Paylocity Holding Corp (PCTY) Q1 2027 Earnings Call Transcript

Welcome to the call. And thank you for standing by. Welcome to the Paylocity Q1 Fiscal 27 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand as raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Ryan Glynn, Chief Financial Officer. Please go ahead.

Fiscal 27, which ended on September 30, 2026. I'm Ryan Glenn, Chief Financial Officer, and joining me on the call today are Steve Beauchamp, Executive Chairman, and Toby Williams, President and CEO of Paylasity. 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. During the call today, we will refer to non-GAAP financial measures as defined in Regulation G. You can find the related reconciliations to GAAP in our press release, which is located on our website at paylocity.com under the Investor Relations tab. We will also make forward-looking statements. Actual events or results could differ materially from those projected in our forward-looking statements. Please refer to our press release and SEC filings, including our most recent 10-K, which contain important factors that could cause actual results to This will be different materially from the forward booking statements. We do not undertake any duty to update any forward-looking statements. In regard to our upcoming conference schedule, we will be attending the BMO Technology and Innovation Leaders Conference, the Needham Virtual Tech Week, the Barclays Global Tech Conference, and the Needham Growth Conference. 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.

Thanks, Ryan, and thanks to all of you for joining us on our first quarter fiscal 27 earnings call. We started off Fiscal 27 with strong financial results, with Q1 recurring and other revenue growth of 12%, as our differentiated value proposition of providing the most modern software in the industry continues to see success in the marketplace. Total revenue was $451.7 million, or 11% growth over Q1 of last year, and well ahead of our guidance. Our growth continues to be led by our ongoing commitment to driving innovation and providing the most modern AI-driven platform for business, highlighted by our recent launch of Recruiting Optimizer, which brings purpose-built AI agents into the recruiting process to help clients rediscover qualified candidates, automate outreach and follow-up, support screening, and streamline interview scheduling. Powered by our Ignite AI platform, Recruiting Optimizer demonstrates how we are embedding AI into everyday workflows to reduce manual effort while preserving human oversight for the decisions that matter most. Recruiting Optimizer provides incremental value to our clients that we can directly monetize in the form of a premium offering for AI-driven capabilities, connecting recruiting with onboarding and the employee record to help create a more seamless transition from candidate to employee. While early days, the solution has helped clients improve recruiting productivity by 35%, fill roles 25% faster, and reduce candidate drop-off by 15%. Additionally, we continue to see increasing adoption and utilization of our Ignite AI platform, with Ignite AI having answered nearly 30 million questions and surfacing over 3 billion recommendations since launch. Adoption has been particularly strong for our Answer and Insight agent, with usage growing over 90% over the last month, with clients leveraging the agent to more efficiently and effectively run and analyze reports that explore and understand workforce trends, answer operational questions, and quickly uncover actionable insights that saves time, helps them make more informed decisions, and drive improved business outcomes. Our innovation also continues to be recognized by third parties, as Paylocity was recently named by HR Tech Outlook as a Top Payroll Software 2026. Additionally, Paylocity was ranked number one in AI recruiting in G2's Fall 2026 grid reports and earned top placements across more than 25 product categories. I would now like to pass the call to Toby to provide further color on the quarter. Thanks, Steve.

As Steve noted, we continue to see strong demand for our platform across our target market, and we're pleased with the momentum of our sales team as we enter the heart of selling season, as evidenced by our strong Q1 recurring revenue performance and strong increase to guidance for fiscal 27. Earlier today, we also wrapped up our annual Elevate Client Conference, where we hosted thousands of business leaders representing HR, finance, IT, and operations across dozens of sessions over the course of the last two days. At Elevate, we highlighted our continued commitment to investing in our differentiated strategy of embedding AI into the everyday flow of work across our HCM, finance, and IT products through the recent launch of Paylocity Ignite AI. It was great to hear firsthand from our clients how this approach is already translating into tangible business value in the form of increased employee productivity and the automation of manual processes and workflows. Similarly, we were pleased with the strong positive feedback on our recent launches of Paylocity Elevate Solutions and Paylocity for Retirement, where we continue to see strong attach rates and broad-based interest from both new and existing clients. Combined with the expansion of our broader product portfolio over the last 18 months, this further provides confidence in our ability to drive greater adoption across our platform, expand the value we deliver to clients, and support durable ARPU growth. 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 Q1. The sustained success of our broker channel continues to be driven by our modern platform, third-party integration capabilities, and because we do not compete with 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. Similarly, we continue to provide world-class service to our client base, and our strong client retention contributed to our Q1 results and increased expectations for fiscal 27. In addition to our market-leading financial performance, our strong culture at Paylocity continues to be recognized externally, as we were recently named by Newsweek as one of America's greatest workplaces for parents. We received the Great Places to Work certification for the eighth consecutive year, and we were selected as one of Time's American Growth Leaders for 2027. I would now like to pass the call to Ryan to review the financial results in detail and provide increased Fiscal 27 guidance.

Thanks, Toby. Recurring in other revenue is $424.5 million, or 12% growth over Q1 of last year, with Q1 total revenue of $451.7 million, an increase of nearly 11%. Our sales team had a solid start to the year across our HCM, finance, and IT suites, in addition to seeing healthy demand for our recent product launches in Paylocity Elevate Solutions and Paylocity for Retirement. We were pleased to come in $7.2 million above the top end of our revenue guidance, with the majority of our revenue beat once again coming from recurring other revenue, allowing us to raise our fiscal year guidance by more than our Q1 beat. We continue to make significant investments in research and development, and to understand our overall investment in R&D 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 nearly 15% when compared to the first quarter of fiscal 26, and we remain focused on making investments in R&D throughout fiscal 27 as we continue to deliver the most modern AI-driven platform in the industry. In regard to our go-to-market activities, on a non-GAAP basis, sales and marketing expenses were 20.3% of revenue in the first quarter, and we remain focused on making investments in this area of the business in fiscal 27 to drive continued growth. Briefly covering our GAAP results, for Q1, gross profit was $304.1 million, operating income was $82.2 million, and net income was $57.6 million. Our adjusted EBITDA for the first quarter is $159.5 million, or a 35.3% margin, and exceeded the top end of our guidance by $3.5 million, resulting in increased margin guidance for fiscal 27. Excluding the impact of interest income on funds held for clients, adjusted EBITDA margin for Q1 was up 30 basis points over Q1 of fiscal 26, and we continue to be pleased with our ability to drive both durable recurring revenue growth and expanded profitability on a multi-year basis. To this end, we remain focused on driving leverage 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, which ultimately is helping to drive increased adjusted gross margin, adjusted EBITDA, and free cash flow on a multi-year basis. Additionally, given the confidence we have in our business and our strong cash flows, in Q1, we repurchased 1.1 million shares of common stock for 152.5 million negative repurchases at an average share price of approximately $139 per share, helping to drive diluted shares outstanding down nearly 4% versus the same trade last year, and with approximately $1.1 billion remaining under the current repurchase program, we anticipate continuing to be active going forward. In addition to our expectations for continued growth and adjusted EBITDA on free cash flow, the combination of increased profitability and reduced diluted shares outstanding will drive continued expansion of earnings per share on an annual basis. Looking at the balance sheet, we ended the quarter with $194.5 million in cash, cash equivalents, and invested corporate cash, and $131.3 million outstanding on our credit facility. In regard to client-held funds and interest income, our average yearly balance of client funds was approximately $3.1 billion in Q1. We're estimating the average yearly balance will be approximately $3.3 billion in Q2, with an average annual yield of approximately 360 basis points, representing approximately $29.5 million of interest income in Q2. On a full year basis, we're estimating the average daily balance will be approximately 3.5 billion, with an average annual yield of approximately 340 basis points, representing approximately 118 million of interest income. In regard to interest rates, our guidance reflects the recent 25 basis point rate hike in September, but assumes no additional changes to interest rates during the remainder of fiscal 27. In regards to our financial guidance for Q2 and Full Fiscal 27. For the second quarter of Fiscal 27, recurring in other revenue is expected to be in the range of $423 million to $428 million, or approximately 10% growth over second quarter of Fiscal 26, recurring in other revenue. And total revenue is expected to be in the range of $452.5 million to $457.5 million, or approximately 9% growth over second quarter Fiscal 26 total revenue. Adjusted EBITDA is expected to be in the range of $152.5 million to $156.5 million. And adjusted EBITDA excluding interest income on funds all for clients is expected to be in the range of $123 million to $127 million. And for fiscal 27, as a result of the strong results we are seeing across HCM, finance, and IT solutions, strong client retention, a stable demand in macro environment, and higher interest rates, we are increasing our total revenue guidance by $30 million, which also results in a strong increase to adjusted EBITDA margin guidance for fiscal 27. Recurring in other revenue is raised by $15 million at the midpoint, and it's now expected to be in the range of $1.792 billion to $1.807 billion, or approximately 9% growth over fiscal 26 recurring in other revenue. And total revenue is raised by $30 million at the midpoint, and it's now expected to be in the range of $1.910 billion to $1.925 billion, or approximately 8% growth over fiscal 26 total Thank you. Adjusted EBITDA guidance is increased and is now expected to be in a range of $711.5 million to $721.5 million. And adjusted EBITDA excluding interest income on funds all for clients is also increased and is now expected to be in a range of $593.5 million to $603.5 million, which represents approximately 90 basis points of leverage at the midpoint. In conclusion, we are pleased with our Q1 results and the continued momentum we have across our sales, operations, and product teams as we enter the busiest time of our year. Operator, we are now ready for questions.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Our first question comes from the line of Brad Reback of Stifle. Your line is now open.

Great. Thanks very much. Ryan, maybe, or Toby or Steve, not sure, but maybe you could dig into the guide. You know, a healthy beat in one cue with kind of 2x that beat flowed through very early in the year to be flowing through such magnitude. So maybe you can talk about what gives you confidence. Thanks.

Hey, Brad, this is Ryan. I can certainly start. I think, you know, we're really pleased with where we started the year with 12% recurring revenue growth in Q1. And I think, as you heard in the prepared remarks, a lot of momentum across the business from a go-to-market operations standpoint, and then some of the investments we're making in product and what that is doing to drive our boot. So as we look at the balance of the year, increasing recurring revenue by $15 million, as you said, is passing on that full Q1 beat, and then an incremental $7 million or so to the fiscal year. And I think when you look at the Q2 guidance, what you see is about 9.3% to 10.6% recurring, spot on with how we guided Q1. So I feel really good about the momentum, and I think we still feel like if we continue to execute well, we're in a position where we can perform well against that guidance and continue to raise the year as we go throughout fiscal 27. And I think the other element I'd mention, too, is on profitability, raising the interest income by $15 million, 100% of that raise going to the bottom line, and then on top of that, raising operating EBITDA by the full Q1 beat plus an incremental $2.7 million. We're really pleased with how we started the fiscal year.

That's great. Thanks very much.

Thank you. Our next question comes from the line of Scott Berg of Needham & Company. Your line is now open.

Hi, everyone. Really nice quarter here, and thanks for taking my questions. I guess let's start off, I don't know, Toby, this is probably for you, is on the demand environments. We've noticed that lately we saw it at the HR Tech Conference. A couple weeks ago, it just seems like demand in the space is ticking up, not a lot, but maybe modestly higher than what we saw either 6 or 12 months ago. I guess, are you all seeing any changes to the demand environment on the HCM side? And if so, is it, you know, related to a product area or just general demand across, you know, the whole payroll platform?

Yeah, thanks, Scott. I mean, I guess what we would say is we feel really good about the demand environment. We feel like it's been pretty stable. You know, maybe it's arrows pointed up a little bit, but I might not have said that had you not framed the question that way. I mean, I think we've seen a lot of stability. I think what we would. What we would say is that the teams have executed really well in a really well-balanced way across go-to-market and then from a service perspective driving on retention. So I think overall, I feel like it was a pretty well-balanced quarter in terms of the execution of the teams against the backdrop of what I would say is a fairly stable and positive demand environment.

Helpful. Thank you. And you guys announced some, I guess, for me, at least I called maybe smaller innovations at your customer conference here the last day or two, and there's certainly some AI themes with all of that. How are you thinking about monetization on the AI side? I know, Steve, you and I have had some good conversations on this last year or two, and you thought the monetization for different modules might be a little bit more on the muted side for lots of different reasons. But as you release more product and as you're seeing customers maybe, you know, drive some solid usage and returns on these products, has it changed your opinion on how you maybe monetize this functionality over time?

I don't know if there's a change in the opinion. Obviously, we have a lot of interaction with customers. We are looking at where the market is moving, and we've been pretty innovative at driving new solutions to market, either organically or via acquisition. And so I think it still comes down to a couple different categories. One is we've got to innovate on the core platform and make our clients' lives easier and save them time. As we do that, Sometimes, we can drive higher margin. Other times, we can maybe get a little bit of pricing on the back end. And so, we see opportunity to continue doing that without question. And Ignite, in many of the agents we've already released, will certainly accomplish. I think the second category is the recruiting optimizer being the great example where we acquired a great team and great technology. We're able to plug that in pretty quickly into our platform. And that's probably a product area that prior to AI wouldn't have even existed. It's something that recruiters would just have to do manually. And as we're able to save them time, we're able to capture a piece of that time savings that the client's realizing. And I think there's going to be incremental opportunity there. And that's probably the category that I'm more excited about today than maybe. A year or two ago is businesses that maybe we wouldn't have even imagined that we can offer the client, you know, hours and hours of savings. We can get paid for that, and both parties win under that equation, and I think there are a number of additional opportunities.

I'll fall next quarter again.

Thank you. Our next question comes from the line of Samad Samana of Jefferies. Your line is now open.

Hey, good evening, and thanks for taking my questions. Maybe first one, Ryan, just maybe just a little bit more of a housekeeping question than anything, but just on gross margins, they were down year over year pretty significantly. Is there anything to call out there? Is that maybe where the AI utilization that you're seeing in terms of the install base, is that pressuring costs there? And then I have a follow-up question as well.

Yeah, I think one quarter into the year, I'd really just call that out, is timing. Obviously, we've got a lot of momentum across the business in making sure that we are well-staffed headed into year-end. And I think we talked in August about some of the excitement we have with Elevate Solutions and Paylocity Retirement, and there being some initial ramp up there, and initially feeling really good about the demand there, so making sure that we're well-staffed. So really, really timing, nothing I'd call out from an AI cost standpoint that's particularly troubling.

Great. And then maybe more broadly, and I don't know if this is for Toby or Steve or for either of you, but just as you think about moving into more solutions and just as the breadth of the portfolio grows, especially into more like IT solutions, is that changing the type of sales rep that you're looking at? Or is the existing sales organization pretty well equipped to sell those solutions? And just maybe help us think through how bookings and the non-payroll portion of the portfolio look. Thank you so much.

Yeah, sure. So, I think, last part first, I think we're really happy with how we were able to drive traction on all across the portfolio, including the parts that you asked about specifically outside of payroll and HCM, including those in finance and IT. And, yeah, I think... As we've launched more and more product over time, I think one of the strengths of the business and one of the strengths of the go-to-market team has been to be able to consistently hire into our rep classes, both for field reps and for our inside sales teams, and be able to generate that type of traction through those teams. And I don't think it's fundamentally changed, you know, who we're hiring or any of our hiring patterns. I think it just goes to the strength of the business to be able to launch new solutions and train our reps and get them up to speed efficiently on how to sell both, attach those products in new deals and then back into the base.

Thank you. Our next question comes from the line of Mark Marcon of Robert W. Byrd. Your line is now open.

Hey, good afternoon. Great quarter. In terms of the strength that you ended up seeing from a revenue perspective, how would you characterize it between new logos versus, you know, truly new solutions and then, you know, just pricing? And pricing strength, because you've got so many new solutions that are out there that you can monetize. So I'm just trying to figure out how the balance is going.

Hey, Mark, I'll start and then others can jump in. I mean, I think we've seen a fairly even balance. I mean, it's early in the year still, so we've got one quarter down, but I think we've seen a fairly even balance between In growth, balance between ARPU and then new units. I think A lot of the new solutions that we're talking about have not been out for that long, so we're talking about a quarter or so in many of the cases, and so I think part of what we're seeing is we're seeing a nice ramp as we've come through Q1 and the interest in those solutions, both from a new client attached perspective and from a sale back into the base standpoint, but I think to answer your question, I think it's been fairly well balanced between the two so far this year.

Mark, the only maybe two things I would add is nothing particularly noteworthy in pricing. I think we continue to adjust pricing on an annual basis and are taking a very consistent approach to this year. And then second, macro environment continues to be very stable. Client workforce levels continue to be up modestly year over year, very consistent with what we saw last year. So that was an incremental tailwind from a guidance standpoint, but to Toby's point, I think the real bulk of the overperformance in Q1 and the cost for the raise above the beat has really just been the execution across the go-to-market operations and product organization.

That's excellent. And then you mentioned that you were spending a little bit more to get ready for Elevate. Would you anticipate that the gross margins by the end of the year would? You know, trend back to where they were over the course, you know, towards the back half of last year? Or how should we think about just the mixed profile with Elevate? And, you know, are there any, you know, pass-through costs that we have to be aware of or anything along those lines?

Yeah, I would really call that out. As I said, timing in the fiscal year would expect margins to continue to raise as you go throughout the fiscal year. Obviously, we've driven a significant amount of leverage over the last few years in gross margin as well as just EBITDA. No structural changes there in respect to be able to continue to drive scale in gross margin as we go deeper into 27 and then beyond.

Perfect. Thank you.

Thank you. Our next question comes from the line of Terry Tillman of Truist. Your line is now open.

Hi, guys. John Carlo. I'm here for Terry. Thank you for taking the question. I just wanted to ask how AI progress has been across the product portfolio. What areas do you feel like may need some more work and what areas are trending solidly? Thank you.

Adoption levels that we've seen from our customers in utilizing all of the AI components that we've released to our customers. We talked a little bit about a couple stats in the prepared remarks. You're really allowing customers to accomplish things so much faster and easier in our product. We're auditing things that would be difficult for them to catch. We're surfacing insights to customers, and we're producing really kind of high-quality experience. And the feedback has been really, really fantastic. And the other part is we're getting great ideas from our customers. So we really believe interacting with the customers, they've got things that take them a little bit longer or processes that they would love to see automated. And so we see a ton of opportunity on a go-forward basis to be able to add to the Ignite AI platform. And at the same time, we're going to continue to look forward to opportunities where we can create new modules, add-on modules, like Recruiting Optimizer, like our absence management module that we're launching in January, to be able to monetize those AI capabilities. And if you look at the breadth of our portfolio in AI, we feel like we've got a leading solution in the market.

Got it. Thanks, guys. I appreciate it. Thank you. Our next question comes from the line of Sati Panigrahi of Mizuho. Your line is now open.

Great. Thanks for taking my question. Just to follow up, you said the leading solution in AI. So the question like this, higher adoption, is that driving paid module attachment or pricing today, or is that nearly the near-term value, primarily retention and differentiation? And particularly in the same context, you know, are you seeing any win, you know, in terms of competitive wins and the new logo deals because your AI capability is better than a competitor, anything like that?

Yeah. Yeah. So I will tell you that on an increasing basis, your AI strategy and then more specifically the AI products that are available to customers are coming up with prospect conversations. And they're absolutely part of that evaluation process, and they not only want to know what you have today, but they also want to know what is coming, because I think as the market gets educated, they realize one of the ways to take advantage of AI is to make sure that the people they're partnering with have AI tools that will really drive efficiency. And so I would say absolutely that it's – really, we've had a great start from a revenue perspective. I think Toby talked about the momentum in the sales force from a prepared remark perspective, and I would tell you that our AI strategy is definitely a factor there. And I think the other point I would just make is we have actual AI products that we have both launched already and announced that are coming that are directly monetizable and then add to the ARPU equation. So it's really a combination of those two that gives us kind of the confidence in making that statement that we're seeing the benefits of having a leading platform in AI.

Okay, and then one quick follow-up, workforce levels. I think you said last quarter 50, 60 BIPs higher than your flat adjustments. So what are those running today, and what's your adjustment in the guidance?

Yeah, I think the Q1 levels were very consistent with what we saw last year, so probably rounding up to a point in that 50 to 60 range, rounding up to about one. We continue to assume flat year over year within the guidance, so no change to how we've approached that historically.

Super helpful. Thank you.

Thank you.

Our next question comes from the line of Jared Levine of TD Cohen. Your line is now open.

Thank you. To start, I was hoping to talk about the managed service offerings. Can you discuss the target market for this offering, including what mix of your existing customer base would fit into that kind of ideal client profile for it?

Hey, Jared, Toby. Yeah, sure. I mean, I think so far we've seen a level of attachment we're really happy with, and I would tell you that that That is... All the way through our target market from those that have under 50 employees to the heart of our market, around 150 on average. And then even into our enterprise clients. And I think when you look at where most of the demand has traditionally sat, it's really been in the core of our market. And I think that's what we've prepared for. But I think as we've really launched these solutions and come through Q1, we've seen attach and penetration, I think, fairly well balanced in the core of our market, right around that 150 in the middle. But we've also seen it be relevant to those that are slightly smaller and slightly larger than that.

Got it. And then, Ryan, the X float adjusted EBITDA beat was the smallest in the history that you've got to float revenue here to be able to back into that. Any impacts in terms of timing of investments or incremental investments made here in terms of, I guess, why that smaller than typical X float adjusted EBITDA beat in the quarter here?

No. I mean, I think we beat the guidance, and I think as we called out on the August earnings call, we plan to invest in R&D this fiscal year, and you saw that in Q1. R&D is up 15% versus Q1 last year. We're seeing the benefits of that investment, and I think results are consistent with expectations to a touch better, and as I mentioned on an earlier question, I think raising the year by more than that beat just points to increased margin as well and passing on the full interest income beat as well.

Got it. Thank you.

Thank you. Our next question comes from the line of Daniel Jester of BMO Capital Markets. Your line is now open.

Great. Good evening, everyone. Thank you for taking my question. So in the past, if I recall correctly, a lot of times when you've come out with new product, it's been easiest to attach that when you've had new customers added to the platform. And so as you think about all of the new products that you've been working on, all of the new AI tools, do you feel like you need to invest more in a back-to-the-base motion so that your current customers will have the opportunity to use all of these tools?

Yeah, I think you're right. You go back in our history, we've generally tried to launch products and focus on that new customer attachment. Out of the gate, we would gain feedback from customers over time. We would stand up back to the base teams, make sure they're up and trained and ready, and then we would have them go back to the client base. So that is something that we have done before that is very much a typical motion. As you look at products like Elevate Solutions and Retirement, there's probably a little bit more pull-through demand that's already available in the client base, and so we would stand up those back-to-the-base teams earlier as part of that launch. I think that's probably why we called out some pretty quick momentum on both of those two new product launches, but it's pretty much the same formula. It's really just running that playbook a little bit earlier with the two new product launches. And then from an AI perspective, it's certainly easier adoption for some of the features for clients, but we really are running the same playbook for the products that are monetizable and that customers have to make a purchase decision for.

Okay, great. And then, you know, at HR Tech a few weeks ago, it did feel like there's a diversity in the industry about how companies are evaluating sort of headless as a philosophy and how they're engaging with other AI tools. And so maybe just for Palocity, like how do you think about headless? How do you think about customers using quad and things like that to access your system? Thank you.

Sure. So, I think if you kind of take a step back, and our philosophy has always been very much kind of an open platform where, if you go back in our history, we'll integrate with a bunch of different providers for things that we don't do, and if a customer is needing us to integrate with a competitor because they feel like they want to use that solution for, I don't know, recruiting or performance, we've always been very open to that. We want to be able to deliver the best possible customer experience, and we've obviously expanded dramatically our marketplace over the last five to seven years, and I think that's the conversation around MCP and headless interaction is really the next iteration of that, and so if a customer wants to be able to interact in something like Cloud or OpenAI or any of the Frontier models, we do not have a problem with that concept at all. We wanted to deliver them the ideal experience, and we will meet them where they are, and so you'll see us continue with that philosophy in terms of our product roadmap on an ongoing Thank you.

Thank you. Our next question comes from the line of Patrick Walravens of Citizens. Your line is now open.

Oh, great. This is Kincaid on for Pat. Thanks for taking the question. I was just curious, when you guys talk to customers about different pricing models, seats, consumption, outcome, what are you hearing from them, and how are they thinking about it in terms of your new products?

I guess I would say there's a lot of consistency in our pricing conversations certainly over the course of the quarter. I think there's been a lot more talk in the market about the variability in pricing models that you're seeing with some of the different AI providers. I think in our industry at this point in time, We haven't seen any significant shifts in terms of the baseline pricing, whether that's on a PPM basis or per seat basis for some of our other solutions. So not to say that that doesn't evolve over the course of time. We certainly have had some of those conversations with clients, but I think you're seeing in our industry at this point in time grounding in the traditional pricing model. And I think for us, as we look forward, we just want to make sure that as we're rolling out new solutions, we have the flexibility to adjust from a pricing standpoint if the market evolves. And I think we've done a pretty good job of making sure that that's the case.

And then I just wanted to touch on the 15% increase in R&D spend. Could you give a little bit of color on kind of where that spend flows through your teams? And then if you can, I'd love to understand how you budget out from a token perspective. Is it like on a per engineer budget basis? Is this something on a per team basis, a segment?

I'd love some color on where that R&D money is going.

Well, I think if you step back and look at all the new products and solutions that we've launched over the course of the last six months or so, it's been a period of significant launch for us. A lot of those solutions we've talked about, whether it's... You know, recruiting or our recruiting optimizer, retirement, or the Elevate solutions, and then everything we've done from the Ignite AI standpoint, and as we look forward a bit, lead management. So it's been a pretty intense period of product development and launch, and so, you know, I think what you're seeing is the flow through of the investments that we've made that we called out that we would make in the course of last year, and all of that was positioned last year as investing for future growth, and I think what you're seeing Being in the quarter with all those launches is just the pull through of the success in the attach and penetration of those new solutions, which I think we're really excited about.

Yeah, and then I think to the other part of your question, we're definitely seeing efficiency using cogeneration tools within R&D, I think. The momentum that we have in terms of the number of product releases, the amount of features, customers are really starting to benefit from the efficiencies that we're seeing there. Obviously, this is all still early days, but we think there's a ton of opportunity for us to use tools like that to drive more innovation back to our customers, and it's pretty well adopted across our client base. We have a budget for these things. It gets managed like we do every other thing. That gets looked at very frequently, and we're pretty comfortable with the spend level and the ROI that we're getting on that.

Thank you so much.

Our next question comes from the line of Ramo Linskow of Barclays. Your line is now open.

Yeah. Hi, this is Sheldon McMeans on for RIMO. Thanks for taking the question here. I wanted to, you know, take a step back and ask about your thoughts on the durability of your AI differentiation in the market. And so, you know, it kind of seems like there's two opportunities. Of course, you can identify current solutions. You can, you know, maybe you talked about some solutions that wouldn't have been possible there without AI. And then there's also the engineering returns and making it easier to expand into new product areas. So, just like... You know, do you see, like, some of the things becoming table stakes and maybe the bigger opportunity is around, like, entering into new areas, getting that product velocity going?

Sure. You know, I'm pretty comfortable with... That part of the equation, because that's really how we've operated forever. At the end of the day, you know, we launched and we had payroll and a couple modules when we IPO'd in 2014. We added a bunch of modules based off product feedback and market demand. We then were really the first to drive kind of an employee experience with community and surveys and rewards and recognition. And so the idea of kind of moving into this next. You know, innovation cycle for our industry and leveraging AI to be able to maybe expand beyond the traditional HCM footprint is something that we were already on that path for the last couple years. This is just going to unlock more opportunity. And so we're never going to sit and tell you we're completely satisfied with what we have today. We're going to drive new innovation to the market. We're going to work with customers to be able to solve more of their problems. And we think that that's going to give us a bigger wall of share over time. And so I'm more excited today to Now that we've been making these investments and seeing customer interactions about the opportunities in front of us than AI than I was even a year or two ago.

That's great to hear. Thank you. And on Elevate, I wanted to ask if there's any metrics around attendance and engagement there compared to last year. And I think the attendance typically leans a little bit more on the existing customer side, but would be particularly interested in any color around new prospects. Thank you.

Yeah, I think it was really, looking back, I mean, just fresh coming out of it, I mean, it was a really successful event again this year, and I think we had a... It's a traditional mix of mostly, as you said, current clients with a fair number of prospects and attendants as well to give them a good sense of what it is like to be a part of the Paylocity family. And the attendance on a year-over-year basis was up slightly, so really happy with, you know, having, you know, just over 3,000 people in attendance at Elevate. Again, thank you to all of our clients who came and spent time with us, and I think it was a really successful event again this year.

Great.

Thank you.

Thank you. Our next question comes from the line of Matt VanVleet of Cantor Fitzgerald. Your line is now open.

Hi, this is Mason Marion on for Matt. Thanks for taking our questions here. I wanted to check in on Paylosity for Finance. So at the time of the Airbase deal, we discussed your longer-term ambitions of penetrating 10% to 20% of your installed base. Now that we're two years down the line, how are you tracking against those longer-term aspirations?

Yeah, I think we're tracking exactly to the plan. As we look back on the, you know, a little less than two years, I think, and certainly less than that since we launched the fully integrated solution, I'm really happy with how the team has progressed. Both in terms of integrating the business, integrating the product set, and really happy with how the go-to-market team has been able to sell those products, both in terms of new deals, attaching to new deals, and then also back into the customer base. So, in aggregate, I think we're really happy in tracking exactly to that plan.

Thank you.

Thank you. Our next question comes from the line of Jacob Smith of Guggenheim Securities. Your line is now open.

Hey, thanks for taking my question. On Elevate, was there pent-up demand when you launched the offering?

Is there a backlog that's giving you confidence to invest in a service organization so early, or was that part of the plan?

Can you just talk about what you're seeing so far in pipeline and ability to close those opportunities?

Yeah, I think we've seen a really strong pipeline, and we've also seen, I think, a strong ability to close those deals in the pipeline. And, you know, I think if we go back to some of the context we've given around the start of those solutions as an idea, I mean, we would frequently see clients coming to us and asking for the type of help that we are providing in the Elevate solutions. And so I think we believed that, and certainly had a large number of client conversations and market testing work leading up to that, but I think we believed that there was demand both in the market for new deals that we would bring in, and I think we also believed there was demand that was in the client base, and I think that's exactly what we've seen as we've actually gotten the solutions launched and out there in still early days. I mean, we're still in, really, I think, the first full quarter of having them live, and I think that's a lot of what has given us the confidence to invest in those teams to support that business. I think we're ultimately really happy with what we've seen so far from a demand standpoint coming through Q1.

And just to follow up there, too, is the expectation still that the margin profile will be similar to the broader software business?

It is. I mean, I think you heard Ryan a few minutes ago just talk about the investments that we've made across the board, both in product and tech and in service, to get those solutions launched. And you see, you know, some timing difference in expense here and there. But I think on an overall basis, as you look out across the end of this fiscal year and into next year, we absolutely believe that the margin profile will be the same.

Great. Thank you.

Thank you. Our next question comes from the line of Tomer Zilberman of Bank of America. Your line is now open.

Hey, guys. I think in the Q&A, you spoke a lot about the HCM market. You also addressed finance, but just wanted to touch a minute on the IT side of the equation, what you're seeing there. Your competitor last night called out strength there and just wanted to see if you're also seeing good progress there as well.

Yeah, I think we're really happy with both finance and IT. I think on a relative basis, it's a much smaller part of our business. We're newer in that category, but we've seen really good momentum. I think the concept of being able to tie back to the employee record and know when the events are happening in real time, then being able to tie IT, particularly as you think of onboarding and offboarding and all the things that need to happen from an employee perspective is really attractive to our customers. Early innings for that product overall, but we are excited with the momentum that we Are seeing and really it's all the new products that Toby just kind of went through and mentioned combined with the investments in finance and IT and additional HCM modules really contributed to a strong start.

Got it. Maybe as a follow up and an unrelated piece going back to the float business. Your guide is $15 million above the previous guide. I think last quarter you set out an expectation of two rate cuts. We've seen so far one rate hike with the potential for a second. Just curious what you're embedding. Is it just the one hike so far? Yeah, so we've factored in the September 25 basis point rate increase. We have no further changes to rates over the balance of the fiscal year. So, I think to the extent we see an increase, we will update you at that time with what the impact is to yield, and we provide the average daily balance every quarter. So, we'll be able to provide that math if that were to happen.

Thank you.

Thank you. Our next question comes from the line of Kevin McVeigh of UBS. Your line is now open.

Great. Thank you. I think you mentioned seeing some green shoots in new product, kind of the demand environment. Maybe help us understand what's been the source of that and the sustainability where that's, again, the new products that are driving that, where there's a little bit better demand. Just help us to dimensionalize that a little bit.

Yeah, I mean, I think I would maybe. Fabricate the new logos and then back into the client base. I think from a new logo standpoint, our view is that the demand environment remains really stable. I think the go-to-market teams have done a really good job coming into this year from an execution standpoint and bringing new logos into the business. Fairly well-balanced quarter in terms of the growth between ARPU increase and new unit increase. And then I think from a launching of new product standpoint, I think we're really happy with the balance that we've seen between attaching new products to new logos and then also being able to sell those products back into the client base and add value to our existing clients. So overall, I mean, I think we're – we think the demand environment's, you know, very stable and pleased with the execution of the teams, and, you know, I think it's been overall from a growth standpoint well-balanced across new business, sales back into the client base, you know, the contributions that the new products have made, and then ultimately the great job that our service team has done driving retention. So I think overall, solid quarter and pretty well-balanced from a performance standpoint.

That's helpful. And then I guess, you know, you've talked a little bit about AI starting to surface from a product perspective. Are you charging for that? Separately similar to a module, or is it wrapping into, you know, just other packages, or is it just, I guess, you know, how you monetize it, I guess.

Yeah, so if you think about our AI Ignite platform, there's multiple capabilities in a whole series of agents that are included in that platform. Some of those things are embedded in the flow of everyday work. So as you're completing your payroll process, our agent capability are going to reduce the number of errors, they're going to increase the efficiency, and they're going to produce more accurate results for you overall. And that's just embedded, and that's just part of our payroll platform, and we're not charging separately for you. But I can tell you that when we demo it and we talk about it with prospects, it's a differentiation. There's a whole series of agents. That's just one example. And then there's a second category of agents where we are really saving the customer a ton of time. It's something that they maybe don't purchase from us today. And then we are monetizing those separately. That's where recruiting optimizer and lead management category come in. And so we're selling those back to existing customers. We're bundling those in for new. So it's really kind of a combination of both. And, you know, as we think about it over time, we'll continue to add modules that we can monetize. We'll continue to add AI capabilities across the platform that we will include just as part of differentiation.

Thank you.

Thank you. This concludes the question and answer session. I would now like to turn it back to Toby Williams for closing remarks.

Thanks so much. Yeah, I just wanted to say thanks to all of you for your interest in Paylocity and a special shout out and thank you to all of our employees for the great jobs they're doing serving our clients. Thank you very much and have a great night.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.