Q3 2025 Paylocity Holding Corp Earnings Call

Operator: Hello and welcome to Paylocity Holdings Corporation third quarter fiscal year 2025 earnings conference call. At this time, all participants are in a listen-only mode.

Hello, and welcome to pay Lofty holding corporation third quarter fiscal year 2025 earnings conference call.

At this time all participants are in a listen only mode.

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After the speaker's presentation, there will be a question and answer session to.

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Ryan Glenn: I would now like to turn the conference over to Ryan Glenn. You may begin.

Ryan Glenn: I would now like to turn the conference over to Ryan Glenn You may begin.

Ryan Glenn: Good afternoon, and welcome to Paylocity's earnings results call for the third quarter of fiscal 25, which ended on March 31, 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.

Ryan Glenn: Good afternoon, and welcome to pay last these earnings results call for the third quarter of fiscal 'twenty, five which ended on March 31, 2025, I'm, Ryan Glenn Chief Financial Officer, and joining me on the call today are executive Chairman and Toby Williams, President and CEO Pelosity today, we will be discussing the results announced in our press release issued after the market close.

Ryan Glenn: A webcast replay of this call will be available for the next 45 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. 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.

Ryan Glenn: A webcast replay of this call will be available for the next 45 days on our website under the Investor Relations tab before beginning the nice constantly that today's remarks, including statements made during the question answer session contain forward looking statements. These statements are subject to numerous important factors risks and uncertainties, which could cause actual results to differ from there.

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.

Ryan Glenn: 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. 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.

Ryan Glenn: We do not undertake any duty to update any forward looking statements also during the course of today's call.

Ryan Glenn: Refer to certain non-GAAP financial measures, 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 <unk> Dot com under the Investor Relations tab and filed with the Securities and Exchange Commission.

Ryan Glenn: 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.

Ryan Glenn: Please note that we are unable to reconcile any forward looking non-GAAP financial measure their directly comparable GAAP financial measure because the information which is needed to complete a reconciliation is unavailable at this time without unreasonable effort.

Ryan Glenn: In regard to our upcoming conference schedule, we will be attending the Cowan Annual Technology, Media, and Telecom Conference, the BMO Virtual Software Conference, the Jeffrey Software Conference, the William Blair Annual Growth Stock Conference, and the Mizzouho Tech Conference. Please let me know if you'd like to schedule time with us at any of these events.

Ryan Glenn: In regard to upcoming conference schedule, we will be attending the Cowen annual technology media and Telecom conference.

Ryan Glenn: Virtual software conference the Jefferies Software conference the William Blair Annual growth Stock Conference and then the duo Tech 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.

Steve Beauchamp: With that, let me turn the call over to Steve. Thanks, Ryan. And thanks to all of you for joining us on our third quarter fiscal 25 earnings call. Q3 represented another quarter of strong results with recurring and other revenue growth of 15% driven by our differentiated value proposition of providing the most modern software in the industry, continuing to resonate in the market. Total revenue grew 13% over Q3 of last year. Our sustained multi-year investment in R&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.

Speaker Change: Thanks, Brian and thanks to all of you for joining us on our third quarter fiscal 25 earnings call Q3 represented another quarter of strong results with recurring and other revenue growth of 15% driven by our differentiated value proposition of providing the most modern software in the industry continuing to resonate in the market.

Ryan Glenn: Total revenue grew 13% over Q3 of last year.

Ryan Glenn: Our sustained multi year investment in R&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.

Steve Beauchamp: In addition to our entrance into the office of the CFO with the acquisition of Airbase and the introduction of headcount planning, we have continued to build on our HCM industry leadership position on AI with a focus on driving a better client and user experience. For example, our AI assistant can now leverage a client's employee handbook to answer policy related questions, such as what is my organization's PTO policy? Additionally, our AI assistant is able to reference publicly available resources to answer common compliance related questions, like what sick pay laws apply to my organization. These automated instantaneous solutions are examples of the early AI use cases that we believe will drive tangible efficiency gains for our clients.

Ryan Glenn: In addition to our entrance into the office of the CFO with the acquisition of Air base and the introduction of head Count planning, we have continued to build on our HCM industry leadership position on AI with a focus on driving a better client and user experience.

Ryan Glenn: Sample our AI assistant can now leverage a client's employee handbook to answer policy related questions such as what is my organization PTO policy.

Ryan Glenn: Our AI assistant is able to reference publicly available resources to answer common compliance related questions like what sick pay laws apply to my organization. These automated instantaneous solutions are examples of the early AI use cases that we believe will drive tangible efficiency gains for our clients.

Steve Beauchamp: We also recently launched several new features to connect and streamline the employee recruiting and onboarding process. Clients can now embed background checks and skill assessments from third-party vendors into a recruiting module through seamless API integration. We believe continued investment in our broad ecosystem of third party partners will provide our clients with the tools needed to run and grow their business. Combined with our ongoing investments in both HCM and finance, we are confident we will continue to drive higher average revenue per client over time, which is now how we think about the economic opportunity associated with our product growth, given that not all of our new products will be priced in a PEPY model, but all of our products will contribute to a higher average revenue per client over time.

Ryan Glenn: We also recently launched several new features to connect and streamline the employee recruiting and Onboarding process.

Ryan Glenn: Clients can now embed background checks and skill assessments from third party vendors into our recruiting module through seamless API integrations.

Ryan Glenn: We believe continued investment in our broad ecosystem of third party partners will provide our clients with the tools needed to run and grow their business.

Ryan Glenn: With our ongoing investments in both HCM and finance we are confident we will continue to drive higher average revenue per client over time, which is now how we think about the economic opportunity associated with our product growth given that not all of our new products will be priced in a P. P Y model, but all of our products will contribute to a higher average revenue per car.

Steve Beauchamp: Our commitment to product development also continues to be recognized in the market, with Paylocity recently being named to TrustRadius' list of Best Love Software for 2025, and an overall leader in 10 HCM product categories in G2's Spring 2025 Grid Report.

Ryan Glenn: Overtime.

Ryan Glenn: Our commitment to product development also continues to be recognized in the market with Pelosity recently being named to Trust Research list of best loved software for 2025.

Ryan Glenn: And in overall leader intent HCM product categories, <unk> Spring 2025, great reports.

Steve Beauchamp: Additionally, Airbase by Paylocity was named a visionary in the 2025 Gartner Magic Quadrant for Accounts Payable application.

Ryan Glenn: Additionally, airbase by Pelosity was named a visionary in the 2025 Gartner magic quadrant for accounts payable applications.

Toby Williams: I would now like to pass the call to Toby to provide further color on the quarter. Solid sales and operational execution continued in our busiest time of the year, helping to drive another quarter of strong recurring revenue growth and increased revenue and profitability guidance for Fiscal 25. Recurring and other revenue of $421.1 million grew 15% over Q3 of last year and beat the high end of our guidance by $6.1 billion. We remain pleased with our sales execution and our strong competitive position in the market and we continue to see our product strategy resonating with clients and prospects.

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

Toby Williams: Thanks, Steve.

Toby Williams: <unk> sales and operational execution continued in our busiest time of the year, helping to drive another quarter of strong recurring revenue growth and increased revenue and profitability guidance for fiscal 'twenty five.

Toby Williams: <unk> and other revenue of $421 1 million grew 15% over Q3 of last year and beat the high end of our guidance by $6 1 million.

Toby Williams: We remain pleased with our sales execution and our strong competitive position in the market and we continue to see our product strategy resonating with clients and prospects.

Toby Williams: We also saw another strong quarter of channel performance as channel referrals, primarily from benefit brokers and financial advisors, once again represented more than 25% of new business for the third quarter as we continue to leverage this strong source of referrals. 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 going forward with the goal of continuing to deliver real value and true partnership and support to our referring brokers and clients.

Toby Williams: We also saw another strong quarter of channel performance as channel referrals, primarily from benefit brokers and financial advisers. Once again represented more than 25% of new business for the third quarter as we continue to leverage the strong source of referrals.

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.

Toby Williams: We remain committed to investing in and supporting the broker channel going forward with the goal of continuing to deliver real value and true partnership and support to our referring brokers and clients.

Toby Williams: While still in the early days, the AirBase team is now fully integrated within Paylocity and we're pleased with the progress we've made towards integrating the platforms from both a product and go-to-market perspective. The value proposition of having a single pane of glass through which all payroll and non-payroll related spend can be managed with a robust set of integrations with third party systems is resonating with existing and prospective clients. We expect this area will serve as a meaningful point of competitive differentiation, continue to build off the workforce planning capabilities offered as a part of our headcount planning solution, and help to expand our average revenue per client going forward.

Toby Williams: Still in the early days the airbase team is now fully integrated within Pelosity and we're pleased with the progress we've made towards integrating the platforms from both a product and go to market perspective.

Toby Williams: The value proposition of having a single pane of glass through which all payroll and non payroll related spend can be managed with a robust set of integrations with third party systems is resonating with existing and prospective clients.

Toby Williams: We expect this area will serve as a meaningful point of competitive differentiation continue to build up the workforce planning capabilities offered as a part of our head count planning solution and help to expand our average revenue per client going forward.

Toby Williams: Lastly, Q3 represents our busiest time of year as we work to support our clients through all their year-end processing and annual tax form filing needs. I'd like to say a huge thank you to our more than 6,500 employees who live and represent our key values every day and who work hard to support our clients.

Toby Williams: Lastly, Q3 represents our busiest time of year as we work to support our clients through other year end processing and annual tax form filing needs I'd like to say a huge thank you to our more than 6500 employees, who live and represent our key values every day and who work hard to support our clients the strong culture Pelosity.

Toby Williams: The strong culture of Paylocity continues to be recognized externally, as we were recently named by Newsweek as one of America's greatest workplaces for women.

Ryan Glenn: <unk> continues to be recognized externally as we were recently named by Newsweek as one of America's greatest workplaces for women I would now like to pass the call to Ryan to review the financial results in detail and provide updated fiscal 'twenty five guidance.

Ryan Glenn: I would now like to pass the call to Ryan to review the financial results in detail and provide updated Fiscal 25 guidance. Thanks, Toby. Q3 recurring and other revenue was $421.1 million, an increase of 15%, with total revenue of 13% from the same period last year. Our Q3 results were primarily driven by another solid quarter for our sales team, allowing us to come in $10.5 million above the top end of our total revenue guidance, and resulting in a raise to our fiscal year guidance by more than our quarterly beat for the third consecutive quarter this year.

Ryan Glenn: Thanks, Tobey Q3 recurring and other revenue was $421 1 million an increase of 15% with total revenue up 13% from the same period last year. Our Q3 results were primarily driven by another solid quarter for our sales team, allowing us to come in $10 5 million above the top end of our total revenue guidance and resulting in a raise to our fiscal.

Ryan Glenn: Year guidance by more than our quarterly beat for the third consecutive quarter. This year. Our adjusted gross profit was 77% for Q3, an increase of 110 basis points from Q3 of last fiscal year as we continue to focus on scaling our operational costs, while maintaining industry leading service levels.

Ryan Glenn: Our adjusted gross profit was 77% for Q3, an increase of 110 basis points from Q3 of last fiscal year, as we continue to focus on scaling our operational costs while maintaining industry leading service level.

Ryan Glenn: We continue to make significant investments in research and development, and to understand our total investment in R&D, it is important to combine both what we expense and what we capitalize. On a dollar basis, our year-over-year investment in total R&D increased by 14.6% when compared to the third quarter of fiscal 24, and we remain focused on making investments in R&D as we continue to build out the Paylocity platform to serve the needs of the modern workforce. In regards to our go-to-market activities, on a non-gap basis, sales and marketing expenses were 18.2% of revenue in Q3, and a non-gap basis, G&A costs were 8.4% of revenue in the third quarter.

Ryan Glenn: We continue to make significant investments in research and development and to understand our total investment in R&D. It is important to combine both what we expense and what we capitalize on a dollar basis, our year over year investment in total R&D increased by 14, 6% when compared to the third quarter of fiscal 'twenty four and we remain focused on making investments in R&D as we contain.

Ryan Glenn: The build out to pay lastly platform to serve the needs of the modern workforce.

Ryan Glenn: In regards to our go to market activities on a non-GAAP basis sales and marketing expenses were 18, 2% of revenue in Q3, and a non-GAAP basis G&A costs were eight 4% of revenue in the third quarter.

Ryan Glenn: Our adjusted EBITDA for the third quarter was $197.1 million, or 43.4% of revenue for the quarter, and well exceeded the high end of our guidance, while adjusted EBITDA excluding the impact of interest income on funds held for clients was $163.6 million, also significantly exceeding our guidance for Q3.

Ryan Glenn: Our adjusted EBITDA for the third quarter was $197 1 million or 43, 4% of revenue for the quarter and well exceeded the high end of our guidance, while adjusted EBITDA. Excluding the impact of interest income on funds held for clients was $163 6 million also significantly exceeding our guidance for Q3.

Ryan Glenn: Briefly covering our gap results for Q3, gross profit was $324.7 million, operating income was $127 million, and net income was $91.5 million. In regard to the balance sheet, we ended the quarter with $477.8 million in cash, cash equivalents and invested corporate cash, and $243.8 million outstanding on our credit facility related to the Airbase acquisition, with approximately $81 million repaid on our outstanding balance in Q3. Additionally, given the confidence we have in our business and our strong cash flows, we continue to utilize our share repurchase program, with $84.9 million for approximately 429,000 shares of common stock repurchased in Q3 at an average price of $198.13 per share.

Ryan Glenn: Briefly covering our GAAP results for Q3 gross profit was $324 7 million operating income was $127 million and net income was $91 5 million.

Ryan Glenn: In regard to the balance sheet, we ended the quarter with $477 8 million in cash cash equivalents and invested corporate cash and $243 8 million outstanding on our credit facility related to the air based acquisition with approximately $81 million repaid on our outstanding balance in Q3.

Ryan Glenn: Additionally, given the confidence we have in our business and our strong cash flows we continue to utilize our share repurchase program with $84 9 million or approximately 429000 shares of common stock repurchased in Q3 at an average price of $198 13 per share in total through April 30, we have repurchased 100.

Ryan Glenn: In total, through April 30th, we have repurchased $150 million, or approximately 800,000 shares of common stock this fiscal year at an average price of $190.16 per share. As a reminder, we have approximately $200 million remaining under our current share repurchase program and anticipate continuing to execute against the repurchase program going forward.

Ryan Glenn: $50 million or approximately 800000 shares of common stock this fiscal year at an average price of $190 16 per share.

Ryan Glenn: As a reminder, we have approximately $200 million remaining under our current share repurchase program and anticipate continuing to execute against our repurchase program going forward.

Ryan Glenn: In regard to client health funds and interest income, our average daily balance of client funds was $3.6 billion in Q3. We are estimating the average daily balance will be approximately $3.1 billion in Q4, with an average annual yield of approximately 350 basis points, representing approximately $27.4 million of interest income in Q4. On a four-year basis, we are estimating the average yearly balance will be approximately $3 billion with an average yield of approximately 400 basis points, representing approximately $120 million of interest income. In regard to interest rates, our guidance reflects all Fed cuts to date, with an additional 25 basis point rate cut assumed in next week's FOMC.

Ryan Glenn: In regard to client held funds and interest income our average daily balance of client funds was $3 6 billion. In Q3, we are estimating the average daily balance will be approximately $3 1 billion in Q4 with an average annual yield of approximately 350 basis points, representing approximately $27 4 million of interest income in Q4.

Ryan Glenn: On a full year basis, we are estimating the average daily balance will be approximately $3 billion with an average yield of approximately 400 basis points, representing approximately $120 million of interest income.

Ryan Glenn: In regard interest rates our guidance reflects all fed cuts to date with an additional 25 basis point rate cut assumed in next week's <unk> meeting.

Ryan Glenn: Finally, I'd like to provide our financial guidance for Q4 and full Fiscal 25. Note that as a result of our strong third quarter, we are increasing our Fiscal 25 recurring and other revenue guidance by $12.5 million and our total revenue guidance by $19.5 million at the midpoint, which includes the full impact of our guidance being in Q3 and a further increase in Q4 revenue guidance. Additionally, we continue to realize success driving increased profitability across our business, resulting in increased adjusted EBITDA guidance, which includes the full impact of our guidance beat in Q3 and increased profitability expectations for fiscal 25.

Ryan Glenn: Finally, I'd like to provide our financial guidance for Q4 and full fiscal 'twenty five note that as a result of our strong third quarter, we are increasing our fiscal 'twenty five recurring and other revenue guidance by $12 $5 million and our total revenue guidance by $19 $5 million at the midpoint.

Ryan Glenn: Which includes the full impact of our guidance beat in Q3, and a further increase in Q4 revenue guidance.

Ryan Glenn: Additionally, we continue to realize success driving increased profitability across our business, resulting in increased adjusted EBITDA guidance, which includes the full impact of our guidance beat in Q3 and increased profitability expectations for fiscal 'twenty five.

Ryan Glenn: We continue to be pleased with our ability to drive operating leverage in our business with our updated guidance reflecting 100 basis points of adjusted EBITDA leverage, excluding interest income on funds held for clients versus Fiscal 24, and representing approximately 200 basis points of organic operating leverage in Fiscal 25, well more than offsetting the approximately 100 basis point headwind in Fiscal 25 from the Airbase Act. With that said, for the fourth quarter of fiscal 25, recurring and other revenue is expected to be in the range of $358.1 million to $363.1 million, or approximately 11% growth over fourth quarter fiscal 24 recurring and other revenue.

Ryan Glenn: We continue to be pleased with our ability to drive operating leverage in our business with our updated guidance, reflecting a 100 basis points of adjusted EBIT leverage excluding interest income on funds held for clients versus fiscal 'twenty, four and representing approximately 200 basis points of organic operating leverage in fiscal 'twenty, five well more than offsetting the approximate 100 basis point headwind in fiscal 'twenty.

Ryan Glenn: Five from the air based acquisition.

Ryan Glenn: With that said for the fourth quarter of fiscal 'twenty five recurring and other revenue is expected to be in the range of $358 1 million to $363 1 million or approximately 11% growth over fourth quarter of fiscal 'twenty four recurring and other revenue.

Ryan Glenn: And total revenue is expected to be in the range of $385.5 million to $390.5 million or approximately 9% growth over fourth quarter fiscal 24 total revenue. Adjusted EBITDA is expected to be in the range of $118.7 million to $122.7 million and Adjusted EBITDA excluding interest income on funds held for clients is expected to be in the range of $91.3 million to $95.3 million. And for fiscal year 25, we are increasing all aspects of our guidance as follows, recurring other revenue is now expected to be in the range of $1.460 billion to $1.465 billion, or approximately 14% growth over fiscal 24 recurring another revenue.

Ryan Glenn: And total revenue is expected to be in the range of $385 5 million to $390 5 million or approximately 9% growth over fourth quarter of fiscal 2000 and for total revenue.

Ryan Glenn: Adjusted EBITDA is expected to be in the range of $118 7 million to $122 7 million.

Ryan Glenn: And adjusted EBITDA, excluding interest income on funds held for clients is expected to be in the range of $91 3 million to $95 3 million and.

Ryan Glenn: And for fiscal year 'twenty five we are increasing all aspects of our guidance as follows recurring other revenue is now expected to be in the range of one 460 billion to $1 46, 5 billion or approximately 14% growth over fiscal 'twenty four recurring and other revenue.

Ryan Glenn: Total revenue is expected to be in the range of $1.580 billion to $1.585 billion, or approximately 13% growth over fiscal 24. Adjusted EBITDA is expected to be in the range of $571 million to $575 million and Adjusted EBITDA excluding interest income on funds held for clients is expected to be in the range of $451 million to $455 million.

Ryan Glenn: Total revenue is expected to be in the range of $1 580 billion to $1 $5 5 billion or approximately 13% growth over fiscal 'twenty four.

Ryan Glenn: EBITDA is expected to be in the range of $571 million to $575 million and adjusted EBITDA. Excluding interest income on funds held for clients is expected to be in the range of $451 million to $455 million.

Ryan Glenn: In conclusion, we are pleased with our Q3 results and the momentum we have across our sales and operations teams as we head into the final quarter of the year.

Ryan Glenn: In conclusion, we are pleased with our Q3 results and the momentum we have across our sales and operations teams as we head into the final quarter of the year. Operator, we are now ready for questions.

Operator: Operator, we are now ready for questions. Thank you. Ladies and gentlemen, as a reminder to ask a question, please press star 1-1 on your telephone, then wait for your name to be announced. To withdraw your question, please press star 1 again. We ask that you limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster.

Les: Thank you Les.

Speaker Change: Ladies and gentlemen, as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to.

Les: To withdraw your question. Please press star one again.

Les: I ask that you limit yourself to one question and one follow up.

Les: Please standby, while we compile the Q&A roster.

Scott Berg: Our first question comes from the line of Scott Berg with Needham and Company. Your line is open. Hi everyone, really nice quarter here.

Scott Berg: Our first question comes from the line of Scott Berg with Needham <unk> Company. Your line is open.

Scott Berg: Hi, everyone really nice quarter here.

Steve Beauchamp: My first question, Steve, is about a comment that you made around future modules, maybe not being in a pep-em or peppy kind of model. I guess, how does that change your conversations with customers? HR, you know, and I know you're starting to do more outside of just the traditional HR role. But, you know, I think about how HR managers kind of think and think about managing a budget, historically been a very much a per employee basis conversation. Does some of the things that you're bringing to market today, you know, does it really change that conversation?

Scott Berg: My first question, Steve is about a comment that you made around future modules JV not being enough capital Mark happy kind of model.

Scott Berg: How does that change your conversations with customers HR and I know, you're starting to do more outside of just the traditional EHR roll but.

Scott Berg: Think about how HR managers kind of thinking about manage the budget stork lead bet. It very much a per employee basis conversation.

Scott Berg: Some of the things that you're bringing to market today doesn't really change the conversation isn't something that they're kind of a constant huge maybe help us think about how that might be different.

Steve Beauchamp: Is it something that they're kind of accustomed to? Maybe help us think about how that might be different. Yeah, it's a good question, Scott. I think you're right. The HR buyers are definitely used to a per employee per month translating to a per employee per year model. And if you look at our HCM portfolio, that is the way we've priced it historically. And that's the way we're going to continue to price it going forward. I think the call out is as we move into office as a CFO, you often see per user model, there may be certain features in there that have transactional fees associated with it.

Scott Berg: Yes, it's a good question Scott.

Scott Berg: I think youre right. The HR buyers are definitely used to a per employee per month translating to a per employee per year model and if you look at our HCM portfolio that is the way we've priced it historically and that's the way we're going to continue to price going forward I think the call out is as we move into office of the CFO you often see per user model there.

Scott Berg: May be certain features in there that have transactional fees associated with it and so our goal is to replicate pricing that the persona is our Youtube whether that to CFO or an HR leader and make sure that we've got a competitive solution not only with features but from a pricing perspective and that will require different pricing models for different solutions and different personas.

Steve Beauchamp: And so our goal is to replicate pricing that the personas are used to, whether that's a CFO or an HR leader, and make sure that we've got a competitive solution, not only with features, but from a pricing perspective. And that will require different pricing models for different solutions and different personas. I don't think it's a problem from a go to market perspective, because it's really a land and expand strategy that we're executing. And so our existing Salesforce will certainly be leading with the HCM products, we will leverage the additional products from a differentiation perspective. But I think the bigger opportunity is to sail back to the client base with those products, which would be a different sales.

Scott Berg: I don't think its a problem from a go to market perspective, because it's really a land and expand strategy that we're executing and so our existing sales force, we will certainly be leading with the HCM products, we will leverage the additional products from a differentiation perspective, but I think the bigger opportunity is the sale back to the client base with those products, which would be different.

Scott Berg: Salesforce.

Scott Berg: Understood. Helpful. Thank you, Steve.

Scott Berg: Yes.

Scott Berg: Understood helpful. Thank you, Steve and then Ryan your.

Ryan Glenn: And then, Ryan, your operating expenses were... I don't know, much lower than I would have expected in the quarter, even with your typical kind of outperformance cadence. Was there any one thing or one time items that kind of contributed to in the quarter to kind of drive that because operating expenses were basically flat quarter over quarter. That's not your typical Q2 to Q3 season. Yeah, Scott, nothing that I'd call out, particularly one time, I think you can always get a little bit of timing within the fiscal year relative to some of the hiring, but some of the non-labor expenses as well.

Speaker Change: Your operating expenses were.

Speaker Change: I don't know much lower than I would've expected in the quarter, even with your typical kind of outperformance cadence was there any one thing or one time items that kind of contributed in the quarter just kind of drive that because operating expenses were basically flat quarter over quarter and that's not your typical Q2 to Q3 seasonality.

Speaker Change: Yes, it's got nothing that I'd call out, particularly one time I think you can always get a little bit of timing within the fiscal year relative to.

Speaker Change: Some of the hiring but then some of the non labor expenses as well I think if you look at for the first nine months of the year R&D spend is up really consistent with revenue growth in the low teens.

Scott Berg: I think if you look at for the first nine months of the year, R&D spend is up really consistent with revenue growth in the low teens. Sales and marketing spend, I think it's about 12% first nine months of the year. So a little bit of timing, I wouldn't read into that, other than, you know, just about when the cost may come in throughout the fiscal Excellent, really nice quarter.

Speaker Change: Sales and marketing spend I think is about 12% in first nine months of the year, So a little bit of timing I wouldn't read into that other than just about when the cost may come in throughout the fiscal year.

Unknown Executive: Congrats again guys. Thanks. Thank you.

Speaker Change: Excellent really nice quarter, Congrats again guys.

Speaker Change: Thanks, Thank you.

Operator: Please stand by for our next question.

Speaker Change: Please standby for our next question.

Alana Brad Reback: Our next question comes from Alana Brad Reback with Stiefel. Your line is open. Great, thanks very much.

Brad Reback: Our next question comes from the line of Brad Reback with Stifel. Your line is open.

Toby Williams: Maybe from a macro perspective, you can talk to what you're seeing in real time. Yeah, Toby, I mean, I think from a macro standpoint, we've seen things be, I think if you go back to the end of last fiscal year, we would have said things were starting to stabilize. And I think that was the case in in the first two quarters of this, this fiscal year, I think, you know, what we started to see in Q3 was, you know, probably some continuation of that stability. But I think there's definitely starting to be some, you know, some reflection of that in some of the deals.

Brad Reback: Great. Thanks, very much maybe from a macro perspective, you can talk to you what youre seeing in real time.

Brad Reback: Yes.

Toby Williams: Toby I mean, I think from macro standpoint, we've seen things be yes.

Toby Williams: Yes, I think if you go back to the end of last fiscal year. We would have said things were starting to stabilize and I think that was the case in the first two quarters of this fiscal year I think what we started to see in Q3 was.

Toby Williams: Probably some continuation of that stability, but I think there is definitely starting to be some.

Toby Williams: Some reflection of that in some of the deals.

Toby Williams: And I think that goes back to a little bit of what we would have seen last year, where you just started to see a little bit of pause entering into the mindset of buyers. And I think, you know, I wouldn't lean into that too far. But I think that's, that's some of what we're starting to see, again, in the market. But I think what we in Q3, I mean, still strong performance. And I think, you know, had a really good January and pleased with overall with how the team executed through the course of the quarter and up to this point in the year.

Toby Williams: I think that goes back to a little bit of what we would've seen last year, where you just started to see.

Toby Williams: Little bit of pause entering into the mindset of buyers and I think I wouldn't lean into that too far, but I think thats thats. Some of what we're starting to see again in the market, but I think in Q3, I mean still strong performance and I think you had a really good January and pleased with overall with how the team executed through the course of the quarter and up to this point in the year.

Alana Brad Reback: Great color.

Toby Williams: And with that as the backdrop, you know, any sense how that might impact your, your, your hiring plans for quota carrying capacity as you head into fiscal 26? Well, we haven't, we certainly haven't finalized the plans for heading into 26 yet. But I think, you know, we're watching pretty closely what we're seeing on a day to day basis across the business, and certainly with respect to our go to market efforts. I mean, I think, if you think about how we came into this fiscal year, you know, the situation wasn't entirely different. And I think we came in with a focus on slightly lower rep headcount growth and the view that we'd be able to drive productivity throughout the course of the year.

Toby Williams: Great color and with that as the backdrop.

Speaker Change: Any sense, how that might impact you.

Speaker Change: Your your hiring plans for quota carrying capacity as you head into fiscal 'twenty six.

Speaker Change: Well, we haven't we certainly haven't finalized plans for heading into 2006, yet, but I think we're watching pretty closely what we're seeing on a day to day basis across the business and certainly with respect to our go to market efforts I think if you think about how we came into this fiscal year.

Speaker Change: The situation wasn't entirely different and I think we came in with a focus on slightly lower rep head count growth and the.

Speaker Change: Yes.

Toby Williams: And I think that's really what we've been able to do. So far in the first three quarters of fiscal 25. And I think our mindset is probably in a similar spot, at least at this point, at the very start of Q4. But like I said, we're, you know, we're kind of going through the cycle right now of putting the plans together. And, you know, I think overall, I would just say I feel pretty good about how we've executed from a go to market perspective throughout the course of the first three quarters. Great, thanks very much.

Speaker Change: View that we'd be able to drive productivity throughout the course of the year and I think that's really what we've been able to do so far in the first three quarters of fiscal 'twenty five and I think our mindset is probably in a similar spot at least at this point at the very start of Q4, but like I said, we're kind of going through the cycle right now of putting the plans to.

Speaker Change: Other than.

Speaker Change: I think overall I would just say I feel pretty good about how we've executed from a go to market perspective throughout the course of the first three quarters.

Speaker Change: Great. Thanks very much.

Operator: Please stand by for our next question.

Speaker Change: Thank you.

Speaker Change: <unk> our next question.

Brian Peterson: Our next question comes from the line of Brian Peterson with Raymond James. Your line is open. My congrats on a strong quarter.

Speaker Change: Our next question comes from the line of Brian Peterson with Raymond James Your line is open.

Toby Williams: So Toby, one of the follow up on the some of the macro commentary, is there anything that you're seeing that separate depending on certain size of your customer base with a larger or smaller customers or just any more color on what you could say if people are maybe hitting the pause button a little No, I mean, I think it's, I think we are starting to see the very beginnings of things like that. I don't think, you know, I wouldn't call it out in any other way, really. I mean, I think last year, when we got into Q1 and Q2, we started to see, you know, more thoughtful decision making probably taking a little bit longer, particularly in the enterprise space.

Speaker Change: My congrats on the strong quarter. So Tobey wanted to follow up on some of the macro commentary is there anything that you're seeing that separate depending on certain size of your customer base with larger or smaller customers or just any more color on what you could say if people are maybe hit the pause button a little bit.

Speaker Change: No I mean I think it's.

Speaker Change: We are starting to see the very beginnings of things like that I don't think.

Speaker Change: I wouldn't call it out in.

Speaker Change: In any other way really I mean, I think last year.

Speaker Change: When we got into Q1 and Q2, we started to see.

Speaker Change: More thoughtful decision, making probably taking a little bit longer, particularly in the enterprise space I mean I think.

Toby Williams: I mean, I think, you know, coming, coming through the end of last fiscal year and into this fiscal year, I think we have shored up some of our execution. And I think the investments that we've made, particularly in the enterprise part of the market for us have really been paying off. And you saw a lot of that coming through in the strength that we had in January.

Speaker Change: Coming coming through the end of last fiscal year and into this fiscal year I think we have.

Speaker Change: Shored up some of our execution and I think the investments that we've made particularly in the enterprise part of the market for us have really been paying off and as you saw a lot of that coming through and the strength that we had in January.

Ryan Glenn: But I think, you know, it's, we're kind of in the early days of what I described and no other, no other real Hey, Brian, the only thing I would add relative to the client basis, we're seeing a lot of stability. So as I look at client workforce levels, they're actually up a touch year over year, we're seeing some of the same seasonal growth that we would see in a normal cycle where some of the clients that have seasonal employees are hiring in that April and May, June timeframe. So I agree with Toby's points. But I think at the same time within the client base, we are seeing a lot of stability and seeing some of that natural seasonal movement that we would typically Got it.

Speaker Change: But I think it's.

Speaker Change: We're kind of in the early days of what I described in no other real comments Brian.

Speaker Change: Brian the only thing I would add relative to the client basis, we're seeing a lot of stability. So as I look at client workforce levels were actually up a touch year over year, we're seeing some of the same seasonal growth that we would see in a normal cycle, where some of the clients that have seasonal employees are hiring in that April and May June timeframe. So I agree with tobi points, but I think it.

Speaker Change: At the same time within the client base, we are seeing a lot of stability and seeing some of that natural seasonal movement that we would typically see.

Ryan Glenn: And maybe just to follow up, Ryan, on the margins, like as we think about the longer term lens, given what you guys just did with the two to three points of margin expansion, excluding float, what's the right way to think about that cadence of margin expansion longer term? Yeah, I think we obviously have been really pleased with the first nine months of this year, the ability to take up the guidance. And as I said, my prepared remarks, guiding operating adjusted EBITDA SOX float to 100 basis points of leverage, which is really, you know, north of 200, when you factor in the headwind from airbase.

Speaker Change: Got it and maybe just a follow up Brian on the margins as we think about the longer term lens given what you guys. Just did with the two to three points of margin expansion, excluding float what's the right way to think about that cadence of margin expansion longer term. Thanks guys.

Speaker Change: Yes, I think we obviously have been really pleased with the first nine months of this year the ability to take up the guidance and as I said in my prepared remarks guiding.

Speaker Change: Operating adjusted EBITDA, So ex float 200 basis points of leverage which is really north of 200, when you factor in the headwind from air base and that's on the back of fiscal 'twenty, four where we had 280 basis points of operating EBIT leverage so tremendous amount of leverage we've driven across the business, particularly over the last 24 months.

Ryan Glenn: And, you know, that that's on the back of fiscal 24, where we had 280 basis points of operating EBITDA leverage. So tremendous amount of leverage we've driven across the business, particularly over the last 24 months, would certainly not expect to drive that level of overperformance in a normal cycle.

Speaker Change: But certainly not expect to drive that level of over performance in a normal cycle and I think we've always thought about this on really a multi year basis. So you may enter periods, where you have a little bit incremental investment across the business, especially when you have significantly over performed so we'll keep all of those elements in mind as you think about what 26 and beyond would look like but no.

Ryan Glenn: And I think we've always thought about this on really a multi year basis. So you may enter periods where you have a little bit incremental investment across the business, especially when you significantly overperformed. So we'll keep all those elements in mind as we think about what 26 and beyond would look like. But no question over the medium and long term, we continue to have a lot of confidence in our ability to drive adjusted EBITDA and free cash flow margins higher as the business continues to scale.

Speaker Change: Over the medium and long term, we continue to have a lot of confidence in our ability to drive adjusted EBITDA and free cash flow margins higher as the business continues to scale.

Unknown Executive: Thanks, Ron.

Karen: Thanks, Karen.

Operator: Please stand by for our next question.

Speaker Change: Okay. Thank you.

Karen: Please standby for our next question.

Samad Samana: Our next question comes from the line of Samad Samana with Geoffrey. Your line is open. Hey, good evening. And thank you for taking my questions. Maybe first, just I know the company has been very, very consistent in the approach to the guidance framework. But I just wanted to ask some context, given some of the answers you've given in the q&a, which is, is because it was the increase being more than the beat is obviously a great sign. But is that point in time based on what you've already experienced?

Speaker Change: Our next question comes from the line of Samad Samana with Jefferies. Your line is open.

Samad Samana: Hey, good evening and thank you for taking my questions.

Samad Samana: First just I know the company has been very very consistent in the approach to the guidance framework, but I just wanted to ask some context.

Samad Samana: Given some of the answers you've given in the Q&A, which is.

Samad Samana: The increase being more than the beat is obviously a great sign but is that point in time based on what you've already experienced or does it incorporate some of the early signs of exit youre pointing out that may have been a maybe a touch of weakness maybe out there just help us understand how you guys cut qualitatively thought about the guidance.

Ryan Glenn: Or does it incorporate some of the early signs that you're pointing out, that may have been a, you know, shows maybe a touch of weakness, maybe out there, just help us understand how you guys kind of qualitatively thought about the guidance. Yeah, I think we, as you said, we have had a lot of consistency. And we can we think about guidance, and we have had the same approach for Q4. So I think to our, you know, my comments a minute ago, we're seeing a lot of stability in the client base, you know, agree with Toby's comments that we're certainly seeing the volatility out there, there's some level of uncertainty, but would not say that there's been any material impact to the momentum we've seen in the business for the first nine months of the year.

Toby Williams: Yes, I think as you said, we've had a lot of consistency and we can we think about guidance and we have had the same approach for Q4. So I think my comments a minute ago, we're seeing a lot of stability in the client base agree with toby's comments that we're certainly seeing the volatility out there. There is some level of uncertainty, but would not say that there has been any material impacts to the momentum.

Toby Williams: We've seen in the business for the first nine months of the year. So feel like we've taken all the factors into account and feel really good about the Q4 guidance and I think similar setup to how we've talked about the first three quarters of the year, which is feel like thats, a prudent level of guidance and if the team continues to deliver strong results, we'd be in a position to potentially beat and raise.

Ryan Glenn: So feel like we've taken all the factors into account. And, you know, feel really good about the Q4 guidance. And I think similar setup to how we've talked about the first three quarters of the year, which is feel like that's a prudent level of guidance. And if the team continues to deliver strong results, we'd be in a position to potentially be right. Great.

Ryan Glenn: And maybe just to follow up, I know Scott asked about just the seasonal trend in OPEX. But if I zoom out, as a follow up, sales and marketing expense has actually been relatively flat, or it's only slightly melted up since, since March of 24. Right. And I think that's pretty impressive, given what you guys have been putting in terms of top line numbers. So how much of that is the the focus on productivity that you guys have called out? Obviously, the sales team seems to be doing a great job there, versus you guys deploying maybe some of these new AI technologies internally to be more efficient or offset maybe headcount growth there just help us understand, given that it's, you know, it's really plateaued over the last several quarters.

Toby Williams: Great and then maybe just a follow up I know Scott asked about.

Toby Williams: Just the seasonal trend in Opex zoom out.

Toby Williams: As a follow up sales and marketing expense has actually been relatively flat or only slightly melted up since since March of 'twenty, four right and I think thats pretty impressive given what you guys have been putting in terms of the top line numbers. So how much of that is the focus on productivity that you guys have called out and obviously sales team seems to be doing a great job there.

Toby Williams: Versus you guys deploying maybe some of these.

Toby Williams: New AI technologies internally to be more efficient or offset maybe head count growth. There just help us understand given that it is really plateaued over the last several quarters.

Ryan Glenn: Fairly broad question there, Samad. I mean, I think overall, I would just step back and say, you know, go back to a few comments that I made a minute ago. I mean, I think what you're seeing from us is a focus on really being able to drive productivity. And, you know, I think part of a big part of the sales and marketing line is certainly our sales headcount. And we came into this year with a lower level of growth in overall headcount year to year than we would have the prior few years. And I think our ability to, you know, hold that line from an expense standpoint and produce the results that we're putting up for the first three quarters of the year are broadly reflective of our focus this year just on trying to drive a higher level of productivity.

Speaker Change: Fairly broad question there. So I think overall I would just step back and say go back to a few comments that I made a minute ago I mean, I think what youre seeing from us is.

Toby Williams: Our focus on really being able to drive productivity.

Speaker Change: And I think part of it.

Toby Williams: A big part of the sales and marketing.

Toby Williams: <unk> is certainly our sales head count and we came into this year with a lower level of growth in overall head count year to year than we would have the the prior few years and I think our ability to hold that line from an expense standpoint and produce the results that we're putting up for the first three.

Toby Williams: Three quarters of the year are broadly reflective of our our focus this year just on trying to drive a higher level of productivity. So I know there is a few parts to your question, but that would be the overall sort of sentiment in terms of how we came into the year the investments that we're making and what we thought we'd be able to produce with with those investments.

Ryan Glenn: So I know there's a few parts to your question, but that would be the overall sort of sentiment in terms of how we came into the year, the investments that we were making and what we thought we'd be able to produce with, you know, with those investments. Understood. Thank you so much.

Toby Williams: Understood. Thank you so much.

Operator: Please stand by for our next question.

Toby Williams: Thank you.

Toby Williams: Ladies standby for our next question.

Mark Marcon: Our next question comes from the line of Mark Marcon with Robert W. Baird. Your line is open.

Speaker Change: Our next question comes from the line of Mark Mccollom with Robert W. Baird. Your line is open.

Steve Beauchamp: Let me add my congratulations for the really strong results. You mentioned early in the call that, you know, Airbase is fully integrated and the value is resonating. I'm wondering, I know it's really small, but can you talk a little bit about what you're seeing qualitatively in terms of discussions? And, you know, can you quantify a little bit, you know, what the contribution is from a top line perspective? I know it's small, but just wondering what rate of growth you're seeing, how confident you're starting to feel about the future, how we should think about that from a longer term perspective.

Speaker Change: Let me add my congratulations.

Toby Williams: Really strong results.

Toby Williams: You mentioned early in the call.

Toby Williams: Airbases fully integrated the value is resonating I am wondering I know, it's really small, but can you talk a little bit about what youre seeing qualitatively in terms of discussions.

Toby Williams: <unk>.

Toby Williams: Can you quantify a little bit what the contribution is from a topline perspective I know, it's small, but just wondering what what rate of growth you're seeing.

Toby Williams: How confident you are starting to feel about the future. How we should think about that from a longer term perspective, yes.

Steve Beauchamp: Yeah, I think the most important part for us to focus on is, you know, how do we feel about the product and that resonating in the marketplace? As you know, it typically will take us 12 or 18 months before we phase in, you know, an integrated offering. And we're making good progress on that front and we're excited about that opportunity. But the great part about Airbase is it's a great product on a standalone basis. And so we've been able to continue to sell that in the market. In some cases, those are Paylocity customers. In other cases, they're not existing Paylocity customers.

Speaker Change: I think the most important part for us to focus on is how do we feel about the product and that resonating in the marketplace. As you know it typically will take US 12 months to 18 months before we phase in.

Speaker Change: Integrated offering and we're making good progress on that front and we're excited about that opportunity, but the great part about air basis. Its a great product on a standalone basis, and so we've been able to continue to sell that in the market. In some cases those are pelosity customers in other cases, they're not payoffs city existing velocity customers and so that has gone probably slightly better than our.

Steve Beauchamp: And so that has gone probably slightly better than our expectations. At the same time, we think the bigger opportunity still stands in front of us. And that's as we complete integration, which will certainly happen in phases, the value proposition becomes even stronger because we start to leverage the data set across the combined portfolio. And as we've had conversations and some of those sales going back to the client base, the idea of being able to have all of your spend in a single spot and track it, manage it with the same workflows, leveraging employee of record, all of that message is resonating.

Speaker Change: Patients at the same time, we think the bigger opportunity still stands in front of us and Thats as we complete integration, which will certainly happen in phases, the value proposition becomes even stronger because we start to leverage the dataset.

Speaker Change: Across.

Speaker Change: The combined portfolio and as we've had conversations and some of those sales going back to the client base. The idea of being able to have all of your spend in a single spot and track it and manage it with the same workflows leveraging employee of record all of that message is resonating. So I would tell you, where we're probably waiting to push too hard on that until we get past. This first phase of integration.

Steve Beauchamp: So I would tell you we're probably waiting to push too hard on that until we get past this first phase of integration that will happen over several phases. But early signs in terms of are we happy with the product that we bought? Is it resonating in the market? The answer is absolutely yes.

Speaker Change: It will happen over several phases.

Speaker Change: But early signs in terms of are we happy with the product that we bought is it resonating the market. The answer is absolutely yes.

Speaker Change: That's great.

Speaker Change: You've dedicated a little bit more space both in terms of the press release as well as your comments with regards to.

Speaker Change: The broker channel and what Youre seeing there.

Speaker Change: Wondering are you seeing any sort of evidence given the recent competitive moves that there's even more brokers that are looking to work with you or what are you seeing from that side.

Steve Beauchamp: Yeah, I mean, I think, you know, Mark, as you know, we've always had a really substantial focus in our business on the broker channel and tried to develop, you know, broad and deep partnerships with with referring brokers, you know, across the across the US. And I think that's been the value that we've been able to bring to the broker channel has, I think, helped make that sustainable at the level that we've been able to maintain, you know, over the course of the last decade plus. And I think, you know, our strategy around being a really good and value added partner to brokers is no different today than it's ever been.

Yes, I mean, I think mark as you know, we've always had a really substantial focus on our business on the broker channel and tried to develop broad and deep partnerships with with referring brokers across the across the U S and I think that's been the value that we've been able to bring to the broker channel has I think helped.

Speaker Change: To make that sustainable at the level that we've been able to maintain over the course of the last decade, plus and I think.

Speaker Change: Our strategy around being a really good and value added partner to brokers is no different today than it's ever been I think you've seen us remain committed to our investments in those channels to our investments with those brokers and I think our message to the broker community has been one of consistency and one.

Steve Beauchamp: I think you've seen us remain committed to our investments in those channels, to our investments with those brokers. And I think our message to the broker community has been one of consistency and one of true partnership, whether that's from a technology perspective or otherwise. And I think that message has continued to resonate in the market in the face of, you know, some industry events with consolidation, where, you know, they might face different challenges, or some disruption. And I think we're sort of the steady hand and all that to, to partner with them throughout whatever, whatever it is they might experience.

Speaker Change: Of true partnership whether Thats from a technology perspective, or otherwise and I think that message has continued to resonate in the market in the face of some industry events with consolidation, where they might face different challenges or some disruption and I think we were sort of a steady hand, and all of that to to partner with them throughout whatever whatever it is they might experience.

Operator: And I think that's broadly been our message to the market. That's been our message to brokers. And I think that has resonated particularly well over the last half Great.

Speaker Change: And I think thats broadly been our message to the market thats been our message to brokers and I think that has resonated, particularly well over the last handful of months.

Speaker Change: Great. Thank you very much.

Daniel Jester: Please stand by for our next question. Our next question comes from the line of Daniel Jester with BMO Capital Markets. Your line is open. Great, good afternoon, and thank you for taking my question. Steve, in the beginning of your prepared remarks, you touched on all of the AI innovations that you've launched. I guess I'd love a little more color about sort of the engagement with your customers with those innovations. Have they gotten more comfortable, more enthusiastic about it? And how should we be thinking about sort of the broad strokes of adoption, maybe as this year progresses?

Speaker Change: Thank you.

Speaker Change: Please standby for our next question.

Speaker Change: Our next question comes from the line of Daniel Jester with BMO capital markets. Your line is open.

Daniel Jester: Great. Good afternoon, and thank you for taking my question.

Daniel Jester: Steve in the beginning of your prepared remarks, you touched on all of the AI innovations that you've launched.

Daniel Jester: I guess I'd love, a little more color about sort of the engagement with your customers with those innovations.

Daniel Jester: Have they gotten more comfortable more enthusiastic about it and how should we be thinking about sort of the broad strokes of adoption maybe as this year progresses.

Steve Beauchamp: Yeah, that's a great question. We really look at the opportunity from an AI is really embedding use cases across our product that will make our customers more efficient, add additional context and insight, make it easier to find their way across the application. There's just so many use cases. And so we are definitely seeing an increase in the number of use cases. We mentioned a couple in the prepared remarks in terms of employee use cases where they can get answers to things that they might have to hunt for in a handbook and have that instantaneously available in a chatbot type interaction.

Speaker Change: Yes, it's a great question, we really look at the opportunity from an AI is really embedding use cases across our product that will make our customers more efficient add additional context and insight make it easier to find their way across the applications. There are just so many use cases.

Speaker Change: And so we are definitely seeing an increase in the number of use cases I mentioned a couple in the prepared remarks in terms of employee use cases, where they can get answers to things that they might have to hunt for and a handbook.

Speaker Change: And have that instantaneously available in a chat bot type interaction. We're also seeing pretty significant increase in our utilization just in our chatbot utilization, which is really the clients themselves asking questions using it for way finding finding insights and we're also excited about bringing third party data into the equation. So we can deliver additional insights so employees can.

Steve Beauchamp: We're also seeing pretty significant increase in utilization just in our chatbot utilization, which is really the clients themselves, asking questions, using it for wayfinding, finding insights. And we're also excited about bringing third party data into the equation so we can deliver additional insights. So employees can, you know, reference compliance oriented information rather than going online, they can do it right in our product in another type of interaction. And so you'll see this across our platform, whether it's in scheduling plus and pre-populating schedules. Our strategy is to embed AI in as many use cases as possible.

Speaker Change: Referenced compliance oriented information rather than going online they can do it right into our product and another type of interaction and so you'll see this across our platform, whether it's in scheduling plus and pre populating schedules.

Speaker Change: Our strategy is to.

Steve Beauchamp: And we think that's the right way to approach a modern platform. And it also doesn't create angst and anxiety when you do it that way. It's not like you've got this side AI thing that is an overlay. It's, it's actually embedded in things that you do. And it makes their everyday lives easier. And for us that we think that's a big opportunity.

Speaker Change: Embed AI in as many use cases as possible and we think thats the right way to approach a modern platform.

Speaker Change: And I'd also doesn't create accident anxiety when you do it that way, it's not like you've got this side AI thing that visit overlay. It's it's actually embedded in things that you do and it makes their everyday lives easier.

Speaker Change: And for US that we think that's a big opportunity.

Steve Beauchamp: Great, thank you. And then just on the comment about growth and average revenue per client is, you know, certainly a key driver going forward. Is that, should we interpret that as maybe an incremental push up market? Or is this more moving more horizontally and capturing more wallet share for the customer across HCM and also the CFO? Thank you. Yeah, I think if you look at our history, we've had a really good success. If you take average revenue per customer, and you look how that has grown, and how that is correlated to the amount of total product that we've had available, we've always characterized that as total PEPY.

Speaker Change: Great. Thank you and then.

Speaker Change: Just on the comment about growth in average revenue per client.

Speaker Change: Certainly a key driver going forward.

Speaker Change: Is that should we interpret that as.

Speaker Change: Maybe an incremental push up market or is that more moving more horizontally and capturing more wallet share with your customer across HCM and also the CFO. Thank you.

Speaker Change: Yes, I think if you look at our history. We've had a really good success. If you take average revenue per customer and you look how that has grown and how that is correlated to the amount of total product that we've had available we've always characterized that as total <unk> and <unk>.

Steve Beauchamp: And that's because we price it on a per employee per month. So it's pretty easy to understand. I think what we're trying to emphasize here is the actual growth in average revenue per client becomes an even more important metric for us going forward, because not all of our products are actually going to be priced on a PEPY basis. And so that will happen with this horizontal expansion into other areas. But by no means do we think that that takes away from the opportunity for us to further expand both existing products into HCM, as well as add new SKUs to HCM.

Speaker Change: Because we price it on a per employee per month, so it's pretty easy to understand I think what we're trying to emphasize here is the actual growth in average revenue per client becomes an even more important metric for us going forward because not all of our products are actually going to be priced on a <unk> basis and so.

Speaker Change: That will happen with this horizontal expansion into other areas, but by no means do we think that that takes away from the opportunity for us to further expand both existing products into HCM as well as add new skus to HCM. So really we're going to try to do both of those things.

Steve Beauchamp: So really, we're going to try to do both ways.

Unknown Executive: Very clear. Thank you.

Very clear thank you.

Operator: Please stand by for our next question.

Speaker Change: Thank you.

Speaker Change: Please standby for our next question.

Jared Levine: Our next question comes from the line of Jared Levine with TD Cowan. Your line is open. Thank you.

Speaker Change: Our next question comes from the line of Jared <unk> with TD Cowen Your line is open.

Ryan Glenn: I wanted to double click on the margins here too, but more focused on the gross margin side here. So, you know, year to date, you have had some strong expansion within that Xflow gross margin here. Can you detail what are the primary drivers there specifically?

Jared: Thank you wanted to double click on the margins here too, but more focused on the gross margin side here. So year to date you have had some strong.

Speaker Change: Expansion within that tax flow gross margin here can you detail what are the primary drivers there specifically and then any reasons why that <unk> gross margin explore it shouldn't be different than the <unk> levels youre seeing in the first half levels.

Ryan Glenn: And then any reasons why that 4Q gross margin Xflow shouldn't be different than the 1Q levels here, excuse me, the first half levels? Yeah, Jared, I think, you know, we continue to execute against the playbook that, you know, we've talked about for the last handful of years, which is to say that, you know, as we continue to grow, we think we can drive scale and efficiencies across the entirety of our operational spend, while at the same time, continue to invest in those teams to be able to drive strong client retention. And I think we've, as I said, executed on that playbook.

Speaker Change: Yes, Jared I think we continue to execute against that playbook that we've talked about for the last handful of years, which is to say that as we continue to grow we think we can drive scale and efficiencies across the entirety of our operational spend while at the same time continuing to invest in those teams to be able to drive strong client retention.

Speaker Change: And I think as I said executed on that playbook. So it is everything from being able to take advantage of economies of scale with third party and software spend as our business grows being able to reduce manual effort to make sure that we're really putting the dollars to the best use and obviously, having strong revenue performance as well helps gross margin too so.

Ryan Glenn: So it is everything from being able to take advantage of economies of scale with third party and software spend as our business grows, being able to reduce manual effort being to make sure that we're really putting the dollars to the best use and obviously having strong revenue performance as well helps gross margin too. So feel good about the progress we've made feel like there's the ability to continue to drive margin forward as well. Got it.

Speaker Change: We feel good about the progress we made feel like there is the ability to continue to drive margin forward as well.

Ryan Glenn: And then in terms of Airbase, you know, how could the recent increase in macro uncertainty impact the near term growth outlook for that business here? I know part of that business is transaction fee driven. Are you kind of seeing any softness, you know, to date in terms of this increasing macro uncertainty? Has it been pretty consistent there in terms of what you're seeing on the more of the transaction side of that business? Yeah. Yeah, I think one of the key messages is how we can save our customers time, save them money and make them more efficient, which I think does resonate when there's uncertainty in the market.

Speaker Change: Got it and then in terms of airbase.

Speaker Change: The recent increase in macro uncertainty impact the near term growth outlook for that business here I know part of that business is transaction fee driven or are you kind of seeing any softness to date in terms of this increasing macro uncertainty has it been pretty consistent there in terms of what youre seeing.

Speaker Change: The transaction side of that business.

Speaker Change: Yes, I think one of the key messages as how we can save our customers time save them money and make them more efficient, which I think does resonate when there is uncertainty in the market and a large majority of the revenue really in air basis software oriented revenue. So we don't necessarily see any material impact at the moment.

Ryan Glenn: And a large majority of the revenue really in Airbase is software oriented revenue. So I we don't necessarily see any material impact at the moment from any macro changes. And of course, we haven't really seen macro changes yet.

Speaker Change: Any macro changes and of course, we haven't really seen macro changes yet so I think overall, we both HCM and airbase.

Ryan Glenn: So I think overall, with both HCM and Airbase, we've sold in different markets, whether that's growth markets, or whether you got flat markets, or whether you've got recession, I think the value proposition historically has resonated, and I'm pretty confident that Airbase will as well.

Speaker Change: We've sold in different markets, whether that growth markets or whether you got flat markets or whether you've got recession I think the value proposition.

Speaker Change: Historically has resonated and I'm pretty confident that aerospace will as well.

Thank you.

Operator: Please stand by for our next question. Our next question comes from the line of Raimo Lenschow with Barclays. Your line is open.

Speaker Change: Thank you.

Speaker Change: Please standby for our next question.

Speaker Change: Our next question comes from the line of Raimo <unk>.

Speaker Change: With Barclays. Your line is open.

Sheldon McMeans: Hi, this is Sheldon McMeans on for Raimo. Thanks for taking our call. Another one on the macro, perhaps from a slightly different angle. It does seem like we're all operating in a tougher and more uncertain macro, particularly relative to last year, and you've been through various cycles in the past. And probably, could you speak to any learnings that you've had on what resonates more in this sort of environment? And given the likely heightened focus on cost control for your customers, do you see an opportunity to lean more heavily on the office of the CFO side?

Sheldon McMeans: Hi, This is Sheldon mcmeans on for Raimo, Thanks for taking our question.

Speaker Change: Another one on the macro perhaps for them on a slightly different angle. It does seem like we're all operating in a tougher and more uncertain macro, particularly relative to last year and you've been through various cycles in the past and probably could you speak to any learnings that you've had on what resonates more and this sort of environment and given.

Speaker Change: Likely heightened focus on cost control for your customers do you see an opportunity to lean more heavily on.

Toby Williams: And are you making any minor adjustments to your sales criteria? Yeah, I think we've always tried to balance the message with our customers between kind of innovation, engaging with employees, driving the right culture to be able to retain them, but at the same time, giving them a platform that just fundamentally makes them more efficient. And so you know, you do you lean sometimes a little bit more on the engagement side versus the efficiency, you certainly do different customers have different priorities, but we're in a great position because we can really help them solve either and or both.

Speaker Change: Office of the CFO side and are you, making any minor adjustments to your sales script here so account for that.

Speaker Change: Yeah, I think we've always tried to balance the message with our customers between kind of innovation engaging with employees driving the right culture to be able to retain them, but at the same time, giving them a platform that just fundamentally makes them more efficient.

Speaker Change: And so you do you mean, sometimes a little bit more on the engagement side versus the efficiency you certainly do different customers have different priorities, but we're in a great position because we can really help them solve either andrew or both.

Toby Williams: And so you do see sometimes with certain customers, where they are maybe more focused on the ROI that they're going to get the efficiency, we don't feel like we have to make changes from a scripting or Salesforce training, I think we're pretty equipped to do that. That's something that we do on a regular basis. As you mentioned, we've seen different cycles in our past. It's one I think it's one of the great things about what we offer is you've got value even even if the market is a little bit soft, because everyone's looking to be more efficient.

Speaker Change: And so you do see some times with certain customers, where they are maybe more focused on the ROI that they're going to get the efficiency. We don't feel like we have to make changes from a scripting or salesforce training I think we're pretty equipped to do that thats something that we do on a regular basis as you mentioned, we've seen different cycles in our past.

Speaker Change: I think it's one of the great things about what we offer is you've got value even if the market is a little bit soft because everyone's looking to be more efficient.

Toby Williams: And we can help them do that.

Speaker Change: And we can help them do that.

Unknown Executive: Excellent. Thank you.

Speaker Change: Excellent. Thank you.

Operator: Please stand by for our next question.

Speaker Change: Thank you.

Speaker Change: Please standby for our next question.

Austin Cole: Our next question comes from the line of Patrick Walravens with Citizen's Mines. Your line is open. Great. This is Austin Cole on for Pat. Appreciate you taking the questions. I guess this has been a good Q&A.

Speaker Change: Our next question comes from the line of Patrick Wall Ravens with citizens Bank. Your line is open.

Speaker Change: Great. This is Austin on for Pat.

Speaker Change: Are you taking the questions.

Speaker Change: I guess this has been a good Q&A just I guess stepping back Tobey as you as you look ahead to FY 'twenty six year. If you were to boil down to one thing what do you think it will be.

Toby Williams: Just I guess stepping back, Toby, as you as you look ahead to FY26 here, if you were to boil down to one thing, what do you think it will be that's most important for Paylocity to get right? Well, I think... We've been able to execute, I think, better and better over the course of the last year or so from both a go-to-market perspective and from an ops perspective. And I'm really proud of our teams and how they've delivered over the course of the first three months or first three quarters of this year. And I think we're on a good trajectory in terms of how we have guided the close of the year.

Speaker Change: That's most important for payoffs due to get right.

Speaker Change: Well I think.

Speaker Change: Yeah.

Speaker Change: We've been able to execute I think better and better over the course of the last year or so from both.

Speaker Change: Go to market perspective, and from an ops perspective.

Speaker Change: Really proud of our teams and how they've delivered over the course of the first three months or first three quarters of this year and I think we're out of it we're on a good trajectory in terms of how we.

Toby Williams: And I think that sets us up to continue to deliver in both of those groups as we tee up fiscal 26. And then I think when you overlay a lot of the comments that Steve's made with respect to our product momentum, whether that's in the context of some of our really exciting AI initiatives or whether that's in the context of being able to lean into Airbase and that product set more as we get into fiscal 26. And I think that's probably the combination that is the opportunity that's before us to continue delivering in fiscal 25 in the path that we've been on.

Speaker Change: We have guided the close of the year and I think that sets us up to continue to deliver in both of those groups.

Speaker Change: As we tee up fiscal 'twenty six and then I think when you overlay a lot of the comments that Steve made with respect to our product momentum and whether thats in the context of some of our really exciting AI initiatives or whether thats in the context of.

Speaker Change: Being able to lean into airbase in that product set more as we get into fiscal 'twenty six I mean, I think thats.

Speaker Change: That's probably the combination that is that is that.

That's the opportunities before us to continue delivering in fiscal 'twenty five and the path we've been on but then.

Unknown Executive: But then I think probably lean into some of those things a little bit harder yet as we kick off 26. So I think that's. Great, thank you.

Speaker Change: Probably lean into some of those things a little bit harder yet as we kick off 26, So I think thats whats in front of us.

Speaker Change: Great. Thank you.

Operator: We stand by for our next question.

Speaker Change: Thank you.

Speaker Change: Please standby for our next question.

Bobby Deon: Our next question comes from the line of Terry Tillman with Shura Securities. Your line is open. Great, thanks for taking the question.

Speaker Change: Our next question comes from the line of Terry Tillman with <unk> Securities. Your line is open.

Toby Williams: This is Bobby Deon for Terry. Just one two-parter from me again on product. Curious to get an update on how you're thinking about the add-on product innovation slash development cadence for the rest of the year. And separately, on recent product launches, what's moving the needle at the at the point of sale at this point? Thank you. Yeah, I'll take the last part first. So if you look at kind of maybe the wave of products that we have released, they continue to increase adoption rates, both back to the base to customers as well as our our sell through rate on the front end.

Bobby <unk>: Great. Thanks for taking the question. This is Bobby <unk> on for Terry just one two parter from me again products.

Bobby <unk>: Curious to get an update on how youre thinking about the add on product innovation Slash development cadence for the rest of the year and separately on recent product launches, what's moving the needle at the point of sale at this point. Thank you.

Bobby <unk>: Yes, I'll take the last part first.

Bobby <unk>: If you look at kind of maybe the wave of products that we have released they continue to increase adoption rates both back to the base to customers as well as our sell through rate on the front end and so pretty happy with things like rewards and recognition employee voice scheduling plus learning plus really some of these enhancements that we've made to.

Toby Williams: And so pretty happy with things like rewards and recognition, employee voice, scheduling plus, learning plus really some of these enhancements that we've made to the core HCM platform that really helps our clients, you know, gather feedback and engage with employees, driving culture and higher retention, those have all continued to do well at higher penetration rates over time. I think we're very early on some of the newest products when you think about the office of the CFO. So I think FY 26 becomes a year where we start to measure, you know, greater success as we start to roll out integration between the two platforms. But overall, we've really been happy with the increase in average revenue per customer that we've been able to drive across our portfolio.

Bobby <unk>: Core HCM platform that really helps our clients gather feedback and engage with employees driving culture and higher retention those evolve to continue to do well at higher penetration rates over time I think we're very early on some of the newest products. When you think about the office of the CFO. So I think FY 'twenty six becomes a year, where we start to measure.

Bobby <unk>: Greater success as we start to rollout integration between the two platforms.

Bobby <unk>: But overall, we've really been happy with the increase in average revenue per customer that we've been able to drive across our portfolio.

Unknown Executive: Thank you.

Bobby <unk>: Thank you.

Operator: Please stand by for our next question.

Bobby <unk>: Thank you.

Bobby <unk>: Please standby for our next question.

Phil: Our next question comes from the line of Siti Panigrahi with Mizzou Hall. Your line is open. Hey, this is Phil on for Citi. I just wanted to circle back on AirBase.

Speaker Change: Our next question comes from the line of city Panic Rocky with Mizuho. Your line is open.

Speaker Change: Hey, this is Phil on for Citi I, just wanted to circle back on Airbus I guess once you guys complete the integration.

Steve Beauchamp: I guess once you guys complete the integration, is it going to be like, are you going to have one sales team that's selling both the HCM payroll offering and AirBase or will there be separate AirBase focused reps? Thank you. Sure. Yeah, so we have had a model historically where our outside sales force is largely in charge of landing new customers and new units. We get them implemented, we get them onboarded, hopefully with as many products as they need. And then over time, those customers often find that, you know, they're very comfortable with Paylocity doing a great job from a service perspective, and they add additional products over time.

Speaker Change: Is it going to be like are you going to have one sales team that's selling both the HCM payroll offering an airbus or would that be separate airbase focused reps.

Speaker Change: Sure.

Speaker Change: Yes, so we have had our model historically, where our outside sales force is largely in charge of landing new customers and new units, we get them implemented we get them on boarded hopefully with as many products as they need.

Speaker Change: And then over time those customers often find that they're very comfortable with philosophy are doing a great job from a service perspective, and they add additional products overtime.

Steve Beauchamp: We will really, from an AirBase perspective, look for both opportunities. So we will look for our sales team to identify need up front, and then we'll have experts that will be inside that will help navigate that purchase process for the customer. And then at the same time, we'll have those same folks, you know, be calling back into the customer and then be able to add that on. We think that some of that purchase might happen at the same time, but realistically, they'll probably have different implementation timeframes. So you end up with some different expert resources, which is the same way we do things like TPA and other products.

Speaker Change: We will really from an air based perspective look for both opportunities. So we will look for our sales team to identify need upfront and then we will have experts that will be inside that will help navigate that purchase process for the customer and then at the same time, we will have those same folks.

Speaker Change: Be calling back into the customer and then be able to add that on we think that some of that purchase might happen at the same time, but realistically they'll probably have different implementation timeframes. So you end up with some different expert resources, which is the same way, we do things like Tpa and other products. So it's a model that we've run for many years and we feel very comfortable with.

Unknown Executive: So it's a model that we've run for many years, and we feel very comfortable with. Got it.

Speaker Change: Got it thank you.

Thank you.

Kevin Mcveigh: We stand by for our next question. Our next question comes from the line with Kevin McVeigh with UBS. Your line is open. Great, thanks so much. Hey, was any of the revenue outperformance in the quarter, any change in terms of kind of competitive dynamics, just given some of the consolidation that's been occurring in the industry? I don't think so. I mean, I think, you know, really pleased with the execution that we saw from from the go to market teams in the quarter. And certainly, you know, big lift from both our implementation service teams. But, you know, I think that was the main driver of the of the performance in the quarter from a revenue standpoint versus anything that we would have seen specifically from a competitive landscape perspective.

Speaker Change: Please standby for our next question.

Speaker Change: Our next question comes from Kevin Mcveigh with UBS. Your line is open.

Speaker Change: Great. Thanks, so much.

Speaker Change: Was any of the revenue outperformance in the quarter any change in terms of kind of competitive dynamics, just given some of the consolidation that's been occurring in the industry.

Speaker Change: Okay.

Speaker Change: I don't think so I mean, I think really pleased with the execution that we saw from from the go to market teams in the quarter and certainly big lift from both our.

Speaker Change: The implementation service teams, but.

Speaker Change: That was the main driver.

Speaker Change: Of the of the performance in the quarter from revenue standpoint versus anything that we would've seen specifically from a competitive landscape perspective.

Ryan Glenn: And then it sounds like the fundamentals are obviously still really, really strong. But is any of the client, I don't know if it caution or just, you know, kind of initial change at the margin. Is that any particular segment or is it? cross, you know, more mid to down market as opposed to up. Any thoughts around that?

Speaker Change: And then it sounds like the fundamentals are obviously still really really.

Speaker Change: Strong but.

Speaker Change: Is any of the client caution or just kind of initial change at the margin.

Speaker Change: Is that any particular segment or is it.

Speaker Change: Across.

Speaker Change: More mid to down market as opposed to up.

Ryan Glenn: Yeah, I think as Toby said, I think we would put this in the qualitative bucket. You know, as we talk to come to the sales reps, and we're looking for some decisions, they would have, you know, examples here and there where people are based off uncertainty in the overall macro market, it's been sometimes a little bit harder to get decision. It's a fairly recent comment. You obviously don't see any of that in our results. And we feel pretty confident that it's not going to impact our next quarter. But I think it's just natural with I think, some of the uncertainty in the market that you would hear that.

Speaker Change: Any thoughts around that.

Yes, I think as Toby said I think we would put this in the qualitative bucket.

Speaker Change: As we talked to come into the sales reps and we're looking for some decisions. They would have examples here and there where people are based off of uncertainty in the overall macro market, it's been sometimes a little bit harder to get decision. It is a fairly recent comment you obviously don't see any of that in our results and we feel pretty confident that is not going to impact our next quarter.

Speaker Change: But I think it's just natural with I think some of the uncertainty in the market that you would hear that but we certainly don't think that that has any impact to the results so far or the guidance that we gave.

Ryan Glenn: But we certainly don't think that that has any impact to the results so far or the guidance that we gave.

Speaker Change: Thank you.

Speaker Change: Thank you.

Unknown Executive: Our next question comes from the line of George Kurosawa with Citi. Your line is open. Hey, thanks for taking the question. This is Aman for Steve Enders. Just wanted to kind of Circle back on that last comment about it, you know, some of the cautious tone from customers being more qualitative at this point. I mean, does that kind of hold true across the metrics that you guys are looking at? You know, I'm thinking about maybe some more forward looking indicators like top of funnel. Have you seen any, you know, indications, you know, of incremental softness in April and in any of those type of indicators?

Speaker Change: Our next question comes from the line of George <unk> with Citi. Your line is open.

Speaker Change: Hey, Thanks for taking my question. This is on for Steve Enders I, just wanted to kind of.

Speaker Change: Circle back on that last comment about some of the cautious tone from customers being more qualitative at this point I mean does that kind of hold true across the metrics that you guys are looking at you know I'm thinking about maybe some more forward looking indicators like top of funnel have you seen any indications of.

Speaker Change: Incremental softness in April and in any of those type of indicators.

Unknown Executive: No, we really have not. I think it's really a qualitative comment that certainly might be isolated. But it's one that we watch. And I think it's, I think, prudent for us to at least mention.

Speaker Change: No we really have not I think it's really a qualitative comment that certainly might be isolated but it's one that we watch and I think it's I think prudent for us to at least mentioned.

Steve Beauchamp: But, you know, we feel pretty good about the momentum that we've got in the business, even as we look at the pipeline from top of funnel all the way through. Okay, okay, that's helpful. And then, you know, you guys call that Relative Strength in the Broker channel. Maybe you could just talk through kind of the investments and initiatives you have there. It sounds like you're leaning into that space. So just, you know, anything where you're, you guys are putting dollars to work. Yeah, I think you see a lot of consistency in our approach there. So probably no call out in the moment.

Speaker Change: But.

Speaker Change: We feel pretty good about the momentum that we've got in the business. Even if we look at the pipeline from top of funnel all the way through.

Speaker Change: Okay. Okay. That's helpful. And then you guys called out some.

Speaker Change: Some relative strength in the broker channel and maybe you could just talk through kind of the investments and initiatives you have there it sounds like you're leaning into that space. So just.

Speaker Change: Anything where you guys are putting dollars to work.

Speaker Change: Yes, I think you see a lot of consistency in our approach there so probably no callout in the moment I think the consistency in our approach has been one of adding value to brokers by being great technology partner to them, one that doesn't compete with them for their insurance business and I think you see a steady.

Steve Beauchamp: I think the consistency in our approach has has been one of adding value to brokers by being great technology partner to them, one that doesn't compete with them for their insurance business. And I think you see a steady, a steady set of investments from us over time that are focused on building those relationships and making sure that we, you know, stand by them and support them in partnership and continuing to invest in the technology that adds value to them and to their client.

Speaker Change: A steady set of investments from us over time that are focused on building those relationships and making sure that we stand by them and support them in partnership and continuing to invest in the technology that adds value to them and to their clients.

Speaker Change: Great. Thanks for taking the questions.

Operator: Our next question comes from the line of Jake Roberge with Wim Blair, your line is open. Yeah, thanks for taking the questions and congrats on the great results. With this being the largest recurring revenue beat of the year in Q3, could you talk about what drove even that incremental outperformance this quarter? Was that more related to some of the broker channel comments that you've been making or maybe the better than expected uptake of Airbase would love to just kind of flesh out what drove even the even higher upside this quarter? Yeah, I mean, I think, you know, building off some of the comments that we've that we've mentioned so far, I mean, I think we saw really strong execution across the business.

Speaker Change: Thank you.

Speaker Change: Our next question comes from the line of Jay.

Speaker Change: <unk> with William Blair. Your line is open.

Yes, thanks for taking the questions and congrats on the great results with this being the largest recurring revenue of the year in Q3 could you talk about what drove even that incremental outperformance. This quarter was that more related to some of the broker channel comments that you've been making or.

Speaker Change: Maybe the better than expected uptake of air base would love to just kind of flush out what drove even the even higher upside this quarter.

Speaker Change: Yes, I mean, I think building off some of the comments that we've that we've mentioned so far I mean, I think we saw really strong execution across the business and I think that started with coming into the year with a fair amount of momentum from a go to market perspective, I think the sales team did a great job in selling season. I think you saw really strong performance from our ops teams in terms of good.

Jake Roberge: And I think that started with, you know, coming into the year, with a fair amount of momentum from a go to market perspective, I think the sales team did a great job in, in selling season, I think you saw, you know, really strong performance from our ops teams in terms of getting new business started in January, and, you know, supporting our clients in the busiest time of their years from a December, January perspective.

Speaker Change: New business started in January and supporting our clients in the busiest time of their years from December January perspective, and I think that all came together to produce the to produce what we saw in the quarter, which again I think we feel really good about in terms of how the how we're executing across the business.

Steve Beauchamp: And, you know, I think that all came together to produce the to produce what we saw in the quarter, which, again, you know, I think we feel really good about in terms of how the how we're executing across the Okay, that's, that's helpful. And then sounds like things have been going fairly well. For Airbase thus far, I know you're still largely selling that on a standalone basis. But for some of the the cross sell logos that you've already landed, could you talk about what's working well, either from a go to market playback perspective, or just from a customer profile that it may be resonating with?

Speaker Change: Yeah.

Speaker Change: Okay.

Speaker Change: Helpful and then it sounds like things have been gone fairly well.

Speaker Change: Airbase, thus far I know youre still largely selling that on a standalone basis, but for some of the cross sell logos that you have already landed could you talk about what's working well either from a go to market playbook perspective, or just from a customer profile that it may be resonating with that would be helpful. Thanks.

Steve Beauchamp: That would be helpful.

Steve Beauchamp: Thanks. Yeah, sure. So I think there's various parts to the value proposition that resonate. So there is this opportunity for them to manage their spend, provide the rules and automation so that all of that spend can be managed. And there's an ROI on that, right? They can manage that spend down. I think there's also efficiencies that can be gained in terms of closing their books, integrating into their general ledger. We integrate a lot with general ledger from a payroll perspective. So this is obviously a different type of transaction. But that is also really been valuable.

Speaker Change: Yes, sure. So I think there's various parts to the value proposition that resonates. So there is this opportunity for them to manage their spend.

Speaker Change: The rules and automation so that all of that spend can be managed and there is an ROI on that rate. They can manage that spend down I think theres also efficiencies that can be gained in terms of closing their books integrating into their general ledger, we integrate a lot with general ledger from a payroll perspective. So this is obviously a different type of transaction, but that.

Steve Beauchamp: And then there's an employee experience component to it, which is, you know, virtual cards and card payment and be able to make sure that that's super easy and easy for them to then create expense reports. And so I think those are probably maybe the three highlights that I would surface when we got feedback from our sales team who are having these conversations with the customers.

Speaker Change: Is also really been valuable and then Theres, an employee experience component to it which is virtual cards and card payment and be able to make sure that that super easy in easy for them to then create what expense reports and so I think those are probably maybe the three highlights that I would.

Speaker Change: Surface when we got feedback from our sales team who are having these conversations with the customers and I think many cases all of those value propositions get even better as we integrate the platforms.

Steve Beauchamp: And I think many cases, all of those value propositions get even better as we integrate the platform.

Unknown Executive: For more information, visit www.paylocity.com Very helpful.

Unknown Executive: Thanks for taking the questions and congrats on the great results.

Speaker Change: Very helpful. Thanks for taking my questions and congrats on the great results.

Jason Celino: Thank you. Our next question comes from the line of Jason Celino with KeyBank Capital Markets, your line is open. Perfect. Thanks for fitting me in. Maybe just on the workforce levels, it sounds like it was up a touch in the quarter and you're seeing stability in the base and seasonal hiring.

Speaker Change: Thank you.

Speaker Change: Our next question comes from the line of Jason <unk> with Keybanc capital markets. Your line is open.

Jason: Perfect. Thanks for fitting me in.

Jason: Maybe just on the workforce levels. It sounds like it was up a touch in the quarter and Youre seeing stability in the base and seasonal hiring.

Ryan Glenn: Maybe can you just remind us what the expectation is for workforce levels contemplated in the Q4 guide? Yeah, so consistent approach with, with, well, with how we've approached guidance in the first three quarters, which is flat workforce levels in Q4. And, you know, I think, as we've said, for the first nine months, if, if that were to turn incrementally positive, then that would be a touch upside, but we have assumed flat workforce levels. And I think feel good about that assumption and feel good about where the base is from a workforce levels through the time of the call.

Jason: Maybe can you just remind us what the expectation is for workforce levels contemplated in the Q4 guide.

Jason: Yes, so consistent approach with with well with how we've approached guidance in the first three quarters, which is <unk>.

Jason: <unk> flat workforce levels in Q4, and I think as we've said for the first nine months if that were to turn incrementally positive then that would be upside, but we have assumed assumes flat workforce levels.

Jason: I think feel good about that assumption and feel good about where the base is from a workforce levels through the time of the call.

Ryan Glenn: Okay, thanks, Ryan. And then, you know, I acknowledge it's probably premature given the backdrop. But when I look at your, you know, implied Q4 recurring guide, and if we strip out, you know, airbase implies an exit of like 10% organic for recurring, you know, is that a good place to start as we think about next year? Or is it still just too hard to say? Yeah, still early.

Jason: Okay. Thanks, Brian and then.

Jason: I acknowledge it's probably premature given the backdrop, but when I look at your.

Jason: Implied Q4 recurring guide and if we strip out.

Jason: Airbase implies an exit of like 10% organic for recurring.

Jason: Is that a good place to start as we think about next year or is it still just too hard to say.

Ryan Glenn: So next earnings call, we'll obviously give formal guidance for Q1 of 26 and full year. But I think, you know, as we've talked about in prior years, that's, you know, at this point, a reasonable proxy to potentially think about how next year may set up. You know, obviously, we have a different level of prudence when you think about what an annual guide might look like versus a near term quarter. But I think, similar to how we played out this year, we will take all those data points into account over the next handful of months and provide you more detail on the Q4 call.

Jason: Yes. So it's still early so next earnings call. We'll obviously give formal guidance for Q1 of 2006 and full year, but I think as we've talked about in prior years that at this point a reasonable proxy to potentially think about how next year may set up obviously, we have a different level of prudence. When you think about what an annual guide might look like.

Jason: Versus our near term quarter, but I think similar to how we played out this year, we will take all of those data points into account over the next handful of months and provide you more detail on the Q4 call.

Unknown Executive: Awesome, thank you.

Speaker Change: Awesome. Thank you.

Jason: Okay. Thank you.

Aleksandr Zukin: Our next question comes from the line of Aleksandr Zukin with Wolf Research.

Speaker Change: Our next question comes from the line of Alex Zukin with Wolfe Research. Your line is open.

Jason: Your line is open. Hey, this is Jason for Aleks. Thanks for taking the questions.

Speaker Change: Hey, this is Jason on for Alex Thanks for taking the questions. So I wanted to touch on the pricing dynamics, a little bit how are you approaching the integration.

Steve Beauchamp: So I want to touch on the pricing dynamics a little bit. And how are you approaching the integration of CFO Office products into the broader platform from the pricing perspective, given the different pricing models involved? And how confident do you feel about your current pricing structure against competitive offerings and potentially market uncertainties around the back? Sure. So I think just overall pricing, the market is competitive. Certainly, it has been for a long time, I wouldn't call it a change to that competitive environment. And we haven't seen anything abnormal from a pricing perspective. And so we feel good about, you know, the price point that in the value that we're offering the customers, and I would call it no change there.

Speaker Change: CFO office products into your broader platform from pricing perspective, given the different pricing models evolve and how confident do you feel about your current pricing structure against competitive offerings and professionally.

Speaker Change: Mark how uncertainties around tobacco sure.

Speaker Change: So I think just overall pricing the market is competitive certainly it has been for a long time I wouldn't call. It any change to that competitive environment, and we haven't seen anything abnormal from a pricing perspective.

Speaker Change: So we feel good about.

Speaker Change: The price point and the value that we're offering the customers and I would call. It no change there.

Steve Beauchamp: I think the reason that we mentioned this in the prepared remarks is in Airbase, those products are definitely priced differently than HCM products. So our goal is to replicate a competitive pricing model, when we approach Office of the CFO, just like our competitors would have, versus trying to force fit something into an HCM pricing model, we're already doing that, it's in market that is resonating pretty well. And then as we integrate the platforms, you would just end up with HCM pricing that would be, you know, by module on a per employee per month basis, and then potentially a different pricing model, depending on the product set in the Office of the CFO, it's something that we feel fairly comfortable with.

Speaker Change: The reason that we mentioned this in the prepared remarks is in air base. Those products are definitely price differently than HCM products. So our goal is to replicate a competitive pricing model.

Speaker Change: When we approach office of the CFO, just like our competitors would have versus trying to force fit something into an HCM pricing model. We are already doing that its end market that is resonating pretty well and then as we integrate the platforms. You would just end up with HCM pricing that would be by module on a per employee per month basis and then.

Speaker Change: Potentially a different pricing model, depending on the product set and the office of the CFO.

Steve Beauchamp: Being able to manage and already have had these conversations with customers, because you have different buyer personas, and it's the way they expect it to be priced, it has gone relatively well.

Speaker Change: Something that we feel fairly comfortable being able to manage and already have had these conversations with customers because you have different buyer personas and it's the way they expect it to be priced it has gone relatively smooth.

Unknown Executive: Thanks, that's really helpful.

Ryan Glenn: And one quick follow up on the sales rep capacity. Could you update us on the sales rep hiring progress of the planned incremental hiring for the selling season? And how is the overall sales productivity trending compared to maybe 90 days ago? Thanks. Yeah, we came into this fiscal year with about 8% rep headcount growth. And I think our focus at the time that we described was coming in feeling good about the new higher class that we had in, and really believing that we had an opportunity to drive efficiency and productivity across the sales team. I think that's what we've been able to deliver so far throughout the course of the fiscal year.

Speaker Change: Thanks, that's really helpful.

Speaker Change: One quick follow up on the.

Speaker Change: The sales rep capacity could you update.

Speaker Change: On the sales rep hiring progress of the planned incremental hiring for.

Speaker Change: For the selling season, and how is the overall sales productivity trending comparing to maybe 90 days ago.

Speaker Change: Yes.

Speaker Change: Yes, we came into this fiscal year with about 8% Rep head count growth and I think our focus at the time that.

Speaker Change: We described was coming in and feeling good about that.

Speaker Change: The new hire class that we had in and really believing that we had an opportunity to drive efficiency and productivity across the sales team I think that's what we've been able to deliver so far throughout the course of the fiscal year and I think our general viewpoint would be very similar as a starting point as we're still finalizing the plans of how we.

Ryan Glenn: And, you know, I think our general viewpoint would be very similar as a starting point as we're still finalizing the plans of how we would go into fiscal 26. But I wouldn't call out any major change in terms of how we're thinking about that approach. Thank you.

Speaker Change: Go into fiscal 'twenty, six, but I wouldn't call out any major change in terms of how we're thinking about that approach.

Speaker Change: Thank you.

Operator: Please stand by for our next question.

Speaker Change: Please standby for our next question.

Alan Verhofsky: Our next question comes from the line of Alan Verhofsky with Scotiabank.

Speaker Change: Our next question comes from Alan Wachowski with Scotiabank. Your line is open.

Alan Verhofsky: Your line is open. Hey guys, congrats on the strong quarter here. I want to just ask a quick follow up to Jason's question about growth rates on a go forward basis.

Alan Wachowski: Hey, guys. Congrats on the strong quarter here wanted to just ask a quick follow up to Jason's question about growth rates on a go forward basis are you looking to have the same level of beaten raise cadence in fiscal 2006 as you initially set fiscal 'twenty five guidance to have and then I got a quick follow up.

Ryan Glenn: Are you looking to have the same level of beaten race cadence in fiscal 26 as you initially set fiscal 25 guidance to have? And then I got a quick follow up. Perfect. That's helpful. And then on Airbase, you previously mentioned about two-thirds of the $22 million fiscal 25 recurring revenue guide increase was attributed to Airbase, so about $15 million. Is that still the expectation for Airbase revenue this year? And maybe can you just opine on what kind of outperformance you've seen this year relative to that expectation, if there has been any? Thank you. Sure, but I don't think we provided a specific dollar amount for Airbase.

Alan Wachowski: Yeah, Hey, I think the way, we're pleased with with how fiscal 'twenty. Five is played out obviously as we've talked about through the now three earnings calls of this fiscal year. We've had a lot of sales momentum over performance from that team and you've seen that result in upwards of $50 million increased to recurring <unk>.

Alan Wachowski: The new guidance from what we provided today versus August obviously, a piece of that is airbase, but the majority of that is going to be over performance in the sales team. So wouldn't necessarily start a fiscal year expecting that level of over performance, but if you step back and think about guidance philosophy, Yes, we would expect to have a very similar cadence in next fiscal year as I mentioned on my earlier.

Alan Wachowski: <unk> comment you have more visibility to the near term quarters to that one.

May result in slightly higher guidance than when Youre thinking about guiding 12 months out you, obviously have a an incremental level of prudence or conservatism because of the uncertainty.

Alan Wachowski: That comes with guiding further out so we again, we will take all those into account and provide more detail on the next call.

Speaker Change: Perfect. That's helpful. And then on airbase you'd previously mentioned about two thirds of the $22 million fiscal 'twenty five recurring revenue guide increase was attributed to airbase. So about $15 million is that still the expectation for air base revenue. This year and maybe can you just.

Speaker Change: Opine on what kind of outperformance you've seen this year relative to that expectation if their house Bill let me. Thank you.

Speaker Change: Sure. So I don't think we provided a specific dollar amount for airbase I think we'd characterize it as roughly 1% of revenue this year and I would continue to believe it would be in that in that range that we feel good about the progress as we talked about throughout this call, but yes still roughly 1% of revenue for the year.

Ryan Glenn: I think we've characterized it as roughly 1% of revenue this year, and I would continue to believe it would be in that range. So feel good about the progress as we talked about throughout this call, but yes, still roughly 1% of revenue for the year. Awesome.

Unknown Executive: Congrats, guys.

Speaker Change: Congrats guys. Thanks.

Operator: Please stand by for our next question.

Speaker Change: Thank you.

Speaker Change: Please standby for our next question.

Zachary Gunn: Our next question comes from the line of Zachary Gunn with FT Partners. Your line is open. Hey there, thanks for taking my question. I also just wanted to ask on Airbase here quickly.

Speaker Change: Our next question comes from the line of Zachary <unk> with <unk> partners. Your line is open.

Speaker Change: Hey, there. Thanks for taking my question I also just wanted to ask on airbase here quickly.

I appreciate the great product, large opportunity, I just want to understand what gives you the confidence in competing against likes of your large players, Brex, Ramp, American Express also just made a big acquisition in the space. So just trying to understand what gives Airbase the right to win in the space? Thanks. Sure. Yeah, so I think it's on a standalone basis, a very strong product set that has gotten good feedback in the marketplace. It's definitely targeted at much more of our average size customer. So if you think of our average size customer being over 100 employees, and obviously, we have different segments, but their overlay of their customer base really is at the core of our market.

Speaker Change: I appreciate the great product large opportunity I just wanted to understand what gives you the confidence in competing against the likes of large players racks ramp American Express also just made a big acquisition in the space. So just trying to understand what gives <unk> the right to win the space. Thanks.

Speaker Change: Yeah.

Speaker Change: Yes, so I think it's.

On a standalone basis, a very strong product set that has gotten.

Speaker Change: Good feedback in the marketplace, it's definitely targeted at a much more of our average sized customer. So if you think of our average sized customer being over 100 employees.

Speaker Change: Obviously, we have different segments, but the overlay of their customer base really is at the core of our market and they've got the feature sets associated with that.

And they've got the feature sets associated with that customer size, in terms of things that CFOs would be looking for, efficiency that it drives, some of the rules that can be more complex. So we feel really good about that. I think the other thing is, you know, there's an employee experience element to this. So employees are using the cards, they're accessing this information, they're provided, they're submitting for approvals, more and more spend is being driven at an employee level, we have a ton of utilization on our mobile app already for core things like either punching in, checking your check, PTO.

Speaker Change: That customer size.

Speaker Change: In terms of things that CFO, who would be looking for efficiencies that drive some of the rules that can be more complex. So we feel really good about that I think the other thing is there is an employee experience element to this so employees are using the cards. They are accessing this information that provided there is submitting for approval as more and more spend is being driven at an employee level we haven't.

Speaker Change: Kind of utilization on our mobile app already for core things.

Speaker Change: Things like either punching in checking your check PTO. So when you can really mirror this employee experience with all the features that exist with airbase.

So when you can really mirror this employee experience with all the features that exist with AirBase, and then be able to on the back end, given that single pane of glass from a reporting perspective, we think that actually ends up being a pretty unique value proposition, as we complete all the phases of integration, and we start to sell it more as a unified platform. Thank you. Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back to management for closing remarks. We just want to say thanks to everybody for your interest in Paylocity, thanks for joining the call, and I wanted to say a special thank you to all of our employees for all their efforts to take care of our clients during the busiest time of year, and thank you for supporting a great Q3.

Speaker Change: Then be able to on the backend given that single pane of glass from a reporting perspective, we think that actually ends up being a pretty unique value proposition.

As we complete all of the pieces of integration and we start to sell it more as a unified platform.

Speaker Change: Thank you.

Speaker Change: Ladies and gentlemen, I'm showing no further questions in the queue I would now like to turn the call back to management for closing remarks.

Speaker Change: Well just wanted to say thanks to everybody for your interest in Pelosity. Thanks for joining the call and I wanted to say a special thank you to all of our employees for all their efforts to take care of our clients during the busiest time of year and thank you for supporting a great Q3 have a good night.

Have a good night. Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect. Thanks for watching!

Speaker Change: Ladies and gentlemen that concludes today's conference call. Thank you for your participation you may now disconnect.

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