管理層發言
Good day, and thank you for standing by. Welcome to the Paylocity Q3 Fiscal Year Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Ryan Glenn, Chief Financial Officer. Please go ahead.
Good afternoon, and welcome to Paylocity's earnings results call for the third quarter of fiscal '26, which ended on March 31, 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. During the call, we will use certain non-GAAP financial measures as defined in Regulation G. You can find the related reconciliations to GAAP in our press release, which is located on our website at paylocity.com under the Investor Relations tab. We will also make forward-looking statements. Actual events or results could differ materially from those projected in our forward-looking statements. Please refer to our press release and SEC filings, including our most recent 10-K which contain important factors that could cause actual results to differ materially from those in the forward-looking statements. We do not undertake any duty to update any forward-looking statements. In regard to our current conference schedule, we will be attending the Baird Global Consumer Technology and Services Conference and the William Blair Growth Conference. Please let me know if you would like to schedule time with us at either of these events. With that, let me turn the call over to Steve.
Thanks, Ryan, and thanks to all of you for joining us on our third quarter fiscal '26 earnings call. The momentum we saw in the first half of the year continued into Q3, which included a strong selling season performance by our sales and operations teams and helped to drive 11.6% recurring and other revenue growth in the quarter and increased guidance for fiscal '26. Our multiyear investment in R&D and commitment to driving innovation continues to fuel our growth as the combination of HCM and finance and IT in a single platform, all underpinned by expanded AI capabilities and our core employee record data represents the broadest and deepest offering in the market. A critical component driving our product strategy is the continued investment in embedding AI across our platform, such that AI capabilities are woven in, not bolted on, and enabling the evolution from AI assistant to AI agents. Powered by automated workflows, leveraging our clients' core employee record data, these agents are embedded into our clients' daily processes, making everything they do more efficient by empowering our clients to move from answers to action. For example, our accounts payable agent leverages a combination of rules and generative AI to automatically populate invoice and purchase order details, which are then categorized by leveraging employee and ERP data, improving accuracy, reducing manual effort and speeding up the AP process by over 60%, with approximately 95% of transactions processed cleanly on the first pass. To drive further expansion of our AI capabilities, last month we announced the acquisition of Grayscale, an AI-powered recruiting automation company that builds upon our existing recruiting capabilities by helping companies hiring at scale move faster without compromising quality. This acquisition represents a continuation of our broader strategy to embed AI across our platform, delivering intelligence within core workflows. By utilizing AI for candidate matching, automated engagement and continuous candidate check-ins, our clients and their recruiting teams will benefit from a reduction in manual administrative work and quicker time to hire. We are excited by the opportunity to integrate Grayscale's advanced capabilities into our existing suite, delivering incremental value to our clients that we can directly monetize in the form of a premium SKU for incremental AI-driven capabilities. Alongside our investment in AI, we are also enhancing the strength and breadth of our platform, highlighted by the recent launch of Paylocity Elevate solutions. This new offering pairs our unified platform with dedicated payroll and HR teams that bring deep operational expertise to manage this work directly for our clients. With offerings across implementation, payroll and HR, Paylocity Elevate solution helps clients streamline these core work streams, lighten administrative workload for internal teams and enables them to focus more time on strategic priorities while delivering measurable efficiencies. As our product portfolio continues to expand in breadth and depth, clients remain focused on unlocking the full value across HCM, finance and IT offerings. Given our team's extensive knowledge and expertise on the Paylocity platform, we deliver an elevated level of service efficiently today with a clear opportunity to drive even greater service and efficiency over time with AI-enabled capabilities. Our commitment to product development also continues to be recognized in the market with Paylocity recently being recognized across five categories in G2's 2026 Best Software Awards, and named a leader across 21 categories in the Spring 2026 G2 Grid reports. I would now like to pass the call to Toby to provide further color on the quarter.
Thanks, Steve. Solid sales and operational execution continued in our busiest time of the year, helping to drive another quarter of strong recurring revenue growth and increased revenue and profitability guidance for fiscal '26. Recurring and other revenue of $469.9 million grew 11.6% over Q3 of last year and beat the high end of our guidance by $7.4 million. We remain pleased with our sales and operational execution, our strong competitive position in the market, and we continue to see our product strategy resonating with clients and prospects. We continue to have a high degree of confidence in our ability to drive strong execution and differentiation in the market going forward with expanded AI capabilities across our platform. HCM is a highly regulated, complex and dynamic industry where accuracy and compliance is paramount with zero margin for error. Legislative changes such as the One Big Beautiful Bill and Secure 2.0 Act are two recent examples that required thousands of system updates, work that demands deep domain expertise across our operations, product, tax, legal and compliance teams, all centered around the employee record. Our more than 40,000 clients trust both our platform and people to help them manage through the impact these changes have on the most critical aspect of their business, their employees. Whether processing payroll, withholding taxes, or administering benefits, these carry significant regulatory and reputational risk across the more than 5,700 tax jurisdictions that we support, which continues to drive demand for our most modern platform and world-class service model. We also saw another strong quarter of channel performance as channel referrals, primarily from benefit brokers and financial advisers, once again represented more than 25% of new business for the third quarter as we continue to leverage this strong source of referrals. The sustained success of our broker channel partnerships continues to be driven by our modern platform, third-party integration and API capabilities and because we do not compete against our broker partners by selling insurance products. We remain committed to investing in and supporting the broker channel going forward with the goal of continuing to deliver real value and true partnership and support to our referring brokers and clients. Lastly, Q3 represents our busiest time of year as we work to support our clients through all of their year-end processing and annual tax form filing needs. In Q3, we moved over $100 billion on behalf of our clients, prepared and delivered to our clients several million W-2 and 1095 forms and remitted funds to over 4,000 state, local and federal tax agencies. I'd like to say a huge thank you to our roughly 6,700 employees who live and represent our values every single day and who work so hard to support our clients. The strong culture of Paylocity continues to be highlighted externally as we were recently recognized by Newsweek on America's Greatest Workplaces for Women in 2026. I would now like to pass the call to Ryan to review the financial results in detail and provide updated fiscal '26 guidance.
Thanks, Toby. Q3 recurring and other revenue was $469.9 million, an increase of 11.6% with total revenue up 10.5% from the same period last year. Our Q3 results were primarily driven by another solid quarter for our sales and operations teams, allowing us to come in $10.3 million above the top end of our total revenue guidance and resulting in a raise for our fiscal year guidance by more than our quarterly beat for the third consecutive quarter this year. Our adjusted gross profit was 77.3% for Q3, an increase of 30 basis points from Q3 of last fiscal year, and through the first nine months of fiscal '26, we have driven 60 basis points of adjusted gross profit leverage as we continue to focus on scaling our operational costs while maintaining industry-leading service levels. We continue to make significant investments in research and development and to understand our overall investment in R&D, it is important to combine both what we expense and what we capitalize. On a dollar basis, our year-over-year investment in total R&D increased by 8.9% when compared to the third quarter of fiscal '25, and we remain focused on making investments in R&D as we continue to build out the Paylocity platform to serve the needs of the modern workforce. In regards to our go-to-market activities on a non-GAAP basis, sales and marketing expenses were 17.5% of revenue in the third quarter, and we remain focused on making investments in this area of business in fiscal '26 to drive continued growth. On a non-GAAP basis, G&A costs were 8.2% of revenue in the third quarter versus 8.4% in the same period last year, representing 20 basis points of leverage. Through the first nine months of fiscal '26, we have driven 50 basis points of G&A leverage versus the same period last fiscal year. Briefly covering our GAAP results. For Q3, gross profit was $363.2 million, operating income was $157 million and net income was $111.3 million. Our adjusted EBITDA for the third quarter was $220.2 million or a 43.8% margin and exceeded the top end of our guidance by $16.2 million resulting in increased margin guidance for fiscal '26. Excluding the impact of interest income on funds held for clients, adjusted EBITDA margin for Q3 was up 110 basis points over Q3 of fiscal '25, and we continue to be pleased with our ability to drive both durable recurring revenue growth and expanded profitability. We remain focused on driving leverage by improved operational scale and through improved efficiencies resulting from our ongoing investments in automation and AI across our business, which are helping us scale our teams and providing the ability to focus on more strategic work. We are also pleased with our ability to drive expanded free cash flow through increased profitability and the benefits of recent tax legislation changes including a 27% increase in cash provided by operating activities in the first nine months of fiscal '26, 25.4% growth in free cash flow over the last 12 months versus the comparative period and free cash flow margin of over 24% over the last 12 months as we execute against our recently increased financial targets. Additionally, given the confidence we have in our business and our strong cash flows, in Q3 we purchased roughly 440,000 shares of common stock at an average price of $113.20 per share for approximately $50 million in aggregate purchases in the quarter. Fiscal year-to-date, we have repurchased roughly 2.3 million shares of common stock at an average price of $152.10 per share for approximately $350 million in aggregate repurchases, helping to drive our diluted shares outstanding down 2.7% as of the end of Q3. In April, our Board of Directors authorized an additional $1 billion share repurchase plan, 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 addition to our expectations for continued growth in adjusted EBITDA and free cash flow, the scale we are demonstrating in stock-based comp expense and the reduction in diluted shares outstanding will help drive continued expansion of earnings per share on an annual basis. Looking at the balance sheet. We ended the quarter with cash and cash equivalents of $299.7 million and $81.3 million in debt outstanding related to the funding of the Airbase acquisition. In regard to client-held funds and interest income, our average diluted balance of client funds was $3.8 billion in Q3. We're estimating the average client balance will be approximately $3.2 billion in Q4, with an average annual yield of approximately 330 basis points, representing approximately $26.2 million of interest income in Q4. On a full year basis, we're estimating the average client balance will be approximately $3.25 billion with an average yield of approximately 360 basis points, representing approximately $117 million of interest income. In regard to interest rates, our guidance reflects all Fed cuts to date with no additional rate cuts forecasted for this fiscal year. Finally, I'd like to provide our financial guidance for Q4 and full fiscal '26. Note that as a result of continued momentum across both our sales and operations teams, we are increasing our fiscal '26 recurring and other revenue guidance by $15.5 million and our total revenue guidance by $20.5 million at the midpoint which includes the full impact of our guidance beat in Q3 and a further increase in Q4 revenue guidance. With that said, for the fourth quarter of fiscal '26, recurring and other revenue is expected to be in the range of $402.2 million to $407.2 million or approximately 9% to 10% growth over fourth quarter of fiscal '25 recurring and other revenue. Total revenue is expected to be in the range of $428.4 million to $433.4 million or approximately 7% to 8% growth over fourth quarter of fiscal '25 total revenue. Adjusted EBITDA is expected to be in the range of $128.6 million to $132.6 million and adjusted EBITDA, excluding interest income on funds held for clients is expected to be in the range of $102.4 million to $106.4 million. And for fiscal year '26, we are increasing all aspects of our guidance as follows: recurring and other revenue guidance is now expected to be in the range of $1.638 billion to $1.643 billion or approximately 11% to 12% growth over fiscal '25 recurring and other revenue. Total revenue guidance is now expected to be in the range of $1.755 billion to $1.760 billion or approximately 10% growth over fiscal '25. Adjusted EBITDA is expected to be in the range of $638 million to $642 million. And adjusted EBITDA, excluding interest income on funds held for clients is expected to be in the range of $521 million to $525 million. In conclusion, we are pleased with our Q3 results, the momentum we have across our sales and operations teams as we head into the final quarter of the year and the strong results we are seeing across our HCM, finance and IT solutions. Combined with continuing to drive competitive differentiation through our AI strategy, we are confident in our ability to drive sustained durable revenue growth and improving leverage across the business to achieve our updated long-term financial targets in the coming years. Operator, we're now ready for questions.
分析師問答
Our first question comes from the line of Mark Marcon with Robert W. Baird.
Congratulations on the strong quarter. I was wondering if you could talk a little bit about just kind of the seasonal or the sequential variability that we ended up seeing during the third quarter with regards to sales and marketing and R&D relative to prior patterns. It seems like you became more efficient as the quarter went on. And then I'm wondering if you can also dovetail that to the EBITDA guide for the fourth quarter? Because it seems like the fourth quarter basically after multiple quarters of the margins expanding on a year-over-year basis on the EBITDA side, it looks like the guide basically implies a little bit of a decline. So I'm wondering what's driving that? And then I've got a follow-up.
Yes, Mark, this is Ryan. I can take that question. I think from an operating expense standpoint, nothing that I would call out from a timing standpoint as far as one-time items in the third quarter. I think as we've talked about, we continue to invest in sales and marketing and R&D and did that once again in the third quarter. As you know, I think we continue to look closely at customer acquisition costs within our sales and marketing spend and have felt really good about those investments and what they've driven from a new sales standpoint as well as recurring revenue growth in the fiscal year. As far as what that means for the fourth quarter, I think there's always a timing element there as you look at the increased guidance for the year. We raised EBITDA guidance by 30 basis points. We obviously overperformed well in the third quarter. So I think there's always a little bit of timing within the fiscal year. And as we talked about, even dating back to last August when we provided our initial guidance for the year, we do want to invest back into R&D and broader automation efforts. And I think we continue to do that into the fourth quarter as well.
And so we'll end up seeing that in the R&D line and maybe also in terms of some sales and marketing, is that right?
Yes. And I think you've seen that as we've gone throughout the year as well. So I wouldn't call it any specific one-time items in the fourth quarter, but the bias is to invest back into those elements of the business while also increasing profitability, and we've done both.
Great. And then just as a follow-up. You mentioned Grayscale and being able to charge for the AI capabilities. Can you talk a little bit about what you're seeing there? I know it's really early. And then anything else on the office of the CFO?
Yes. We're excited about the Grayscale acquisition. And just like prior acquisitions that are product tuck-ins and integrations, we'll take the time. We're going to integrate that experience and then we will launch that. We typically have done that in the 12-month or so range. So we're looking at that as a similar opportunity to get that to market. But we're really excited about the AI capabilities in Grayscale. It can fully automate candidate engagement, so conversations and marketing, something that we think is really demanded in the market. And so that gives us an opportunity to have a bit of a premium SKU in recruiting once we complete that integration and launch.
Our next question comes from Scott Berg of Needham & Company.
This is Ian Black on for Scott Berg. A couple of questions. First, on Grayscale, it looks like the company primarily targeted larger enterprises. How does the product convert to your kind of core customer demographic?
Yes. I wouldn't say that it is targeted to larger enterprises. I think when it comes to candidate engagement, you see customers with maybe larger hourly populations being a great fit or even companies with big salary populations that are in hiring mode. You basically want to do a fair amount of recruiting and hiring, either because you naturally have turnover in your business or you're in growth mode. And so we see a lot of our customers that fit that bill really nicely. Many customers overlap perfectly within our average-sized target market of 150 employees. So that was actually one of the things that attracted us to the opportunity; we felt like it was a really nice product-market fit.
Awesome. And then how does the acquisition boost your overall AI strategy outside of the acquired technology?
Our AI strategy is really to embed AI across the suite in everyday processes, driving an ROI to the customers and saving them time, providing better insights and intelligence. Grayscale is a great example when it comes to candidate interaction. Not only does it automate a bunch of that candidate interaction from a recruiter perspective, but it provides a greater level of intelligence throughout that process. Sometimes we build and organically launch agents that operate in that capacity, like payroll and time or in some of our talent management suite like recruiting, where we were able to do a product tuck-in to go after a space that we're pretty excited about. Certainly, as we look externally and think about opportunities, new product tuck-ins are probably more important if those capabilities result in monetization. That's another element that we're excited about. It's a great capability and functionality, and the AI interaction is very powerful, but it also gives us an opportunity to monetize it.
Our next speaker is Samad Samana with Jefferies.
This is Jordan Boretz on for Samad. It was great to see the strong double-digit recurring growth. It outperformed the guide by a wider margin than in recent quarters. So I know you haven't guided formally to fiscal '27. But as we think about setting an initial recurring growth estimate, is it fair to look at fiscal Q4 guidance for 9% to 10% growth and kind of extrapolate that out?
Yes, Jordan, I think as we said in the prepared remarks, we're really pleased with the results so far this fiscal year. You've seen a lot of consistency in recurring revenue growth. You've seen a lot of consistency in how we've guided each of the quarters. And obviously, there's been some overperformance that has impacted the results each quarter and allowed us to raise the fiscal year by more than that quarterly beat. As you look at the fourth quarter, the recurring guide of 9% to 10% is a data point as you think about next fiscal year, probably more so for the early part of the year. Our guidance philosophy has not changed. So as you think about the prudence that we would have typically in a full-year guide, we would continue to have that level of prudence when we guide in August. I think the other element that has been a bit of a tailwind this year is client workforce levels have continued to be up and very resilient. Historically, we would not assume that level of increase year-over-year in our guidance. So that's been helpful this year. And as you think about guidance, we would likely assume flat year-over-year workforce as a starting point.
Great color. I appreciate it. And then quickly on the capital allocation front, nice to see the strong cadence of buybacks, the incremental $1 billion increase to the repurchase authorization. When I think about how that's going to be funded on the balance sheet, I see $300 million in cash. So how are you thinking about funding that? And what cadence do you expect to deploy that on as we think about next year?
Yes. I would not think of our capital allocation policy changing. We've been really pleased with the ability to buy back stock so far this fiscal year: $350 million in the first nine months. Dating back two years, we've repurchased $650 million while also being able to fund acquisitions to drive future growth and product differentiation. That will continue to be our strategy going forward. I think this provides us incremental flexibility and we will continue to be opportunistic while maintaining dry powder from an M&A standpoint.
Our next question comes from the line of Jared Levine with TD Cowen.
I wanted to start in terms of your recent announcement of some of the managed service offerings. Can you discuss the revenue opportunity, whether that's TAM or potential PEPM uplift? And then Ryan, any kind of margin headwinds from more of a service offering versus your historical legacy and software?
Jared, it's Toby. I'll start and then Ryan can jump in. If you think about how we serve our clients today, this is really just an extension of our platform to provide a higher level of service for our clients across payroll and HR. A lot of that is borne out of the client experience and a lot of the client feedback that we have. I think it will be a competitive offering for us in the market that will deliver a higher level of service and meet client needs. Ultimately, we're really excited about the TAM expansion opportunity and the revenue expansion opportunity. But at the heart of it, it's a need that our clients have. We will be leveraging our platform to provide that service. So I don't think we expect any significant headwind from a margin perspective as we look at Q4 and into '27.
Got it. And then in terms of Grayscale, Ryan, can you comment in terms of the impact of that ex guide raise there? And then any headwind related to that implied 4Q margin guide as well too?
Yes, completely immaterial on both the revenue and EBITDA front. As we file our 8-K over the next few days, you'll see in the supplement what the purchase price was. But it's a small acquisition, all-cash, and not material to the financial results.
Our next question comes from the line of Siti Panigrahi with Mizuho.
This is Phil on for Siti. Can you guys talk a little bit about what you're seeing in the macro backdrop, specifically trends in employment and what's baked into your assumption for Q4?
I'll start. We've seen relative stability both in the demand environment and in employment. As Ryan mentioned earlier, workforce levels have been up through the first nine months of the fiscal year against an assumption that we started with at the beginning of the fiscal year of being flat. We have embedded that assumption across the full fiscal year. That's probably how we're thinking about '27 as well. From a macro standpoint, for the first nine months of the fiscal year, we're pleased with the stability we've seen, and that's what we're seeing as we go into Q4.
Our next question comes from the line of Patrick Walravens with Citizens.
When you guys look back at the quarter and the competitive environment, what was winning you the most deals with new customers? And when you look at renewals, why were customers staying?
When I look back at the quarter, I think you saw strong execution across the entirety of the business. Anytime you have these types of results and that type of beat you have really strong sales and go-to-market execution. That's a mix of the value proposition and the breadth of our platform. The broker channel continued to perform for us, which we're pleased with. We had strong service. It's the busiest time of the year for our teams, and I think we performed really well. So I think the client interactions and retention throughout year-end and through January were really strong. You also saw strong product innovation, including Grayscale as an acquisition to integrate and the launch of the Elevate solutions. Overall, performance was well balanced and strong across every area of the business.
Great. And just a quick follow-up on Elevate, where do you think that's going to take the margins? What's the impact going to be?
I don't think we have any expectation of a material headwind associated with margins. It's a higher level of service for our clients, but we'll be leveraging our teams and our platform. As we look forward, there is an opportunity to scale that right in line with the rest of the business and certainly leveraging internal and product-driven AI capabilities. Our expectation is that this is a TAM expansion opportunity, an opportunity to serve clients in an even higher way and a revenue opportunity, and I don't think there will be an incremental headwind from a margin standpoint.
Our next question comes from the line of Brian Peterson with Raymond James.
This is Jessica on for Brian. As you're thinking about further M&A opportunities in the market, should we be thinking that you're looking at more AI-focused deals or will there be more traditional applications that could also be broadly in your value proposition, like what you did with Airbase? Just some high-level thoughts here.
From a product strategy perspective, when we look at M&A, we want to make sure it accelerates the direction we're already heading in. Any software acquisition that would be a product tuck-in we'd be selling back to customers would ideally have some strength in AI. We think AI is a critical component in offering great product to our customers. We're spending a lot of time embedding AI across our entire core suite. It doesn't mean we wouldn't consider something outside of that, but it would have to fit into our existing product strategy and we would need the ability to embed AI across anything we launch to our customers.
Got it. And then also along with Elevate, as you're talking about this TAM and revenue opportunity, I know it's still early, but how should we be thinking about the market fit? What kind of customers would be more inclined to take Elevate? Who will be best served by having increased service?
I would say Elevate really goes after our core target market, average customer size of about 150 employees. From the customer's perspective, they may have an HR or payroll team that's stretched, they may have turnover, or they may lack deep expertise. We know our products better than anybody and can help them with implementation, HR or payroll capabilities. We can automate a lot of this on their behalf. When we provide this extra level of service, we increase the revenue opportunity for us and the customer can redeploy staff elsewhere. One of the exciting things is as we invest more in AI and automation, we can do that in a way that doesn't have a margin impact, so we can provide that elevated level of service and get additional revenue efficiently. It also helps with cross-sell: as customers purchase Elevate solutions, there's an opportunity to drive utilization and lower implementation barriers for additional products.
Our next question comes from the line of Terry Tillman with Truist.
It's Analyst on for Terry. Just looking forward, how do you guys think your pricing model will change? And what have you been hearing from customers about a potential hybrid pricing model?
We haven't heard a lot from clients asking for a different pricing model. Across the industry, pricing models have been fairly stable. I don't think we've seen shifts there. That said, there are different levers we and others in the industry could pull if needed to maintain revenue levels, but we are not at that point. The important part is thinking about how we go to market and what the client expectation is. We continue to see strong engagement with clients and prospects, and meeting them where they are with a consistent pricing conversation.
Our next question comes from the line of Jason Celino with KeyBanc Capital Markets.
This is Devin on for Jason today. Congrats on the acquisition of Grayscale, it seems like a great addition to the portfolio. The recruiting space has tracked a lot of attention lately. Would love to get a sense of how competitive that market is. I noticed on Grayscale's website there are a few notable customers being highlighted. What's Grayscale's secret sauce in landing these customers?
Recruiting has been a strong category for us overall. We've been able to attach recruiting across market segments at an attractive rate since we launched. We improve it every year, and part of our strategy is to embed AI across that experience. Many of the agents we will be launching will be our own, but Grayscale ties nicely into the candidate engagement side of the equation, which we didn't have at an advanced level. Combining our AI investments with Grayscale's capabilities gives us confidence to offer a premium SKU for customers that need that engagement the most and to provide competitive differentiation versus other players.
Got it. No, that's helpful. And then maybe just a quick follow-up, for 4Q recurring guidance are you still assuming workforce level to be stable?
Yes, we are. Workforce levels have been up year-over-year and have been resilient, but our guidance approach is consistent: we assume workforce levels are flat year-over-year in the fourth quarter.
Our next question comes from the line of Daniel Jester with BMO Capital Markets.
Maybe one on sales and go-to-market. In the last 18 months, you've added an Office of the CFO product, IT asset management, access management, now managed solutions and premium SKUs. It seems like a lot to digest from a sales enablement perspective. How are you getting the sales force positioned to sell this expanded platform?
If you look at our multiyear growth algorithm, a core part has been increasing ARPU by launching new solutions. We've more than tripled the size of the portfolio since the IPO. One competency we've developed is launching new technology successfully to the sales force, training them and giving them the ability to attach those products at the point of new sale and sell back into the base. This is the same cadence and playbook we've used for over a decade. We're early days for Elevate, but we're pleased with traction in newer offerings over the last 18-plus months.
I'll add that we've developed a good way to surface products to customers without overloading sales folks so we're not losing productivity. We evaluate products from a complexity perspective. Sometimes our field sales sell the entire suite; other times, it's a referral model where they identify the need and pass it to an internal specialist who takes the SKU from discovery through sale. That two-tier model gives us capacity to expand the product portfolio in the future.
Okay, that's really helpful. And then maybe any updated thoughts on the trajectory of headcount, either for the organization overall or for the sales force as we go into fiscal '27?
We're in the planning period now and will finalize plans for fiscal '27 as we go through Q4. The theme remains the same as in fiscal '26 and '25: continue to drive recurring revenue growth efficiently, giving teams capabilities from staffing or tools to drive new sales. That will remain the focus as we go through Q4 and the planning process for '27.
Our next question comes from the line of Steve Enders with Citi.
Maybe on the financial products and the IT asset management products. What have you seen so far from an adoption perspective? How is the go-to-market translating into cross-sell versus what you expected?
We've been pleased with performance in each of those categories. The ability to convey the value of the platform from payroll to HCM to finance and IT resonates with new clients and within the client base. We've been pleased with traction and the mix in terms of attaching those products at the time of sale to new opportunities and selling back into the client base.
Okay. That's helpful. And then on the margin side, it seems like you're finding more opportunities to automate and get more leverage. What work have you put in so far internally and where do you view the next incremental areas to drive further leverage?
We've been very active across every team—go-to-market, operations and service teams, product development and engineering—to find ways to leverage AI and automation to remove manual processes and provide greater efficiency. We've found categories in every area where we've captured opportunities or believe we can as we look into Q4 and fiscal '27. The focus has been providing higher efficiency and productivity, and you'll continue to see that flow through in margin leverage over time.
To add from a financial standpoint, across every metric you've seen leverage: adjusted gross margin up 60 basis points this year, GAAP EPS up almost 30% in the quarter, and free cash flow up 25% over the last 12 months. We're seeing leverage across the business quarter-to-quarter.
Our next question comes from the line of Raimo Lenschow at Barclays.
This is Sheldon McMeans on for Raimo. I wanted to take a step back on the new Paylocity Elevate solutions, which certainly seems like an exciting opportunity. You touched upon this a bit, but it would be helpful to hear more around what the impetus for this offering was, particularly in the context of AI. It's interesting to hear clients interested in higher-touch services when there's some fear in the market that agents will be doing everything. Are you feeling more confident around AI disruption fears, and is that part of why you're launching this offering?
We have confidence in our moat around high-touch service, money movement, and compliance, which is difficult to replace with just code. Where we are seeing progress from AI is in automating step-by-step compliance and complicated processes—areas that require training. As we automate using AI, it becomes easier to work through those processes. Taking on higher-touch responsibilities becomes much more manageable with confidence in deploying agents and automation across the platform. There will still absolutely be a human touch—payroll and HR are sensitive and must be 100% accurate. If we can leverage our expertise and continue to automate, it's a great time to enter the market with that solution. The offering came from customer demand—customers with turnover or staffing gaps asking for more help. From our perspective, it's more services combined with leveraging the platform capabilities they might not have used on their own, making it a win-win.
That makes a lot of sense. Quick follow-up: it was nice to see the recurring revenue acceleration in the quarter. Could you speak more to some of the driving factors around that, particularly in new customer wins—are you seeing larger land sizes from your growing portfolio? Any product categories that particularly resonated this quarter or any change in velocity versus land size?
It's more a reflection of many things working well versus one specific factor. You get to that result by go-to-market teams producing strong results across the first nine months and in the quarter, strong go-lives in January, and strong performance from our services team driving client satisfaction and retention during a critical time of year. All of those elements together produced the result.
Our next question comes from the line of Jacob Smith at Guggenheim Partners.
The brokerage channel has become a bigger source of differentiation as the landscape has evolved, and this past selling season was potentially where you'd expect that to show up more pronounced in the numbers. Is the broker contribution actually accelerating and driving some of the upside this quarter? Or was that more seasonal with form filings running stronger than expected and the broker benefit still building towards next year? Also, has the conversation with brokers changed over the last 12 to 18 months—are they bringing in deals earlier or recommending Paylocity differently than before?
Part of the success this quarter was balanced across go-to-market production, implementation and service contributing to retention and new business. The broker channel is certainly a component of the success, and over the last 18 months we've seen more momentum with brokers that continued into year-end and Q3. We have always had a strong presence in the broker channel and differentiated relationships, which continued into the quarter and the first nine months of the year.
Our next question comes from the line of Kevin McVeigh at UBS.
Congratulations on the results. Can you give a sense of how clients are absorbing the efficiencies you're bringing? It sounds like a lot of client cost savings in addition to your efficiencies. As clients see these savings, are you able to increase pricing more? Is there a shift in revenue mix given these efficiencies?
We've always focused on delivering more value to customers than trying to match that with price. There are times we've invested in product segments and as we've improved those products we've moved pricing up over time. AI accelerates some of that innovation, but adoption cycles are still relatively early. There's more opportunity ahead in AI-driven monetization. We're getting great feedback from customers using these capabilities and continue to drive utilization across many customers that are new to it.
Our next question comes from the line of Patrick with William Blair.
Toby and Ryan, thanks for squeezing me in here. As you increasingly build out the breadth of this platform across HR, finance, IT and now some services, how meaningful do you feel those adjacent workflows can be over time? How much more room is there to continue rounding out this platform?
A big part of our growth algorithm over time has been expanding products and services and increasing the chargeable suite, which we've grown more than threefold since the IPO. The evolution of the industry has expanded client needs, and we've added products and services to meet those needs, helping raise ARPU. I do not believe we've reached the end of ways to add value to clients, either in products or services, and that will continue to be a major focus as we look forward.
Now that it's been roughly a year since you launched Paylocity for Finance, an update on success selling into the Office of the CFO. When you're winning deals there, how often is it a greenfield land versus a displacement?
We've been happy with progress so far. Our expectations have been met in terms of product attach both to new logos and into the client base following the Airbase acquisition. The value proposition of having payroll, HCM, finance and IT on a single platform resonates in the market and shows up in go-to-market motion for new logos and within the base. We're pleased with the acquisition's performance so far—still relatively early but encouraging.
Thank you. This concludes the question-and-answer session. I would now like to turn it back over to management for closing remarks.
Yes. I just wanted to thank everybody for their interest in Paylocity. Thanks for joining the call. And I also wanted to provide a special thank you to all of our employees who served our clients so well through the course of year-end and helped deliver a great quarter. So thanks, everybody, and I hope you have a great night.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.