Paylocity Holding Corp. Q2 FY2025 earnings call

• Recurring and other revenue grew 17% in the second quarter, with total revenue up 16% year-over-year. - The company's sustained investment in R&D has led to product differentiation and an expansion of the product suite, resulting in an increase in max PEPY from $550 to $600. - A new AI assistant chatbot is generally available with early positive adoption, showing a 30% increase in utilization and over 20% reduction in time to find reports. - Paylocity was awarded the TrustRadius Buyer's Choice Award and named overall leader in ten HCM product categories in G2's Winter 2025 Grid Reports. - The sales team's strong performance contributed to exceeding revenue guidance and raising the fiscal year guidance for the second consecutive quarter. - The Airbase acquisition is being integrated with positive reception from clients, and there's interest from both existing and prospective customers.

Recurring and other revenue in the second quarter was $347.7 million, representing a 17% increase. Total revenue for the quarter was $377 million, up 16% from the same period last year. Adjusted gross profit for Q2 was 73.8%, compared to 72.7% in Q2 of the previous fiscal year, showing a 110 basis points of leverage. Year-over-year investment in total research and development increased by 16.2% compared to Q2 of fiscal 2024. On a non-GAAP basis, sales and marketing expenses were 21.7% of revenue in Q2, and G&A expenses were 9.8% of revenue. Adjusted EBITDA for Q2 was $126.2 million, or a 33.5% margin.

• For the third quarter of fiscal 2025, recurring and other revenue is expected to be in the range of $410 million to $415 million, total revenue in the range of $439 million to $444 million, and adjusted EBITDA in the range of $171 million to $175 million. - For fiscal year 2025, recurring and other revenue guidance is revised to $1.445 billion to $1.455 billion, total revenue guidance is $1.558 billion to $1.568 billion, adjusted EBITDA is $542 million to $550 million, and adjusted EBITDA excluding interest income on funds held for clients is $429 million to $437 million. The company is seeing a beat and raise cadence supported by strong sales momentum.

No specific risks were explicitly detailed in the transcript beyond the general forward-looking statement risks associated with factors, uncertainties, and risks that could cause actual results to differ from projected outcomes.

Q: With M&A activity in the market and Acorn being taken out, do you see an opportunity to accelerate the broker go-to-market?

A: Toby Williams stated that it's about the investments made to build broker relationships, providing meaningful technology, visibility, and integrations, and not competing with brokers on insurance product sales.

Q: How do you think about sales hiring in 2025 as you look to 2026?

A: Toby Williams said they had a 8% growth in sales headcount at the start of the fiscal year, focused on driving productivity across go-to-market teams, and feel positive about the stable market environment.

Q: Can you talk about the contribution of Airbase in the quarter and its influence on guidance?

A: Ryan Glenn said Airbase contribution is roughly 1% of revenue for the fiscal year, and the upward revision in guidance is driven by core Paylocity's overperformance.

Q: What's the high-level thought on recalibrating a new target after reaching the $600 PEPY target?

A: Steve Beauchamp said they're proud of reaching the goal, see opportunities in the office of the CFO with different pricing models but continue to focus on average revenue per customer growth.

Q: How do you balance integrating Airbase with driving new product launches and existing product penetration?

A: Steve Beauchamp said they balance investments in R&D for existing product enhancements, innovation with AI, and strategic acquisitions like Airbase, with a history of being first to market in many categories.

Q: Can you discuss client interest in Gen AI functionality and monetization thoughts?

A: Steve Beauchamp said client interest in Gen AI is strong, with use in various processes for better experience, and near-term focus is on client satisfaction, efficiency, and differentiation with long-term eye on monetization.

Q: Can you provide color on January retention performance?

A: Toby Williams said the team performed well during the busy period, similar to the success seen in the selling season.

Q: On upmarket traction, can you share about attach rate of other products and propensity to buy office of CFO products?

A: Steve Beauchamp said attach rates are gradually increasing, Airbase has customer overlap, and there's a strategy to expand the target market by enhancing capabilities.

Q: How is sales momentum and macro stabilization manifesting?

A: Toby Williams said there's stability in the demand environment, allowing the sales team to effectively communicate the value proposition.

Q: On Q2 versus Q3 dynamics and pull forward of clients, can you explain?

A: Ryan Glenn said pull forward is due to strong bookings momentum and touch of earlier starts, not related to the election, with relatively minor impact on the quarter.

Q: On workforce levels and the competitive side, what's being observed?

A: Ryan Glenn said no material impact from weather or holidays on workforce levels, and Toby Williams said the industry is competitive but Paylocity is well-positioned with its strategy.

Q: On go-to-market front with Airbase and office of the CFO, how does seller profile change?

A: Steve Beauchamp said they'll evolve the go-to-market motion for Airbase, leveraging experience with a more inside team model.

Q: On Gen AI impact on financials and DeepMind announcements?

A: Steve Beauchamp said Gen AI is focused on improving client experience, efficiency, and differentiation with long-term potential for monetization, and DeepMind announcements don't change the focus on leveraging AI for Paylocity's goals.