All right, awesome. Well, thank you, everybody, for being here for day one, session one, bright and early in the morning with joining us with Paylocity. So we have Ryan Glenn, CFO from Paylocity, here with us. Ryan, thank you so much for being here.
Yeah, thanks for having me, Steve.
Yeah, maybe we can just start off by giving a little bit of an overview of the most recent quarter. I think most people in the room probably know Paylocity at this point. I think it's been about 10 years since you've been public.
That's right.
So can you just kick off, you know, recent highlights and what's been going on with the business?
Sure. So we reported our fourth quarter and full fiscal 2024 results about a month ago, had a really solid end of the fiscal year. We grew recurring revenue about 15%. We continued to drive really nice leverage across the business, specifically through Adjusted EBITDA and Free Cash Flow. We ended fiscal 2024 with about $1.4 billion of revenue, 35% Adjusted EBITDA margins, Free Cash Flow margins north of 20%, and kind of mid-teens recurring revenue growth with just under 40,000 clients. So really strong end of the fiscal year, and I think we feel good about the momentum we've seen in the business.
Okay, great to, great to hear. We are gonna open it up for questions. So if you do have anything, I guess get those ready. We'll let the caffeine kick in a little bit before we go to Q& A, later in the session, and, we'll go from there. So I guess maybe we'll just start on the demand picture and what you're seeing today. I guess, how would you kind of characterize the macro, and, and maybe how has that trended for the past couple of quarters and for the past couple of months from what you've seen?
Yeah, I think it's largely been a stable macro environment as I think about the fiscal year that we just completed. It sort of moved in fits and starts a bit. So we came off of a sort of multi-year period where employees in the platform were rising in the post-COVID world, and then I think fiscal 2024, we saw some sequential declines, particularly in the first two or three quarters of the fiscal year, which we called out on those earnings calls. I think Q4 results were a little bit better than expectations. We had assumed that there was gonna be some continued decline, and I think there was more of a stabilization in the fourth quarter, so overall, I think the demand environment continues to be pretty durable.
I think we feel good about certainly the sales results in the back half of the fiscal year. You saw that, in the results we saw, particularly in the fourth quarter, the guide to the first quarter. I think we feel good about, and I think we're happy with how fiscal 2025 is setting up. I think probably the one area that we did call out from, a macro standpoint is Up Market, seeing some longer sales cycles, potentially some more decision makers involved in the process. That has continued to be the case. We have not seen that worsen, but I do think Up Market, it's been a little bit more challenging than it probably would've been historically.
Okay. Would you consider mid-market at this point stable, or does it feel like there still is a little bit of, you know, choppiness within that segment?
I would characterize it as stable.
Okay. I think one of the bigger questions we tend to get from investors today is just, you know, how do you think about saturation in the market? And maybe how has the mix of opportunities changed from what you've seen historically to maybe what you're seeing in the past couple of quarters for where new customers are coming from or how those deals are coming together?
Yeah, I would view it as, you know, we've always characterized it as a competitive market. I think where we are winning business from has been very stable within a pretty tight range for, you know, a good part of the last decade or so. So we continue to see, call it 40% or so of our wins coming off of the legacy incumbents. We see 15%-20% of business coming off of local or regional payroll providers, of which there are thousands across the U.S. 15% is coming from what we would call the in-house channel, companies that are not using a traditional third-party provider. And then the balance is coming from, sort of all the other public and private names that you'd be familiar with.
And that mix sort of moves around quarter to quarter a little bit, but has largely been stable. And we would not have seen any trends, you know, over the last handful of quarters that would have trended differently than those historical ranges.
Okay. And so moving forward, you still feel like it's the same, somewhat competitive dynamics, you know, nothing's really changed there. It's not more of a knife fight or there's not more discounting or pricing going on?
We have not seen that. I think the discounting and pricing environment continues to be rational. You always see it in pockets, typically geographically across competitors. You may see it more so in what we would define as selling season. So in the fall through the winter, some level of potentially increased promotions. But that I would characterize as normal course of business year in and year out. I think our discount rates are spot on to where they have been historically. Haven't seen any unnatural actions from the competitive side.
Okay. All right. No, good to know. Maybe just on top of funnel, net new, you know, I guess how are you kind of viewing where that stands today versus maybe a year ago? How would you kind of feel like the health of the pipeline, those, you know, dynamics that you're seeing today?
Yeah, I mean, as I mentioned earlier, I think I view it as stable. I think we called out during fiscal 2024, as I mentioned earlier, Up Market was probably the element that we saw a little bit of softness in. And I think, you know, in fairness, we did characterize some of that as certainly macro and some of that was execution on our side. And we certainly feel good about the progress we're making on what we can control. But overall, I think that the pipeline continues to be strong. You know, you did see probably better results versus guidance, larger beats in the back half of the fiscal year.
I think the way that we've characterized the setup for fiscal 2025 is certainly a desire to get back to that beat and raise cadence and feel like we have done so with the guidance we've put out. So overall, I think it's top of funnel we're overall pretty happy with.
Okay. No, great to hear. Maybe just on Paylocity's value proposition and, you know, what is resonating with customers today and in the current macro situation that customers are experiencing?
I think if you think back, not just recently, but over the last four or five years, we have really positioned ourselves as the most modern player in the HCM space. I think you've seen that resonate with both clients and prospects. You've seen that show up in results. We've been the fastest growing HCM provider for the last handful of years. I think that value proposition of having the most modern software in the industry has driven those results, so we continue to see increasing attach rates really across the product suite, but in particular, those newer products that help clients solve challenges for a younger worker demographic, helping them modernize their HR tech stack, so we're seeing success in products such as Learning Management, Market Pay, newer products such as Recognition and Rewards.
Those are the products Onboarding. I'd probably call it as well. Those are the products that are seeing particular success, and that goes for, as we land new deals, but also as we go back to upsell existing clients. We're seeing some nice success, and that overall message resonating at a very high level.
Okay. I guess as we think about that product set, like maybe what is helping support PEPM growth, how do we think about what are gonna be the next kind of, you know, levers or big supporters of, of further PEPM growth over the next couple of years?
Sure. So we have, if you think back, you mentioned earlier that the time of the IPO and having been public for about a decade now, when we went public, our product suite at list price was $200 per employee per year, and we sit at $550 per employee per year today. So that number has grown significantly over the last decade. We released a number of new products just over the last 12-18 months as well. And I think it is those products, as well as LMS, as I mentioned a few minutes ago, really driving those increasing attach rates. I think the totality of the product suite has pulled us Up Market as well over the last few years. So, we're seeing the full suite resonate with larger and larger clients.
And then likewise, as you think back to the roughly 40,000 clients we have today, being able to continue to add to the sales team that goes back to existing clients to upsell. So we started that team seven or eight years ago. We've added to it year in and year out as the product suite has continued to expand. We added to it again in fiscal 2025, and they continue to see a lot of success, both driving that message as well as being able to demonstrate that value proposition of some of those newer products.
I wanna touch a little bit more on go-to-market changes, a little bit later, but maybe sticking on the, on the PEPM discussion right now, I guess how close do you feel like you are to kind of hitting the ceiling on, on PEPM and, you know, what that could look like? Are there bigger categories that you feel like you can move into that could drive that PEPM even higher than the $550 it's at today?
Sure. Yeah. I would not characterize it as nearing a ceiling. I think our target is $600 per employee per year. We're at $550 today. We made a lot of progress towards that $550 over the last 18 months or so. So there's roughly a $50 gap to get to that target. I would not view that as an ultimate ceiling. I think there continues to be opportunity both within the existing product suite, so features and functionalities that we can drive increasing pricing. You saw that last year where we announced additional features within scheduling as well as LMS that had pricing attached to it. We think there continues to be opportunities within HCM.
We obviously have really expanded the definition of what traditional HCM product looks like, with some of those newer products that if we were up here five or six years ago, would likely not have been on a roadmap. So I think you continue to see expansion of what companies are willing to pay for ways to be able to monetize and add value, and I think lastly, as you think about the acquisition we made last December of Trace, which is a step towards headcount planning and think a little bit more broadly around what the Office of the CFO might look like. We think over time that may be an area where you continue to see an expansion and that would open potentially an additional subset of an addressable market for us.
Okay. Interesting. I mean, it is, I'm sure, a topic of the moment is probably AI just across the board. And being at a tech conference, I feel like we need to ask about that. So how are you feeling about where the AI product is today and how are you kind of viewing about, you know, the further portfolio investments and the overall monetization potential for AI in you all?
Mm-hmm. Yeah. We've had a number of elements of AI in the product suite really for the last handful of years. We've invested in a reasonably sized team, from a data science standpoint that is fully dedicated to those efforts. So those are gonna be elements of the product suite in Community where it's helping clients write community-related announcements or communications and messages to their teams. The ability within Recruiting to be able to use AI for job descriptions, right, or roles and responsibilities. So there's elements such as those that we've had for the last handful of years. I think seven or eight months ago we put out a press release that details a number of additional features. Advanced Scheduling would be one.
So more intelligent routing as clients work with their hourly workers to understand whether that is roles and certifications required for jobs, being able to take individual employee preferences into account when scheduling, being able to leverage AI to control over time. So there's a number of different elements within the product suite that we have today. We continue to view there to be opportunity to add AI throughout the platform. And I think likewise, as you think about our operational teams, for instance, being able to reduce client effort, whether that is through chatbots or other sources, being able to improve the client experience and over time being able to hopefully increase retention as well. So we think there's a number of different ways that AI can drive client satisfaction. I think the question is, is it monetizable?
That still is an open question. That is not something that in the HCM space you have seen companies do to date, but it's an area, as I said, that we're certainly investing in and view it as something of an opportunity going forward.
Okay. And I guess as a company, how is Paylocity leveraging AI today? Like, are there certain functions that you're using it for? What are kind of like the key use cases that, you know, as a CFO, you're driving efficiency and pulling more margin out of the business?
Sure. It's definitely an area, as I said, that we are investing in. The teams are spending more and more time. You see it in productivity levels within the software engineering team. So they're leveraging there. We're able to leverage it within my function. So from a legal and accounting standpoint, I think some of those more manual-based tasks. You see it in the ability to be able to drive scale within the billing team, for instance. You're seeing it on the tax side as well. And then, as I mentioned earlier, I think operationally there's a number of use cases that can reduce client effort, can reduce call volume. 'Cause if you think about it, companies just want the answer. They don't necessarily wanna call and interact with somebody.
So being able to reduce time to resolution, obviously a big portion of our employee base is tied to service and implementation. So I think over time there's a number of opportunities there as well.
Okay. All right. That's great to, great to hear. I think gonna shift gears a little bit, focus a little bit on the go-to-market changes that you put in place. I think you called out already improved sales execution.
Yep.
Last quarter, and it's been trending in the right direction. But, where do you feel like there are areas to drive further improvement? Maybe you can just talk to us about what actually improved this past quarter that helped kind of support that better execution. And then maybe more broadly, you know, what do you feel like is under your own control versus more of a function of a bit of the deal environment that's going on right now?
Yeah, I think, you know, if you step back and think about the last handful of years, we've been really happy with the trends that we've seen from a sales and marketing standpoint. So we talked earlier about Paylocity as the fastest growing HCM. At the same time, I think you've seen us drive efficiencies across the business, including within sales and marketing. So being able to also be mindful of customer acquisition costs, and I think over the last few quarters, you've seen a combination of better execution internally, right? I think that is an area of constant focus for our teams as we add new reps, as we think about how do you drive discipline across that salesforce as it continues to scale.
We've continued to invest back in those teams and software and people processing technology to help them be as efficient as they can, increase rep productivity, and you know, as you said, we've seen better results over the last few quarters. I think as we've built out that Up Market team over the last couple of years, a lot of the reps that were successful in the first few cohorts were Paylocity reps that had been with us for a number of years that had been successful in the mid-market and would've graduated Up Market, and as we've scaled out that team, we've added more and more reps from outside of our business, and we have and continue to really double down on hiring profile, training, onboarding, making sure we're investing in all the things required for those reps to be successful, and it's still early.
You know, the reality is a lot of those larger clients like to start in January. So you likely wouldn't see the benefit of a lot of those investments until the back half of fiscal 2025. But we certainly are really happy with activity levels. You know, we talked about top of funnel and pipeline earlier. I think those continue to trend well. So I feel like we're absolutely on the right path.
Okay. I guess as we're thinking about, you know, that upmarket motion and mentioned you had to hire more people from the outside, how is maybe the profile of the person you're bringing in different today than it was, historically? And I guess, is there any kind of difference between, you know, someone you would be hiring typically for, you know, for the core customer versus the mid-market customer?
Yeah, I think by and large the hiring profile is not materially different than it was a handful of years ago. We continue to source most, if not the vast majority of our reps from the industry. Doesn't mean that they had to come most recently from a competitor or HCM space, but likelihood is high that somehow, somewhere in their career they've worked with an HCM. So that was the case, say, five to seven years ago. That continues to be the case today. I think probably where you've seen some more nuanced changes are as we've built out that up-market team. So you think about the part of the market in the 500+ employee space, you're likely looking for a rep that has a bit of a different profile than maybe that core market.
So they likely have been a sales rep for longer. They have more experience on the enterprise side. And accordingly, we likely would source them from certain competitors at a higher rate than others. But by and large, the overall hiring motion hasn't changed. We're really happy with where we are from a staff standpoint. So we entered the fiscal year with just under 900 sales reps, fully staffed to enter the year. We feel good about that level. Certainly the bias is to continue to grow, right? So if we see the macro improve, if we see stronger sales execution, we feel like we have the talent and recruiting motion internally to be able to go back and add more reps at a quicker rate to the extent we see better success.
Okay. Maybe just on the, on the Up Market side again, I guess based on what you've seen in the past couple of quarters, has that changed maybe how you think about what that looks like moving forward and, and the pace of investment that's needed? And do you feel like, you know, what is the signal that you would need to see where maybe it makes sense to kind of re-accelerate hiring on, on that upper part of the market?
Yeah. I mean, I think we have tried to run the business in a very measured and thoughtful way. So we haven't let results, you know, up or down over a couple quarters change how we think about the business longer term. So we feel good about the 8% rep headcount growth we have for fiscal 2025 that is driving initial guidance of 10%-11% recurring revenue growth. But as I mentioned earlier, the pipelines continue to grow. So if we see increasing rep productivity at a rate better than we expected, if we see a, you know, macro that is becoming a tailwind, we absolutely have the ability to add to that team. But I think where we sit today at, you know, guiding towards north of $1.5 billion of revenue, it is a balanced approach.
We're looking certainly at how do you drive durable revenue growth, but at the same time, how do you invest in those teams at a level that allows you to continue to drive Adjusted EBITDA margin and Free Cash Flow as well. It's probably a little bit more of a balanced approach, but certainly the bias continues to be towards growth.
Okay. I wanna ask on international. I think you made an acquisition there a few years ago to kind of help jumpstart that, that effort. But how would you kind of characterize what the international opportunity looks like for Paylocity today? And maybe how has your thinking about that evolved over the past few years since you have made that acquisition?
We're, I think, just coming up on the third anniversary of that acquisition of a company called Blue Marble, which opened the international markets to us. That was really a focus on U.S.-based businesses that have some portion of their employees based internationally. We are not looking for companies that are domiciled internationally, but really for our client base, of which there is a subset that have a portion of their employees that are based overseas to be able to provide to them on a single pane of glass, not only their U.S.-based payroll data, but also for their international employees. That has performed, I think, well and with our expectations.
It has been a differentiator certainly to the sort of middle and upper end of our client base that likely have some portion of their employees based internationally, so no overall change to the strategy. I think we, as I said, we've been happy with how that is, how it has trended, and I think that is in a spot from an integration standpoint where it is, you know, a consolidated platform that we're able to sell.
Okay. I guess, would you at some point consider kind of leaning more into that international motion and like opening international sales offices or focus on geographies? Or is that not something that's being contemplated?
I think potentially over time, I probably would not characterize that as a short-term or near-term area of focus. I think we continue to be focused on the U.S. market. We have roughly 40,000 clients today against an opportunity of about 1.3 million businesses. So that continues to be our primary focus. Although, as I said, I think we continue to feel good about the ability to differentiate through that Blue Marble acquisition. Longer term, you know, I think there certainly are opportunities internationally, but probably not something I'd characterize in the immediate term.
Okay. I guess maybe on that idea, like what would you kind of put in the bucket of like what's a near-term investment that you're really focusing on and what's kind of maybe more in that medium term or, or longer term, timeframe?
Yeah, I think international I'd probably put in that median or longer term timeframe. So I think there's certainly opportunity there. Probably not something that we prioritize in the immediate shorter term, you know. I think, as I said earlier, continue to feel like there's opportunities across HCM, being able to expand the product suite there, functionality within the existing suite that we think is monetizable. And as I mentioned earlier, I think Office of the CFO is probably something that could potentially be interesting to us as well in the short to medium term.
Okay. I guess maybe pulling on that thread a little bit more, like, you know, what would make sense from Paylocity to maybe move into that space? Like what are the use cases or types of product sets that would help CFOs, you know, further on? And how could your software enable that?
Yeah, I think there's potentially a lot of opportunities there. We did acquire a business called Trace last December. We have not formally released that product yet, but that was an entree into the Office of the CFO really with headcount planning software. So as you think about more broadly, what type of products could be within the Office of the CFO, and certainly budgeting and forecasting, variable compensation, accounts payable, spend management, AR, I think those are the types of products that we would be looking at. It continues to be a balance build versus buy. But I think to the extent that there are assets out there that are actionable that we think will expand our addressable market, those are certainly things that we would look at very closely.
Okay. I'm gonna shift gears a little bit. Maybe we can talk a little bit about the guidance and, you know, how you're thinking about it today. So maybe just kind of walk us through the underlying assumptions that are now being included in the fiscal 2025 guide, and where do you feel like there's maybe the most conservatism that's being baked in right now?
Yep. Yeah, I think, you know, as we, as we talked about, feel good about the momentum in the back half of the fiscal year, and I think our desire has been to get back to the historical cadence we've had historically from a guidance standpoint, which is being able to beat and raise, so being able to beat the quarter's results and raise the year, you know, by the beat plus, and I think we feel like the guidance we provided for fiscal 2025, if we execute well, allows us to be able to do that, so as you think about the 25 guide, we have more visibility into the early part of the year, so you see that with higher recurring revenue guidance in the first quarter, right?
So we're in the 12%-13% range where you have probably a little bit more, you know, thoughtfulness or potentially conservatism would be as you think about the back half of the fiscal year, right? It's still a fairly short sales cycle in the part of the market that we target. You do have some continued level of uncertainty from a macro standpoint. So you naturally probably have a level of thoughtfulness in that part of the fiscal year. But feel like we are in a spot where teams are performing well. And I think to the extent, as I said, we execute well, we have the ability to beat and raise. And that goes for both revenue as well as Adjusted EBITDA guidance.
Okay. That makes sense. I think we've heard some of your competitors in the space, you know, still talking about deal cycles extending, some calling out some slowdown in pipeline or the number of deals reaching no decision has been increasing. I guess, what is your view on those dynamics? And I mean, I guess how what has Paylocity been seeing like that would be different or maybe similar to what some others have called out?
Yeah, I think what we've called out, and this is really going back to our February earnings call, is we've seen some of those same trends, particularly on the upper end of the market. So that's for us commentary in the 500+ employee part of the market. We would've seen some level of longer deal cycles, more decision makers involved in the process, some number of clients deciding to hold off on a decision. And so we certainly have seen others comment similarly. In our experience, that has not gotten worse from February. I think it's been pretty stable. But we have seen, you know, largely similar experiences over the last, you know, call it six to seven months.
Okay. All right. Makes sense. I think we're nearing about 10 minutes left here. So if you have questions, we wanna make sure we can get to those. Yep. Up front. We have a mic coming, so I'm gonna hold on one second.
Sure. Hey, good morning, Glenn. Good, good to see you again. Good morning. The, Glenn, you talked about the PEPM, PPY actually, today is sitting at 550 with a goal of 600. Now this is driven by your number of, modules, monetizable, modules. And that actually naturally leads to the R&D, effort. So love to, to hear from you, how do you guys manage the whole process starting from the idea generation and then how do you qualify the idea, whether there is enough demand and the competitive environment is amicable so that you can make a dent? And then how do you execute and then revalidate, for example, this product, maybe doing some kind of a beta testing before, a full rollout and then finally the, the full launch of the module?
So if you can walk through this process, give us some kind of a sense of how the sausage is made. Thanks so much.
Sure. So as you think about foundationally R&D investment, we have a target of investing 10%-15% of revenue back into R&D. We have been at the high end of that range for the last several years. I think we were roughly 14.5% of revenue last year. I'd expect to be probably in a similar range for fiscal 2025. The way that we go about that investment process is across our now Executive Chairman as well as our CEO. They really drive a lot of that product strategy. So Steve Beauchamp and Toby Williams, along with the entirety of our product team, being able to look at HCM as a whole, being able to identify what we think some of the gaps are in our existing products, where we think there's an ability to monetize.
I think where you've seen us focus over the last few years is what are the problems that companies are looking to solve from an employee standpoint? What are the challenges that those clients are having? We spend a lot of time working with our clients through a Customer as a Co-Creator process. So being able to talk to our client base, both small, medium, and large clients, what are the challenges they're facing from an HR perspective? What are some of the things that they're looking for software to help solve those problems? I think through that, that helps us identify ways that not only we can monetize, but also ways that we can help solve their problems and hopefully make those clients stickier over time.
And I think you've seen that Customer as a Co-Creator model result in some of the newer products that we've talked about, like Market Pay, Recognition and Rewards. Community is a good example where over the last handful of years, customers have come to us and said, "Hey, I'm struggling to be able to drive the connection and culture that I want with my employee base. I have more and more of my workers that are remote or hybrid. I'm not able to really drive the connection that I maybe did historically." Employee Voice is another good example. So customers coming to us and saying, you know, "Hey, I used to be able to walk around the office and get a sense of what is working and what isn't.
And now I actually need the software to help me to be able to do that." So a lot of those product ideas are coming from interactions with our clients as well as us looking more broadly at what is going on within the competitive landscape. So where companies are having success, where we think there's challenges. And to your, to your next part of your question relative, how do we think about that process? It is absolutely iterative. So we would go out, we would have clients that are beta testing the products. We'd have sort of that version 1.0 where customers are able to utilize those products, provide us feedback. We go through an ongoing process that allows us to iterate to be able to improve the product before we roll it out a little bit more broadly and make it GA.
And that has been a process that we've leveraged over the last several years. And I think that's likely how we're able to run new products that we're gonna release going forward.
Yeah, we got another question here. Yep, sorry, man. Yeah, same one. Yeah, sorry about that.
Oh, a quick follow-up, Ryan. So that's a very, very good, high, high level comments on the R&D activities. Now, is there any way you can quantify, for example, if you look at the funnel, the top of the funnel at any given time, I have 50 new ideas. And then after the first level of qualification, it becomes 35 and then becomes 15 at the beta. And then GA is whatever, five to seven per year. So if you can give us some kind of a metrics, that'll be great. I guess I'm sure that the R&D team measures its productivity that way. So, to the extent that you can, you can share, that'll be give us a good sense of how you guys do that. Thanks.
Sure. I think it's probably less of a sort of a metrics that we'd provide publicly. But I think the way that you describe the process is correct, which is as we go through our planning process for a fiscal year, the teams are working through what are the areas of investments that we would make across R&D. So we're allocating that spend, that 14%-15% of revenue back into R&D. We are working with the individual product owners, the leadership team, with both Steve and Toby to allocate where that spend is and prioritize that level of investment. That investment may fall into buckets of what can I actually monetize versus what are feature and functionality gaps or other things that we're gonna invest back into those teams.
From an is it successful or not perspective, I think what shows up most clearly is gonna be attach rates, usage. So we're looking at those levels of metrics. We're looking at daily, weekly, monthly users. So what type of activity you're seeing on the platform, our clients actually utilizing those products as you're going back to companies that are beta testing, you're iterating and taking that feedback to understand what can make those products sticky as well. And all of that would go into the process as we think about how we're allocating those dollars.
I guess maybe similarly, you know, you have organic contribution, you have inorganic, and you have an acquisitive. How do you think about where does it make sense for you to leverage M&A to try to accelerate that roadmap versus try to build something organically?
Yeah. So we've made a handful of acquisitions over the last handful of years. I think that the bias for us continues to be build versus buy, but absolutely, similar to the exact acquisitions we've made historically. If there is something that is strategic, is on the product roadmap, we think is a good cultural fit. We feel like we're absolutely do have the balance sheet to be able to do that. We have access to a $550 million credit facility. We have over $400 million of cash on hand, increasing cash flows. So we feel like to the extent there is actionable M&A out there, we have the ability to do that. You know, we would look at ways that we can expand our total addressable market, right?
Our bias to speed go-to-market, as I said, is build versus buy, but we absolutely are open to larger acquisitions as well.
Okay. And as we're thinking about margin, I know you mentioned R&D is kind of at the higher end of your historical range, but how do you think about where the key drivers of further leverage are kind of over the next couple of years? Like where do you kind of see the most room to, you know, maybe get a little bit of incremental improvement there?
Yeah, I think going forward, it's a similar playbook as the last handful of years. So being able to continue to drive leverage across G&A spend, that's an area where we've seen a lot of leverage historically, but we think there's more to go on a year in and year out basis, gross margin as well. So as this business continues to scale, whether that is leveraging some of the AI investments we talked about earlier or just really sort of scale-based leverage in those teams, those would be the two primary areas of focus. I think over time, as you see a more normalized revenue growth, you likely see some level of leverage in sales and marketing, although that would be more second level versus a primary focus.
Then R&D, I think we'll certainly continue to invest, but it's probably more at a rate that is consistent with revenue growth versus incremental.
Okay. And I guess, you know, I know rates are rates, and I think you're assuming some rate cuts coming this year. But, you know, as we think about rates normalizing a little bit and coming down over the next few years, how do you view what that means for margin? How much are you trying to, I guess, protect margin versus letting some of that flow through? Can you just kind of walk us through what the mindset is for Paylocity here?
Sure. So we do have four rate cuts assumed in our fiscal 2025 guide with the first one being later this month. So obviously we'll update that as more information comes, but we do have the four cuts included in guidance. I think on the way up, so as rates increased over the last handful of years, the vast majority of that has fallen to the bottom line. And you see that this fiscal year where we had north of 400 basis points of Adjusted EBITDA leverage, including float. If you exclude the impact of float, we still had over 200 basis points of Adjusted EBITDA leverage. So the way that we manage the business is ex float, what is actually controllable to us.
You've seen us provide, I think, more discreet guidance in fiscal 2025, meaning adjusted EBITDA both with and without the impact of float. So we manage it on what I can control, how do I drive leverage in the business, excluding the impact of float. When you see rates going up, obviously you see outsized levels of margin, and it's a headwind going down. I think fiscal 2025 with the four rate cuts assumed, we have guided to roughly 50 basis points of leverage this year. I think including float, it's flat to probably down 20 or 30. The desire would certainly be able to beat that initial guidance that we set. I think as we go forward in an environment where you see rates come down, it certainly is an overall headwind.
We have the ability to absolutely prioritize investment to be able to maybe hold off on incremental spend to the extent you see rates come down quicker. But our view is really run the business ex float. We continue to feel like there's a massive opportunity for us in front of us. We don't wanna make short-term investments based on, you know, a rate cut that happened in a certain month or quarter that would take us off path for that larger opportunity.
Okay. And then from that flowing down into Free Cash Flow, how do you think about Free Cash Flow conversion rates here?
Yeah, I think, you know, as you look at the progress we've made across free cash flow margin over the last few years, it has been pretty significant. So we ended fiscal 2024 with roughly 22% free cash flow margin, significant leverage over last year. We think there continues to be a lot of opportunity going forward to drive both free cash flow and Adjusted EBITDA. I think the conversion rate probably stays pretty similar to how it was historically. We will become a more meaningful cash taxpayer this fiscal year as profitability has increased. But over an extended period of time, I think the conversion rate itself is probably in a fairly similar range to where it's been historically.
Okay. And I know from a growth perspective, you've talked about Paylocity being a 20% grower. I think you're guiding to, you know, 10%-11% recurring for the year. How should we think about that kind of like longer-term growth outlook here and maybe bridge the gap between what needs to improve to maybe get back to, to those levels?
Yeah, I think we, going back a few quarters, have come off of a 20% target. That was something that we set going back a decade when we were kind of 100 million+ of revenue and exceeded that for long periods of time. I think where we sit today, to your point, is recurring revenue guide in the first quarter is 12%-13% and 10%-11% for the fiscal year. I think where we sit today at 1.5 billion of revenue driving towards 2 billion is we think there's multiple ways to win. Certainly driving durable revenue growth, double digit growth as we've guided this fiscal year is absolutely our target. And at the same time, being able to drive increasing margin, right?
So as you think about last fiscal year where we were Rule of 50+ Adjusted EBITDA and revenue growth, you look at the guide this year. I think that combination of revenue growth and profitability continues to be strong, so we think a more balanced approach with durable double digit revenue growth, improving margins each year, and as you think about a business driving towards $2 billion at that financial profile, as well as the $500 million share repurchase program we put in place in May, we feel like that's a very attractive and compelling value proposition, and that's what we're driving towards.
Okay. I think we've got about a minute left here. I wanna see if there's any last questions in the room.
And maybe this just needed me, but the focus on Office of the CFO as a place where you're expanding and you said you've done your first deal there in the December quarter. Are you seeing more assets in the private markets that just aren't gonna reach scale that are making that a more attractive opportunity or what was the kind of the synthesis of saying, okay, we can make this leap across and how do you map that market and how do you think about, you know, three years from now to become a more meaningful part of revenue?
Sure. So I think as part of our overall M&A and product strategy focus, we would be looking at the entirety of the HCM space as well as adjacencies and looking to identify ways that over time we can expand our total addressable market. I think there's potentially a clear overlap there between HCM and Office of the CFO. As you think about finance and HCM solutions, being able to potentially get to a spot, you know, over time where on a single pane of glass, companies can see their payroll and non-payroll spend across the entirety of their business. I think that's a pretty unique value proposition that doesn't exist in the mid-market. So something that, along with other potential areas that we would look at pretty closely, but that is one area that could potentially be attractive to us.
Okay. Awesome. I think we're running up against time here, but Ryan, I wanna thank you so much for being here and wanna thank everybody in the room for being here as well to kickstart the conference. So thanks again.