Paylocity Q3 Earnings Call Highlights

Key Points

• Paylocity delivered a strong Q3 with recurring revenue of $469.9M (+11.6% y/y) and total revenue up 10.5%, beating the high end of guidance by $10.3M and producing Adjusted EBITDA of $220.2M (43.8% margin), prompting management to raise full‑year guidance for the third consecutive quarter.
• The company is embedding AI across its HCM platform—highlighting an accounts‑payable agent that can speed AP by over 60% and processing ~95% of transactions cleanly—and acquired Grayscale to add AI recruiting automation with a roughly 12‑month integration and monetization plan.
• Paylocity reported strong cash flow and capital returns (free cash flow growth ~25% y/y), repurchased ~2.3M shares YTD (~$350M) and bought back ~$50M in Q3, and the board authorized an additional $1 billion share repurchase plan while raising Q4 and full‑year revenue and EBITDA guidance.

Paylocity NASDAQ: PCTY reported fiscal third-quarter results that management said reflected continued momentum from the first half of the year, supported by what it described as strong execution during its busiest selling and service period. The company’s fiscal 2026 third quarter ended March 31, 2026.

Chief Financial Officer Ryan Glenn said recurring and other revenue in the quarter was $469.9 million, up 11.6% year over year, while total revenue increased 10.5% from the prior-year period. Glenn added that results exceeded the top end of the company’s total revenue guidance by $10.3 million and marked the third consecutive quarter in fiscal 2026 in which Paylocity raised full-year guidance by more than the quarterly beat.

Q3 performance and operating metrics

President and CEO Toby Williams said “solid sales and operational execution continued” during what he called the company’s busiest time of year, driving recurring revenue growth and prompting increased revenue and profitability guidance for fiscal 2026. Williams said recurring and other revenue beat the high end of guidance by $7.4 million.

Williams emphasized the operational demands of the human capital management (HCM) industry, citing regulatory complexity and the need for accuracy. He pointed to recent legislative changes, including the “One Big Beautiful Bill” and the “Secure 2.0 Act,” which he said required thousands of system updates across Paylocity’s operations, product, tax, legal, and compliance teams. He also highlighted the company’s scale supporting payroll and tax processing, saying Paylocity moved more than $100 billion on behalf of clients during the quarter, prepared and delivered several million W-2 and 1095 forms, and remitted funds to more than 4,000 state, local, and federal tax agencies.

Glenn said adjusted gross profit was 77.3% in Q3, up 30 basis points from the same quarter last fiscal year, and added that Paylocity generated 60 basis points of adjusted gross profit leverage over the first nine months of fiscal 2026. He also said Adjusted EBITDA in the quarter was $220.2 million, representing a 43.8% margin and exceeding the top end of guidance by $16.2 million. Excluding interest income on funds held for clients, Glenn said Adjusted EBITDA margin was up 110 basis points year over year.

On a GAAP basis for Q3, Glenn reported gross profit of $363.2 million, operating income of $157 million, and net income of $111.3 million.

AI strategy and Grayscale acquisition

Executive Chairman Steve Beauchamp said Paylocity’s multi-year investments in R&D and innovation are intended to support a unified platform spanning HCM, finance, and IT, “all underpinned by expanded AI capabilities and our core employee record data.” Beauchamp said the company is focused on embedding AI across the platform so that capabilities are “woven in, not bolted on,” and described an evolution from AI assistants to AI agents.

As an example, Beauchamp highlighted an accounts payable agent that uses rules and generative AI to populate invoice and purchase order details and categorize transactions using employee and ERP data. He said the capability can “speed up the Accounts Payable process by over 60%” with “approximately 95% of transactions processed cleanly on the first pass.”

Beauchamp also discussed Paylocity’s acquisition of Grayscale, an AI-powered recruiting automation company, which the company announced the prior month. He said the deal expands Paylocity’s recruiting capabilities through AI-driven candidate matching, automated engagement, and continuous candidate check-ins, with the goal of reducing manual work and shortening time to hire. Beauchamp said Paylocity expects to “directly monetize” incremental AI-driven capabilities, including through a “premium SKU.”

In the Q&A, Glenn said the acquisition was “completely immaterial” to revenue and EBITDA guidance and described it as a “small acquisition,” funded with cash. Glenn said Paylocity typically takes time to integrate product tuck-in acquisitions and suggested a timeline “in the 12-month or so range” to integrate Grayscale and bring it to market.

Addressing Grayscale’s customer fit, Beauchamp said he would not characterize the product as targeted to larger enterprises, and instead framed it as a fit for organizations hiring at scale, including those with larger hourly populations or those in growth mode. He said many Grayscale customers overlap with Paylocity’s average target market size of about 150 employees.

Elevate Solutions and managed services

Beauchamp also highlighted the launch of Paylocity Elevate Solutions, which pairs the company’s platform with dedicated payroll and HR teams to manage work directly for clients. Beauchamp said the offering spans implementation, payroll, and HR, and is intended to streamline workflows and reduce administrative burden.

Williams told analysts Elevate is an extension of how Paylocity serves clients today and was driven by client feedback and demand for higher levels of service, particularly when client HR or payroll teams are “stretched thin” or facing turnover. He described it as both a total addressable market expansion and a revenue expansion opportunity, while stating that management does not expect “any significant headwind from a margin opportunity perspective.” Beauchamp added that increased automation and AI-driven workflows make it more manageable for Paylocity to take on additional responsibilities for clients while maintaining accuracy in sensitive areas like payroll, time, and benefits.

Williams also said Elevate could help drive utilization of additional products and lower barriers to implementing add-on solutions, potentially supporting cross-sell efforts.

Capital return, cash flow, and updated guidance

Glenn said Paylocity continues to invest in R&D, noting that total R&D investment—combining expensed and capitalized costs—increased 8.9% year over year in Q3. On a non-GAAP basis, Glenn said sales and marketing expenses were 17.5% of revenue and G&A was 8.2% of revenue, compared with 8.4% a year earlier.

Glenn also pointed to cash flow strength, citing a 27% increase in cash provided by operating activities for the first nine months of fiscal 2026 and 25.4% free cash flow growth over the last 12 months versus the comparative period, along with free cash flow margin “of over 24%” over the last 12 months.

On share repurchases, Glenn said Paylocity bought back about 440,000 shares in Q3 at an average price of $113.20 for roughly $50 million. Fiscal year to date, the company repurchased about 2.3 million shares at an average price of $153.10 for approximately $350 million, reducing diluted shares outstanding by 2.7% as of quarter-end. He also said the board authorized an additional $1 billion share repurchase plan in April, which the company plans to execute opportunistically while maintaining flexibility for M&A.

Glenn said Paylocity ended the quarter with $299.7 million in cash and cash equivalents and $81.3 million of debt related to the Airbase acquisition. He also provided updated assumptions for interest income on client funds, citing an average daily balance of $3.8 billion in Q3 and estimating $3.2 billion in Q4, with an average annual yield of about 330 basis points and interest income of approximately $26.2 million in Q4. For the full year, he estimated an average daily balance of about $3.25 billion, an average yield of about 360 basis points, and roughly $117 million in interest income. Glenn said guidance reflects all Federal Reserve rate cuts to date, with no additional cuts forecast for the remainder of the fiscal year.

For the fourth quarter of fiscal 2026, Paylocity guided to:

• Recurring and other revenue of $402.2 million to $407.2 million (approximately 9% to 10% growth)
• Total revenue of $428.4 million to $433.4 million (approximately 7% to 8% growth)
• Adjusted EBITDA of $128.6 million to $132.6 million
• Adjusted EBITDA excluding interest income on funds held for clients of $102.4 million to $106.4 million

For full fiscal 2026, Glenn raised guidance to:

• Recurring and other revenue of $1.638 billion to $1.643 billion (approximately 11% to 12% growth)
• Total revenue of $1.755 billion to $1.760 billion (approximately 10% growth)
• Adjusted EBITDA of $638 million to $642 million
• Adjusted EBITDA excluding interest income on funds held for clients of $521 million to $525 million

In the Q&A, management said workforce levels at clients have been resilient and up year over year through the first nine months, while noting that guidance assumptions remain based on flat year-over-year workforce levels. Glenn said that resilience has been a tailwind in fiscal 2026, and he said the company would typically assume flat workforce levels as a starting point when setting guidance.

Beauchamp closed the call by thanking employees for supporting clients through year-end processing and helping deliver what he called a “great quarter.”

About Paylocity NASDAQ: PCTY

Paylocity NASDAQ: PCTY is a leading provider of cloud-based payroll and human capital management (HCM) software designed to streamline workforce administration for mid-sized organizations. The company's integrated platform automates core functions such as payroll processing, benefits administration, time and labor tracking, and compliance management, enabling employers to manage employee data more efficiently and reduce administrative burdens.

In addition to payroll and HR capabilities, Paylocity offers talent management solutions including recruiting, onboarding, performance tracking, and learning management.

This instant news alert was generated by narrative science technology and financial data from MarketBeat in order to provide readers with the fastest reporting and unbiased coverage. Please send any questions or comments about this story to contact@marketbeat.com.