Automatic Data Processing, Inc. Q1 FY2026 earnings call

Management Statement and Operational Highlights

• Financial Results and Highlights: Reported 7% revenue growth and 7% adjusted EPS growth. Delivered solid Employer Services new business bookings with growth accelerating, healthy growth in small business portfolio, reacceleration in Employer Services HR Outsourcing business, stable HCM demand with specific strength in ADP Lyric HCM, retention rate exceeded expectations with slight decline, client satisfaction score at new high, PEO revenue growth of 7% exceeded expectations.
• Strategic Priorities:
  • Best-in-class HCM technology: In small business, scaled embedded payroll solution, launched benefits recommendation tool; in mid-market, accelerated deployment of Workforce Now Next-Gen with over 80% of new mid-market clients in the 50 - 150 employee space using Next-Gen version; in enterprise, ADP Lyric HCM had strong momentum with new business bookings exceeding expectations; advanced WorkForce Software acquisition and announced acquisition of Pequity; advanced AI initiatives with ADP Assist using generative AI and increasing utilization.
  • Unmatched expertise and outsourcing solutions: Internal AI tools provide client-specific insights to sales, implementation, and service teams, and developers equipped with coding copilot tools for productivity gains; expanded digital implementation for small business and PEO clients.
  • Global scale: Unmatched footprint in over 140 countries, went live with first GlobalView client in Costa Rica, positioned as a leader in multi-country payroll by NelsonHall and Everest.
• Client Satisfaction: Overall client satisfaction score reached a new all-time high for the first quarter, reflecting improvements in each business unit.

Segment Performance

• Employer Services: Revenue increased 7% on a reported basis and 5% on an organic constant currency basis in the first quarter. New business bookings were solid with growth accelerating from the fourth quarter of the previous year. Growth was healthy in the small business portfolio, HR Outsourcing business reaccelerated growth, ADP Lyric HCM showed strength, retention rate exceeded expectations with a slight decline, client satisfaction score reached a new high, pays per control growth moderated to 0% for the first quarter, and PEO revenue growth of 7% exceeded expectations. Revenue contribution: Employer Services is the major segment contributing significantly to overall revenue.
• PEO: Revenue growth of 7% in the first quarter with average worksite employee growth of 2%. New business bookings continued to grow but pays per control growth moderated. Expected fiscal 2026 PEO revenue growth of 5% - 7% and average worksite employee growth of 2% - 3%.

Guidance

• Consolidated Revenue: Maintain fiscal 2026 consolidated revenue growth outlook for 5% - 6% growth and adjusted EBIT margin expansion of 50 - 70 basis points. Expected effective tax rate to be around 23% for the year. Forecast adjusted EPS growth of 8% - 10% supported by share repurchases.
• Employer Services: Maintain full year revenue growth forecast of 5% - 6%. Increase full year forecast for client funds interest revenue by $10 million to a range of $1.30 billion - $1.32 billion and expected net impact from extended investment strategy by $10 million to a range of $1.26 billion - $1.28 billion. Pays per control expected to remain about flat for the full year.
• PEO: Continue to expect fiscal 2026 PEO revenue growth of 5% - 7% and average worksite employee growth of 2% - 3%.

Risks

• Actual results may differ materially from current expectations due to factors such as changes in macroeconomic environment, regulatory changes, and other unforeseen events. Investors are encouraged to review ADP's filings with the SEC for additional information on factors that could cause actual results to differ materially from current expectations.

Question and Answer

Q: Samad Samana asked about the backdrop of deal cycles and changes in deal timelines for larger customers.

A: Maria Black said the HCM demand backdrop was relatively stable and no meaningful changes in deal cycles were observed in Q1. Peter Hadley explained about the guidance elements and quarterly cadence, mentioning factors like processing days and SUI revenue.

Q: Mark Marcon asked about the most surprising area in new bookings and the embedded side.

A: Maria Black said growth in Employer Services new business bookings, especially in small business and HR Outsourcing, was pleasing. Embedded payroll was in early days with good partnership progress but not much contribution to sales results yet.

Q: Jason Kupferberg asked about the weakness in U.S. PPC and confidence in the full-year guide.

A: Peter Hadley explained that the weakness in U.S. PPC was due to small movements, and the guidance was maintained with factors like client fund interest and other elements offsetting each other.

Q: Kartik Mehta asked about price expectations and AI rollout in the sales force.

A: Peter Hadley said price expectations remained unchanged. Maria Black said AI in the sales force had increased deployment, with over 40% initially deployed and now north of that, and it was a game changer.

Q: Jared Levine asked about PEO WSEs performance and growth confidence.

A: Peter Hadley said PEO WSEs were broadly in line with expectations, and Maria Black mentioned higher participation rates in health benefits for PEO.

Q: David Paige Papadogonas asked about the acquisition of Pequity.

A: Maria Black said it was to enhance HCM technology, and Peter Hadley said the financial impact was not meaningful in the context of ADP.

Q: Daniel Jester asked about differences between U.S. and international markets and Workforce Now Next-Gen.

A: Maria Black said international market had lumpy nature, and for Workforce Now Next-Gen, 20% not adopted were mostly clients with special situations. Peter Hadley explained related details.

Q: Tien-Tsin Huang asked about the partnership with Fiserv and its restructuring.

A: Maria Black said there was strong commitment to the partnership with Fiserv, and the bulk of the opportunity was still ahead.

Q: Kevin McVeigh asked about the impact of processing days and client funds/floating.

A: Peter Hadley and Matthew Keating explained the modest impact of processing days and that floating increase was mainly balance-driven.

Q: Dan Dolev asked about recent announcements and their impact on expectations.

A: Peter Hadley said related situations were contemplated in guidance, with hiring levels static.

Q: Michael Infante asked about stablecoin as a payment mechanism.

A: Maria Black said they were keeping a keen eye on regulatory environment and preparing to support if it evolves.

Q: Zachary Gunn asked about macro factors in the guidance.

A: Peter Hadley said the guidance had contemplated macro factors with some marginal adjustments but remained confident in delivery.