Snapshot
Paylocity Holding Corp reported $502M of revenue in Q3 2026, up 10.5% year over year, with diluted EPS of $2.05 and an operating margin of 31.3%.
- Revenue
- $502M
- YoY growth
- +10.5%
- Diluted EPS
- $2.05
- Operating margin
- 31.3%
What management said
- •In regard to our upcoming conference schedule, we will be attending the Baird Global Consumer, Technology & Services Conference and the William Blair Growth Stock Conference.
- •This acquisition represents a continuation of our broader strategy to embed AI across our platform, delivering intelligence within core workflows.
- •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 2026.
- •Recurring and other revenue of $469.9 million grew 11.6% over Q3 of last year and beat the high end of our guidance by $7.4 million.
- •HCM is a highly regulated, complex, and dynamic industry where accuracy and compliance is paramount with zero margin for error.
- •I would now like to pass the call to Ryan to review the financial results in detail and provide updated fiscal 2026 guidance.
- •Q3 recurring net other revenue was $469.9 million, an increase of 11.6%, with total revenue up 10.5% from the same period last year.
- •Our adjusted gross profit was 77.3% for Q3, an increase of 30 basis points from Q3 of last fiscal year.
- •Through the first nine months of fiscal 2026, we have driven 60 basis points of adjusted gross profit leverage as we continue to focus on scaling our operational costs while maintaining industry-leading service levels.
- •On a non-GAAP basis, G&A costs were 8.2% of revenue in the third quarter versus 8.4% in the same period last year, representing 20 basis points of leverage.
- •Through the first nine months of fiscal 2026, we have driven 50 basis points of G&A leverage versus the same period last fiscal year.
- •Our Adjusted EBITDA for the third quarter was $220.2 million or 43.8% margin and exceeded the top end of our guidance by $16.2 million, resulting in increased margin guidance for fiscal 2026.
What went well
- •Recurring and other revenue of $469.9 million grew 11.6% over Q3 of last year and beat the high end of guidance by $7.4 million, with total revenue coming in $10.3 million above the top end of guidance.
- •Adjusted EBITDA was $220.2 million, or a 43.8% margin, exceeding the top end of guidance by $16.2 million, and Adjusted EBITDA margin excluding interest income on funds held for clients was up 110 basis points year-over-year.
- •Channel referrals, primarily from benefit brokers and financial advisors, again represented more than 25% of new business in Q3.
- •The company drove 60 basis points of adjusted gross profit leverage through the first nine months and raised fiscal 2026 guidance by more than the quarterly beat for the third consecutive quarter.
- •Free cash flow grew 25.4% over the last 12 months with free cash flow margin over 24%, and cash from operating activities rose 27% in the first nine months.
- •The company announced the acquisition of Grayscale, an AI-powered recruiting automation company, and launched Paylocity Elevate Solutions, a managed payroll and HR service offering.
What went wrong
- •Implied fourth-quarter Adjusted EBITDA guidance suggests a slight year-over-year margin decline after multiple quarters of year-over-year EBITDA margin expansion, driven by the bias to invest back into R&D and broader automation efforts.
- •The average daily balance of client funds is expected to decline to approximately $3.2 billion in Q4 from $3.8 billion in Q3, and guidance reflects all Fed cuts to date with no additional rate cuts forecasted.
Guidance changes
| Metric | Period | Previous | Current | Change |
|---|---|---|---|---|
| Recurring and other revenue (full year FY2026) | FY2026 | — | Increased by $15.5 million at the midpoint | +$15.5M at midpoint |
| Total revenue (full year FY2026) | FY2026 | — | Increased by $20.5 million at the midpoint | +$20.5M at midpoint |
| Adjusted EBITDA margin (full year FY2026) | FY2026 | — | Raised EBITDA guidance by 30 basis points | +30 bps |
| Recurring revenue growth (Q4) | Q4 FY2026 | — | 9%-10% growth | — |
| Interest income (Q4) | Q4 FY2026 | — | Approximately $26.2 million, on average daily balance of ~$3.2 billion at ~330 bps yield | — |
| Interest income (full year) | FY2026 | — | Approximately $117 million, on average daily balance of ~$3.25 billion at ~360 bps yield | — |
Performance breakdown
| Metric | YoY change | Reason |
|---|---|---|
| Recurring and other revenue | +11.6% | Strong selling season performance and solid sales and operational execution; total revenue up 10.5%. |
| Adjusted gross profit margin | +30 bps (77.3% in Q3) | Continued focus on scaling operational costs while maintaining industry-leading service levels. |
| Total R&D investment (expensed plus capitalized) | +8.9% | Continued significant investment to build out the Paylocity platform for the modern workforce. |
| G&A as percent of revenue | 8.2% vs 8.4% (20 bps leverage) | Operational scale and efficiency improvements. |
| Adjusted EBITDA margin excluding interest income | +110 bps | Durable recurring revenue growth combined with expanded profitability from operational scale and automation/AI efficiencies. |
| Cash from operating activities (first nine months) | +27% | Increased profitability and benefits of recent tax legislation changes. |
| Free cash flow (last 12 months) | +25.4% | Increased profitability and tax legislation benefits; free cash flow margin over 24%. |
| Diluted shares outstanding | -2.7% as of end of Q3 | Share repurchases of approximately $350 million fiscal year to date. |
Earnings call themes & trends
| Topic | Previous mention | Current period | Trend |
|---|---|---|---|
| Embedding AI across the platform (AI Assistants to AI Agents) | Multi-year investment in R&D and AI capabilities | AI woven in not bolted on; agents embedded in daily workflows; AP agent speeds AP process by over 60% with ~95% clean first-pass; Grayscale acquisition to enable a premium recruiting SKU | increasing |
| Broker / channel partnerships | Long-standing strong presence and differentiated relationships in the broker channel | Channel referrals again more than 25% of new business; momentum with brokers has grown over the last 18 months | increasing |
| Platform breadth across HCM, Finance, and IT | Portfolio tripled since IPO; Airbase acquisition added office-of-the-CFO/Finance products | Continued attach of Finance and IT products to new logos and existing base; launch of Paylocity Elevate Solutions managed services | increasing |
| Client workforce / employment levels | Guidance assumed flat year-over-year workforce levels | Workforce levels have been up and resilient through nine months, a tailwind; Q4 guidance again assumes flat year-over-year | stable |
| Capital allocation / share repurchases | $650 million repurchased over the prior two years | $350 million repurchased fiscal year to date; board authorized an additional $1 billion repurchase plan in April | increasing |
| Pricing model | Industry pricing models have been fairly stable | No significant client demand for a different pricing model; consistency maintained in pricing conversations | stable |
Q&A summary
What drove the sequential variability in sales & marketing and R&D in Q3, and why does the Q4 EBITDA guide imply a slight margin decline after multiple quarters of expansion?
No one-time timing items in Q3; the company continues to invest in sales, marketing, and R&D. There is always a timing element across the year, and the bias is to invest back into R&D and broader automation in Q4 while still increasing profitability. EBITDA guidance for the year was raised 30 basis points.
On Grayscale and charging for AI capabilities, what are you seeing?
Management is excited about Grayscale as a product tuck-in; integration typically takes around 12 months before launch. Grayscale can fully automate candidate engagement, conversations, and marketing, giving Paylocity a premium recruiting SKU once integrated. Its customers overlap well with Paylocity's core target market of about 150 employees.
Is it fair to extrapolate the Q4 recurring growth guide of 9%-10% as a starting point for fiscal 2027?
The Q4 recurring guide is a data point, more relevant to the early part of next year, and guidance velocity is unchanged. The company expects to apply its usual prudence in the August full-year guide and would likely assume workforce levels flat year-over-year as a starting point, since up workforce levels were a tailwind this year.
What is the revenue opportunity and margin impact of the new Paylocity Elevate managed service offering?
Elevate is an extension of the platform providing higher-level payroll and HR service, born from client feedback and targeting the core ~150-employee market. It is a TAM and revenue expansion opportunity, and management does not expect any significant margin headwind because it leverages the existing platform, teams, and AI capabilities.
How are you positioning the sales force to cross-sell the rapidly expanded platform (CFO products, IT asset/access management, managed solutions, premium SKUs)?
Increasing ARPU by launching new solutions has been part of the growth algorithm for over a decade, and the portfolio has more than tripled since IPO. The team uses a proven two-tier model where reps sell some products directly and refer more complex products to internal specialists, preventing productivity loss while expanding the portfolio.
How is the office-of-the-CFO / Paylocity for Finance product performing about a year after launch, and is it greenfield land versus displacement?
Management is happy with the progress; expectations for product attach to both new logos and the existing base from the Airbase-acquired Finance products have been met. The single-platform value proposition across payroll, HCM, Finance, and IT resonates in the market, though it remains relatively early.