Paylocity's Q1 2026: Contradictions Emerge on Demand Stability, Sales & Marketing Costs, Product Integration, and ARPU Strategy

Date of Call: November 4, 2025

Financials Results

• Revenue: $408.2M total revenue for Q1, up 12% YOY; recurring and other revenue up 14% YOY
• Gross Margin: Adjusted gross margin 75.1% for Q1, compared to 74.0% in Q1 last year (110 bps improvement)
• Operating Margin: Adjusted EBITDA margin 35.9% for Q1, up 110 basis points YOY; GAAP operating income $74.2M

Guidance:

• Q2 FY26 recurring & other revenue: $378.5M–$383.5M (~10% YOY)
• Q2 FY26 total revenue: $405.5M–$410.5M (~8% YOY)
• Q2 FY26 adjusted EBITDA: $131.5M–$135.5M; excl. client-funds interest: $104.5M–$108.5M
• FY26 recurring & other revenue: $1.605B–$1.620B (~10% YOY); total revenue: $1.715B–$1.730B (~8% YOY)
• FY26 adjusted EBITDA: $615M–$625M; excl. client-funds interest: $505M–$515M
• Interest income: Q2 ~ $27M; FY26 ~ $110M; one-time FY26 tax benefit ~ $65M
• Updated long-term targets: revenue target $3B (from $2B); adjusted gross margin 80%+; adjusted EBITDA margin 40%–45%; free cash flow 25%–30%; S&M 15%–20%; G&A 5%–7%; R&D 10%–15%; stock-based comp target ~5% of revenue.

Business Commentary:

* Revenue Growth and AI Strategy: - Paylocity reported total recurring and other revenue growth of 14% for Q1 fiscal '26, with Paylocity for Finance contributing to this increase. - The growth was driven by Paylocity's differentiated AI strategy, which includes predictive and actionable insights and AI-driven automation.

• Client Retention and Go-to-Market Effectiveness:
• The company reported strong client retention levels, with the broker channel contributing more than 25% of new business in Q1.

• The effectiveness of the broker channel is attributed to Paylocity's commitment to not compete with brokers by selling insurance products and investing in the channel to maintain strong partnerships.

• Profitability and R&D Investment:

• Adjusted gross margin improved to 75.1% from 74% in Q1, representing 110 basis points of leverage.

• The increase in profitability is attributed to scale and efficiency improvements, as well as significant investments in R&D, which increased by 16.4% year-over-year.

• Updated Financial Targets:

• Paylocity raised its long-term financial targets, including revenue to $3 billion and adjusted gross margin to 80% plus.
• The updated targets reflect confidence in achieving leverage and long-term growth opportunities driven by AI and expansion into the office of the CFO and IT.

Sentiment Analysis:

Overall Tone: Positive

• Management reported Q1 total revenue $408.2M, +12% YOY and said they beat the top end of guidance by $5.7M. Adjusted gross margin improved to 75.1% (up 110 bps) and adjusted EBITDA margin was 35.9% (up 110 bps). Company raised FY26 guidance and increased long-term revenue target from $2B to $3B, citing early AI benefits and scaling.

Q&A:

• Question from Brad Reback (Stifel, Nicolaus & Company, Incorporated, Research Division): Can you all give us an update on the macro, maybe how things were trending over the course of the quarter into October and your headcount assumptions in the updated guide?
  Response: Workforce levels were stable and slightly up YOY; guidance assumes flat workforce for the remainder of the fiscal year.

• Question from Brad Reback (Stifel, Nicolaus & Company, Incorporated, Research Division): On the updated long-term guidance, does the upside skew more to natural scale versus AI benefit?
  Response: AI is early but provides incremental multiyear leverage; natural business scale remains the core driver.

• Question from Mark Marcon (Robert W. Baird & Co. Incorporated, Research Division): Can you give more color on Paylocity for Finance and Airbase—client approach, go-to-market, sales trajectory?
  Response: Early traction: selling to new clients and adding into existing clients; field teams identify opportunities and inside sales close spend-management deals.

• Question from Mark Marcon (Robert W. Baird & Co. Incorporated, Research Division): You beat EBITDA by roughly $13.4M but raised guide by less than the beat—why?
  Response: Management maintained prudence to preserve flexibility for timing of investments; continued outperformance would flow to higher margins.

• Question from Daniel Jester (BMO Capital Markets Equity Research): Can you expand on the IT opportunity versus Paylocity for Finance?
  Response: IT leverages employee-record data for asset and identity management; early innings but complements finance and strengthens platform differentiation.

• Question from Daniel Jester (BMO Capital Markets Equity Research): Why update long-term targets now after the prior $2B target two years ago?
  Response: Strong execution against prior targets plus early benefits from AI and automation increased confidence to raise long-term targets.

• Question from Connor Passarella: What 1–2 execution milestones give highest confidence toward the $3B target?
  Response: Sustained unit growth plus ARPU expansion via cross-sell into finance and IT are the key execution drivers.

• Question from Connor Passarella: How are you thinking about pricing for Paylocity for Finance—stand-alone versus bundled?
  Response: Default is bundled suite pricing for new and existing clients, with flexibility to pivot to per-user pricing when market-fit dictates.

• Question from Sitikantha Panigrahi (Mizuho Securities USA LLC, Research Division): Can you describe demand across employee segments and feedback since adding finance and IT?
  Response: Demand was stable and broad-based across segments; no one segment materially outpaced others in Q1.

• Question from Sitikantha Panigrahi (Mizuho Securities USA LLC, Research Division): As AI drives efficiency, will you reinvest savings into go-to-market or capture margin?
  Response: They will balance reinvestment in product/R&D with margin expansion—both priorities going forward.

• Question from Sheldon McMeans (Barclays Bank PLC, Research Division): Any insight from Elevate sign-ups or top-of-funnel ahead of selling season?
  Response: Registrations are strong; Elevate is expected to support client engagement and sales momentum during the selling season.

• Question from Sheldon McMeans (Barclays Bank PLC, Research Division): Does the new AI assistant create go-to-market tailwinds to drive platform expansion?
  Response: Yes—AI assistant simplifies workflows, increasing product adoption and enabling back-sell into the client base.

• Question from Jared Levine (TD Cowen, Research Division): What ARPU opportunity do your IT offerings present relative to HCM and Airbase?
  Response: IT ARPU is larger than most HCM modules but generally smaller than the Airbase $25–30k ARPU; still early in commercialization.

• Question from Jared Levine (TD Cowen, Research Division): The ~$65M tax benefit—any headwinds to FY27?
  Response: The ~$65M tax benefit is a one-time FY26 item and should be adjusted out when modeling FY27.

• Question from Jacob Roberge (William Blair & Company L.L.C., Research Division): How has the selling season and pipeline progression been versus prior years?
  Response: Pipeline and conversion trends are positive; demand remains stable and go-to-market execution has been strong.

• Question from Jacob Roberge (William Blair & Company L.L.C., Research Division): Are deal cycles lengthening when selling a broader platform to multiple departments?
  Response: No meaningful elongation—typical approach is implement HCM first, then phase in other modules; sales motion mitigates longer cycles.

• Question from Ian Black: Does Paylocity for Finance impact long-term gross margin targets?
  Response: They expect the finance solution to achieve similar margins over time and not be a headwind to gross-margin targets.

• Question from Jordan Boretz: Any change in win rates versus competitors amid market consolidation?
  Response: Product differentiation and broker-neutral positioning support win rates; market remains competitive but consolidation can be helpful.

• Question from Jordan Boretz: How is sales rep productivity trending versus hiring expectations?
  Response: Headcount rose ~8%; focus on rep productivity has driven strong growth with modest hiring increases.

• Question from Jessica Wang (Raymond James & Associates, Inc., Research Division): Are customers landing with more products at outset or expanding later?
  Response: Both—clients increasingly take more products at acquisition and also expand post-sale, boosting ARPU.

• Question from Kincaid LaCorte: Any specific AI tools sales reps are using?
  Response: No single tool named; they leverage multiple AI capabilities across the go-to-market tech stack to automate rep workflows.

• Question from Kincaid LaCorte: Broker channel represented >25% of new business—do you want that to grow?
  Response: Broker channel (>25% of new business) remains a strategic focus and they will continue investing in it.

• Question from Aleksandr Zukin (Wolfe Research, LLC): How will retention evolve with AI, monetization and Airbase; organic vs inorganic strategy?
  Response: Retention (~92%+) is stable; organic product development remains core while M&A is used selectively for strategic acceleration.

• Question from Matthew VanVliet (Cantor Fitzgerald & Co., Research Division): How much ARPU growth is from cross-sell vs AI monetization today?
  Response: Current ARPU gains are primarily driven by HCM cross-sell; finance/IT and AI are expected to accelerate ARPU over time.

• Question from Matthew VanVliet (Cantor Fitzgerald & Co., Research Division): How should we think about the $2B→$3B split across HCM, finance and IT?
  Response: $3B target relies on continued unit growth plus ARPU expansion across HCM, finance and IT rather than a single-source lift.

• Question from Jason Celino (KeyBanc Capital Markets Inc., Research Division): For IT asset/identity management, what are customers using today and who are you competing with?
  Response: Many customers use manual processes or spreadsheets; Paylocity offers integrated asset management and identity integrations via APIs to improve automation.

• Question from Jason Celino (KeyBanc Capital Markets Inc., Research Division): Could Paylocity expand into front-office areas long term?
  Response: Focus remains on back-office (HCM/finance/IT) where TAM and low penetration offer runway; front-office expansion not prioritized.

• Question from George Michael Kurosawa (Citigroup Inc., Research Division): Any signs customers change hiring behavior because of AI?
  Response: No—client workforce levels observed remain stable; no material AI-driven hiring changes detected.

• Question from George Michael Kurosawa (Citigroup Inc., Research Division): Does Airbase change seasonal patterns versus HCM?
  Response: Airbase is a small part of the business today and does not materially alter seasonality at this time.

• Question from Zachary Gunn (Financial Technology Partners LP): Is cross-sell embedded within the $3B target—how does it affect the mix?
  Response: Management expects roughly half growth from units and half from ARPU historically; finance/IT support ARPU expansion but don't materially change that split.

• Question from Madeline Brooks: Why did the long-term sales & marketing target decline versus prior guidance?
  Response: Target reflects a rightsizing—prior FY S&M was near the top of prior range; new target assumes ongoing productivity improvements, not underinvestment.

• Question from Jacob Cody Smith (Guggenheim Securities, LLC, Research Division): How are you deepening broker relationships and any benefits from channel disruption?
  Response: They cultivate field-level and corporate broker relationships, leveraging long-term partnerships and pursuing opportunities from market consolidation.

Contradiction Point 1

Demand Environment Stability

It reflects differing perspectives on the stability of the demand environment, which is crucial for assessing the company's growth prospects.

How has the year-end selling season performed so far? How does this year's sales pipeline compare to the prior year period? - Jacob Roberge(William Blair & Company L.L.C.)

2026Q1: We are seeing stability in demand and strong execution from our go-to-market teams. Demand environment is stable, and teams have executed well, leading to strong performance in Q1. - Toby Williams(CEO)

What is the current demand environment? Is this environment reflected in your 2026 guidance? Are there factors that could adjust customer acquisition numbers up or down during the year? - Scott Randolph Berg(Needham & Company)

2025Q4: 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. - Toby J. Williams(CEO)

Contradiction Point 2

Sales and Marketing Expense Changes

It involves changes in the strategy and execution of sales and marketing expenses, which directly impact the company's budgeting and operational efficiency.

Why did your updated sales and marketing expense as a percentage of revenue decrease, despite AI and technological opportunities? - Madeline Brooks(Bank of America)

2026Q1: We are rightsizing our go-to-market investments. Our targets reflect our improved productivity, led by strong execution. - Toby Williams(CEO)

What caused the significant increase in sales and marketing expenses quarter-over-quarter—were they due to bonus payments or new investments in programs this year? - Scott Randolph Berg(Needham & Company)

2025Q4: 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. - Ryan Glenn(CFO)

Contradiction Point 3

Product Integration and Sales Strategy

It relates to the integration of acquired products and the associated sales strategy, which affects how the company approaches the market and its competitive position.

As you continue to market Paylocity for Finance, how are you approaching pricing? Are you testing a stand-alone versus bundled approach? - Connor Passarella(Truist Securities)

2026Q1: Our strategy is to bundle the product, but we are flexible with pricing depending on client preferences. - Toby Williams(CEO)

What are your expectations for Paylocity's finance and pricing? - Mark Steven Marcon(Baird)

2025Q4: We are getting good feedback from customers seeing the value in the integrated platform and ease of managing expenses. The integration is providing a real value proposition. - Steven R. Beauchamp(CFO)

Contradiction Point 4

Macroeconomic Conditions and Hiring Plans

It reflects differing perspectives on macroeconomic conditions and their impact on hiring plans, which could influence operational costs and productivity.

Can you provide an update on macro trends during the quarter into October and your headcount assumptions in the updated guidance? - Brad Reback (Stifel, Nicolaus & Company, Incorporated, Research Division)

2026Q1: We are assuming flat workforce levels over the balance of the fiscal year. That was our experience, not only in the quarter, but through October as well. - Ryan Glenn(CFO)

How will macroeconomic trends affect fiscal 2026 hiring plans? - Brad Reback (Stifel)

2025Q3: We're focused on slightly lower headcount growth and driving productivity. Plans for fiscal 2026 are still being finalized, but our mindset is similar to the current year and focused on efficiency. - Toby Williams(President and CEO)

Contradiction Point 5

ARPU Strategy and Growth Potential

It involves differing approaches to ARPU growth and the role of cross-selling in achieving revenue targets, which are critical for revenue projections and market positioning.

Is the $3 billion revenue target driven by HCM, finance, or IT? - Matthew VanVliet (Cantor Fitzgerald & Co., Research Division)

2026Q1: We achieve growth through unit growth and ARPU expansion, balanced across HCM, finance, and IT. - Toby Williams(CEO)

With PEPY at $600, how are you adjusting your forward-looking targets? - Jessica Wang (Raymond James & Associates, Inc., Research Division)

2025Q2: Our growth formula remains consistent: half from unit growth and half from ARPU expansion. - Steven Beauchamp(CFO)