Paylocity Holding Corp Q2 FY2026 earnings

Paylocity posted total revenue of $416.1 million for the fiscal 2026 second quarter, up 10.4% from the prior-year quarter. Recurring and other revenue, the subscription core of the model, reached $387.0 million, a gain of 11.3%. Interest income on funds held for clients was essentially flat, so nearly all of the growth came from selling software and services rather than from client balances. Year to date, total revenue was $824.3 million, up 11.4%. Management credited the quarter to a strong selling season and pointed to new platform capabilities such as Benefits Guided Setup, which supports clients and broker partners through open enrollment.

Profit grew faster than revenue. Gross profit was $282.1 million, up 11.8%, and gross margin of 67.8% was up 0.8 percentage points. Operating income of $70.4 million rose 51.0%, and operating margin of 16.9% was up 4.5 percentage points. Net income of $50.2 million rose 34.0%, and diluted EPS of $0.92 rose 39.4%. The diluted share count came down year over year, which gave per-share results an extra push on top of the earnings gain.

Cost discipline carried part of the load. Cost of revenues rose 8% to $134.0 million on higher employee costs, internal-use software amortization and processing. Sales and marketing rose 5% to $98.1 million. Research and development rose 3% to $57.7 million. General and administrative fell 1% to $55.9 million, as lower acquisition-related costs offset higher stock-based compensation. On a non-GAAP basis, operating income was $119.1 million compared with $101.1 million, and Adjusted EBITDA was $142.7 million compared with $126.2 million. Adjusted EBITDA excluding interest income on funds held for clients, the cleaner read on the operating business, was $113.6 million against $96.9 million. Management tied part of that lift to internal AI and automation work.

Cash generation was the standout. Operating cash flow was $117.0 million for the quarter, up 115.9%, and $203.5 million for the first six months, up 39.7%. Capital expenditures were $3.4 million in the quarter, up 12.7%, and $7.2 million year to date, up 34.8%. Free cash flow for the trailing twelve months was $396.9 million, or 23.6% of total revenue. Contracted work also built up. Remaining performance obligations were $166.1 million, up 64.6%, and deferred revenue was $33.3 million, up 16.1%. The company repurchased $100 million, or 690,000 shares, during the quarter. First-half repurchases totaled 1.8 million shares for roughly $300.0 million at an average price of $162.66, leaving $400.4 million authorized.

Guidance for the fiscal third quarter points to recurring and other revenue growth of approximately 9% to 10% and total revenue growth of approximately 7% to 8%. Adjusted EBITDA for that quarter is guided to $200.0 million to $204.0 million, and Adjusted EBITDA excluding interest income on funds held for clients is guided to $170.5 million to $174.5 million. For the full fiscal year 2026, management guided recurring and other revenue growth of approximately 10% to 11% and total revenue growth of approximately 9%, with Adjusted EBITDA of $622.5 million to $630.5 million and the version excluding interest income on funds held for clients at $510.5 million to $518.5 million. The fiscal third quarter carries the usual W-2 seasonal lift in recurring revenue and client fund balances.

Two items deserve scrutiny. The effective tax rate jumped to 28.5% for the quarter from 20.0% a year earlier, and to 32.3% from 24.8% for the six months, on stock-based compensation shortfalls, state and local income taxes and a valuation allowance on certain state tax attributes tied to the One Big Beautiful Bill Act. Management also flags market and economic uncertainty that could hit revenue through client employee counts, elongated sales cycles, client losses and interest rates. Client fund yields face pressure if rates fall. Add the standard list of risks around competition, client retention, cybersecurity and evolving rules on artificial intelligence, and the outlook carries real caveats. Full-year and quarterly non-GAAP targets could not be reconciled to GAAP.