AUTOMATIC DATA PROCESSING INC Q2 FY2025 earnings call

Maria Black mentioned ADP's 50th consecutive year of dividend increase, a strategic partnership with Fiserv for small-business solutions (including Clover and CashFlow Central integration with ADP's Run), progress of the WorkForce Software acquisition which is progressing well and seeing new business activity, and strong interest in ADP Lyric with new business booking volumes increasing. Don McGuire provided details on Employer Services and PEO results, reaffirmed the fiscal 2025 outlook for consolidated revenue growth, adjusted EBIT margin expansion, and adjusted EPS growth, and discussed cadence matters such as expected deceleration in ES and total revenue growth in Q3 followed by reacceleration in Q4, and lower adjusted EBIT margin expansion and adjusted EPS growth in Q3 than in Q4 due to integration expenses from the WorkForce Software acquisition.

Employer Services: In the second quarter, revenue saw an 8% increase on a reported basis and 7% on an organic constant-currency basis. New business bookings were solid with growth across various segments like HR outsourcing, compliance, enterprise, and small-business offerings. Retention declined slightly compared to the prior year but still modestly exceeded expectations. Pays per control increased 1% in Q2, decelerating from the 2% growth in Q1. For the full year, Employer Services revenue growth is guided to be in the range of 6% to 7%, with margin expected to increase by 40 to 60 basis points. PEO: Revenue growth was 8%, driven by strong new business bookings and faster zero margin pass-through growth. Average worksite employee growth was 3%, slightly exceeding expectations. For the full year, PEO revenue growth is guided to be in the range of 5% to 6%, with margin expected to decrease by 70 to 90 basis points.

Maintained fiscal 2025 consolidated revenue growth guidance of 6% to 7% and adjusted EBIT margin expansion of 30 to 50 basis points. Adjusted EPS growth forecast remains at 7% to 9%. Anticipates deceleration in ES and total revenue growth in Q3, then reacceleration in Q4. Adjusted EBIT margin expansion and adjusted EPS growth are expected to be lower in Q3 than in Q4 due to lower revenue growth and integration expenses related to the WorkForce Software acquisition.

Q: Regarding the Fiserv partnership, can you elaborate on the referrals, co-development, and revenue share?

A: Initially, it's a referral relationship, and they are working on integrating the products long-term, with both referral and potential revenue-share elements.

Q: On the enterprise side of Lyric, is there a clear inflection point?

A: Lyric is resonating well in the marketplace, with a strong pipeline building, and is expected to contribute to growth this year from a new business bookings perspective though it's early days.

Q: What are the drivers of the slower pace per control growth in PEO?

A: SUI timing and pace per control growth.

Q: How has the M&A environment changed in your view?

A: Views on M&A haven't changed, still looking for tuck-ins that complement offerings.

Q: Can you update on AI and ML initiatives?

A: Focused on ADP Assist (putting GenAI in products), Agent Assist (putting GenAI in service organization), and sales modernization with productivity improvements.

Q: How do the economics work in the Fiserv partnership?

A: There are referral elements and over time, there is a revenue-share aspect.

Q: What's the outlook for the pricing environment?

A: The competitive environment is the same, targeting a 100 basis points price increase.

Q: How are bookings timing and deal sizes?

A: Consistent with pre-pandemic, deal sizes and timing are consistent, and it's a back-half business.

Q: Have you seen any changes in PEO benefits enrollment?

A: No significant changes seen.

Q: What about deal awards and the shape of the pipeline?

A: Deals move through motions similarly to pre-pandemic, with large deals sometimes lumpy.

Q: What's your view on the adjacency of B2B payments?

A: Thinking about strategic partnerships in this area.

Q: What's the reasoning for the reacceleration in Q4 vs Q3?

A: Client funds interest and integration expense factors.

Q: What's the seasonality of retention?

A: Seasonal dips occur, but retention is still good.

Q: What's the outlook for pricing in the next couple of years?

A: Difficult to speculate, but will pass costs if needed.

Q: On the PEO pace per control, is it in specific pockets?

A: Broad-based, no specific pockets.

Q: On hiring slowdown, is it a trend?

A: Macro environment is strong, fundamentals are good, so hiring slowdown is not a major concern