Paylocity Holding Corp Q3 FY2025 earnings

Paylocity posted $454.5 million of total revenue in its fiscal third quarter, up 13.3% from $401.3 million a year earlier. Recurring and other revenue, the subscription-driven core that accounted for 93% of the total, grew 15%. Interest income on funds held for clients slipped 3% as lower rates offset higher average client fund balances. Gross profit rose 13.8% to $324.7 million, and gross margin came in at 71.4%, up 0.3 percentage points from 71.1%.

Operating leverage showed up further down the income statement. Operating income climbed 19.5% to $127.0 million, and operating margin reached 27.9% from 26.5%. Net income rose 7.2% to $91.5 million, or $1.61 per diluted share versus $1.50, on 56.8 million diluted shares. Profit growth trailed revenue growth partly because the effective tax rate was 27.7% in the quarter versus 22.9% a year earlier, and because interest expense rose by about $4.3 million on the Airbase borrowings.

Non-GAAP results moved in the same direction. Non-GAAP operating income was $172.7 million against $145.9 million a year earlier, and Adjusted EBITDA was $197.1 million versus $167.9 million. Adjusted EBITDA excluding interest income on funds held for clients reached $163.6 million, up from $133.5 million. Stock-based compensation and related payroll taxes remained a large reconciling item at $37.5 million in the quarter.

Cash generation stayed solid. Operating cash flow for the first nine months of fiscal 2025 was $331.7 million, up 8.8% from $304.7 million. Capital expenditures were $2.3 million in the quarter, down 58.4%, and $7.6 million for the nine months, down 34.8%. Free cash flow for the nine months, defined by the company as operating cash flow less capitalized internal-use software and property purchases, was $278.5 million, compared with $248.5 million a year earlier. Cash and cash equivalents totaled $477.8 million at March 31, 2025. Long-term debt was $243.8 million, the balance of borrowings taken to fund the October 2024 Airbase acquisition, after roughly $81.3 million was repaid during the quarter.

Backlog metrics improved sharply. Remaining performance obligations rose 68.3% to $125.0 million from $74.3 million, and deferred revenue increased 12.1% to $29.0 million from $25.9 million. Referrals from benefit brokers and financial advisors again accounted for more than 25% of new business in the quarter. Paylocity also kept returning capital, repurchasing $150 million, or roughly 800,000 shares, through April of this fiscal year, with $256.4 million still authorized under the repurchase program.

Expense growth was mixed but largely followed hiring plans. Sales and marketing rose 6%, research and development rose 18%, and general and administrative rose 12%, with the research increase driven largely by $5.9 million of additional employee-related costs. Guidance covers both the fourth quarter and the full fiscal year 2025, and the company raised its revenue and profitability outlook for the fiscal year. Fourth-quarter Adjusted EBITDA is guided to $118.7 million to $122.7 million, or $91.3 million to $95.3 million excluding interest income on funds held for clients. For the full fiscal year 2025, Adjusted EBITDA is expected in a range of $571.0 million to $575.0 million, or $451.0 million to $455.0 million excluding interest income on funds held for clients. The company states it cannot reconcile those forward-looking non-GAAP measures to comparable GAAP measures without unreasonable effort.

Risks stay concentrated in the rate and demand environment. Interest income on funds held for clients fell 3% as rates came down, and interest expense rose with the Airbase financing. Management noted that market and economic uncertainty could pressure revenue through client employee counts, elongated sales cycles, client losses, and the interest rate environment. The company's risk disclosures also name competition, cybersecurity threats, reliance on the broker referral network and third-party payroll partners, and evolving rules around artificial intelligence. Seasonality matters too. The fiscal third quarter gets a lift from W-2 preparation and heavier client fund collections, so this period is not a reliable guide to other quarters.