Paylocity Holding Corporation Q2 FY2026 earnings call

Key Points

• Revenue Growth: Strong results persisted in Q2 with recurring and other revenue growing by 11%. The company's modern software value proposition resonated in the market.
• Product Differentiation: Reward and recognition, featuring a native reward system and cash redemption, served as a point of competitive differentiation. Expanded AI capabilities, such as the policy and procedures agent and the AI assistant in HR rules, simplified employee support and reduced risks. The average monthly usage of the AI assistant increased over 100% quarter - on - quarter.
• Business Drivers: Results were driven by strong sales, operational execution, and product differentiation. New functionality in core products like video candidate screening and self - service scheduling enhanced client processes. The referral channel contributed over 25% of new business in Q2. The broker channel thrived due to the modern platform and no competition with insurance products.
• Investments and Support: The company was committed to investing in and supporting the broker channel with benefits guided setup. Client retention was strong. Internally, AI was leveraged to drive efficiency in the operations team, reducing client case volumes and automating interactions.

In the second quarter, recurring and other revenue was $387 million, marking an 11% increase, which accounted for 92.99% of the total revenue of $416.1 million. Total revenue saw a 10% growth compared to the same period last year. The adjusted gross profit for Q2 was 74.4%, up from 73.8% in the same period of the previous fiscal year. On a non-GAAP basis, sales and marketing expenses made up 21.1% of revenue, and G&A costs were 9% of revenue, contrasting with 9.8% in the corresponding period last year. In terms of GAAP results, gross profit was $282.1 million, operating income was $70.4 million, and net income was $50.2 million. The adjusted EBITDA for the second quarter was $142.7 million, with a margin of 34.3%.

Fiscal 2026 Guidance

• Q3 2026: Recurring and other revenue is expected to range from $457.5 million to $462.5 million (a 9% - 10% growth over Q3 2025), total revenue is expected to range from $487 million to $492 million (a 7% - 8% growth over third quarter fiscal 2025), adjusted EBITDA is expected to range from $200 million to $204 million, and adjusted EBITDA excluding interest income on funds held for clients is expected to range from $170.5 million to $174.5 million.
• Full Fiscal 2026: Recurring and other revenue guidance is now $1.62 billion to $1.63 billion (a 10% - 11% growth over fiscal 2025), total revenue guidance is $1.732 billion to $1.742 billion (a 9% growth over fiscal 2025), adjusted EBITDA is $622.5 million to $630.5 million, and adjusted EBITDA excluding interest income on funds held for clients is $510.5 million to $518.5 million.
• Share Repurchases: In Q2, approximately 690,000 shares of common stock were repurchased at an average price of $144.86 per share, with an aggregate repurchase of about $100 million. For the fiscal year to date, over 1.8 million shares have been repurchased at an average price of $162.66 per share, with an aggregate repurchase of approximately $300 million.

Risk Factors

• Forward - Looking Statements: Actual events or results may significantly deviate from forward - looking statements due to various factors. The impact of AI advancements on competitors and the market poses risks. Although Paylocity views AI as an opportunity, there are complexities in areas such as handling tax and labor regulations. Uncertainties related to market consolidation and its impact on the company's pipeline, win rates, etc., also exist.

Q: Daniel Jester from BMO Capital Markets inquired about the selling environment, comparing and contrasting how they exited this year with last year and any pockets of strength or weaknesses.

A: Toby Williams stated that the selling season was strong this year, the go - to - market team performed well, the demand environment was stable, and the sales performance through selling season was strong, characterized as consistent and stable compared to last year.

Q: Daniel Jester from BMO Capital Markets followed up on AI, asking about how customers engage with AI and if there were trends of customers building some functionality themselves.

A: Steven Beauchamp mentioned that they had been focused on embedding AI across the suite. Use cases like policies and procedures were seen, with more engagement and utilization in the platform. They would continue to build templated agents with flexibility, observing improved ease of use and time savings for customers.

Q: Brad Reback from Stifel asked about translating saving customers' time into revenue for Paylocity, specifically regarding how they were doing this with APIs and the marketplace.

A: Steven Beauchamp said that as a system of record, they used APIs and the marketplace to connect to other systems. More data and utilization led to the upsell of modules, and clients valued the relationship and service. AI drove an easier - to - use experience and larger upsells.

Q: Terry Tillman from Truist Securities asked about an update on Airbase and Paylocity's play in the office of CFO and finance, as well as IT operations.

A: Toby Williams said they were pleased with Airbase momentum, having delivered the version one of the integrated product set in July. They were seeing growth in Paylocity for Finance and in the early days of IT - oriented offerings, with positive progress from an attach and use case perspective.

Q: Mark Marcon from Robert W. Baird asked about the selling environment, client hesitation, and Salesforce productivity.

A: Toby Williams said the selling season was strong, the team performed well, the demand environment was stable, the client base and the team's ability to sell were stable. Steve Beauchamp added that the service level was a significant moat compared to the AI conversation.

Q: Mark Marcon from Robert W. Baird asked about AI advantages, R&D efforts, and M&A opportunities.

A: Toby Williams said that efficiencies from AI drove productivity and free cash flow. From a capital allocation perspective, they focused on M&A that could speed up the product roadmap and add value to clients.

Q: Sitikantha Panigrahi from Mizuho asked about employment levels and Paylocity's view on AI disrupting employment.

A: Ryan Glenn said that employment levels were stable in Q2 and January. Toby Williams said they did not have specific vertical concentration exposure and saw stability despite AI - related commentary.

Q: Scott Berg from Needham and Company asked about win rates since having Paylocity for finance and IT asset management available, and if there was a debate on using tax law cash flows.

A: Toby Williams said win rates were consistent, and they were happy with the performance. Ryan Glenn said they were reinvesting in the business to drive growth, with free cash flow on the rise and focusing on balancing reinvestment and margin.

Q: Samad Samana from Jefferies asked about customers' focus in a muted hiring environment and the reaction to the pricing environment.

A: Toby Williams said that clients focused on a trusted partner, a broad range of solutions, and a purpose - built platform. The pricing environment was stable.

Q: John Messina from Raymond James asked about measuring the success of finance and IT product penetration and the impact of industry consolidation.

A: Toby Williams said that penetration rates aimed for 10 - 20% over time, and they were on track. He also said that execution was good and they were well - positioned despite industry consolidation.

Q: Jared Levine from Jefferies asked about the timing of the adjusted EBITDA guide and free cash flow.

A: Ryan Glenn said they were reinvesting in the business, driving margin increases, and free cash flow was moving towards the upper end of the range, balancing reinvestment and margin.

Q: Sheldon McMeans from Barclays asked about why AI advancements were not a big risk for Paylocity.

A: Steven Beauchamp said that service was a moat, and there were complexities in areas like handling tax and labor regulations that made it difficult for AI to replace quickly. Capital structure and deterministic algorithms were also factors.

Q: Austin Cole from Citizens asked about the upsell motion of HCM offerings like rewards and recognition and the monthly usage of the AI assistant.

A: Steven Beauchamp said they saw opportunities in product adoption driving average revenue per customer. The monthly usage of the AI assistant increased 100% quarter - on - quarter, with a focus on embedding AI and saving customers' time.

Q: Zane Meehan from KeyBanc Capital Markets asked about new customer lands and pull forward.

A: Toby Williams said they had not seen smaller customer lands and there was no pull forward in this quarter.

Q: Steve Enders from Citi asked about the forward pipeline and broker channel opportunities.

A: Toby Williams said that the pipeline was stable and the broker channel had strong momentum with continued focus on value - added delivery.

Q: Matt Van Vliet from Cantor asked about sales capacity, market coverage, and broker channel resource allocation.

A: Toby Williams said they felt good about sales capacity and productivity, and broker channel resource allocation was about execution in the field and driving value for brokers.

Q: Jacob Smith from Guggenheim Securities asked about the evolution of the retention rate with cross - selling and multiple modules.

A: Toby Williams said that the retention rate had been high due to adding value through platform adoption and the service model, and they were pleased with maintaining high retention rates.