Paylocity Holding Corp Q3 FY2026 earnings

Paylocity reported fiscal 2026 third-quarter total revenue of $502.3 million, up 10.5% from the prior-year quarter, with recurring and other revenue growth of 11.6%. Gross profit rose 11.9% to $363.2 million, and gross margin improved to 72.3% from 71.4%. Operating income climbed 23.6% to $157.0 million, lifting operating margin to 31.3% from 27.9%. Net income rose 21.6% to $111.3 million, and diluted EPS rose 27.3% to $2.05. This is the seasonally strongest stretch of Paylocity's year, because W-2 preparation and payroll tax collections lift recurring revenue and interest income on client funds. Management cautions that fiscal third-quarter results should not be read as a reliable guide to other periods.

Through the first nine months of fiscal 2026, revenue reached $1.33 billion, up 11.1% from the prior-year period, and gross profit rose 12.1% to $925.1 million. Operating income for the nine months was $301.6 million, up 26.8%, and net income was $209.4 million, up 17.3%. Diluted EPS for the nine months was $3.81, up 21.0%. Operating cash flow for the nine months was $421.4 million, up 27.0%. Capital spending is rising quickly off a small base: capital expenditures were $8.4 million in the quarter, up 261.7%, and $15.5 million over the nine months, up 103.5%. On a trailing twelve month basis, free cash flow, a non-GAAP measure, was $421.0 million, or 24.4% of total revenue, compared with $335.8 million, or 21.6% of total revenue, a year earlier. Free cash flow is a different measure from operating cash flow, since it nets out capitalized software and property purchases.

Remaining performance obligations were $204.0 million, up 63.2% from a year earlier, and deferred revenue was $34.5 million, up 19.0%. The backlog jump is a forward-looking signal, though the absolute base is still small next to annual revenue. Paylocity also returned capital at pace, repurchasing $50 million, or 440,000 shares, in the quarter and $350 million, or 2.3 million shares, over the first nine months, at an average cost of $153.10 per share. The board approved a $1.0 billion increase to the repurchase authorization in April 2026, leaving $1.35 billion available as of May 7, 2026. In April 2026 the company also acquired Grayscale Labs, an AI-powered recruiting automation business, extending the AI features it has been building into its platform.

Guidance for the fiscal fourth quarter points to total revenue growth of approximately 7% to 8% over the prior-year fourth quarter, with recurring and other revenue growth of approximately 9% to 10%. Adjusted EBITDA, a non-GAAP measure, is guided to $128.6 million to $132.6 million, or $102.4 million to $106.4 million excluding interest income on funds held for clients. For the full fiscal year 2026, management guides total revenue growth of about 10% and recurring and other revenue growth of about 11% to 12% over fiscal year 2025. Full-year adjusted EBITDA is guided to $638.0 million to $642.0 million, or $521.0 million to $525.0 million excluding interest income on client funds. The company says it cannot reconcile these forward-looking non-GAAP measures to comparable GAAP figures without unreasonable effort. The fourth-quarter outlook implies slower growth than the full year, largely because the fourth quarter lacks the W-2 and tax season lift. Management also increased its revenue and profitability guidance for the fiscal year, citing the strength of the first nine months.

Several items bear watching. Interest income on funds held for clients declined year over year as lower rates outweighed higher client fund balances, and that line is a meaningful slice of total revenue. The effective tax rate for the quarter was higher than a year earlier, driven by stock-based compensation shortfalls and state and local taxes, and the company recorded a valuation allowance on certain state tax attributes after the One Big Beautiful Bill Act changed the treatment of qualified property and research expenditures. Management also flags uncertainty around market and economic conditions, which could affect client employee counts, sales cycles and client losses. Other disclosed risks include cybersecurity threats and evolving regulation, the challenge of expanding a sales organization, dependence on a referral network of third parties, competition, and the difficulty of integrating acquisitions such as Grayscale. Capital spending and capitalized software costs are climbing, which will pressure free cash flow if these growth investments do not convert into revenue.