Paylocity Holding Corporation (PCTY) Q4 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call summary reflects positive sentiment in several areas: recurring revenue growth, successful AI initiatives, and strong channel performance. The Q&A section supports this with optimistic guidance on AI adoption, integration of Airbase, and a robust broker channel. Despite some unclear responses, the overall sentiment remains positive, particularly with the integration of new products and a strong retention rate. The absence of negative financial surprises and the potential tax tailwind further bolster the positive outlook.

Key Financial Performance

Recurring Revenue Growth (Q4 FY25) 14% year-over-year increase. Driven by the company's differentiated value proposition and modern platform.

Total Revenue Growth (Q4 FY25) 12% year-over-year increase. Supported by recurring revenue growth and product differentiation.

Recurring Revenue Growth (FY25) 15% year-over-year increase. Attributed to sustained investments in R&D and product suite expansion.

Total Revenue Growth (FY25) 14% year-over-year increase. Resulted from recurring revenue growth and increased average revenue per client.

Average Revenue Per Client (FY25) $35,300, an 8% increase from $32,800 in FY24. Growth driven by product expansion and cross-selling opportunities.

Client Base Growth (FY25) 7% year-over-year increase to 41,650 clients. Growth attributed to strong sales execution and channel performance.

Revenue Retention (FY25) Greater than 92%, consistent year-over-year. Reflects strong client satisfaction and operational investments.

Adjusted EBITDA (Q4 FY25) $130.7 million, 32.6% margin, exceeded guidance by $8 million. Growth due to strong sales and operational efficiency.

Adjusted EBITDA (FY25) $583 million, 36.5% margin, a 15% increase from FY24. Reflects operating leverage and R&D investments.

Free Cash Flow Margin (FY25) 21.5%, a 12% increase from FY24. Growth despite headwinds from tax status transition and acquisition impact.

Total R&D Investments (FY25) 14.3% of revenue, a 14% year-over-year increase. Investments aimed at product differentiation and future growth.

Sales and Marketing Expenses (FY25) 21% of revenue. Reflects continued investment in go-to-market functions.

General and Administrative Costs (FY25) 9.3% of revenue. Indicates focus on driving leverage in G&A expenses.

Gross Profit (FY25) $1.1 billion. Reflects strong revenue growth and operational efficiency.

Operating Income (FY25) $304 million. Indicates profitability and operational success.

Net Income (FY25) $227.1 million. Reflects overall financial health and profitability.

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Operating Highlights

Paylocity for Finance: Launched a new product expanding the HCM platform into the office of the CFO, integrating finance and HR through a unified system. It includes tools for spend management, workforce planning, and AI-powered solutions.

Average Revenue Per Client: Increased to $35,300 in fiscal '25 from $32,800 in fiscal '24, an 8% growth, driven by product expansion.

Client Base Growth: Expanded client base by 7% to 41,650 clients in fiscal '25.

Channel Performance: Benefit brokers contributed over 25% of new business in fiscal '25, supported by the company's modern platform and third-party integration capabilities.

Sales Force Expansion: Increased sales force by 8% to 952 reps for fiscal '26, focusing on productivity and efficiency.

Revenue Retention: Maintained consistent revenue retention at over 92% in fiscal '25.

R&D Investments: Invested 14.3% of revenue in R&D in fiscal '25, a 14% increase from fiscal '24, to drive product differentiation and growth.

Share Repurchase Program: Repurchased approximately 800,000 shares in fiscal '25 for $150 million, with an additional $500 million authorized for future repurchases.

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Risk or Challenges

Market Conditions: The company anticipates 4 interest rate cuts during fiscal '26, which could impact interest income. Additionally, flat workforce levels in fiscal '26 versus fiscal '25 may limit growth opportunities.

Competitive Pressures: The company is heavily reliant on its broker channel, which represented more than 25% of new business in fiscal '25. Any disruption or increased competition in this channel could adversely affect new client acquisition.

Regulatory Hurdles: No specific regulatory risks were mentioned, but forward-looking statements caution about risks and uncertainties that could materially impact results.

Supply Chain Disruptions: Not applicable to the company's operations as no supply chain risks were discussed.

Economic Uncertainties: The company faces potential headwinds from transitioning to full cash taxpayer status and the impact of lower interest rates, which could affect free cash flow and profitability.

Strategic Execution Risks: The success of the newly launched Paylocity for Finance platform is critical for future growth. Any delays or issues in adoption by clients could hinder revenue growth. Additionally, the company’s ability to maintain high revenue retention (greater than 92%) and expand its client base is essential for sustained performance.

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Guidance & Outlook

Revenue Growth: Recurring and other revenue for Q1 fiscal '26 is expected to be in the range of $370 million to $375 million, representing approximately 12% growth over Q1 fiscal '25. Total revenue for Q1 fiscal '26 is expected to be in the range of $397.5 million to $402.5 million, representing approximately 10% growth over Q1 fiscal '25. For fiscal '26, recurring and other revenue is expected to be in the range of $1.597 billion to $1.612 billion, representing approximately 9% growth over fiscal '25. Total revenue for fiscal '26 is expected to be in the range of $1.707 billion to $1.722 billion, representing approximately 8% growth over fiscal '25.

Adjusted EBITDA: Adjusted EBITDA for Q1 fiscal '26 is expected to be in the range of $131 million to $135 million. For fiscal '26, adjusted EBITDA is expected to be in the range of $608.5 million to $618.5 million. Adjusted EBITDA, excluding interest income on funds held for clients, is expected to be in the range of $498.5 million to $508.5 million for fiscal '26.

Interest Income on Funds Held for Clients: The average daily balance of client funds is estimated to be approximately $2.85 billion in Q1 fiscal '26 with an average annual yield of approximately 390 basis points, representing approximately $27.5 million of interest income in Q1. For fiscal '26, the average daily balance is estimated to be $3.15 billion with an average yield of approximately 350 basis points, representing approximately $110 million of interest income.

Product Expansion and Revenue Per Client: The launch of Paylocity for Finance is expected to drive further growth in average revenue per client, which increased by 8% in fiscal '25. The company sees a significant multiyear opportunity for both new clients and cross-selling to its existing client base of 41,650 clients, which grew 7% from fiscal '24.

Sales Force Expansion: The sales force was expanded by 8% to 952 sales reps for fiscal '26, with a focus on driving productivity and efficiency. The company is fully staffed to begin fiscal '26 and aims to sustain durable recurring revenue growth.

Share Repurchase Program: The Board increased the share repurchase authorization by an additional $500 million. As of June 30, there was approximately $200 million remaining under the existing repurchase program, and the company plans to continue executing against the program in fiscal '26.

Interest Rate Assumptions: Guidance assumes four 25 basis point rate cuts during fiscal '26, with cuts in September, December, March, and April.

Long-Term Revenue Goal: The company aims to surpass $2 billion in total revenue on a multiyear basis.

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Shareholder Return Plan

Share Repurchase Program: In fiscal '25, Paylocity repurchased approximately 800,000 shares of common stock at an average price of $190.16 per share, amounting to roughly $150 million in aggregate repurchases. During Q4 alone, the company repurchased approximately 315,000 shares at an average price of $178.21 per share, totaling $56 million. In July, the Board increased the share repurchase authorization by an additional $500 million. As of June 30, there was approximately $200 million remaining under the existing repurchase program, and the company plans to continue executing against the repurchase program going forward.

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Key Q&A

Q:How do we think about the demand environment right now? Is this how we should view the environment that's kind of baked in your guidance into '26?

A:Toby J. Williams stated that the demand environment was fairly stable throughout the year, including Q4. He noted relative stability in year-to-year growth in units through '25 and ARPU growth. He attributed the overage to strong execution from the go-to-market and sales teams.

Q:Why did sales and marketing expenses jump quarter-over-quarter?

A:Ryan Glenn explained that the increase was due to typical Q4 year-end timing, including bonus payments and additional programs. He also mentioned hiring in Q4 and stated that sales and marketing spend was consistent with expectations for '25 and heading into '26.

Q:Is the integration of Airbase complete, or is there more work to be done?

A:Steven R. Beauchamp mentioned that the integration is being done in phases. The first phase, which is the most meaningful, is complete, but there are plans for continued integration and enhancements every quarter.

Q:Are you shifting resources in your sales organization to focus on back-to-base opportunities?

A:Steven R. Beauchamp confirmed that the field sales organization is being trained on the integrated product offering. An inside sales team of experts is also focusing on back-to-base opportunities, and this effort has just been launched.

Q:Are there any puts and takes as we think about the free cash flow outlook for fiscal '26?

A:Ryan Glenn noted that free cash flow margin has expanded by 400 basis points over the last two years. He mentioned a potential tailwind from new tax legislation that could reduce federal taxes in fiscal '26, positively impacting free cash flow.

Q:What are the expectations for Paylocity for Finance, and what is the pricing strategy?

A:Steven R. Beauchamp stated that early feedback from customers is positive, with CFOs appreciating the integration and singular support structure. He expects a 10%-20% penetration rate over time, with a higher revenue per client compared to HCM modules. Pricing is generally on a per-employee-per-month (PEPM) basis.

Q:Are there any new AI-driven features or client adoption trends to highlight?

A:Steven R. Beauchamp mentioned increased client adoption of embedded AI capabilities, including chatbot interactions that source data from client data, knowledge management, and third-party data. He emphasized ongoing innovation and a strong roadmap for AI.

Q:How does the integration and launch of Airbase impact your appetite for M&A?

A:Toby J. Williams stated that the strategy around M&A remains consistent, focusing on areas that accelerate the product roadmap. He emphasized the importance of tightly integrating acquired products into the platform.

Q:What stage are you at with AI investments for internal operations, and when could it be a net benefit?

A:Steven R. Beauchamp described AI investments as being in the early stages, with opportunities across operations, product development, and support teams. He views AI as a gradual process that will drive better client experiences and margin enhancements over time.

Q:Can you provide color on retention for FY '25, including controllable vs. uncontrollable churn?

A:Ryan Glenn reported retention at 92%-plus for FY '25, with no material changes in controllable or uncontrollable churn. He credited strong execution from sales, implementation, and service teams.

Q:What are the incentives for Paylocity sales reps, and will they change with the launch of Paylocity for Finance?

A:Steven R. Beauchamp explained that sales reps are incentivized based on new recurring revenue. They can also earn commissions for referring opportunities to an expert team. Incentives remain robust with the launch of Paylocity for Finance.

Q:How does Paylocity for Finance change the competitive selling motion and competitive field?

A:Toby J. Williams noted that the integrated finance solution differentiates Paylocity from competitors in the HCM space. He emphasized the value of a single platform for clients and expressed optimism about early traction.

Q:Have you seen any changes in the broker channel following recent M&A in the space?

A:Toby J. Williams stated that the broker channel remains strong, contributing 25%+ of new business. He emphasized the importance of not competing with brokers and noted continued momentum in the channel.

Q:What are the trigger points for adopting Paylocity for Finance?

A:Steven R. Beauchamp highlighted the value of an integrated platform, ease of use, and robust finance capabilities as key drivers for adoption. He noted that the decision-making process may take longer due to the higher price point and organizational commitment.

Q:How are you addressing the supplier and customer sides of the network with Airbase and finance products?

A:Steven R. Beauchamp mentioned capabilities for managing suppliers, PO processes, and payments. He sees greater opportunities as the solution scales and drives volume through the platform.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the free cash flow impact of new tax legislation, stating that they are still working through the specifics. Additionally, they did not provide a clear timeline for when AI investments would result in a net benefit, describing it as a gradual process.

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