PCTY 10-K & 10-Q changes, risk factors and insider trading

Moreover, a significant portion of our operating expenses are related to compensation and other items which are relatively fixed in the short-term,short term, and we plan expenditures based in part on our expectations regarding future needs and opportunities. Changes in our business or revenue shortfalls could decrease our gross and operating margins and could negatively impact our operating results from period to period.

The market for our solutions is characterized by rapid technological advancements, including but not limited to artificial intelligence (“AI”) and machine learning, changes in client requirements, frequent new product introductions and enhancements and changing industry standards. The life cycles of our products are difficult to estimate. Rapid technological changes and the introduction of new products and enhancements by new or existing competitors, or development of entirely new technologies to replace existing offerings could limit the demand for our existing or future solutions and undermine our current market position. New technologies that involve AI or machine learning or that are created using AI or machine learning may emerge that are able to deliver solutions at lower prices, more efficiently or more conveniently than our solutions, which could adversely impact our ability to compete. Additionally, if new technologies used in our products fail to operate as expected, ouror businessif mayproducts be negatively impacted. For example, the non-deterministic nature ofutilizing generative AI outputsare maytrained compromiseon inaccurate, biased or misleading data or generate unreliable outputs, the reliabilityreliability, transparency, or accuracy of our products could be impacted, which may leadresult toin customer dissatisfactiondissatisfaction, andreputational damageharm toor our reputation.litigation.

Several of our competitors are larger and have greater name recognition, longer operating histories and significantly greater resources than we do. Many of these competitors are able to devote greater resources to the development, promotion and sale of their products and services. Furthermore, our current or potential competitors may be acquired by third parties with greater available resources and the ability to initiate or withstand substantial price competition, which may include price concessions, delayed payment terms, or other terms and conditions that are more enticing to potential clients. As a result, our competitors may be able to develop products and services better received by our markets or may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies such as AI or machine learning, regulations,regulations or client requirements.

In addition, our ability to deliver our cloud-based modules depends on the development and maintenance of Internet infrastructure by third parties. This includes maintenance of a reliable network backbone with the necessary speed, data capacity, bandwidth capacity, and security. We may experience future interruptions and delays in services and availability from time to time. Any interruption may affect the availability, accuracy, or timeliness in our services and could damage our reputation, cause our clients to terminate their use of our software, require us to indemnify our clients against certain losses due to our own errors and prevent us from gaining additional business from current or future clients. In the event of a catastrophic event with respect to one or more of our systems, we may experience an extended period of system unavailability, which could negatively impact our relationship with clients.

We typically pay client employees and may payemployees, taxing authorities amountsand due for a payroll periodvendors before a client’s electronic funds transfers are finally settled to our account. If client payments are rejected by banking institutions or otherwise fail to clear into our accounts, we may require additional sources of short-term liquidity and our operating results could be adversely affected.

Our payroll processing businessand involvesspend management businesses involve the movement of significant funds from theclient account of a clientaccounts to its employees andemployees, relevant taxing authorities.authorities Thoughand vendors. Although we debit a client’s account prior to any disbursement on its behalf, due to Automated Clearing House, or ACH, banking regulations, funds previously credited could be reversed under certain circumstances and timeframes after our payment of amounts dueare to employees and taxing and other regulatory authorities.due. There is therefore a risk that the client’s funds will be insufficient to cover the amounts we have already paid on its behalf. While such shortage and accompanying financial exposure has only occurred in very limited instances in the past, should clients default on their payment obligations in the future, we might be required to advance funds to cover such obligations. Depending on the magnitude of such an event, we may be required to seek additional sources of short-term liquidity, which may not be available on reasonable terms, if at all, and our operating results and our liquidity could be adversely affected and our banking relationships could be harmed.

In addition, we utilize certain third-party software in some of our products. Although we believe that there are alternatives for the functionality provided by the third-partysuch software, any significant interruption in theits availability of such third-party software, oravailability, defects andor errors in the third-partysoftware, software,or risks arising from the third party's use of AI technologies, including but not limited to inaccurate, biased, misleading, or unreliable outputs, could haveadversely an adverse impact onaffect our products and business unless and until we can replace the functionality provided by thesesuch productssoftware at a similar cost.

We may not be able to integrate the acquired personnel, operations and technologies successfully, or effectively manage the combined business following the acquisition, in which case we may not realize the expected benefits of such acquisitions. Factors that may negatively impact our operating results, business and financial position, without limitationlimitation, include the following:

Our success is dependent, in part, upon protecting our proprietary technology. Our proprietary technologies are not covered by any patent or patent application. Instead, we rely on a combination of copyrights, trademarks, service marks, trade secret laws, and contractual restrictions to establish and protect our proprietary rights in our products and services. However, the steps we take to protect our intellectual property may be inadequate. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we dofail notto detect unauthorized use or disclosure of our intellectual property.property or confidential proprietary information, including through the use of AI tools. Despite our precautions, it may be possible for unauthorized third parties to copy our products and use information that we regard as proprietary to create products and services that compete with ours. Some license provisions protecting against unauthorized use, copying, transfer and disclosure of our products may be unenforceable under the laws of certain jurisdictions and foreign countries.

Our intellectual property could be wrongfully acquired as a result of a cyberattack orcyberattack, other wrongful conduct by employees or third parties.parties or as a result of increased use of AI tools by us or our vendors. In order to protect our intellectual property rights, we may be required to spend significant resources, including cybersecurity resources, to monitor and protect these rights. Litigation may be necessary in the future to enforce our intellectual property rights and to protect our trade secrets. Litigation brought to protect and enforce our intellectual property rights could be costly, time consuming,time-consuming, and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims, and countersuits attacking the validity and enforceability of our intellectual property rights. Our inability to protect our proprietary technology against unauthorized copying or use, as well as any costly litigation or diversion of our management’s attention and resources, could delay further sales or the implementation of our solutions, impair the functionality of our solutions, delay introductions of new solutions, result in our substituting inferior or more costly technologies into our solutions, or damage our reputation. In addition, we may be required to license additional technology from third parties to develop and market new solutions, and we cannot assure you that we could license that technology on commercially reasonable terms, or at all. Although we do not expect that our inability to license this technology in the future would have a material adverse effect on our business or operating results, our inability to license this technology could adversely affect our ability to compete.

There is considerable patent and other intellectual property development activity in our industry. Our success depends, in part, upon our not infringing upon the intellectual property rights of others. Our competitors, as well as a number of other entities and individuals, may own or claim to own intellectual property relating to our industry. From time to time, third parties may claim that we are infringing upon their intellectual property rights, and we may be found to be infringing upon such rights. However, we may be unaware of the intellectual property rights that others may claim cover some or all of our technology or services.services, particularly as we expand our use of AI which is subject to uncertainty regarding intellectual property ownership and license rights of AI algorithms and content generated by AI. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our services, or require that we comply with other unfavorable terms. In connection with any such claim or litigation, we may also be obligated to indemnify our clients or business partners or pay substantial settlement costs, including royalty payments, and to obtain licenses, modify applications, or refund fees, which could be costly. Even if we were to prevail in such a dispute, any litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations.

The terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts. Accordingly, there is a risk that those licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to commercialize our solutions. In that event, we could be required to re-develop our products or solutions, to discontinue sales of our products or solutions, or to release our proprietary software code under the terms of an open source license, any of which could harm our business. Similarly, open source AI models may be trained on data of unknown or uncertain sources, which could include copyrighted or otherwise proprietary, confidential or private information. Further, given the nature of open source software, it may be more likely that third parties might assert copyright and other intellectual property infringement claims against us based on our use of these open source software programs.

Our products and services may become subject to increasing and/or changingevolving regulatory requirements, including changes in tax, benefits, wage and hour, employment, intellectual property, artificial intelligence, data privacy and other domestic and international laws and otherregulations, international and domestic laws, andand, as these requirements proliferate, we may be required to changemodify or adapt our products and services to comply. Changing regulatory requirements mightcould reduce or eliminate the need for some of our products and services, blockdelay usor fromprevent developingthe development or introduction of new products and services or haveadversely an adverse effect onaffect the functionalityfunctionality, andmarketability or acceptance of our solution. This might in turn impose additional costs upon us to comply, modify or further develop our products and services. It might also make introduction of new products and services more costly or more time-consuming than we currently anticipate or prevent introduction of such new products and services. For example, the adoption of new money transmitter or money services business statutes in jurisdictions or changes in regulators’ interpretation of existing state and federal money transmitter or money services business statutes or regulations, could subject us to registration or licensing or limit business activities until we are appropriately licensed. These occurrences could also impact how we conduct some aspects of our business or invest client funds, which could adversely impact interest income from investing client funds. Should any state or federal regulators determine that we have operated as an unlicensed money services business or money transmitter, we could be subject to civil and criminal fines, penalties, costs, legal fees, reputational damage or other negative consequences. Any of these regulatory implementations or changes could have an adverse effect on our business, operating results or financial condition.

Some of our products incorporate new technologies such as AI and machine learning. The abilitydevelopment, deployment, and use of these technologies are subject to provideevolving productslegal, powered by newregulatory, and evolvingindustry technologiesstandards, mustincluding berequirements approachedand inexpectations a principled mannerrelating to navigateprivacy, intellectual property, employment, civil rights, transparency, explainability, and the complexitiesprevention associatedof with the currentbias or futurediscriminatory regulatory requirements as well as social and ethical considerations.outcomes. Additionally, failurefailures or misuse of these technologies by others in our industry, or actions taken by our clients, employees, vendors or other end users (including misuse of these technologies) could negatively affect themarket adoptionacceptance of our solutionssolutions, increase regulatory scrutiny and restrict our ability to continuedevelop toor leveragedeploy novelthese technologies in innovative ways and subject us to reputational harm, regulatory action, or legal liability, which maycould harm our business, financial condition and operating results.

Among the most comprehensive data privacy laws that apply to various aspects of our business are HIPAA (which applies to our benefit administration solution, BeneFLEX, and our self-insured group health plan), the European Union’s General Data Protection Regulation ("GDPR"), and an expanding network of U.S. state privacy lawslaws, such asincluding the California Consumer Privacy Act (“CCPA”)., as amended. Other countries and U.S. states arehave increasinglyadopted, adoptingand continue to adopt, similarly comprehensive laws that impose newnew, and in some cases, overlapping or inconsistent data privacy and protection requirements and restrictions on covered organizations. Importantly, these laws can impose significant penalties and fines for non-compliance, such as a fine of up to 4% of an organization’s worldwide revenue for the preceding year under the GDPR.

In May 2024, we announced that our board of directors approved a share repurchase program, authorizing the purchase of up to $500 million of our issued and outstanding common stock. In AugustJuly 2025,2025 weand announcedApril that2026, our board of directors approved an additional $500 million and $1 billion increases, respectively, to the share repurchase program. The authorization does not obligate us to repurchase any specific dollar amount or number of shares, there is no expiration date for the authorization, and the repurchase program may be modified, suspended or terminated at any time and for any reason. Any future announcement of a termination or suspension of the program, or our decision not to utilize the full authorized repurchase amount under the program, may reduce investor confidence and/or result in a decrease in the market price of our shares.

Our business depends on the overall demand for our software solutions, and on the economic health of our current and prospective clients. As a result, we and our clients are subject to risks arising from adverse changes in economic and market conditions such as lower employment levels, increasing interest rates, inflation, tariffs, changes in trade policies, volatility in capital markets, and instability of the banking environment, among other factors. During an economic slowdown or downturn, clients may reduce their number of employees and delay or reduce their spending on payrollHCM, finance and other HCMIT solutions or renegotiate their contracts with us. This could result in reductions in our revenues and sales of our products, longer sales cycles, increased price competition and clients’ purchasing fewer solutions than they have in the past. Any of these events would likely harm our business, results of operations, financial condition and cash flows from operations.

We are a leading cloud-based provider of human capital management, or HCM, payrollfinance and spend managementIT software solutions that deliver a comprehensive platform for the modern workforce. Our platform offers an intuitive, easy-to-use product suite that helps businesses streamlineautomate and automatestreamline HR, payrollfinance and spend managementIT processes, attract and retain talent, and build culture and connection with theirartificial employees.intelligence We("AI") areembedded expandingdirectly theinto spendeveryday management capabilities of our platform beyond expense managementworkflows to includesave accountstime, payablereduce automation,manual corporate cards,effort, and procurementsupport capabilitiesbetter through the acquisition of Airbase Inc. in October 2024. This integrated platform will enable HR and finance leaders to manage all their spend, including payroll, on a single platform.decision-making.

Effective management of human capitalcapital, finance and business-relatedIT spendoperations is a core function in all organizations and requires a significant commitment of resources. Our cloud-based software solutions, combined with our unified database architecture, are highly flexible and configurable and feature a modern, intuitive user experience. The platform is built on a single employee record with workflows and integrations designed to automate processes across teams and systems. AI, analytics and reporting capabilities are embedded throughout the platform to deliver value with intelligent automation, tailored insights, and real-time guidance to administrators and employees. Our platform also offers automated data integration with hundreds of third-party partner systems, such as 401(k), benefits and insurance provider systems. We plan to continue to invest in research and development efforts that will allow us to offer a broader selection of products to new and existing clients focused on experiences that solve our clients’ challenges.

We also believe that delivering a positive service experience is an essential element of our ability to sell our solutions and retain our clients. We supplement our comprehensive software solutions with an integrated implementation and client service organization, all of which areorganization designed to meet the needs of our clients and sales prospects. We expect to continue to invest in and grow our implementation and client service organization as our client base grows.

Our recurring revenue model and high annual revenue retention rates provide significant visibility into our future operating results and cash flow from operations. This visibility enables us to better manage and invest in our business. Total revenues increased from $1,174.6 million in fiscal 2023 to $1,402.5 million in fiscal 2024, representing a 19% year-over-year increase. Total revenues increased from $1,402.5 million in fiscal 2024 to $1,595.2 million in fiscal 2025, representing a 14% year-over-year increase. DuringTotal revenues increased from $1,595.2 million in fiscal 2025,2025 to $1,771.3 million in fiscal 2026, representing an 11% year-over-year increase. The increase in year-over-year total revenue growth was driven by the strong performance of our sales team and continued annual revenue retention in excess of 92%. Uncertainties around market and economic conditions may impact revenue growth, which we have recently experienced and may continue to experience, through fluctuations in client employee counts, elongated sales cycles, client losses, and a changing interest rate environment, among other factors.

We define Adjusted Gross Profit as gross profit before amortization of capitalized internal-use software costs and certain acquired intangibles, stock-based compensation expense and employer payroll taxes related to stock releases and option exercises and other items as described below. We define Adjusted EBITDA as net income before interest expense, income tax expense (benefit),expense, depreciation and amortization expense, stock-based compensation expense and employer payroll taxes related to stock releases and option exercises and other items as described below.

We generate substantially all of our recurring and other revenue from ongoing subscriptions to our cloud-based software solutions, which are recurring in nature. Recurring fees for each client generally include a base fee in addition to a fee based on the number of client employees and the number of products a client uses. We also charge fees attributable to our preparation of W-2 documents and annual required filings on behalf of our clients. We charge implementation fees for professional services provided to implement our software solutions. Implementations of our solutions typically require one to eight weeks, depending on the size and complexity of each client, at which point the new client’s payroll is first processed using our solution. Our average client size has continued to be over 150 employees.

Cost of revenues consists primarily of employee-related expenses, including wages, stock-based compensation, bonuses and benefits, relatingand costs related to the provision of ongoing client support and implementation activities, payroll tax filing, distribution of printed checks and other materials as well as delivery costs,and computing costs, amortization of certain acquired intangiblesintangible assets and bank fees associated with client fund transfers. Costs related to recurring support are generally expensed as incurred. ImplementationWe capitalize implementation costs related to our proprietary productsproducts. areFor the year ended June 30, 2026 and earlier, such capitalized andcosts were generally amortized over a period of 7 years. At the end of fiscal 2026, we reassessed the expected period of benefit and, effective June 30, 2026, extended the amortization period to 8 years on a prospective basis. This change did not impact Cost of revenues for the fiscal year ended June 30, 2026. Our cost of revenues is expected to increase in absolute dollars for the foreseeable future as we increase our client base. However, we expect to realize cost efficiencies over the long term as our business scales, resulting in improved operating leverage and increased margins.

Sales and marketing expenses consist primarily of employee-related expenses for our direct sales and marketing staff, including wages, commissions, stock-based compensation, bonuses, and benefits, and marketing expenses and other related costs. Our sales personnel earn commissions and bonuses for attainment of certain performance criteria based upon new sales throughout the fiscal year. We capitalize certain selling and commission costs related to new contracts or purchases of additional services by our existing clientsclients. For the year ended June 30, 2026 and earlier, we generally amortizeamortized themthese costs over a period of 7 years. At the end of fiscal 2026, we reassessed the expected period of benefit and, effective June 30, 2026, extended the amortization period to 8 years on a prospective basis. This change did not impact Sales and marketing for the fiscal year ended June 30, 2026.

Interest income on funds held for clients for the year ended June 30, 20252026 increaseddecreased by $2.6$3.5 million, or 2%,3%, to $123.4$120.0 million from $120.8$123.4 million for the year ended June 30, 2024.2025. Interest income on funds held for clients increaseddecreased slightly,slightly as the negative impact from lower interest rates was mostly offset by positive impact from higher average daily balances of funds held for new and existing clients was mostly offset by lower interest rates as compared to the prior fiscal year.

Cost of revenues for the year ended June 30, 20252026 increased by $56.5$47.6 million, or 13%,10%, to $498.2$545.8 million from $441.7$498.2 million for the year ended June 30, 2024.2025. Cost of revenues increased primarily as a result of the continued growth of our business, in particular, $22.1$26.0 million in additional employee-related costs, $14.7 million in increased internal-use software amortization, $12.6$10.7 million in additional processing and delivery related costscosts, and $8.3$10.6 million in increased amortizationinternal-use ofsoftware certain acquired intangible assets.amortization. Gross profit margin was 69% for both years ended June 30, 20242025 and 2025.2026.

Sales and marketing expenses for the year ended June 30, 20252026 increased by $39.3$19.7 million, or 12%,5%, to $374.2$393.9 million from $335.0$374.2 million for the year ended June 30, 2024.2025. The increase in sales and marketing expense was primarily due to $36.8$20.5 million of additional employee-related costs, includingpartially thoseoffset incurredby to$3.7 expandmillion ourin saleslower team.stock-based compensation expense.

Research and development expenses for the year ended June 30, 20252026 increased by $27.5$15.5 million, or 15%,8%, to $205.9$221.4 million from $178.3$205.9 million for the year ended June 30, 2024.2025. The increase in research and development expenses was primarily due to $25.7$16.3 million of additional employee-related costs related to additional development personnel.personnel, net of capitalized internal-use software costs, partially offset by $5.2 million in lower stock-based compensation expense.

General and administrative expenses for the year ended June 30, 20252026 increased by $25.5$11.3 million, or 14%,5%, to $212.9$224.2 million from $187.4$212.9 million for the year ended June 30, 2024.2025. The increase in general and administrative expenses was primarily due to $14.3$6.8 million ofin additional employee-relatedstock-based costscompensation andexpense aas $4.3 million gain relatedcompared to leasethe exitprior activityfiscal year, largely driven by executive award forfeitures during the year ended June 30, 2024.2025 and $6.5 million in additional employee-related costs.

Other income for the year ended June 30, 20252026 decreased by $11.9$3.7 million as compared to the year ended June 30, 2024.2025. The change in other income was primarily due to $12.3an $11.7 million reduction in additionalinterest earned on our cash and cash equivalents from lower average balances and lower interest rates, partially offset by a $7.2 million decrease in interest expense relateddue to less borrowings under our revolving credit facility.

Our effective tax rates were 25.4%26.5% and 26.5%30.4% for the years ended June 30, 20242025 and 2025,2026, respectively. Our effective tax ratesrate for the yearsyear ended June 30, 2024 and 2025 werewas higher than the federal statutory rate of 21% primarily due to state and local income taxes. Our effective tax rate for the year ended June 30, 2026 was higher than the federal statutory rate of 21% primarily due to stock-based compensation shortfalls and state and local income taxes.

We include the results of businesses acquired in our consolidated financial statements from the date of acquisition. We allocate the purchase price consideration associated with our acquisitions to the fair values of assets acquired and liabilities assumed at their respective acquisition dates, with the excess recorded to goodwill. The purchase price allocations require us to make significant judgments and estimates in determining such fair values, particularly related to the proprietary technology intangible asset. Such estimates used in valuation methodologies can include, but are not limited to, forecasted revenue growth rates, royalty rates, technology migration ratesrates, and required rate of return. These estimates are inherently uncertain and may be refined over the measurement period. Adjustments to the fair values of assets acquired and liabilities assumed may be recorded during the measurement period, which may be up to one year from the acquisition date, with the corresponding offset to goodwill.

Our primary liquidity needs are related to the funding of general business requirements, including working capital requirements, research and development, and capital expenditures. As of June 30, 2025,2026, our principal sources of liquidity were $398.1$271.9 million of cash and cash equivalents. We maintain a credit agreement which provides for a $550.0 million revolving credit facility which may be increased up to $825.0 million. No amounts were drawn on the revolving credit facility as of June 30, 2024. In September 2024, we borrowed $325.0 million under this credit facility to fund the October 2024 acquisition of Airbase Inc. We had $162.5$81.3 million in outstanding borrowings under this credit facility at June 30, 2025,2026, as we repaid $162.5 million duringin the second half of fiscal 2025.2025 and an additional $81.3 million in fiscal 2026. Refer to Notes 7 and 12 of the Notes to the Consolidated Financial Statements included in Part II, Item 8: “Financial Statements and Supplementary Data” for additional details on the Airbase acquisition and credit agreement, respectively.

In April 2024, our board of directors authorized the repurchase of up to $500 million of our common stock (the “Repurchase Program”). In July 2025 and April 2026, our board of directors approved $500 million and $1 billion increases, respectively, to the Repurchase Program. The extent to which we repurchase shares, the number and price of any shares repurchased and the timing of any repurchases depends on the market price of our common stock, trading volume, general market conditions and other corporate and economic considerations. During fiscal 2024, we repurchased an aggregate of 1.1 million shares for approximately $150.0 million at an average cost per share of $142.82 under the Repurchase Program. During fiscal 2025, we repurchased 0.8 million shares for approximately $149.6 million at an average cost per share of $190.16 under the Repurchase Program. InDuring Julyfiscal 2025,2026, ourwe boardrepurchased 2.8 million shares for approximately $398.1 million at an average cost per share of directors authorized an additional $500 million of our common stock for repurchase$144.67 under the Repurchase Program. Refer to NotesNote 15 and 20 of the Notes to the Consolidated Financial Statements included in Part II, Item 8: “Financial Statements and Supplementary Data” for additional detail on our Repurchase Program.

In order to grow our business, we intend to increase our personnel and related expenses and to make investments in our platform, data centers and general infrastructure, some of which may be significant.infrastructure. The timing and amount of these investments will vary based on our financial condition, the rate at which we add new clients and new personnel and the scale of our module development, data centers and other activities. Many of these investments will occur in advance of experiencing any direct benefit from them, which could negatively impact our liquidity and cash flows during any particular period and may make it difficult to determine if we are effectively allocating our resources. However, we expect to fund our operations, capital expenditures, acquisitions, share repurchases and other investments principally with cash flows from operations, and to the extent that our liquidity needs exceed our cash from operations, we would look to our cash on hand or utilize the remaining borrowing capacity under our credit facility to satisfy those needs.

Our payroll and spend management processing activities involve the movement of significant funds from accounts of clients to their employees, relevant taxing authorities and vendors. Funds held for clients and client fund obligations will vary substantially from period to period mostly as a result of the timing of payroll and payroll tax obligations due. Though we debit a client’s account prior to any disbursement on its behalf, there is a delay between when our payments are due and when the incoming funds from the client to cover these amounts payable actually clear into our operating accounts. We currently have agreements with various major U.S. banks to execute ACH and wire transfers to support our services. We believe we have sufficient capacity under these ACH arrangements to handle all transaction volumes for the foreseeable future. We primarily collect fees for our HCM and payroll services via ACH transactions at the same time we debit the client’s account for payroll and payroll tax obligations and thus are able to reduce collectability and accounts receivable risks.

The change in net cash provided by operating activities from fiscal 20242025 to fiscal 20252026 was primarily due to improved operating results after adjusting for non-cash items including stock-based compensation expense, depreciation and amortization expense and deferred income tax expense during(benefit) and lower income tax payments resulting from the yearprovisions ended June 30, 2025 as compared toof the yearOne endedBig JuneBeautiful 30,Bill 2024.Act, partially offset by changes in operating assets and liabilities over the same period.

The change in net cash used in investing activities from fiscal 20242025 to fiscal 20252026 was primarily due to $265.8a $228.7 million reduction in additional amounts paid for acquisitions, net of cash acquired, associated with the fiscal 2025 acquisition of Airbase. It was also attributable to $134.4a $112.0 million increase in less proceeds from sales and maturities of available-for-sale securities, partially offset by $43.5a million$23.1 increase in less purchases of available-for-saleproperty securitiesand equipment as compared to the year ended June 30, 2024.2025.

Net cash provided by (used in) financing activities was $(1,434.7)$141.6 million, $141.6$(325.8) million and $(325.8)$9.0 million for the years ended June 30, 2023,2024, 20242025 and 2025,2026, respectively. The change in net cash provided by (used in) financing activities from fiscal 20242025 to fiscal 20252026 was primarily due to the net change in client fund obligations of $623.0$812.1 million due to the timing of client funds collected and related remittance of those funds to client employees, taxing and other regulatory authorities and vendors and an $81.3 million increase in credit facility repayments during the year ended June 30, 2025 as compared to the yearcurrent endedyear. June 30, 2024. The change in client fund obligationsThis was partially offset by $162.5$325.0 million in net borrowings onunder our credit facility as we borrowed $325.0 million in September 2024related to acquirethe acquisition of Airbase of which we repaid $162.5 millionInc. during the year ended June 30, 2025.2025 and $248.5 in additional share repurchases during the year ended June 30, 2026.

At June 30, 2025,2026, our principal commitments consist of $162.5$81.3 million in borrowings onunder our revolving credit facility, which is contractually not due in the next twelve months, and related interest payments, as well as $64.6$59.6 million in operating lease obligations, of which $11.0$11.7 million is due in the next twelve months. Refer to Note 13 of the Notes to the Consolidated Financial Statements included in Part II, Item 8: “Financial Statements and Supplementary Data” for additional details on our lease activity. We also have $95.5$140.6 million in purchase obligations, of which $57.6$85.8 million is due in the next twelve months.

We are a leading cloud-based provider of HR, finance and IT software solutions that deliver a comprehensive platform for the modern workforce. Our platform offers an intuitive, easy-to-use product suite that helps businesses automate and streamline HR, finance and IT processes, attract and retain talent, and build culture and connection - with theirartificial employees.intelligence We("AI") areembedded expandingdirectly theinto spendeveryday management capabilities of our platform beyond expense managementworkflows to includesave accountstime, payablereduce automation,manual corporate cards,effort, and procurementsupport capabilitiesbetter through the acquisition of Airbase Inc. in October 2024. This integrated platform will enable HR and finance leaders to manage all their spend, including payroll, on a single platform.decisions.

Our recurring revenue model and high annual revenue retention rates provide significant visibility into our future operating results and cash flow from operations. This visibility enables us to better manage and invest in our business. Total revenues increased from $377.0$454.5 million for the three months ended DecemberMarch 31, 20242025 to $416.1$502.3 million for the three months ended DecemberMarch 31, 2025,2026, representing aan 10%11% year-over-year increase. Total revenues increased from $739.9$1,194.5 million for the sixnine months ended DecemberMarch 31, 20242025 to $824.3$1,326.6 million for the sixnine months ended DecemberMarch 31, 2025,2026, representing an 11% year-over-year increase. The increase in year-over-year revenue growth was driven by the strong performance by our sales team. Uncertainties around market and economic conditions may impact revenue growth, which we have recently experienced and may continue to experience, through fluctuations in client employee counts, elongated sales cycles, client losses, and a changing interest rate environment, among other factors.

The number of client employees on our platform and the mix of products purchased by a client as well as the timing of services provided with respect to those client employees can vary each period. As such, the number of client employees on our system is not necessarily a good indicator of our financial results in any given period. Recurring and other revenue accounted for 92%93% and 93%94% of our total revenues for the three months ended DecemberMarch 31, 20242025 and 2025,2026, respectively, and 92% and 93% of our total revenues for the sixnine months ended DecemberMarch 31, 20242025 and 2025,2026, respectively.

We also capitalize a portion of our internal-use software costs, which are then primarily amortized as Cost of revenues. We amortized $14.8$15.2 million and $17.7$17.2 million of capitalized internal-use software costs during the three months ended DecemberMarch 31, 20242025 and 2025,2026, respectively, and $28.6$43.9 million and $35.0$52.2 million of capitalized internal-use software costs for the sixnine months ended DecemberMarch 31, 20242025 and 2025,2026, respectively.

We capitalize a portion of our development costs related to internal-use software. The timing of our capitalized development projects may affect the amount of development costs expensed in any given period. The table below sets forth the amounts of capitalized and expensed research and development expenses for the three and sixnine months ended DecemberMarch 31, 20242025 and 2025.2026.

Comparison of Three Months Ended DecemberMarch 31, 20242025 and 20252026

Recurring and other revenue for the three months ended DecemberMarch 31, 20252026 increased by $39.3$48.8 million, or 11%,12%, to $387.0$469.9 million from $347.7$421.1 million for the three months ended DecemberMarch 31, 2024.2025. Recurring and other revenue increased primarily as a result of incremental revenues from new and existing clients due to the strong performance by our sales team.

Interest income on funds held for clients for the three months ended DecemberMarch 31, 20252026 wasdecreased flatby $1.1 million, or 3%, as compared to the three months ended DecemberMarch 31, 2024.2025. The slight decrease in Interest income on funds held for clients decreasedwas slightlythe asresult of the negative impact from lower interest rates wasrates, mostly offset by positive impact from higher average daily balances of funds held for new and existing clients as compared to the prior fiscal year.

Cost of revenues for the three months ended DecemberMarch 31, 20252026 increased by $9.5$9.2 million, or 8%,7%, to $134.0$139.1 million from $124.5$129.9 million for the three months ended DecemberMarch 31, 2024.2025. Cost of revenues increased primarily as a result of the continued growth of our business, in particular, $5.9$4.4 million in additional employee-related costs, $2.9$4.2 million in additional processing and delivery-related costs and $2.0 million in additional amortization of internal-use software and $1.5 million in additional processing and delivery related costs.software. Gross margin increased from 67%71% for the three months ended DecemberMarch 31, 20242025 to 68%72% for the three months ended DecemberMarch 31, 2025.2026.

Sales and marketing expenses for the three months ended DecemberMarch 31, 20252026 increased by $4.9$4.0 million, or 5%,4%, to $98.1$95.7 million from $93.1$91.8 million for the three months ended DecemberMarch 31, 2024.2025. The increase in sales and marketing expense was primarily due to $4.9$4.3 million of additional employee-related costs, including those incurred to expand our sales team.costs.

Research and development expenses for the three months ended DecemberMarch 31, 20252026 increased by $1.6$1.1 million, or 3%,2%, to $57.7$52.5 million from $56.2$51.4 million for the three months ended DecemberMarch 31, 2024.2025. The increase in research and development expenses was primarily due to $2.4$2.6 million of additional employee-related costs related to additional development personnel, net of capitalized internal-use software costs, partially offset by $1.5$1.8 million in lower stock-based compensation expense.

General and administrative expenses for the three months ended DecemberMarch 31, 20252026 decreasedincreased by $0.6$3.5 million, or 1%,6%, to $55.9$58.0 million from $56.5$54.5 million for the three months ended DecemberMarch 31, 2024.2025. General and administrative expenses decreasedincreased primarilylargely due to lower$1.6 acquisition-related costs and other non-recurring items partially offset by an increasemillion in stock-basedadditional compensationemployee-related expense.costs.

Other income (expense) for the three months ended DecemberMarch 31, 20252026 decreaseddid bynot $0.4materially millionchange as compared to the three months ended DecemberMarch 31, 2024.2025. The change in other income (expense) was primarily due to a $3.9$3.6 million reduction in interest earned on our cash and cash equivalents from lower average balances,balances and lower interest rates, partially offset by a $3.6$3.3 million decrease in interest expense related to less borrowings under our revolving credit facility.

Our effective tax rate was 20.0%27.7% and 28.5%29.2% for the three months ended DecemberMarch 31, 20242025 and 2025,2026, respectively. Our effective tax rate for the three months ended DecemberMarch 31, 20242025 was lowerhigher than the federal statutory rate of 21% primarily due to excessan taxincrease benefitto fromnon-deductible stock-based compensation.compensation under Internal Revenue Code Section 162(m) and state and local income taxes. Our effective tax rate for the three months ended DecemberMarch 31, 20252026 was higher than the federal statutory rate of 21% primarily due to stock-based compensation shortfalls realized and state and local income taxes.

Comparison of SixNine Months Ended DecemberMarch 31, 20242025 and 20252026

Recurring and other revenue for the sixnine months ended DecemberMarch 31, 20252026 increased by $85.0$133.9 million, or 12%, to $765.8$1,235.8 million from $680.8$1,101.9 million for the sixnine months ended DecemberMarch 31, 2024.2025. Recurring and other revenue increased primarily as a result of incremental revenues from new and existing clients due to the strong performance by our sales team.

Interest income on funds held for clients for the sixnine months ended DecemberMarch 31, 20252026 decreased by $0.6$1.7 million, or 1%,2%, to $58.5$90.8 million from $59.1$92.6 million for the sixnine months ended DecemberMarch 31, 2024.2025. Interest income on funds held for clients decreased slightly,slightly as the negative impact from lower interest rates was mostly offset by positive impact from higher average daily balances of funds held for new and existing clients as compared to the prior fiscal year.

Cost of revenues for the sixnine months ended DecemberMarch 31, 20252026 increased by $22.9$32.1 million, or 10%,9%, to $262.4$401.5 million from $239.5$369.4 million for the sixnine months ended DecemberMarch 31, 2024.2025. Cost of revenues increased primarily as a result of the continued growth of our business, in particular, $12.3$16.6 million in additional employee-related costs, $6.3$8.3 million in additional amortization of internal-use software,software $3.0and $7.2 million in additional processing and deliverydelivery-related related costs and $2.3 million in additional amortization of certain intangible assets.costs. Gross margin remainedincreased consistentfrom at 68%69% for both the sixnine months ended DecemberMarch 31, 20242025 andto 2025.70% for the nine months ended March 31, 2026.

Sales and marketing expenses for the sixnine months ended DecemberMarch 31, 20252026 increased by $12.9$16.8 million, or 7%,6%, to $194.4$290.2 million from $181.6$273.3 million for the sixnine months ended DecemberMarch 31, 2024.2025. The increase in sales and marketing expense was primarily due to $11.6$15.9 million of additional employee-related costs, including those incurred to expand our sales team.costs.

Research and development expenses for the sixnine months ended DecemberMarch 31, 20252026 increased by $9.9$11.1 million, or 10%,7%, to $113.3$165.9 million from $103.4$154.8 million for the sixnine months ended DecemberMarch 31, 2024.2025. The increase in research and development expenses was primarily due to $10.1$12.7 million of additional employee-related costs related to additional development personnel, net of capitalized internal-use software costs, partially offset by $2.0$3.8 million in lower stock-based compensation expense.

General and administrative expenses for the sixnine months ended DecemberMarch 31, 20252026 increased by $4.9$8.3 million, or 5%, to $109.5$167.5 million from $104.7$159.2 million for the sixnine months ended DecemberMarch 31, 2024.2025. General and administrative expenses increased primarily due to $7.0$6.9 million in additional stock-based compensation expense as compared to the prior fiscal year period, largely driven by executive award forfeitures during the sixnine months ended DecemberMarch 31, 20242025, and $3.6$5.2 million in additional employee-related costs during the sixnine months ended DecemberMarch 31, 2025,2026, partially offset by a $2.3 million decrease in acquisition-related costs and other non-recurring items.

Other income for the sixnine months ended DecemberMarch 31, 20252026 decreased by $4.4$3.9 million as compared to the sixnine months ended DecemberMarch 31, 2024.2025. The change in other income was primarily due to $5.9a $9.5 million reduction in interest earned on our cash and cash equivalents from lower average balances,balances and lower interest rates, partially offset by a $1.7$5.0 million decrease in interest expense relateddue to less borrowings under our revolving credit facility.

Our effective tax rate was 24.8%26.3% and 32.3%30.7% for the sixnine months ended DecemberMarch 31, 20242025 and 2025,2026, respectively. Our effective tax rate for the sixnine months ended DecemberMarch 31, 20242025 was higher than the federal statutory rate of 21% primarily due to state and local income taxes. Our effective tax rate for the sixnine months ended DecemberMarch 31, 20252026 was higher than the federal statutory rate of 21% primarily due to stock-based compensation shortfalls realized, state and local income taxes and an increase to the valuation allowance as explained below.

On July 4, 2025, the "One Big Beautiful Bill Act" (the "Act") was enacted into law. The most significant provision applicable to us relates to accelerated tax deductions for qualified property and research expenditures. As a result of this provision, deferred tax assets and liabilities and income tax payables and receivables were impacted starting in fiscal 2026 and we expect cash tax benefits due to lower cash tax payments throughout fiscal 2026. Furthermore, we evaluated the impacts of the Act on certain state tax attributes and determined that a valuation allowance was needed to reflect the realizability of those assets based on current federal and state law as of DecemberMarch 31, 2025.2026.

Our primary liquidity needs are related to the funding of general business requirements, including working capital requirements, research and development, and capital expenditures. As of DecemberMarch 31, 2025,2026, our principal source of liquidity was $162.5$299.7 million of cash and cash equivalents. We maintain a credit agreement that provides for a $550.0 million revolving credit facility, which may be increased up to $825.0 million. During fiscal 2025, we borrowed $325.0 million under this credit facility to fund the October 2024 acquisition of Airbase Inc. We had $81.3 million in outstanding borrowings under this credit facility at DecemberMarch 31, 2025,2026, as we repaid $162.5 million in the second half of fiscal 2025 and an additional $81.3 million during the first halfnine months of fiscal 2026. Refer to Notes 4 and 8 of the Notes to the Unaudited Consolidated Financial Statements for additional details on the Airbase acquisition and credit agreement, respectively.

In April 2024, our board of directors authorized the repurchase of up to $500.0 million of our common stock (the "Repurchase Program"). In July 2025, our board of directors approved a $500.0 million increase to the Repurchase Program. The extent to which we repurchase shares, the number and price of any shares repurchased and the timing of any repurchases depends on the market price of our common stock, trading volume, general market conditions and other corporate and economic considerations. During the sixnine months ended DecemberMarch 31, 2025,2026, we repurchased an aggregate of 1.82.3 million shares for approximately $300.0$350.0 million at an average cost per share of $162.66$153.10 under the Repurchase Program. As of March 31, 2026, approximately $350.4 million remains authorized for repurchases under the Repurchase Program. In April 2026, our board of directors authorized an additional $1 billion of our common stock for repurchase under the Repurchase Program. Refer to Note 14 of the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1: “Financial Statements” for additional detail on our Repurchase Program.

We may invest portions of our excess cash and cash equivalents in highly liquid, investment-grade marketable securities. These investments may consist of commercial paper, corporate bonds, asset-backed securities, certificates of deposit, U.S. treasury securities, and other securities with credit quality ratings of A-1 or higher as well as in money market funds. As of DecemberMarch 31, 2025,2026, we did not have any corporate investments classified as available-for-sale securities.

Net cash provided by operating activities was $145.7$331.7 million and $203.5$421.4 million for the sixnine months ended DecemberMarch 31, 20242025 and 2025,2026, respectively. The change in net cash provided by operating activities from the sixnine months ended DecemberMarch 31, 20242025 to the sixnine months ended DecemberMarch 31, 20252026 was primarily driven by improved operating results after adjusting for non-cash items, including stock-based compensation expense, depreciation and amortization expense and deferred income tax expense (benefit) and lower income tax payments resulting from the provisions of the One Big Beautiful Bill Act, partially offset by changes in operating assets and liabilities over the same period.

Net cash used in investing activities was $301.0$328.5 million and $27.5$53.7 million for the sixnine months ended DecemberMarch 31, 20242025 and 2025,2026, respectively. The net cash used in investing activities is significantly impacted by the timing of purchases and sales and maturities of investments as we invest portions of funds held for clients in highly liquid, investment-grade marketable securities. The amount of funds held for clients invested will vary based on timing of client funds collected and payments due to client employees and taxing and other regulatory authorities.

The change in net cash used in investing activities was primarily due to $278.0$277.9 million paid for the acquisition of Airbase Inc., net of cash and funds held for clients acquired during the sixnine months ended DecemberMarch 31, 2024.2025. The change was also due to a $46.4$145.7 million increase in proceeds from the sales and maturities of available-for-sale securities, partially offset by a $49.2$138.2 million increase in purchases of available-for-sale securitiessecurities, during the sixnine months ended DecemberMarch 31, 20252026 as compared to the sixnine months ended DecemberMarch 31, 2024.2025.

Net cash provided by financing activities was $835.5$543.6 million and $2,403.7$680.5 million for the sixnine months ended DecemberMarch 31, 20242025 and 2025,2026, respectively. The change in net cash provided by financing activities was primarily due to the net change in client fund obligations of $2,259.0$709.2 million due to the timing of client funds collected and related remittance of those funds to client employees and taxing authorities. This was partially offset by $325.0 million in borrowings under our credit facility during the sixnine months ended DecemberMarch 31, 20242025 and $291.6$258.9 million in additional share repurchases and $81.3 million repayment of amounts borrowed on our credit facility during the sixnine months ended DecemberMarch 31, 2025.2026.

At DecemberMarch 31, 2025,2026, our principal commitments consisted of $81.3 million in borrowings on our revolving credit facility, which is contractually not due in the next twelve months, and related interest payments, as well as $60.5$61.8 million in operating lease obligations, of which $10.5$11.1 million is due in the next twelve months. We also had $143.2$139.6 million in purchase obligations, of which $73.8$76.2 million is due in the next twelve months.

We expect to continue to invest in capital spending as we continue to grow our business and expand and enhance our operating facilities, data centers and technical infrastructure. Future capital requirements will depend on many factors, including our rate of sales growth. In the event that our sales growth or other factors do not meet our expectations, we may eliminate or curtail capital projects in order to mitigate the impact on our use of cash. Capital expenditures were $5.3$7.6 million and $7.2$15.5 million for the sixnine months ended DecemberMarch 31, 20242025 and 2025,2026, respectively, exclusive of capitalized internal-use software costs of $29.6$45.6 million and $31.4$49.1 million for the same periods, respectively.