Paylocity closed fiscal 2026 with a strong fourth quarter, growing recurring revenue 12.4% and total revenue 11% to end the year at roughly $1.8 billion, with recurring revenue growth accelerating for a second straight quarter. GAAP revenue rose about 11% to $445 million with a 19.0% operating margin and $1.12 of diluted EPS, while Q4 revenue beat the top of guidance by $11.3 million and adjusted EBITDA of $145.5 million (32.7% margin) beat by $12.9 million. Full-year adjusted EBITDA reached $654.9 million (37% margin), free cash flow margin hit 24.2%, revenue retention stayed above 92%, average revenue per client rose more than 5% to ~$37,200, and the client base grew 7% to 44,400. The strategic story is an intensifying platform-and-AI push: the launch of Paylocity Ignite AI (agents embedded in payroll, time and recruiting workflows with a new AI Hub dashboard, and AI interactions nearly doubling sequentially), the new Paylocity Retirement and Elevate Solutions offerings, and the cash-funded Grayscale and Aidora acquisitions that add directly monetizable AI-native capabilities. Management guided fiscal 2027 to ~7% total revenue growth (recurring ~8%) and adjusted EBITDA of $690-700 million, embedding its trademark prudence (flat workforce assumption, conservative interest-rate and client-fund-balance assumptions, and two rate cuts). A change in deferred-contract-cost amortization from a seven- to eight-year life adds 120-140 basis points to fiscal 2027 adjusted EBITDA margin, partly offset by subscale acquisition headwinds. Leadership reaffirmed multi-year margin expansion toward an 80%+ gross-margin target at $3 billion of revenue and its ability to both repurchase stock ($398 million in fiscal 2026, ~$1.3 billion remaining) and fund growth.
Good afternoon. Welcome to Paylocity's earnings results call for the fourth quarter in fiscal 2026, which ended on June 30th, 2026. 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. 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.
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. We do not undertake any duty to update any forward-looking statements. 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 on 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.
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. With that, let me turn the call over to Steve.
Thanks, Ryan, and thanks to all of you for joining us on our fourth quarter and fiscal 2026 earnings call. Our differentiated value proposition of providing the most modern platform in the industry continues to resonate in the marketplace and help drive recurring revenue growth of 12.4% and total revenue growth of 11% in Q4. For fiscal 2026, recurring revenue growth 12.2% and total revenue grew 11% as we ended the year with approximately $1.8 billion of revenue. Our sustained multi-year investment in R&D and commitment to driving innovation continues to fuel durable recurring revenue growth and expanded average revenue per client as the combination of HCM finance and IT in one single platform, all underpinned by its expanded AI capabilities and core employee record data represents the most comprehensive offering in the market.
A critical component of this strategy is the launch of Paylocity Ignite AI, which is designed to help accelerate productivity for HR, finance, and IT teams across companies of all sizes and industries. Our approach to AI remains focused on driving value for our clients rather than adding complexity through standalone features. Ignite AI is woven directly into core workflows to help clients complete tasks faster, surface insights more quickly, and move from answers to action. For example, within recruiting, our candidate fit agent uses job description analysis, recruiter-defined criteria, and candidate application data to help identify strong potential matches while giving recruiters the ability to review, audit, and adjust the criteria.
Similarly, clients can leverage our talent rediscovery agent to scan their existing talent pool to identify candidates whose skills, experiences, education, and certifications align most closely with current job requirements and re-engage qualified talent with personalized invitations to apply for open roles. Additionally, our answers and insight agent makes HR and payroll teams more efficient. Rather than relying on spreadsheets or manual analysis to uncover data-driven insights, administrators can ask natural language questions and receive faster client-specific answers in their flow of work. As part of this continued evolution, we are also introducing our Ignite AI Hub, a centralized dashboard that gives clients greater visibility and control over how AI is used across their organization.
The Ignite AI Hub helps close the visibility gap by measuring real productivity gains, including questions answered, tasks completed, and issues resolved across our payroll time and recruiting agents. It also allows leaders to see which agents are active, configure them based on their organization's needs, and identify opportunities for additional automation. The early feedback from our clients reinforces the value proposition of Ignite AI. It is embedded in the workflows our clients already use, powered by the data they already trust, and designed to support people rather than replace them. As an auto dealer client with more than 600 employees told us, "Paylocity's AI feels like another team member." While a nonprofit client with over 500 employees describes it as an extra set of hands that still preserves the human element of approval and decision-making.
That combination of productivity, trust, and control is critical in HR and payroll, where accuracy, transparency, and compliance are paramount. This positive sentiment is similarly reflected in the growing utilization of our AI capabilities, with the number of AI interactions nearly doubling quarter-over-quarter. Product expansion has been a key part of Paylocity's growth algorithm for over a decade, and we believe the launch of Paylocity Ignite AI, combined with the continued expansion of our broader HCM finance and IT portfolio, will help to drive further growth in our average revenue per client, which reached roughly $37,200 in fiscal 2026, compared to $35,300 in fiscal 2025, an increase of more than 5%. We also continue to see significant growth in our client base in fiscal 2026 to 44,400 clients, representing approximately 7% growth from fiscal 2025.
Our commitment to product development also continues to be recognized in the market, with Paylocity recently recognized by HR Tech Outlook Magazine as the top payroll software for 2026. I would now like to pass the call to Toby to provide further color on the quarter.
Thanks, Steve. In Q4 and fiscal 2026, our differentiated position in the market was reflected in solid sales and go-to-market execution, and we have continued investing in our go-to-market functions to carry this momentum into fiscal 2027. We also saw another strong year of channel referral performance, primarily from benefit brokers, who once again represented more than 25% of new business in fiscal 2026. The sustained success of our broker channel continues to be driven by our modern platform, third-party integration and API capabilities, because we do not compete against our broker partners by selling insurance products. We remain committed to investing in and supporting the broker channel, with the goal of continuing to deliver real value and true partnership and support to our referring brokers and their clients.
We have also continued to drive product innovation to meet client needs and bring to market meaningful new solutions that both create differentiation and drive ARPU. In addition to our recent launch of our Elevate Solutions, in June, we also announced the launch of Paylocity Retirement, a new offering that brings plan administration and employee savings tools directly to the Paylocity platform. Retirement benefits are a critical component of an employee's long-term financial well-being, many employers still manage these programs through disconnected systems, manual file transfers, and separate employee portals. This fragmentation creates additional administrative work for HR and payroll teams, increases the risk of errors, and can make it more difficult for employees to engage with their retirement savings.
As Steve highlighted, we are also excited about the continued evolution of our AI capabilities and the incremental value we expect to deliver to our more than 44,000 clients through the recent launch of Ignite AI. To further expand the AI capabilities across our platform, we also recently announced the acquisition of Aidora, which will enhance our leave of absence management capabilities through a fully automated AI-native system that streamlines the full leave of absence life cycle, from eligibility and planning to payroll coordination and compliance. This is one of the most complex areas of regulatory compliance in HR, which is typically also manual in nature for both HR teams and employees.
With Aidora as part of Paylocity, the full leave of absence process will be automated, leveraging Aidora's AI-native product, delivering a seamless employee experience with clear timelines, personalized guidance, and transparent pay expectations, all through natural language interaction. HR teams will be able to shift their focus from managing manual payroll and complicated compliance processes to supporting their people. We are excited by the opportunity to integrate Aidora's advanced capabilities into our existing suite, delivering incremental value to our clients that we can directly monetize in the form of a premium offering for incremental AI-driven capabilities. Following our acquisition of Grayscale last year, we are also integrating Grayscale's AI-powered recruiting automation capabilities into our platform in the form of a premium offering, helping companies hiring at scale move faster through candidate matching, automated engagement, and continuous candidate check-ins.
Collectively, the launch of Ignite AI, Elevate Solutions, Paylocity Retirement, and the ongoing integration of Grayscale and Aidora into the Paylocity platform highlights our dual focus on embedding AI into high-value workflows while continuing to broaden the platform with solutions that reduce manual work and help clients unlock more value from the Paylocity platform. This commitment to product innovation and world-class service continues to be reflected in our industry-leading revenue retention rates, which once again remained above 92% in fiscal 2026. Our strong culture, industry-leading software innovation, and exceptional sales and operational execution would not be possible without the dedication and commitment of our employees. As we close out a very strong fiscal 2026, I'd like to thank all of our people and teams for a fantastic year, and we appreciate everything that you do.
The strong culture at Paylocity also continues to be recognized externally as we recently were named by Time as one of America's Best Companies 2026, and by Forbes as one of America's Best Employers for Women 2026. I would now like to pass the call to Ryan to review the financial results in detail and provide initial outlook on fiscal 2027.
Thanks, Toby. Recurring revenue for the fourth quarter was $415.6 million, an increase of 12.4%, with total revenue up 11% from the same period last year. As Toby noted, our sales and operations team had another solid quarter, and we were pleased to come in $11.3 million above the top end of our revenue guidance, with the majority of our Q4 revenue beat coming from recurring and other revenue. Adjusted EBITDA for the fourth quarter was $145.5 million, or 32.7% margin, and exceeded the top end of our guidance by $12.9 million. For fiscal 2026, adjusted EBITDA was $654.9 million, or 37% margin, an increase of 12.3% on a dollar basis from fiscal 2025, resulting in leverage of 50 basis points.
Excluding the impact of interest income on funds held for clients, adjusted EBITDA margin for fiscal 2026 was 32.4%, reflecting operating leverage of 120 basis points versus fiscal 2025 and a year-over-year increase of 16.4% on a dollar basis.
Additionally, we continue to show strong growth on free cash flow with fiscal 2026 free cash flow margin of 24.2%, representing an increase of 24.8% on a dollar basis from fiscal 2025. Excluding the impact of interest income on client held funds, we expanded free cash flow by approximately 40% in fiscal 2026, representing margin expansion of 370 basis points. While fiscal 2027 will be a difficult comparison due to the tax legislation that provided one-time benefits in fiscal 2026, we continue to have confidence in our ability to further expand free cash flow margin on a multi-year basis. We continue to make significant investments in research and development. To understand our overall investment in R&D, it's important to combine both what we expense and what we capitalize.
On a combined non-GAAP basis, total R&D investments were 14.5% of revenue in fiscal 2026, and on a dollar basis, our year-over-year investment in total R&D increased by 12.6% in fiscal 2026 when compared to fiscal 2025. On a non-GAAP basis, sales and marketing expenses were 21.9% of revenue in the fourth quarter and 20.3% of revenue in fiscal 2026. On a non-GAAP basis, G&A costs were 8.9% of revenue in fiscal 2026. We remain focused on continuing to drive leverage in our G&A expenses on an annual basis. Briefly covering our GAAP results. For Q4, gross profit was $300.4 million, operating income was $84.4 million, and net income was $60.3 million. For the full year, gross profit was $1.2 billion, operating income was $386 million, and net income was $269.7 million.
In regard to funds held for clients and interest income, our average daily balance of client funds was $3.4 billion in Q4 and $3.3 billion for fiscal 2026. We are estimating the average daily balance will be approximately $3.0 billion in Q1 of fiscal 2027, with an average annual yield of approximately 340 basis points, representing approximately $25.5 million of interest income in Q1. On a full year basis, we're estimating the average daily balance will be approximately $3.4 billion-$3.5 billion in fiscal 2027, with an average yield of approximately 300 basis points, representing approximately $103 million of interest income. In regard to interest rates, our guidance assumes two 25 basis point rate cuts in the back half of fiscal 2027, with a cut in each of January and March reflected in our guidance.
Additionally, given the confidence we have in our business and our strong cash flows, we repurchased approximately 466,000 shares for $48.1 million in aggregate repurchases during Q4. In total for fiscal 2026, we repurchased approximately 2.8 million shares for $398.1 million in aggregate repurchases, helping to drive our diluted share count down 3.1% in fiscal 2026. As of June 30th, we had approximately $1.3 billion remaining under the existing repurchase program, which we will opportunistically execute against on a go-forward basis, while also maintaining flexibility in our capital allocation plan to invest for future growth. In regard to the balance sheet, we ended the fiscal year with $271.9 million in cash equivalents and invested corporate cash, and $81.3 million outstanding on our credit facility.
Finally, I'd like to provide our financial guidance for Q1 and fiscal 2027, which includes the impact of two 25 basis point interest rate cuts in the back half of fiscal 2027 and flat workforce levels in fiscal 2027 versus fiscal 2026. Note, beginning in fiscal 2027, we will amortize deferred contract costs over an eight-year useful life, an increase from the current seven-year convention. This change is reflected in our guidance and will result in an increase to adjusted EBITDA margins in fiscal 2027 of approximately 120-140 basis points, which is dependent upon our overall business performance and timing and volume of sales and client implementations. For the first quarter of fiscal 2027, recurring and other revenue is expected to be in the range of $414 million-$419 million, or approximately 10% growth over first quarter fiscal 2026 recurring and other revenue.
Total revenue is expected to be in the range of $439.5 million-$444.5 million, or approximately 8% growth over first quarter fiscal 2026 total revenue. Adjusted EBITDA is expected to be in the range of $152 million-$156 million, adjusted EBITDA, excluding interest income on funds held for clients, is expected to be in the range of $126.5 million-$130.5 million. For fiscal 2027, recurring and other revenue is expected to be in the range of $1.777 billion-$1.792 billion, or approximately 8% growth over fiscal 2026 recurring and other revenue. Total revenue is expected to be in the range of $1.880 billion-$1.895 billion, or approximately 7% growth over fiscal 2026.
Adjusted EBITDA is expected to be in the range of $690 million-$700 million, and adjusted EBITDA excluding interest income on funds held for clients is expected to be in the range of $587 million-$597 million, representing approximately 80 basis points of leverage at the midpoint. In conclusion, as we kick off fiscal 2027, we remain confident in our differentiated value proposition, go-to-market strategy, operational strength, and product roadmap, and believe our predictable business model and execution, durable recurring revenue growth, and prudent approach to guidance sets us up for a strong fiscal 2027.
With a combination of industry-leading recurring revenue growth and free cash flow margin, a long track record of strong and consistent revenue retention, and expanding both our client base and average revenue per client, we have a high level of confidence in our ability to continue to drive sustainable revenue growth and increase margin on a multi-year basis. Operator, we are now ready for questions.