Paylocity (PCTY) Q1 2027 Earnings Call Transcript

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DATE

Nov. 5, 2026

CALL PARTICIPANTS

• Chief Financial Officer - Ryan Glenn
• Executive Chairman - Steven Beauchamp
• President and Chief Executive Officer - Toby Williams

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TAKEAWAYS

• Total Revenue -- $451.7 million, representing 10.7% growth compared to the first quarter of fiscal 2026 driven by platform innovation and go-to-market execution.
• Recurring and Other Revenue -- $424.5 million, reflecting 12% growth due to strong demand across human capital management, finance, and IT suites.
• GAAP Net Income -- $57.6 million, or $1.07 per diluted share, representing an increase from $48 million in the prior year period.
• Non-GAAP Adjusted EBITDA -- $159.5 million, reflecting a margin of 35.3% and exceeding the top end of guidance by $3.5 million.
• Total Research and Development Investment -- Increased by 15% year over year on a dollar basis, combining expensed and capitalized costs to support AI-driven platform modernization.
• Non-GAAP Sales and Marketing Expense -- 20.3% of total revenue, reflecting continued investment in driving growth during the primary selling season.
• Share Repurchase Activity -- 1.1 million shares of common stock were repurchased for $152.5 million at an average price of approximately $139 per share.
• Diluted Shares Outstanding -- Decreased by nearly 4% compared to the first quarter of fiscal 2026 due to active share repurchase programs.
• Client Funds Average Daily Balance -- Approximately $3.1 billion during the first quarter, with projections increasing to $3.3 billion in the second quarter.
• Interest Income Guidance -- Estimated at $29.5 million for the second quarter and $118 million for the full fiscal year based on current interest rate levels.
• Client Funds Annual Yield -- Projected at 360 basis points for the second quarter and 340 basis points for the full fiscal year.
• Full-Year Total Revenue Guidance -- Raised to a range of $1.91 billion to $1.93 billion, representing approximately 8% growth for fiscal 2027.
• Full-Year Recurring Revenue Guidance -- Increased to a range of $1.79 billion to $1.81 billion, reflecting 9% growth over fiscal 2026.
• Full-Year Adjusted EBITDA Guidance -- Raised to a range of $711.5 million to $721.5 million, reflecting increased profitability expectations.
• Second Quarter Revenue Guidance -- Expected to be between $452.5 million and $457.5 million, representing approximately 9% growth.
• Referral Channel Performance -- Delivered more than 25% of new business during the first quarter, driven by partnerships with the broker community.
• Recruiting Optimizer Performance -- Early data indicates the solution helped clients improve recruiting productivity by 35% and fill roles 25% faster.
• Ignite AI Engagement -- The platform has answered nearly 30 million questions and surfaced over 3 billion recommendations since its launch.
• Answer & Insight Agent Usage -- Usage of the AI-driven reporting agent grew by more than 90% during the last month.
• Client Workforce Levels -- Increased by approximately 1% year over year, providing a stable tailwind to the company's financial guidance.
• Cash and Liquidity -- Ended the first quarter with $194.5 million in cash and cash equivalents and $131.3 million outstanding on the credit facility.
• Trailing Twelve Month Free Cash Flow -- $416.7 million, representing 23% of total revenue compared to $336 million in the prior year period.
• Aidora Inc. Acquisition -- Completed in July 2026 to expand AI-powered leave management capabilities and enhance the human capital management suite.

SUMMARY

Paylocity Holding Corporation (NASDAQ:PCTY) reported first-quarter results for fiscal 2027, characterized by 11% top-line growth and a significant increase in full-year financial guidance. Management reported that growth is driven by the rapid adoption of its Ignite AI platform and the successful expansion into finance and IT product suites. The company increased its total revenue guidance for the fiscal year by $30 million, reflecting strong first-quarter execution, stable client retention, and higher-than-anticipated interest income on client funds. Management stated that the company remains focused on driving margin leverage through operational scale and the application of internal AI tools to automate workflows across service and R&D teams.

• CEO Toby Williams indicated that the company is seeing "strong attach rates and broad-based interest from both new and existing clients" for its recently launched retirement and employee experience solutions.
• Executive Chairman Steven Beauchamp stated that the Recruiting Optimizer provides "incremental value to our clients that we can directly monetize in the form of a premium offering for AI-driven capabilities."
• Management noted that the company continues to avoid direct competition with its broker partners in the insurance market, which supports a referral channel that provides 25% of new business.
• CFO Ryan Glenn reported that the company expects to continue driving scale in gross margin through fiscal 2027 by leveraging investments in automation and AI across the business.
• The company reported that its Answer & Insight Agent is enabling clients to "more efficiently and effectively run and analyze reports that explore and understand workforce trends."
• Management stated that the demand environment remains stable and positive as the company enters its primary selling season for the remainder of the fiscal year.

INDUSTRY GLOSSARY

• HCM: Human Capital Management, a suite of software for managing employee records, payroll, and HR functions.
• ARPU: Average Revenue Per User, a metric used to measure the average amount of revenue generated per client or employee on the platform.
• Adjusted EBITDA: Earnings before interest, taxes, depreciation, and amortization, adjusted for non-cash or non-recurring items such as stock-based compensation.
• Ignite AI: Paylocity's proprietary artificial intelligence platform used to embed AI agents and recommendations into HR and payroll workflows.
• Basis Points: A unit of measure for interest rates and financial yields, where 100 basis points equals 1 percentage point.
• Recruiting Optimizer: An AI-driven tool within the Paylocity platform that automates candidate outreach and interview scheduling.
• PEPM: Per Employee Per Month, a standard billing unit in the payroll and HCM industry.

Full Conference Call Transcript

Operator: Good day, and thank you for standing by. Welcome to the Paylocity Q1 Fiscal '27 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Ryan Glenn, Chief Financial Officer. Please go ahead.

Ryan Glenn: Good afternoon, and welcome to Paylocity's earnings results call for the first quarter of fiscal '27, which ended on September 30, 2026. I'm Ryan Glenn, Chief Financial Officer. And joining me on the call today are Steve Beauchamp, Executive Chairman; and Toby Williams, President and CEO of 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 today, we will refer to non-GAAP financial measures as defined in Regulation G.

You can find the related reconciliations to GAAP in our press release, which is located on our website at paylocity.com under the Investor Relations tab. We will also make forward-looking statements. Actual events or results could differ materially from those projected in our forward-looking statements. Please refer to our press release and SEC filings, including our most recent 10-K, which contain important factors that could cause actual results to 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 BMO Technology and Innovation Leaders Conference, the Needham Virtual Tech Week, the Barclays Global Tech Conference and the Needham Growth Conference.

Please let me know if you'd like to schedule time with us at any of these events. With that, let me turn the call over to Steve.

Steven Beauchamp: Thanks, Ryan, and thanks to all of you for joining us on our First Quarter Fiscal '27 Earnings Call. We started off fiscal '27 with strong financial results with Q1 recurring and other revenue growth of 12% as our differentiated value proposition of providing the most modern software in the industry continues to see success in the marketplace. Total revenue was $451.7 million or 11% growth over Q1 of last year and well ahead of our guidance.

Our growth continues to be led by our ongoing commitment to driving innovation and providing the most modern AI-driven platform for business, highlighted by our recent launch of Recruiting Optimizer, which brings purpose-built AI agents into the recruiting process to help clients rediscover qualified candidates, automate outreach and follow-up, support screening and streamline interview scheduling. Powered by our Ignite AI platform, Recruiting Optimizer demonstrates how we are embedding AI into everyday workflows to reduce manual effort while preserving human oversight for the decisions that matter most.

Recruiting Optimizer provides incremental value to our clients that we can directly monetize in the form of a premium offering for AI-driven capabilities, connecting recruiting with onboarding and the employee record to help create a more seamless transition from candidate to employees. While early days, the solution has helped clients improve recruiting productivity by 35%, fill roles 25% faster and reduce candidate drop-off by 15%. Additionally, we continue to see increasing adoption and utilization of our Ignite AI platform with Ignite AI having answered nearly 30 million questions and surfacing over 3 billion recommendations since launch.

Adoption has been particularly strong for our Answer & Insight Agent with usage growing over 90% over the last month with clients leveraging the agent to more efficiently and effectively run and analyze reports that explore and understand workforce trends, answer operational questions and quickly uncover actionable insights that saves time, helps them make more informed decisions and drive improved business outcomes. Our innovation also continued to be recognized by third parties as Paylocity was recently named by HR Tech Outlook as a Top Payroll Software 2026. Additionally, Paylocity was ranked #1 in AI recruiting in G2's Fall 2026 Grid Reports and earned top placements across more than 25 product categories.

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

Toby Williams: Thanks, Steve. As Steve noted, we continue to see strong demand for our platform across our target market, and we're pleased with the momentum of our sales team as we enter the heart of selling season as evidenced by our strong Q1 recurring revenue performance and strong increase to guidance for fiscal '27. Earlier today, we also wrapped up our annual Elevate Client Conference, where we hosted thousands of business leaders representing HR, finance, IT and operations across dozens of sessions over the course of the last 2 days.

At Elevate, we highlighted our continued commitment to investing in our differentiated strategy of embedding AI into the everyday flow of work across our HCM, finance and IT products through the recent launch of Paylocity Ignite AI. It was great to hear firsthand from our clients how this approach is already translating into tangible business value in the form of increased employee productivity and the automation of manual processes and workflows. Similarly, we were pleased with the strong positive feedback on our recent launches of Paylocity Elevate Solutions and Paylocity for Retirement, where we continue to see strong attach rates and broad-based interest from both new and existing clients.

Combined with the expansion of our broader product portfolio over the last 18 months, this further provides confidence in our ability to drive greater adoption across our platform, expand the value we deliver to clients and support durable ARPU growth. We also continue to be pleased with the consistency of our referral channel, which once again delivered more than 25% of our new business in Q1. The sustained success of our broker channel continues to be driven by our modern platform, third-party integration capabilities and because we do not compete with our broker partners by selling insurance products.

We remain committed to investing in and supporting the broker channel with the goal of continuing to deliver real value in true partnership and support to our referring brokers and their clients. Similarly, we continue to provide world-class service to our client base and our strong client retention contributed to our Q1 results and increased expectations for fiscal '27. In addition to our market-leading financial performance, our strong culture at Paylocity continues to be recognized externally as we were recently named by Newsweek as one of America's Greatest Workplaces for Parents. We received the Great Place to Work certification for the eighth consecutive year, and we were selected as one of TIME's American Growth Leaders for 2027.

I would now like to pass the call to Ryan to review the financial results in detail and provide increased fiscal '27 guidance.

Ryan Glenn: Thanks, Toby. Recurring and other revenue was $424.5 million or 12% growth over Q1 of last year with Q1 total revenue of $451.7 million, an increase of nearly 11%. Our sales team had a solid start to the year across our HCM, finance and IT suites in addition to seeing healthy demand for our recent product launches in Paylocity Elevate Solutions and Paylocity for Retirement. We were pleased to come in $7.2 million above the top end of our revenue guidance with the majority of our revenue beat once again coming from recurring and other revenue, allowing us to raise our fiscal year guidance by more than our Q1 beat.

We continue to make significant investments in research and development and to understand our overall investment in R&D is important to combine both what we expense and what we capitalize. On a dollar basis, our year-over-year investment in total R&D increased by nearly 15% when compared to the first quarter of fiscal '26, and we remain focused on making investments in R&D throughout fiscal '27 as we continue to deliver the most modern AI-driven platform in the industry. In regard to our go-to-market activities, on a non-GAAP basis, sales and marketing expenses were 20.3% of revenue in the first quarter, and we remain focused on making investments in this area of the business in fiscal '27 to drive continued growth.

Briefly covering our GAAP results, for Q1, gross profit was $304F.1 million, operating income was $82.2 million and net income was $57.6 million. Our adjusted EBITDA for the first quarter was $159.5 million or 35.3% margin and exceeded the top end of our guidance by $3.5 million, resulting in increased margin guidance for fiscal '27. Excluding the impact of interest income on funds held for clients, adjusted EBITDA margin for Q1 was up 30 basis points over Q1 of fiscal '26, and we continue to be pleased with our ability to drive both durable and recurring revenue growth and expanded profitability on a multiyear basis.

To this end, we remain focused on driving leverage by improved operational scale and through improved efficiencies resulting from our ongoing investments in automation and AI across our business, which are helping us scale our teams and providing the ability to focus on more strategic work, which ultimately is helping to drive increased adjusted gross margin, adjusted EBITDA and free cash flow on a multiyear basis. Additionally, given the confidence we have in our business and our strong cash flows, in Q1, we repurchased 1.1 million shares of common stock for $152.5 million aggregate repurchases at an average share price of approximately $139 per share, helping to drive diluted shares outstanding down nearly 4% versus the same period last year.

And with approximately $1.1 billion remaining under the current repurchase program, we anticipate continuing to be active going forward. In addition to our expectations for continued growth 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. Looking at the balance sheet, we ended the quarter with $194.5 million in cash, cash equivalents and invested corporate cash and $131.3 million outstanding on our credit facility. In regard to client-held funds and interest income, our average daily balance of client funds was approximately $3.1 billion in Q1.

We're estimating the average daily balance will be approximately $3.3 billion in Q2 with a average annual yield of approximately 360 basis points, representing approximately $29.5 million of interest income in Q2. On a full year basis, we're estimating the average daily balance will be approximately $3.5 billion with an average annual yield of approximately 340 basis points, representing approximately $118 million of interest income. In regard to interest rates, our guidance reflects the recent 25 basis point rate hike in September but assumes no additional changes to interest rates during the remainder of fiscal '27.

In regards to our financial guidance for Q2 and full fiscal '27, for the second quarter of fiscal '27, recurring and other revenue is expected to be in the range of $423 million to $428 million or approximately 10% growth over second quarter fiscal '26 recurring and other revenue. And total revenue is expected to be in the range of $452.5 million to $457.5 million or approximately 9% growth over second quarter fiscal '26 total revenue. Adjusted EBITDA is expected to be in the range of $152.5 million to $156.5 million. And adjusted EBITDA, excluding interest income on funds held for clients, is expected to be in the range of $123 million to $127 million.

And for fiscal '27, as a result of the strong results we are seeing across HCM, finance and IT solutions, strong client retention, a stable demand and macro environment and higher interest rates, we are increasing our total revenue guidance by $30 million, which also results in a strong increase to adjusted EBITDA margin guidance for fiscal '27. Recurring and other revenue is raised by $15 million at the midpoint and is now expected to be in the range of $1.792 billion to $1.807 billion or approximately 9% growth over fiscal '26 recurring and other revenue.

And total revenue is raised by $30 million at the midpoint and is now expected to be in the range of $1.910 billion to $1.925 billion or approximately 8% growth over fiscal '26 total revenue. Adjusted EBITDA guidance has increased and is now expected to be in the range of $711.5 million to $721.5 million. And adjusted EBITDA, excluding interest income on funds held for clients, has also increased and is now expected to be in the range of $593.5 million to $603.5 million, which represents approximately 90 basis points of leverage at the midpoint.

In conclusion, we are pleased with our Q1 results and the continued momentum we have across our sales, operations and product teams as we enter the busiest time of our year. Operator, we're now ready for questions.

Operator: [Operator Instructions] Our first question comes from the line of Brad Reback of Stifel.

Brad Reback: Ryan, maybe -- or Toby or Steve, not sure, but maybe you could dig into the guide. A healthy beat in 1Q with, kind of, 2x that beat flowed through, very early in the year to be flowing through such magnitude. So maybe you can talk about what gives you confidence?

Ryan Glenn: Yes. Brad, this is Ryan. I can certainly start. I think we're really pleased with where we started the year with 12% recurring revenue growth in Q1. And I think as you heard in the prepared remarks, a lot of momentum across the business from a go-to-market operations standpoint and then some of the investments we're making in product and what that is doing to drive ARPU. So as we look at the balance of the year, increasing recurring revenue by $15 million, as you said, is passing on that full Q1 beat and then an incremental $7 million or so to the fiscal year.

And I think when you look at the Q2 guidance, what you see is about 9.3% to 10.6% recurring spot on with how we guided Q1. So I feel really good about the momentum. And I think we still feel like if we continue to execute well, we're in a position where we can perform well against that guidance and continue to raise the year as we go throughout fiscal '27. And I think the other element I'd mention too is on profitability, raising the interest income by $15 million, 100% of that raise going to the bottom line. And then on top of that, raising operating EBITDA by the full Q1 beat plus an incremental $2.7 million.

We're really pleased with how we started the fiscal year.

Operator: Our next question comes from the line of Scott Berg of Needham & Company.

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

Toby Williams: Yes. Thanks, Scott. I mean, I guess, what we would say is we feel really good about the demand environment. We feel like it's been pretty stable. Maybe it's arrows pointed up a little bit, but I might not have said that had you not framed the question that way. I mean I think we've seen a lot of stability. I think what we would say is that the teams have executed really well in a really well-balanced way across go-to-market and then from a service perspective, driving on retention.

So I think overall, I feel like it was a pretty well-balanced quarter in terms of the execution of the teams against the backdrop of what I would say is a fairly stable and positive demand environment.

Scott Berg: All right. Helpful. And you guys announced some, I guess, for me, at least I call maybe smaller innovations at your customer conference here the last day or 2, and there's certainly some AI themes with all of that. How are you thinking about monetization on the AI side? I know, Steve, you and I have had some good conversations on this last year or 2, and you thought the monetization for different modules might be a little bit more on the muted side for lots of different reasons.

But as you release more products and as you're seeing customers maybe drive some solid usage and returns on these products, does it change your opinion on how you maybe monetize this functionality over time?

Steven Beauchamp: I don't know if there's a change in the opinion. Obviously, we have a lot of interaction with customers. We are looking at where the market is moving, and we've been pretty innovative at driving new solutions to market either organically or via acquisition. And so I think it still comes down to a couple of different categories. One is we've got to innovate on the core platform and make our clients' lives easier and save them time. As we do that, sometimes we can drive higher margin. Other times, we can maybe get a little bit of pricing on the back end. And so we see opportunity to continue doing that without question.

And Ignite and many of the agents we've already released will certainly accomplish that. I think the second category is the Recruiting Optimizer being a great example, where we acquired a great team and great technology. We're able to plug that in pretty quickly into our platform. And that's probably a product area that prior to AI wouldn't have even existed. It's something that recruiters would just have to do manually. And as we're able to save them time, we're able to capture a piece of that time savings that the client is realizing. And I think there's going to be incremental opportunity there.

And that's probably the category that I'm more excited about today than maybe a year or 2 ago is businesses that maybe we wouldn't have even imagined that we can offer the client hours and hours of savings, we can get paid for that, and both parties win under that equation. And I think there are a number of additional opportunities.

Operator: Our next question comes from the line of Samad Samana of Jefferies.

Samad Samana: Maybe first one, Ryan, just maybe this is a little bit more of a housekeeping question, anything. But just on gross margins, they were down year-over-year pretty significantly. Just anything to call out there? Is that maybe where the AI utilization that you're seeing in terms of the installed base? Is that pressuring costs there? And then I have a follow-up question as well.

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

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

Toby Williams: Yes, sure. So I think last part first. I think we're really happy with how we were able to drive traction on all across the portfolio, including the parts that you asked about specifically outside of payroll and HCM, including those in finance and IT. And I think as we've launched more and more product over time, I think one of the strengths of the business and one of the strengths of the go-to-market team has to -- has been to be able to consistently hire into our rep classes, both for field reps and for our inside sales teams and be able to generate that type of traction through those teams.

And I don't think it's fundamentally changed who we're hiring or any of our hiring patterns. I think it just goes to the strength of the business to be able to launch new solutions and train our reps and get them up to speed efficiently on how to sell both -- attach those products in new deals and then back into the base.

Operator: Our next question comes from the line of Mark Marcon of Robert W. Baird.

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

Toby Williams: Mark, I'll start and then others can jump in. I mean I think we've seen a fairly even balance. I mean it's early in the year still. So we've got 1 quarter down, but I think we've seen a fairly even balance between -- in growth, balance between ARPU and then new units. I think a lot of the new solutions that we're talking about have not been out for that long. So we're talking about a quarter or so in many of the cases.

And so I think part of what we're seeing is we're seeing a nice ramp as we've come through Q1 and the interest in those solutions, both from a new client attach perspective and from a sale back into the base standpoint. But I think to answer your question, I think it's been fairly well balanced between the 2 so far this year.

Ryan Glenn: Mark, the only -- maybe 2 things I would add is nothing particularly noteworthy in pricing. I think we continue to adjust pricing on an annual basis and are taking a very consistent approach to this year. And then second, macro environment continues to be very stable. Client workforce levels continue to be up modestly year-over-year, very consistent with what we saw last year. So that was a incremental tailwind from a guidance standpoint. But to Toby's point, I think the real bulk of the overperformance in Q1 and the cause for the raise above the beat has really just been the execution across the go-to-market, operations and product organization.

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

Ryan Glenn: Yes, I wouldn't really call that out. As I said, timing in the fiscal year, I would expect margins to continue to raise as we go throughout the fiscal year. Obviously, we've driven a significant amount of leverage over the last few years in gross margin as well as adjusted EBITDA. No structural changes there, and we expect to be able to continue to drive scale in gross margin as we go deeper into '27 and then beyond.

Operator: Our next question comes from the line of Terry Tillman of Truist.

Giancarlo Valle: Giancarlo on for Terry. I just wanted to ask how AI progress has been across the product portfolio? What areas do you feel like may need some more work and what areas are trending solidly?

Steven Beauchamp: Yes. We've been really happy with the adoption levels that we've seen from our customers in utilizing all of the AI components that we've released to our customers. We talked a little bit about a couple of stats in the prepared remarks. But you're really allowing customers to accomplish things so much faster and easier in our product. We're auditing things that would be difficult for them to catch. We're surfacing insights to customers. And we're producing really, kind of, high-quality experience. And the feedback has been really, really fantastic. And the other part is we're getting great ideas from our customers.

So we really believe interacting with the customers, they've got things that take them a little bit longer or processes that they would love to see automated. And so we see a ton of opportunity on a go-forward basis to be able to add to the Ignite AI platform. And at the same time, we're going to continue to look forward to opportunities where we can create new modules, add-on modules like Recruiting Optimizer, like our absence management module that we're launching in January to be able to monetize those AI capabilities. And when you look at the breadth of our portfolio in AI, we feel like we've got a leading solution in the market.

Operator: Our next question comes from the line of Siti Panigrahi of Mizuho.

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

Steven Beauchamp: Yes. Yes. So I would tell you that on an increasing basis, your AI strategy and then more specifically, the AI products that are available to customers are coming up with prospect conversations, and they're absolutely part of that evaluation process. And they not only want to know what you have today, but they also want to know what is coming because I think as the market gets educated, they realize one of the ways to take advantage of AI is to make sure that the people they're partnering with have AI tools that will really drive efficiency. And so I would say absolutely that is -- really, we've had a great start from a revenue perspective.

I think Toby talked about the momentum in the sales force from a prepared remarks perspective. And I would tell you that our AI strategy is definitely a factor there. And I think the other point I would just make is we have actual AI products that we have both launched already and announced that are coming, that are directly monetizable and then add to the ARPU equation. So it's really a combination of those 2 that gives us, kind of, the confidence in making that statement that we're seeing the benefits of having a leading platform in AI.

Sitikantha Panigrahi: Okay. And then one quick follow-up. Workforce levels, I think you said last quarter, 50, 60 bps higher than your flat assumptions. So what are those running today? And what's your assumption in the guidance?

Ryan Glenn: Yes. I think the Q1 levels were very consistent with what we saw last year. So up -- probably rounding up to a point in that 50 to 60 range, rounding up to about 1. We continue to assume flat year-over-year within the guidance, so no change to how we approached that historically.

Operator: Our next question comes from the line of Jared Levine of TD Cowen.

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

Toby Williams: Jared, Toby. Yes, sure. I mean I think so far, we've seen a level of attach that we're really happy with. And I would tell you that, that is all the way through our target market from those that have under 50 employees to the heart of our market around 150 on average and then even into our enterprise clients. And I think when you look at where most of the demand has traditionally sat, it's really been in the core of our market. And I think that's what we've prepared for.

But I think as we've really launched these solutions and come through Q1, we've seen attachment penetration, I think, fairly well balanced in that -- in the core of our market, right around that 150 in the middle, but we've also seen it be relevant to those that are slightly smaller and slightly larger than that.

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

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

Operator: Our next question comes from the line of Daniel Jester of BMO Capital Markets.

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

Steven Beauchamp: Yes. I think you're right. You go back in our history, we've generally tried to launch products and focus on that new customer attach out of the gate. We would gain feedback from customers over time. We would stand up back to the base teams, make sure they're up and trained and ready and then we would have them go back to the client base. So that is something that we have done before. That is very much a typical motion. As you look at products like Elevate Solutions and Retirement, there's probably a little bit more pull-through demand that's already available in the client base.

And so we would stand up those back to the base teams earlier as part of that launch. I think that's probably why we called out some pretty quick momentum on both of those 2 new product launches. But it's pretty much the same formula. It's really just running that playbook a little bit earlier with the 2 new product launches. And then from an AI perspective, it's easier -- certainly easier adoption for some of the features for clients. But we really are running the same playbook for the products that are monetizable and that customers have to make a purchase decision for.

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

Steven Beauchamp: Sure. So I think if you, kind of, take a step back and our philosophy has always been very much, kind of, an open platform where if you go back in our history, we'll integrate with a bunch of different providers for things that we don't do. And if a customer is needing us to integrate with a competitor because they feel like they want to use that solution for, I don't know, recruiting or performance, we've always been very open to that. We want to be able to deliver the best possible customer experience. We've obviously expanded dramatically our marketplace over the last 5 to 7 years.

And I think that's the conversation around MCP and headless interaction is really the next iteration of that. And so if a customer wants to be able to interact in something like Claude or OpenAI or any of the frontier models, we do not have a problem with that concept at all. We want to deliver them the ideal experience, and we will meet them where they are. And so you'll see us continue with that philosophy in terms of our product road map on an ongoing basis.

Operator: Our next question comes from the line of Patrick Walravens of Citizens.

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

Toby Williams: I guess I would say there's a lot of consistency in our pricing conversations over the course of -- certainly over the course of the quarter. I think there's been a lot more talk in the market about the variability in pricing models that you're seeing with some of the different AI providers. I think in our industry at this point in time, we haven't seen any significant shifts in terms of the baseline pricing, whether that's on a PEPM basis or per seat basis for some of our other solutions. So not to say that, that doesn't evolve over the course of time. We certainly have had some of those conversations with clients.

But I think you're seeing in our industry at this point in time, grounding in the traditional pricing model. And I think for us, as we look forward, we just want to make sure that as we're rolling out new solutions, we have the flexibility to adjust from pricing standpoint if the market evolves. And I think we've done a pretty good job of making sure that's the case.

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

Toby Williams: Well, I think if you step back and look at all of the new products and solutions that we've launched over the course of the last 6 months or so, it's been a period of significant launch for us. A lot of those solutions we've talked about, whether it's recruiting or our Recruiting Optimizer, Retirement or the Elevate solutions and then everything we've done from the Ignite AI standpoint and as we look forward a bit, leave management. So it's been a pretty intense period of product development and launch. And so I think what you're seeing is the flow-through of the investments that we've made that we called out that we would make in the course of last year.

And all of that was positioned last year as investing for future growth. And I think what you're seeing in the quarter and with all those launches is just the pull-through of the success in the attach and penetration of those new solutions, which I think we're really excited about.

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

And we're pretty comfortable with the spend level and the ROI that we're getting on that investment.

Operator: Our next question comes from the line of Raimo Lenschow of Barclays.

Sheldon McMeans: This is Sheldon McMeans on for Raimo. I wanted to take a step back and ask about your thoughts on the durability of your AI differentiation in the market. And so it, kind of, seems like there's 2 opportunities, of course. You can agentify current solutions. You can -- maybe you talked about some solutions that wouldn't have been possible there without AI. But -- and then there's also the engineering returns and making it easier to expand into new product areas. So just, like, do you see, like, some of the things becoming table stakes and maybe the bigger opportunity is around, like, entering into new areas, getting that product velocity going?

Steven Beauchamp: Sure. I'm pretty comfortable with that part of the equation because that's really how we've operated forever. At the end of the day, we launched and we had payroll in a couple of modules when we IPO-ed in '14. We added a bunch of modules based on product feedback and market demand. We then were really the first to drive, kind of, an employee experience with community and surveys and rewards and recognition. And so the idea of, kind of, moving into this next innovation cycle for our industry and leveraging AI to be able to maybe expand beyond the traditional HCM footprint is something that we were already on that path for the last couple of years.

This is just going to unlock more opportunity. And so we're never going to sit and tell you we're completely satisfied with what we have today. We're going to drive new innovation to the market. We're going to work with customers to be able to solve more of their problems, and we think that, that's going to give us a bigger wallet share over time. And so I'm more excited today now that we've been making these investments and seeing customer interactions about the opportunities in front of us than AI than I was even a year or 2 ago.

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

Toby Williams: Yes. I think it was really -- looking back, I mean, just fresh coming out of it, I mean, it was a really successful event again this year. And I think we had a -- what I would characterize as traditional mix of mostly, as you said, current clients with a fair number of prospects in attendance as well to give them a good sense of what it is like to be a part of the Paylocity family. And the attendance, yes, on a year-over-year basis was up slightly. So really happy with having just over 3,000 people in attendance at Elevate.

Again, thank you to all of our clients who came and spent time with us, and I think it was a really successful event again this year.

Operator: Our next question comes from the line of Matt VanVliet of Cantor Fitzgerald.

Mason Marion: This is Mason Marion on for Matt. I wanted to check in on Paylocity for Finance. So at the time of the Airbase deal, we discussed your longer-term ambitions of penetrating 10% to 20% of your installed base. Now that we're 2 years down the line, how are you tracking against those longer-term aspirations?

Toby Williams: Yes. I think we're tracking exactly to the plan. As we look back on the -- a little less than 2 years, I think, and certainly less than that since we launched the fully integrated solution, really happy with how the team has progressed both in terms of integrating the business, integrating the product set and really happy with how the go-to-market team has been able to sell those products, both in terms of new deals, attaching to new deals and then also back into the customer base. So in aggregate, I think we're really happy and tracking exactly to that plan.

Operator: Our next question comes from the line of Jacob Smith of Guggenheim Securities.

Jacob Cody Smith: On Elevate, was there pent-up demand when you launched the offering? Is there a backlog that's giving you confidence to invest in the service organization so early? Or was that part of the plan? And can you just talk about what you're seeing so far in pipeline and ability to close those opportunities?

Toby Williams: Yes. I think we've seen a really strong pipeline, and we've also seen, I think, a strong ability to close those deals in the pipeline. And I think if we go back to some of the context we've given around the start of those solutions as an idea, I mean, we would frequently see clients coming to us and asking for the type of help that we are providing in the Elevate Solutions. And so I think we believe that -- and certainly had a large number of client conversations and market testing work leading up to that. But I think we believe that there was demand both in the market for new deals that we would bring in.

And I think we also believe there is demand that was in the client base. And I think that's exactly what we've seen as we've actually gotten the solutions launched and out there. It's still early days. I mean we're still in really, I think, the first full quarter of having them live. And I think that's a lot of what has given us the confidence to invest in those teams to support that business. I think we're ultimately really happy with how -- what we've seen so far from the demand standpoint coming through Q1.

Jacob Cody Smith: And just a follow-up there, too. Is the expectation still that the margin profile will be similar to the broader software business?

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

Operator: Our next question comes from the line of Tomer Zilberman of Bank of America.

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

Steven Beauchamp: Yes. I think we're really happy with both, kind of, finance and IT. I think on a relative basis, it's a much smaller part of our business. We're newer in that category. But we've seen really good momentum. I think the concept of being able to tie back to the employee record and know when the events are happening in real time, then being able to tie IT, particularly as you think of onboarding and offboarding and all the things that need to happen from an employee perspective, is really attractive to our customers. And so early innings for that product overall, but we are excited with the momentum that we are seeing.

And really, all the new products that Toby just, kind of, went through and mentioned, combined with the investments in finance and IT and additional HCM modules really contributed to a strong start.

Tomer Zilberman: Got it. Maybe as a follow-up in an unrelated piece, going back to the float business, your guide is $15 million above the previous guide. I think last quarter, you set out an expectation of 2 rate cuts. We've seen so far 1 rate hike with the potential for a second. Just curious what you're embedding. Is it just the one hike so far?

Ryan Glenn: Yes. So we've factored in the September 25 basis point rate increase. We have no further changes to rates over the balance of the fiscal year. So I think to the extent we see an increase, we will update you at that time with what the impact is to yields, and we provide the average daily balance every quarter. So we'll be able to provide that math if that were to happen.

Operator: Our next question comes from the line of Kevin McVeigh of UBS.

Kevin McVeigh: I think you mentioned seeing some green shoots in new product, kind of, the demand environment. Maybe help us understand what's been the source of that and the sustainability is your -- that's, again, the new products that are driving that, where it's a little bit better demand? Just help us dimensionalize that a little bit.

Toby Williams: Yes. I mean I think I would maybe bifurcate the new logos and then back into the client base. I think from a new logo standpoint, our view is that the demand environment remains really stable. And I think the go-to-market teams have done a really good job coming into this year from an execution standpoint and bringing new logos into the business. Fairly well-balanced quarter in terms of the growth between ARPU increase and new unit increase.

And then I think from a launching of new product standpoint, I think we're really happy with the balance that we've seen between attaching new products to new logos and then also being able to sell those products back into the client base and add value to our existing clients. So overall, I mean, I think -- we're -- we think the demand environment is very stable and pleased with the execution of the teams. And I think it's been overall from a growth standpoint, well balanced across new business, sales back into the client base, the contributions that the new products have made and then ultimately, the great job that our service team has done driving retention.

So I think overall, solid quarter and pretty well balanced from a performance standpoint.

Kevin McVeigh: That's helpful. And then I guess you've talked a little bit about AI starting to surface from a product perspective. Are you charging for that separately similar to a module? Or is it wrapping into just other packages? Or is it just -- I guess, how do you monetize it, I guess, [ is what I am asking ].

Steven Beauchamp: Yes. So if you think about our AI Ignite platform, there's multiple capabilities in a whole series of agents that are included in that platform. Some of those things are embedded in the flow of everyday work. So as you're completing your payroll process, our agent capability are going to reduce the number of errors. They're going to increase the efficiency, and they're going to produce more accurate results for you overall. And that's just embedded, and that's just part of our payroll platform. We're not charging separately for you. But I can tell you that when we demo it and we talk about it with prospects, it's a differentiation. There's a whole series of agents. That's just one example.

And then there's a second category of agents where we are really saving the customer a ton of time. It's something that they maybe don't purchase from us today. And then we are monetizing those separately. That's where Recruiting Optimizer and the leave management category come in. And so we're selling those back to existing customers. We're bundling those in for new. So it's really, kind of, a combination of both. And as we think about it over time, we'll continue to add modules that we can monetize. We'll continue to add AI capabilities across the platform that we will include just as part of differentiation.

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

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

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

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