Paylocity Q4 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 5, 2025

Key Takeaways

  • Positive Sentiment: Paylocity delivered 14% recurring revenue growth in Q4 and 15% for FY25, with total revenue up 12% in Q4 and 14% for the year, outperforming guidance by $10.2 M.
  • Positive Sentiment: The company launched Paylocity for Finance, integrating finance and HCM on a single platform to cross‐sell into its ~41,650 clients and expand its market opportunity.
  • Positive Sentiment: Ongoing R&D investment at 14.3% of revenue fueled product differentiation—evidenced by an 8% rise in average revenue per client to $35,300 and a third consecutive TrustRadius award.
  • Positive Sentiment: Fiscal Q4 adjusted EBITDA margin reached 32.6% and FY25 margin hit 36.5%, while free cash flow margin expanded to 21.5%, enabling a FY26 outlook of ~9% recurring revenue growth.
  • Positive Sentiment: Go-to-market strength was bolstered by an 8% salesforce expansion (to 952 reps), over 25% of new business via brokers, and a stable >92% revenue retention rate.
AI Generated. May Contain Errors.
Earnings Conference Call
Paylocity Q4 2025
00:00 / 00:00

There are 13 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Paylocity Holding Corporation Fourth Quarter twenty twenty five Fiscal Year Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press 11 on your telephone.

Operator

You will then hear an automated message advising that your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ryan Glenn, Chief Financial Officer. Please go ahead.

Speaker 1

Good afternoon, and welcome to Paylocity's earnings results call for the fourth quarter and fiscal year 'twenty five, which ended on 06/30/2025. 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 forty five days on our website under the Investor Relations tab. Before beginning, we must caution you that today's remarks, including statements made during the question and answer session, contain forward looking statements.

Speaker 1

These statements are subject to numerous important factors, risks and uncertainties which could cause actual results to differ from the results implied by these or other forward looking statements. Also, these statements are based solely on the present information and are subject to risks and uncertainties that can cause actual results to differ materially from those projected in the forward looking statements. For additional information, please refer to our filings with the Securities and Exchange Commission for the risk factors contained therein and other disclosures. We do not undertake any duty to update any forward looking statements. Also, during the course of today's call, we will refer to certain non GAAP financial measures.

Speaker 1

We believe that non GAAP measures are more representative of how we internally measure the business, and there is a reconciliation schedule detailing these results currently available in our press release, which is located on our website at paylocity.com under the Investor Relations tab and filed with the Securities and Exchange Commission. Please note that we are unable to reconcile any forward looking non GAAP financial measure to their directly comparable GAAP financial measure because the information which is needed to complete a reconciliation is unavailable at this time without unreasonable effort. In regard to our upcoming conference schedule, we will be attending the KeyBanc Technology Leadership Forum and the Stifel Technology Executive Summit. Please let me know if you'd like to schedule time with us at either of these events. With that, let me turn the call over to Steve.

Speaker 1

Thanks, Ryan, and thanks to all

Speaker 2

of you for joining us on our fourth quarter and fiscal twenty twenty five earnings call. Our differentiated value proposition of providing the most modern platform in the industry continues to resonate in the marketplace and help drive recurring revenue growth of 14% and total revenue growth of 12% in Q4. For fiscal twenty twenty five, recurring revenue growth grew 15% and total revenue grew 14% as we ended the year with $1,600,000,000 of revenue. Our sustained multi year investment in R and D has resulted in continued product differentiation and a significant expansion of our product suite, which has helped drive durable recurring revenue growth and continued expansion of our average revenue per client. Most recently, we announced the launch of Paylocity for Finance, expanding our market leading modern workforce platform for HCM into the office of the CFO and bringing both finance and HR together through a unified system grounded in the employee record.

Speaker 2

With the addition of Airbase and our previously launched headcount planning solution, Paylocity for Finance delivers a comprehensive suite of tools that connects day to day spend management with strategic workforce planning, reflecting our vision to equip leaders with modern AI powered solutions that bridge the gap between HR and finance on our single unified platform. Going forward, our clients can now manage both payroll and non payroll spend in a single platform and eliminate disconnected systems, manual processes and approval bottlenecks. Product expansion has been a key part of Paylocity's growth algorithm for over a decade and we believe Paylocity for Finance, together with the continued expansion of our HCM portfolio, will drive further growth over time in our average revenue per client, which reached just over $35,300 in fiscal twenty twenty five compared to $32,800 in fiscal twenty twenty four, an increase of approximately 8%. We believe Paylocity for Finance represents a significant multi year opportunity for both new clients and to cross sell back into our 41,650 existing client base, which grew 7% from fiscal twenty twenty four. Our commitment to product development also continues to be recognized in the market, with Paylocity recently winning a TrustRadius top rated award in HR management software for the third year in a row.

Speaker 2

I would now like to pass the call to Toby to provide further color on the quarter.

Speaker 3

Thanks, Steve. In Q4 and fiscal twenty twenty five, our differentiated position in the market was reflected in solid sales execution and we have continued investing in our go to market functions to carry this momentum into fiscal twenty twenty six across sales, marketing and channel referrals. Coming into fiscal twenty twenty six, we expanded our sales force by 8% to nine fifty two sales reps and will be focused on continuing to drive productivity and efficiency across our teams. Consistent with prior years, we are pleased to be fully staffed to begin fiscal twenty twenty six, and we continue to successfully attract the best sales talent in the industry, positioning us well for durable recurring revenue growth. We also saw another strong year of channel performance, primarily from benefit brokers, who once again represented more than 25% of new business in fiscal twenty twenty five.

Speaker 3

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 in support of our referring brokers and their clients. Revenue retention also remained consistent at greater than 92% in fiscal twenty twenty five, and we remain committed to investing in our operations teams to deliver world class service to our clients. As Steve highlighted, are excited about the opportunity with the recent launch of Paylocity for Finance, which represents the natural evolution of our mission to simplify work through innovation and empowers finance teams with AI powered automated solutions seamlessly integrated into the Paylocity platform, including headcount planning, expense management, AP automation, corporate cards, and guided procurement. By unifying data and connecting critical workflows, we're delivering enhanced visibility, improved efficiency, and an exceptional user experience that drives increased value across HR and finance teams and their employees.

Speaker 3

Employees will now be able to submit expense reports and spend requests in the same system they already use for payroll, time tracking, and benefits, while managers will benefit from a single centralized task list for all approvals, whether for time off, expenses, or purchases. This unified experience minimizes friction, accelerates financial processes, provides better controls, and ultimately drives increased value from a single platform. For example, an early adopter has consistently struggled to manage approvals and spend requests across multiple disconnected systems, leading to bottlenecks and delayed decisions, sometimes taking up to forty five days to complete a purchase. After implementing Paylocity for Finance, including AP automation and guided procurement, the client was able to streamline their approval cycle by eliminating numerous manual steps and integrating seamlessly with their existing critical systems, driving greater efficiency and generating time savings for their finance teams. With features like invoice matching, they now have full confidence that incoming invoices align with pre approved spend, ensuring every purchase is backed by clear accountability and real time visibility.

Speaker 3

Our strong culture, industry leading software innovation and exceptional sales and operational execution would not be possible without the dedication and commitment of our employees. As we close out a very strong fiscal twenty twenty five, I'd like to thank all of our people and teams for a fantastic year. The strong culture at Paylocity also continues to be recognized externally as we recently were named by Newsweek as one of America's greatest workplaces for Gen Z, listed by Time as one of America's best mid sized companies and included in the Association for Talent Development's twenty twenty five Best Award Winners list. I would now like to pass the call to Ryan to review the financial results in greater detail and provide an initial outlook on fiscal 'twenty six.

Speaker 1

Thanks, Toby. Recurring revenue for the fourth quarter was $369,900,000 an increase of 14%, with total revenue up 12% from the same period last year. As Toby noted, our sales team had another solid quarter and we were pleased to come in $10,200,000 above the top end of our revenue guidance, with the majority of our Q4 revenue beat coming from recurring and other revenue. Adjusted EBITDA for the fourth quarter was 130,700,000.0 or 32.6% margin and exceeded the top end of our guidance by $8,000,000 For fiscal 'twenty five, adjusted EBITDA was $583,000,000 or 36.5% margin and an increase of 15% on a dollar basis from fiscal 'twenty four, resulting in leverage of 50 basis points. Excluding the impact of interest income on funds held for clients, adjusted EBITDA margin for fiscal 'twenty five was 31.2%, reflecting operating leverage of 120 basis points versus fiscal 'twenty four and approximately two twenty basis points of organic operating leverage when excluding the impact of Air Base.

Speaker 1

Additionally, we continue to show strong growth on free cash flow, with fiscal 'twenty five free cash flow margin of 21.5%, representing an increase of 12% on a dollar basis from fiscal 'twenty four despite facing material headwinds as we transition to full cash taxpayer status, the impact of lower interest rates, and the headwinds from the Air Base acquisition. Excluding the impact of interest income on client held funds, we expanded free cash flow by approximately 19% in fiscal twenty twenty five, representing margin expansion of 50 basis points. We continue to have confidence in our ability further expand free cash flow on a go forward basis. We continue to make significant investments in research and development, and to understand our overall investment in R and D, it is important to combine both what we expense and what we capitalize. On a combined non GAAP basis, total R and D investments were 14.3% of revenue in fiscal 'twenty five, and on a dollar basis, our year over year investment in total R and D increased by 14% when compared to fiscal 'twenty four.

Speaker 1

We continue to believe our investments in R and D provide us with valuable product differentiation and the ability to drive future growth as we deliver the most modern platform in the industry. On a non GAAP basis, sales and marketing expenses were 23.1% of revenue in the fourth quarter and 21% of revenue in fiscal 'twenty five. On a non GAAP basis, G and A costs were 9.7% of revenue in the fourth quarter and on a full year basis, G and A costs were 9.3% of revenue and we remain focused on continuing to drive leverage in our G and A expenses on an annual basis. Briefly covering our GAAP results. For Q4, gross profit was $271,900,000 operating income was $66,200,000 and net income was $48,600,000 For the full year, gross profit was 1,100,000,000.0 operating income was $3.00 $4,000,000 and net income was $227,100,000 In regard to funds held for clients and interest income, our average daily balance of client funds was $3,100,000,000 in Q4 and $3,000,000,000 for fiscal 'twenty five.

Speaker 1

We are estimating the average daily balance will be approximately $2,850,000,000 in Q1 of fiscal 'twenty six, with an average annual yield of approximately three ninety basis points, representing approximately 27,500,000 of interest income in Q1. On a full year basis, we are estimating the average daily balance will be $3,150,000,000 in fiscal 'twenty six, with an average yield of approximately three fifty basis points, representing approximately $110,000,000 of interest income. In regard to interest rates, our guidance assumes four twenty five basis point rate cuts during fiscal 'twenty six, with a cut in September, December, March and April reflected in our guidance. Additionally, given the confidence we have in our business and our strong cash flows, we repurchased approximately 315,000 shares of common stock at an average price of $178.21 per share for $56,000,000 in aggregate repurchases during Q4. In total, for fiscal 'twenty five, we repurchased approximately 800,000 shares of common stock at an average price of $190.16 per share for roughly $150,000,000 in aggregate repurchases.

Speaker 1

In July, our Board increased our share repurchase authorization by an additional $500,000,000 In addition to the increased authorization, as of June 30, we had approximately $200,000,000 remaining under the existing repurchase program and anticipate continuing to execute against the repurchase program going forward. In fiscal 'twenty five, we also drove 140 basis points of leverage in stock based comp expense and achieved our target of less than 10% of revenue, as stock based comp expense was down year over year on a dollar basis for the second consecutive year. In regards to the balance sheet, we ended the fiscal year with $398,100,000 in cash, cash equivalents and invested corporate cash and $162,500,000 outstanding on our credit facility related to the Airbase acquisition, with approximately $81,000,000 repaid on our outstanding balance in Q4. Finally, I'd like to provide our guidance for Q1 and full fiscal year 'twenty six, which includes the impact of 100 basis point interest rate cuts in fiscal 'twenty six and flat workforce levels in fiscal 'twenty six versus fiscal 'twenty five. For the '6, recurring and other revenue is expected to be in the range of $370,000,000 to $375,000,000 or approximately 12% growth over first quarter fiscal 'twenty five recurring and other revenue.

Speaker 1

And total revenue is expected to be in the range of $397,500,000 to $402,500,000 or approximately 10% growth over first quarter fiscal 'twenty five total revenue. Adjusted EBITDA is expected to be in the range of $131,000,000 to $135,000,000 and adjusted EBITDA, excluding interest income on funds held for clients, is expected to be in the range of $103,500,000 to $107,500,000 And for fiscal 'twenty six, recurring and other revenue is expected to be in the range of 1,597,000,000 to $1,612,000,000 or approximately 9% growth over fiscal 'twenty five recurring and other revenue. Total revenue is expected to be in the range of $1,707,000,000 to $1,722,000,000 or approximately 8% growth over fiscal twenty twenty five. Adjusted EBITDA is expected to be in the range of $608,500,000 to $618,500,000 And adjusted EBITDA, excluding interest income on funds held for clients, is expected to be in the range of $498,500,000 to $508,500,000 representing approximately 20 basis points of leverage at the midpoint. In conclusion, as we kick off fiscal twenty twenty six, we remain confident in our differentiated value proposition, go to market strategy, operational strength and product roadmap and believe our predictable business model and execution, durable recurring revenue growth and prudent approach to guidance sets us up for a strong fiscal 'twenty six.

Speaker 1

A combination of industry leading recurring revenue growth and free cash flow margin, a long track record of strong and consistent revenue retention and expanding both our client base and average revenue per client, we have a high level of confidence in our ability to continue to drive sustainable revenue growth and increase margin on a multiyear basis as we execute against our goal of surpassing $2,000,000,000 in total revenue. Operator, we're now ready for questions.

Operator

Certainly. And our first question will be coming from Scott Berg of Needham and Company. Your line is open, Scott.

Speaker 4

Hi, everyone. Really nice quarter and thanks for taking my questions here. A couple of them. Don't know who wants to take this between probably Steve and Toby, but how do we think about the demand environment right now? I kind of look at your results and ARPU growth remained really strong in the year.

Speaker 4

Customer growth is normalizing towards mainly pre pandemic level, maybe a little bit elevated from that. But a really consistent number right now, this how we should view the environment? It's kind of baked in your guidance into 26%. Are there any puts and takes with the ability to maybe move that customer acquisition kind of number maybe up or down in the year?

Operator

Please stand by. Again, ladies and gentlemen, we do appreciate your patience. Please stand by. Ma'am, please stand by. We do appreciate your patience.

Operator

Please stand by.

Speaker 2

Operator, can you

Speaker 1

hear us now?

Operator

You are loud and clear. Our first question will come from Scott Berg. Your line is open, Scott.

Speaker 4

Hi, everyone. For some reason, I thought you didn't like my question. That was the Scott, end of the

Speaker 2

we can hear you. You couldn't hear us. So we can pick up from

Speaker 1

your question and jump to the answer, if that's helpful.

Speaker 4

That works great, thanks.

Speaker 1

Yes, I appreciate the

Speaker 3

patience and thanks for the question, Scott. So, I mean, I think relative to the demand environment, I think we saw a fairly stable demand environment across the course of the year and that's what we continue to see in Q4 as well. And to your comment or to part of your question, I think we saw relative stability in the year to year growth in units in through 2025 and then the same thing with respect to ARPU with ARPU growth and unit growth being fairly evenly distributed through the course of 2025. And so ultimately with all those things, really happy with the execution from a go to market and from a sales team perspective throughout the course of '25, which is where I think you saw some of the overage come from.

Speaker 4

Understood, thank you. And then, Ryan, if I look at the financials, pretty much in line with my expectations from what we heard in the quarter, but your sales and marketing expense had a kind of significant jump quarter over quarter. You maybe kind of help us understand what the difference there is. I don't know if it's bonus payments or some new investments in some programs here going into this year, but any color there would be helpful. Thanks.

Speaker 1

Yes, Scott, I think it's your typical Q4 year end timing where you do have a little bit of movement of bonus payments and some additional programs that we may try to get into the end of the year. Obviously, as Toby mentioned, we came into the year fully staffed as well, so a fair amount of hiring in the fourth quarter as well. So it's really just timing within the year, I would say. As we look at the sales and marketing spend over the course of 2025 and headed into 2026, we came in consistent with expectations.

Speaker 4

Really nice quarter. Thanks for taking my questions again, and sorry if I scared you off.

Speaker 1

Thanks, Scott. Thank you.

Operator

Thank you. And our next question will be coming from Daniel Jester of BMO Capital Markets. Daniel, your line is open.

Speaker 5

Great. Thanks for taking my question. Maybe we'll go with Paylocity for Finance. Appreciate all the context there. Does this mean that the integration of Airbase is basically complete, is there more work to be done on that part?

Speaker 5

So that's part number one. And then number two is, are you shifting any more resource in your sales organization to attack sort of the back to the base opportunity here? Seems pretty large relative to maybe just adding another module or two on the HR side. Thank you.

Speaker 2

Sure. I think as we had mentioned after we had made that acquisition that we would anticipate doing the integration in phases. We certainly put out the press release indicating we've completed the first phase of that integration, which is certainly probably the most meaningful step. However, we do view opportunities to continue to integrate that platform over time. We're excited about that opportunity and getting users feedback and continue to look for the leverage that we believe we can drive from an employee record perspective across HCM and finance.

Speaker 2

And so, our product is in market full, I would say, a fully integrated version with new opportunities, coming, and we'll probably see enhancements to that realistically every quarter is our goal. I think on the second point with our go to market motion, we are just in process with that product just being released, getting our field sales organization up to speed and knowledgeable with the integrated product offering such that they can refer an inside sales team of experts to then be able to take those opportunities across the finish line. And we've also got that inside sales team of experts looking at back to the base opportunities. And so all that has just been launched with the press release that you saw from an integration perspective.

Speaker 5

That's really helpful. Thank you. And maybe Ryan, I know you don't guide the free cash flow, but I'd appreciate it. Are there any puts and takes as we think about the free cash flow outlook for fiscal twenty twenty six? Obviously, float is going to change.

Speaker 5

Maybe there's some R and D tax credits we should consider. But anything you'd share on that would be very helpful. Thank you.

Speaker 1

Yes, Dan, I think to your point, as I said in my prepared remarks, really pleased with where we've taken profitability as a whole and that includes both adjusted EBITDA and free cash flow. I think we've expanded free cash flow margin by, call it, 400 basis points just over the last two years and continue to have a lot of confidence that we'll be able to do so 2026 and on a go forward basis. I think probably the only note I would make is you do have the likelihood of some tailwind relative to the new tax legislation. We're still working through what that impact would look like specifically, but a high likelihood that that will reduce our federal taxes in fiscal twenty twenty six and that will have a knock on effect or a tailwind to free cash flow. So we'll be able to provide more details as we get more clarity, but that's probably the one item I would note.

Speaker 1

We're now full cash taxpayer status outside of that new legislation and have a lot of confidence that that free cash flow margin and EBITDA will continue to move forward in 2026 and beyond.

Speaker 5

Great. Thank you very much.

Operator

And our next question will be coming from Mark Marken of Baird. Your line is open, Mark.

Speaker 6

Good afternoon. Great quarter. Thanks for taking my questions. So two questions. One, just on Paylocity fee for finance.

Speaker 6

Can you tell us a little bit about I know it's extremely early, but what sort of expectations are you kind of building in for that? And can you talk a little bit about the pricing, the types of clients that would probably be the most likely to adopt? Sure. The experiences of the clients that you've talked to thus far? Remember during our conference, Toby was very optimistic about how things were going there.

Speaker 2

Yeah, so I think early on we are getting good feedback from customers. They see the value in the integrated platform, the ability to leverage the employee data that we have so that it's easy to request spend, easy to put in rules around spend, make sure that that approval process happens relatively quickly. All of that leads to a much faster close process on the back end. And so I think the integration is getting us a really good feedback. We're also very pleased with the standalone product capabilities that we purchased and our ability to be able to continue to move those forward and enhance those based off client feedback.

Speaker 2

So I think that has gone up pretty well. As you mentioned, we are still early. We are setting up our first clients on the integrated offering kind of as we speak. And so we're excited about that opportunity. But I think what I would say is one of the questions we get a lot of is how is that sales process going to translate from a decision maker capability.

Speaker 2

And that's another area that I would say we're pretty happy with. The CFO is definitely involved in a payroll and HR purchase, although sometimes they're not the primary decision maker, but we have certainly had opportunities either via referrals or back to base conversations have pretty easy access into that conversation from a CFO perspective. And they've got appreciation for what the integration offers as well as the opportunity to get a singular support structure as well. And so early on good success.

Speaker 1

I would

Speaker 2

say, our expectations are that it takes a little bit longer than maybe an additional module from a sales process because it is a bigger purchase price as you mentioned. So it might take us a little bit longer to get to the same penetration rate as additional HCM modules, but we feel confident that our over 40,000 customers represent a great opportunity to sell back into.

Speaker 6

I mean, do you think Steve, that we can still get to somewhere in the 15% to 25% penetration rates over time? Can you remind us of how you're pricing this solution? Because obviously it's going to end up adding a lot more than typical $1 to $2 per month.

Speaker 2

That's correct. So I think, over time we've always talked about modules getting into that 10% to 20% penetration rate. That would still be the goal with this. As I mentioned, it may take a little bit longer. However, the revenue per client is much higher and so it can certainly be more impactful than most of our HCM modules that we've launched.

Speaker 2

It will also provide us additional capabilities from an expense management perspective. So we had an expense management solution embedded in our suite. I would call that a more basic version. They have much more advanced capabilities. And so I think that represents an opportunity that is priced generally on a PEPM basis.

Speaker 2

And the rest of the modules are really per employee per user.

Speaker 6

Terrific, thank you.

Operator

Thank you. And one moment for our next question, which will be coming from Terry Tillman of Charisse Securities. Your line is open, Terry.

Speaker 7

Hi. This is Dominique Guananzala on for Terry. Thanks for taking my question. So just looking at AI innovations like the policy answering assistant that you all mentioned last quarter, are there any new AI driven features or client adoption trends you want to call out in the quarter? How does adoption rates or client feedback shape your view on AI as a differentiator now as you're heading into fiscal year twenty twenty six?

Speaker 2

That's a great question. We definitely see AI coming up in the conversation with prospects at an increased rate. At the same time, we are seeing our current customers take advantage of the embedded AI capabilities across various modules in the suite. And we've got certainly a long list of opportunities that we're working on to be able to continue to embed AI. I think we talked a little bit about, and you mentioned kind of the chatbot interactions and how that sources data both from client data as well as our knowledge management and then our ability to add third party data to be able to answer a wider variety of questions.

Speaker 2

We see that growing, as we continue to grow the dataset and the capabilities within that chat interaction. So we've been really happy with the innovation we've put into the platform so far from an AR perspective, and we're excited about what the roadmap looks like.

Speaker 7

Got it, thank you.

Operator

And our next question will be coming from Brian Peterson of Raymond James. Brian, your line is open.

Speaker 6

Thank you. This is Jonathan McCary on for Brian this evening. This is just one for me here. So I wanted to ask on

Speaker 3

the thinking on M and

Speaker 6

A now that Air Base is in early stages of being integrated and launched. I'm curious, how does that impact your appetite for M and A? And are there some strategic product areas you'd point us to that you find particularly interesting at the moment from here? Thank you.

Speaker 8

Yes. Thanks, John. I mean,

Speaker 3

I think we are first of all, just really, I think happy with our ability to get the air base deal done, certainly an area of strategic interest for us and to be able to get the integration accomplished with the success that we have and then the launch with just recently of Paylocity for Finance. And so I think overall, have been very happy with our ability over time, not just to do that deal, but to do a few others that have been strategic to us that have really added to the product set and helped drive our differentiation over time and drive more value to clients. So I think the strategy around M and A has been fairly consistent and will continue to be in terms of being open to areas where we can accelerate the roadmap through M and A. I think the focus from our teams generally is to be able to continue to build out products that drive more value for clients and that address key needs. And when we can augment that from an M and A standpoint that with in areas where it'll accelerate the product roadmap, I think those are the things that are interesting to us.

Speaker 3

But I think it's fairly high bar from the standpoint of really being focused on the ability to take any acquired product and integrate it so tightly into the platform that a user can't tell whether you built it or bought it. And I think that's what we're doing with Airbase, which is one of the reasons I think we're so excited about the experience that we're creating from that integrated product set.

Speaker 6

Thank you.

Operator

One moment for our next question. Our next question will be coming from Jared Levine of TD Cowen. Your line is open.

Speaker 6

Thank you. In terms of your AI investments for internal operations, what stage would you say you're at currently and any sense on how long until you could potentially be in a net benefit position from AI?

Speaker 2

Well, I think one of the things that we've called out in the past is that there is a tremendous amount of opportunity from AI across the business. And so whether that's in our operation, whether that's in our product development team and building new features for our customers or really a lot of our teams that support individuals talking to clients or even in G and A. And so I think we're still in the relatively early innings. I also think this happens gradually over time. And so we look at this as an opportunity to continue invest in that category.

Speaker 2

That becomes one of the ways that we can drive both a better client experience, but also margin enhancements over time. And so as we continue to identify use cases, make investments and realize the benefits from it, that becomes part of our long term model in the way that we think about driving efficiency in the business.

Speaker 6

Got it. And then, Ryan, in terms of retention, directionally, can you give us some color on that that was up or down here for FY 2025, including any differences on controllable versus uncontrollable churn?

Speaker 1

Yes, nothing I'd particularly note. I think as we said in the prepared remarks, at 92% plus again in fiscal twenty twenty five. So really pleased with those results. And I think when you look at the results we put up on recurring revenue in fiscal twenty twenty five, obviously strong execution from a sales standpoint, but really strong execution from an operational standpoint. I think that goes both to our implementation teams as well as our service teams.

Speaker 1

So really pleased with where we are from retention, always a key focal point for us. But outside of that, nothing I would call out that would have materially changed in 2025.

Speaker 6

Great, thank you.

Operator

Thanks. And our next question will be coming from Patrick Walravens of Citizens Bank. Patrick, your line is open.

Speaker 6

Hi team, thanks for taking my question. This is Kincaid on for Pat. I just have two questions about incentives. First off, if I'm a Paylocity sales rep, what am I making the most money selling? And number two, with the launch of Paylocity for finance, is there gonna be a shift in those incentives?

Speaker 6

Thanks.

Speaker 2

Yeah, so I think, our Paylocity sales reps are really focused on new business and new reoccurring revenue, that get added to the platform. And so I don't think those incentives are changed at all. We also have a system where, if they're going to refer an expert, they're going be able to collect some part of that commission from that referral. So if I'm a sales rep, I see a great opportunity, I've created a relationship with the head of HR as well as the CFO, I realized they could benefit from some of the air base modules. I can refer them over to an expert.

Speaker 2

We can do that all as part of one sales process. We could actually go back to them after they've already started or start them first from a finance perspective. And so the incentives are absolutely there. And as we mentioned earlier, it's fairly robust from an annual recurring revenue, which creates even a higher incentive for our field sales force of over 900 people to be able to refer our team of experts in.

Speaker 6

Good afternoon. Thanks so much guys.

Operator

And our next question will be coming from Raimo Lenschow of Barclays. Your line is open.

Speaker 8

Hey, perfect. Thank you. Quick question on philosophy for finance as well. Obviously, now you can have like a joint offering. How does it change the competitive selling motion that you have there?

Speaker 8

And does it change your competitive field? Does it increase the win rate? What are the early experiences there? Thank you.

Speaker 3

Yeah, thanks, Raimo. I mean, I think we're still early for sure. But I think part of there's incremental value that we're delivering to clients from the ability to have a finance solution on the same platform. And that's a different strategy that I think you see with the vast majority of our competitors in the HCM space. So we definitely view it as a point of differentiation.

Speaker 3

And I think to Steve's earlier comments, yes, we're very early, but I think we're really pleased with what we've been able to do in terms of the integration of the airbase products and solutions into a single platform. That is real value that is significant value prop for clients, both new clients coming onto our platform and back into the client base. So, I think we're optimistic early days, but optimistic with the traction we'll be able to get with that value prop.

Speaker 8

And does it kind of bring you into certain verticals because like finance is obviously not finance in every single vertical. Is there something that kind of then kind of gets you into some other verticals? Thank you.

Speaker 3

Well, I mean, I think the offering being on one platform gives us the ability to go across verticals the same way that we do with the payroll and HCM parts of our suite. So, I think part of the attraction was this was another horizontally interesting area that we think we can also take into different verticals the same way that we have Paylocity for payroll and HCM. So I think it's a great fit for the platform. And I think back to these comments early days, but I think the early traction that we're seeing is positive. I think we're pretty excited about it.

Speaker 9

Perfect. Thank you. Congrats.

Operator

And one moment for our next question. Our next question will be coming from Siti Pangra of Mizuho. Your line is open.

Speaker 8

Thank you. I just want to ask about the AR base. It's been more than a year. Wondering what kind of feedback you have got from customer, at least those customers who are using Velocity, customer using ARBIS, what sort of revenue uplift you are seeing? And one clarification in terms of sales rep growth, 8%, is this mostly the Velocity sales or the combined one?

Speaker 3

Sure. On the first part, it's been ten months since we made the acquisition and we're just now in the last couple of weeks launching Velocity for Finance. And so we're really just now at a point where we have the air based products integrated into the PayLocity platform. And so I think we're really at the point now where we can be, I think more focused and more aggressive from a sales team and from a go to market standpoint, now that we really have, think a key part of value prop, we're able to deliver against the key part of the value prop in terms of the whole set of solutions on a single platform, which is, I think, really important to clients and prospects. So we're in the early days, but I think the feedback so far from a just product perspective has been very strong.

Speaker 3

That was part of our attraction to the Airbase business was the strength of the product set. It's been well regarded in things like G2. So I think our view was we could take a really strong product, create significant integration on a single platform and bring that to market and that that would be valuable to clients. And I think that's what we're seeing, albeit in the early days of launch.

Speaker 2

I think your question on headcount growth, that is total headcount growth across all of our sales forces, including airbase, which as you know, when we bought that was relatively small. We're excited about the opportunity in front of us, the bulk of those additions are really in our HCM sales forces.

Speaker 6

Thank you.

Operator

And our next question will be coming from Alex Zukin of Wolfe Research. Your line is open, Alex.

Speaker 6

Yeah, hey guys, thanks for taking the question. I guess maybe on sticking with the theme of AirFace, any features that you're seeing drive the most kind of interest and intense cross sell conversations? Is it headcount planning, expense management, corporate card? And maybe just comment on the gross margin tailwinds potentially around kind of as the mix evolves with those deals relative to the core? And then I've got a quick follow-up.

Speaker 1

Yes. So I think if you

Speaker 2

look at module adoption, expense management probably has the greatest adoption and in some cases that ends up being the entry product, although we absolutely see full suite purchases. Because once you have all your employees using that, and making approvals, you can then really take advantage of that utilization on that single platform to drive spend management, more complex rules, all the reporting on the back end. And ultimately, if you use all of their products, we've got all the data that they spend both on people as well as on their business items. And so there's analytics on the back end that are valuable to the customers. And so but if I had to call one out, I think that's probably the expense management in terms of the most penetrated module they offer.

Speaker 2

And then, Ryan, any comments?

Speaker 1

Yeah, I guess, Alex, this is the other part of your question on gross margins. I wouldn't say that the airbase product has materially different margin profile than the core Paylocity business. I think we will, going forward, as we did in 2025, look to expand gross margin both within air bases as well as the core product set and we have confidence that we're better to do so while still investing in the air base opportunity.

Speaker 6

Perfect. And then maybe just dimensionalize potential contribution for fiscal twenty six. I know last time you guys talked about revenue contribution, it was on the order of maybe 1% for fiscal twenty five. Is it fair to assume something similar for fiscal twenty six or could it be a little bit above that?

Speaker 1

Yeah, I mean, think you're still in that range. That business has grown faster than our core business, so that probably becomes a higher percentage over time, although it is still a very small portion, so I wouldn't sort of overstate that, but I think that business continues to grow at a healthy rate and will continue to increase in 'twenty six.

Speaker 6

Perfect. Thank you, guys. Congrats on a great quarter. Thank you.

Operator

And our next question will come from Jason Celino of KeyBanc Capital Markets. Your line is open,

Speaker 10

Great. Thanks. Just a couple of questions for Ryan, if that's okay. Looking at the recurring revenue guide for this year, I know Q1 still has some inorganic benefit, but how should we think about the shape of the rest of the decel heading into 2026? Thanks.

Speaker 1

Sure. Yes, think to your point, Q1 is fourth quarter of the air base impact and I think you see a little bit of that in the guide and I think you also see the strong momentum we had to end fiscal twenty twenty five. If you look at what's implied for Q2 to Q4, I think it's sort of roughly 8.5 recurring. And I think, as I said in the prepared remarks, guidance approach will likely be similar in fiscal 'twenty six, which is to say if we continue to see strong execution, we obviously have closer and better visibility into the near term quarter, and that's typically where you see probably slightly higher revenue growth and guidance, and then a level of prudence as you think about probably the back half of the year. But feel good about the momentum, feel good about the Q1 and full year guide.

Speaker 1

And I think if we continue to execute well, hope to be able to take that number up as we go throughout 'twenty six, very similar to what we did in 'twenty five.

Speaker 10

Okay, great. And then just following up with Dan's very first question on the OBVA potential benefit. I know there's a difference between R and D expensing in The U. S. And international, but for you, the majority of your R and D operations are in The U.

Speaker 10

S, correct?

Speaker 1

The majority are, yes. We would have a small portion that would be foreign related, but the majority are going to be U. S, that's correct.

Speaker 2

Okay, thank you.

Operator

Thank you. And our next question will be coming from Jacob Riberge of William Blair. Yes.

Speaker 11

Thanks for taking the questions and congrats on the solid results. You referenced continued strength in the broker channel. I know it's still fairly early days, but have you started to see any incremental changes in that channel following just the recent M and A in the space or have things been fairly consistent with what you've seen in prior years?

Speaker 3

Yeah, mean, think to your question, Jake, we've been really happy with what we've seen in the broker channel and being able to continue to drive 25% plus of new business referred from that channel is I think a testament to the effort there. And I think it's also a testament to the value prop that we've been able to provide to brokers over a long period of time. And I think that continued clearly through the course of '25. And I think what I'd say is, our message, I think has resonated in the market. I think it continues to.

Speaker 3

I think that continued through the course of '25 and into Q4. And so, I think that continues to be strong for us. And I certainly think to your question, our value prop that we have always stood behind, including not competing with brokers from a market standpoint is a really important point that we've certainly leaned on and I think has continued to resonate. So feel good about where we finished in '25 with respect to broker relationships and the broker channel. I think we're teed up for continued momentum there as we go into Q1.

Speaker 11

Okay. That's helpful. And then just wanted to follow-up on the demand environment. I know last quarter, you called out a little bit of noise in the April. Did that noise continue throughout the quarter?

Speaker 11

Or was it just a week or two blip? And then, Ryan, helpful commentary on your headcount and rate cut expectations in the guide, just any sense of what you're assuming for the health of broader HR budgets when compared to prior years?

Speaker 3

Yeah, I mean, think maybe going back to my earlier comments on the demand environment overall, I mean, I think we if you look back at fiscal twenty five in its entirety, I think what we would say is that we saw a fairly steady and healthy demand environment. And I think that's what we continue to see in Q4. And I think that's what sits underneath our guide as we've come into Q4, develop the guide and as we looked across '26, I think we're making a similar assumption relative to the demand environment. And I think our sales and go to market team did a great job of executing throughout the course of 'twenty five. And I think that is what allowed us to produce the result that we've reported.

Speaker 3

Yeah, I would just add,

Speaker 1

I think we feel really good about the initial guide. We took a similar approach as we did in fiscal 'twenty five. So comfortable with, I think, all assumptions across each of the variables, whether that is HR budgets, workforce levels, obviously interest rate impact as well, and feel good about where we are from a guidance standpoint, then to Toby's point, I think feel really good about the momentum we have exiting '25 into '26.

Speaker 11

Great, thanks for taking the questions.

Operator

And our next question will come from George Kurosawa of Citi. Your line is open, George.

Speaker 9

Great. I'm on for Steve Anders. Thanks for taking the questions here. Just on that point about hiring activity, headcount hiring for FY twenty twenty six and maybe the flip side of that productivity. I understand FY twenty twenty five, you guys were quite focused on go to market productivity.

Speaker 9

Can just talk about what seems to have been working there and how you're thinking about proving that metric into FY 2026?

Speaker 3

Yeah, I mean, I think coming into fiscal twenty five, we increased our sales headcount by right around 8%. And the goal coming into '25 was to be able to continue to drive productivity. And I think that's what we saw throughout the course of the year, quarter to quarter. And then looking back on the full fiscal year, I think we continue to have access to the best talent in the industry from a go to market, from a sales perspective. And that's always been the goal to be, I think the destination in the industry for the best talent.

Speaker 3

I think that continues to be the case. And I think we're really fortunate we were able to come into fiscal twenty six fully staffed again with right around 8% headcount growth again this year coming into '26. And I think looking out across the year, I think the goal and the focus will be exactly the same as it was in '25 to be able to take that 8% headcount lift and to be able to continue to drive productivity. And I think that's exactly what you saw us be able to do throughout the course of '25. So I think pretty happy overall with the setup that we think we have for '26.

Speaker 9

Okay, great. And then just one on Paylocity for Finance. It sounds like you've alluded to it being a bit of a bigger purchase decision. Maybe if you could talk about what you've seen or what you expect in terms of trigger points for adoption, what causes someone to purchase?

Speaker 2

Well, I think it varies by organization. But I think the value prop, you've got people our kind of mobile app every day using all of our products on the web. And so when we talk to a CFO and present the opportunity to be able to manage expenses, spend, cards all in a single place with incremental rules that match the organizational policies. And then be able to accumulate all that data on the back end for a faster close. It's a pretty interesting value proposition that we find most customers are at least willing to entertain the conversation and then it's about differentiating versus other competitive offerings that they can have.

Speaker 2

And so overall, I think it really starts with the integrated platform is the point I'm really trying to make and the value that it is from a service and implementation and how easy all that really is to use. And then we've got the finance capabilities that they're looking for with a very rich product in air based capabilities. So, but as I said, it's probably not going to scale quite as fast as simply an HCM add on because it's a higher price point, it's probably a bigger commitment from an organizational implementation. But early signs, we feel really good about that. We feel good about the referrals that we've gotten back to the client base as well as new prospects.

Speaker 2

And we were only a few weeks in, as Toby mentioned, into the launch. So we're going to keep making this better over time and take advantage of the opportunity.

Speaker 9

Great. Thanks for taking the questions.

Operator

And our next question will be coming from Zachary Gunn of Feet Partners. Your line is open.

Speaker 6

Hey there. Just one for me. Thanks for taking my question.

Speaker 12

As other companies have looked to build out their accounts payable products, there's always a

Speaker 6

lot of focus on the supplier side of the network as much as the customer side. And as companies like Bill have also pushed up market, they've stressed the need for building the supplier side of the network. So can you just talk a

Speaker 12

little bit about with Airbase and with the finance products,

Speaker 6

how you're addressing the kind of supplier and customer sides of the network?

Speaker 2

I think there's different parts of that supplier question that we do provide capabilities for. So certainly managing who the supplier is, there's a PO process that maybe a larger organization might have to be able to make sure that purchase is approved with that supplier, obviously making those payments on the back end. I think the greater the payment volume that you've got, then the greater opportunity is to have that broad supplier network. And so we certainly will see that, I think opportunity become more interesting as we scale this solution over time and we drive volume through the platform. If you look at the average customer size being roughly similar to ours around 150 employees, you probably in general are not necessarily highly sophisticated in terms of that supplier network, but it's an area that we're investing in and that we feel as we scale and drive volume to will create incremental opportunity.

Speaker 1

Helpful, thank you.

Operator

And I show no further questions at this time. I would now like to turn the call back to management for closing remarks.

Speaker 3

Yeah. Just wanted to thank everybody for joining. I appreciate your interest in Pilosse, and wanted to say a special thank you to all of our employees for a strong fiscal twenty five. Thanks, and have a good night.

Operator

And this concludes today's conference call. Thank you for participating. You may now disconnect.

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