary was that we thought the demand environment was fairly stable. I think that's been the case through the course of the first 3 quarters in the fiscal year.

And I think that is -- I think we're coming into Q4, which is really the core of the planning time for next fiscal year. I think we're coming in with a similar viewpoint there. It's a fairly stable demand environment, which is a great baseline to have coming new fiscal year.

So I think that's 1 piece that's really important. I think another piece is workforce level, so employees in the platform. We guided fiscal '25 to be flattish. And I think that's the experience that we've seen over the course of the year. It's slightly positive but basically flattish through the course of the year. And that is probably the starting point for how we would start to think about '26, so relative consistency there.

And then I think when you start to get into other other investment areas like the sales headcount investment that we would typically make going into a fiscal year. We grew sales headcount by 8% coming into fiscal '25. Haven't finalized the plan yet, but I think we'd be probably above a similar mindset going into at least similar ZIP code of mindset with a view that we'll invest in sales at and we'll also try to drive for a level.

So I think there's a strong consistency with where we sit today with where we would have entered fiscal '25. Work left to do we have to close the year, looking for a strong close and need to finalize the plan. But I think those -- that's how I would describe our thought around those things, which are certainly relevant to the fiscal '26 planning as you sit here today in Q4.

Okay. So I think Dave has all together. But relatively recently, you reset some of the midterm margin profile of the business. They had a $2 billion revenue target and you set the midterm margin targets and free cash flow. And we're already there. And so right, but we're already there. So as investors sort of think about the medium-term algorithm here, -- are we compounding along at sort of this level of margin? Or are there things either AI, efficiency, scale in which there is the opportunity to drive more EBITDA or more free cash flow margin on the pathway to the $2 billion revenue target?

Yes. I think -- so off, I mean one is, I don't think those targets were men represent ceilings in any way, shape of form. And while we are in most of the ranges, we're not yet at the top end of the range. And so I think there's some notion of, hey, we still got room -- very performance. I should start there. And I think we've driven a ton of leverage from adjusted EBITDA and from a free cash flow perspective, while still delivering market-leading growth.

So I'm very happy with what we've been able to deliver from a financial perspective. We're not at the top end of the target yet. I think that's the effort that we have in front of us, but there's no ceiling feeling that those represent.

So this is a business that should be able to continue to drive leverage over time. But the time this question to the last question you asked about '26, I mean we've delivered -- haven't closed the year yet, but we'll end up somewhere in the ZIP code of a few hundred basis points adjusted EBITDA leverage for fiscal '25.

And I think the comment that we made on the last earnings call was that the business over time, we believe, will continue to drive leverage on a multiyear basis. That's what we have done, and that's what we believe we can be looking forward.

Not every year is going to be 200 basis points adjusted EBITDA leverage. As we look at -- as we look at '26, again, the plan is not finalized and we haven't provided guidance. But as we look at '26, feel more like that's a year where there are investments that we would like to make across the business to probably moderate that same margin expansion. So it's not that we think differently about the multiyear opportunity there or that we won't deliver margin expansion in '26.

It just probably doesn't look same as '25. And that's just because we see areas of want to invest in in '26 that we think will help drive both growth and scalable over time.

Okay. So I think it's an interesting perspective because Paylocity has had such stability in terms of sort of the leadership at least the Wall Street facing leadership like you and Steve and Ryan have been talking to us for many years.

And so I guess I love your perspective about the maturity of the business. Like you've taken the business, as you said, where you came in a couple of hundred million of revenue now, it's going to be $1.6 billion-plus. What are the things that you're working on now to sort of mature the business for the next leg of growth?

Like are you thinking about offshore development? Are you thinking about shared services centers? Like what do you need to do in order to get the business ready for $2 billion, $3 billion, $4 billion of revenue and beyond?

Yes, I mean, to the first one, I think just on the consistency, I mean, I've been here for 8 years now and for that entire time, it's been Steve and I and Ryan that have been in the roles that have, I think -- and certainly leading the business, but also engage with you and both our investors and coverage analysts.

So I think there's tremendous amount of consistency there, not just in terms of the people, but if the way the business gets wrong. And I think that adds a ton of value over time. And I think part of what you get when that's the case is there's not a -- you get consistency in how the business is driven over time and there's not the step function change that you then need to go drive is totally different than what it was last year.

So from a year-to-year perspective, one of the things that we've been really focused on is setting the business up for scale, so that you're prepared well ahead of time for taking the threshold that we I mean been here for almost almost 19, almost 20 years. So an even broader spectrum of time. But even in the time that I've been here, we crossed the $500 million mark that, then we crossed the $1 billion mark, then we crossed $1.5 billion margin.

Now we get added on $2 billion and beyond. And I think 1 of the things that we've done well has been to set ourselves up for the scalability to be well ahead of time. So you don't get to this clip stage or set function stage that you need to do all these things in a fundamentally different way in a given fiscal year. I think we've been pretty thoughtful on a forward basis about how to do that.

I think some of the things you asked about, though, goes through some of the investments that I think we'll be focused on in '26, it will be putting even more focus on what we're doing from the Airbase platform integration standpoint. There will be investments in AI that will cut across internal and external usage across the business in every single area and continue to invest in our operations and service and implementation teams so that they can operate as effectively and more efficiently at scale. So those are all the things that I think we're focused on. And I think we're doing that at a fairly consistent and linear fashion.

Okay. The focus on integrating Airbase, does that limit you in terms of what you're willing to do in terms of inorganic opportunities in '26?

I don't think so. I mean I think our focus is certainly on making sure that, that goes well. So there is no doubt that, that is a primary focus in terms of continuing to integrate the platform. So the business itself is well integrated at this point the product and platform integration work is continuing and will continue through '26. And that we need to be able to make that successful.

So that's definitely a primary area of focus. But I don't think that cuts off any opportunity to do anything else from an inorganic standpoint, but it's a pretty high bar for us. I mean Yes, we have done some acquisitions, but they tend to be situations where there's a product or technology in the market that's a great fit for our sentiment in the market and then will accelerate time to market for our product road maps, where we also think we have an opportunity to deliver an integration experiences second to none in that it's very seamless from a user perspective.

And so I think it's -- it has always been a fairly high bar. It continues to be a high bar, and we have to make sure Airbase is successful, but I don't think that's cuts off any opportunity that we might see to do something else in '26. We certainly have the financial capability to do it. We have the the desire from a strategy standpoint to continue to grow the capabilities of our platform and to be able to continue to drive expanded ARPU and deliver incremental value clients. So I think it's a matter of that across the high threshold.

Great. Well, all right, we are out of time. So Toby, it was wonderful talking to you. Thank you so much for joining our event this year. And for all the folks in line, if you have any follow-ups, please let me know, and I'll get them over to the Paylocity team as soon as I can. So I'll thank you so much, Toby.

All right. Thank you very much. Have a good day, everybody. Appreciate your time.

Thanks, everybody.

All right. Well, thanks, everyone, for joining today, both in person and listening over the webcast. Before we kick things off, my name Jake Roberge. I'm the research analyst here at William Blair, that covers Paylocity. And so for a full list of our research disclosures, please visit our website at williamblair.com. With that, really excited to have Ryan Glenn here, Chief Financial Officer of Paylocity. Thanks for joining us today Ryan. I appreciate it.

Thanks for having me.

Yes. I guess just to kick things off, maybe for those that are newer to the story, could you provide maybe a brief history of Paylocity, what the business does, what the market opportunity is that you're addressing just to level set the room?

Yes, absolutely. So Paylocity is a payroll, human capital management and spend management software company. We've been public since 2014, business focuses on the 10 to 5,000 employee space. We have roughly 40,000 clients today. Our average client has about 150 employees. Business has grown pretty significantly, as you know, over the last decade or so, we've been public. We IPO-ed at about $100 million of revenue, and we'll do roughly $1.6 billion this fiscal year. So growth has been significant over that period of time. And I think similarly strong financial and marketability profile. So where we sit here today is coming up on $1.6 billion of revenue, a business that has 35% plus adjusted EBITDA margin, 20% plus free cash flow margins and this fiscal year growing about 14% on the recurring side.

That's helpful. And then thinking about the competitive landscape, a common feedback point I get on Paylocity is it's a great business, it's operating in a large market but there are a lot of other players out there. So how do you think about competing in that type of market? And how do you become 1 of the long-term winners in the space?

Sure. I think it is -- HCM specifically has always been a competitive space. As I referenced a minute ago. We focus on 10 to 5,000 employee segment of the market. There are over 1 million businesses in the U.S. that fit that definition, and that's compared to the 40,000 clients or so we have today. So I feel like we're only a few percentage points penetrated into that market opportunity. I think on top of that, we've also grown significantly through increasing average revenue per client. So being able to expand the percentage or the attach rate of our HCM suite and now with the acquisition of Airbase, starting to move more firmly into office of the CFO, which we think will also expand the addressable market over time. So it is really a story of large market opportunity and pretty significant competitive differentiation on the product side.

That's helpful. And then double-clicking into that kind of competitive differentiation on the product side, what acts as a differentiator between you and some of the other cloud platforms out there like a Paycom or a Paycor. I would love to kind of double-click and note where you really win, what type of customers and what really sets the product apart.

Sure. I think what has been a differentiator for us for the really last several years plus has been the focus on product investment and really positioning ourselves as the most modern HCM provider. So we've seen increasing attach rates on really all of those newer products, whether that is community, premium video, market pay, recognition and rewards, some of the expanded offerings across time and labor and learning management.

So we're really able to go to market with a competitive differentiated story across the product set. We have a number of products that others don't in the industry. And I think we've been able to really articulate how the software is useful certainly from a reduction of manual effort, being able to automate various elements across an individual client's use case. But how do you drive our product set to get better insights around your employee base. How do you drive it whether that is from an AI or other standpoint around automation and increasing workflows in that perspective. And I think all that has been backed up with really, really strong performance from an operational standpoint. So industry-leading service levels, industry-leading implementation as well. So really, really strong package there.

Yes. That's helpful. And then one of the largest portions of your new business still comes from ADP and Paychex today, but there's -- there's recently been talk about maybe a little bit of improving churn for those vendors. And so could you talk about what you're seeing on the competitive front with them and kind of how that opportunity should trend moving forward?

Sure. I think that's probably been a question that we've gotten every quarter for the last decade we have been public. I think the competitive landscape has been stable, nothing that I would call out as far as different players we're seeing in the space, any new entrants or folks that we're seeing less. We've certainly seen increased success upmarket, as you know, over the last few years. So we have increased that target client with up to 5,000 employees over the last few years. So we're seeing increased success in that part of the market. But largely speaking, it has always been competitive. And I think that's why you see us continue to press hard on strategy, press hard on product investment and sales and marketing as well. So nothing really new that I would call out that we're seeing, whether that is from ADP or otherwise.

Okay. That's helpful. And then shifting over to the macro environment. Obviously, it's a bit variable, especially over the last few months with the recent tariff announcement. So can you talk about how the macro has impacted your business over the past few quarters? And if there's been any change in demand since the recent tariff announcements?

Yes, nothing that I would call out. I think it has -- we described it last month on the earnings call as a stable macro environment, and that continues to be the case. I think year-over-year, we've seen client workforce levels or pace per control up a touch. I think we're seeing the same seasonal increase in client workforce levels that we typically see in the spring and summer months. So it's certainly a question I think that is out there with some clients and prospects. Obviously, everyone sees some of the volatility, whether that is from a policy standpoint, tariffs or just the overall news cycle, but nothing tangible that we have seen yet within the client base.

And certainly, when you look at the results we put up in the third quarter, the ability and the fact that we've beat our guidance each of the quarters this fiscal year, we've raised the year by more than the beat. We've increased profitability pretty substantially as well. There's nothing that I would call out, certainly something we're watching, but has not shown up in any of our data today.

Yes. They just beat in Q3, too. So it's definitely helpful in terms of the business trends there. So -- but as we think about the macro, you're obviously heading into Q4 going to be guiding for the full year. So what are some of the kind of high-level considerations you'll be looking at as you're looking to put out that guidance for the full year?

Sure, yes. So earnings call will provide guidance for Q1 '26 and then the full year -- and I think very expectation, a very consistent approach from a guidance philosophy standpoint as we went into fiscal '25, which is we feel like we set probably prudent but reasonable guidance that if we performed well, we'd be able to beat raise throughout the year, and that's exactly the execution that we've seen. Typically, you'd see a little bit higher recurring revenue growth in the near-term quarters because you have a better visibility.

You've got less volatility and uncertainty. And then as you think about what the guidance could look like on a full year basis, there's probably incremental prudence there because we haven't seen it in the data yet, but there is some uncertainty from a macro standpoint, you have larger and some level of execution risk when you're guiding for a full year. So I think from a philosophic standpoint, we'll likely have a very similar approach, and we'll give you more details next quarter.

Yes, makes sense. Okay. Taking a step back and thinking about Airbase, so recent acquisition you all did. Can you talk about that product? What it exactly does? Who it competes with? And maybe just kind of help us better understand that product opportunity moving forward.

Yes. I think for us, as we think about how do you drive global revenue growth for years and years to come, not only within HCM, but with the broader offerings. I think office of the CFO software broadly has been something that we've probably looked at for each of the last few years, we made a small acquisition of a company called Trace a few years ago, which became head count planning software, and that was really our first entree into office of the CFO. And I think Airbase is a business that we probably knew for, I don't know, 9 to 12 months leading up to the acquisition.

It was certainly an adjacency that was interesting to us. And I think the value proposition at the time continues to be really where we're focused today is as we get through a real purposeful integration process, being able to be in a position where not only for the 40,000 clients we have today, but for prospects as well, an integrated single pane of glass where they're able to see all of their labor and nonlabor spend altogether in a fully integrated product set that links and is seamless with their ERP.

There's really nobody else in our industry that has that level of offering. So the Airbase product set would be really everything from procure to pay, spend management, AP automation, procurement, expense management more broadly, corporate cards and things like that. So we're continuing to work through the integration. I think all of that has tracked exactly how we would have expected, and we'll be able to provide more details as we get into '26. But I think for us, that is 1 of the elements as you think about how do you drive global revenue growth on a go-forward basis? How do you expand the addressable market? I think there's a lot of excitement that we have around what that can be on a multiyear basis.

Yes. Obviously, you primarily sell into the HR department, but there is some overlap between the office of the CFO because the CFO with the customers that you're dealing with is making a lot of decisions for both of those purchasing decisions. So how often are you selling your core HCM platform to a CFO type of buyer profile that you already have a foot in the door to sell these types of solutions?

Yes. I think it's with reasonable regularity that the CFO or VP of Finance is involved in these decisions. Many organizations, the HR team or the payroll team specifically may roll up to the finance org, ours will be no different. So the payroll team is part of my organization. So that would be something that we would look at holistically within my team. So we see that with pretty regular cadence today. I think no question as you think about Airbase more broadly, that is something that I think we'll see incremental focus with that buyer persona, but we feel like we've got a pretty strong number of use cases around what that buyer is looking for. And I think as we go on a go-forward basis, that would be 1 of the areas that we would be focusing on around what that buyer needs and what that person does and may impact to our sales process.

Okay. That's helpful. And then I know you're still early in the integration process. But what has the initial reception been like from customers, especially thinking about kind of the combined customers that you have and when do you think that integration process should be kind of fully wrapped up?

Yes. I think early days were, call it, 6 or 7 months post acquisition, and as I said, going through the really thoughtful integration process. But continue to be really optimistic. I think early feedback has been very positive and consistent with the work we did during diligence both for our existing clients as well as the Airbase clients around what that combined offering may look like. So I think we've we really characterize that integration as 12 to 18 months. I think that puts you deeper into fiscal '26. And certainly, the ability to unlock and deliver value over time. So we've started to have more fulsome conversations with our existing client base. And I think that will continue as you get deeper into next fiscal year.

Yes. That makes sense. And then you all have talked about a lot of your acquisitions, the expectation that attaches to 10% to 20% of the existing base over the first few years of the acquisition. Is there any reason Airbase would be different? Or do you think that, that type of framework should hold true for Airbase as well?

10% to 20%, I think, has generally been our target, not only for acquisitions, but really for new products as well. And I think we've seen a number of examples over the years where products have actually attached it at higher than 20% rates quicker than we would have expected. So learning management is a good example, premium video. Both of those 2 products, has examples attached quicker and in a larger way than we would have expected. So yes, I think that's a reasonable attach rate. That's a multiyear expectation, right? This is certainly a new product set and its adjacencies. So I would not expect out of the gate, you're going to see 10% to 20%. But as you think about that on a multiyear basis, certainly feel like that is the right target for the roughly 40,000 clients we have today as well as a target attach rate for new deals as well.

Yes. That's helpful. And then just taking a step back, longer term, thinking about Airbase and the opportunity in the office of the CFO, how large do you think that opportunity in a portion of the business could be 1 day compared to the core HCM suite?

Yes. I think if you start to do the math around what a 10% to 20% attach rate could be across the 40,000-plus clients that we have in growing plus the number of new clients we would attach in any given year at a similar rate. I think it's certainly a product that we see growing at a healthy rate going forward. And as I mentioned earlier, as you think about how do you drive global revenue growth, not only to $2 billion, which we're couple of years away from. But from that $2 billion to $3 billion range, having the ability to expand the product offering, having the ability to cross-sell in a continued fashion. I think this is a business that can grow at a pretty healthy rate for many years to come.

Okay. That's helpful. And then shifting back over to the core HCM suite. You all have obviously increased PEPI quite a bit over the past few years. Can you talk about where you've seen the most traction driving actual kind of the effective PEPI within your customer base?

Sure. I think we've seen increasing average revenue per client really manifests itself in a few different ways. One has been continued focus with upselling existing clients. So most of our revenue growth has been focused on landing new logos. But each year, we have added to the team that is fully focused on going back to existing clients and upselling them, either new products that they didn't take at point of sale or maybe products that have been released since they joined Paylocity. So that has been a key driver of growth. We continue to have success up market. So we have increased our target businesses that have up to 5,000 employees over the last few years.

So we're seeing continued success in what we would define as the enterprise space as well. And then within the core offering in that call that 50 to 500 range, we are seeing clients attach with premium video and market pay, recognition and rewards. Those are some of the newer product learning management, I think, has continued to attach at a healthy rate. So really those products that move beyond traditional HCM functionality are the things that we're seeing clients have a particular interest in.

Okay. That's helpful. And then you mentioned it a little bit there, but you all have started to move up market in recent years, kind of expanding that top end of your threshold. There was a little bit of kind of noise beginning in that transition, but things have seemed to stabilize and you're seeing more and more momentum at market. So what are you seeing there? And what's kind of led to that better execution upmarket over the last few quarters?

The enterprise space for us, which we really think of as clients with 500 to 1,000-plus employees up to that 5,000 threshold. That's an area that going back several years on, we really didn't focus on, specifically, we didn't have a dedicated sales team that was focused on that part of the market. But as we built out the entirety of the HCM suite, as we move beyond HCM over the last few years, we've certainly been pulled up market. So we've seen incremental success there with clients having incremental interest in Paylocity. And -- over the last 3 or 4 years, we've really built out an enterprise-level sales team. We've built out all of the, I think, required elements across the organization to sell larger and larger deals.

So that's a part of our go-to-market motion that has performed really well this year included. And I think that's an area where maybe growth looks a little bit more consistent with our broader sales segments as we've invested significantly over the last few years, but certainly an area that we think can continue to provide a nice tailwind for us. And the focus for us, to your question over the last few years is really how do you scale that team? How do you focus on talent? We have felt really good about the offering. We felt really good about the talent and team we have in place. And the focus for us is really onboarding, training and development. So that new set of reps is able to perform and execute as well as the base reps have, and we've certainly seen some really nice progress there.

Okay. That's helpful. And then does the competitive environment change as you move up market? And if you start when you get into those 1,000-plus employee organizations, maybe run into a day force or some of the legacy ERP offerings more. Like what's kind of the differentiation point? Like does the selling message change there versus how you're selling to an organization with 200 or 300 employees?

It does. I don't think there's a bright line there to say, hey, above 1,000 employees, it's entirely different. But certainly, the enterprise sales process is different in a number of ways. It is typically a longer sales process that you would see down market, you're going to have a sophisticated buyer involved. The buyer oftentimes is going to want to have conversations with the implementation leadership team. They're going to want to understand who their account manager is from a service standpoint. Oftentimes, they're going to want to have conversations with your product. What the product road map looks like.

So I think there is a real packaged go-to-market team that we have with those larger deals. And you have a sales rep that has more tenure and is able to sell to the enterprise buyer as well. So we have, I think, learned over time, continue to tweak that go-to-market motion, but have felt really good about the success we've had up market.

And then I know your -- the primary growth engine for you over the years has always been acquiring new logos and seeing that growth. But given the expanding product portfolio and especially with Airbase recently, how are the recent sales investments been changing in terms of targeting, upselling the existing base? And when do you -- do you think that ever becomes the biggest driver of your growth rate kind of sales back into the base?

Yes. So today, the vast majority of our sales would be new logo driven. We certainly have seen success really for the last probably 7 or 8 years that we've had an inside sales team focused on existing clients. We've added to that team from a rep perspective every single year. Productivity continues to trend very positive with that team. And I think that's something that we have done in a very measured and thoughtful way versus making an investment in 1- or 2-year period and then having grow over concerns or not really being able to go back to that well.

So we've been pleased with how that team has executed. I think we've been pleased with the strategy that we have taken to grow that organization. And I think we're in a spot where, as we continue to grow the HCM product suite, as we continue to expand and integrate the offering within office of the CFO that we will be able to add to that team as well into '26 and beyond. So I think we're still a long ways away, though, from that being the predominant driver of new logos -- new revenue.

No, that makes sense. And then shifting over to the broker channel. Over 25% of new clients come from the channel referrals. So why do you think that's been so consistent? Why do you think you've done so well in that channel over the years?

Broker channel, I think, for us has been a really consistent driver of new business for us for certainly a decade plus. Going back to the IPO, we were still seeing 20% to 25% plus of our business coming from the broker channel. And obviously, as the business has grown, that contribution on a dollar basis has grown with it. So that's something that we have invested in and focused on that is a part of the market that is nurtured and developed on a rep-by-rep basis.

So as you think about the roughly 900 sales reps we have today, those are relationships that each of those reps are cultivating and building in their individual territory. And you have for context tens of thousands of individual brokers across the U.S. So there is not a level of concentration there with 1 or 2 brokers giving us the vast majority of deals. You have a real strong level of diversification there, which I think has allowed us to grow that channel. I think for us, too, as we get larger and have continued success there, we're able to really double down on the playbook with our sales reps.

We're able to train them and onboard them to understand what actually works with that channel, what do brokers want and then similarly, we're in constant conversation and communication with brokers, to understand what can we do better, what are the investments you want us to make? How do we continue to see referrals come in from you. So whether that is product investment, service or operational investments, continued focus on integrations and API. Those are the things and the conversations we're having with brokers. And it's not an area that you ever -- the work is ever done. It's a continued area of focus. But I think for us, given how large the market is and the decade plus success we have, we feel really good about being able to drive strong referrals there going forward.

Yes. That makes sense. And then both maybe a competition question as well as a broker network question. There's obviously a lot of us have seen the recent acquisition of Paychex and Paycor, that business combination. Obviously, Paycor drove a lot of its new business from the broker referral network. I think it was over 50% towards the end there. So curious how you're thinking about that opportunity now that Paycor is under the Paychex umbrella and may actually start competing more with the broker network. So curious how you're thinking about that from a competitive standpoint and if there's any playbooks that you may be looking to run to address that moving forward?

I think anytime you have a level of consolidation coming with that as a level of uncertainty within the broker channel. And -- for us, as we just talked about, that has been an area that we have consistently performed well. We've seen strong and consistent execution there. And I think that's an opportunity for us to really double down on our value proposition to those individual brokers.

There's a level of questions and uncertainty that many of those brokers have and we're able to really have those direct conversations with them and remind them the value that Paylocity provides. The fact that we don't compete with them, the fact that we don't sell competing insurance products. So I think for us, it is an inflection point we're able to really double down on that focus. And I think over time, we'll see some increased success there.

Okay. Helpful. And then AI is obviously a big topic in software these days. So maybe could you kind of double-click into how AI -- what that means for Paylocity and how you're looking to address that opportunity moving forward?

Sure. So I think Paylocity has been a leader in AI within HCM really for the last handful of years. And I think we now have levels of elements of AI across nearly every product we have today. We have had a few press releases over the last few years. We talked about it in a more fulsome way on the earnings call in May. And we're seeing increased usage and adoption within our client base. So we're seeing clients use it to really drive automation, increase workflows, being able to allow their employees to get access to answers in a more efficient way.

So they're not having to call their Paylocity account manager, not having to interact with their HR leaders. So being able to leverage our AI assistant to understand questions like what type of sick time do I have? What type of vacation time do I have, employee handbook related questions. We're seeing clients use AI within our time and labor offering to help really curate more intelligent scheduling to reduce over time and make sure that they have the right employees for the right ships based on certifications or other requirements.

We're seeing clients use AI within learning management to help curate really specific recommended learning paths for their employees based on tenure or development areas of focus. So there are elements of AI, I think, throughout the product suite and certainly seeing increased adoption. And as I think about '26 and the investment we're making in product, that is certainly 1 of the key areas of focus for us as well as broader automation opportunities. And I think that goes for both the product set as well as ways that we can drive efficiencies within our teams as well internally.

Okay. That's helpful. And then you all have talked about the kind of the key strategies, embedding AI into the existing platform to drive better attention, better win rates against the competition is kind of a unique differentiator. So now that we're a year or 2 into the initial AI releases, what are you seeing on that front? Like are you seeing the improvements through retention? Are you seeing the improvements to win rates. Just curious if you could kind of flesh out how that strategy has been going?

Yes. I think this will be a multiyear endeavor and we're still very early days. But to my comments a minute ago, we're definitely seeing increased adoption and usage across the products. We're very confident that there continues to be ways that we can differentiate within the product suite with AI. And I think going forward, there are certainly ways that we can drive efficiencies within our operations teams, which should improve the client experience, I think, reduce the effort of our employees, help us drive increased profitability going forward. So this is, again, as I said a multiyear journey for us, but we're certainly seeing some early signs of positivity there and feel like going into '26, that will be an area that we continue to see some strong momentum.

Okay. That's helpful. And then last 1 on the AI front. Obviously, there's been a lot of talk about Agentic over the last few years -- last year or so. So curious if -- how you're thinking about the Agentic opportunities in your platform? And then do you see Agentic as potential like productization where it could be a separate SKU that you can monetize it? Or do you think it will fall into the earlier discussion around improving retention and win rates?

Yes. I think Agentic AI, I'd put that under the broader umbrella around things that we would be looking at in investments we'll be making within AI. So that would be certainly part of the use cases and value proposition that we would be thinking about on a go-forward basis. Probably early days to understand the ability to monetize AI specifically. But I think no question, we are seeing ways to increase the client experience, reduce client effort, which, over the long term, certainly would help with the stickiness of clients. And then as I mentioned a minute ago, I think there's a number of opportunities for us to drive efficiencies internally as well. So whether it's Agentic or broader AI opportunities, it's definitely an area that we think will drive dividends into 2016 and beyond.

That's helpful. And then thinking -- taking a step back thinking about capital allocation. You've obviously -- you've done some M&A over the years, you have a share buyback in place. How are you thinking about capital allocation moving forward just as the Chief Financial Officer, how do you see things moving forward?

I think we're in a really strong position from a financial standpoint, very strong balance sheet, increasing cash flows, we have a $500 million share repurchase authorization, of which we have repurchased $300 million of stock over the last 13 months or so almost 2 million shares. We've reduced diluted share count. And I think going forward, we'll be able to continue to drive share repurchase activity going forward. How much and when, I think, is dependent on share price and competing priorities. But I would view a level of share repurchase activity as pretty foundational to our capital allocation program going forward.

And I think similarly, as you think about stock-based comp, that has been an area of focus for us too. So we've reduced stock comp from roughly 12% of revenue a few years ago, down to roughly 9% of revenue this fiscal year and on top of that being able to reduce share count as well. So I think for us, we're in a position where not only can you buy back stock, but we're able to be acquisitive as well. Bar is obviously very high, but I think for us, if there are products or other opportunities out there that speed go-to-market, are things that are on our product road map, expand addressable market. We think we've got the ability to continue to utilize our buyback as well as the opportunities there from an M&A perspective.

Okay. That's helpful. And then I know we're coming up on time here. So maybe just 1 last question for me. What gets you most excited about the Paylocity opportunity moving forward? And if there was a world in which we could potentially reaccelerate the company's growth, what would be the kind of building blocks and drivers of that?

Sure. We're, I think, really excited about the results we've had this fiscal year, as we talked about earlier, have had really strong results each of the first 9 months, each of the first quarters of this fiscal year, we've raised the revenue by a significant amount. We've guided to 100 basis points of operating EBITDA leverage, which includes a 100 basis point headwind from the Airbase acquisition, so 200 basis points of organic leverage. So really excited about the results this year, and I think excited about fiscal '26, large market opportunity within HCM. We feel good about where we are from an integration standpoint within Airbase and what that can do to help us drive revenue growth going forward. So feel really good about the execution and where we're headed into '26 and beyond.

Well, sounds good. Well, Ryan, thanks for the time today. Thanks, everyone, in the audience for attending. For those that want to dig a little bit deeper in, we will have the breakout starting in 10 minutes.