Earnings Call Transcript - PCTY Q1 2026

Ryan Glenn, Chief Financial Officer

Good afternoon, and welcome to Paylocity's earnings results call for the first quarter of fiscal '26, which ended on September 30, 2025. 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 Paylocity. Today, we will be discussing the results announced in our press release issued after the market closed. A webcast replay of this call will be available for the next 45 days on our website under the Investor Relations tab. During the call, we will use certain 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 contains important factors that could cause actual results to differ materially from the forward-looking 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 Annual Needham Tech Week, the Cowen Virtual Human Capital Management Summit, the Barclays Global Tech Conference, the Raymond James 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.

Steven Beauchamp, Executive Chairman

Thank you, Ryan, and thanks to all of you for joining us on our first quarter fiscal '26 earnings call. We started off fiscal '26 with strong financial results with Q1 recurring and other revenue growth of 14% as our differentiated value proposition of providing the most modern software in the industry continues to see success in the marketplace. Total revenue was $408.2 million or 12% growth over Q1 of last year. 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 the recent launch of Paylocity for Finance, which expanded our market-leading workforce platform for HCM into the office of the CFO, which we have further expanded across IT. We are very pleased with the early response from both existing clients and prospects to the value proposition of managing all spend and key business workflows in a single AI-driven platform across critical company functions, HR, finance and IT, all driven by employee data, which contributed to our strong results in the quarter and the increased confidence reflected in our updated fiscal '26 guidance. Our AI strategy is also setting us apart in the market and contributing to our strong financial results and increased guidance as we expand and deepen AI capabilities throughout our platform to deliver the next level of business impact and user experience. For example, at HR Tech in September, we announced the next generation of our AI assistant, which now turns everyday questions into instant action by providing users the answer, data or the workflow needed across both desktop and mobile. With our AI assistant, users can now ask how many vacation days do I have left this year and immediately see their up-to-the-minute vacation balance with a direct link to submit a new request or a manager may say, 'Show me open headcount for my department.' And the AI assistant will show real-time openings for their specific teams or department and provide direct links for planning new hires, backfills or role transfers. We believe these enhancements will help to further increase the value proposition of our platform and is beginning to drive wider product adoption across our client base by enabling an even more simplified user experience with direct access to answers and actions. To this point, in the past year, usage of our AI-powered features has more than doubled, including over 1.2 million questions answered by our AI assistant. Our innovation also continues to be recognized by third parties as Paylocity was recently named as an overall leader across 10 HCM product categories in the latest G2 Fall 2025 Grid reports. I would now like to pass the call to Toby to provide further color on the quarter.

Toby Williams, President and CEO

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. 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 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. We also saw strong client retention in the quarter, which contributed to our strong financial performance and reflects our commitment to world-class client service and client partnership. As Steve noted, our AI strategy has continued to progress, delivering predictive and actionable insights, generative AI functionality, the Paylocity AI assistant and a growing number of autonomous agents across the platform to drive productivity through task and workflow automation that goes beyond the basic search capabilities that are considered table stakes in today's evolving AI landscape. Our continued investment in AI across our platform is driving increased adoption of our broader product suite with these new features resulting in simplified and connected user experience across HCM, finance and IT use cases, driving higher utilization and increased business value for our clients. While still in the early days, we are seeing this translate to stronger product penetration, higher average revenue per client and improving client satisfaction and retention. 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. For example, our engineering teams are now using AI coding assistants on a daily basis for code generation, testing and design mockups and are realizing increased productivity and code quality through these investments. Similarly, our operations teams have seen a reduction in client case volumes, and our sales teams are investing in AI tools to drive efficiencies in our go-to-market motion to automate rep day-to-day activities. We will continue to invest in AI and broader automation and believe these investments will drive further efficiencies and provide for more time to focus on strategic and value-added work for all of our teams while also driving continued leverage in our business over time. Next week, we will hold our annual Elevate Client Conference, where we will host thousands of business leaders representing HR, finance, IT and operations across dozens of sessions over the course of 2 days. At Elevate, we will highlight the continued investments in our differentiated AI strategy and our expanding platform capabilities, delivering automated workflows and seamless user experiences across the platform enabled by AI. In addition to our market-leading financial performance, our strong culture at Paylocity continues to be recognized externally as we were recently named to Time's America's Growth Leaders 2026 list. I would now like to pass the call to Ryan to review the financial results in detail and provide updated fiscal '26 guidance.

Ryan Glenn, Chief Financial Officer

Thanks, Toby. Total revenue for the first quarter was $408.2 million, an increase of 12%, with recurring and other revenues up 14% from the same period last year. Our sales team had a solid start to the year across both our HCM and finance suites, and we were pleased to come in $5.7 million above the top end of our revenue guidance, with the majority of our revenue beat once again coming from recurring and other revenue, allowing us to raise our fiscal year guidance by more than our beat in Q1. Our adjusted gross margin was 75.1% for Q1 versus 74% in Q1 of last year, representing 110 basis points of leverage 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 16.4% when compared to the first quarter of '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 regards to our go-to-market activities, on a non-GAAP basis, sales and marketing expenses were 21.3% of revenue in the first 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 8.8% of revenue in the first quarter versus 9.5% in the same period last year, representing 70 basis points of leverage. Briefly covering our GAAP results. For Q1, gross profit was $279.8 million, operating income was $74.2 million and net income was $48 million. Our adjusted EBITDA for the first quarter was $146.4 million or 35.9% margin and exceeded the top end of our guidance by $11.4 million, resulting in increased margin guidance for fiscal '26. Excluding the impact of interest income on funds held for clients, adjusted EBITDA margin for Q1 was up 110 basis points over Q1 of fiscal '25, and we continue to be pleased with our ability to drive both durable recurring revenue growth and expanded profitability. To this end, we remain focused on driving leverage by improving 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 is ultimately helping to drive increased adjusted gross margin, adjusted EBITDA and free cash flow. Additionally, given the confidence we have in our business and our strong cash flows, in Q1, we repurchased nearly 1.2 million shares of common stock at an average price of $172.30 per share for $200 million in aggregate repurchases. Since May of '24, we have repurchased approximately $500 million or 3 million shares and with $500 million remaining under the current repurchase program, we anticipate continuing to be active going forward. In addition to our expectations for continued growth in adjusted EBITDA and 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. In regard to cash flows, we expect the impact of the recent tax legislation changes to benefit fiscal '26 free cash flow by approximately $65 million as a result of a reduction in our fiscal '26 cash tax payments, primarily driven by changes to tax deductibility rules for domestic R&D costs, and we continue to be pleased by our ability to drive the best combination of recurring revenue growth and free cash flow margin in the industry. Looking at the balance sheet. We ended the quarter with $165.2 million in cash, cash equivalents and invested corporate cash and $81.3 million outstanding on our credit facility related to the Airbase acquisition with approximately $81.3 million repaid on our outstanding balance in Q1. In regard to client-held funds and interest income, our average daily balance of client funds was approximately $2.9 billion in Q1. We're estimating the average daily balance will be approximately $3 billion in Q2 with an average annual yield of approximately 360 basis points, representing approximately $27 million of interest income in Q2. On a full year basis, we are estimating the average daily balance will be approximately $3.25 billion with an average annual yield of approximately 340 basis points, representing approximately $110 million of interest income. In regard to interest rates, our guidance reflects the recent 25 basis point rate cuts in each of September and October with additional 25 basis point rate cuts in each of December, March and April. Note, our guidance reflects an additional 25 basis point rate cut during fiscal '26 versus our initial expectations for the year we provided on our August earnings call. Before I provide our updated financial guidance, as a result of the confidence we have in our ability to drive durable growth, the significant profitability increases we've realized over the last several years, the long-term opportunity we see in AI and automation benefits and natural scale in our business, we are increasing our long-term financial targets as follows: Our revenue target increases from $2 billion to $3 billion; our adjusted gross margin target increases from 75% to 80% plus; our non-GAAP total R&D target remains at 10% to 15% of revenue; our sales and marketing spend target decreases from 20% to 25% to 15% to 20% of revenue. Our G&A spend target decreases from 5% to 10% to 5% to 7% of revenue; our adjusted EBITDA margin target increases from 35% to 40% to 40% to 45%; our free cash flow margin target increases from 20% to 25% to 25% to 30%; and our stock-based comp target decreases from less than 10% of revenue to 5% of revenue, and we expect to make progress against these updated financial targets on a go-forward basis, and there is a table in our earnings press release that provides our prior and updated financial targets for reference. In regards to our financial guidance for Q2 and full fiscal '26, for the second quarter of fiscal '26, recurring and other revenue is expected to be in the range of $378.5 million to $383.5 million or approximately 10% growth over second quarter fiscal '25 recurring revenue. And total revenue is expected to be in the range of $405.5 million to $410.5 million or approximately 8% growth over second quarter fiscal '25 total revenue. Adjusted EBITDA is expected to be in the range of $131.5 million to $135.5 million and adjusted EBITDA, excluding interest income on funds held for clients, is expected to be in the range of $104.5 million to $108.5 million. And for fiscal '26, as a result of the strong results we are seeing across our HCM, finance and IT solutions and our confidence in our ability to continue to drive competitive differentiation in our AI strategy, we are increasing all aspects of our guidance as follows. Recurring and other revenue is expected to be in the range of $1.605 billion to $1.620 billion or approximately 10% growth over fiscal '25 recurring and other revenue. And total revenue is expected to be in the range of $1.715 billion to $1.730 billion or approximately 8% growth over fiscal '25 total revenue. Adjusted EBITDA is expected to be in the range of $615 million to $625 million and adjusted EBITDA, excluding interest income on funds held for clients, is expected to be in the range of $505 million to $515 million, which represents approximately 40 basis points of leverage at the midpoint. In conclusion, we are pleased with our Q1 results, the early success of Paylocity for Finance and the continued momentum we have across our sales and operations teams as we enter the busiest time of the year. Operator, we're now ready for questions.

Operator, Operator

Our first question comes from Brad Reback of Stifel.

Brad Reback, Analyst

Can you all give us an update on the macro, maybe how things were trending over the course of the quarter into October and your headcount assumptions in the updated guide?

Ryan Glenn, Chief Financial Officer

Yes. Brad, it's Ryan. I think, what we saw in the quarter was continued stability. So workforce levels at our clients were up a touch year-over-year, very consistent with what we saw in Q4, a little bit better than expectations. And from a guidance standpoint, continue to have the same philosophy. So we've assumed flat workforce levels over the balance of the fiscal year. That was our experience, as I said, not only in the quarter, but through October as well and continue to run the same playbook relative to guidance. So I feel like if we continue to see strong execution, we have the ability to beat and raise and continue to feel like we've got a level of prudence embedded in guidance as well.

Brad Reback, Analyst

That's great. And then switching to the updated long-term guidance, and I appreciate it may not be able to perfectly parse the answer on this. But if you think about the natural scale of the business driving the upside versus AI benefit helping to drive the upside, does it skew more one way than the other?

Ryan Glenn, Chief Financial Officer

Yes. I think, still early days from AI and automation. But I think, where we sit today, that gives us certainly incremental confidence on a multiyear basis to be able to continue to drive leverage. We've always had confidence that this business will continue to scale. That continues to be the case. You heard in the prepared remarks, Toby referenced reduced case volume we're seeing in our operational teams, all of our engineers using coding assistants. My teams are using it from a back-office standpoint as well. So not sure I'd parse out how to break out the leverage we'll see on a go-forward basis, but certainly seeing the early benefits both from a margin expansion standpoint as well as the ability for the teams to really focus on the most important elements of the business.

Operator, Operator

And our next question comes from Mark Marcon of Robert W. Baird.

Mark Marcon, Analyst

Really nice quarter. Wondering if you can talk a little bit about the office of the CFO and the Airbase acquisition. Can you give us a little bit more dimensions with regards to like number of clients approach, what the go-to-market motion is? I know it's early, but still any sort of reading on the sales trajectory, who is it appealing to the most, et cetera. We demoed it at HR Tech, and we thought it was really slick. And it sounds like it's got a really good ROI for users to take it up. So I'm just trying to get a little bit more color there.

Toby Williams, President and CEO

Mark, it's Toby. Thanks for your question. I'm glad you got the chance to actually check the product out at HR Tech. We're pretty proud of what we've been able to launch so far. And I think, I would start with just a few comments on the quarter. I think, to your beginning part of your question, I think it was a strong quarter really across the board for the business. And we had mentioned in the prepared remarks that the launch, which we did in July of V1 of the finance product, I think, has really been well received in the market. I think we are starting to see early days still, of course, just with the launch in July, but I think starting to see traction in the market, both from a new client perspective and back into the client base, which is an important part of the motion. To the part of your question on the go-to-market piece, those are both avenues for us, both with new clients coming on to the Paylocity platform and then being able to add that value through our platform back into the client base. So I think early days, but I think we're pleased with the momentum and the trajectory that we're seeing. I think the thesis has very much been validated in terms of the value of having that product set and that category on the platform and the value that, that can add to clients. So I think overall, we're pretty happy in the early days.

Steven Beauchamp, Executive Chairman

The one additional comment I would make, Mark, is the feedback we get from our field who we've got fully trained on the product, they're identifying prospects. They're really telling the broader story upfront. It's certainly helping from an overall differentiation perspective. And then we've got an inside sales team that can take those spend management opportunities and take them over the finish line. And so we're seeing really good partnership across our organization, and we're getting really good feedback that this is really resonating with prospects in our overall platform differentiation.

Mark Marcon, Analyst

That's great. The performance for the quarter was impressive. The EBITDA exceeded expectations by approximately $13.4 million, but the guidance was raised by less than the increase in EBITDA. What factors influenced this decision regarding the full year guidance for adjusted EBITDA?

Ryan Glenn, Chief Financial Officer

Yes, Mark, I think similar thoughts relative to a level of prudence in guidance. I think really happy with Q1, as you said, strong performance versus our expectations. We're certainly seeing some of the benefits of the investments we've made to continue to scale the business. There's always some timing elements, certainly one quarter into the year, want to maintain a level of flexibility to make the investments that we've talked about to drive continued growth. But at the same point, we are expecting increased profitability for fiscal '26. We're guiding to leverage again in Q2 as well. So probably some timing elements of that. And I think as you've seen historically, to the extent we continue to see overperformance, then that would accrue to increased margin as we go over the balance of the fiscal year.

Operator, Operator

And our next question comes from Daniel Jester of BMO Capital Markets.

Daniel Jester, Analyst

Maybe Steve or Toby, you've been talking about the opportunity in the IT department of your customers a little bit more recently. So I'd love if you can maybe expand on sort of the opportunity you see there? And how should we view that relative to Paylocity for finance?

Steven Beauchamp, Executive Chairman

Yes, from a product standpoint, we have a significant opportunity to better utilize the employee record data we possess to provide more comprehensive support for customers during employee onboarding and offboarding. We understand their employment details and departmental requirements, and our product can now store information about the necessary equipment. We can track all devices, and through partnerships and APIs, we can facilitate the delivery of equipment directly to the site. This approach enhances both asset management and identity management by effectively using employee record data. We're still in the early stages of this initiative, similar to our comments about Paylocity for Finance. However, I want to reiterate that this is essential for overall platform differentiation. We're receiving excellent feedback from clients currently using the service. By combining a leading modern HCM platform with scalability across finance and IT, we believe we offer a more unique value proposition than we did a year ago before launching these two categories.

Daniel Jester, Analyst

Great. And then on the updated financial targets that you provided today, I guess, why was this the right time to update them? If I remember correctly, I think you just updated the $2 billion revenue target, not even 2 years ago. So maybe a little more context would be helpful in terms of why you decided to make these adjustments to the long-term model today?

Ryan Glenn, Chief Financial Officer

Dan, it's Ryan. I think we've obviously been really pleased with the progress we've made across those prior targets, which we did set in August of 2023. Since that time, we've driven several hundred basis points of EBITDA leverage, free cash flow leverage as well. We've reduced stock-based comp. So I think these updated targets are really just an acknowledgment of what we see as continued confidence in the ability to scale the business, having made a lot of progress against those prior targets, it felt like the right time to acknowledge the fact that we continue to have a lot of confidence in driving durable revenue growth across the business, being able to scale from a profitability standpoint. And I think this is that natural extension. When you start to layer on the early benefits we're seeing from AI, I think that is another element that as we looked at where we are from a financial standpoint, gave us incremental confidence. And as you think about that $3 billion target, 25% to 30% free cash flow, this is a very attractive opportunity for us and one that we think when you look at $3 billion of revenue, 30% free cash flow margin, what we're really excited about what that can be on a multiyear basis.

Operator, Operator

And our next question comes from Terry Tillman of Truist Securities.

Connor Passarella, Analyst

This is Connor Passarella on for Terry. I just wanted to follow up on the previous one, looking at the long-term targets, specifically around the updated $3 billion of total revenue. So I guess just as you look at FY '26 here, maybe what are the 1 or 2 execution milestones, whether it's cross penetration of Paylocity for finance, attach rates on newer modules or even partner productivity that you kind of view as the highest confidence drivers towards driving towards that $3 billion long-term target?

Steven Beauchamp, Executive Chairman

Yes, sure. So I'll start. So first of all, I think I'd like to mention that we've got a huge TAM. And so we're still relatively low penetration in terms of the total addressable opportunity in front of us. And so we think there's a ton of runway just in the HCM category. So by no means extending into these other categories does that mean we don't think we're excited about what we can do in HCM. And then I think when you add on top of that, the ability for us to expand that TAM, HCM TAM by moving into the office of the CFO as well as IT, it gives us even greater confidence and be able to scale this business from under $2 billion today to that $3 billion target. And then to Ryan's point, hitting all of those other profitability metrics at the same time.

Toby Williams, President and CEO

The only thing I'd add is I think there's all of the above element to your question in terms of continuing to drive the unit growth consistently that we have been able to drive and also increasing the overall ARPU on a go-forward basis. And that's, I think part of what Steve said is what gives us the opportunity to do that on the ARPU element. But I think as we look at '26 in particular, I think we're taking, again, same as we did last year, a pretty balanced view of the ability to continue to drive new client acquisition, drive unit growth while also expanding the ARPU, which has been, I think, a key part of the growth algorithm for years. And I think we see that same opportunity as we look forward to that $3 billion mark.

Connor Passarella, Analyst

Yes, that's great and really helpful. As a follow-up, as you continue to market Paylocity for Finance, how are you considering the pricing? Are you thinking more about a stand-alone testing approach versus a bundled one? What are you learning about clients' willingness to pay from early adoption?

Toby Williams, President and CEO

Most of the way we price our offerings is primarily on a bundled basis, which is something we have consistently done. This approach applies whether we’re addressing needs in the finance and spend management area or from an IT perspective. Our strategy remains steady as we aim to expand in these domains and continue using the bundled model for both new clients and existing ones.

Steven Beauchamp, Executive Chairman

I think the only thing I would add is we have the flexibility with some of these newer product offerings. If we think that a per user model is more attractive to the market, we can easily pivot to that. To Toby's point, we kind of sell it as a bundle and here's what your whole overall annual spend would be, here's the ROI you're going to get on that investment. So no real change in the sales motion, but we definitely see some of our products being priced on a per user basis, obviously, a higher price point, lower number of users, whereas the HCM products are largely on a per employee basis.

Toby Williams, President and CEO

I think the interesting thing about what we've seen so far as we've gone to market still in the early days is the fact that there is a willingness to pay based on the value that's being delivered. So I think that's certainly a part of the traction that we've seen is clients and prospects are finding value in it. They're willing to invest in it. And that has not been a challenge from a value perceived and price perspective.

Operator, Operator

And our next question comes from Siti Panigrahi of Mizuho.

Sitikantha Panigrahi, Analyst

I would like to focus on the comments about the strong demand environment. Can you share insight into the demand you're observing in various employee segments? Specifically, with your platform offering finance, HR, and IT, what kind of feedback are you receiving from different employee segments regarding the value you provide compared to your competitors?

Toby Williams, President and CEO

Yes. I think through the course of Q1, we've seen a very stable demand environment. I think really pleased with the results overall in Q1. And I think that's part of what's reflected in that is the strength of the execution in our go-to-market teams, and that was really well balanced across the entirety of the target market that we're focused on. So I wouldn't call out any specific difference whether it's in HCM or the finance area in any segment that we have, I think it's pretty broad-based. And I think the demand environment was stable throughout the course of the quarter. And I think our teams did a really good job from an execution perspective in go-to-market across the segments that we're in.

Sitikantha Panigrahi, Analyst

Okay. And as you talk about efficiency gain from all the AI uses in engineering, sales, marketing and operation, it's early stage at this point. But as you gain efficiency, are you planning to invest back that more into your go-to-market and sales to drive growth? Or are you going to offer more efficient margin?

Steven Beauchamp, Executive Chairman

Yes. I believe we have maintained a consistent strategy aimed at improving margins across most areas. We also recognize a significant opportunity to keep investing in our products to drive growth. This is evident as our R&D expenditures have increased, and concurrently, we've achieved margin improvements across other areas that offset this increase. We continually strive to find the right balance in our decisions. We are optimistic about the long-term potential of the business and see excellent opportunities to invest in R&D while also enhancing efficiency in other divisions. This is reflected in the new long-term guidance we have announced today.

Operator, Operator

And our next question comes from Raimo Lenschow of Barclays.

Sheldon McMeans, Analyst

This is Shel McMeans on for Raimo. I would love to ask, you have your upcoming Elevate conference. Is there any insight from sign-ups for the event or broadly from your top of funnel metrics that you're seeing? And can you speak to how that plays into your thinking entering the large end of your selling season?

Toby Williams, President and CEO

Well, I think so far, I mean, you can see what I think we believe were pretty strong results in Q1. So I think we're pretty happy with how our go-to-market motion has progressed through the course of the fiscal year. You're right, we're definitely in the heart of selling season. And I think I would just give you that same commentary. I think we've been really pleased with our go-to-market initiatives and efforts throughout the course of the year so far to date. And I think we're certainly excited about Elevate. That's always a great opportunity for us to spend time with our existing clients and really excited about the registration levels that we've seen so far. So I feel like we have had year-to-year positive momentum with Elevate, and I think we do again this year. And I think we are, again, just excited to be able to spend time with clients. It's always, I think, a valuable set of days for us.

Sheldon McMeans, Analyst

I understand. I would like to ask about the new generation of the AI assistant. Sometimes it's beneficial when your sales team has a new product to showcase. I realize you’re not directly monetizing it, but is there a chance to engage with your existing customers, demonstrate this new product, and possibly encourage further platform expansion? My understanding is that to derive the maximum value from the AI solution, all underlying modules need to be in place.

Steven Beauchamp, Executive Chairman

Yes. I think you heard us say in the prepared remarks that some of our investments in AI are driving broader product adoption and kind of sale back to the client base. And so I think you're absolutely correct. The more products you use, the more value you can get out of these integrated AI experiences where something that might be more difficult to use, I might have to take 3 or 4 different steps to figure that out, it's pretty seamless certainly from an employee and manager perspective, I can use natural language. I can interact with the software, really simplifies the user experience, and it really makes that value proposition much easier for a customer to implement and use. I think we're still in the early innings of that, but we are definitely seeing that trend early on. And I think if you really talk to the customers, that's where they're getting a ton of value. My employees are going to be asking me less questions because it's super easy for them to get things done. I myself as an administrator, you've reduced the number of steps that it takes for me to accomplish the task. You're automating from an agentic experience, things that I used to have to do manually. And so that's the concept really where we see the differentiation opportunity. And the simpler we can make that user experience, the more product adoption. And I think that it's also true as you start to extend beyond HCM and think about the integrated experience across IT and finance.

Operator, Operator

And our next question comes from Jared Levine of TD Cowen.

Jared Levine, Analyst

I first want to start on your IT offerings. So with the Airbase acquisition, you called out an ARPU comparable to HCM somewhere in the neighborhood of like $25,000 to $30,000. Can you talk about the ARPU opportunity your IT offerings present?

Steven Beauchamp, Executive Chairman

Yes. I would say it's a little bit smaller. We're a little bit earlier in the launch of that cycle. We certainly have clients on it. We are actively selling it in the market. But we're probably just from a timing perspective, a couple of quarters behind where we were with the Airbase offering. I don't think we're prepared to give you kind of the exact number. What I would say is it's larger than most of our HCM modules. And so I think we're excited about that. So it's a good sized revenue opportunity. And again, some of this is a little bit of pricing mix. Some of you had to price on a per user basis versus per employee. So there's a mix there. But think about it as somewhere between one of our larger HCM modules and that Airbase number.

Ryan Glenn, Chief Financial Officer

Well, I think we're calling that out as a one-time benefit in fiscal '26. So you'd have to adjust the model as that benefit would not be recurring. I think there are likely some other tailwinds from the new tax legislation that will help in '27, but that big element, that $65 million is one-time. So I would adjust that out in '27. Outside of that, there's nothing at this time that I would call it on free cash flow other than the fact that we would expect to continue to drive leverage certainly in '26, but on a go-forward basis as well.

Operator, Operator

And our next question comes from Jacob Roberge of William Blair.

Jacob Roberge, Analyst

Just wanted to follow up on the demand environment. Can you talk more about how the start to the end of the year selling season has gone thus far? And just how the pipeline you're seeing this year may compare to some of those prior year periods?

Toby Williams, President and CEO

Yes, I think things have been going well so far. We've described the demand environment as stable, and if we look at it from a quarter-to-quarter perspective over the last year, we noted consistent stability in demand along with strong execution from our go-to-market teams. This strong performance has carried into fiscal '25 and continues into Q1 as we enter the main selling season. The demand environment remains stable, and our teams are executing effectively. We are pleased with the momentum we've seen in both our pipeline and conversion rates.

Jacob Roberge, Analyst

Okay. That's helpful. And then just on the sales side, now that you're selling a bigger platform into a few different departments, are you seeing any changes to the time it takes you to close a deal just given you may need more signatures? Or have those remained fairly consistent since the launch of Paylocity for Finance?

Steven Beauchamp, Executive Chairman

Yes. I would say, no, we have not. We've been very conscious of that fact. And I think our go-to-market strategy really mitigates the potential to have elongated sales cycles. So we're very comfortable getting them up and running on any of the products first and foremost, and it typically happens with HCM since that's obviously the bigger part of our suite today. And then they may take a little bit longer to implement any of the additional modules. That's a motion we're very used to that happens sometimes even within the HCM products. And so we try to get them up and running, deal with the decision-makers that are ready to move. I think it's important that they understand the breadth of the platform. And then sometimes they implement at the same time, sometimes they implement a little bit later, and sometimes we got to go back and sell them the additional products, which is a very consistent motion with finance, IT, just as it was with the additional HCM module. So no elongated sales cycles.

Toby Williams, President and CEO

I would also say that it is common for selling HCM to involve discussions with representatives from other areas. Therefore, the notion that this is a completely new approach with an entirely new buyer is inaccurate. Typically, we engage with the Head of HR, someone from finance, and someone from IT, which could include the CIO, CFO, and Head of HR. Often, it's members of their teams, but we generally deal with individuals across all three of those areas.

Operator, Operator

And our next question comes from Scott Berg of Needham & Company.

Ian Black, Analyst

This is Ian Black on for Scott Berg. Does the Paylocity for Finance solution impact your long-term financial targets at all? Is there an impact on gross margin specifically?

Steven Beauchamp, Executive Chairman

Yes. We've had that question in the past that we were pretty comfortable that over time, we can get the Paylocity for Finance solution to be similar margins to the rest of our portfolio. And I think you see that kind of reflected in our confidence in increasing the target for long-term gross margin. So we don't necessarily see that as being a headwind at all.

Operator, Operator

And our next question comes from Samad Samana of Jefferies.

Jordan Boretz, Analyst

This is Jordan Boretz speaking for Samad. Congratulations on the strong results. I wanted to discuss the competitive landscape briefly. You mentioned that product differentiation within your platform is a key strength. Given the ongoing consolidation in the market at both the high and low ends, particularly with Dayforce and Paycor, are you noticing any significant changes in win rates against those competitors, especially in the lower market segment as that area adjusts to the evolving conditions?

Steven Beauchamp, Executive Chairman

Yes. We've always believed that our product portfolio is distinct, and while the competitive landscape has been challenging, it continues to be so. The value we provide, as Toby highlighted, being broker-neutral and broker-friendly, has been essential to our strategy for many years. This uniqueness has allowed us to maintain a leadership position in that area. Some consolidation in the market is definitely beneficial for us. However, it’s crucial to focus on winning through the quality of our product and service every day. It’s a competitive market, and we are very proud of what our sales team achieved in the first quarter.

Jordan Boretz, Analyst

Awesome. And then on the go-to-market side, I was wondering if you can maybe parse out how sales rep productivity is trending versus hiring and how hiring is trending versus your initial expectations into the year?

Toby Williams, President and CEO

Yes. I think we came into the fiscal year with around an 8% increase in headcount. And obviously, you can see where we landed the quarter and where we've guided the year. So I think our focus going into fiscal '25 and then coming into fiscal '26 again was to be able to drive the type of performance that we've actually delivered and to be able to do that focused on our sales rep and go-to-market productivity, which, again, I think by looking at the headcount increase versus the amount of growth we've been able to deliver in Q1, I think we've done that again in Q1 of fiscal '26. So overall, I think we continue to focus on the productivity of the teams, including our go-to-market teams, and I think that's what we've delivered again in Q1.

Jordan Boretz, Analyst

Congrats on the strong start to the year.

Operator, Operator

And our next question comes from Brian Peterson of Raymond James.

Jessica Wang, Analyst

This is Jessica on for Brian. I was just thinking a bit of a follow-up to earlier discussions we've had at comments is as you have this increasingly differentiated value of your platform, are you seeing customers trying to trend towards landing with more products than prior cohorts were? Or has this been more of a benefit of saying like Paylocity, you guys have more places that customer can land on and then from there building out to expanding later?

Toby Williams, President and CEO

I believe we've witnessed both aspects. In line with Steve's comments, we've experienced differentiation gains from our broader platform, which aids us in overall client acquisition and unit growth. Over an extended period, we've consistently seen an increase in the amount we realize from the total chargeable amount on the platform. This indicates that clients are consistently taking a larger portion of products from us year after year. Additionally, we benefit from selling those products back into our customer base. This is evident in our differentiation, which drives higher average revenue per user at the time of client acquisition, as well as the ability to achieve an overall higher average revenue per user as we sell more to our existing customers over time.

Operator, Operator

And our next question comes from Pat Walravens of Citizens.

Kincaid LaCorte, Analyst

This is Kincaid LaCorte on for Pat. You guys highlighted your sales reps are going to be using some AI tools to automate parts of their go-to-market. Is there any specific tools that you could call out there?

Toby Williams, President and CEO

Yes. When we look at the technology our sales and marketing teams are using, our goal has been to identify opportunities to automate everyday processes, including those of our sales representatives. We assess the AI tools available in each piece of technology to ensure we maximize their use, while continuously seeking ways to automate these processes. My earlier comments were addressing this broad approach to the technology we employ in our go-to-market strategy.

Kincaid LaCorte, Analyst

And then on the brokerage channels, it's more than 25% of your new business in Q1. Is there a level that you'd like to see that get to? Or is it around where you hope it is?

Toby Williams, President and CEO

Well, I mean, I think we've been saying for a very long time, making the same comment that we've been able to drive more than 25% of new business coming from the broker channel. And Steve made the comment before that when the business went public in 2014, looking at the size and scale of it then and now as you see us guiding towards just under $2 billion in revenue for this fiscal year, our ability to continuously for the last decade plus, deliver 25% of our new business coming from the broker channel, I think, is a testament to the focus that we put on it, the investments from a technology perspective that we've made that well serve the broker channel and their clients. And then I think ultimately, the investment that we have made to build those relationships over that period of time. And I think it reflects the fact that they see real value and real partnership in how we approach business with them. And I think overall, I think we're really pleased at what we've been able to deliver in Q1, the part that the broker channel has played in that and look forward to continuing to partner with our broker channel throughout the course of the rest of the year.

Operator, Operator

I show no further questions at this time. I'd like to turn it back to Toby Williams for closing remarks.

Toby Williams, President and CEO

Yes. I just want to thank everybody for their interest in Paylocity. Thanks for your time tonight. And certainly, a large thank you to all of our employees who helped make Q1 great. Thank you again. Have a good night.

Operator, Operator

This concludes today's conference call. Thank you for participating, and you may now disconnect.