Excellent. Good morning. My name is Sheldon McMeans, and I help support Raimo in covering the U.S. enterprise software space here at Barclays. I'm pleased to be here with Ryan Glenn, CFO of Paylocity. Ryan, thanks for coming.
Absolutely. Thanks for having me.
Yeah. So Paylocity has been a leader in the space for a while, so I think we can skip the higher-level intro. But to start, I would love to hear you speak about where Paylocity plays within the HCM market and how does Paylocity differentiate itself versus the competition?
Yeah, absolutely. So our target market is companies with between 10,000 and 5,000 employees. Our average client has about 150 employees today. And as we think about the evolution we've been on over the last several years, when we went public in 2014, we had an average client of 100-plus employees. And as we've built out the product suite, as we've really built out the entirety of the HCM suite as well now has moved beyond that, we've seen incremental success at market, particularly over the last few years. And with that, you've seen both an incrementally larger average client as well as us taking our target market up from 1,000, really was the top end previously. And over the last few years, we've now focused up on businesses that have 5,000 employees.
And if you think about the success we've had and why we win, it is predominantly driven off of product and service. And I think that has been the case for many, many years. And I think one of the core tenets of our strategy has been continuing to invest significantly back into the product. So we have spent a target of 10%-15% into R&D. We've typically been in the high end of that range. And that's allowed us to not only invest back into existing products, but also pretty significantly expand the product suite as well. So we've not only driven more success up market, but we've also driven more success going back to existing clients and upselling them additional products.
Yeah. And on that latter point, you have evolved quite significantly over the years. So I think at the time of IPO, you had about $200 per employee, per-year opportunity if they kind of buy everything. And now you're targeting $600. So could you speak to that evolution, and is there opportunity to expand that further?
There certainly is opportunity to expand that further. And I think to your point, 10 years ago when we went public, or just over 10 years, this was very much a payroll business and a payroll industry. A significant portion of the sale was tied to payroll. Investors thought of this as really a payroll company. And I think the evolution we've been on has been, one, we've built out the traditional HCM products over the first few years as being public. So everything from payroll to HR to time and labor, benefits administration, and broader talent management offering.
And then I think we went through an evolution that we're still in in many regards today, is moving beyond that traditional HCM functionality and really evolving the conversation both with existing clients as well as with new clients to now it is much more about, yes, the HCM suite and the functionality within that, but being able to leverage the Paylocity platform for a number of things that was not part of the definition five or 10 years ago. So being able to drive connection and engagement and culture, being able to present yourself as truly a modern employer to younger and younger workers, having a mobile-first approach. So what we've seen, particularly over the last three or four years, is some of those newer products, whether that is Employee Voice, Community, Market Pay, Recognition and Rewards more recently, being able to really evolve that conversation.
That not only has been a differentiator, but has also allowed us to continue to land larger deals and, as I mentioned earlier, see increasing average revenue per client.
Right. And you also recently acquired Airbase, which expands your presence into the office of the CFO. Can you talk a little bit about what motivated that acquisition, what you saw there?
Sure. So I think the office of the CFO has been something that's been of interest to us really going back probably 18 months or so. And our first entree towards that new part of the market has really been with an acquisition that we closed about a year ago with a small company called Trace. And that was a headcount planning software that we've gone through a pretty measured and thoughtful integration process over the last year or so. That is a product that will go GA here over the next few months. So headcount planning is really the first step towards that. But I think what attracted us to that market is, one, at our size and scale, we'll do, call it $1.5 billion-$1.6 billion in revenue this year, targeting $2 billion in the coming years.
I think our view is to be able to continue to drive durable revenue growth. You continue to have to find ways to remain competitive, differentiate, and expand the addressable market. And we think the office of the CFO will absolutely do that over time. Headcount planning through Trace is one of those avenues. And then I think specific to Airbase, that is a business that we've really started conversations with dating back probably 9- 12 months. And I think in our view, Bill Pay, Accounts Payable Automation, and the broader spend management offering that Airbase has is really foundational to broader office of the CFO functionality. So if this is an industry and an opportunity that you believe in, that is something that starts to check a lot of boxes towards full functionality.
I think our view today is what interested us in Airbase is, one, very similar segmentation. So Airbase has an average client that has about 200 employees today. And our view is, as we go through integration, to be able to be in a position where you have full HR and financial capabilities in a spot where clients are able to see not only their payroll spend on a single pane of glass, but all of their non-labor spend. That will drive efficiencies in the back office, which I know has been a topic of this conference. And you've seen that with increased airtime as of late. So being able to monitor, monetize back office spend, being able to reduce manual effort.
We think that is going to be a very compelling value proposition both to the 40,000 or so clients we have today as well as the new deals.
Got it. You talked about 200 average employee size for Airbase customers. My question is, is that relevant to all of your clients? Is Airbase something, a solution that applies to all of them? Is there any sort of characteristics, whether that be a mix of hourly employees or certain industries or anything that makes Airbase particularly more compelling to your base of clients?
Yeah. I think it scales across industries. There's probably not one or two that I would point out as this being particularly relevant for. Probably scans as well throughout our average client size. It's probably average to slightly higher if anything, but it's certainly something that we think is a really large opportunity for us. And our view is we have many, many years' success going back to existing clients, upselling them, being able to sell additional product at time of sale as well. So our view is, and this is a comment on a multi-year basis, but being able to get to a position where we have 10%-20% adoption on Airbase we think is absolutely attainable over several years.
Yeah. And a couple more on Airbase while we're here. So what would customers be using that do not have Airbase, that don't have a type of solution? Would that be Excel and spreadsheets and some paper-based workflows? And then so how do you think about the opportunity in terms of what would be competitive takeaways or more greenfield opportunities?
I think a lot of it will be really that greenfield opportunity as you describe. So companies, again, average clients of 150 employees, a lot of those clients are not using a traditional Bill Pay and AP automation and spend management platform. So what they're doing today is either some combination of they aren't doing it or they're doing it in a very manual way, which oftentimes looks like there's an individual or two or three within their accounting or accounts payable team that is going and tracking down all of the expenses and tracking down approvals. Oftentimes that is an email or Teams or Slack. They're doing it in a very, very manual and time-consuming way that has very little, if any, automation in that process. So they have a manual set of processes that is typically Excel, human intervention through email, and very little automation.
We think Airbase for those types of clients as they think about how do they monetize that back office, whether that is being more efficient with the team they have, being able to be more efficient with the staff that they have, being able to automate a lot of those, being able to have truly robust third-party integrations across, whether that is NetSuite or Sage or QuickBooks. That will be a really compelling value proposition for clients of effectively all sizes.
Understood. And it does make a lot of sense. It seems like a natural adjacency to the HCM suite. So I guess that calls into question, in theory, competitors might want to replicate this and also move into this sort of market. So one, I would love to hear from your CFO perspective. What are some of the things that you think differentiates Airbase from like-for-like competitors? And then for an HCM suite provider that might want to build this functionality themselves, what are some of the barriers to entry of the market? Would that be banking relationships or payment capabilities or those sorts of things?
Sure. And as I step back and think about the conversations that we would have had internally when we were looking at an Airbase or when we're looking at really any acquisition, the conversation we're having is build-buy and partnership. The bias for us oftentimes is to build it. We have a large, robust, and talented R&D team. So we typically start with, hey, is this something we want to build? And if not, then we're going to look at an acquisition to the extent there's assets out there. And then we may look at partnerships as well. And I think Airbase was one where what we were really impressed by specifically was the product and the depth of the product. And it's an interesting part of the market in that it really impacts all businesses, ours included.
We were able to, through diligence, spend a lot of time with my accounting and finance leaders, really getting underneath the covers on the product, understanding the use cases, understanding the value proposition. We spent a lot of time doing that. We also spent a lot of time talking to clients that had overlap. So there are some number of clients today pre-acquisition that were using Airbase and Paylocity. So understanding the value proposition, understanding what they view and what they get out of Airbase and how they would think about a combined business. So I think those conversations went really well. I think if anything, they were very incremental to our confidence in how we'd be able to sell this as we go through integration.
And I think we'll get to a position where, as we have with prior acquisitions, those two products are seamless from a user experience standpoint. So what we learned in talking with those teams is when you get to that point where you have, as I mentioned earlier, robust integrations, you have a single pane of glass, there's really nobody in our industry that is doing this. You've seen this at the up market with certain competitors. You've seen this on the very, very low end of the market. But in the core mid-market or SMB, depending on how you define it, there's really nobody else with this level of capability.
And I think as we've looked at that build versus buy decision, I think this would have been a many, many year investment for us from an R&D standpoint, likely would have been something that we would have had to move resources off of areas more core to the business. So our view is, one, really impressed with Airbase. And I think a number of elements from a moat standpoint, not only in developing the software, but in some of the other elements you mentioned as well.
Great. And lastly on Airbase, could you give some color on the monetization? Is it part subscription, part transactional? How do you think about that? And then in theory, if you think about a mature Paylocity customer versus a mature Airbase customer, how does the ARR, however you want to define it, compare between the two?
Yeah. I think the way that Airbase monetizes today, and I'd put this in the category of all elements we would look at as we go through integration. So pricing and packaging would be certainly on that shortlist. But today is largely a subscription-based revenue based on the number of Airbase modules that clients have. There are some elements of the revenue stream that is tied to interchange as well as float, but the vast majority is subscription recurring revenue today. So we will look closely at a number of different revenue models. Certainly, the model they have today has been successful. We'll look at, as we go through integration, potentially ways that we would bundle and packaging it with our broader HCM offerings as well. So we'll look at all of those things as we go through the integration.
Great. And last one on the product and shift into a little bit more of the macro and demand environment. Could you speak to how you think about AI and generative AI into your platform? So I think you were one of the first, if not the first, especially in the lower end of the market to bring generative AI into your platform. So you recently launched the Paylocity AI Assistant. You have AI-powered learning journey. So what's been kind of the early reception there? And then how do you think about potentially monetizing some of those things?
Yeah, you're right. I think we were the earliest in HCM to have AI. And we sit here today with AI parts of all elements of our product suite. We've put out a number of press releases over the last year or so that detail that and a very specific product-by-product level. But I think some of the things that we're seeing clients use within the product suite relative to AI is, one, the ability to get smarter about how they schedule their hourly employees. So AI is now embedded in that product such that it will offer intelligent recommendations based on being able to minimize overtime levels, being able to make sure that you're scheduling employees that have the right levels of certifications, being able to look at potentially employee preferences on days and times that they work.
So being able to really present for that manager a really curated and intelligent view of way to schedule their teams. We're seeing it within learning management getting a lot of usage. So being able to present clients and employees a curated learning path based on the role that they have, based on their time with the company, based potentially on the development opportunities that they're looking for. So a number of elements across the product suite. I think most recently, over the last few months, we released an AI assistant, which will do a number of additional things within the product suite to drive efficiency.
So being able to speed time to answer from an administrative standpoint, helping them get answers to the questions a lot quicker, being able to reduce time that employees are needing to maybe interact with HR or interact with the system, getting them answers to questions much, much quicker. Things like, what is my vacation balance? What holidays does my company offer? And similar other questions as well. So definitely something we've seen an increasing usage on. As I said, this has been an area that we have focused on for many years. We continue to put pretty significant resources behind it. And going forward, it's not something that our industry to date has monetized specifically, but we absolutely think it has and will continue to reduce client effort, be able to make the product a little bit more sticky.
We think there's efficiencies both from a client standpoint as well as for our teams. So as I think about our service and implementation teams being able to drive down interactions that they have to have with the client. Because if you step back and think about it, clients want answers as efficiently as they can. They don't necessarily want to interact with the person. So how do you be able to reduce that client effort from a back office or gross margin standpoint in our teams? How do you scale our teams to be able to reduce the effort that they need and then ultimately help us drive increasing profitability?
Great. And shifting gears a little here, how has the macro environment played out from your perspective? And it would be great if you could separate the employment environment, which seems to be kind of flat, into more around sales cycles, customer willingness to expand.
Yeah. I think our view, and we're a quarter into the fiscal year, but we've been describing and have seen the macro to be largely stable from our perspective. I think where we sit today is we released our 1st quarter results about five and a half weeks ago. Really strong start to the fiscal year. Really pleased with the start to the year from our sales team. They beat internal plans in the 1st quarter. We're seeing a lot of momentum headed into selling season. So as you know, January is the biggest month of new starts in the HCM industry. So feeling really good about the momentum that that team has had. And I think the backdrop there is a pretty stable macro environment.
We're coming up on about a year from when we started to call out a longer sales cycle, particularly on the upper end of the market. And I think we're in a spot where that has been stable. Certainly has not gotten worse. I wouldn't say it's gotten materially better, but the teams have largely learned to operate in what is a new normal, at least in the short term. So I think from our perspective, stable macro, a number of things that we've talked about and have focused internally, particularly on the up market team. So as we've scaled out our reps focused on larger and larger deals, many of the first few cohorts of those reps came from Paylocity internally. So they moved up from the core or majors markets and have moved to larger and larger deals.
Those reps came out of the gates with a high level of productivity. They had been with Paylocity. They had been successful. They knew how to navigate our business internally. And where we focused incrementally over the last nine or 10 months is feel really good about the pipeline from a sales talent standpoint. So feel really good about the individuals we're bringing in. And we have focused incrementally more on onboarding, making sure that we're training those folks in the way that gets them productive quicker. And continuous process for sure, not something that we think is going to all be done in one individual moment, but feel really good about the progress we're making there.
Okay. Understood. And so a question that we've been asking all of our companies up here is post-election. Seems like some of the uncertainty has gone out of the market there. So I was wondering as you go through your big selling season that you alluded to, has there been any change? How does it feel out there?
Yeah. I would not point to anything material relative to election cycle. I'd be surprised if that was a key point that you hear from us as well as the broader HCM space, so I'd put that in the category of certainly a level of uncertainty in the fall period leading up to the election. A little bit more certainty now, but at the same time, I think there's still a lot of questions, so probably not something that specifically will drive deal acceleration or has really driven pushes off. Probably an element, but not particularly material.
That's been pretty consistent to what we're hearing more broadly. And so you recently had your Elevate virtual conference, your annual conference there. And can you talk about activity coming out of the event? And I would love to hear specifically on clients' willingness to expand and kind of what the propensity is there as you earlier we talked about moving from 200 per employee per year to 600. So how's that evolving?
Yeah. So we had our Elevate client conference in October where we were able to interact with thousands of clients and partners and prospective clients as well. And that has always been a great opportunity to get to spend time with our clients, but also to be able to demonstrate and show them new products that have come out maybe since last year or new products that have come out since they joined us. And I think where we sit today is we continue to not only expand the product suite, but also expand the number of sales reps that focus solely on upselling existing clients. And that's a team that we've had in place for really going back eight years or so. We've added to it every single year as the product suite has expanded. That team continues to perform really, really well.
I'd expect us to be able to add to that again next year. What they're having success with is going to be some of those newer products I mentioned earlier. Elements that drive a more modern HCM experience. They're having the success with learning management and Recognition and Rewards and Market Pay and Employee Voice in particular.
Got it. And more structurally, industry growth rates have come down a little bit compared to the last few years. And I was wondering, have you seen a shift from your perspective? And how do you think about overall industry growth rates?
Yeah. I think you certainly have seen probably more normalized growth rates across the industry with most competitors. Obviously, some of the faster growing names have gotten significantly larger than they were several years ago. I think where we sit today is we feel really confident in being able to drive durable revenue growth for years and years to come. We're focused on driving towards $2 billion of revenue. And I think where the conversation has probably evolved as our business has grown and scaled is, one, it's still about revenue growth. It is still about driving that durable growth going forward. But you've started to see the conversation broaden out a bit as well. So we've talked about and focused incrementally more on overall profitability in addition to strong revenue growth. So where we sit today is we've significantly expanded just EBITDA margins.
We have, over the last 12 months, free cash flow margins that are north of 20% that are largely industry leading. So I think it's a little bit more of a balanced story. You've seen us focus incrementally on stock-based comp. We put a target out there of 10% of revenue or less on stock-based comp, which we'll likely get into this fiscal year. We put a $500 million share repurchase program in place, of which we've utilized about $150 million to date. So the story has evolved a little bit, but I think our view is feel really good about the progress, feel really good about where we are to start the year, and I think as we talked about leading into fiscal 2025, definitely want to get back to that beat and raise cadence.
We feel like we're off to a really good start to the year to the extent the teams continue to execute. We feel like we should be able to continue to do that.
Great. And part of that ties into my next question. So you have done a good job of driving operating margin growth or Adjusted EBITDA margin growth on an ex-float basis. So can you speak to some of the levers there? And how do you feel about your ability to continue to drive operating leverage in the model?
So we feel really good about the ability to continue to drive operating leverage in the model. And I think the areas that we focused on particularly have been gross margin and general administrative costs. And that has been the area for several years that we've continued to drive leverage. And I think that's a combination of really people, process, and technology investments in each of those areas. So we talked about AI a few minutes ago. How do you drive incremental efficiencies across your operational teams? How do you look at the back office teams and drive increasing efficiencies there from either processes or from technology investments? So those are the areas that we focused on particularly. And I think as the business has grown and scaled, as you've seen a more normalized growth, we've focused incrementally on sales investments.
So certainly still feel like it's a massive market opportunity, still feel like we're focused on growth. But you've seen us pivot incrementally towards customer acquisition costs and making sure that those sales investments are really delivering a strong ROI. And I think to your point, what that has resulted in significant increases in Adjusted EBITDA and Free Cash Flow margin in addition to the strong revenue growth we've had.
Yeah. Great. And specifically on the gross margin line, our checks have been that Paylocity has best-in-class service, but you've also been able to drive some expansion there. So I was wondering, how do you think about that balance of maintaining those high service levels and driving continued expansion in that line? And then specifically, when you think about generative AI, is there an opportunity or is this something you're doing to leverage it internally for your service and support teams to help quicken time to resolution so maybe you can get a little bit more out of less employees from that perspective?
I think continue to have a high degree of confidence that we can continue to drive leverage. So we're at a spot where while we have driven a lot of leverage, we're not at the top of that level. So continue to feel like there's opportunity there. It's a balance for sure, though. I mean, the investment that we continue to make back into our operations teams, particularly client services and implementation, we continue to grow those teams year in and year out to support client growth and overall revenue growth of the business. So it's a balance. But I think within that, you're pushing incrementally harder on making sure that those dollars are going to the highest and best use, that they're really driving stable and increasing revenue retention, that you're putting it to the teams that are interacting and touching clients specifically.
So you're able to do both over time. I think relative to AI, that's absolutely an area that we are investing in internally. I put broader robotic process automation efforts as well. So how do you reduce manual effort of things that maybe in the past required people intervention? How do you use technology to do that? I think AI, as we talked about a little bit ago, is allowing clients to get answers quicker, is reducing the amount of time that they're having to interact with our account managers. And all that is incrementally positive towards driving continued increases in leverage over time.
Yeah. Understood. And so you talked earlier about your share repurchase program. I believe that was in May, $500 million authorization, $350 million remaining. How do you think about capital returns in general more broadly? You did make an acquisition, so maybe a little bit larger than you have done in the past. So how do you think about that balance and capital returns?
Sure. I think we're in a strong financial position from a balance sheet, cash flow, and access to capital perspective such that we can likely continue to do all those things going forward. So to your point, we did pretty aggressively repurchase $150 million of stock based on some pretty significant share price dislocations in the spring. And where we sit today is $350 million remaining under that authorization. I would largely view that as part of our capital allocation process going forward. So it doesn't mean we're going to repurchase $150 million exactly every year, but I think foundational to how we think about returning capital to shareholders will likely be share repurchase activity. And we have the ability to certainly have that be foundational to capital allocation, but also potentially be a little bit more opportunistic in periods where maybe you've seen a depressed share price.
At the same time, as I said, based on where the business sits, we feel like we can continue to be acquisitive to the extent there's things of interest to us. So we continue to look. It's a high bar. As I mentioned earlier, the bias is to build versus buy. But to the extent there's assets out there that we think speed go-to-market, expand our addressable market, and ultimately will help drive durable revenue growth, we're absolutely looking at those closely.
Got it. And so you talked earlier about moving up market and kind of getting pulled by your customers. So I wanted to ask, is there any, what's driving that a little bit? Would love to hear some color on that. And then is there any fundamental barriers from a scalability perspective of the solution, how configurable it is, that would prevent you from going even higher up market? Help me think about that.
I think there's really been two drivers of the incremental success we've had up market. One has been the expansion of the product suite. So as we've built out the HCM suite, and I think within that, you're constantly adding features and functionalities even of more mature products. So we have done that. We've expanded in some of the products we talked about earlier beyond that traditional functionality. So I think that specifically has attracted us to larger and larger clients. I think the other element that's been helpful is it's not part of the market that we've traditionally focused on. So I mentioned at the start of the discussion, we previously were focused on businesses with up to 1,000 employees, and as we built out that suite, we were pulled incrementally up market.
So we've built out a sales team focused on what we would define as the enterprise space. So both putting resources there from a sales and product standpoint has helped drive that success. There's not a specific bright line on client size where the product may not scale. Focus today is up to 5,000 employees. But at the same time, Paylocity has over 6,000 employees, and we use all of our own products today. So there is not a specific bright line. It's really much more case by case based on individual client needs.
Right. And what's your latest thinking on international and how that plays into moving up market?
Yeah. So you think back a few years ago, we purchased a company called Blue Marble, which is a business we've known very well for many years. It was actually founded by Steve Sarowitz, who also founded Paylocity. So we've tracked and had a nice partnership with that business for several years. And I think where that sits today, one, it is fully integrated to the Paylocity suite. And what that product has allowed us to do is we talked earlier about the upmarket success. That's been also one of the differentiators to be able to have capabilities for still focused on U.S.-based businesses, but capabilities for those clients to, again, on a single pane of glass in one reporting structure, to be able to see all of their U.S. and non-U.S.-based employee labor payroll-related data on a single platform. So I felt really good about that acquisition.
I think it's performed exactly as we had wished and hoped, and that continues to be the focus today, so we have not yet put resources towards broader international capabilities. I'd put that somewhere on the roadmap, but probably not something in the very immediate term.
Understood. And we got about 50 seconds left. So I want to ask just broadly on the competitive environment. I was wondering if you've seen any broad changes maybe to the legacy players that have been donors of market share over the years or some of the newer entrants into the market. And then if I could tie sorry, if I could tie in two questions. So I go to HR Tech every year, and there's over 400 vendors there every year. And I would argue that that might be a little too high. And I think that this market is kind of ripe for vendor consolidation. So I wanted to hear how that theme plays into it. Is that something that prospective clients are asking for? They're like, "I have too many vendors. Can you help me solve this issue?
Yeah. I think maybe on the last point relative to HR Tech and the industry broadly, many of those players are focusing on different parts of the market, so you have some of those companies you see at HR Tech that are focused on truly the mega cap or enterprise elements of the market, so it continues to be a massive market out there. The market continues to be competitive. We have always described it as such. I would not point to any material changes in who we are seeing in the average deal, the number of players as we talked about over the last half hour or so. We feel really good about the momentum of the business. We feel really good about the momentum across product and sales, and I think we're set up very well for fiscal 2025.
Yes, it's a competitive market, but we feel like we're operating and executing really well against it.
Great. And that's a good point to end on. Ryan, thank you very much.
Absolutely. Thank you.