Hello, and thank you for joining us. Welcome to Paylocity Holding Corporation's Fourth Quarter 2024 Fiscal Year Results. Currently, all participants are in listen-only mode. After the presentations, we will have a question-and-answer session. I would now like to turn the call over to Ryan Glenn. Please proceed.

Good afternoon, and welcome to Paylocity's earnings results call for the fourth quarter of fiscal year 2024, which ended on June 30, 2024. I'm Ryan Glenn, Chief Financial Officer. And joining me on the call today are Steve Beauchamp and Toby Williams, Co-CEOs of Paylocity. Today, we will be discussing the results announced in our press release issued after the market closed. A webcast replay of this call will be available for the next 45 days on our website under the Investor Relations tab. Before beginning, we must caution you that today's remarks, including statements made during the question-and-answer session, contain forward-looking statements. These statements are subject to numerous important factors, risks, and uncertainties, which could cause actual results to differ from the results implied by these or other forward-looking statements. Also, these statements are based solely on the present information and are subject to risks and uncertainties that can cause actual results to differ materially from those projected in the forward-looking statements. For additional information, please refer to our filings with the Securities and Exchange Commission for the risk factors contained therein and other disclosures. We do not undertake any duty to update any forward-looking statements. Also, during the course of today's call, we will refer to certain non-GAAP financial measures. We believe that non-GAAP measures are more representative of how we internally measure the business, and there is a reconciliation schedule detailing these results currently available in our press release, which is located on our website at paylocity.com under the Investor Relations tab and filed with the Securities and Exchange Commission. In regard to our upcoming conference schedule, Toby will be attending the Stifel Tech Executive Summit in Deer Valley on August 27, and I will be attending the Citi Global Tech Conference in New York on September 4 and HR Tech in Las Vegas in late September. Please let me know if you'd like to schedule time with us at any of these events. With that, let me turn the call over to Steve.

Thank you, Ryan, and thanks to all of you for joining us on our fourth quarter and fiscal 2024 earnings call. Our differentiated value proposition of providing the most modern software in the industry continues to resonate in the marketplace and help drive recurring revenue growth of 15% and total revenue growth of 16% in Q4. For fiscal 2024, recurring revenue grew 17% over fiscal 2023, and total revenue grew 19% and finished at $1.4 billion. Our solid results were once again driven by both adding new clients and increasing average revenue per client. We ended fiscal 2024 with 39,050 clients compared to 36,200 at the end of last fiscal year, an increase of 8%. Additionally, our average number of employees per client increased to over 150 given our continued upmarket success. Average recurring revenue per client was nearly $33,000 in fiscal 2024 compared to just over $30,000 in fiscal 2023, an increase of approximately 8% as a result of increasing product attach rates across our client base. We continue to attach more product at the time of sale and have realized increased success selling back into existing clients as our products, focused on the modern workforce, resonate across our entire client base with Learning Management, Recognition & Rewards, and Employee Voice seeing particular success. Our sustained investment in product development allows us to continue to expand our product suite, evidenced by the release of several new premium offerings and feature enhancements in fiscal 2024, including Recognition & Rewards, Employee Voice, Advanced Scheduling, Market Pay, AI-driven personalized learning plans, and our next-gen mobile app. We are pleased with the early traction of these new product offerings, highlighted by more than 30,000 market job searches within Market Pay, over 500,000 AI-assisted platform interactions, and our mobile app ranking as one of the highest in the software industry with the majority of employee interactions on the platform now occurring via mobile. Our commitment to product development continues to be recognized in the market with Paylocity recently being ranked as an overall leader for 10 product categories in G2's Summer 2024 Grid Reports, listed as the Best Payroll and Software combo by Forbes Advisor, named as TrustRadius' Top Rated HR Management software platform for the second year in a row, and recognized in Gartner Peer Insights 2024 Voice of the Customer for cloud HCM suites for 1,000-plus employee enterprises. I would now like to pass the call to Toby to provide further color on the quarter and fiscal 2024.

Thanks, Steve. As Steve highlighted, in fiscal 2024, we continued our investments in R&D to further grow our differentiated value proposition of providing the most modern software in the industry and increased our PEPY by more than 10% with the introduction of new premium products and feature enhancements. And we're excited to continue this trend with the launch of headcount planning later in fiscal 2025. In Q4 and fiscal 2024, our differentiated position was reflected in solid sales execution. We have continued investing in our go-to-market functions to carry this momentum into fiscal 2025 across sales, marketing, and channels. Coming into fiscal 2025, we expanded our sales force by 8% to 885 sales reps and will be focused on continuing to drive productivity and efficiency across our teams. Consistent with prior years, we are pleased to be fully staffed to begin fiscal 2025. We continue to successfully attract the best talent in the industry, and we believe that we are well positioned for the fiscal year. We have also continued to invest in our marketing and channel efforts to support our sales teams throughout fiscal 2025, including the recent release of our new Benefits Decision Support enhancement to help continue driving further differentiation and value to our clients and broker channel, which once again, delivered over 25% of our new business in Q4 and fiscal 2024. Revenue retention also remained strong at greater than 92%, and we remain committed to continuing to invest in our service and support teams to deliver world-class service to our clients. The strong culture at Paylocity continued to be recognized this fiscal year as we were recently named one of Forbes' Best Employers for Diversity for the third consecutive year, received ATD's BEST for Employee Talent Development Award, and earned the Great Place to Work certification for the seventh consecutive year. Our strong culture, industry-leading software, and exceptional sales and operational execution would not be possible without the dedication and commitment of our over 6,000 employees. As we close out a very strong fiscal 2024, I'd like to thank all of our people and teams for a fantastic year. I would now like to pass the call to Ryan to review the financial results in detail and provide fiscal 2025 guidance.

Thanks, Toby. Recurring revenue for the fourth quarter was $324.7 million, an increase of 15%, with total revenue up 16% from the same period last year. As Toby noted, our sales team had another solid quarter, and we were pleased to come in $5.5 million above the top end of our revenue guidance with the majority of our Q4 beat coming from recurring and other revenue. Adjusted EBITDA for the fourth quarter was $120.2 million or a 33.6% margin and exceeded the top end of our guidance by $13.1 million. For fiscal 2024, adjusted EBITDA was $505.6 million, or a 36% margin, and an increase of 35% on a dollar basis from fiscal 2023, resulting in leverage of 410 basis points. Excluding the impact of interest income on funds held for clients, adjusted EBITDA margin for fiscal 2024 was 30%, reflecting operating leverage of 280 basis points versus fiscal 2023. Additionally, we continue to show strong progress on free cash flow with fiscal 2024 free cash flow margin of 21.8%, up 340 basis points and an increase of 42% on a dollar basis from fiscal 2023. Excluding the impact of interest income on funds held for clients, we drove 170 basis points of operating free cash flow leverage in fiscal 2024 to a 14.4% margin. Given our increased profitability and limited remaining NOLs and credits, we expect to become a full cash taxpayer in fiscal 2025, which will create a free cash flow margin headwind in fiscal 2025. But we remain confident in our ability to continue expanding free cash flow margin in the coming years. We continue to make significant investments in research and development and to understand our overall investment in R&D, it is important to combine both what we expense and what we capitalize. On a combined non-GAAP basis, total R&D investments were 14.6% of revenue in the fourth quarter and on a full year basis, total R&D investments were 14.2% of revenue. On a dollar basis, our year-over-year investment in total R&D increased by 18% in fiscal 2024 when compared to fiscal 2023. We continue to believe our investments in R&D provide us with valuable product differentiation and the ability to drive future growth as we deliver the most modern platform in the industry. On a non-GAAP basis, sales and marketing expenses were 22.5% of revenue in the fourth quarter and 21.2% of revenue in fiscal 2024. On a non-GAAP basis, G&A costs were 9.6% of revenue in the fourth quarter versus 10.7% in the same period last year. Full year G&A costs were 9.3% of revenue as compared to 11% in fiscal 2023 representing 170 basis points of leverage, and we remain focused on consistently leveraging G&A expenses on an annual basis. Briefly covering our GAAP results. For Q4, gross profit was $240.4 million, operating income was $62.9 million, and net income was $48.8 million. For the full year, gross profit was $960.8 million, operating income was $260.1 million, and net income was $206.8 million. In regard to funds held for clients and interest income, our average daily balance of client funds was $2.8 billion in Q4 and $2.6 billion for fiscal 2024. We are estimating the average daily balance will be approximately $2.5 billion in Q1 of fiscal 2025 with an average annual yield of approximately 450 basis points, representing approximately $28 million of interest income on client-held funds in Q1. On a full year basis, we are estimating the average daily balance will be $2.75 billion in fiscal 2025 with an average yield of approximately 390 basis points, representing approximately $107 million of interest income on funds held for clients. In regards to interest rates, our guidance assumes 425 basis point rate cuts during fiscal 2025 with the cut assumed in September, November, March, and May reflected in guidance. Additionally, given the confidence we have in our business and our strong cash flows, we repurchased approximately 1.1 million shares of common stock at an average price of $142.82 per share for $150 million in aggregate repurchases during Q4. As a reminder, we have $350 million remaining under our share repurchase program. We also closed Q4 with $401.8 million in cash and cash equivalents on our balance sheet. In fiscal 2024, we also drove 200 basis points of leverage in stock-based compensation expense. In fiscal 2025, we expect to drive continued leverage in stock-based compensation towards our target of less than 10% of revenue and are committed to driving incremental leverage in stock-based comp annually going forward. Finally, I’d like to provide our financial guidance for Q1 and full fiscal 2025, which includes the impact of the 425 basis point interest rate cuts in fiscal 2025, as mentioned earlier, and roughly flat workforce levels in fiscal 2025 versus fiscal 2024. For the first quarter of fiscal 2025, recurring and other revenue is expected to be in the range of $325.5 million to $330.5 million or approximately 12.5% growth over the first quarter of fiscal 2024 recurring and other revenue. Total revenue is expected to be in the range of $353.5 million to $358.5 million or approximately 12.1% growth over the first quarter fiscal 2024 total revenue. Adjusted EBITDA is expected to be in the range of $116.5 million to $120.5 million. Adjusted EBITDA, excluding interest income on funds held for clients is expected to be in the range of $88.5 million to $92.5 million, which represents approximately 60 basis points of leverage over Q1 of fiscal 2024. And for fiscal year 2025, recurring and other revenue is expected to be in the range of $1.405 billion to $1.420 billion or approximately 10.2% growth over fiscal 2024 recurring and other revenue. Total revenue is expected to be in the range of $1.512 billion to $1.527 billion or approximately 8.3% growth over fiscal 2024. Adjusted EBITDA is expected to be in the range of $533 million to $543 million. Adjusted EBITDA, excluding interest income on funds held for clients is expected to be in the range of $426 million to $436 million, which represents approximately 50 basis points of leverage over fiscal 2024. Despite the macro headwinds we faced in 2024, we’re pleased to finish the year with 19% total revenue growth, 17% recurring revenue growth, and an adjusted EBITDA margin of 36% and a rule of 55 overall performance. As we kick off fiscal 2025, we remain confident in our differentiated value proposition, go-to-market strategy, operational strength, and product roadmap, and we have a high level of confidence in our ability to continue driving durable revenue growth and increasing margins as we execute against our multiyear goal of achieving $2 billion in total revenue. I would now like to turn the call over to Steve for final remarks.

Thanks, Ryan. As announced in our earnings release, I’m excited to move into the role of Executive Chairman of the Board effective August 5. This is the natural evolution of the co-CEO model we put in place in March of 2022. I have full confidence that under Toby’s leadership as President and CEO of Paylocity, we will continue its market-leading position. My role as Executive Chairman will allow me to focus on product and corporate strategy while working closely with Toby and the Paylocity leadership team to continue delivering the most modern platform in the industry. As Executive Chairman, I will continue to dedicate my time and energy to Paylocity, including participating on all future earnings calls. Looking back, I’m very proud of everything we have accomplished, and I’m very excited about our future opportunities. With that, we are ready for questions.

Thank you. Our first question comes from Brad Reback with Stifel. Your line is open.

Great. Thanks very much. And Steve, it’s been a great run, and I know it will continue. Given your experience, Steve and Toby, in the market for as long as you’ve been in it, can you help frame up what’s going on? Obviously, growth has meaningfully decelerated across the industry. Is this purely cyclical? Or are there some secular issues at play here as well? Thanks.

Sure. I’ll start, Brad. I think you’ve got a few things going on. First of all, we remain pretty excited about the size of the opportunity. We obviously have a small penetration rate in terms of the available TAM. So we still think there’s a great opportunity to grow. You’ve got certainly some law of large numbers and then growing at this size and scale has been impactful. We’ve called out the most recent impact in terms of whether it was employees on the platform or some of the economic headwinds we saw in the sales cycle, we see certainly some impact from that. You get to a bit of a new normal where we still have an opportunity to be a growth company focused on that $2 billion target. At the same time, we’ve shifted our focus to driving profitability. So we’re balancing that equation. When you put all that together, we’re still pretty excited about the story that we’ve got in front of us and the size of the opportunity.

That’s great. Thanks very much.

Thank you. Please stand by for our next question. Our next question comes from the line of Samad Samana with Jefferies. Your line is open.

Hi. This is Mason Marion on for Samad. Thanks for taking our questions. So congrats on the move, Steve. Can you talk about why you felt this is the right time to step back in the co-CEO role? And glad to hear you will still be joining us on these calls in the future.

Yes. It feels pretty natural, I think, internally. Toby has been co-CEO now for over two years, and I have been gradually transitioning different functions to him. This past year, I have largely been focused on our product and technology organization. So that will obviously transition to him formally, and that team will report into Toby. However, I will still be involved in the product initiatives as I have before; I’ll be involved with our corporate strategy team as we chart out our course over the next several years. I think this is the stuff that I’m the best at, to be quite honest with you. It gives me an opportunity to focus on that. I have tremendous confidence in both Toby and the team of executives around so that I feel like I’m in a position to do that.

Thank you.

Thank you. Please stand by for our next question. Our next question comes from the line of Scott Berg with Needham & Company. Your line is open.

Hi, everyone. And Steve, good luck on the next step. And Toby, I hope you have really big broad shoulders. You might need them. A couple of questions for me. Let’s start off with the guidance for the year. The guidance would, at least to me, imply subscription revenue growth of sub-10% exiting the year. How do we think about kind of breaking that down a little bit between ARPU growth and net new customer adds? Your growth between accounts and customers pretty balanced last year, roughly 8% in each of those categories. But we’re going to be in the sub-10% category; how do we think about what that kind of blend looks like?

Hey Scott. I mean, I think you saw a pretty balanced performance this last year, and I think that came from the result of executing pretty well from a go-to-market perspective, driving, I think, a ton of new products to market over the course of the last, call it, 1.5 years or so and having success with those products, both in terms of attached to new deals and then being able to sell back into the customer base. Ultimately, we also had strong execution from an operations perspective, providing service to our clients. So I think had a pretty balanced year. As you know, those numbers in the mix have pushed around in prior years a little bit. As we jump into fiscal 2025, we’re really pressing on all the same things: driving strong go-to-market execution, continuing to drive from a product execution and from an attach and penetration perspective and then delivering world-class service to our clients. So yes, I think it has changed. The mix is different every single year. We’re happy with the result from a balance perspective in fiscal 2024 and as we jump into 2025, it’s continuing to drive on those three things and probably expect that to be – you don’t know exactly where it’s going to land throughout the course of the year, but probably expect a relative level of balance in those different factors.

Understood. Helpful. And then Toby, I think you noted that your sales capacity is up 8% year-over-year going in this year, you’re fully staffed for busy selling season. But how do we think about your investments here going forward through the balance of your fiscal year? What have you contemplated for capacity growth into next spring? And how flexible are those plans assuming that the macro might potentially change both one way or the other?

Yes. I think we’ve maintained a fair amount of flexibility as we go through the course of fiscal 2025. That’s certainly been our thinking and what we’ve said over the last couple of quarters. The recognition coming into 2025 was that we want to be rightsized for the opportunity in front of us in terms of go-to-market capacity. As Steve said, we feel really good about the opportunity out there in the market. Coming in with 8% year-over-year growth in reps allows us to press on the productivity levers as well as we've launched a lot of new products. We feel really good about the go-to-market motion and fully staffed with the ability to attract the best sales and go-to-market talent in the industry, we feel very good about how we’re positioned coming into the year. If we get an uplift in terms of what the macro looks like, we have the flexibility that would allow us to even move that up from where we’re starting and coming into the fiscal year.

Great. Very helpful. Thanks for taking my questions.

Thank you. Please stand by for our next question. Our next question comes from the line of Mark Marcon with Baird. Your line is open.

Good afternoon and thanks for taking my questions. Steve, it has been a tremendous run and glad that you’re going to stay and Toby, congrats on taking on the sole role. I’m wondering with regards to the comments on the back-to-base motion, can you tell us how big the internal sales group is in terms of that back-to-base motion? And how much when we take a look at the bookings over the course of this year, how much was from new logos versus upsells into the existing base? And how do you think that could trend?

Yes. Maybe just to start with a little bit of the history. If you go back to our back-to-base motion, really would have started in earnest coming off of ACA and that was coming out of, I think, 2016 general time frame wise. We’ve continued to invest in that more so every single year. That’s been the investment philosophy. I think it’s paid off really well for us, both in terms of being able to drive incremental product attachment penetration and incremental revenue growth. That’s still smaller on a relative basis to our focus on going after new logos and new business in the market. But as we come into 2025 and even as we look forward, I think our philosophy around investing there would remain true, continuing to deploy dollars there. It’s about being able to bring back solutions to our customers who might not have bought those products at the outset of their partnership with us and be able to keep providing more and more value to our client base.

Can you say how big it is in terms of the incremental bookings that you had this year relative to the total bookings and where that could ultimately go?

I don’t think we’ve done that with any of our different teams. But I guess, to give you a direction, the real focus is on continuing to drive new unit growth, continuing to drive the employees on the platform and also expanding the product set to be able to continue to take advantage of that opportunity as we look forward. Delivering incremental value year in and year out to our client base.

Great. And then can you just comment regarding the success in engagement tools? LMS is getting good upsell. Are you displacing other players or are some of your clients essentially saying this sounds like a great tool that we haven’t used before?

Yes. I think as we think about our new product strategy, you can fit it into a couple of buckets. So one ends up being kind of innovation in the market where we’re often first to market, and we’re able to sell that as a new module. The second category probably refers to kind of LMS or even that as scheduling plus where we have an existing offering, and we’ve enhanced it to a point where there are additional capabilities that we think we can monetize and bundle. LMS was a new bundle that we had with additional content available for compliance for customers that they saw value in. We have the opportunity there to sell that to new customers as they come on board, but we also have the opportunity to go back to customers. We look for both opportunities to add more value by taking our products to the next level and coming up with new bundles and packages that offer them value.

Great. Thank you.

Thank you. Please stand by for our next question. Our next question comes from the line of Brian Peterson with Raymond James. Your line is open.

Thanks, everyone. And Steve, it’s been a heck of a run. I’m glad you’re staying on, and Toby I’ll echo a well-deserved congratulations. So we’ve seen growth rates moderate across the industry. I appreciate there’s still a big opportunity ahead as you look towards $2 billion in revenue. But I’m curious if there’s anything that’s changed as you’re thinking about your guidance strategy.

No, I don’t think there has been. I mean, I think we’ve been pretty consistent in our guidance philosophy over the course of time. We come into fiscal 2025 with that same philosophy. We try to call what we can see right in front of us at the beginning and evolve that as we go through the course of the year.

Yes, Brian, I’d agree. I think obviously, had a strong fourth quarter, particularly on the recurring revenue side. We’re really happy with where the beat came in and feel like we’ve got a lot of momentum headed into fiscal 2025. To Toby’s point, as we start out any fiscal year, there’s a desire to get back to a beat and raise cadence. You see a higher revenue growth in the first quarter. We are taking a prudent and measured approach as we think about the balance of the fiscal year. With strong execution, we feel good about this plan and the momentum across both product and operations and sales.

It’s good to hear. Maybe following up just on sales hiring. I’m curious if anything has changed in terms of the types of reps that you may be looking to bring in and anything in terms of the type of people that are available in the current environment.

Thanks. Yes, sure. It's a good question. Toby made the call out as well that we’ve been pretty happy getting fully staffed. We have very low turnover when you think about the performing category this year. So we came into the year with a really strong team that we were able to retain. I think that speaks to the position we have in the marketplace. The reps often want to be able to sell the best product in the marketplace. We continue to hire mostly with industry experience. That would be another point I’d make. We’re able to bring on talent from competitors or those with prior experience in the industry, which can help them ramp faster. That’s another element of our strategy in building the sales force. All three of those elements were clicking going into this fiscal year.

Great. Thanks, Steve.

Thank you. Please stand by for our next question. Our next question comes from the line of Jared Levine with TD Cowen. Your line is open.

Thank you. Can you discuss how top of funnel activity and pace of prospective client decision-making has trended since the last earnings call?

So I think we highlighted on the last couple of earnings calls that we were definitely seeing good activity top of funnel. Think about that as first-time appointment opportunities. We are definitely seeing a little bit longer decision cycles, particularly upmarket. We are making some changes in that part of the sales force just to drive efficiency. We feel like going into the start of this fiscal year, we’ve been able to continue seeing strong top-of-funnel activity and driving a better and more efficient sales process. The reality is, those larger clients take longer to implement and start. We did see success on the back end of last year and good starts in January, so we’re off to a good start.

Great. And then in terms of the Q4 beat, can you discuss what drove that beat there?

Sure. The beat really came from recurring revenue. Our sales activity was strong in the quarter. We felt good about where retention ended from a fiscal year perspective. We probably saw some incremental positive trends from a workforce level perspective, though that was not particularly material. So it’s really a combination of those items that drove a better fourth quarter than initially expected.

Just to clarify, were client employment levels flat quarter-over-quarter? Or was there still some sequential pressure?

Did not see the same sequential pressure that we saw earlier in the year, up a bit year-over-year and sequentially. That really started to normalize.

Thank you. Please stand by for our next question. Our next question comes from the line of Terry Tillman with Truist Securities. Your line is open.

Great. Thanks so much for taking the questions. Steve and Toby, congratulations to you both. I’m curious what kind of signals you are seeing down market and in the more traditional mid-market. And then I had one follow-up. Thank you.

Yes. We’ve been pretty happy with the activity levels and kind of our core marketplace, which includes businesses under 500 employees. That’s where we have the bulk of our sales force and our broker referrals. The comments going in are that we’re fully staffed. Sales was one of the reasons we beat in the fourth quarter, so we have a fair amount of momentum. The top-of-funnel activity is good in both the upmarket space and our core.

Much appreciated. And then if rates move aggressively over the next couple of years, does that change your thinking around long-term margin targets? And if so, are those still achievable?

Yes. We reset or increased our margin targets on this call last year. We made significant progress not only this year but also over the last few years, well into the profitability levels we have today. Certainly, there’s a potential headwind there. Looking at guidance for 2025, we have four rate cuts assumed. We’d expect to continue driving leverage ex-flow, with a guidance indicating 50 to 60 basis points of leverage this fiscal year. Operationally, we expect to be able to continue to drive leverage both within adjusted EBITDA and free cash flow.

Thank you. Please stand by for our next question. Our next question comes from the line of Jake Roberge with William Blair. Your line is open.

Hey, thanks for taking the questions. Just on the guidance, has anything changed from a competitive environment perspective that’s impacting the guide? Or is this mainly just the macro-driven issues and the law of large numbers as you scale?

Yes. It’s probably more the latter. We’re seeing the same competitors in the market; it’s always been a pretty competitive environment. You typically compete with two or three different competitors as the customer evaluates that. That dynamic has not changed. The law of large numbers is a factor for us and the competitive set as well. While our size is larger, the size of the opportunity relative to where we are today allows us to execute on the plan in front of us this fiscal year. We can really set our sights on $2 billion and beyond.

Okay. Helpful. If you had to parse out some of the growth drivers heading into next year, which do you feel kind of the most confident in heading into next year, and which might be a little bit more pressured in the near term?

Yes. Overall, we feel good about our relative position coming into the fiscal year. Most of your questions are centered around go-to-market. We feel good about our staffing levels and our talent across all the go-to-market teams. In Q4 and fiscal 2024, we saw another year of driving over 25% of our new business coming through referrals from our partners. We have a high degree of confidence in our ability to execute that play through fiscal 2025. We feel good about our starting point and the momentum around go-to-market is well balanced.

The only thing I would add is that we’ve focused on growing that upmarket team pretty aggressively. We’ve had great success over the past few years. That team, we called it out before, and we feel much better positioned this year than last year.

Very helpful. Thanks for taking the questions.

Thank you. Please stand by for our next question. Our next question comes from the line of Daniel Jester with BMO Capital Markets. Your line is open.

Great. Thanks for taking my question. Maybe one on headcount planning coming up this year. That feels like it could be used in use cases beyond just in the HR suite. How are you thinking about selling into potentially different personas in the organization, if at all?

Yes. It's a great question. One of the real values that we offer our customers is the platform that manages all their employee data. When employees log into the platform and our mobile app, it opens up different opportunities. We’ve been first to market with many products, and we're really looking at how we leverage employee data to help our clients offer more value. Headcount planning has a natural tie to HR as positions get replaced or added, involving approvals and workflows. We’ll continue to push the boundaries of what might have been a traditional HCM by leveraging that data set. CFOs are already heavily involved in our sales, but they will become more primary buyers.

Okay, that's helpful. And then Ryan, you mentioned cash tax payments that we’re going to see this year, and a little bit of headwind on operating cash flow. Did you quantify what that could look like relative to EBITDA margin?

Not in the prepared remarks, Dan. But the way to think about that is there is a two-step process for us to becoming a full cash taxpayer. You saw step one this year with cash taxes at roughly $50 million versus just a few million dollars a year prior. That’s a headwind we faced this year, but we grew through that, continuing to leverage free cash flow. Next year, the step up will be similar, so you may be looking at $100 million in cash paid for taxes. That was the call out; next year, we become a full cash taxpayer, but continue to have a lot of confidence in driving free cash flow leverage going forward. Excluding float, we’d still expect to drive at least flat free cash flow margins but did want to call that out as we enter an inflection point on the cash tax side.

Great, thank you very much.

Thank you. Please stand by for our next question. Our next question comes from the line of Pat Walravens with Citizens JMP. Your line is open.

Great. Thank you. And congratulations, Steve and Toby on what seems like a well-planned transition. Are you guys seeing any signs that as your clients adopt more AI technologies, that's going to impact client levels?

Yes. We haven't seen that yet. It’s hard to know what’s going to happen from a macro perspective in terms of AI driving efficiency in the workforce. This last quarter, we saw things stabilize pretty well, so workforce levels were better than expected and pretty stable sequentially. No early signs that AI is happening in the workforce today. A significant part of that workforce consists of industries that will take much longer to be impacted by AI. Organizations might be hiring a little bit less trying to drive efficiencies in this macro market. That's been evidenced by workforce levels over the past 15 months, but we don’t hear AI as being the primary driver of that.

All right, that's great. Just a quick follow-up. What are some examples of those industries?

We’re in nearly every industry. Nearly 40,000 clients align with the distribution of businesses. More than half of our client workforce is hourly, and that’s true across America. So it really matches what you see every day.

Thank you. Please stand by for our next question. Our next question comes from the line of Raimo Lenschow with Barclays. Your line is open.

Thank you. Thanks for squeezing me in. A lot of the questions centered around what's the growth outlook for you. How do you see industry growth rates and how to interpret them compared to recent seasons?

I think if you look at earlier in our growth trajectory, we were certainly relatively in terms of what the size of that opportunity. Now we’re at $1.4 billion; you have Paycom slightly larger, ADP, Paychex, UKG, all continue to grow. There is some broad law of large numbers. We are not out there saying we can grow this business at 30% per year; we’re focused on growing this business at double-digits on a recurring revenue basis. Balancing profitability is also a factor, so we think there’s a compelling opportunity for us to continue growing and have a strong business.

Yes, okay, perfect. Yes, that's very clear. Thank you very much for that. And then Ryan, can you talk a little bit about how you think about M&A and share repurchase in this context of the interest rate environment? Where do you stand there? Thank you.

Sure. Last quarter, we announced a $500 million share repurchase program. We repurchased $150 million of stock in the past quarter, and we have $350 million remaining under that program. There’s no formal expiration date, so it’s available for the foreseeable future. We can also drive different priorities from a capital allocation standpoint. Having done $150 million repurchase, we still have $400 million in cash on the balance sheet, access to significant cash in our credit facility, and increasing cash flow. We will look at all aspects of capital allocation, considering a handful of acquisitions over the last few years. We are active and looking for strategic opportunities.

Thank you.

Thank you. Please stand by for our next question. Our next question comes from the line of Siti Panigrahi with Mizuho. Your line is open.

Thanks for taking my question. I just want to dig into the recurring revenue per client growth. That's two years back growing 18% to 14% to 8% this year. What are the factors influencing that? Are you seeing any pricing pressure or less cross-selling, or lower size customer size? What’s driving that? How should we think about revenue per client going forward?

As we've called out, we’ve largely focused on landing new customers and selling them more product. When you’ve got 8% client growth, and you’re selling those customers more product, that is a big contributor to average revenue per customer. When you go back four years when it was higher, we had much higher client growth. So that's one aspect. We’ve been able to sell back to our client base pretty effectively, contributing to client revenue growth.

I think for a couple of years, we had pretty rapid expansion within the client base as companies rehired post-COVID, elevating year-over-year growth in recurring revenue. That likely showed in FY22 and FY23, thus normalizing those numbers relative to more consistent expectations.

Okay, that's fair. Now looking at the client growth also, it assumes your guidance assumes that for the resource and client growth, what trends are you seeing among customers switching their payroll vendors? What is causing them not to switch or to switch in this kind of environment?

We have nearly 40,000 customers. The market for us is over 1 million customers. Yes, there’s a fair number of customers that would consider change in any given year. We can sometimes convince a customer to change when they weren’t considering it. At the same time, macro factors play a role. Customers tend to be more cautious in tougher macro environments, however, top-of-funnel activity looks relatively good right now.

Thank you.

Thank you. Please stand by for our next question. Our next question comes from the line of Kevin McVeigh with UBS. Your line is open.

Great, thank you so much. Following up on the 2025 guidance, it looks like the recurring is outpacing the float, but it looks like the EBITDA is a little bit better. Anything to reconcile like, where is the leverage coming in?

In the guidance, we provided ranges for recurring revenue and total revenue. The delta there is the interest income expectations. We provided adjusted EBITDA as well; if you look at those pieces, our guidance indicates about 50 basis points of adjusted EBITDA leverage ex-float. Including the impact of four assumed rate cuts, you see adjusted EBITDA margins impact slightly.

Okay, thank you.

Thank you. Please stand by for our next question. Our next question comes from the line of Jason Celino with Key. Your line is open.

Thanks for taking my question. Maybe if we kind of go back to Siti's logic, in any normal year, would you say that there's a finite number of customers willing to evaluate switching payroll providers? And has the propensity to switch been reduced? In a better environment, does that increase?

Yes, we have nearly 40,000 customers with over 1 million potential customers in the market. There is a fair number of customers considering change. In a tougher macro environment, clients may be more hesitant to switch. However, we don’t observe any significant macro factors currently. Overall, top-of-funnel activity remains strong.

Okay, thank you.

Thank you. Please stand by for our next question. Our next question comes from the line of Zachary Gunn with FT Partners. Your line is open.

Check to see if you are on mute. All right, no response from Mr. Gunn.

Do we have any other questions?

I'm showing no further questions in the queue. I would now like to turn the call back over to management for closing remarks.

I wanted to just say thank you very much to all of you for your interest in Paylocity this quarter and over the last 17 years. My final remarks are, I'm not going anywhere. That's the big message. I'm excited about Paylocity and what we will be able to achieve. I'm excited about Toby and the team we have driving success forward. I look forward to continued conversations. Have a great day, everybody.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.