Paylocity (NASDAQ:PCTY) reported fiscal second-quarter 2026 results that management described as a continuation of the momentum seen in the first quarter, supported by what executives characterized as a stable demand backdrop, strong execution in sales and operations, and ongoing product differentiation across its platform.
Quarterly results and profitability
Executive Chairman Steve Beauchamp said Paylocity delivered “strong results” in the quarter, with recurring and other revenue growth of 11%. Chief Financial Officer Ryan Glenn reported recurring and other revenue of $387 million, up 11% year over year, and total revenue of $416.1 million, up 10% from the prior-year period.
On a GAAP basis, Paylocity reported Q2 gross profit of $282.1 million, operating income of $70.4 million, and net income of $50.2 million. Adjusted EBITDA was $142.7 million, representing a 34.3% margin, and exceeded the top end of guidance by $7.2 million, Glenn said. Excluding interest income on funds held for clients, adjusted EBITDA margin was up 140 basis points year over year, according to management.
Glenn also highlighted cash generation, citing a 40% increase in cash provided by operating activities in the first six months of fiscal 2026 and 26% growth in free cash flow over the last 12 months versus the comparative period. He said free cash flow margin was “nearly 24%” over the last 12 months. Glenn pointed to both improved profitability and the benefits of recent tax legislation changes, while stating that the “strong majority” of free cash flow leverage was driven by “natural scale across the business.”
Product strategy: HCM, finance, IT, and AI
Management emphasized that Paylocity’s multi-year R&D investments and product roadmap are aimed at combining human capital management, finance, and IT capabilities in a single platform underpinned by core employee record data. Beauchamp said adoption and utilization across the suite continued to grow, including newer HCM offerings such as Reward and Recognition, which he described as a point of differentiation because it is a native reward system that automates taxation of rewards payments and allows cash redemption.
Executives also discussed the company’s ongoing push to embed AI across the platform. Beauchamp said Paylocity recently released a Policy and Procedures Agent that allows clients to use internal documentation—such as handbooks and standard operating procedures—to provide employees with answers to policy questions. He also said Paylocity extended its AI assistant into HR rules and regulations by tapping more than 200 IRS and Department of Labor knowledge sources to provide administrative guidance. Beauchamp reported that average monthly usage of Paylocity’s AI assistant increased more than 100% quarter over quarter.
In Q&A, management said AI adoption is being driven by embedded use cases that improve ease of use, increase engagement, and save customers time. CEO Toby Williams said the company plans to continue building “templated agents” that customers can customize. Beauchamp added that, while AI can make workflows easier and may increase utilization and upsell opportunities, clients still value service and advice—an area where he argued Paylocity has a “moat” through implementation, ongoing service, and tax expertise.
On the finance front, Williams provided an update on the Airbase acquisition, saying Paylocity closed the deal last October and delivered “V1 of the integrated product set” in July. He said Paylocity has been pleased with momentum and client/prospect feedback for what it is now branding as “Paylocity for Finance,” and indicated the company is seeing a “positive path” for attach rates, penetration, adoption, and usage.
Williams described the company’s IT-related solutions as “early days,” but said Paylocity sees opportunities in use cases tied to employee status changes—such as onboarding and offboarding, system access, and device management—leveraging its role as system of record.
Sales execution, broker channel, and retention
Williams characterized the selling season as “strong” and said the demand environment remained stable, consistent with commentary from the prior quarter. He said the company was “pretty consistent with last year” in terms of client growth pace through the first half of the year.
The company also highlighted its referral channel performance. Williams said the broker channel again delivered more than 25% of new business in Q2, and he reiterated that Paylocity does not compete with broker partners by selling insurance products. Management pointed to Benefits-Guided Setup—a self-service tool that allows brokers to build plans and rate structures and update rates—as part of its investment in broker enablement.
Retention was another focus, with Williams saying Paylocity delivered “another strong quarter of client retention.” In Q&A, management said the company’s retention rate has been north of 92% for over a decade and tied durability to the value of broader module adoption combined with Paylocity’s service model, particularly during heavy year-end processing periods.
Capital allocation, balance sheet, and client funds
Glenn said Paylocity repurchased roughly 690,000 shares in Q2 at an average price of $144.86, for approximately $100 million in repurchases during the quarter. Fiscal year to date, he said the company repurchased over 1.8 million shares at an average price of $162.66, totaling approximately $300 million, and reduced diluted shares outstanding by more than 2% as of the end of Q2. Glenn said about $400 million remained under the company’s repurchase authorization.
Paylocity ended the quarter with $162.5 million in cash and cash equivalents and $81.3 million in debt related to funding the Airbase acquisition. On client funds, Glenn said average daily balance was approximately $3.2 billion in Q2, and the company expects approximately $3.7 billion in Q3, with an average annual yield of about 320 basis points, translating to an estimated $29.5 million of interest income in Q3. For the full year, Paylocity estimated average daily client funds of approximately $3.3 billion with an average yield of about 340 basis points, or roughly $112 million of interest income. Glenn said guidance reflects all Fed cuts to date and assumes an additional 25-basis-point cut in each of March and April.
Guidance raised for Q3 and fiscal 2026
Glenn said the company increased fiscal 2026 guidance across the board, citing momentum in sales and operations. Paylocity raised recurring and other revenue guidance by $12.5 million and total revenue guidance by $14.5 million, which Glenn said includes the full impact of the Q2 beat as well as higher expectations for the back half of the year. The company also increased adjusted EBITDA guidance.
- Q3 fiscal 2026 recurring and other revenue: $457.5 million to $462.5 million (about 9% to 10% growth)
- Q3 fiscal 2026 total revenue: $487 million to $492 million (about 7% to 8% growth)
- Q3 fiscal 2026 adjusted EBITDA: $200 million to $204 million
- Q3 fiscal 2026 adjusted EBITDA excluding interest on client funds: $170.5 million to $174.5 million
- Fiscal 2026 recurring and other revenue: $1.620 billion to $1.630 billion (about 10% to 11% growth)
- Fiscal 2026 total revenue: $1.732 billion to $1.742 billion (about 9% growth)
- Fiscal 2026 adjusted EBITDA: $622.5 million to $630.5 million
- Fiscal 2026 adjusted EBITDA excluding interest on client funds: $510.5 million to $518.5 million
On employment levels, Glenn said Paylocity saw “a lot of stability” in Q2, with year-over-year workforce levels up modestly and similar to Q1. He said guidance assumes flat employment levels year over year in the back half, which would represent a slight degradation from the first half.
Looking ahead, management said it remains focused on balancing reinvestment in areas such as R&D and sales and marketing with continued margin expansion, while continuing to embed AI, expand product adoption across the platform, and maintain service levels during peak processing periods.
About Paylocity (NASDAQ:PCTY)
Paylocity (NASDAQ: PCTY) is a leading provider of cloud-based payroll and human capital management (HCM) software designed to streamline workforce administration for mid-sized organizations. The company’s integrated platform automates core functions such as payroll processing, benefits administration, time and labor tracking, and compliance management, enabling employers to manage employee data more efficiently and reduce administrative burdens.
In addition to payroll and HR capabilities, Paylocity offers talent management solutions including recruiting, onboarding, performance tracking, and learning management.
-sa-logo-1200x675.png?v=20240109092235&h=45&w=95&zc=2){kind=logo}
-logo-1200x675.jpg?v=20230512120326&h=45&w=95&zc=2){kind=logo}