Paylocity at TD Cowen Conference: Growth Amid Stability

On Thursday, 29 May 2025, Paylocity (NASDAQ:PCTY) participated in TD Cowen’s 53rd Annual Technology, Media & Telecom Conference 2025. The company presented a strategic outlook that balanced optimism about its growth potential with awareness of industry challenges. CEO Toby Williams highlighted Paylocity’s stable demand environment and strategic initiatives, including the Airbase acquisition, which are expected to drive future growth and margin expansion.

Key Takeaways

• Paylocity’s demand environment has remained stable since Q4 of the previous fiscal year.
• The Airbase acquisition aims to penetrate 10% to 20% of Paylocity’s client base in three to five years.
• Paylocity is guiding for a 100 basis point EBITDA margin expansion in FY25.
• Generative AI is being integrated to enhance client experience and workflow efficiency.
• The company is expanding its sales headcount to target businesses with 15 to 5,000 employees.

Financial Results

Paylocity has consistently exceeded financial expectations, raising its guidance for the year. The company reported a stable demand environment and strong execution, with benefit brokers referring over 25% of new business. For FY25, Paylocity anticipates approximately 100 basis points of EBITDA margin expansion, despite headwinds from the Airbase acquisition.

Operational Updates

The Airbase acquisition, completed in October, is a strategic move to expand Paylocity’s offerings into the CFO’s office, focusing on automating spend management processes. The company targets a penetration rate of 10% to 20% within three to five years. Paylocity also plans to attach Airbase to new payroll and HCM deals and sell back into its existing client base of over 40,000 clients.

Future Outlook

Paylocity is optimistic about its growth strategy, which includes expanding sales headcount by 8% in FY25. The company is leveraging generative AI to improve client experience and operational efficiency. Although immediate monetization of AI features is not prioritized, long-term benefits are anticipated. Paylocity continues to focus on maintaining strong relationships with benefit brokers and exploring new opportunities, such as IT department solutions and retirement services.

Q&A Highlights

During the Q&A session, CEO Toby Williams emphasized Paylocity’s competitive advantage in not competing with brokers, unlike PEO vendors. He acknowledged recent industry consolidation but stressed the company’s large addressable market and low penetration rate. Williams also highlighted Paylocity’s commitment to providing excellent service and being a destination for top talent.

In conclusion, Paylocity’s presentation at the conference showcased its strategic focus on growth and stability. For more detailed insights, readers are encouraged to refer to the full transcript.

Full transcript - TD Cowen’s 53rd Annual Technology, Media & Telecom Conference 2025:

Unidentified speaker: Awesome. Well, today we have Toby Williams, CEO of Paylase, with us. First, thanks for joining us, Toby.

Toby Williams, CEO, Paylase: Yeah. Thanks for having us.

Unidentified speaker: So let’s start with the current state of the demand environment. It’s a key investor focus here. How would you characterize it?

Toby Williams, CEO, Paylase: Yeah. I think the demand environment that we’ve seen really starting in, call it, probably Q4 of last fiscal year, so roughly a year ago now, has been fairly stable. And I think last year, there was a reasonable amount of disruption for a lot of enterprise software companies just from a macro demand environment perspective. We really saw that settle down in our Q4 of last year, and I think that’s been fairly stable throughout the course of this fiscal year. I think there’s plenty of other uncertainty in different areas of the world or different areas of the macro conversations.

But from a demand environment perspective, I think we’ve seen things be fairly stable.

Unidentified speaker: Got it. And then

Unidentified speaker: on your most recent earnings call, you did cite some elongation of sales cycles starting to emerge a bit. You know, how pervasive is that behavior? Just to clarify, did that impact your 3Q results or even your No. New guidance here?

Toby Williams, CEO, Paylase: No. I think we’ve seen again, going to the relative stability comment, I mean, I think we’ve seen everything be fairly stable throughout the course of the year, including through Q3. And I think from a performance perspective, if you look at our what we’ve delivered from a financial performance perspective quarter to quarter through the first three quarters of the fiscal year, we’ve beat expectations. We’ve raised the year substantially, including a pretty big raise in the last quarter. And I think that reflects the a stable demand environment and pretty darn strong execution from our team’s perspective, both in go to market and closing new deals and then also from our retention standpoint.

So overall, I think relatively happy with the stability in the demand environment and also happy with the the level of performance and execution in the business.

Unidentified speaker: Got it. And then in terms

Unidentified speaker: of looking at FY twenty five ex float growth here, can you review what are the primary of the headwinds to that growth the company is facing here?

Toby Williams, CEO, Paylase: Yeah. I mean, I think we came into this fiscal year, and our assumption when we gave the initial guidance for the current fiscal year that we’re in, our fiscal ’twenty five, was that we would see a relatively flat level of employees on the platform. So contextually, before COVID, we would have seen, call it, two percent to 3% tailwind in growth from employees on the platform. That was much more moderated last fiscal year. And the things that I’m saying, I think, were reflected by a lot of the larger players in our space, so not Paylocity specific.

And I think we’ve seen that same dynamic as we came into this fiscal year. So we guided this fiscal year relatively flat on employees of the platform. And that’s really what we’ve seen from a month to month, quarter to quarter standpoint through the year.

Unidentified speaker: Got it. So assuming consistent backdrop here, it’s reasonable to assume that will persist as we think about ’twenty six here as well?

Toby Williams, CEO, Paylase: Yeah. I mean, obviously, we haven’t guided for the year for ’twenty six yet and still are closing out ’twenty five. But that is probably where my mindset would be based on what we’ve seen fiscal year to date in terms of how I would directionally think about next year.

Unidentified speaker: Makes sense. And there has been a lot of investor focus on the potential benefits the company could accrue related to that notable recent M and A in the industry between two competitors, Paylocity or excuse me, Paycor and Paychex. What are your thoughts there on this creating sales opportunity for Paylocity?

Toby Williams, CEO, Paylase: Yeah. I mean, I think if you look at referral business for us, I mean, we have a significant focus, and we have over time on developing relationships with benefit brokers who have historically referred more than 25% of our new business. And that was, I think, a playbook that Paycor also had run-in their business. I don’t think we’ve seen any seismic shift in the broker market as of yet. I think as that business gets integrated into the acquirer, into Paychex, any disruption that comes from that, I think we just want to be ready to be able to take advantage of that if and when that occurs.

I think our messaging over time has been very consistent in terms of our focus on and the value prop that we’re able to deliver to the broker community from the standpoint of, hey, we don’t have a competing set of solutions. We invest a significant portion of our focus from a tech perspective in the ability to export and integrate data with third party systems that are important to benefit brokers, whether that’s benefit systems or whether it’s actual carrier systems that make their jobs easier. We give them visibility into their book of business with us and benefit utilization, things like that. So the two dimensions are we or three. We’ve built the relationships in the field with brokers in the field.

We don’t compete with them. And we deliver, I think, a level of technology investment and visibility that they don’t get from other people. Makes sense. And then historically, when you’ve seen M and

Unidentified speaker: A between two different payroll vendors, how long does it typically take potentially to see some benefit related to that acquisition? Is that more within a few months, could it take a year plus to potentially see any benefit related to that? You mean incremental opportunities in the Yes.

Toby Williams, CEO, Paylase: I think that it depends on it depends on what the acquirer does and whether for example, if an acquirer tries to migrate the platforms, like clients from one platform to another platform, that tends to be more disruptive. Don’t actually know what they will do. But I think you see more disruption in that use case. If it’s, hey, we’re going to keep a platform going, then you might see less disruption. I think it entirely depends on what you see in terms of the level of integration between the businesses and the level of subsequent disruption.

Don’t know what that experience will be. But I think from our perspective, we have been, over time, very consistent in our strategy of, hey, we want to be the destination for referrals because we provide the greatest value prop to the broker community. We want to be a destination for talent. And I think if you look at our record over time in our industry, we’ve been a destination for the best talent. Want that to continue to be the case.

And I think, ultimately, our strategy of driving a higher level of differentiation and value prop to our clients because we have a broader and deeper set of solutions that add the most value to them, that has been the strategy, and that will continue to be.

Unidentified speaker: Makes sense. And then double click on the broker channel here. Do these referrals tend to skew towards a certain employer size segment? And then also, can you discuss the opportunity to expand the broker channel? Or I don’t know how many relationship the companies maybe disclose, but is that an opportunity incrementally to add more relationships there as well?

Toby Williams, CEO, Paylase: I think it is. I mean, the broker environment’s highly fragmented across The US, so there’s thousands and thousands and thousands of brokers in local communities across the country. And I think we have the broadest coverage in that from an HCM, payroll and HCM perspective. But no doubt, there are brokers that we don’t get referrals from today that I think we have an opportunity to build relationships with. And a lot of the brokers that we would deal with might not refer all of their business to a specific provider.

They may mix that up in terms of two or three providers that they might send deals to. And I think from our standpoint, yes, there’s an effort to expand, the relationships to those that we might not hold today. But within the relationships that we do have, there’s also an effort to be able to get more share from from those referring brokers. And I think that’s always been our position, and it’s always been our strategy. And, I think that doesn’t change as we sit here today.

I think we just want to be positioned to take advantage of any potential disruption that happens in the market.

Unidentified speaker: Makes sense. And we’ve also heard multiple PEO vendors leaning into the broker referral channel through revenue share agreements. Is this something that you’ve seen there? And do you provide any financial incentives for your broker referrals?

Toby Williams, CEO, Paylase: Yeah. I mean, that dynamic with either some of the other larger providers in our space or any of the specific PEO providers. I think if you look back over the arc of time, they’ve always, as a category, wanted to they’ve recognized an opportunity to get referrals from brokers. It’s hard because they’re basically selling something that competes with the core thing that brokers sell. And so people have tried over time to do different things to build relationships, including revenue shares or commissions or things like it’s really hard because at the end of the day, you have a competing offering.

And so some of those things someone might roll out and they might have traction for a short period of time. It’s hard to make them durable because of the inherent conflict in the nature of the relationship. And that’s where, from our standpoint, we don’t have any of that dynamic. And so it tends to be a more natural there’s a more solid foundation for building a relationship when you’re not actually competing at your core. And so our positioning with brokers has really been less about the splitting of revenue or something like that.

It’s more around, hey, how do we actually partner together to the greater good of our clients when we don’t have any inherent competition in the things that we’re doing and therefore have a more solid footing from a relationship standpoint? And it goes back to what I was saying a few minutes ago. It is being a best in class technology provider, being a best in class service provider, and building those relationships at the ground level in the field, investing in technology to the benefit of our brokers in a way that no one else really does, that tends to be a more durable that we’ve observed that to be a more durable path with brokers to build relationships that have now lasted decades.

Unidentified speaker: Got it. And let’s pivot to Airbase. Been a big focus area. So in October, you closed the acquisition of Airbase. For those not familiar, it is a private spend and expense management vendor that expanded Paylas into the office as CFO.

I guess, can you discuss your right to win in this segment of the market, given historically you have focused on the HR function?

Toby Williams, CEO, Paylase: Sure. I mean, I’ll start overall with our strategy over time. A big part of our growth algorithm has been to broaden out and, I think, stretch the boundaries of what you would typically find from a product or solution standpoint in an HCM suite. So we really would have expanded from a core payroll offering to a very broad, at this point, set of HCM solutions on our platform. And we’ve always been, I think, the innovator in our industry, pushing the boundaries of what you can deliver in the platform.

And I think our push more recently has been, in talking with clients, you see a need for our average client size is around 150 employees. In that segment of the market, people are really looking for a single vendor that can provide them a broad swath of solutions. They’re also looking for ways to solve with software, things that they would do manually today. And so you see this opportunity for us where we sit in a part of the market where a lot of spend management is handled, manually by finance teams. There’s a huge amount of reliance on the HR data that drives that spend.

And so we sit, I think, at an intersection of manual process and being able to address that with a set of automated workflows software from what we get in Airbase and spend in their spend management products, an intersection to be able to leverage the HR data that sits in our systems and deliver on a single platform, which is hugely valued by the core of our market, a set of end to end payroll, HR, and finance solutions also have a set of solutions for the office of the CIO as well. But that’s the expansion of the core in payroll and HCM to the natural extension of spend and then what people need to do from a, IT perspective and, for example, onboarding and offboarding employees.

Unidentified speaker: Got it. And then in terms of how

Unidentified speaker: do you foresee the go to market motion? Is this going to require a separate sales force? And do you anticipate continuing to sell this on a standalone basis as well, or will it be purely on a bundled basis?

Toby Williams, CEO, Paylase: Yeah. I think most of of what you will see over time will be a focus on attaching to new, payroll and HCM deals. But also, I mean, we have 40,000 we have more than 40,000 clients on our platform today. So I think there’s also a meaningful opportunity to sell those spend management, solutions and office of the CFO solutions back into that customer base. So I think you will see us do both.

I think out of the gate, the the bigger opportunity is certainly from a back to base standpoint. That’s a meaningful part of our motion with any new product that we introduce. And I think that will be the case with the spend management solutions today. Our go to market motion with all of our solutions, but then particularly with some that we have rolled out in recent years, has been to put those solutions in the bags of all of our field based sales folks, but also have deep core competency within the smaller inside team that can help support those go to market, go to market motions.

Unidentified speaker: Got it. And then I believe historically, the company has messaged, you know, targeting about 10% to 20% penetration of any new offerings kind of over the medium term. Is that a reasonable expectation with Airbase? Or just given it is a much higher price tag offering, does that extend a bit longer here?

Toby Williams, CEO, Paylase: I think it’s at the core the same, and it’s probably just on the longer end of how we would typically think about it. So any new solution that we’ve invested in, whether that’s a build or buy, our perspective has been that it’s worth the time and effort and resource allocation if you can drive a 10% to 20% penetration into the client base over a, call it, three to five year time frame. And I think that is the same lens through which we would have seen the airbase opportunity. And to your point, I mean, it’s meaningful product in terms of the ARPU that’s associated with it. It’s on par with what we would see in HCM.

And so I think it might take a little bit longer, but it’s the same, very similar lens or very similar threshold that we would have looked at this through.

Unidentified speaker: Got it. And as you think about the office as CFO, are there any other kind of adjacencies within the office as CFO that you see as an opportunity? I believe Airbase also has accounts payable automation. Sure. And I believe a little bit on the procurement side.

But anything else, I guess, within the Office of CFO that presents an opportunity over time?

Toby Williams, CEO, Paylase: Yeah. I think those were the that was the natural starting point for because you see a high degree of leverage in the employee record data in terms of powering those solutions and driving the value from those solutions. And so that was a very natural starting point for us. There’s certainly a broad there’s any number of different software categories that service the office of the CFO. I think we found what we thought was the natural starting point for us as a payroll and HCM provider.

And now, I think over the next year or so, say, we’ll get a lot more experience with what it’s like to bring those solutions to market to our client base, to new logos coming into Paylocity. And I think that will inform our perspective on, hey, is there an opportunity to go somewhere beyond that, and what is that right next step?

Unidentified speaker: Got it. And then also looking at potentially the Department of IT, which I think you touched on a little bit there. There is one notable private competitor, has been pushing into this with things such as device management, eventually. What kind of opportunity do you see to do a little bit more on the IT side as well?

Toby Williams, CEO, Paylase: Yeah, I think there’s an opportunity there for us. I mean, it goes to when you have a new employee coming into the business, you really need to look at the requirements that a business has in terms of onboarding a new employee. So part of that is getting employees and a lot of this we do today. There’s a couple of pieces that we think present opportunity. We are helpful to businesses automating the onboarding of a new employee, including getting onto the benefits platform, getting them into the payroll system, getting them into the HR system.

They also need to be granted access to whatever internal systems that, an employee would need to do their job. And we can help deliver that in terms of access management, which we’re starting to do. And then there’s, you mentioned devices. Another part of the onboarding process for an employee is actually getting them the devices that they need, whether that’s an iPhone or whether it’s a computer, whatever the device is that they’re going to need. As a part of doing their job, we can facilitate the ordering and then delivery of the devices that they will need, which is, again, I think an important part of the onboarding experience, which is helpful from and again, going to the ability to leverage the employee record to drive further value in incremental solutions.

This is another example of these things are all keyed off of employees. They’re keyed off of employee record. That’s a key data set that we have. And I think it’s also very much the strategic relation to what we do from an HCM core perspective is really strong.

Unidentified speaker: Got it. And let’s touch on one of my favorite topics, margins here. So the company is guiding to about 100 basis points of ex float EBITDA margin expansion at the midpoint for FY 2025 despite right around 100 basis points of headwind from airbase. You know, how durable is that level of expansion here as we think about, call it, the medium term?

Toby Williams, CEO, Paylase: Yeah. I mean, I think so. If you go back over the last handful of years, I mean, we have we’ve delivered north of, 500 basis points of operating adjusted EBITDA leverage, even a little bit more than that from a free cash flow perspective. So I think our business has continued to deliver leverage And I think that will continue to be the case as we look forward over the next handful of years.

I think year to year, I think you get some variation year to year based on the investment decisions that you’re making. So we drove pretty hard this year. When we were guiding for this year, a large part of our chalk track was being able to drive productivity throughout the business. And I think we’ve really delivered on that through the course of fiscal ’twenty five. So being able to achieve obviously, the year’s not finished yet, but getting to that zip code of 200 basis points of adjusted EBITDA leverage is pretty strong performance.

I think that same opportunity exists over time. I would never say that we’re going to be able to deliver that every single year, year in and year out. I think you go through cycles where you see an opportunity for investment. That’s probably more how I think about fiscal ’twenty six, recognizing that we haven’t finalized the plan or provided any guidance for fiscal ’twenty six. But that’s probably how I would think about the year in front of us more so than a year where you’re going to deliver the same type of leverage potentially that we stand to in this fiscal year.

But on a multi year basis, over a multi year period of time, no doubt the opportunity exists to continue to drive leverage, which we have demonstrated the capability of doing over the last ten years. Got it.

Unidentified speaker: And then specifically on your long term adjusted gross margin target, 75 to 80%, that compares to last year’s performance of 74%. What are the key drivers and levers to get you within that range here?

Toby Williams, CEO, Paylase: Yeah. So in our business, I mean, from a gross margin standpoint, you see most of the leverage coming from two specific areas. One is you just see you see a flow through of leverage, including in gross margin, from the size and scale of the business. That’s piece one. I think piece two is for our portfolio, as you sell products back into the customer base, there is a much lighter lift from an implementation perspective, and that drives leverage at the gross margin line.

So, a lot of products that we would sell back into the customer base would have virtually no implementation associated with them. Some would have a little bit of implementation, but nowhere near what would be the case in standing up a new client in payroll and HR on the platform. So I think those are the two biggest drivers of gross margin leverage over time. And similar commentary, I think if you look back over a multiyear period, we’ve been able to drive meaningful leverage in gross margin. And I think that same opportunity exists as we look forward.

There’s no the ranges that we provided, while I believe we can make our way into them, I also don’t believe that they provide any ceiling to what we’ll be able to do over time.

Unidentified speaker: Got it. And then we have to talk about,

Unidentified speaker: touch on Gen AI here. You discuss you have begun to, you know, embed it within some of your offerings such as, you know, job title descriptions. Yep. What’s the opportunity you see in terms of potential monetization here over the medium term?

Toby Williams, CEO, Paylase: Well, I think there’s probably two different dimensions to or maybe three different dimensions to what we see the ability to unlock with AI over time. One is, as you just identified, there’s a number of different features, I would say, that I think you can unlock by embedding AI into the platform. Leveraging Gen AI to help draft communications or job descriptions, things like that, is certainly one example. We have those examples embedded throughout the platform today. They add real value.

And I think they do create efficiencies for users, like hiring managers, for example, in what you just referenced. I don’t the value is strong enough in those things alone to be able to drive a higher degree of chargeability. They’re certainly not separate SKUs. So I think those opportunities may change over time, but that’s one category. Another category is the ability to create more efficiency in workflows.

So if you have a process in your daily job, if you have a workflow that has 10 steps in it today, do we think we can create the ability to make that process more efficient and take out half the steps over time, as an example? I definitely think that exists, and AI can be a tool for helping deliver that. That’s fundamentally a better client experience. I think that fundamentally creates more efficiency for users. Unclear whether that can be separately monetized.

That may give you the ability to differentiate and win more business. It may give you the ability to eventually charge more. I don’t know that it’s a separate SKU, and I think we’re all in the early stages of being able to actually unpack that and then deliver it at scale. And then the third bucket that I would reference is the ability to create a better just overall client experience because you’re taking friction out of the relationship. So if we can answer client questions or user questions in the application, leveraging AI as a tool to be able to do that, because we’re spotting patterns of when questions get asked, either in a payroll cycle or in an annual cycle, and we’re able to surface answers to those questions in the application to users before they have to reach out to us to get an answer, that’s a better client experience.

I think that also accrues to the benefit of all of our employees. That’s valuable from a client experience and from a, I think, efficiency standpoint over time. I think that’s real. But I also think we’re in the fairly earlier stage of being able to do that and recognizing the benefits of it. So all opportunities are in front of us, I think.

Unidentified speaker: Yeah. Let’s double click on that customer support side. That’s been a key, I’d say, investor focus area, the potential margin benefits related to the customer support function. I guess how early are you in terms of deploying Gen AI within the customer support function? And how material of a step function could that cause over the medium to long term here?

Toby Williams, CEO, Paylase: Yeah, I think my answer to it really is grounded in the client experience. So I think we are doing some of what I just described. So we are surfacing answers to a set of questions in the application ahead of being asked. And I think feedback is, hey, that’s a much better client experience for those things. That’s real.

That’s in use today. And I think that, over time, helps to ease the inflow of that helps to take away the number of questions that a client would have and therefore that they need to ask. But I think at the end of the day, our mind goes to, Okay, how do you provide a fundamentally better client experience and better client service year in and year out? That’s always been the hallmark of our business. So I think, yes, you stand the opportunity to get potential leverage over that over time.

But I think the first thought that goes through our minds is, Okay, how do you just continue to provide better and better service year in and year out? So hard to dimension as we sit here today what that can mean from a leverage perspective over a long period of time other than to say the real focus is on providing the best possible client experience. And I think there’s probably some leverage that you get with that. I think we’re in the early days.

Unidentified speaker: Makes sense. And then sales headcounts. The company does have a pretty consistent track record of growing that on an annual basis. I guess based on your existing target markets and geographies in The US, how much additional runway do you see to potentially increase the sales headcount here over the medium term?

Toby Williams, CEO, Paylase: Yeah. We came into this fiscal year, fiscal ’twenty five for us, growing headcount at around 8%, coming into the year. And a lot of our focus as we as as we, started the year and provided our guidance was, with that 8% headcount growth, being able to really focus on the productivity and the efficiency of our go to market efforts and of our sales teams. And not perfect correlation, but when you think about how we’ve been able to perform throughout the course of the year to date, we’re driving in that low teens, low to mid teens sort of zip code from a recurring revenue perspective as we look out and look at closing the year here in the next month or so. And that’s off of an 8% growth in headcount.

So I think that’s the type of efficiency and productivity we were hoping to be able to drive through the course of the fiscal year. And so feel really good about coming in at that level of headcount growth, driving that level of overall resulting recurring revenue growth. And I think that is probably of a similar mindset as we start to think about providing the putting together and finalizing the plan for

Unidentified speaker: ’twenty six and how we would think about the guide. Obviously, we still have to

Toby Williams, CEO, Paylase: close out the year, but that’s probably the mindset that we would have.

Unidentified speaker: Got it. And then I want to touch on one industry prediction here. So in the mid market, you have seen more of, let’s call it, more of the down market focused vendors push into, let’s call it, the 50 to 500 employee space in recent years as well as some of the more enterprise focused push down in that market. Kind of what do you see in terms of the number of vendors here over the medium term? Should that continue to increase, or would you anticipate to see some consolidation in terms of the number of vendors serving that mid market here?

Toby Williams, CEO, Paylase: Well, I mean, we’ve seen some consolidation with the the the Paychex and Paycor deal more recently. I think a lot of the questions that we’ve gotten over time have been, you know, hey. Is there a wave of consolidation that you think takes, takes hold across the industry? It’s it’s probably harder for me to to see that. But I think for us, I mean, we target businesses with between 15,000 employees, and there is more than 1,300,000 of those businesses in The US today.

We have a client base of 40,000 employees, so that’s depending on how you round it based on either the number of employees or clients. You’re at a very, very low penetration rate in that three to five zip code. From my perspective, and I think from our perspective at Paylocity, we have a really big runway in terms of the available market opportunity. And we, sitting here today, have a pretty small piece of the pie. So I think we look at that as a big opportunity that’s in front of us.

And all of our focus from a growth perspective is on being able to continue to drive unit growth, continue to broaden out the product set and deliver more value to clients, which should also ultimately drive ARPU growth. We’ve demonstrated both of those things over time, and I think that continues to be our focus today.

Unidentified speaker: One last one here. So ADP and Paychex have pointed to retirement services being a double digit growth area for Are retirement plans an opportunity for Paylocity here? It feels like natural adjacency to your TPA business.

Toby Williams, CEO, Paylase: Yeah. I mean, it could be over time. I think when we would look at the opportunities that we have, the framework that we would sort of use is, hey, is there an opportunity to either leverage the data that we have? Is there an opportunity to provide a solution set that clients don’t have? You get a lot of feedback from clients in terms of what they’re struggling with, what their manual processes are.

So I think that’s certainly on the list of opportunities. I think our move into something like spend management with Airbase reflects our view of a really, really big TAM expansion, a really high priority challenge for clients, a pain point that’s largely addressed through manual process in that part of the client base today, and the opportunity for us to meaningfully differentiate, our platform from other platforms. And that’s an area where, you know, you see a lot of the other providers have that. With what we’ve done or what we are doing with Airbase and spend management, that is a Well, today, we have an environment that we’ve seen, really starting in, call it, probably q four of last fiscal year, so roughly a year ago now, has been fairly stable. And I think last year, was a reasonable amount of disruption for a lot of enterprise software companies just from a macro demand environment perspective.

We really saw that settle down in our Q4 of last year. And I think that’s been fairly stable throughout the course of this fiscal year. I think there’s plenty of other uncertainty in different areas of the world or different areas of the macro conversations. But from a demand environment perspective, I think we’ve seen things be fairly stable.

Unidentified speaker: Got it. And then on your most recent earnings call, you did cite some elongation of sales cycles starting to emerge a bit. How pervasive is that behavior? Just to clarify, did that impact your 3Q results or even your 4Q guidance here?

Toby Williams, CEO, Paylase: No. I think we’ve seen again, going to the relative stability comment, I mean, I think we’ve seen everything be fairly stable throughout the course of the year, including through Q3. And I think from a performance perspective, if you look at our what we’ve delivered from a financial performance perspective quarter to quarter through the first three quarters of the fiscal year, we’ve beat expectations. We’ve raised the year substantially, including a pretty big raise in the last quarter. And I think that reflects a stable demand environment and pretty darn strong execution from our team’s perspective, both in go to market and closing new deals and then also from our retention standpoint.

So overall, I think relatively happy with the stability in the demand environment and also happy with the level of performance and execution in the business.

Unidentified speaker: Got it. And then in terms of looking at FY25 ex float growth here, can you review what are the primary of the headwinds to that growth the company is facing here?

Toby Williams, CEO, Paylase: Yeah. I mean, I think we came into this fiscal year, and our assumption when we gave the initial guidance for the current fiscal year that we’re in, our fiscal ’twenty five, was that we would see a relatively flat level of employees on the platform. So contextually, before COVID, we would have seen, you know, call it, two to three percent, tailwind in growth from employees on the platform. That was much more moderated last fiscal year. And I might the things that I’m saying, I think, were reflected by a lot of the larger players in our space, so not Paylocity specific.

And I think we’ve seen that same dynamic as we came into this fiscal year. So we guided this fiscal year relatively flat on employees on the platform. And that’s really what we’ve seen from a month to month, quarter to quarter standpoint through the year.

Unidentified speaker: Got it. So assuming consistent backdrop here, it’s reasonable to assume that will persist as we think about ’twenty six here as well?

Toby Williams, CEO, Paylase: Yeah. I mean, obviously, we haven’t guided for the year for ’twenty six yet and still are closing out ’twenty five. But that is probably where my mindset would be based on what we’ve seen fiscal year to date in terms of how I would directionally think about next year.

Unidentified speaker: Makes sense. And there has been a lot of investor focus on the potential benefits the company could accrue related to that notable recent M and A in the industry between two competitors, Paycor and Paychex. What are your thoughts there on this creating sales opportunity for Paylocity?

Toby Williams, CEO, Paylase: Yeah. I I think if you look at referral business for us, I mean, have a significant focus, and we have over time, on developing relationships with benefit brokers who have historically referred more than 25% of our new business. And that was, I think, a playbook that Paycor also had run-in their business. I don’t think we’ve seen any seismic shift in the broker market as of yet. I think as that business gets integrated into the acquirer, into Paychex, any disruption that comes from that, I think we just want to be ready to be able to take advantage of that if and when that occurs.

So, I think our messaging over time has been very consistent in terms of our focus on and the value prop that we’re able to deliver to the broker community from the standpoint of, hey, we don’t have a competing set of solutions. We invest a significant portion of our focus from a tech perspective in the ability to export and integrate data with third party systems that are important to benefit brokers, whether that’s benefit systems or whether it’s actual carrier systems that make their jobs easier. We give them visibility into their book of business with us and benefit utilization, things like that. So the two dimensions are three. We’ve built the relationships in the field with brokers in the field.

We don’t compete with them. And we deliver, I think, a level of technology investment and visibility that they don’t get from other people. Makes sense.

Unidentified speaker: And then historically, when you’ve seen M and A between two different payroll vendors, how long does it typically take potentially to see some benefit related to that acquisition? Is that more within a few months, or could it take a year plus to potentially see any benefit related to that? You mean incremental opportunities in the Yes.

Toby Williams, CEO, Paylase: I think that it depends on what the acquirer does and whether for example, if an acquirer tries to migrate the platforms, like clients from one platform to another platform, that tends to be more disruptive. I don’t actually know what they will do, but I think you see more disruption in that use case. If it’s, hey, we’re going to keep a platform going, then you might see less disruption. I think it entirely depends on what you see in terms of the level of integration between the businesses and the level of subsequent disruption. Don’t know what that experience will be, but I think from our perspective, we have been, over time, very consistent in our strategy of, hey, we want be the destination for referrals because we provide the greatest value prop to the broker community.

We want to be a destination for talent. And I think if you look at our record over time in our industry, we’ve been a destination for the best talent. Want that to continue to be the case. And I think, ultimately, our strategy of driving a higher level of differentiation and value prop to our clients because we have a broader and deeper set of solutions that add the most value to them, I mean, has been the strategy, and that will continue to be.

Unidentified speaker: Makes sense. And then double click on the broker channel here. Do these referrals tend to skew towards a certain employer size segment? And then also, can you discuss the opportunity to expand the broker channel? I don’t know how many relationship the companies maybe disclose, but is that an opportunity incrementally to add more relationships there as well?

Toby Williams, CEO, Paylase: I think it is. I mean, the broker environment’s highly fragmented across The US, so there’s thousands and thousands and thousands of brokers in local communities across the country. And I think we have the broadest coverage in that from an HCM payroll and HCM perspective. But no doubt, there are brokers that we don’t get referrals from today that I think we have an opportunity to build relationships with. And a lot of the brokers that we would deal with might not refer all of their business to a specific provider.

They may mix that up in terms of two or three providers that they might send deals to. And I think from our standpoint, yes, there’s an effort to expand the relationships to those that we might not hold today. But within the relationships that we do have, there’s also an effort to be able to get more share from those referring brokers. And I think that’s always been our position, and it’s always been our strategy. And I think that doesn’t change as we sit here today.

I think we just want to be positioned to take advantage of any potential disruption that happens in the market.

Unidentified speaker: Makes sense. And we’ve also heard multiple PEO vendors leaning into the broker referral channel through revenue share agreements. Is this something that you’ve seen there? And do you provide any financial incentives for your broker referrals?

Toby Williams, CEO, Paylase: Yeah. I mean, dynamic with either some of the other larger providers in our space or any of the specific PEO providers, I think if you look back over the arc of time, they’ve always, as category, wanted to they’ve recognized an opportunity to get referrals from brokers. It’s hard because they’re basically selling something that competes with the core thing that brokers sell. And people have tried over time to do different things to build relationships, including revenue shares or commissions or things like that. It’s really hard because at the end of the day, you have a competing offering.

And so some of those things, someone might roll out and they might have traction for a short period of time. It’s hard to make them durable because of the inherent conflict in the nature of the relationship. And that’s where, from our standpoint, we don’t have any of that dynamic. And so it tends to be a more natural there’s a more solid foundation for building a relationship when you’re not actually competing at your core. And so our positioning with brokers has really been less about the splitting of revenue or something like that.

It’s more around, hey, how do we actually partner together to the greater good of our clients when we don’t have any inherent competition in the things that we’re doing and therefore have a more solid footing from a relationship standpoint? And it goes back to what I was saying a few minutes ago. It is being a best in class technology provider, being a best in class service provider, and building those relationships at the ground level in the field, investing in technology to the benefit of our brokers in a way that no one else really does. That tends to be a more durable that we’ve observed that to be a more durable path with brokers to build relationships that have now lasted decades.

Unidentified speaker: Got it. And let’s pivot to Airbase. It’s been a big focus area. So in October, you closed the acquisition of Airbase. For those not familiar, it is a private spend and expense management vendor that expanded Paylas into the office as CFO.

I guess, can you discuss your right to win in this segment of the market, given historically you have focused on the HR function?

Toby Williams, CEO, Paylase: Sure. I mean, I’ll start overall with our strategy over time. A big part of our growth algorithm has been to broaden out and, I think, stretch the boundaries of what you would typically find from a product or solution standpoint in an HCM suite. So we really would have expanded from a core payroll offering to a very broad, at this point, set of HCM solutions on our platform. And we’ve always been, I think, the innovator our industry, pushing the boundaries of what you can deliver in the platform.

And I think our push more recently has been, in talking with clients, you see a need for our average client size is around 150 employees. In that segment of the market, people are really looking for a single vendor that can provide them a broad swath of solutions. They’re also looking for ways to solve with software, things that they would do manually today. And so you see this opportunity for us where we sit in a part of the market where a lot of spend management is handled manually by finance teams. There’s a huge amount of reliance on the HR data that drives that spend.

And so we sit, I think, at an intersection of manual process and being able to address that with a set of automated workflows and software from what we get in Airbase and their spend management products, an intersection to be able to leverage the HR data that sits in our systems and deliver on a single platform, which is hugely valued by the core of our market, a set of end to end payroll, HR, and finance solutions also have a set of solutions for the office of the CIO as well. But that’s the expansion of the core and payroll and HCM to the natural extension of spend and then what people need to do from a IT perspective and, for example, onboarding and offboarding employees.

Unidentified speaker: Got it. And then in terms of how

Unidentified speaker: do you foresee the go to market motion? Is this going to require a separate Salesforce? And do you anticipate continuing to sell this on a standalone basis as well, or will it be purely on a bundled basis?

Toby Williams, CEO, Paylase: Yeah. I think most of what you will see over time will be a focus on attaching to new payroll and HCM deals. But also, I mean, we have 40,000 we have more than 40,000 clients on our platform today. So I think there’s also a meaningful opportunity to sell those spend management solutions and Office of the CFO solutions back into that customer base. So I think you will see us do both.

I think out of the gate, the bigger opportunity is certainly from a back to base standpoint. That’s a meaningful part of our motion with any new product that we introduce. And I think that will be the case with the spend management solutions today. Our go to market motion with all of our solutions, but then particularly with some that we have rolled out in recent years, has been to give put those solutions in the bags of all of our field based sales folks, but also have deep core competency within a smaller inside team that can help support those go to market motions.

Unidentified speaker: Got it. And then I believe historically, the company has messaged, you know, targeting about 10% to 20% penetration of any new offerings kind of over the medium term. Is that a reasonable expectation with Airbase? Or just given it is a, you know, much higher price tag offering, does that extend a bit longer here?

Toby Williams, CEO, Paylase: I think it’s at the core the same, and it’s probably just on the longer end of how we would typically think about it. So any new solution that we’ve invested in, whether that’s a build or buy, our perspective has been that it’s worth the time and effort and resource allocation if you can drive a 10% to 20% penetration into the client base over a, call it, three to five year time frame. And I think that is the same lens through which we would have seen the airbase opportunity. And to your point, I mean, it’s a meaningful product in terms of the ARPU that’s associated with it. It’s on par with what we would see in HCM.

And so I think it might take a little bit longer, but it’s the same very similar lens or very similar threshold that we would have looked at this through.

Unidentified speaker: Got it. And as you think about the office as CFO, are there any other kind of adjacencies within the office as CFO that you see as an opportunity? I believe Airbase also has accounts payable automation. Sure. And I believe a little bit on the procurement side.

But anything else, I guess, within the office CFO that presents an opportunity over time?

Toby Williams, CEO, Paylase: Yeah, think that was the natural starting point for us because you see a high degree of leverage in the employee record data in terms of powering those solutions and driving the value from those solutions. And so that was a very natural starting point for us. There’s certainly a broad there’s any number of different software categories that service the office of the CFO. I think we found what we thought was the natural starting point for us as a payroll and HCM provider. And now, I think over the next year or so, say, we’ll get a lot more experience with what it’s like to bring those solutions to market to our client base, to new logos coming into Paylocity.

And I think that will inform our perspective on, hey, is there an opportunity to go somewhere beyond that, and what is that right next step?

Unidentified speaker: Got it. And then also looking at potentially the Department of IT, which I think you touched on a little bit there, there is one notable private competitor that has been pushing into this with things such as device management, eventually. What kind of opportunity do you see to do a little bit more on the IT side as well?

Toby Williams, CEO, Paylase: Yeah, I think there’s an opportunity there for us. I mean, it goes to when you have a new employee coming into the business, you really need to look at the requirements that a business has in terms of onboarding a new employee. So part of that is getting employees and a lot of this we do today. There’s a couple of pieces that we think present opportunity. We are helpful to businesses automating the onboarding of a new employee, including getting onto the benefits platform, getting them into the payroll system, getting them into the HR system.

They also need to be granted access to whatever internal systems that an employee would need to do their job. And we can help deliver that in terms of access management, which we’re starting to do. And then there’s, you mentioned devices. Another part of the onboarding process for an employee is actually getting them the devices that they need, whether that’s an iPhone or whether it’s a computer, whatever the device is that they’re going to need as a part of doing their job, we can facilitate the ordering and then delivery of the devices that they will need, which is, again, I think an important part of the onboarding experience, which is helpful from and again, going to the ability to leverage the employee record to drive further value in incremental solutions. This is another example of these things are all keyed off of employees.

They’re keyed off of employee record. That’s a key data set that we have. And I think it’s also very much the strategic relation to what we do from an HCM core perspective is really strong.

Unidentified speaker: Got it. And let’s touch on one of my favorite topics, margins here. So the company is guiding to about 100 basis points of ex float EBITDA margin expansion at the midpoint for FY ’twenty five despite right around 100 basis points of headwind from Airbase. You know, how durable is that level of expansion here as we think about, call it, the medium term?

Toby Williams, CEO, Paylase: Yeah. I mean, I think so. If you go back over the last handful of years, I mean, we have we’ve delivered north of, 500 basis points of operating adjusted EBITDA leverage, even a little bit more than that from a free cash flow perspective. So I think our business has continued to deliver leverage at scale. And I think that will continue to be the case as we look forward over the next handful of years.

I think year to year, I think you get some variation year to year based on the investment decisions that you’re making. So we drove pretty hard this year. When we were guiding for this year, a large part of our chalk track was being able to drive productivity throughout the business. And I think we’ve really delivered on that through the course of fiscal ’twenty five. So being able to achieve obviously, the year’s not finished yet, but getting to that zip code of 200 basis points of adjusted EBITDA leverage is pretty strong performance.

I think that same opportunity exists over time. I would never say that we’re going to be able to deliver that every single year, year in and year out. I think you go through cycles where you see an opportunity for investment. That’s probably more how I think about fiscal ’twenty six, recognizing that we haven’t finalized the plan or provided any guidance for fiscal ’twenty six. But that’s probably how I would think about the year in front of us more so than a year where you’re going to deliver the same type of leverage potentially that we stand to in this fiscal year.

But on a multi year basis, over a multi year period of time, no doubt the opportunity exists to continue to drive leverage, which we have demonstrated the capability of doing over the last ten years. Got it.

Unidentified speaker: And then specifically on your long term adjusted gross margin target, 75 to 80%, that compares to last year’s performance of 74%. What are the key drivers and levers to get you within that range here?

Toby Williams, CEO, Paylase: Yeah. So in our business, I mean, a gross margin standpoint, you see most of the leverage coming from two specific areas. One is you just see you see a flow through of leverage, including in gross margin from the size and scale of the business. That’s piece one. I think piece two is for our portfolio, as you sell products back into the customer base, there is a much lighter lift from an implementation perspective, and that drives leverage at the gross margin line.

So a lot of products that we would sell back into the customer base would have virtually no implementation associated with them. Some would have a little bit of implementation, but nowhere near what would be the case in standing up a new client in payroll and HR on the platform. So I think those are the two biggest drivers of gross margin leverage over time. And similar commentary, I think if you look back over a multiyear period, we’ve been able to drive meaningful leverage in gross margin. And I think that same opportunity exists as we look forward.

There’s no the ranges that we provided, while I believe we can make our way into them, I also don’t believe that they provide any ceiling to what we’ll be able to do over time.

Unidentified speaker: Got it. And then we have to talk about,

Unidentified speaker: touch on Gen AI here. You discuss you have begun to, you know, embed it within some of your offerings such as, you know, job title descriptions. Yep. What’s the opportunity you see in terms of potential monetization here over the medium term?

Toby Williams, CEO, Paylase: Well, I think there’s probably two different dimensions to or maybe three different dimensions to what we see the ability to unlock with AI over time. One is, as you just identified, there’s a number of different features, I would say, that I think you can unlock by embedding AI into the platform. Leveraging Gen AI to help draft communications or job descriptions, things like that, is certainly one example. We have those examples embedded throughout the platform today. They add real value, and I think they do create efficiencies for users, hiring managers, for example, what you just referenced.

I don’t the value is strong enough in those things alone to be able to drive a higher degree of chargeability. They’re certainly not separate SKUs. So I think those opportunities may change over time, but that’s one category. Another category is the ability to create more efficiency in workflows. So if you have a process in your daily job, if you have a workflow that has 10 steps in it today, do we think we can create the ability to make that process more efficient and take out half the steps over time, as an example?

I definitely think that exists, and AI can be a tool for helping deliver that. That’s fundamentally a better client experience. I think that fundamentally creates more efficiency for users. Unclear whether that can be separately monetized. Monetized.

That may give you the ability to differentiate and win more business. It may give you the ability to eventually charge more. I don’t know that it’s a separate SKU, and I think we’re all in the early stages of being able to actually unpack that and then deliver it at scale. And then the third bucket that I would reference is the ability to create a better just overall client experience because you’re taking friction out of the relationship. So if we can answer client questions or user questions in the application, leveraging AI as a tool to be able to do that, because we’re spotting patterns of when questions get asked, either in a payroll cycle or in an annual cycle, and we’re able to surface answers to those questions in the application to users before they have to reach out to us to get an answer, that’s a better client experience.

I think that also accrues to the benefit of all of our employees. That’s valuable from a client experience and from a, I think, efficiency standpoint over time. I think that’s real. But I also think we’re in the fairly earlier stage of being able to do that and recognizing the benefits of it. So all opportunities are in front of us, I think.

Unidentified speaker: Yeah. Let’s double click on that customer support side. That’s been a key, I’d say, investor focus area, the potential margin benefits relate to the customer support function. I guess how early are you in terms of deploying Gen AI within the customer support function? And how material of a step function could that cause over the medium to long term here?

Toby Williams, CEO, Paylase: Yeah. I think my answer to it really is grounded in the client experience. So I think we are doing some of what I just described. So we are surfacing answers to a set of questions in the application ahead of being asked. And I think feedback is, hey, that’s a much better client experience for those things.

That’s real. That’s in use today. And I think that, over time, helps to ease the inflow of that helps to take away the number of questions that a client would have and therefore that they need to ask. But I think at the end of the day, our mind goes to, Okay, how do you provide a fundamentally better client experience and better client service year in and year out? That’s always been the hallmark of our business.

So I think, yes, you stand the opportunity to get potential leverage over that over time. But I think the first thought that goes through our minds is, Okay, how do you just continue to provide better and better service year in and year out? So hard to mention as we sit here today what that can mean from a leverage perspective over a long period of time other than to say the real focus is on providing the best possible client experience. And I think there’s probably some leverage that you get with that. I think we’re in the early days.

Unidentified speaker: Makes sense. And then sales headcounts. The company does have a pretty consistent track record of growing that on an annual basis. I guess based on your existing target markets and geographies in The US, how much additional runway do you see to potentially increase the sales headcount here over the medium term?

Toby Williams, CEO, Paylase: Yeah, we came into this fiscal year, fiscal ’twenty five for us, growing headcount at around 8%, coming into the year. And a lot of our focus as we started the year and provided our guidance was, with that 8% headcount growth, being able to really focus on the productivity and the efficiency of our go to market efforts and of our sales teams. And not perfect correlation, but when you think about how we’ve been able to perform throughout the course of the year to date, we’re driving in that low teens, low to mid teens sort of zip code from a recurring revenue perspective as we look out look at closing the year here in the next month or so. And that’s off of an 8% growth in headcount. So I think that’s the type of efficiency and productivity we were hoping to be able to drive through the course of the fiscal year.

And so feel really good about coming in at that level of headcount growth, driving that level of overall resulting recurring revenue growth. And I think that is probably of a similar mindset as we start to think about providing the putting together and finalizing the plan for ’twenty

Unidentified speaker: six and how we would think about the guide. Obviously, still have to close out

Toby Williams, CEO, Paylase: the year, but that’s probably the mindset that we would have.

Unidentified speaker: Got it. And then I want to touch on one industry prediction here. So in the mid market, you have seen more of, let’s call it, more of the down market focused vendors push into, let’s call it, the 50 to 500 employee space in recent years as well as some of the more enterprise focused push down in that market. What do you see in terms of the number of vendors here over the medium term? Should that continue to increase, or would you anticipate to see some consolidation in terms of the number of vendors serving that mid market here?

Toby Williams, CEO, Paylase: Well, I mean, we’ve seen some consolidation with the the the Paychex and Paycor deal more recently. I think a lot of the questions that we’ve gotten over time have been, you know, hey, is there a wave of consolidation that you think takes, takes hold across the industry? It’s it’s probably harder for me to to see that. But I think for us, I mean, we target businesses with between 15,000 employees, and there is more than 1,300,000 of those businesses in The US today. We have a client base of 40,000 employees, so that’s depending on how you round it based on either the number of employees or clients.

You’re at a very, very low penetration rate in that three to five zip code. So from my perspective, and I think from our perspective at Paylocity, we have a really big runway in terms of the available market opportunity. And we, sitting here today, have a pretty small piece of the pie. So I think we look at that as a big opportunity that’s in front of us. And all of our focus from a growth perspective is on being able to continue to drive unit growth, continue to broaden out the product set and deliver more value to clients, which should also ultimately drive ARPU growth.

We’ve demonstrated both of those things over time, and I think that continues to be our focus today.

Unidentified speaker: One last one here. So ADP and Paychex have pointed to retirement services being a double digit growth area for them. Are retirement plans an opportunity for Paylocity here? It feels like natural adjacency to your TPA business.

Toby Williams, CEO, Paylase: Yeah. I mean, it could be over time. I think when we would look at the opportunities that we have, the framework that we would sort of use is, hey, is there an opportunity to either leverage the data that we have? Is there an opportunity to provide a solution set that clients don’t have? You get a lot of feedback from clients in terms of what they’re struggling with, what their manual processes are.

So I think that’s certainly on the list of opportunities. I think our move into something like spend management with Airbase reflects our view of a really, really big TAM expansion, a really high priority challenge for clients, a pain point that’s largely addressed through manual process in that part of the client base today, and the opportunity for us to meaningfully differentiate our platform from other platforms. And that’s an area where you see a lot of the other providers have that. With what we’ve done or what we are doing with Airbase and spend management, we’re creating a ton of differentiation. So that’s always part of the calculus too.

Unidentified speaker: Great. Well, with that, we’re out of time. Thank you for joining us.

Toby Williams, CEO, Paylase: Thanks a lot for having us. Thank you.

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