PCTY Q3 Deep Dive: AI Expansion and Product Diversification Drive Growth

HR and payroll software provider Paylocity (NASDAQ:PCTY) announced better-than-expected revenue in Q3 CY2025, with sales up 12.5% year on year to $408.2 million. The company expects next quarter’s revenue to be around $408 million, close to analysts’ estimates. Its non-GAAP profit of $1.75 per share was 11.3% above analysts’ consensus estimates.

Is now the time to buy PCTY? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

Paylocity’s third quarter results were shaped by steady demand for its workforce management software and increased adoption of its AI-powered platform. Management highlighted that the recent launch of Paylocity for Finance and new AI assistant features played a significant role in expanding use across HR, finance, and IT functions. CEO Toby Williams noted, "Our ongoing investment in AI capabilities is resulting in higher product engagement and client satisfaction." Additionally, the company’s broker referral channel remained robust, contributing over a quarter of new business and supporting stable client retention.

Looking ahead, Paylocity’s updated guidance reflects confidence in the traction of its broadened platform and the efficiency gains from automation and AI investments. Management believes that ongoing expansion into finance and IT, alongside a bundled sales approach, will drive higher average revenue per client. CFO Ryan Glenn stated, "We expect continued leverage from automation and AI, which should translate into both profitability improvements and sustained revenue growth." The company also aims to balance investment in R&D and go-to-market initiatives to capture further market share while maintaining operational discipline.

Key Insights from Management’s Remarks

Management attributed Paylocity’s Q3 performance to strong adoption of new product offerings, increased AI utilization, and stable execution in its core markets, with notable traction from its broker referral channel.

• AI-driven platform adoption: Usage of Paylocity’s AI features more than doubled year-over-year, with over 1.2 million questions answered by the new AI assistant, driving broader product adoption across HR, finance, and IT.
• Paylocity for Finance launch: The introduction of Paylocity for Finance, following the Airbase acquisition, extended the company’s platform into spend management for CFOs. Early feedback from both new and existing clients was positive, validating cross-selling and differentiation strategies.
• Broker channel momentum: Over 25% of new business originated from the broker referral channel, highlighting the company’s broker-neutral approach as a key differentiator in a competitive market.
• Operational efficiency from automation: Investments in AI and automation led to productivity gains in engineering, sales, and operations, with the company citing reduced client case volumes and improved code quality as examples of realized efficiency.
• Product bundling strategy: Management emphasized a bundled pricing and sales approach for new modules, enabling higher average revenue per user and easier cross-sell opportunities, while retaining flexibility for per-user pricing if market demand shifts.

Drivers of Future Performance

Paylocity’s outlook is shaped by continued platform expansion, efficiency gains from automation, and a stable demand environment supporting double-digit growth.

• Platform expansion into finance and IT: Management expects that broadening the platform beyond HR to include finance and IT solutions will enable deeper client penetration and higher average revenue per customer, particularly as more organizations adopt integrated workflows.
• AI and automation efficiency: Continued investment in AI is projected to deliver operational scale, margin improvements, and productivity gains across both internal teams and client-facing solutions, supporting higher adjusted operating margins.
• Stable macro and channel environment: The company anticipates consistent workforce levels among its clients and ongoing strength in the broker referral channel, which should provide a steady foundation for sales growth and retention in the near term.

Catalysts in Upcoming Quarters

In upcoming quarters, our analysts will focus on (1) the pace of adoption and cross-sell rates for Paylocity for Finance and IT modules, (2) the impact of AI and automation on operational efficiency and margin trends, and (3) sustained strength and productivity in the broker referral channel. Progress on these fronts will be critical to tracking execution against management’s long-term strategy.

Paylocity currently trades at $138.20, down from $139.60 just before the earnings. In the wake of this quarter, is it a buy or sell? Find out in our full research report (it’s free for active Edge members).

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