Both in person and listening over the webcast. Before we kick things off, my name is Jacob Bairs. I am the research analyst here at William Blair that covers Paylocity. 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, Jack. Thanks for having me.
Yeah. 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?
Yeah, absolutely. So Paylocity is a payroll, human capital management, and spend management software company. We've been public since 2014. Business focuses on the 10-5,000 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 will do roughly $1.6 billion this fiscal year. Growth has been significant over that period of time. I think similarly, strong financial and profitability profile. Where we sit here today is coming up on $1.6 billion of revenue, a business that has 35%+ adjusted EBITDA margins, 20%+ free cash flow margins, and this fiscal year growing about 14% on the recurring side.
That's helpful. 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. How do you think about competing in that type of market, and how do you become one of the long-term winners in the space?
Sure. I think HCM specifically has always been a competitive space. As I referenced a minute ago, we focus on the 10-5,000 employee segment of the market. There are over one million businesses in the U.S. that fit that definition, and that's compared to the 40,000 clients or so we have today. 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. Being able to expand the percentage or the attach rate of our HCM suite. 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. It is really a story of large market opportunity and pretty significant competitive differentiation on the product side.
That's helpful. 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? We'd love to kind of double-click into 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. We have 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. We are really able to go to market with a competitive differentiated story across the product set. We have a number of products that others do not in the industry. I think we have 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. 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? I think all that has been backed up with really strong performance from an operational standpoint. Industry-leading service levels, industry-leading implementation as well. Really, really strong package there.
Yeah, that's helpful. One of the largest portions of your new business still comes from ADP and Paychex today. There's recently been talk about maybe a little bit of improving churn for those vendors. 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've 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 up market, as you know, over the last few years. We have increased that target client with up to 5,000 employees over the last few years. We're seeing increased success in that part of the market. Largely speaking, it has always been competitive. 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. Nothing really new that I would call out that we're seeing, whether that is from ADP or otherwise.
OK. That's helpful. Then shifting over the macro environment, obviously, it's a bit variable, especially over the last few months with the recent tariff announcements. 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?
Yeah, nothing that I would call out. I think 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 pays 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. It is 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.
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 to date.
Yeah, they just beat in Q3 too. It is definitely helpful in terms of the business trends there. As we think about the macro, you're obviously heading into a Q4, going to be guiding for the full year. 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. Yeah. As earnings call, we'll provide guidance for Q1 2026, and then the full year. I think expectation will be very consistent approach from a guidance philosophy standpoint as we went into fiscal 2025, 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. 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 better visibility. You've got less volatility and uncertainty. 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's some uncertainty from a macro standpoint. You have larger and some level of execution risk when you're guiding for a full year.
I think from a philosophic standpoint, we'll likely have a very similar approach. We'll give you more details next quarter.
Yeah, makes sense. OK. 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?
Yeah. I think for us, as we think about how do you drive durable 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. It became Headcount Planning software. That was really our first entree into Office of the CFO. I think Airbase is a business that we probably knew for, I don't know, 9-12 months leading up to the acquisition. It was certainly an adjacency that was interesting to us.
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 non-labor spend all together in a fully integrated product set that links in a seamless way with their ERP. There is really nobody else in our industry that has that level of offering. 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. We are continuing to work through the integration. I think all of that has tracked exactly how we would have expected.
We will be able to provide more details as we head into 2026. I think for us, that is one of the elements as you think about how do you drive durable revenue growth on a go-forward basis, how do you expand the addressable market. I think there is a lot of excitement that we have around what that can be on a multi-year basis.
Yeah. 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. 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?
Yeah. 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 would be no different. The payroll team is part of my organization. That would be something that we would look at holistically within my team. 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. We feel like we've got a pretty strong number of use cases around what that buyer is looking for.
I think as we go on a go-forward basis, that would be one of the areas that we would be focusing on around what that buyer needs and what that persona does and may impact to our sale process.
OK. That's helpful. 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? When do you think that integration process should be kind of fully wrapped up?
Yeah. I think early days, we're, call it, six or seven months post-acquisition and, as I said, going through the really thoughtful integration process. 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. I think we've really characterized that integration as 12-18 months. I think that puts you deeper into fiscal 2026 and certainly the ability to unlock and deliver value over time. We've started to have more fulsome conversations with our existing client base. I think that will continue as you get deeper into the next fiscal year.
Yeah, that makes sense. You all have talked about a lot of your acquisitions, the expectation that attaches to 10%-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%-20%, I think, has generally been our target, not only for acquisitions, but really for new products as well. I think we've seen a number of examples over the years where products have actually attached at higher than 20% rates quicker than we would have expected. Learning Management is a good example, Premium Video, both of those two products as examples attached quicker and in a larger way than we would have expected. Yes, I think that's a reasonable attach rate. That's a multi-year expectation. This is certainly a new product set and its adjacency. Would not expect out of the gate you're going to see 10%-20%.
As you think about that on a multi-year 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.
Yeah, that's helpful. 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 and portion of the business could be one day compared to the core HCM suite?
Yeah. I think if you start to do the math around what a 10%-20% attach rate could be across the 40,000+ clients that we have and 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. As I mentioned earlier, as you think about how do you drive durable revenue growth, not only to $2 billion, which we're a couple of years away from, but from that $2 billion-$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.
OK. That's helpful. 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 manifest itself in a few different ways. One has been continued focus with upselling existing clients. Most of our revenue growth has been focused on landing new logos. 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. That has been a key driver of growth. We continue to have success up market. We have increased our target businesses that have up to 5,000 employees over the last few years. We're seeing continued success in what we would define as the enterprise space as well.
Within the core offering in that call that $50-$500 range, we are seeing clients attach with Premium Video and Market Pay Recognition and Rewards. Those are some of the newer products. Learning Management, I think, has continued to attach at a healthy rate. Really, those products that move beyond traditional HCM functionality are the things that we're seeing clients have a particular interest in.
OK. That's helpful. 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. What are you seeing there and what's kind of led to that better execution up market over the last few quarters?
The enterprise space for us, which we really think of as clients with 500- 1,000+ 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. As we built out the entirety of the HCM suite, as we moved beyond HCM over the last few years, we've certainly been pulled up market. We've seen incremental success there with clients having incremental interest in Paylocity. Over the last three or four 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. That's a part of our go-to-market motion that has performed really well this year included.
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. 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've felt really good about the talent and team we have in place. 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. We've certainly seen some really nice progress there.
OK. That's helpful. Does the competitive environment change as you move up market? If you start when you get into those 1,000+ employee organizations, maybe run into a Dayforce or some of the legacy ERP offerings more, what's kind of the differentiation point? 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. Certainly, the enterprise sales process is different in a number of ways. It is typically a longer sales process than 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 what your product roadmap looks like. I think there is a real packaged go-to-market team that we have with those larger deals. You have a sales rep that has more tenure and is able to sell to the enterprise buyer as well.
We have, I think, learned over time, continued to tweak that go-to-market motion, but have felt really good about the success we've had up market.
OK. I know the primary growth engine for you over the years has always been acquiring new logos and seeing that growth. Given the expanding product portfolio, and especially with Airbase recently, how have the recent sales investments been changing in terms of targeting upselling the existing base? Do you think that ever becomes the biggest driver of your growth rate, kind of sales back into the base?
Yeah. Today, the vast majority of our sales would be new logo driven. We certainly have seen success really for the last probably seven or eight 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. I think that's something that we have done in a very measured and thoughtful way versus making an investment in a one or two-year period and then having growover concerns or not really being able to go back to that well. We've been pleased with how that team's executed. I think we've been pleased with the strategy that we have taken to grow that organization.
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 in 2026 and beyond. I think we're still a long ways away, though, from that being the predominant driver of new logos or new revenue.
Yeah, that makes sense. Then shifting over to the broker channel, over 25% of new clients come from the channel referrals. Why do you think that's been so consistent? Why do you think you've done so well in that channel over the years?
The 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%-25%+ of our business coming from the broker channel. Obviously, as the business has grown, that contribution on a dollar basis has grown with it. That is 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. 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. For context, you have tens of thousands of individual brokers across the U.S. There is not a level of concentration there with one or two 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 our brokers want. Similarly, we're in constant conversation and communication with brokers. 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? Whether that is product investments, service, or operational investments, continued focus on integrations and API, those are the things and the conversations we're having with brokers. It's not an area that the work has ever done. It's a continued area of focus.
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.
Yeah, that makes sense. Both maybe a competition question as well as a broker network question. 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. 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. 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 any time you have a level of consolidation coming with that is a level of uncertainty within the broker channel. 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. 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. 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. I think for us, it is an inflection point where we're able to really double down on that focus. I think over time, we'll see some increased success there.
OK. Helpful. AI is obviously a big topic in software land these days. 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. I think Paylocity has been a leader in AI within HCM really for the last handful of years. 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. We are seeing increased usage and adoption within our client base. We are 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 are not having to call their Paylocity account manager, not having to interact with their HR leader. 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 overtime and make sure that they have the right employees for the right shifts 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. There are elements of AI, I think, throughout the product suite and certainly seeing increased adoption. As I think about 2026 and the investment we're making in product, that is certainly one of the key areas of focus for us as well as broader automation opportunities. I think that goes for both the product set as well as ways that we can drive efficiencies within our teams as well internally.
OK. That's helpful. You all have talked about kind of the key strategies, embedding AI into the existing platform to drive better retention, better win rates against the competition is kind of a unique differentiator. Now that we're a year or two into the initial AI releases, what are you seeing on that front? Are you seeing the improvements to retention? Are you seeing the improvements to win rates? Just curious if you could kind of flesh out how that strategy has been going.
Yeah. I think this will be a multi-year endeavor. We're still very early days. To my comments a minute ago, we're definitely seeing increased adoption and usage across the product suite. We are very confident that there continues to be ways that we can differentiate within the product suite with AI. I think going forward, there are certainly ways that we can drive efficiencies within our operations teams, which should improve the client experience, reduce the effort of our employees, help us drive increased profitability going forward. This is, again, as I said, a multi-year journey for us. We're certainly seeing some early signs of positivity there. I feel like going into 2026, that will be an area that we continue to see some strong momentum.
OK. That's helpful. Last one on the AI front. Obviously, there's been a lot of talk about Agentic over the last year or so. Curious how you're thinking about the Agentic opportunities in your platform. Do you see Agentic as potential productization where it could be a separate SKU that you can monetize? Or do you think it'll fall into the earlier discussion around improving retention and win rates?
Yeah. I think Agentic AI, I'd put that under the broader umbrella around things that we would be looking at and investments we would be making within AI. 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. 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. As I mentioned a minute ago, I think there's a number of opportunities for us to drive efficiencies internally as well. Whether it's Agentic or broader AI opportunities, it's definitely an area that we think will drive dividends into 2026 and beyond.
Yeah. That's helpful. Taking a step back, thinking about capital allocation, 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. 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. I would view a level of share repurchase activity as pretty foundational to our capital allocation program going forward. I think similarly, as you think about stock-based comp, that has been an area of focus for us, too. We've reduced stock comp from roughly 12% of revenue a few years ago down to roughly 9% of revenue this fiscal year.
On top of that, being able to reduce share count as well. 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. I think for us, if there are products or other opportunities out there that speed go-to-market or things that are on our product roadmap, expand addressable market, we think we've got the ability to continue to utilize our buyback as well as be opportunistic there from an M&A perspective.
OK. That's helpful. I know we're coming up on time here. Maybe just one last question from me. What gets you most excited about the Paylocity opportunity moving forward? If there was a world in which we could potentially re-accelerate the company's growth, what would be the kind of building blocks and drivers of that?
Sure. 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 nine 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 100 basis point headwind from the Airbase acquisition, so 200 basis points of organic leverage. Really excited about the results this year. I think excited about fiscal 2026, 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. I feel really good about the execution and where we're headed into 2026 and beyond.
Sounds good. 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 in the Adler Room on the second floor. Thanks, everyone, for joining today.
Thank you.