All right, we are going to get started here. Thanks, everyone, for joining us. My name is Scott Berg, I lead our enterprise software and SaaS research efforts here at Needham. Today with us, we have a company I've covered for a long time. I've covered, so I always think this is comical to me, probably not comical to others, is I was the first analyst to pick up Paylocity after the IPO that was not a part of the transaction at all. Funny, I came to Needham, and Needham was on the IPO, though, so a short time later.
Perfect.
But I've effectively covered you since the IPO, the company at least at this point. So with us, we have Paylocity, we have the company CEO, Toby Williams. Thank you so much for joining us today.
Thanks for having us.
We were just kind of chatting before we got started, there's a lot going on in both Paylocity's arena and HCM kind of broadly the last four or five months. So this is going to be a fun conversation, and the first question actually will be, I think, most interesting to a lot of people here just because the perspective is different. I don't think most people kind of understood all what's going on out there. But before we get started, Toby, how about a brief overview of Paylocity for the one or two people that aren't familiar with it?
Sure. Yeah, happy to do it. Thanks for having us. So Paylocity is a software provider of payroll, human capital management, and now office of the CFO software, primarily to businesses that have between 10,000 and 5,000 employees. And that's everything from doing the actual payroll to things like recruiting, benefits, time and labor, rewards and recognition, and then a long list of HCM software products. And then from an office of the CFO perspective, expense management, spend management, and workflows, procurement, and accounts payable. So really automating everything related to spend. And we've been public since 2014. I joined the company in 2017, and I think we had $300 million in revenue at the time. We've guided to around $1.5 billion this year. So it's been a great journey over the last seven-plus years.
My math tells me that's 1.2 addition from where it was 10 years ago. I'm looking forward to, I guess, 2.7 over the next decade. I'm just going to throw that out there. So big news in the HCM industry last week for those that may not have been following it, Paychex acquired Paycor in our space. Obviously, you compete with them, you know, on a, I'm sure, a regular basis. The company does. But for everyone's knowledge here, at least, is I knew this before, but as I'd written out all these questions last week, this had been written out before this, I'm like, "Ooh, there's going to be a good one here." But most know Toby. Toby, as he mentioned, has been with the company since 2017, coming in as the company's CFO. You're a recovering attorney, at least by trade, have a JD.
But you've also ran corp dev at a small company called Paychex for a period of time. Given the news last week, I just thought it would be interesting to get your viewpoint. And you've been gone for a decade, so you don't know what the rationale there is, obviously. But I guess two-part question. One, if you were in that seat again, why make this acquisition? But two, how do you think of what does that mean to the space, how Paylocity competes kind of overall over the next five to ten years? Because it's the first time we've seen one of these large service bureaus actually buy a SaaS vendor like this.
Yeah, I think just a little bit of the history. Our executive chairman, Steve Beauchamp, who I shared CEO duties with and was the CEO that hired me as the CFO of Paylocity, he had previously run product at Paychex and hired me there in 2005. And we spent time there together. He hired me there to run corp dev there, start and run corp dev and strategy there. And that's the initial history of Steve and I, which has now played forward at Paylocity for the last seven years. I think there's been a period of time where over the last, call it, 12-18 months, there's been a lot of questions around whether or not there would be consolidation in the HCM space.
And I guess my perspective through it has been, you know, I think there are going to be players that are playing from a position of strength. And those players, whether or not it's going to end in consolidation, I think those folks have an opportunity to do things that are interesting to them strategically. And I think you've seen that from us and our acquisition of Airbase. That's an important thing for us from a strategy standpoint. You've seen folks like ADP buy WorkForce Software, and now you're seeing Paychex buy Paycor. And I think this has been a period of time where I'm not sure I necessarily saw a ton of consolidation, but I thought there would be activity, and I think that's played out.
I think those two businesses in particular, I mean, I think have a lot of respect for, obviously spent time at Paychex, have a lot of respect for that business and that team, and obviously same thing with the Paycor team, know Raul well, and think they have built and grown a nice business. It'll be interesting to see what happens with those two businesses coming together, because to your point, they're not the same thing, and I think from a competitive standpoint, our view has been we need to be the market leader from a product perspective. That's shown through in how we've been able to continuously grow the portfolio we had, which you'll probably remember we had $200 per employee per year chargeability across our full suite at the time of the IPO in 2014.
Today we're at $550 and pushing that forward with new product launch pretty continuously. And so our view has been we will be able to compete and we'll be able to win and continue to grow the business by driving a portfolio that is truly delivering the most modern experience in the industry. And that's, I think, as we look forward, regardless of some of these deals, that's really how we believe we can continue to win and be the highest growth, both in revenue and profitability in the industry, which is where we want to be.
Okay. The last year has, pardon me, been a big change for the company for a variety of reasons. You talked about Airbase. The other one has been on the management side a little bit. You had the co-part of the co-CEO removed, and I'm sure many people here spent a lot of time with Steve as well. As you look back at the last year, or maybe as you go forward here for calendar 2025, do you think the business is operating any differently? Sometimes it happens with a change at the top, sometimes it doesn't.
I think our goal was to be able to provide a huge degree of continuity as we thought about succession and transition. And when you think about what we've been able to do over the last seven years, that's been seven years that I've been able to spend with Steve as first me being the CFO and then co-CEOs. That's a lot of time to, I mean, we've worked together before, but that's a lot of time to be able to spend with one another and understand and grow that commonality of, hey, this is how this place needs to run. And I think that made it easier in terms of the succession and the transition, and I think that provides a lot of continuity.
So when you think about how the business is running and how it's performing, I think it's very, very continuous with how it has been since the beginning. And same thing, I would also point out with Ryan, our CFO. So in the same way that I've worked with Steve, I mean, Ryan's been in the business more than 10 years. He spent a lot of time with me as my right hand when I was the CFO. And I think you get this continuity that's built through that too. So if you think about how the business is run and how it's performed, the ability to have that type of transition has been. That's what we designed it to be. And I think it's been pretty smooth and a lot of continuity.
One of the things I always look for in these management changes, seen them a lot, a lot of people have seen them a lot here, is messaging.
Yeah.
It's amazing how through that 10 years, through all that change, the messaging hasn't really changed at all, which is kind of to your point. And that's a good thing.
You were talking to the same three people six or seven years ago, and that's still the case today.
Yep. It's great. All right, let's move on to product. Let's talk about Airbase. It's kind of a big deal because of how it shifts the company, maybe not shifts, but adds on to the horizontal strategy a little bit. And we're going to talk about the thesis, not the price tag, because on a relative basis to your market cap, it wasn't that big of a deal. But talk about how Airbase fits with an HCM platform. It's obviously the number one question I get. I know it's been, what, three months, four months since the acquisition. Now I still get a lot of those questions. Why is this the right fit for what you all want to do?
Yeah, I mean, I'll start at the top and then I'll go back to the bottom. I think if you think about the biggest picture concept, it's not a new idea to have financial software products on the same platform as HCM and payroll. So if you think about some of the largest competitors forever have ERP systems, really, where I think the concept began of having a full suite of products on a single platform, meaning payroll, HCM, and financial products, whether that's GL or any other financial pieces to an ERP. And I think that's the framing from where I would start.
Now, if you go to our business, we have, as I mentioned, a long history of identifying new product areas, pushing the boundaries of what you would see in sort of the traditional HCM suite, and bringing products to market that we're able to sell both to new clients, sell back into the base, and that provide a huge degree of differentiation against the competitive set that we're out there in the market competing with day in and day out. And I think this is another area where that is true and is going to be true. So a couple other examples. And going back, I mean, we've almost tripled the amount of per employee per year product that we have in the full suite going from $200- $550. And that doesn't include Airbase in that number or Headcount Planning for that matter.
So I think as we've gone through and looked at different ways that we could better serve and provide more value to our clients, you start to get into things like, hey, there's an area where the HR teams and the finance teams are coming together. There's not great headcount planning tools as an example for businesses. Our average size client has 150 employees. So while we cover a range of businesses from 10 to 5,000 in our target market, the average is still 150. And you see these needs where people have not good workflows. It's all manual. And so we've identified those friction points to be able to come in and provide software. We started with headcount planning as a move towards that area of the business in finance.
And then with things like the tools that Airbase provides, you start to get into how do businesses of that size track expenses? Do they have workflows associated with approvals? Do those roll up to the finance and accounting teams in a way that makes it easy for them to disperse those funds and automate the AP process? So those are all the things that we would have thought about in coming into that space. And the other point I would make is there's a significant percentage of the time where the payroll team rolls into the CFO. That's point one. So you're dealing with commonality in buyer conversation. The other point would be that the CFOs are always approving the spend. So they're always approving the purchase, whether the payroll and HCM teams or HR teams roll to them or not.
So they're almost always involved in our conversation set. So you get an overlap in terms of the things that the people are actually doing every single day. You get a ton of process that can easily be automated. You get a desire for a better experience from an employee perspective, and you have commonality of buyer. And I didn't talk about, but also a material piece is the ability to leverage data. So all of the spend is happening either for or by an employee. And so being able to tie those things together from a workflow perspective is really powerful.
So when we think of the type of customer you're going to sell this to, Paylocity sells to a wide range. We'll call it 50 to 5,000. I'm sure you have some customers in the 5- 10 range.
We do.
Probably even one or two, maybe above 10.
We do.
Yeah, I know that. But it's a big swath, right?
It is.
It's a lot of different categories. How do you think about selling Airbase to that swath? Because I cover a competitor in that space. You talked about some of the ERPs. Once you get into above 1,000, you start competing against those. But I remember when you made the transaction, I remember where I was. I was on an NDR in Philadelphia with another company. But I had to call with you while we were in a meeting. But I had to channel check with one of your customers because I'd know the CFO of one of your customers, and I had it like in 10 minutes. So I got feedback on it right away, which was great. But that company has 1,200 employees, which was a bigger profile than what I thought. But how do you think about taking that across that swath of customers you sell to?
Yeah, I mean, I think one of the things that was interesting to us about the Airbase asset was they were focused almost squarely on top of our target market, not competing upstream with ERPs, but really focused on the mid-market set, which for them was 50-5,000 employees, which is almost directly on top of what I would say in terms of 10-5,000 employees. So I think there's a core right in the middle of that that's going to be a really good fit. And I think it also there's a lot of leeway there because some people are going to be coming at it. And I've had all of these conversations as we've started to sell that product back into our customer base. Early days, for sure.
But you get some people potentially on the smaller end who are coming at this from a, hey, I need a way to track and automate my expenses. You might get something, then you might have a larger customer saying, hey, I need to be able to take all that data, feed it into my GL, which we do from a GL integration perspective, and automate the actual AP process. And so I think you get a mix of needs on the smaller and larger end, but I think you get that full coverage of the spectrum that we have between 10 and 5,000.
Last question on the Airbase side. Like the vision, this is a great vision, bringing all this together, but it requires an integrated product. What does that time frame look like to be able to actually sell that vision effectively?
Yeah, so we've done a handful of deals in our time. And I think Steve and I have always been really clear. Things that are interesting to us from an acquisition perspective, they've been technology oriented. And the biggest thing that we have to believe in and focus on is the integration from both the data and then from a user experience and ultimately from a technology perspective. So taking those products, taking those capabilities, and building them onto our platform in a seamless way, we've always described that as that's a 12- 18 month process to get it where you really want it to be.
And I think that's the case with this transaction as well. It doesn't mean that you don't have the capability to deliver incremental value over that period of time. I think we have that in this situation too, but it takes a while to do it and do it right.
Okay. So not necessarily on the acquisition, but along the theme, I think some have viewed this acquisition as one because the native product expansion within HCM might be slowing or it's tapped out a little bit. We've seen kind of signs of that in the end market a little bit. The HR Tech Conference, the last couple of years, I've gone to, I don't know, 14, 15 of them now. It's been a lot. The new innovation the last couple of years seems definitely slower. Should we view this acquisition as a reflection that the expansion mode there is slowing down, or are you as fired up as you always are?
I am as fired up as I've ever been. I mean, hearing you say that, if you were to take that comment and you were to juxtapose that against our product launch over the last, call it, 18 months, we've launched a ton of product. So I mean, I think this has been one of the busier sort of 12 to 24 month periods that we've had from a launch standpoint. And so I mean, I don't sit here thinking that there's a slowdown in the things that are interesting to do in HCM land. It doesn't mean that everyone else is as creative as visionary as we are, but I think I feel good about our prospects.
I mean, we've launched a new scheduling product. We've launched Rewards and Recognition, Employee Voice, Headcount Planning, not to mention what we're on the path of doing with Airbase. So it's been a really busy 12- 18, 24 months for us from a launch standpoint.
I heard you have a new head of product.
We do.
His name's Steve. He's also your Executive Chairman. He's kind of only focused on it.
A lot of continuity. Yeah, I mean, I think that is, that's been a really important core for us. I mean, Steve and I have obviously had different jobs over the course of our careers, but we've both run product. We've both always been very involved with strategy. And that's still the case today. And I mean, we both have a lot of fun in that space.
I think you actually technically do have a new head of product, and that's Steve.
We do, but Steve is still very involved. I mean, going back to the days where we first started working together at Paychex, I mean, he's a very product oriented, visionary exec. And it's been a lot of fun.
How do you think about the GenAI theme? You all have launched a module called AI Assist kind of within that. And HCM is a space that I think unless someone's really deep into it, might not be as attuned to how the space can benefit from these technologies. How do you think about what that either looks like today or what the roadmap looks like for you all?
Yeah, I think there's a few different dimensions on this. I mean, and I think we're also in the earlier days, just I think across HCM land. I mean, I think there's a few different lanes. I mean, one is just the overall customer experience and how can we make that better leveraging AI technology, so think about across all of the workflows that exist, the opportunity to automate workflows, I think, is one of the bigger opportunities that we have, not just Paylocity, but across the HCM space.
You also have, I think, a meaningful opportunity, particularly in our part of the market, for delivering insight and actionable analytics in the platform in the context of those workflows that you can also automate, so leveraging the opportunity to bring people data where they are in the platform, in the activity that they're doing, that's something that hasn't been done. And I think it's particularly important in our part of the market where, for example, you wouldn't have this huge analytics tool at a 150-employee customer that they'd be leveraging. I think there's a big opportunity to automate workflows, create greater efficiency across the platform and in people's day-to-day work, and to give them, I think, actionable insights and analytics along the way.
Have you seen any difference in adoption for what you have out there yet today for a company that's, I don't know, 10 employees versus at 10,000?
Yeah, I think so. We're early days, as I said, but I think what you start to see is you start to see adoption, but it doesn't look like you would usually measure adoption, so do you start to see workflows that used to have 10 steps in them have seven steps and then five steps and then three steps, and so do you start to see those users at a 10-employee company have more efficiency in their process? I absolutely think you do, and that's one of the bigger opportunities that I think lies in front of us.
Okay. Moving to go-to-market a little bit.
Sure.
Referrals, broker referrals.
Yeah.
They continue to generate 25% of your net new business.
Yep.
To me, that's an amazing statistic given how the company has grown over the last 10 years because it's been that way since your IPO.
Yep.
There was a spike for a period of time around all the ACA stuff, but it's been 25% consistently. I think it spiked to 40% one quarter, which was a crazy number. But big changes in that end market for a while. But I guess, how do you think about that opportunity continuing to grow forward? Is there more to kind of continuing development? Your product's bigger with Airbase coming in. You're going to get leads in different areas. Can that still be 25% or better?
I think it can be. But to your point, I think if you'd asked Steve at the time of the IPO, can you maintain 25% plus of broker referrals at 10 times the size of the business, I'm not sure it would have been a straight yes with huge confidence. I think what we found over time, though, is if you do two things. One is if you invest in those relationships. So yes, we have corporate agreements with some of the bigger brokerage houses, but the relationships are really built and managed with the field-based sales force in the territories. And if you invest in that and you train on that and you drive that from an execution perspective, that's where the rubber really meets the road in terms of actually getting those referrals and sustaining that over a long period of time.
Second thing is actually creating differentiation with what we offer to brokers as a value proposition. So yes, we're in the same local communities. Yes, there's commonality of interest in serving clients within a territory. But there's two elements where I think we have differentiation against a lot of the competitive set out there. One is from folks like an ADP or Paychex. We don't have an insurance business. I mean, they have Paychex has one of the largest insurance businesses in the U.S. And so a lot of their back-to-base revenue growth has come from the ability to sell insurance back into those customers, which is taking lunches away from brokers. We don't do that.
I think a lot of the brokers have looked at us as a great technology partner that shows well for them and their clients that is not competitive with what they do every day to earn a living. So that's one piece. The other piece is we've invested in technology that actually adds value to the brokers in a way that I don't think anybody else in the industry really has. So giving those brokers a way to see into our system to understand the companies and, more importantly, the employees to whom they have sold benefits actually using those benefits.
If they are, they have a good visibility into what that looks like for their client base. If they're not, it gives them an early sign into what they need to go do to help drive that utilization to maintain that business. And so I think there's this combination of just on-the-ground execution with our sales team that drives the fruit of those partnerships. And then there's the actual investing in that area of the business to add value to what they do from a technology perspective.
To the first point that you just talked about, if you asked my associate Ian, when that acquisition got done, we put out an industry note because I didn't want to just focus on, hey, this is a transaction, this is a valuation, et cetera, but kind of the impact of the space. I'm sure you probably saw it.
I did.
The one thing I forgot in there, and I was livid right after it just because it was such a nuanced item, but it's vastly important to you is if you look at Paycor's business over the last couple of years, they've really talked about how 40% of their leads have come through brokers. You mentioned Paychex has this great insurance business. That dries up and goes away. That's going to go to someone else or has the opportunity to positively benefit you, I would think, whatever those deals were going to them might end up falling back to you because why would that broker refer them with that Paychex insurance business behind them?
Well, I mean, I think there's always disruption that goes along with any transaction. And I think from our perspective, we just want to be in a position where, hey, we have a really clear value prop to brokers. And we have great coverage from a territory standpoint all across the U.S. And we want to be able to communicate that, hey, not only do we have that physical coverage in every territory where you have brokers, but we actually have a real value prop in terms of the technology that we provide. And we have a long, long-standing history going back to earlier days, even before the IPO, of partnering with both brokers and financial advisors to provide a great technology partnership to them. And that's the focus. That's the message.
I think it highlights even more your value proposition there. So looking forward to that 25% number. Just overall growth in the space today is kind of slower than what it was two or three years ago, even if you normalize for some of the pandemic stuff, right?
Mm-hmm.
Let alone five plus years ago. But how have you shifted your go-to-market kind of investments and strategies with what's kind of been going on in the broader HCM environment?
Yeah, I mean, I think it's hard to look past, I think, all the disruption from COVID. I feel like we haven't had a just steady state year since like 2019, which is now five years ago.
Your space has the most disruption of any category ever, given what payrolls looked like in 2020 and 2021.
It feels that way. I didn't used to have any gray hair. Yeah, I think there's a couple of different dynamics. Like for us, for example, before the nine months coming into the pandemic, we were at a 25% growth rate. I mean, we were a fraction of the size that we are today, but these are the two dynamics. I think you had more of a steady state from a macro perspective coming into the pandemic, and we haven't seen that since. So meaning you had more normalized GDP growth, you had employment, how we would feel that in terms of employees on the platform in that kind of 3% tailwind range from a revenue growth perspective. And we haven't seen any of those dynamics in a steady state since.
I think you had this falloff during the pandemic. You had this climb back, and then you had a spike actually coming out of the pandemic that also wasn't, that was not normalized in terms of the growth rates. As we came through last year, I think we thought that might be a year where things normalized, but I think what we saw was a lot of downward pressure from a macro perspective that was putting downward pressure on growth. That came in, I think, two forms. One was employees in the platform. That's how we talk about it, but everybody in our industry has some way of measuring that same thing in terms of the number of employees that they have on their products or platform.
There was pressure on that from a macro perspective, whereas we would have usually seen pre-pandemic, call it 3%-ish growth. That was much lower, and you also had, I think, not a full freezing, but the market for enterprise software was a lot tougher. And we started to call that out early in our last fiscal year of, hey, we're seeing deal cycles take longer at the upper end of the market. Things were generally a tougher selling environment. I think people were generally more cautious with overall spend. You had more people getting involved in deal cycles, and that really played out through the course of our last fiscal year. I think we started to see stabilization in our Q4, and that came through in Q1 as well, which we talked about on the call.
So I think we came into this year with a view that, hey, things aren't getting markedly better, but they're also not getting worse. And we felt like there was a sense of stability in the market in Q4, and we saw that come through in Q1 as well. So I guess overall, our setup and hope for this fiscal year was, can we see some stability across the market and sort of get back to normal course?
Okay. Assuming this year has some of that normality to it, hopefully it does for the first time in a while, how do you think about the growth algo kind of going forward? It's kind of split between new and expansions. I think the metric is last year or two, expansion has been about 20% of new bookings or gross new bookings, excuse me. I might have that number wrong. I was doing it off the top of my head. I don't have it listed here. But how do you think about that going forward, especially with Airbase, which opens you to both a new market, but also new expansion opportunities?
Yeah, I mean, I think so stepping way back in part of answering your last question too, I mean, the growth algorithm for us has been you have to be able to sell new units. And our investments from a go-to-market perspective have included growing the sales force year over year. We grew it a little bit slower coming into this fiscal year as we had in prior just to reflect sort of the state of macro and state of growth across the industry. But I think those are still the drivers in terms of our investments from a go-to-market perspective. It's the ability to continue to grow the sales team, which we can, continuing to invest in marketing, continuing to invest in more product, and then continuing to invest in channels, which we talked about a minute ago.
I think that's really, I think, still the message and still the focus from a go-to-market perspective. The product piece is also and all that's focused on largely focused on driving new units. I think the other part of it is continuing to grow the product suite. So that's been a critically important part of the growth algorithm going from, again, $200 per employee per year chargeability across the platform in 2014 at the time of the IPO to $550 today, which doesn't include some of the new products in Airbase yet.
So being able to drive that level of innovation, to drive that level of expansion in the product set gives you the ability to differentiate for new deals, sell back into the base, and the new deals that you win are generally worth more. So I think that is still the growth algorithm for us. I think that is very consistent with what we would have seen over the last decade. That's how we think about it as we look forward.
Okay. One more question for me, and then happy to open it up to the audience for any questions. This last question is kind of funny only because do you know who gave me a call yesterday?
No.
Your head of IR, Jeff.
Okay.
So on this very question, actually.
Okay.
Sounds like you're doing some internal work on it.
Well, when we get good questions from folks like you, we pay attention.
Apparently. I just thought the timing was a little on the ironic side at least. But so I've had this question a lot more over the last couple of three years, especially as just general demand in enterprise software has slowed a little bit. But the question is around adjusting to free cash flow conversion.
Yep.
Your model, obviously. I've covered the company 11 years. As you know, I know it well. The difference in your model is really capitalized R&D, software development. And you guys have been very transparent since the IPO. You're going to spend about 15% every quarter, every year when you combine what's expensed, what's capitalized. And that number has not varied much. So very consistent messaging there. But I know you all are focused on margin expansion. And you're going to be a tax cash payer, full payer this year.
Full boat this year. Yep.
I'm sorry to hear that. Maybe more acquisitions, more NOL. No, not necessarily. To bring that down.
We don't have any choice in that one, so.
Yeah. But how do we think about the opportunity for margin expansion going forward, especially in a model where your gross margins relative to other SaaS companies are lower? It's because of the payroll solution. I know that historically is part of the industry. But what do kind of the puts and takes maybe kind of look like on that, given your focus on it?
Yeah, I mean, I think if you step back in the question, I mean, I think we've tried to deliver a balanced equation of driving revenue growth as hard as possible. And I think if you look at us versus, excuse me, if you look at us versus our competitive set in HCM, we've been for, I think, the last three years the highest growth public company. And we've also been, I think, higher on average than I think on your software index, but on a lot of them, we're right there or above most from a revenue growth standpoint, but also focused on delivering the balance with profitability. And the specific focus there is on Adjusted EBITDA and Free Cash Flow.
And so if you look back over the last handful of years, you'll see this great up and to the right progress relative to both revenue growth, Adjusted EBITDA progress, and Free Cash Flow. And I think as we look forward, that will absolutely continue to be the focus. And I think it's an important point relative to any benchmarking or comparisons. There's not a lot of companies around that are delivering that mix across those three dimensions. There may be some that are higher growth or maybe somebody that has a higher Adjusted EBITDA margin or has greater Free Cash Flow conversion. But when you look at those three dimensions, there's not a lot of people that screen higher than we do on those three, which has really been our focus.
And so to your point on capitalization, I mean, there's opportunities for each one of those things. Like, hey, I talked about the go-to-market and product focus to drive revenue growth. There's certainly been a degree of focus on Adjusted EBITDA from a profitability standpoint and from an efficiency standpoint. One of the things that we talked about coming into this year was as we grew the sales force a little bit slower than we had in prior years, focusing on productivity as an example. And then from a Free Cash Flow conversion standpoint, we've been very focused on, hey, what are the line-by-line opportunities that we have as we grow revenue, as we grow Adjusted EBITDA to focus on that Free Cash Flow conversion.
And I think that's the path as we look forward over the next handful of years. And the other point I would make is if you look at the financial targets that we put out, you can trace down through them. People ask me frequently, hey, what does the business look like over the next handful of years? We've put a target out there of getting to $2 billion plus in revenue.
And you can trace right down through what we think the business will look like from a $2 billion revenue business with gross margin, Adjusted EBITDA, what we're spending on R&D, and on sales and marketing, getting to an Adjusted EBITDA line. So we've tried to be really clear about what the focus is in terms of revenue growth, Adjusted EBITDA, and free cash flow, and give everybody a picture of what we think that can look like.
Does Airbase materially change that vision? Pure software business, margins are a little bit better than yours.
It doesn't change it overall, and I think the reason that I say that is every time we look at something like that, we have to believe we have the ability to integrate it from a product and platform perspective to sell it to new deals, sell it back into the customer base to be able to drive the same level of margin profile that we have across the business, and I believe that's true with Airbase as well. Take a little step back in the year from a profitability standpoint, but I think we'll get back to it in 2026.
George, you're first. Hi, George.
Happy New Year. The Airbase does get you into a new space. You talked about ambition there in a few years, how big this new space is going to be as part of the overall business, and what does the landscape look like, and shall we expect the future additional acquisitions in order to build the critical mass? Thank you.
Yeah, sure. I mean, I think it's a really interesting space for us, but at the same time, Airbase itself was a smaller business on a revenue basis, and so doing $1.05 billion in revenue, it's a fairly small component for us on an overall revenue basis in 2025, and you're building off a small number as you look through 2026, 2027, and beyond, so I think it's important to us strategically, and I think it gives us the ability to sell those products back into the customer base, sell to new deals. Just to give you a sense, the average size deal for an Airbase customer, they had around 500 clients at the time of the acquisition, was in that sort of $15,000-$20,000 range.
And I think we have to go through the full packaging and pricing analysis relative to something like that in our platform. But that's the type of opportunity that I think it presents from an ACV standpoint. And so you can think through how that would build over time. But I think our real focus is on integrating that solution set tightly into the platform and making that a part of our go-to-market motion from a new deal, new client, new logo, and then back-to-base perspective.
Shall we expect a few more acquisitions just to build the critical mass?
I think from our view, I mean, we have the core of what we think makes the most sense for us. We started purposefully in that place because we thought those were the most important elements from an expense management, a spend management, a workflow, and then an accounts payable automation perspective. Those were, we thought, the highest value-add pieces for a platform like ours and where you could drive the highest degree of integration. So I don't view this as, hey, we have this piece, but it's not the most important piece, and we have to go do five more things. I think this is the most important piece.
I think we'll get a lot of experience over the next 12-24 months. And there could be things out there that we think also make strategic sense as we move forward. So I'm not cutting that off. I'm just focusing on, hey, we've got a lot of work to do with the most important piece, which I think we have. And that's where we'll start from. Yep.
Have about two or three minutes left. Eric?
Obviously, amazing story, et cetera. Obviously, thanks for everything. I guess you mentioned a few times you said, hey, early days, totally understood. On GenAI, how do you see for the next 24 months, et cetera? How do you think that does impact your overall top line when you talk to these clients? I think you mentioned the companies that have 10 versus the companies that have 5,000 or 10,000. Do you think that in three years from now, it will have a very big impact, or we really have to wait and see over the next 12 months to see how companies get back there?
My perspective would be there have not been. I hate to say that it's early days, but it is early days, and I'm saying that because I actually feel that that's the case. I think from a, your question was really focused on revenue, and I think it's hard to say. I think buyers of the solutions that have AI embedded will get more value out of those solutions. I don't necessarily sit here and say, hey, that's going to be a huge accelerant to new deal volume, nor do I think it's going to be an accelerant because it's not priced that way with us or anybody else in the industry as some huge lift from an ACV perspective, so I think there's more value to be delivered there.
And I think to be competitive, folks like us will have to drive the value to clients and have to make the decisions from a product perspective to leverage AI across the platform, which I talked about earlier. So I think that's a real opportunity. And I think that will define how the competition behaves with AI or what they do with AI. It's hard for me to say sitting here today that in 24 months' time, there's going to be a huge lift from a new unit volume or from an ACV perspective based on where we are today, acknowledging again that it's early.
I guess one just follow-up on that.
Sure.
Just because you guys are working with obviously so many large customers, is your sales team or others getting inbounds of trying to understand the data more over the next 12 months in terms of efficiency, cost savings, et cetera? Do you feel as though your customers are going to want to better understand, okay, if we are implementing GenAI or products that include any of that kind of stuff, that they want to fully understand what the lift could be, or it's still even early days for the customers to be asking those sorts of questions?
I think customers in the segment that we're focused on, and again, Scott's point was, hey, it's kind of broad. You get up to some actual enterprise-sized clients, and you're also covering some that have 10 employees. And the conversations are different, for sure. I think as a practical matter, what people want to know is, what are you actually doing with AI? Where does it show up in the products? And why do I care? What is it doing for me? And so the point that I go to is whenever anybody is engaging in buying software, forget about what flavor and forget about what size. They're doing it.
A large part of what they're looking at is a solution to take out manual process. And that's why CFOs forever have asked about ROI calculations on XYZ software product. What I think, what I would tell you about at least our view in terms of what AI has the promise to deliver, it's a better client experience, and I think that better client experience shows up in things like, hey, I have this process. It used to take 10 steps, and now it takes half of that, and so it's much smoother. It's faster.
It's more efficient, and you're taking unnecessary steps, and sometimes that's going to be manual process, and then sometimes that's going to be, hey, the thing that we automated, we're automating it, and so you're going to get a better experience for a payroll admin that has 10 steps in their process that now is going to have 5. That's just one example.
Now, I don't think necessarily in our part of the market that a client is going to say, hey, well, I would have paid you $10,000 for the process that had 10 steps. I'm willing to pay you $12,000 for the process that has five steps. I don't personally think that's the way it will unfold, but that's how I think we want to be able to talk about the value-add. It's tangible in terms of, hey, your process is going to be faster, more efficient, and fundamentally a better experience. Put aside everything that I think we can also deliver from an insights and analytics that are actionable from a people perspective. I think that's also important.