Paylocity outlines $3B revenue target and boosts AI-driven platform investments amid updated long-term guidance

Earnings Call Insights: Paylocity Holding Corporation (PCTY) Q1 2026

MANAGEMENT VIEW

* Steven Beauchamp, Executive Chairman, stated that "we started off fiscal '26 with strong financial results with Q1 recurring and other revenue growth of 14% as our differentiated value proposition of providing the most modern software in the industry continues to see success in the marketplace." He highlighted total revenue of $408.2 million, a 12% growth over the prior year, and emphasized the launch of Paylocity for Finance, broadening the platform to the office of the CFO and IT. He described strong market reception to the unified AI-driven platform and noted, "usage of our AI-powered features has more than doubled, including over 1.2 million questions answered by our AI assistant."
* Toby Williams, President and CEO, indicated continued strong demand and sales momentum, with more than 25% of new business in Q1 sourced from the broker channel. He noted that AI-driven automation is driving higher product penetration, average revenue per client, and retention. Williams added, "our engineering teams are now using AI coding assistants on a daily basis for code generation, testing and design mockups and are realizing increased productivity and code quality through these investments."
* Ryan Glenn, CFO, stated, "total revenue for the first quarter was $408.2 million, an increase of 12%, with recurring and other revenues up 14% from the same period last year." Glenn reported that adjusted gross margin reached 75.1%, representing a 110 basis point improvement, and that adjusted EBITDA was $146.4 million, exceeding the top end of guidance by $11.4 million. He announced the repurchase of nearly 1.2 million shares at an aggregate $200 million and outlined an increase in long-term financial targets, including a revenue target of $3 billion and adjusted gross margin target of 80% plus.

OUTLOOK

* Glenn indicated that for Q2, recurring and other revenue is expected in the range of $378.5 million to $383.5 million, and total revenue is expected in the range of $405.5 million to $410.5 million. Adjusted EBITDA is expected between $131.5 million and $135.5 million. For fiscal '26, recurring and other revenue is expected to be $1.605 billion to $1.620 billion, with total revenue in the range of $1.715 billion to $1.730 billion. Adjusted EBITDA is guided to $615 million to $625 million.
* Glenn emphasized, "we are increasing all aspects of our guidance as follows...we are estimating the average daily balance will be approximately $3.25 billion with an average annual yield of approximately 340 basis points, representing approximately $110 million of interest income."
* Updated long-term targets now include higher revenue, margin, and cash flow projections than previously outlined, reflecting confidence in scaling through AI and automation.

FINANCIAL RESULTS

* The company reported total revenue of $408.2 million for Q1, recurring and other revenues up 14%, gross profit of $279.8 million, operating income of $74.2 million, and net income of $48 million. Adjusted gross margin improved to 75.1%, and adjusted EBITDA margin was 35.9%.
* Sales and marketing expenses were 21.3% of revenue, and G&A costs were 8.8%. Year-over-year, investment in total R&D increased by 16.4%. The company ended the quarter with $165.2 million in cash and $81.3 million outstanding on its credit facility. The company expects a $65 million free cash flow benefit from recent tax legislation in fiscal '26, which is a one-time item.

Q&A

* Brad Reback, Stifel: Asked about macro trends and updated headcount assumptions. Glenn responded that workforce levels were stable and even slightly better than expected, and flat workforce levels are assumed for the year.
* Mark Marcon, Baird: Inquired about the office of the CFO and Airbase acquisition. Williams explained early traction among new and existing clients, while Beauchamp added, "the feedback we get from our field...they're identifying prospects. They're really telling the broader story upfront."
* Daniel Jester, BMO: Asked about IT opportunities and timing for updated financial targets. Beauchamp described IT as another area for leveraging employee data and noted early client feedback. Glenn cited "continued confidence in the ability to scale the business," attributing updates to achieving prior targets and early benefits from AI.
* Connor Passarella, Truist: Sought top execution milestones for the $3 billion target. Beauchamp emphasized TAM and unit growth, while Williams cited a balanced approach between new client acquisition and ARPU expansion.
* Sitikantha Panigrahi, Mizuho: Focused on demand environment and efficiency gains from AI. Williams called demand stable, while Beauchamp stated, "we've had a pretty consistent approach of driving margin expansion...while also getting leverage in all the other parts of the business."

SENTIMENT ANALYSIS

* Analysts asked probing questions about macro stability, the Airbase integration, pricing, and the impact of AI, reflecting cautious optimism and focus on execution milestones, competitive differentiation, and go-to-market productivity. Tone was slightly positive, given strong results and raised guidance.
* Management maintained a confident and upbeat tone throughout, frequently referencing strong execution, early traction of new products, and increased guidance. Frequent use of phrases like "we are pleased," "we are confident," and "we are excited" signaled high confidence, with no defensive or hesitant language noted.
* Compared to the previous quarter, both management and analysts exhibited slightly increased confidence, with more focus on long-term targets and AI-driven differentiation.

QUARTER-OVER-QUARTER COMPARISON

* The current quarter saw an increase in all aspects of guidance and a significant update to long-term targets, including raising the revenue target to $3 billion and adjusted gross margin to 80% plus, compared to prior guidance focused on surpassing $2 billion.
* Strategic emphasis shifted more toward AI adoption, platform expansion into finance and IT, and automation benefits, whereas the previous quarter focused mainly on integrating Airbase and bringing Paylocity for Finance to market.
* Analysts' questions this quarter pivoted toward execution milestones for new targets, product penetration rates, and cross-sell opportunities, compared to earlier focus on demand environment and product integration.
* Management's tone was more proactive and ambitious, signaling confidence in scaling the business and leveraging AI and automation, compared to a more measured approach previously.

RISKS AND CONCERNS

* Management identified the one-time nature of the $65 million free cash flow benefit from tax legislation in fiscal '26, advising adjustment for fiscal '27.
* Analysts pressed on the sustainability of margin expansion, integration of new products, and potential for elongated sales cycles, with management assuring that sales cycles have remained consistent and that the go-to-market strategy mitigates potential delays.
* Market competition and consolidation were discussed, with management reiterating the importance of product differentiation and broker channel strength.

FINAL TAKEAWAY

Paylocity’s Q1 2026 results reflect robust revenue growth, increased adoption of its AI-driven platform, and successful expansion into the finance and IT segments. Management raised both near-term and long-term guidance, now targeting $3 billion in revenue and 80% plus adjusted gross margin, citing strong product momentum, stable demand, and early benefits from automation and AI. The company highlighted improved operating leverage, continued investment in R&D, and a significant one-time free cash flow benefit, while maintaining confidence in its ability to scale and differentiate in a competitive landscape.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/pcty/earnings/transcripts]

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