Automatic Data Processing, Inc. (ADP) Earnings

Management highlights

• AI Strategy and Product Innovation - ADP positions itself as a trusted leader for AI-powered HCM, noting AI increases workforce and regulatory complexity that plays to ADP's core strengths in compliance, accuracy, and scale. ADP's AI is embedded into core HR and payroll processes, grounded in regulatory logic, operational data, and decades of expertise, beyond surface-level automation. - Launched ADP Assist agentic AI tools in January 2026, which have delivered measurable efficiency gains: ADP Assist payroll agents save an average of 30 minutes per payroll, tax registration agents help clients avoid late filing penalties, and Smart Action Search reduces time spent on common HR actions by ~80%. ADP Lyric HCM has delivered significant client workflow improvements, including reducing recruiting steps from 23 to 8 and enabling a 71% leaner payroll operations model for enterprise clients. - Expanded the agentic AI ecosystem in March 2026 via the ADP Marketplace, adding a dedicated curated space for third-party AI agents aligned with ADP's safe and responsible AI principles. ADP was ranked #1 in HR on Fast Company's Most Innovative Companies list. • Competitive and Structural Advantages - Data: ADP has a 77-year workforce data foundation, paying 1 in 6 U.S. workers, moving $3.3 trillion annually in the U.S., and capturing data for 1.1 million global clients and 42 million workers, creating a compounding advantage for AI and data capabilities. - Domain Expertise: Decades of hands-on experience across all company sizes and regulatory environments is built into product architecture. 20% of the total service population is now on ADP's GenAI-enabled Zone service platform, with full utilization at SPS and Wisely teams, targeting 40% coverage by the end of fiscal 2026. More than 200 new U.S. HR compliance laws have been enacted in 2026 alone, and ADP's ability to operationalize regulatory change drives strong client retention. - Brand Trust: ADP's decades-long track record of reliable delivery through disruption makes it a trusted partner for mission-critical HCM, with trust becoming even more critical in the AI era. ADP is committed to ethical, responsible AI development. • Global Scale - ADP serves clients across 140 countries, with a hard-to-replicate final mile ecosystem connecting to tens of thousands of global government entities, tax authorities, and banking institutions. Recent large client wins include a 30-country enterprise payroll transformation project, reflecting demand for ADP's complex global compliance capabilities. Retention rates and client satisfaction reached new Q3 records, with broad-based strength across international, compliance, enterprise, small business, and retirement services segments.

Guidance

- **Fiscal 2026 Consolidated Guidance**: Raised consolidated revenue growth guidance to 6% to 7% (up from prior range). Increased adjusted EBIT margin expansion guidance to 70 to 80 basis points. Raised adjusted EPS growth guidance to 10% to 11%, supported by ongoing share repurchases. Full-year effective tax rate guidance of ~23% remains unchanged. - **Employer Services Guidance**: Maintained full-year new business bookings growth guidance of 4% to 7%. Improved full-year ES retention guidance by 10 basis points to a range of flat to down 20 basis points. Reaffirmed full-year pays per control growth forecast of ~1%. Increased average client funds balance growth forecast to ~6%, maintained expected average portfolio yield of ~3.4%. Raised the midpoint of full-year client funds interest revenue forecast by $25 million to a $1.34 to $1.35 billion range. Raised full-year ES revenue growth guidance to 6% to 7%. - **PEO Guidance**: Increased full-year PEO revenue growth guidance to 6% to 7%, and raised PEO revenue excluding zero margin pass-throughs growth guidance to 4% to 5%. Reaffirmed full-year average worksite employee growth forecast of ~2%. - **Pricing Contribution**: Updated expected price contribution to full-year growth to ~130 basis points, up from the prior target of 100 basis points. - **Fiscal 2027 Early Outlook**: Management expects to continue accelerating margin expansion as AI productivity benefits scale. Client funds portfolio tailwinds are expected to continue, with reinvestment rates above maturing security yields, leading to higher overall portfolio yields than fiscal 2026. Share repurchases are expected to continue at or above current elevated levels for the remainder of fiscal 2026 and throughout fiscal 2027 (absent major market changes), in addition to ongoing dividend growth and business investment.

Segment performance

1. Employer Services (ES): Q3 revenue increased 7% on a reported basis and 5% on an organic constant currency basis, with favorable foreign exchange contributing approximately 2 percentage points of growth. ES pays per control growth remained at 1% for the quarter. Client funds interest revenue grew more than anticipated, driven by 9% growth in average client funds balances. ES margins increased 130 basis points year-over-year, supported by operational productivity improvements and client funds interest revenue growth. The ES segment accounts for the majority of ADP's consolidated revenue. 2. Professional Employer Organization (PEO): Total PEO revenue increased 7% in Q3, while PEO revenue excluding zero margin pass-throughs grew 5%. Average worksite employee growth held at 2% for the quarter. Stronger new business bookings offset continued softening in PEO pays-per-control growth. PEO margins decreased 120 basis points in Q3, driven by zero-margin pass-through growth, higher SUI costs, and higher selling expenses.

Risks & headwinds

- Macroeconomic uncertainty creates a range of possible new business bookings outcomes heading into the typically important fourth quarter, with results still dependent on end-of-period execution. - AI-driven shifts in work and workforce composition could impact seat-based revenue models if overall employment levels decline, though management notes workforce management complexity still increases even as work processes change. - Continued regulatory fragmentation across jurisdictions increases operational complexity, though this dynamic also drives client demand for ADP's compliance services. - Competitive intensity remains normal but elevated in the bookings-heavy back half of the fiscal year, with ongoing pressure from existing competitors and new AI-native entrants in the HCM space. - Foreign exchange tailwinds that boosted Q3 results are expected to moderate in Q4, creating a modest headwind to reported revenue growth relative to Q3.

Analyst Q&A

• Q: The analyst asks how to interpret implied Q4 guidance for FY27 planning, and asks for details on how the record Q3 ES retention was distributed across segments. /

  A: Management notes they maintain a guidance range rather than a precise point estimate, and remain confident in their full-year trajectory heading into Q4. FX tailwinds that added ~1.5 points to Q3 ES growth will moderate in Q4, reducing the revenue tailwind but slightly improving margin profile. Management states the Q3 retention gain was broad-based, with notable strength across international compliance, enterprise, small business, and retirement services, which hit a new quarterly record. The result reflects product and service investments that align with client needs.

• Q: The analyst asks for an update on Q3 bookings, strong areas of performance, the mix of new logos vs upsells, and how AI is driving efficiency in R&D and product development despite flattish reported R&D costs. /

  A: Management says Q3 bookings built on first-half momentum, with particular strength in international, compliance solutions, and small business insurance/retirement services. Pipelines are solid with 8,500 sellers ready to execute in Q4, but the 4-7% full-year guidance range remains appropriate as there is still much work to close end-of-year deals. The 50/50 split between new logos and upsell/additional business remains unchanged. Management notes sequential R&D cost movements can reflect accounting treatment (capitalization/amortization) rather than actual investment levels: R&D spending has been reallocated to AI initiatives, and AI is already driving large efficiency gains, including a 35% reduction in calls and labor for India year-end tax validation. Some AI investment is carried in operating expenses for the Zone service platform rollout.

• Q: The analyst asks for an update on Lyric HCM traction, if its unique architecture opens new addressable markets, how common the best-of-breed payroll/compliance layer use case is alongside existing HCM platforms, and how ADP will scale implementation capacity as bookings grow. /

  A: Management reports strong year-to-date pipeline growth and execution for Lyric, with growing client and market momentum driven by its flexible, dynamic architecture that supports modern work models better than legacy platforms. Lyric enables new use cases and market conversations, particularly when paired with global time capabilities from the Workforce Software acquisition, and it is gaining traction as a best-of-breed layer alongside existing platforms, expanding ADP's addressable market. To scale implementation capacity, ADP is both investing in internal scaling and deepening partnerships with global and mid-tier system integrators, building on existing relationships from the Workforce Software acquisition to support larger enterprise deployments.

• Q: The analyst asks what drivers explain the upward guidance revision, and if there has been any change in competitive intensity from new AI-native competitors. /

  A: Management says the upward revision reflects strong Q3 performance, higher than expected client funds balance growth, better than expected retention, stronger than projected price contribution (now expected to add 130 basis points to growth, up from 100 basis points), and solid underlying growth in both segments. FX contribution will be lower in Q4 than in Q3. Management notes competitive intensity is normal for the back half of the year, with no material change from recent levels. There is no notable increase in pressure from new entrants, and ADP's strengths in trust, compliance accuracy, scale, and distribution keep it well-positioned against competition.