Good day and thank you for standing by. Welcome to Palacities Holdings Corporation's second quarter 2026 fiscal year results conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that this conference is being recorded. I would like to hand the conference over to your speaker today. Ryan Glenn, Chief Financial Officer, please go ahead.

We will be discussing. You can find the related under the investor relations or results could differ materially from those projected in our forward-looking statements. Please refer to our press release and SEC filings. We do not undertake any duty to update any forward-looking statements. Conference schedule, we will be attending the Raymond James Annual Institutional Investors Conference. Please let me know if you'd like to schedule time with us at either of these events. With that, let me turn the call over to Steve.

Second quarter fiscal 26 earnings continued in Q2 with recurring and other revenue growth of 11% as our differentiated value proposition of providing the most modern software in the industry continues to resonate in the marketplace. Total revenue was $416.1 million or 10% growth over Q2 of last year. Our multi-year investment in R&D and commitment to driving innovation continues to fuel our growth as the combination of HCM, finance and IT in one single platform, all underpinned by our core employee record data, represents the broadest and deepest comprehensive offering in the marketplace. This dynamic continues to be highlighted by the growing adoption and utilization of products across our suite, including new HCM offerings such as reward and recognition. As the only provider with native reward system that automates the taxation of rewards payments and allows for the cash redemption of rewards, reward and recognition continues to serve as a point of competitive differentiation in the market and a driver of improved employee engagement and efficiency for our clients. For example, during calendar year-end, which is a popular time for companies to recognize employees, an existing client fully transitioned and automated their manual holiday reward program within our platform, successfully distributing gift cards to more than 750 employees located across multiple locations. Our expanded AI capabilities, which we have continued to embed across the platform, also contributed to our strong financial results and increased guidance, including the recent release of our Policy and Procedures Agent, which enables clients to leverage their own internal documentation, such as employee handbooks and standard operating procedures, to provide employees with instant and accurate answers to questions around topics such as travel expense and sick leave policies. Additionally, we recently extended our AI assistant and HR rules and regulations, tapping into more than 200 IRS and Department of Labor knowledge sources to provide administrators with guidance on tax and labor regulations. Collectively, these new capabilities will help our clients simplify and automate employee support while also reducing risk and improving compliance outcomes. And we continue to see growing utilization of our AI capabilities, with the average monthly usage of our AI assistant increasing over 100% quarter over quarter. Our ongoing commitment to product innovation continues to be recognized by third parties, as Paylocity was recently awarded the 2026 Buyer's Choice Award from Trust Radius, named a leader in 19 categories within the winter 2026 G2 grid reports, and listed on Capterra's payroll shortlist. I would now like to pass the call to Toby to provide further color on the quarter.

Thanks, Steve. As Steve mentioned, the momentum seen in Q1 continued into the second quarter and contributed to a strong selling season performance and increased revenue and profitability guidance for fiscal 26. Our results continue to be driven by the combination of strong sales, operational execution and product differentiation including the addition of new functionality to core products such as video candidate screening self service scheduling and pre-screening forms within our recruiting module as a result of these new capabilities we are helping our clients improve their hiring process drive a higher degree of automation and efficiency within their business and better stand out in an otherwise competitive hiring environment as evidenced by an existing client with over 1,200 employees that has seen a roughly 50% reduction in their time to hire since adopting our new recruiting functionality. We also continue to be pleased with the consistency of our referral channel which once again delivered more than 25% of our new business in Q2. The sustained success of our broker channel continues to be driven by our modern platform, third-party integration and API capabilities and because we do not compete against our broker partners by selling insurance products. We remain committed to investing in and supporting the broker channel with the goal of continuing to deliver real value and true partnership and support to our referring brokers and their clients through enhanced capabilities such as our benefits guided setup through self service and intuitive tooling benefits guided setup allows brokers to directly build plans and rate structures and update rates on behalf of their clients directly within the paylossity platform enabling our partners to deliver a higher level of service to our mutual clients we also saw another strong quarter of client retention which helped contribute to our strong financial performance through the first half of fiscal 26 as highlighted last quarter in addition to embedding AI capabilities within our product suite we are also investing in AI and broader automation efforts internally to help drive greater efficiency and productivity across our business specifically within the operations team we continue to leverage AI to drive down client case volumes automate client interactions and case routings and perform sentiment analysis to flag urgent cases for faster response, and we remain committed to continuing to evaluate new opportunities to help deliver world-class service and partnership. Overall, we are pleased with our Q2 results and believe we are well-positioned heading into the back half of the year, which is reflected in our increased guidance for Fiscal 26. Finally, this time of year is a very busy time for all of our teams, as they work closely with clients on year-end processing of payrolls, W-2s, 1095s, and annual tax form filings to federal, state, and local agencies, and on the implementation of new clients. I want to thank all of our employees for their hard work and dedication to our clients during this very busy time of year. In addition to our market-leading financial performance, our strong culture of Paylocity continues to be recognized externally, as we were recently recognized by Newsweek on America's Greatest Workplaces for Culture, Belonging, and Community 2026. I would now like to pass a call to Ryan to review the financial results in detail and provide our increased fiscal 26 guidance.

Thanks, Toby. Q2 recurring in other revenue period last year. Our strong Q2 results were primarily driven by another solid quarter for our sales and operations team, allowing us to come in $8.1 million above the midpoint of our revenue guidance and allowing us to again raise our fiscal year guidance by more profit was 74.4% for Q2 versus 73.8% in Q2 of last fiscal, representing 60 basis points of leverage. And over the first six months of fiscal 26, our adjusted gross profit is up 80 basis points over the same period last year as we continue to focus on scaling our operational costs while maintaining industry-leading service levels. 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 dollar basis, our year-over-year investment in total R&D increased by 10% when compared to the second quarter of fiscal 25, and we remain focused on making investments in R&D throughout fiscal 26 as we continue to build out the Paylocity platform to serve the needs of the modern workforce. In regard to our go-to-market activities, on a non-GAAP basis, sales and marketing expenses were 21.1% of revenue in the second quarter, and we remain focused on making investments in this area of the business in fiscal 26 to drive continued growth. On a non-GAAP basis, G&A costs were 9% of revenue in the second quarter versus 9.8% in the same period last year, representing 80 basis points of leverage. Briefly covering our GAAP results, for Q2, gross profit was $282.1 million, operating income was $70.4 million, and net income was $50.2 million. Our adjusted EBITDA for the second quarter was $142.7 million, or a 34.3% margin, and exceeded the top end of our guidance by $7.2 million, resulting in increased margin guidance for fiscal 26. Excluding the impact of interest income on funds held for clients, Adjusted EBITDA margin for Q2 is up 140 basis points over Q2 of last year, and we continue to be pleased with our ability to drive both durable recurring revenue growth and expanded profitability, having leveraged by improved operational scale and through improved efficiencies resulting from our ongoing investments in automation and AI across our business, which are helping us scale our teams and providing the ability to focus on more strategic work. We're also pleased by our ability to drive expanded free cash flow through increased profitability and the benefits of recent tax legislation changes, including a 40% increase in cash provided by operating activities in the first six months of fiscal 26, 26% growth in free cash flow over the last 12 months versus the comparative period, and free cash flow margin of nearly 24% over the last 12 months as we execute against our recently increased financial targets. Additionally, given the confidence we have in our business and our strong cash flows, In Q2, we repurchased roughly 690,000 shares of common stock at an average price of $144.86 per share for approximately $100 million in aggregate repurchases. From the year to date, we have repurchased over 1.8 million shares of common stock at an average price of $162.66 per share for approximately $300 million in aggregate repurchases, helping to drive our diluted shares outstanding down more than 2% as of the end of Q2. As a reminder, we have approximately $400 million remaining under our share repurchase program, which we anticipate continuing to opportunistically execute against going forward. In addition to our expectations for continued growth in adjusted EBITDA and free cash flow, the scale we are demonstrating in stock-based comp expense and the reduction in diluted shares outstanding will help drive continued expansion of earnings per share on an annual basis. Looking at the balance sheet, we ended the quarter with cash and cash equivalents of $162.5 million and $81.3 million in debt outstanding related to the funding of the air-based acquisition. In regard to client-held funds and interest income, our average daily balance of client funds was approximately $3.2 billion in Q2. We're estimating the average daily balance will be approximately $3.7 billion in Q3, with an average annual yield of approximately 320 basis points, representing approximately $29.5 million of interest income in Q3. On a full-year basis, we're estimating the average daily balance will be approximately $3.3 billion, with an average yield of approximately 340 basis points, representing approximately $112 million of interest income. In regard to interest rates, our guidance reflects all Fed cuts to date, with an additional 25 basis point rate cut assumed in each of March and April of this fiscal year. Finally, I'd like to provide our financial guidance for Q3 and full fiscal 26. Note that as a result of continued momentum across both our sales and operations teams, we are increasing our fiscal 26 recurring and other revenue guidance by 12.5 million and total revenue guidance by 14.5 million, which includes the full impact of our guidance beat in Q2 and a further increase in back half fiscal 26 revenue guidance. Additionally, we continue to realize success driving increased profitability across our business, resulting in increased adjusted EBITDA guidance for fiscal 26. For the third quarter, fiscal expected to be in the range of 402.5 million or approximately 9 to 10 percent growth over third quarter fiscal 25 recurring in other revenue and total revenue is expected to be the range of 487 million to 492 million or approximately seven to eight percent growth over a third quarter fiscal 25 total revenue adjusted EBITDA is expected to be the range of 200 million to 204 million and adjusted EBITDA excluding interest income on funds held for clients is expected to be in a range of 170.5 million to and for fiscal 26 we we are increasing all expects over guidance as follows. Other revenue guidance is now expected to be in the range of 1.620 billion to 1.630 billion, expected to be in the range of 1.732 billion to percent growth over fiscal 25. Adjusted EBITDA is expected to be in the range of 622.5 million to 630.5 million. And adjusted EBITDA, excluding interest income on funds held for clients, is expected to be in the range of 510.5 million to 518.5 million. In conclusion, we are pleased with our Q2 results, the momentum we have across our sales and operations teams as we execute the busiest time of the year, and the strong results we are seeing across HCM, finance, and IT solutions. Combined with continuing to drive competitive differentiation, our AI strategy, we are confident in our ability to drive sustainable, durable revenue growth and improve leverage across the business to achieve our updated long-term financial targets over the coming years. Operator, we're now ready for questions.

Thank you, ladies and gentlemen. If you have a question or a comment at this time, please press star 1 to 1 on your telephone. If your question has been answered and you wish to move yourself from the queue, please press star 1 to 1 again. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Daniel Jester with BMO Capital Markets. Your line is open.

Thanks for taking my questions. I guess maybe we'll start with the selling environment. I think the commentary was that it was pretty strong. So I guess maybe double-click on that if you could please maybe compare and contrast kind of how you exited this year compared to last and any pockets of strengths or weaknesses you'd call out.

Hey, Dan. Yeah, I'll start off. I mean, I think overall I would characterize the selling season as strong this year. I think the go-to-market teams, excuse me, across sales and marketing and our channel teams, and I think we saw, you know, a very stable demand environment. So I think similar commentary on the demand environment from order. And I think our performance from a sales perspective through selling season was strong. And I think that's a good part of what allowed us to really strong results we did from and profitability perspective. And I think that's a lot of what carried into the raise of guidance for the rest of the year. I think on a relative basis to last year to the other part of your question, I would characterize it as really strong. So I think we were overall pretty happy with it.

Great, thanks. And then maybe just to follow up on maybe sort of a bit of an obligatory AI question, you know, I think you've commented a lot about how Paylocity is building tools and integrating AI into the platform. How are you seeing your customers engage with AI and are you seeing any trends about customers maybe building some of the functionality themselves?

Appreciate the context, guys.

Thank you so much.

Yeah, I think I'll grab that one, Steve, here. What I would say is we have really been focused on embedding AI across the suite. As you know, our value proposition is being the most modern platform. And as we embed AI, the two use cases that we called out in the script, you know, policies and procedures and allowing clients to be able to upload their own docs and answer employees' questions is certainly one of the big use cases that we've seen. We've seen a lot of interactions with our AI assistant with how do I do something? How can I accomplish this? Asking for data in the application. And so I think from our perspective, you know, we will continue to build templated agents for our customers to be able to use. We'll give them some flexibility so that they can customize those for their use cases. And what we're seeing is really improved ease of use from our customer feedback. We're seeing more engagement in the platform, some more utilization. And then finally, it's really saving our customers' time.

Thank you so much.

One moment for our next question. Our next question comes from Brad Reback with Steve. Your line is open.

Thanks very much, Steve. So in that last point, saving your customers' time, that's great. Can you talk about how you're translating that into revenue for Paylocity?

Yeah. So I think, as you know, Brad, one of the things about being in payroll and HR is we have the data in terms of being a system record. So we know in real time when anything happens, whether somebody's getting a new job, new supervisor, new hires terms, and many times our customers then want to use those triggering events via our APIs and marketplace to be able to connect to other systems. I think as the agentic experience becomes more developed, we will see more and we've already started seeing significantly more usage of our APIs, tying our data to other really key work flows within an organization. That's number one. Number two is we're seeing people put more data and drive more utilization of our platform. So from a monetization perspective, that has an opportunity for us to sell more of our modules back to our clients. They're seeing more value and they're able to customize more of that experience so that it's purpose built to really deliver on their individual use cases. So I think from a client perspective, it's less about us driving them away from the personal interaction that we have. As you also know, our clients call us very frequently. They're looking for advice. That relationship is really part of our strong retention, so we don't want to walk away from that. But we really want to be able to drive an easier-to-use experience, drive more utilization. When we do that, we get larger upsell on top of the opportunity and marketplace and APIs. That's really where we see the near-term opportunities.

And on that upsell and the retention, is it still too early to have good metrics around if customers with high AI engagement are spending 10 or 15 percent more than peers or retaining two or three points better?

I think it's a little early. I think you've got to go back to our average size customers, about 150 employees. And so this does happen on a gradual basis and we have those seen in the past as we've really expanded the number of modules that the customers who are using more of our modules typically have a stronger retention typically are more satisfied and we see AI as another tool to be able to drive that same outcomes awesome thank you very much one moment for our next question our next question comes from Terry Tillman with Truist Securities.

Your line is open.

Yeah, hey, good afternoon. Nice job on the quarter. I've decided to abstain from asking an AI question. I was going to ask two questions on kind of evolving products, which I'm very intrigued by. First, just an update on Airbase and just your play in the office of CFO and finance. And then secondly, I also wanted to ask what's developing and what can you share around your ability to help in the area of IT operations? Thank you.

Airbase update, and you'd be pleased with the momentum we have there. We closed that acquisition year or so, V1 of the integrated product set in July, and I think that was, you know, an important factor from a differentiation standpoint as we came through selling season, so it's sweet now as Paylocity for Finance. I think we are continuing to see lift there. We're continuing to get IT-oriented, but I think we continue to see positive progress there from a use case perspective there. And that's, you know, I think you see Steve's comment in relation to data that we have in our system to create automation against some real device management. I mean, I think all those things are triggered off of changes in the data that we see from a status perspective with respect to employees.

That's great. Maybe just a quick follow-up. The cash flow was well above what we were looking for. Was there, and maybe this is for Ryan, but anything timing there that may not reoccur in the second half of the year? or just anything more you can share on just the strong outperformance and comparing it to the second half?

Yeah, hey, Terry, this is Ryan. No, I think, obviously, you can see cash flow movement changes, but – Okay, thanks.

One moment for our next question. Our next question comes from Mark Marcon with Robert W. Baird. Your line is open.

Good afternoon, and thanks for taking my questions. I was wondering if you could talk just a little bit more about the selling environment. And obviously, you know, the stocks have all gotten hit, you know, based on concerns around the impact of AI. Can you just talk a little bit about, like, from your client's perspective, average client size is 150. I imagine they're not thinking anything close to about using, you know, any sort of new tools. but are you seeing any sort of hesitation in terms of blowing down either at the core part of the market or even at the enterprise side? And how would you judge your Salesforce productivity, you know, given some of the noise that's out there?

Yeah, so I think there's a few questions in that, Mark. I guess selling season was strong. I think the team performed really well. I think we continue to be on a fairly capability to from a new sales perspective in the first half of the year. And I think the confidence that we have in our ability to perform across all segments throughout quarters three and four. And so I mean, I think we've seen just a relative level of stability in our client base, in the demand environment, in our team's ability to sell and bring on new units. And, you know, I think the continued really strong execution from both a sales and ops perspective as we've come through selling season performing really well, active as well. I mean, our opening through January, I think we sit here halfway through the year and our ability to be successful in Q3 and Q4.

I would just add one thing to that is, and I know you've been in this industry a long time. There's a lot more conversation from prospects around our service levels, our ability to meet those customer needs and not necessarily replace all the interaction from an AI perspective. Certainly, when we automate things for them, they love that. We make it easier for them. That's great. And they want to make sure that, you know, we're really pursuing the right modern technology. But our service organization, as Toby called out, is a big reason why there's a driver. So unlike other software spaces, we've got a pretty big moat around the service component of what we do, whether that's an implementation or ongoing service or taxes.

And that is actually a much bigger conversation still today with prospects than AI, which is a conversation and is a growing conversation, but still a smaller part of the overall value problem. that's great and then i was wondering if we could flip the ai uh in terms of advantages and wondering if you can just talk a little bit about like how much more efficient i know it's early days um you know clode cloud code just came out a little while ago but if we think about like when we think about your r d uh efforts are there any early thoughts there and then in addition to that with all the fears around AI, you know, from a capital allocation perspective, are there some opportunities, you know, for M&A in terms of valuations becoming more reasonable that you're starting to explore to a greater degree? Thank you.

Yeah, and the first part, the efficiencies that we're able to drive in areas like, you know, going back to Ryan's 6%, I mean, what you're seeing across the continued productivity and efficiency increases across the business, and you see it show up in the free cash flow. And that comes from all kinds of different places. One of them is driving automation across the business, and part of that is utilizing AI in areas like engineering, but we're also using that from a broader operations perspective to help create a better – so I think that's part of the story that you're seeing play out in both adjusted EBITDA and free cash flow. So I think that's a – An M&A. I mean, I think we have always been speed time to really strategic. And I think that, you know, that that opportunity continues to exist. We continue to focus on it. But I think our our threshold for what makes sense for us has not changed. I mean, I think you see valuation sort of ebb and flow, ebb and flow in any given quarter from a target perspective. But I mean, I think our hold for being able to find solutions that make sense for our platform that will add value to clients and that we can tightly integrate. Those are still the things that we're focused on. And if we can find things that will add value and that will speed our time to market, then those are the things that we'll continue to be interested in.

Great. Thank you. One moment for our next question. Our next question comes from Siti Pengrahi with Mizuho. Your line is open.

Great. Thanks for taking my question. I just wanted to ask about employment level. First, what do you saw this quarter, I mean, in December quarter, employment level, and what's baked into your guidance?

Assumption in the back employment levels year over year, which would be a slight degradation from what we saw.

Okay, that's great. And then at a broader high-level question on employment, we keep hearing from, you know, people around saying that how AI is going to disrupt in terms of employment, more layoffs coming. how do you what's your view on that how exposed or not exposed your velocities well I think just give you a couple thoughts I mean I think you know we we don't have any and I then that he just shared around us seeing things be

relatively stable you know despite any of the commentary that's out in the market and we've seen stability and I think if you go back to the company of the large providers you'll you hear the same thing so I think what we see in real time is stability across the employees and the platform in our business, and I think that's what you hear from others.

Great.

Thanks for the caller.

One moment for our next question. Our next question comes from Scott Berg with Needham & Company. Your line is open.

Hi, everyone. Nice quarter, and thanks for taking my questions. I have two non-AI questions. I hope you're ready for them. The first one, I guess, is any commentary on win rates since you've had paylossity for finance and asset management, IT asset management out in the market. I heard someone in the ecosystem tell me, you know, that they're seeing some at least chatter around it, that people have some interest in it. And just don't know. It's early, obviously, but didn't know if you're seeing any, you know, changes to your win rates based on having the availability of those modules.

Well, I think we've been, going back to my prior comments, man, I think through, you know wealthy in win rates I do think though that there's there's a few things in the market Scott that are helping it's just it's you know I think the differentiation that we're able to create through things like Paylocity for finance I think that is in the helpful column I also think it helps from a incremental ARPU standpoint I would say the same thing with respect to our IT solutions I think it's helpful from a differentiation perspective also helpful for ARPU in pretty early days for each of those. And then I think the other thing that we've seen momentum on is our relationship with brokers, which has always been strong, but I think we continue to see momentum with the broker channel. And so I think all of those things are positive in addition to just the overall value prop of the platform and the execution from our teams, I think, was really strong in the quarter. So I think there's a lot of positive there against a fairly stable demand environment. And it's tough sometimes to create perfect attribution on those things. But I think that's the overall picture.

Fair enough. And I guess from a follow-up perspective, now that we've kind of seen what the impact of the tax law changes were, you know, on the business in the last quarter, which I assume had some maybe catch up for the year a little bit, is was there any debate or any conversation around maybe taking some of those cash flows and trying to, you know, invest that in other aspects of the business versus just, you know, harvesting them i know it's just accounting treatment and timing and et cetera but you guys already generate plenty of cash so my guess is you know probably there wasn't a lot of thought there but i didn't know if there was anything that you thought of that you could maybe you know spend on that would be a worthwhile for short term yeah i mean i think you know just echoing ryan's kind i mean i think we've you know i think we're really excellent thank you for taking my questions

one moment for our next question our next question comes from samad samana with jeffries your line is open.

Hi, good evening. Thanks for taking my questions. I guess one that I wanted to ask about is if you think about customers in a more muted hiring environment, presumably if they're hiring less and or there's less people to hire, what are they focused on? Like where are they either redirecting within the HR tech budget and or are they redirecting that HR tech budget somewhere else? And then I have a follow-up question.

Yeah, I mean, I think we've seen some of Steve's comments as we come through this time of year. So Dispective and you have a huge amount of new business coming onto the platform. So, I mean, I think, I don't think there's a significant shift in terms of the value prop that clients in the core of our market are looking for. They're looking for a partner they can trust. They're looking for breadth of solution and a platform that will serve their needs and is purpose-built for their use cases. And I think we're continuing to deliver all of those things and focused on driving a level of automation and productivity and efficiency and usability to them that I think they value more and more by the day. So I think that's the, that's probably how I understood.

And maybe just for a follow-up in a different direction, just as I think about the pricing environment, we've seen, you know, with different software vendors, either raising price, especially over the last couple of years, I know, um, Price increases are just a normal course of business, but how are you seeing customer reaction on renewal to either price increases and a reduction of discounts? Any change in behavior versus prior renewal cycles and anything that we can extrapolate from that?

No, I don't think we've seen any change there whatsoever. It's been very – we typically look at – Great.

Appreciate the time as always. Thank you. One moment for our next question. Our next question comes from Brian Peterson with Raymond James. Your line is open.

Hi, thanks for taking the question. This is John Messina on for Brian. Maybe a follow-up to Terry Tillman's question earlier. As you look to deepen the penetration of finance and IT over time, what are the key execution milestones we should look for over the next 18 to 24 months to measure success there? And how are sales cycles for those products either landing or expanding versus the traditional HCM modules? And then I have a quick follow-up.

Yeah, I think, so taking that apart, I mean, I think when we're talking about the addition of those solutions to new clients that are coming on, it could be in the go-live times, no meaningful deviation from new deals coming onto the platform, and then from a back-to-base perspective, I mean, it depends on what the specific product or company is, but those are in the client base, buying those and being able to get them live on them. And there's, you know, depending on what it is, I mean, a lot of times, remind me if there's other parts of your question that you want me to hit on.

It was just on measuring success from the outside there on the penetration rate of those products across the base.

Yeah, I mean, I think from what we've always described as success for new clients, their new products being launched, is if you can get any tickets any different from to get to each one of those products or product areas. And so I think we're really pleased with the traction that we're seeing in the path that we're on. And I think what you see play out overall over time is our ability to continue to win new deals and continue to grow our client base in a fairly consistent fashion year-to-year while also continuing to drive ARPU. So I think those are overall the results that we've been really targeted on.

Okay, thanks. A really helpful color there. And then with the announced consolidation in the industry, just can you share any impact the consolidation's having on pipeline, win rates, or go-to-market efficiency? The execution seems really good, but just trying to get at what extent you're maybe benefiting as competitors or navigating that M&A activity.

Yeah, I mean, again, some of the attribution is challenging probably, but I think overall the execution, I appreciate your comment. I think the execution has been very good across both our sales and ops teams in particular. And I think, you know, we see momentum in the business coming through selling season. And, you know, I think we've executed well. And not to the extent that there's disruption in the market because of, you know, one company or another transaction. And, you know, I think we stand ready to perform for our clients and perform for the prospects that we're bringing onto the platform. And I think if we can maintain that focus in the case that others lose theirs, we'll be well positioned to take advantage of that. So really happy with the level of focus and the execution that we had in the quarter and year-to-date.

Thank you. One moment for our next question. Our next question comes from Jared Levine with TD Cowan. Your line is open.

Thanks. To start here, can you talk about air-based upsell progress year-to-date versus expectations and your expectations for the second half of the year here?

Yeah, I think they're right on pace with our expectations, both through the first half of the fiscal year and from what we can see for the back half. So, I mean, just kind of one of the integrated solutions, pretty pleased with what we've seen and believe that overall, I mean, it's a story that helps with differentiation, believe that that's a meaningful area of differentiation for prospects that we're pitching. And I think it's been part of the reason that we've had such a successful first half of the fiscal year.

Got it. And then, Ryan, for follow-up here, in terms of the adjusted EBITDA guide, you didn't pass through all the 2QB here. or anything to call out in terms of timing? Because I think there was a similar dynamic with 1Q. There was some timing call out in terms of not passing through all the beat with the prior print, but just with this print, what would you call out here?

Yeah, I mean, I think, you know, as we set up the year on the August earnings call, I think the context we provided is if you look back to adjusted EBITDA, we have driven reinvestment back into sales and marketing because, as you've heard on the call, we feel really good about the progress in each of those teams, and we want to reinvest in upside that will drive continued growth in the back half of this year and on to 27. So I think that's the context, and that is how we're operating this year. Obviously, you are seeing outsized performance from a free cash flow standpoint, as we've talked about. So that is not something that we have historically guided to. But when you think about free cash flow specifically in the updated target of 25 to 30% free cash flow margin against a TTM number of 24 percent, we are quickly moving to the high end of the prior range and not at range. So continue to believe like we have the ability to balance, continue to take margins up on a multi-year basis.

Great. Thank you. One moment for our next question. Our next question comes from Ramo Linshaw with Barclays. Your line is open.

Hi, this is Phil McMains on for Rymo. Thanks for taking the question, and I just have one here. The perceived AI risks in the market have been brought up multiple times on the call, and as you mentioned, things are relatively stable for you. However, we're seeing announcements from AI companies that are moving software stocks significantly, and to that point, could you speak a little bit more to some of the specific ideas on why AI advancements are not as big of a risk for your company compared to what maybe some of the recent price action may suggest. And you talked about the motor on your service org. And, you know, are there a couple other areas you could point out, too? For example, the banking relationships and payment rails are not, you can't vibe code something like that. Payroll companies need a certain scale from a balance sheet perspective on the float side. Or that simply, you know, just throwing a bunch of expensive GPUs at a payroll run just isn't efficient and doesn't make sense. And, yeah, as I mentioned, you touch upon this already, but I think we need some more hand-holding here.

So I think you hit some of the points. I think, let me start with, I think AI can certainly improve our client experience in a number of ways. Make the software easier to navigate, make the data more accessible, provide additional use cases where, you know, we have an opportunity to be able to expand our footprint and drive ARPU. All those things, I think, are opportunities in front of us. I think on the concept that some company is going to quickly kind of build a replacement product, there's challenges to that. And so you mentioned one, there is a lot of interaction with the customer. And so they call us, we email interaction, there's projects that we do on their behalf. Implementation is largely a handheld process where we lose money on implementation, right, to be able to bring the customer on board, which is well worth it when we think of how long we retain them for. So the service is absolutely an element. The other thing is we interface with thousands of agencies on the back end from a tax filing perspective. So local agencies, state, federal agencies, those formats change, the rules change. You're constantly changing your engine. And those are all deterministic calculations. They're not something that you can do and be probably right. And they require a fair amount of investment in testing. And so another example of where AI, at least today, is really not necessarily suited to be able to solve that problem. most efficiently. And you even got into a little bit of the capital structure behind that. To do that with an AI model and to be able to make the capital investments, it's much easier to be able to have deterministic algorithms to get you to that answer. And so as we think of this in a layered approach, the service capability that we have, the fact that we've got the data from a system of record perspective that allows us to continually expand our use cases, AI making those even better. And then the fact that we're moving, you know, billions of dollars through banks and to thousands of tax agencies across, we believe all are natural moats that, you know, we have, and certainly many of our competitors have. And again, I'll just end with, we see AI as a big opportunity. And we certainly see an opportunity to be able to drive utilization, make our products easier to use, even integrate broader use cases into other applications. And so we're excited about that opportunity. And we certainly understand the nature of the question, but I think there's more complexity behind the scenes in our business. Very clear. Thank you.

One moment for our next question. Our next question comes from Patrick Wallravens with Citizens. Your line is open.

Great. Thanks for taking the question. This is Austin Cole on for Pat. A lot of questions here have been asked. I want to ask two on the new offerings in HCM, maybe rewards and recognitions and some of the other offerings there. What was kind of the upsell motion? How was that performed recently? And what's the opportunity around some of those new offerings?

Yeah, I think Toby summarized it. I think best if you look at our historical formula and average revenue per customer growth versus unit growth, You know, those have moved a little bit year by year. But we've been fairly consistent on a year over year basis where unit growth is. And so you can see we're getting broader product adoption across the board that's really driving that incremental difference in terms of our unit growth versus our overall revenue growth. And I would not call out a singular product. I think to be able to move the needle at our size and scale, you know, our goal is, you know, we want to get to 10 or 20% penetration for early products, things like reward and recognition. And then we want to move that to 30 and 40%. And then you've got products in our portfolio where we're seeing 70 and 80% adoption. And for those products, we think about what's the opportunity to be able to potentially add, you know, plus offerings or get more value from product enhancements that allow us to be able to continue to increase that average revenue per customer from those modules. So we see a ton of opportunity within the HCM category. Those continue to be probably because they're generally bigger and been around longer, the bigger driver today. And then you've got earlier in that in that product portfolio, things like IT and finance still being relatively small, but off to a really good start. And so I think we're really happy with seeing our product strategy resonate in the market and see the adoption across our client base.

Great. And then just as a quick follow-up, there was a comment made about the AI assistant monthly usage increasing 100% quarter over quarter. How should we think about that metric and maybe how it compares to your guys' expectations and that going forward and as a catalyst for some of that upsell as well?

Yeah. So, you know, our strategy is to continue to embed AI across the suite, really adding additional use cases, increasing flexibility and making the assistant more powerful over time. So certainly part of that utilization increase is the features that we've added. We talked about the policies and procedures. We talked about third party content, whether that's Department of Labor, IRS or state websites, and really helping our clients not only answer their questions, but in many cases, save them time by answering a bunch of their employee questions. And so that's been really positive. We see an opportunity to continue investing in AI, adding additional use cases and really driving agents experiences that are going to really embed multi-step processes into single clicks. That's going to be able to drive insights and anticipate what their next steps are going to be, all of which is part of our goal, which is to be able to save our customers time so that they can really spend time with people versus spend time on administrative tasks. And so we're really, really happy with where we are, how that's really resonated with our customers. And we would anticipate that, you know, that single kind of text box interaction that you see in AI assistant is going to allow customers to do an increasing number of things over time.

Great. Thank you. One moment for our next question. Our next question comes from Jason Salino with KeyBank Capital Markets. Your line is open.

Great. Thanks for taking my question. This is Zane Meehan on for Jason Salino. Just two quick ones for me. One of your peers noted that they had been seeing slightly smaller lands for just the initial lands for new customers, maybe due to macro or increased budget scrutiny. Is that anything you saw in the quarter? Anything new there?

No, we haven't seen that at all.

I think we've seen a huge amount of consistency from a go-to-market standpoint and new business being brought in. during selling season and great good to hear um and secondly i believe last year second quarter you noted um seeing a little bit of pull forward is that any that dynamic reoccur this quarter um anything that might have pushed or pulled out of the quarter no i don't think we saw anything this quarter and what we mentioned last year was extraordinarily small which we noted at the time Great.

Appreciate it. Thank you. One moment for our next question. Our next question comes from Steve Enders with Citi. Your light is open.

All right, great. Thanks for taking the questions here. I guess just to start, it sounds like you had a good, strong selling season. I guess what are you seeing kind of in the forward pipeline and maybe how are kind of the new appointment requests or kind of the other forward leading indicators kind of looking for pipeline development?

Selling season, I think we've seen the demand environment. you know the ability to take okay great and then I'm just on the on the broker

channel side of it I guess have you seen kind of any changes in terms of the you know that the number of opportunities or maybe the share of opportunities that you've been able to capture within that channel and then how does kind of the new solutions and capabilities that you're releasing here to to the broker side how does it maybe impact how you're thinking about that kind of go forward opportunity and and I guess how it can change the number of opportunities coming from uh from from the brokers broker standpoint with um with that channel new business uh the first half of the year

and through selling season in q2 um I think we've had just you know directionally I think we've had great momentum over the last year with the brokers in particular and I think there's been some some disruption from a market perspective with with certain other competitors that have played in that space before, but I think we've gotten the benefit of some of that. I think we have great momentum, and I think focus and value-added delivery to that channel, and part of that is also focus there from a product perspective. So Benefit Guided Setup is a product that we've launched, and I think that is certainly one that accrues to brokers being able to give more help and service to their clients. So I think we continue to focus on that channel in every respect, whether it's from a go-to-market standpoint, from a service standpoint, being able to partner with them and service their clients, and from a product perspective, launching new products that are not just useful to clients, but also helpful to the brokers.

Okay, awesome. Thanks for taking the questions here.

One moment for our next question. Our next question comes from Matt VanVleet with Kanti. Your line is open.

Yeah, good afternoon. Thanks for taking the question. Just looking towards the rest of the year and even into fiscal 27. Curious where you feel you are from a sales capacity and overall market coverage, especially with the addition of Paylocity for finance and IT there and just kind of how you think you can continue to meet the demand in the market.

Yeah, I think overall we feel pretty good about our coverage. I mean, I think as we've said, it's on making sure that we have the opportunity set, but also that we're continuing to focus on driving productivity across those teams. And I think we're really happy with what we've seen so far this fiscal year from a sales productivity standpoint. And I think that's part of what helped us perform well in Q2 and through selling. I think what gives us confidence to take the year up for three and four as we're looking ahead. I feel pretty good with where we sit today. Investment and the productivity.

And then a quick follow-up on the broker channel. You've obviously seen better momentum there and you highlighted some disruption from competitors. But in terms of resource allocation, is there There's still more to be done in terms of total broker coverage, or is it now just, you know, kind of leaning into those that have greater success of selling through Paylocity and how you do that, you know, kind of how you leverage that relationship there? And within that, have win rates gone up at all, given some of that disruption in the market?

Well, I think from an execution standpoint, and it's an important part of the selling motion in the field with our reps and building those relationships at the ground level, also managing them from a corporate perspective. But partnership and a lot of that success is driven in the field with and through our reps. And I think it is just in the things that the brokers find the most value in. That's in part the relationship in the field. That is in part our client to our mutual clients and the clients they are patient in service. And it's continuing to also drive the delivery of a platform and a solution set, including new product launches like Benefit Guide Setup that add value to them and give them the ability to add more value to their clients.

All right, great. Thank you. One moment for our next question. Our next question comes from Jacob Smith with Guggenheim Securities. Your line is open.

Hey, thanks for taking my question. Retention has been consistently around 92% over the past couple of years. As you look at the elements from cross-selling pay-lossy for finance, expanding IT offerings, getting greater AI adoption across the platform, how do you see that retention rate evolving over the next few years? Is there a structural reason it should move higher as customers become more embedded across HCM finance and IT, or are there any offsetting factors we should be mindful of?

And maybe related to that too, are you seeing any early evidence that customers who adopt multiple modules have different churn characteristics and single product customers. Thanks.

Yeah, our retention rate has been north of 92% for over a decade. And I think, you know, we are.

And I'm not showing any further questions at this time. I might turn the call back to management for any further remarks.

Very much. I really appreciate everybody joining the call and your interest in Paylocity. And I want to send a special shout out to all of our teams and all of our employees helping our clients through year end and onboarding in January. Great job. I very much appreciate all the effort, and I hope everybody has a great night.

Well, ladies and gentlemen, that's concluded today's presentation. You may now disconnect, and have a wonderful day.