Executive Summary / Key Takeaways

• Paylocity is a leading cloud-based provider of human capital management (HCM), payroll, and spend management solutions, strategically expanding its platform to capture a larger share of the workforce and finance technology market.
• Recent performance, highlighted by 15% recurring revenue growth in Q3 FY25 and 9M FY25, demonstrates strong sales execution and product adoption, contributing to consistent increases in average revenue per client.
• The acquisition of Airbase significantly expands Paylocity's total addressable market by adding comprehensive spend management capabilities, positioning the company to offer a unified platform for all payroll and non-payroll spend.
• Paylocity is effectively leveraging its scale and operational focus to drive significant profitability expansion, with adjusted EBITDA margin (excluding float) showing substantial leverage, offsetting the initial dilutive impact of the Airbase acquisition.
• Management's increased guidance for FY25, projecting approximately 14% recurring revenue growth and 13% total revenue growth at the midpoint, reflects confidence in continued sales momentum, product differentiation (including AI), and operational execution, despite ongoing macro uncertainties and interest rate fluctuations.

The Evolution of Workforce Management: Paylocity's Platform Story

Paylocity Holding Corporation has grown from a payroll processing provider into a comprehensive cloud-based platform for human capital management and, increasingly, financial spend management. Operating in the competitive landscape of workforce technology, Paylocity has carved out a strong position, particularly within the mid-market segment (clients typically over 100 employees), by focusing on delivering modern, intuitive software. This strategy is built on a unified database architecture, which the company believes provides a differentiated foundation for seamless data flow and integrated functionality across its growing suite of solutions.

The company's history, dating back to 1997 with the formation of the holding company in 2013, is marked by a consistent commitment to innovation and product expansion. This has been crucial in navigating a competitive environment populated by large, established players like IBM (IBM) and Microsoft (MSFT), as well as more niche or specialized providers like Blackbaud (BLKB). While larger competitors may offer broader enterprise solutions or deeper integrations within their own ecosystems, Paylocity has focused on agility, user experience, and a comprehensive suite tailored to the specific needs of its target market. Its success is evidenced by consistent recognition as a leader in various HCM product categories by third parties like G2 and TrustRadius, and its strong reputation within the broker channel, which consistently drives over 25% of new business referrals. This channel strength is underpinned by Paylocity's modern platform, robust third-party integration capabilities, and a strategic decision not to compete with brokers by selling insurance products.

Paylocity's competitive moat is significantly reinforced by its proprietary technology and the resulting customer loyalty. The unified platform architecture is designed to streamline HR, payroll, and now spend management processes, offering tangible benefits like potentially faster processing and improved efficiency compared to disparate systems or less integrated solutions offered by some competitors. The company's ongoing investment in R&D, which has seen a significant increase in absolute dollars, is aimed at extending this technological leadership and driving future growth.

Technological Differentiation: Powering Efficiency and Engagement

At the heart of Paylocity's strategy is its investment in differentiated technology. The company's cloud-based platform is built on a single database, which facilitates seamless integration across modules and provides a consistent user experience. This unified approach offers tangible benefits to clients, such as streamlined workflows, reduced data entry errors, and improved reporting capabilities.

Recent technological advancements highlight Paylocity's commitment to innovation, particularly in areas like artificial intelligence (AI) and platform expansion. The company has launched a new AI Assistant chatbot, now generally available to all client administrators. This tool is designed to streamline HR processes and elevate the employee experience by providing real-time contextual support and answering common questions. Early adoption levels are promising, with a 30% increase in utilization since its October launch. Specific features, such as natural language search in reporting, have driven an over 20% reduction in the time required for users to find reports, demonstrating concrete efficiency gains for clients. The AI Assistant can also leverage client-specific data like employee handbooks for policy questions and reference public resources for compliance inquiries, showcasing practical AI use cases that drive value.

Beyond AI, Paylocity continues to expand its core HCM capabilities and integrate new functionalities. The launch of Benefit Decision Support and an integrated headcount planning product contributed to increasing the company's maximum per-employee-per-year (PEPY) potential from $550 to $600, achieving a target set in August 2023. These additions, along with other recent enhancements like Recognition & Rewards, Employee Voice, Advanced Scheduling, and Market Pay, demonstrate a focus on building out a comprehensive suite that addresses a wide range of workforce needs.

A significant strategic move leveraging technology is the acquisition of Airbase Inc. in October 2024. This acquisition brings modern finance and spend management capabilities onto the Paylocity platform, including bill pay, accounts payable automation, expense management, corporate cards, and procurement. The rationale is to create a "single pane of glass" for managing all payroll and non-payroll spend. While integration is in its early stages, the company is making progress, and the value proposition of a unified spend management platform is already resonating with clients and prospects. This expansion into the Office of the CFO market represents a significant increase in Paylocity's total addressable market and is expected to drive higher average revenue per client over time, even if these new products utilize different pricing models than the traditional PEPY structure.

The "so what" for investors is clear: Paylocity's continuous investment in technology, particularly its unified platform, AI capabilities, and strategic expansion into spend management, strengthens its competitive moat. These technological differentiators enable the company to attract new clients, increase product adoption within the existing base (driving ARPU growth), enhance operational efficiency (contributing to margin expansion), and position itself favorably against competitors who may lack the same level of integration or specialized functionality for the mid-market.

Performance Reflecting Strategy and Execution

Paylocity's recent financial performance underscores the effectiveness of its strategic focus on product innovation, sales execution, and operational efficiency. For the three months ended March 31, 2025 (Q3 FY25), total revenues reached $454.5 million, a 13% increase from $401.3 million in the prior year period. Recurring and other revenue, the core software component, grew even faster at 15%, reaching $421.1 million compared to $366.8 million in Q3 FY24. This growth was primarily attributed to incremental revenues from both new and existing clients, driven by strong performance from the sales team. For the nine months ended March 31, 2025, total revenues were $1.19 billion, up 14% from $1.05 billion in the prior year period, with recurring and other revenue also growing 15% to $1.10 billion.

Interest income on funds held for clients, while a smaller portion of total revenue (7% in Q3 FY25), contributed $33.5 million in Q3 FY25 and $92.6 million for the nine months. The Q3 figure represented a slight decrease year-over-year, primarily due to lower interest rates, partially offset by higher average daily balances of client funds ($3.6 billion in Q3 FY25). The nine-month figure showed a 5% increase, reflecting higher average balances over the longer period, despite rate fluctuations.

Profitability metrics demonstrate significant progress. Gross margin remained stable at 71% in Q3 FY25 and 69% for the nine months. However, adjusted gross profit showed leverage, indicating effective scaling of operational costs. Operating expenses increased in absolute dollars across sales and marketing (up 6% in Q3, 11% in 9M), research and development (up 18% in Q3, 15% in 9M), and general and administrative (up 12% in Q3 and 9M), reflecting continued investment in growth initiatives, sales force expansion, and product development. Despite these investments, operating income grew by 19.5% in Q3 FY25 to $127 million and by 20.6% for the nine months to $237.8 million.

Adjusted EBITDA margin for Q3 FY25 was a strong 43.4%, significantly exceeding guidance. Excluding the impact of interest income, adjusted EBITDA also exceeded expectations. For the nine months, adjusted EBITDA reached $452.2 million. Management highlighted their success in driving operating leverage, noting that updated guidance reflects 100 basis points of adjusted EBITDA leverage (excluding float) versus fiscal 2024, representing approximately 200 basis points of organic operating leverage that more than offsets the estimated 100 basis point dilutive headwind from the Airbase acquisition in fiscal 2025. This focus on operational efficiency is also reflected in the company's efforts to drive leverage in stock-based compensation expense towards a target of less than 10% of revenue.

Liquidity remains robust. As of March 31, 2025, Paylocity held $477.8 million in cash and cash equivalents. The company utilized its revolving credit facility, borrowing $325 million to fund the Airbase acquisition in October 2024. By March 31, 2025, $81.3 million of this had been repaid, leaving $243.8 million outstanding. The company was in compliance with all credit facility covenants. Cash flow generation is strong, with net cash provided by operating activities increasing to $331.7 million for the nine months ended March 31, 2025, up from $304.7 million in the prior year period. Investing activities saw a significant increase in cash used ($328.5 million vs $76.4 million), primarily due to the Airbase acquisition payment. Financing activities were impacted by the credit facility movements and share repurchases. Paylocity actively repurchased shares under its $500 million authorization, buying back 472 thousand shares for $93.6 million in the nine months ended March 31, 2025, with $256.4 million remaining authorized. The company believes its current cash, future cash flow from operations, and credit facility access are sufficient for its liquidity needs.

Outlook and Forward Momentum

Paylocity's outlook for the remainder of fiscal year 2025 and beyond reflects confidence in its strategic direction and execution capabilities, despite acknowledging potential macro uncertainties. Management provided increased guidance for both the upcoming quarter (Q4 FY25) and the full fiscal year.

For the fourth quarter of fiscal 2025, recurring and other revenue is expected to be in the range of $358.1 million to $363.1 million, representing approximately 11% growth over Q4 FY24. Total revenue is projected between $385.5 million and $390.5 million, or approximately 9% growth. Adjusted EBITDA is guided to be between $118.7 million and $122.7 million, with adjusted EBITDA excluding interest income expected in the range of $91.3 million to $95.3 million.

The full fiscal year 2025 guidance was raised following the strong Q3 performance. Recurring and other revenue is now expected to be in the range of $1.460 billion to $1.465 billion, representing approximately 14% growth over fiscal 2024. Total revenue is projected between $1.580 billion and $1.585 billion, or approximately 13% growth. Adjusted EBITDA is guided to be between $571 million and $575 million, and adjusted EBITDA excluding interest income is expected in the range of $451 million to $455 million.

These guidance figures are based on specific assumptions, including the impact of Federal Reserve interest rate cuts. As of the Q3 earnings call (May 1, 2025), guidance reflected all Fed cuts to date with an additional 25 basis point cut assumed in the following week's FOMC meeting. The guidance also assumes roughly flat workforce levels within the client base for the fiscal year, although management noted observing stability and some seasonal growth in Q3.

Management expressed confidence in their ability to continue driving operating leverage, projecting approximately 100 basis points of adjusted EBITDA leverage (excluding float) for FY25 compared to FY24. This indicates strong underlying operational efficiency gains, which are expected to more than offset the initial dilutive impact of the Airbase acquisition on adjusted EBITDA margin (estimated at around 100 basis points).

While the outlook is positive, management acknowledged potential risks, including ongoing uncertainties in market and economic conditions. These could manifest as fluctuations in client employee counts, elongated sales cycles, or client losses. Management noted seeing the "very beginnings" of a "little bit of pause entering into the mindset of buyers" in Q3, similar to observations from the prior year, though they characterized this as qualitative and not having a material impact on momentum thus far. Litigation, including potential class action complaints related to biometric privacy laws, also represents a potential, albeit currently unquantifiable, risk. Interest rate fluctuations pose a risk to interest income on client funds and to the variable interest expense on the credit facility.

Despite these potential headwinds, Paylocity remains focused on its multiyear goal of achieving $2 billion in total revenue. The strategic expansion into spend management via Airbase, coupled with continued innovation in HCM and AI, is expected to drive both new client acquisition and increased revenue from the existing base. The company's operational strength and focus on efficiency are anticipated to support continued margin expansion, contributing to durable growth and increasing profitability.

Conclusion

Paylocity Holding Corporation presents a compelling investment narrative centered on a modern, expanding platform, strong operational execution, and a clear path to increasing profitability. The company's strategic evolution from a payroll provider to a comprehensive HCM and spend management solution is gaining traction, evidenced by consistent recurring revenue growth and increasing average revenue per client. The acquisition of Airbase marks a significant step in expanding the company's addressable market and deepening its value proposition by unifying payroll and non-payroll spend management.

Paylocity's technological differentiation, built on a unified platform and enhanced by investments in AI and new modules, provides a competitive edge that resonates with clients seeking efficiency and engagement tools. This differentiation, combined with a strong go-to-market strategy and a robust broker channel, supports continued client acquisition and retention. While macro uncertainties and competitive pressures persist, Paylocity's focus on driving operating leverage is yielding tangible results, contributing to significant adjusted EBITDA margin expansion. Management's increased guidance for fiscal year 2025 reflects confidence in the company's ability to execute against its growth and profitability objectives, positioning Paylocity favorably as it pursues its long-term revenue targets. Investors should monitor the pace of Airbase integration, the impact of macro conditions on sales cycles and workforce levels, and the company's continued ability to drive product adoption and operational efficiency.