Snapshot
Paylocity Holding Corp reported $416M of revenue in Q2 2026, up 10.4% year over year, with diluted EPS of $0.92 and an operating margin of 16.9%.
- Revenue
- $416M
- YoY growth
- +10.4%
- Diluted EPS
- $0.92
- Operating margin
- 16.9%
What management said
- •Our strong results continued in Q2, with recurring and other revenue growth of 11% as our differentiated value proposition of providing the most modern software in the industry continues to resonate in the marketplace.
- •Total revenue was $416.1 million, or 10% growth over Q2 of last year.
- •Additionally, we recently extended our AI Assistant into HR rules and regulations, tapping into more than 200 IRS and Department of Labor knowledge sources to provide administrators with guidance on tax and labor regulations.
- •As Steve mentioned, the momentum seen in Q1 continued into the Q2 and contributed to a strong selling season performance and increased revenue and profitability guidance for fiscal 2026.
- •Overall, we are pleased with our Q2 results and believe we are well-positioned heading into the back half of the year, which is reflected in our increased guidance for fiscal 2026.
- •I would now like to pass the call to Ryan to review the financial results in detail and provide our increased fiscal 2026 guidance.
- •Q2 recurring and other revenue was $387 million, an increase of 11%, with total revenue of $416.1 million and up 10% from the same period last year.
- •Our adjusted gross profit was 74.4% for Q2 versus 73.8% in Q2 of last fiscal, representing 60 basis points of leverage.
- •On a non-GAAP basis, G&A costs were 9% of revenue in the Q2 versus 9.8% in the same period last year, representing 80 basis points of leverage.
- •Our adjusted EBITDA for the Q2 was $142.7 million, or 34.3% margin, and exceeded the top end of our guidance by $7.2 million, resulting in increased margin guidance for fiscal 2026.
- •I think the go-to-market teams performed really well across sales and marketing and our channel teams, and I think we saw a very stable demand environment.
- •I think similar commentary on the demand environment from last quarter carried through to this quarter.
What went well
- •Recurring and other revenue grew 11% to $387 million, and total revenue rose 10% to $416.1 million, coming in $8.1 million above the midpoint of revenue guidance.
- •Management characterized the selling season as strong, with the referral broker channel again delivering more than 25% of new business in Q2 and another strong quarter of client retention above 92%.
- •Adjusted gross profit reached 74.4% versus 73.8% a year ago (60 basis points of leverage), and non-GAAP G&A fell to 9% of revenue from 9.8% (80 basis points of leverage).
- •Adjusted EBITDA was $142.7 million at a 34.3% margin, exceeding the top end of guidance by $7.2 million; excluding interest income on client funds, EBITDA margin rose 140 basis points year over year.
- •Free cash flow grew 26% over the last twelve months with a free cash flow margin of nearly 24%, and operating cash flow increased 40% in the first six months of fiscal 2026.
- •AI adoption accelerated, with average monthly usage of the AI Assistant increasing more than 100% quarter over quarter, supported by the new Policy and Procedures Agent and HR rules and regulations capabilities, plus new HCM products such as Reward and Recognition.
What went wrong
- •Management assumes flat year-over-year employment levels in the back half of the year, a slight degradation from the modest workforce growth seen in the first half.
- •Management acknowledged heightened market concern around AI disruption to software and employment, noting significant negative price action in software stocks, while maintaining that its own demand environment remains stable.
Guidance changes
| Metric | Period | Previous | Current | Change |
|---|---|---|---|---|
| Fiscal 2026 revenue and profitability guidance | FY2026 | — | Raised; full-year guidance increased by more than the quarterly beat | Increased |
| Adjusted EBITDA margin guidance | FY2026 | — | Increased following the $7.2 million EBITDA beat, with bias toward reinvesting some upside into R&D and sales and marketing | Increased |
| Free cash flow margin target | Multi-year | — | 25%-30%, against a trailing-twelve-month level of nearly 24% | Updated/approaching |
| Employment level assumption | H2 FY2026 | Modest year-over-year growth in H1 | Flat year-over-year | Slight degradation |
Performance breakdown
| Metric | YoY change | Reason |
|---|---|---|
| Recurring and other revenue | +11% to $387 million | Strong sales and operations execution, product differentiation, and broader product adoption across the suite. |
| Total revenue | +10% to $416.1 million | Solid quarter for sales and operations, beating the revenue guidance midpoint by $8.1 million. |
| Adjusted gross profit margin | +60 bps to 74.4% | Scaling operational costs while maintaining industry-leading service levels. |
| Non-GAAP G&A as % of revenue | Improved to 9.0% from 9.8% (80 bps leverage) | Operational scale and efficiencies from automation and AI investments. |
| Adjusted EBITDA | $142.7 million at 34.3% margin; margin +140 bps ex-interest income | Durable recurring revenue growth combined with expanded profitability and operating leverage. |
| Total R&D investment (expensed plus capitalized) | +10% | Continued investment to build out the platform for the modern workforce. |
| Free cash flow | +26% over trailing twelve months; ~24% FCF margin | Increased profitability, natural business scale, and benefits from recent tax legislation changes. |
Earnings call themes & trends
| Topic | Previous mention | Current period | Trend |
|---|---|---|---|
| Embedding AI across the platform | Discussed last quarter as embedding AI in the product suite | New Policy and Procedures Agent and HR rules and regulations capabilities launched; AI Assistant monthly usage up over 100% QoQ | rising |
| Stable demand and employment environment | Similar stability commentary in Q1 | Stable demand, modest H1 workforce growth, flat assumed in H2 | steady |
| Broker referral channel | Consistently over 25% of new business | Again more than 25% of new business, with momentum aided by competitor disruption and Benefits-Guided Setup | rising |
| Paylocity for Finance (Airbase) and IT solutions | Airbase acquisition closed last October; V1 integrated product delivered in July | Tracking to expectations, aiding differentiation and ARPU; targeting 10%-20% penetration over several years | rising |
| Profitability and free cash flow leverage | Several hundred basis points of EBITDA leverage over prior 24 months | Continued margin expansion with reinvestment bias; FCF approaching updated 25%-30% target | rising |
| Client retention | North of 92% for over a decade | Another strong quarter, sustained above 92% | steady |
Q&A summary
How would you characterize the selling environment this year versus last, and any pockets of strength or weakness?
Management called the selling season strong, with go-to-market teams performing well and a stable demand environment consistent with the prior quarter and prior year; that performance drove the revenue growth, profitability, and guidance raise.
How are you translating AI-driven customer time savings into revenue for Paylocity?
As the system of record, Paylocity uses real-time employee data and APIs to connect to other workflows, driving more module upsell, greater platform utilization, and marketplace and API monetization, while preserving the high-touch service relationship that supports retention.
Given AI fears hitting software stocks, are you seeing hesitation in the selling environment, and how is sales force productivity?
Management reported a strong selling season with stable client growth consistent with last year, no slowdown across segments, and strong sales productivity; prospects focus more on service levels than AI replacement, which remains a smaller part of the value proposition.
Was the strong cash flow boosted by timing that may not recur in the second half?
Ryan Glenn said nothing notable on timing; on a trailing-twelve-month basis free cash flow margin is nearly 24% (up 26%), driven mostly by natural business scale with some benefit from recent tax legislation changes.
Why are AI advancements not as big a risk to Paylocity as recent stock price action suggests?
Management cited natural moats: a high-touch service and money-losing implementation model, interfaces with thousands of tax agencies requiring deterministic calculations and constant updates, system-of-record data enabling expanding use cases, and the capital and banking scale to move billions of dollars, framing AI as an opportunity rather than a threat.
On the adjusted EBITDA guide, why wasn't the full Q2 beat passed through, similar to Q1?
Management has driven several hundred basis points of EBITDA leverage over 24 months and raised margin guidance each quarter, but is biased toward reinvesting some upside into R&D and sales and marketing to drive growth into the back half and fiscal 2027, while free cash flow approaches the updated 25%-30% target.