Q2 2025 Automatic Data Processing Inc Earnings Call
The fact that this song got to this far is partly because we weren't prepared to act in its own way.
Thank you for watching!
John
Michelle: Good morning. My name is Michelle, and I'll be your conference operator. At this time, I would like to welcome everyone to ADP's second quarter 2025 earnings call.
Speaker Change: I would like to inform you that this conference is being recorded. After the prepared remarks, we will conduct the question and answer session. Instructions will be given at that time. I will now turn the conference over to Matt Keating, Vice President of Vestal Relations. Please go ahead.
Matt Keating: Thank you, Michelle, and welcome, everyone, to ADP's second quarter fiscal 2025 earnings call. Participating today are Maria Black, our president and CEO, and Don McGuire, our CFO.
Speaker Change: Earlier this morning we released our results for the quarter. Our earnings materials are available on the SEC's website and our investor relations website at investors.adp.com, where you'll also find the investor presentation that accompanies today's call.
Speaker Change: During our call, we will reference non-GAAP financial measures which we believe to be useful to investors and that exclude the impact of certain items.
Speaker Change: A description of these items along with a reconciliation of non-GAAP measures to their most comparable GAAP measures can be found in our earnings release.
Speaker Change: Today's call will also contain forward-looking statements that refer to future events and involve some risk. We encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ materially from our current expectations. I'll now turn it over to Maria.
Maria Black: Thank you, Matt, and thank you everyone for joining us. Before I cover our results, I'd like to take a moment to acknowledge those impacted by the devastating wildfires in Los Angeles. Our hearts go out to our clients, associates, community members, and everyone touched by this tragic situation.
Maria Black: To begin, I'd like to highlight a significant milestone achieved during the second quarter.
Maria Black: When ADP's Board of Directors approved the 10% increase to our quarterly dividend in November, it marked the 50th consecutive year in which we raised our dividend.
Maria Black: We are now proud to be included among an elite group of dividend kings, a small number of publicly traded U.S. companies with 50 or more consecutive years of dividend increases.
Maria Black: This distinction is a testament to ADP's enduring business model and our ability to innovate over time and across economic cycles.
Maria Black: We embrace this accomplishment and our role as a global HR technology leader and builder of a new era of workforce insight and innovation.
Maria Black: We look forward to sharing more about where we've been and, more importantly, where we're headed at our 2025 Investor Day, which will take place on June 12th.
Maria Black: This morning, we reported strong second quarter results that included 8% revenue growth, 60 basis points of adjusted EBIT margin expansion, and 10% adjusted EPS growth. These results reflected strength across our employer services and PEO segments.
Maria Black: I'll begin with some additional financial highlights before providing an update on the progress made across our strategic priorities.
Maria Black: We delivered solid employer services new business bookings with record volume for a fiscal second quarter. Growth was notably strong across our HR outsourcing, compliance, and enterprise businesses, as well as our small business offerings.
Maria Black: With a continued healthy demand backdrop and a new business pipeline that is up from this time last year, we look forward to a strong second half of the year.
Maria Black: Employer services retention declined slightly compared to the prior year but once again modestly exceeded our expectations.
Maria Black: We continue to benefit from a strong overall business environment and very high client satisfaction levels. In fact, our client satisfaction levels reached a new all-time high in the second quarter and through the first half of our fiscal year.
Maria Black: Employer services pace per control increased 1% in Q2, decelerating from the 2% growth in Q1. The U.S. labor market remains strong and our clients continue to hire, albeit at a slightly slower pace.
Maria Black: Finally, PEO revenue growth of 8% was driven by strong PEO new business bookings and faster zero-margin pass-through growth.
Maria Black: Now let's turn to our strategic priorities where we delivered another quarter of considerable progress.
Maria Black: During the second quarter, we announced a strategic partnership with Fiserv that brings Fiserv's leading small business solutions, specifically Clover, its cloud-based point-of-sale and business management platform, and Cashflow Central, its accounts payables and receivables management platform, together with RUN, our industry-leading small business payroll and HR solution.
Maria Black: Helping small businesses thrive has been ADP's mission since day one and we are excited to partner with Pfizer to advance this goal and to support the millions of small businesses that drive the U.S. economy.
Maria Black: Through this partnership, ADP and FISERB will offer U.S.-based small businesses access to an integrated, all-in-one solution combining the full power of RUN and the Clover Small Business Management Platform.
Maria Black: In addition, Cash Flow Central will be available to run clients, enabling our mutual customers to manage their cash flow more efficiently.
Maria Black: These integrated solutions will make it easier than ever for small businesses to manage the flow of money into and out of their business, whether they are selling to customers, paying bills, or managing payroll.
Maria Black: We initiated mutual client referrals to our respective offerings during the second quarter, and our teams are working closely to deliver the integrated solution in the coming months.
The End
Maria Black: Our Workforce Software acquisition, which closed in mid-October, is progressing well and in line with expectations. We are thrilled to have Workforce Software's associates join ADP, and our teams are working to integrate Workforce Software's time-in-attendance, absence management, and scheduling tools with key ADP HCM platforms.
Maria Black: While that happens, the Workforce Software team is focused on maintaining its momentum and delivering best-in-class solutions, and in Q2, we experience healthy new business activity across our new Workforce Software offering, as well as our other existing Workforce Management solutions.
Maria Black: In addition, we have already started to see new business opportunities that validate the growth anticipated from the combination. For example, workforce softwares, enterprise-focused, industry-specific solutions are a strong fit for clients, allowing us to better compete and win in a wide range of industry verticals and geographies.
Maria Black: Similarly, we are seeing opportunities to offer ADP HR and payroll solutions to workforce software clients looking for a full suite HCM solution.
Maria Black: With the addition of workforce software, ADP is uniquely positioned to provide clients with a global HR, payroll, service, and time solution. And this value proposition is generating excitement in the marketplace.
Maria Black: We remain confident in our opportunity to accelerate our growth in the workforce management and enterprise spaces.
Maria Black: Lyric's new business booking volumes increased again and its new business pipeline ended this quarter up significantly compared to last year.
Maria Black: One client that started on Lyric in Q2 is a large recreation management company in the Midwest that operates nearly 20 parks, a nationally acclaimed zoo, and nine golf courses.
Maria Black: The client selected Lyric for a cutting-edge user experience and to simplify its personal management activities and payroll processes. It went live with the full suite, including HR, payroll, time, benefits, recruiting, and talent management, and is very pleased with the outcome.
Maria Black: Since Lyric is a global platform, we remain focused on expanding its already broad international reach to capitalize on what we see as a significant global opportunity.
Speaker Change: Before I turn the call over to Don, I want to take a moment to express my gratitude to our associates for their dedication and hard work.
Speaker Change: Their unyielding commitment to our clients inspires me each and every day. It is these efforts that continue to contribute to our record client satisfaction scores.
Speaker Change: Thank you again for all that you do for ADP, for each other, and for our clients. Let's continue to build on our momentum and strive for even greater success together. Don?
Don McGuire: Thank you, Maria, and good morning, everyone. I'll start by providing some more color on our second quarter results and then update our fiscal 2025 outlook.
Don McGuire: Let me begin with our Employer Services results and outlook. ES segment revenue increased 8% on a reported and 7% on an organic, constant currency basis in the second quarter.
Don McGuire: As Maria mentioned, ES new business bookings growth was solid, with a healthy HCM demand backdrop and higher new business pipelines compared to last year, we are maintaining our 4-7% full year growth guidance.
Don McGuire: ES retention declined slightly in Q2 and we continue to forecast a modest decline of 10 to 30 basis points for fiscal 2025.
Don McGuire: ESP's per control growth of 1% came in slightly below our expectations, but we are maintaining our forecast for 1-2% growth for the full year.
Don McGuire: Client funds interest revenue increased by more than we anticipated, driven mainly by stronger growth in average client funds balances. For the full year, we are increasing our forecast for client funds interest revenue and the net impact from our extended investment strategy by $25 million.
Don McGuire: Despite recent FX headwinds, more than offsetting the increase to our client fund's interest revenue forecast, we are maintaining our outlook for full year ES revenue growth of six to seven percent.
Don McGuire: Our ES margin increased 90 basis points in the second quarter, reflecting operating leverage and client funds interest revenue growth. We continue to forecast ES margin increasing 40 to 60 basis points for the full year.
Thank you.
Moving to the PEO.
Don McGuire: Revenue growth of 8% and average worksite employee growth of 3% slightly exceeded our expectations. Revenue growth benefited from strong new business bookings, accelerating zero-margin pass-through growth, wage growth, and the timing of state unemployment insurance revenue.
Don McGuire: With continued healthy new business activity levels, we are maintaining our full-year forecasts for PEO revenue growth of 5 to 6 percent and average worksite employee growth of 2 to 3 percent.
Don McGuire: QEO pays-per-control growth stabilized in Q2, but we continue to expect it to grow slightly slower than ES pays-per-control growth for the full year.
Don McGuire: CEO margin decreased 140 basis points in the quarter, impacted by higher zero margin benefits passed through revenue growth and an increase in workers compensation and state unemployment insurance costs.
Don McGuire: We continue to expect PEO margin to decrease between 70 and 90 basis points for the full year.
Don McGuire: Putting it all together, we are maintaining our fiscal 2025 outlook for consolidated revenue growth of 6 to 7 percent and adjusted EBIT margin expansion of 30 to 50 basis points.
Don McGuire: We continue to expect a full-year effective tax rate of around 23%. Our fiscal 2025 adjusted EPS growth forecast of 7% to 9% is also unchanged.
Don McGuire: There are two cadence matters I would like to highlight. First, we mentioned the timing of PEO state unemployment insurance revenue, and we likewise had some favorable revenue timing in our ES segment in Q2 related to the calendar.
Don McGuire: We expect these factors, as well as the strengthening U.S. dollar and the impact of lower short-term interest rates to result in a deceleration in both E.S. and total revenue growth in Q3.
before growth trends reaccelerate in Q4.
Don McGuire: Second, we expect adjusted EBIT margin expansion and adjusted EPS growth to be lower in Q3 than in Q4, to reflect the lower revenue growth as well as the timing of integration expenses associated with the workforce software acquisition.
Don McGuire: Thank you, and I'll now turn it back to the operator for Q&A.
Don McGuire: Thank you. If you wish to ask a question, please press star 1 1. If your question hasn't been answered and you wish to remove yourself from the queue, please press star 1 1 again. Please be aware of the allotted time for questions. Please ask one question with a brief follow-up.
Speaker Change: Our first question comes from Samad Samana with Jeffreys. Your line is open.
Samad Samana: Hi, good morning. Thanks for taking my questions and great to see the strong end to the calendar year for last year, Maria and team. So congrats on that. I guess first question just on
Samad Samana: the Pfizer partnership. That's obviously exciting news. Is that going to be referrals between the two organizations? Is there co-development on the product?
Speaker Change: and maybe just help us think about is there any kind of revenue share associated with it and and should we see this is the beginning of more of an ISP driven strategy. I know it's a multi-partner but there's a lot there.
Speaker Change: Yeah, sure. Good morning, Samad, and thank you for the accolades on the strong finish. Certainly excited as well about it. With respect to the FISER relationship, we're incredibly pleased to enter into
Speaker Change: this relationship. If you think about our two organizations, they're two companies that are anchored in serving the small business market and have always believed in making things easier for that small business owner to navigate being in business.
Speaker Change: So if you imagine two great companies coming together, two great distribution arms.
coming together to
Speaker Change: to really solve what I believe are real things for real clients in the real world, if you will. So to answer your question, we are at this point in a referral relationship back and forth. That's what we've done to date.
Speaker Change: But you're exactly right as we think about integration of the products long-term. And so the RUN offering will be embedded inside of Clover and vice versa. So Clover will be embedded inside of RUN. And so that ability to really have a joint offering from the technology side is what we're working on and what is to come, if you will. But thus far,
Speaker Change: We're really encouraged by what we're seeing so far with respect to the distribution, arms, passing leads back and forth between the two great companies.
Speaker Change: I think you also asked at the beginning of more relationships, and I think my answer would be, you know, we believe in partnerships, we believe in ecosystem. Certainly how we go to market, specifically in the down market today, is through the great strength of our distribution, but through that great strength of our channel partners, be it banks, be it the accountant channel, and now be it this channel with Fiserv.
Speaker Change: Great, and maybe just one follow-up. On the enterprise side, I know that with the rebranding to Lyric, there's been a lot of focus on that. You sounded very good about it last quarter. You called it out for bookings this quarter. Are you seeing, is this kind of a clear inflection now? Is it fair to say that? And how should we think about maybe the impact of bookings or what's built in the forecast this year from the enterprise side of the business?
Speaker Change: and it is really anchored in flexibility, intelligence, it's human centric in design. So we believe it's a really strong product offering. I believe the market is seeing that as well based on what we're seeing with respect to client ads, the pipeline building. I think the pipeline is incredibly strong year on year. We do expect Lyric to contribute to our growth this year from a new business bookings perspective. But again, it is still early days.
Speaker Change: And so we'll take some time to scale and for it to overall dent the the financials of the organization But the offering is resonating with our global enterprise clients and we're really excited in terms of the receptivity we're seeing in the market
Great. Thank you so much for taking my questions.
Speaker Change: Thank you. Our next question comes from Brian Bergen with TD Kallen. Your line is open.
Brian Bergen: Hi, good morning. Thank you. The first question is on demand, so it's good to hear the continuation of a healthy backdrop here.
Brian Bergen: Can you double-click on how that's progressed across the client segment size? And I'm curious, with the calendar turned and just post-U.S. election, did you note any changes or anything just worth calling out in booking specifically on what you see in the U.S. versus international?
Maria Black: Sure, Brian, and good morning. So demand, demand is strong. It's broad based, we feel good about the overall HCM demand. We also clearly benefit from having a great sales and marketing organization. I would say across the various segments in the downmarket, downmarket companies, they're still hiring, they're still buying, they're still navigating being small business owners.
Maria Black: as we just talked about. There are a couple pockets. I think we're keeping a watchful eye on things like new business formations.
Maria Black: which seems to have a little bit of pressure this fiscal year, but it's still at an elevated level, if you will, from a pre-pandemic standpoint. In the mid-market, we are seeing that strength in HR outsourcing. I mentioned that in the prepared remarks.
Maria Black: And that's a differentiation for us in that mid-market space. Really excited to see the extension there. And then we've talked.
Maria Black: over the quarters about the investments we've made into our mid-market product, Workforce Now, the record MPS, the record retention. And so we have a nice mid-market story to meet that demand across the mid-market segment. I think with respect to global and up-market, I tend to say every quarter, we're always keeping a watchful eye, just given the uncertainty in the global space and economic backdrops. But at this point, we don't see anything that would be alarming.
Maria Black: we feel really good and broad-based about the pipeline strength heading into the back half but as we all know we're a back half business we have a lot to execute against.
Maria Black: You asked about the new administration and anything that's changed. I think it's too early to call whether or not we're seeing a demand change.
Maria Black: as a result of the new administration. But the good news is there seems to be a lot of activity and change is good for ADP. As companies navigate change, we're there to help them stay compliant. And so we're looking forward to helping our clients sort through what undoubtedly seems to be quite a bit of change.
The End
Yeah, for sure. Okay, I appreciate all that detail.
Matt Keating: and then something on the 25 outlook here. So, Don, I appreciate the cadence clarifications. For the full-year outlook, when we think about, you know, you affirmed the range on EPS growth. Does any indications on kind of comfort levels within that range as you move through the second half? How should we be thinking about the EPS here as it relates to kind of float upside potential as the curve remains elevated versus, you know, potential FX headwinds from dollar strength?
Speaker Change: Yeah, Brian, so I think you touched on it right there at the end. It's the FX headwinds that are really...
Speaker Change: causing us to see some slowdown. But I'd also say that particularly in the third quarter, which is by far our largest average daily balance time as the new taxes, or sorry, as federal and state taxes kick in again at the start of the year, that's when we tend to have the highest balances.
Speaker Change: and all those funds, or most of those funds, are short. And short-term rates are down 100 basis points year on year. So that's what's put more pressure on Q3 in particular before it rebounds into Q4. So I think that's the tradeoff.
Speaker Change: FX headwinds are causing some grief and then of course the short nature of the investment portfolio in the third quarter as a result of the
Speaker Change: various taxes re-kicking in at the start of the calendar tax year.
Speaker Change: Okay, okay, appreciate that and congrats on the 50 years of dividend increases.
Thank you.
Speaker Change: Thank you. Our next question comes from Ramsey Ellisal with Barclays. Your line is open.
Hi, thanks for taking my question this morning.
Speaker Change: Don, would you comment a bit further on the drivers of the implied slower PEO revenue growth in the back half? I know there was some timing.
Speaker Change: related issues. Can you just sort of parse that out for us and help us understand?
Speaker Change: a little better, you know, why that should decelerate the way you've implied it will.
Speaker Change: Well, we certainly have the SUI. We talked a little bit also in the prepared remarks about the pull forward of some SUI into Q2. So that was really just the way the calendar fell.
Speaker Change: New Year's Day happening when it did in the holiday people processed at the back end of Q2 as opposed to Q3 so that pulled some of the low margin sui into the second quarter as opposed to letting it fall into the third
Speaker Change: And then, of course, you know, we are in our renewals time, so we're looking at that pays-per-control.
Speaker Change: continue to be, as we said, we expect pace for control growth.
Speaker Change: in the PEO to be a little bit slower than they were in there, or they are in the ES. I do want to clarify in ES while I'm saying this, though,
Speaker Change: We did round down to 1% pace per control growth, and yes, we didn't round up, we rounded down. So pace per control growth was a little bit slower than expected, but it was still above the 1% rate. So I think those are really the primary drivers of what's slowing the PO growth in the back half.
Speaker Change: In the context of the Paychex PayCorps acquisition, do you see any changes in the M&A environment or in your appetite to do deals?
Speaker Change: Yeah, I guess I'd say that our views on M&A really haven't changed. I think that...
Speaker Change: Over the years, the things we've looked at, we really haven't thought that regulatory environments really been an encumbrance to us doing anything. There's still an incredible amount of fragmentation in the industry.
Speaker Change: So I think we're going to keep to our principles. We need to make sure that things that we acquire complement our offerings and don't complicate them. But certainly,
Speaker Change: We continue to look. I mean, you should expect to see, as we've done over the years, expect to see some tuck-ins are very important for us, and they've contributed to us getting better control over our network, etc. So you may see some of those going forward.
Speaker Change: I don't think that there's going to be any changes based on potential new regulation that would result in us
Speaker Change: seeing a much different stance in M&A than we've had to date.
Thank you very much.
Speaker Change: Thank you. Our next question comes from James Fawcett with Morgan Stanley. Your line is open.
Speaker Change: Great, thank you very much. Appreciate all the time this morning.
Speaker Change: I want to ask quickly about retention. Last quarter you flagged, you saw a little bit of retention degradation, but it wasn't really specifically attributable to an uptick in small-medium-sized bankruptcies and instead kind of rather broad-based off-peak hiring levels.
Speaker Change: What specifically did you see in the quarter on that ladder point? Are we seeing kind of hiring levels move around at all? And what's the assumption in the back half for – and is the assumption for the back half that small – medium-sized business bankruptcies will pick up again?
and Danyal Hussain.
Thank you.
Speaker Change: Yes, that is the assumption, James, in the back half and good morning. So retention, as you noticed, we did beat modestly again on retention. I'm very pleased to see that because the biggest piece is if we're beating modestly on
Speaker Change: on retention. That does mean that ultimately small business owners are staying in business, so that makes me even more happy for them as well as
Speaker Change: as our results. We did see, you know, a little bit of a degradation, if you will, in the down market. So, you know, we believe we're almost all the way normalized. We're not quite there. It declined. It declined modestly in the first quarter, declined modestly in the second quarter. That said, we do continue to beat.
Speaker Change: So, based on what we're seeing and the fact that across
Speaker Change: You know, each one of our segments, we've really been at that record retention levels. We believe it's prudent to keep our retention guide as is, but I'm optimistic, as I'm sure we all are, to hope that specifically small businesses stay in business.
Speaker Change: I'm wondering if you can just give us an update on service and sales efficiency efforts with some of your Gen-AI projects and if you have any examples that you could provide of how your Gen-AI initiatives are impacting client retention or sales productivity or any other metric you may want to touch on.
Speaker Change: Yeah, sure. So I'll start, and I certainly welcome Don to...
Speaker Change: to chime in here with respect to the results that we're seeing. But we are laser focused on our generative AI strategy, on our
overall approach and just
Speaker Change: to kind of level set and remind everybody the way that we've been thinking about it is really in in three, call it specific buckets, which is putting generative AI into our products. That's what we call ADP assist. That's making our products.
Speaker Change: more usable and better for our clients. It's putting generative AI into our service organizations. So think of that as agent assist, but that's part of the overall
Speaker Change: ADP Assist Umbrella. And that specifically, James, kind of answers your question around service and and things of that nature. Some of the things we've spoken about in the past.
Speaker Change: that are already making meaningful impact are with respect to things like call summarization. So I think I cited before that, you know, we're shaving off a minute per call, which may not sound that exciting to everybody that a minute per call, but when you take lots and lots of calls, it adds up pretty quickly. So we continue to make a meaningful impact.
Speaker Change: some of those tools, other things we've cited in the past.
Speaker Change: digital transformation as it relates to implementation. And so the small business organization is at
Speaker Change: really record levels as it relates to end-to-end digitally onboarding clients using new tools that are anchored in generative AI. So that's kind of the service side. By the way, I could go on and on about this topic. Switching gears really quickly to the go-to-market.
Speaker Change: think the likes of best-in-class technology to enable our sellers. Some of the things that we've talked about is...
Speaker Change: opportunity prioritization. So think about putting the right lead in front of the right seller at the right time to drive value into the sales process. We're doing things like rapid pre-call planning. So this takes me back to my olden days where I used to have to pull everything up on
Speaker Change: on the internet or MapQuest and try to study, you know, what I should say to a certain client. These are all tools now that exist that are helping our sellers become more effective on their sales calls.
Speaker Change: and the way that you see that and quantify it, certainly the end game there is more sales, but it's really this balance between, as we invest into sales modernization and these various pieces of technology, it's really driving productivity. So we have a natural lift right now in productivity just based on the tenure that we're seeing in our sales organization. So if you imagine as we're bringing on new associates, we're also building tenure in the existing sales force.
Speaker Change: So new associates are able to become more productive and existing associates.
Speaker Change: are also able to become more productive. Part of that is anchored in tenure. A lot of that is anchored in these tools that we're investing in, and the long-term output of that is...
Don McGuire: is more sales and more sales productivity. So I think I've said a lot, but I'll offer, Don, if there was anything you wanted to add to that. No, I just add that we are seeing good efficiency and good productivity, but I would say that
Don McGuire: We still have these tools in many of our associates' hands, but there's still many more to get the tools.
Don McGuire: and when we get to those tools, we expect to see even more positive results. So we'll watch the productivity improvements and hopefully we see those things reflected in the margin. Of course, we have made some minor investments in these tools themselves.
Don McGuire: The bottom line impact is going to be over the longer term and certainly not short term.
Don McGuire: Very, very positive results from everything we're seeing and everything we're doing.
That's great. Thank you so much.
Thank you.
Thank you.
Speaker Change: Thank you. Our next question comes from Mark Marcon with Baird. Your line is open.
Mark Marcon: Good morning, Maria, Don, and congratulations on the strong end of the calendar year and obviously the 50 years to
for the whole organization.
On the strategic side,
Mark Marcon: Could it be expanded above and beyond RUN? Because I think, you know, for some for some clients it might also be pretty relevant, you know, on the lower end of workforce now. So I'm wondering how you're thinking about that.
Mark Marcon: I know it's early days, but wondering if you can just give us a feel for that.
Mark Marcon: distribute through those channels, be it banks, be it CPAs, certainly through POS channels or merchant services channels such as Fiserv. This could be a meaningful channel for us. That is why we've engaged.
Mark Marcon: and we believe in it. So if I was to fast forward five years, I think it's a channel that we speak to very similarly to the way that we speak to the accountants and the banks today. And I think about two, again, great products, great companies and great distribution engines coming together to really drive that value into the
Mark Marcon: into the overall small business space. Could it go beyond small business? I think the answer is, you know, a little bit to be determined. I think that's something that, as we see the traction in the down market, we'll continue to challenge ourselves. Listen, it's very simple for me. To me, it's
Mark Marcon: The guiding principle is always about the client. And if we have an opportunity to solve real challenges for business owners, be it small, be it mid, be it up, up market, we're all about that. And Fiservice as well, and I think that's what makes us so exciting. So anything we can do to make things easier, to navigate being in business, we're here to help.
Mark Marcon: It's great. And then on workforce software, it sounds like everything's going according to plan.
Mark Marcon: As you think through, you know, the next fiscal year, how well integrated will it be by, you know, for fiscal 26, do you think, and, you know, how meaningful could that end up being with regards to the upmarket?
Mark Marcon: Sure, Mark, so we are we are actively working through that from a plan perspective right now, so I'm pleased to say
Everything is on track. We actually just rounded 100 days.
Mark Marcon: It's amazing. Time flies when you're having fun. But last week, we celebrated 100 days in, and at this juncture, what we've done is welcomed the Workforce Software Associates. We folded them into the ADP family, really pleased to see how the milestones that we've accomplished in the
Mark Marcon: first hundred days have come along. And in there, thus far, it's really taking a look at the go-to-market. So as we we talked about last quarter, they have a meaningful set of clients. And so as we look at their client base and our client base,
Mark Marcon: and comparing pipelines, really that ability to go to market together to ensure that we're winning consistently on the workforce software and the time and labor management side. That's been a big piece of the focus.
Mark Marcon: And then, as you can imagine, working through the integration is really the next set of pieces. So I don't think we're in a spot yet to declare necessarily exactly by when, but that is a big piece of the work that is being done, and we're really excited about what this is going to mean to us.
Mark Marcon: from an opportunity in the workforce management space, but also in the enterprise space and the global space as we bring this product also together with the Lyric offering.
Mark Marcon: Terrific. I've got tons of questions, but I'll leave it there. Congratulations again. Thanks, Mark.
Speaker Change: Thank you. Our next question comes from Brian Keane with Deutsche Bank. Your line is open.
Thank you.
Brian Keane: Hi guys, good morning and congrats on the solid results. Just a clarification on the Fiserv partnership, just on the economics, how does the economics exactly work between the two companies? Is it a percentage of sales as a one-time fee? Is it a recurring fee? Just curious on how that relationship works on both sides.
Brian Keane: So I don't know that we want to get into the specifics of exactly how we orchestrated it, but the answer in a broad sense is both. So there is a referral piece to it. There's also revenue share over time that really drive the
Brian Keane: the financials for both of us to make this an accretive proposition for us to go to market together.
Speaker Change: Okay, that's helpful. And then just as a follow-up, just thinking about selling season and targets for kind of new client growth and what is the pricing environment? What kind of pricing yield do you think you'll be able to get in the key new selling season?
Yeah, Brian, I don't think we're seeing anything unusual.
Speaker Change: The competitive environment continues to be pretty much the same. Nothing's happening, there's always promotions, we have promotions, other folks have promotions, etc.
Speaker Change: Things are feeling the same as they were previously, so not seeing anything unusual. In terms of price increases for existing clients, as we said, you know, we're targeting about 100 basis points this year.
Speaker Change: which is more than the 50 we've got historically, but less than 150 we got during the couple of years of heavy inflation, but and the 100 basis points is looking pretty attainable and our clients are staying with us as a retention rate shows so we think it's something that's achievable for us.
and Danyal Hussain.
Okay, that's helpful. Thanks, guys.
Thanks for watching!
Speaker Change: Thank you. Our next question comes from Jason Kupferberg with Bank of America. Your line is open.
Jason Kupferberg: Thank you guys. Good morning. I just wanted to start on bookings. The tone there continues to sound quite upbeat. I know the guidance...
Jason Kupferberg: for the year is unchanged at 4% to 7%. I was hoping you could talk qualitatively at least about how you're tracking to that guide this year versus last year. Just wondering whether or not the visibility on the full year bookings is higher now than it was at this time last year.
Jason Kupferberg: Yes, I perhaps the best way to answer that question is with respect to pipelines year-on-year so the pipelines are in good shape overall They are up year-on-year
Speaker Change: Just to clarify, when we talk about pipelines, that's really a mid-market, up-market, international term, right? As you're able to actually see the longevity of a deal and how a deal...
Speaker Change: is moving through the sales motions, and we feel good about pipelines year on year. In the down market, instead of pipelines, we really talk about things like activity. How many new appointments are we going on? How many RFPs?
Speaker Change: are being handled in our PEO, so again we feel good about the activities, we feel good about the RFPs, we feel good about the pipelines.
Speaker Change: year on year heading into the back half. What I would say is, all across, and I mentioned it earlier, all across ADP, we are a back half company as it relates to sales. So we still have a lot of execution to get done, but we feel good with respect to our position year on year.
Matt Keating: Understood, okay. And then maybe one for Don, appreciate all the moving parts here in the back half of the year, but can you just put up maybe a finer point on Q3 versus Q4, how we should be thinking about revenue growth and margin cadence, just so that we've got the pieces calibrated?
Speaker Change: Yeah, so just to reiterate, I think the, you know, I'll do these in order of importance.
Speaker Change: is having a revenue impact, which of course will fall through and have a margin impact. The CFI, of course, is a bit of a challenge, given the 100 basis point drop and how much of the portfolios
Speaker Change: in the short position. And of course, in the third quarter, we're also really getting going here with all the integration expenses, whatnot, with respect to workforce software. I'll also call out now that when you see the 10-Q, you'll see a very detailed breakout of all the
Speaker Change: items that all the breakdown of the goodwill and all of the line items in the intangibles etc so you'll both have some very clear insight into amortization times etc and get a view of how that's going to look over the coming years
Speaker Change: But certainly we're going to see some softness in Q3 as a result of those factors, and then when we get back into Q4 we'll see growth accelerate a little bit more, but
Speaker Change: more slowing, slower growth in Q3, bit faster growth in Q4, bringing us to our reiterated guidance for for the full year.
Okay, thanks for that.
Speaker Change: Thank you. Our next question comes from Scott Wurtzel with Wolf Research. Your line is open.
Scott Wurtzel: Hey, good morning guys. Thank you for taking my questions. I wanted to start on the PEO segment. One of your peers had called out maybe some dynamics with clients opting into maybe lower cost benefit plans. So I'm just wondering if you've been seeing any changes in benefits enrollment behavior recently?
Speaker Change: So, not really, Scott. I think, you know, for our purposes, we're actually heading into our renewal season here in the back half of our fiscal year in the PEO.
Speaker Change: So, a bit to be determined, if you will, but not really, not thus far. I think some of the PEOs, just to remind everybody, we're all somewhat structured differently. Some of us have ASO offerings, HRO offerings, some of us have different ways that we fund our health plans.
As you know, the PEO ADP total source were
Speaker Change: We're fully insured on the health side, and so, you know, the behaviors don't always match each other, and we've really not called out those swings in the past.
Speaker Change: We do have an HR outsourcing offering, I mentioned it earlier. It has contributed great results from a bookings perspective, and we expect that both from that offer as well as the PEO. So I think we see strength across both, and we don't really see the swings back and forth.
Speaker Change: Gotcha, that's helpful. And then just as a follow-up, Don, on the softer pace per control growth, maybe relative to your expectations, was that in any specific pockets of your client base?
Speaker Change: No, it was pretty broad-based. It was no specific industries or regions of the country, etc. Pretty broad-based.
Got it. Thanks, guys.
Speaker Change: Thank you. Our next question comes from Tianjin Huang with J.P. Morgan. Your line is open.
Tianjin Huang: Hi, thanks so much. Yeah, so a couple quarters of a really strong pipeline, I think you've mentioned. I'm just curious, do you see it timely?
Tianjin Huang: deal awards in the second half, and I don't know if I heard this, but our deal size is getting larger in general, just curious how the shape of the pipeline and the quality.
Tianjin Huang: I would say deal sizes and timing on deals is relatively consistent, and so I think we've talked about
Tianjin Huang: several times over the last couple of years, we're kind of back to, I guess, the new normal or the old normal. So I think deal cycles move through motions very similar to how they operated prior to the pandemic. That's not to suggest that you don't hear every now and then, you know, strangeness and timing. Certainly the holidays this year fell differently. That had, you know, interesting impact to us, both from a revenue perspective, but also interesting impact on the sales side.
Tianjin Huang: across that line. But you know, listen, large deals are sometimes lumpy as well. And so I would say, you know, generally speaking, things seem to be moving through the motions that they usually do. And it's really, it's really similar to how we think about the business pre pandemic.
Tianjin Huang: I feel like we've seen some SMB players invest in mid-market solutions.
Uh,
It feels like an endorsement of the 80-piece model.
I don't know, do you see that as a trend?
Love your thoughts.
Speaker Change: on that? Well, first, yeah, first, I'll say thanks. I'll take that. There's nothing, you know, better than the best form of flattery is when somebody copies you, right? So, no, all kidding aside, listen, the, I obviously know the consolidation that you're, you're referencing, I think for our end, it does validate.
Speaker Change: having a broad-based segment approach, the breadth and depth of ADP continues to shine. I would say with respect to the two players that are consolidating, we've fared well against both of them. We expect that we will continue from a balance of trade to fare well.
Speaker Change: against both of them. Who knows, maybe it presents itself to be a bit of an opportunity for us. But I think, you know, as it stands, we feel really
strong about the position of our products.
Speaker Change: and the best-in-class platforms that we have in each of the segments, so the run offering in the down market, the workforce now offering across the mid-market, and our HR outsourcing solutions inclusive of the PEO.
Speaker Change: and now with Lyric and Workforce Software coming together, we feel really great about the offers that we have in each one of these segments.
Speaker Change: That's great. Thanks, Maria. And way to get MapQuest into the transcript. Didn't expect that. Old school. Thanks. Yes. Have a good day.
Pete Christensen: Thank you. Our next question comes from Pete Christensen with Citi. Your line is open.
Pete Christensen: Thank you and good morning. A lot of good stuff here. Maria, I wanted to talk about, dig a little bit in your thoughts, longer term perhaps.
Pete Christensen: On the adjacency of B2B payments, even treasury management solutions, seems like a real natural adjacency for ADP, I know.
Pete Christensen: The ADP established the ADP Trust Company a couple of years ago.
Pete Christensen: Just wondering how you think about that longer-term. We've seen a couple integrations with some other companies even on the cross-border side.
with payroll. Just curious if you see...
Speaker Change: this emerging as a real longer-term TAM expansion opportunity for ADP. Thank you. Sure, yeah, sure Pete. By the way, I'll take that as an offer to join us at our Investor Day because I think we're pretty excited to talk about the future of our strategy and certainly we think a lot about the
Speaker Change: You know, the various things that you're referencing. And we've looked, right? We've looked before. By the way, we've been in the office of the CFO before. I think this adjacency partnership that we're entering into with Pfizer, I think we're going to learn a lot.
Speaker Change: I'll go back to what I said earlier, which is really putting the client at the center of that solve.
Speaker Change: which means if we have the ability to come together with other companies through partnership or perhaps even deeper integration or perhaps even, you know, shared ownership or full ownership to solve real problems, those are always things that we are batting around from a strategic standpoint.
Speaker Change: So I suppose more to come. That's not, by the way, to suggest there's some giant...
Speaker Change: unveil but we're pretty excited to have to share some of the things that
Speaker Change: we're thinking about for the future for ADP. We actually haven't done an Investor Day since November of 21, and a lot has changed, both in certainly how we are thinking about the business and some of the other things that.
Speaker Change: We've shared over the last couple years, but certainly the overall industry has changed and continues to evolve as well. So more to compete, but certainly top of mind for us always.
Thanks Maria, super interesting. Looking forward to the Analysts' Day.
Speaker Change: Thank you. Our next question comes from Kevin McVeigh with UBS. Your line is open. Great. Thanks so much.
Kevin Mcveigh: I think Don you talked about kind of trends in the back half with the re-acceleration in Q4 as opposed to Q3, any puts and takes on what drives that re-acceleration, specifically around ES or maybe the business overall?
Don McGuire: Yeah, I think around, it is around ES predominantly. I think that the big difference is
is the client fund's interest.
Don McGuire: The Q3, of course, is where we have the largest short portfolio.
Don McGuire: and we don't have that in Q4. So that is what's going to, so the impact of the short-term interest rates are gonna be somewhat less in Q4 than they will be in Q3. And I think that's a significant piece of the.
Don McGuire: a significant piece of the puzzle. The other part is that we do have some heavier expenses in Q3, or even though it's 100 days, we are still in the early days of the
Don McGuire: integration of workforce software. So there's some heavier expenses in this coming quarter than there will be in the fourth quarter, but that's really about it. There's really nothing more detailed than that.
Speaker Change: it's helpful and then just real quick on the retention you know I know
Don McGuire: typically the Q2, right, the December quarter or, you know, Q1 rather.
Just any thoughts on...
what quarter season we would have.
Don McGuire: the most outsized retention, just to remind us that there's some seasonal impact, just given that the
January start, just any thoughts around.
Thank you for your time. Thank you.
I think the seasonally the retention tends to
Don McGuire: Go up and down by by quarter, but certainly it's in q3 That's what all the switching happens and whatnot so that's where you'd see a bit of a dip But of course we compare the dip to the prior year's dip etc
Don McGuire: So, nothing there unusual, and as Maria said, even though we had a slight decline, we declined less than anticipated, less than expected.
Don McGuire: And clients are staying because they're happy. NPS scores continue to be high. So, we're, hopefully, we'll see some opportunity in the retention score for the whole year. But we're certainly happy with where it's at right now. Great. Thank you.
Speaker Change: Thank you. Our next question comes from Karthik Mehta with North Coast Research. Your line is open.
Speaker Change: Hey, good morning. Don, you talked about pricing and pricing being about 100 basis points versus 50 that it's historically been, maybe down from the 150 you saw previously, but I'm wondering, do you think the environment has changed, is 100 basis points something you could see net pricing for the next couple of years or do you think we're just in a unique period where you're getting this little bit outsized pricing?
and Danyal Hussain.
Danyal Hussain: Good morning. Thanks for the question. I think that's a difficult one to speculate on for me because
Danyal Hussain: I guess it depends on what you think the economic forecasts are saying. Some are saying we should...
Danyal Hussain: expect higher inflation, but who knows? Not sure. We haven't seen whether
Danyal Hussain: Some of the policies that are being bantied about are really going to...
be put in force and drive inflation or not.
Danyal Hussain: But I would say generally that if there's higher inflation, we'll do our best or take the opportunity to continue to provide good value and make sure that we're passing our costs along.
Danyal Hussain: It's once again, it's all about the long-term value of the client for us And we'll do what we need to do to make sure that we keep that retention rate up That's the most important metric for us when it comes to the pricing
Speaker Change: And just to follow up on the PEO, you know, you've talked about Pace Per Control being slightly lower in the PEO than ES, and I know that's kind of a more of a near-term phenomenon. Is there anything changing in that business or the industry where you could see this trend continue or is this just a bit of an anomaly where the Pace Per Control are lower than the ES business?
Speaker Change: I think we've been talking for several quarters about PEO, and we've been happy to talk the last couple of quarters about stabilization and improvement. So hopefully things are going to go back and look better. Historically, as you know, the pace for control growth in...
Speaker Change: P.O. has been better than it has been in the E.S. segment, but...
Speaker Change: I think we're happy with where we're at right now, and we'll see how it materializes, but I don't know if there's any particular drivers. I will say that...
Speaker Change: For the quarter, we saw stabilization across most of the industries where we provide the services, so that was a positive thing to see in particular.
Speaker Change: are in the financial administrative, it's stabilized, and that had been an area of weakness for us in the past, but it is stabilized. So we are comfortable with where we're at and looking forward to improve.
Thank you very much. Appreciate the time.
Thank you.
Speaker Change: Thank you. We have time for one last question, and that question comes from Dan Doleff with Mizuho. Your line is open.
Hey guys.
Dan Doleff: Thanks for squeezing me in here. Um, I did notice, you know, I know we talked, we talked a lot about the macro, but I did, I did notice a slight change in maybe language or formulation. I believe last quarter you said,
Dan Doleff: Clients continue to hire at a moderate pace and now you're saying I'll be at a slower pace I just want to know maybe more about from your experience. You've obviously been doing this for a long time You know in this
Dan Doleff: Sloan train starts rolling. Is it a trajectory that could change? Is it maybe just a hiatus? Just more like a long-term perspective on this one would be great. And other than that, obviously, really strong results.
You know, love it.
Speaker Change: Dan, I guess I'd answer that by saying that the macro environment continues to be very, very strong and solid. The labor environment is strong, 4.1% unemployment. I think the fundamentals are good.
Speaker Change: And so I think that the hiring and companies still being profitable and there seems to be an awful lot of optimism in the U.S. market in particular, so I think that all bodes well for...
Speaker Change: for Pace for Control and overall growth. And then, of course, you know, we do have the opportunity that we also have operations outside of the U.S., so we can see opportunities there.
Speaker Change: manage the portfolio in that way. But I would say, I think really the only way to answer that question is just around the macro environment that continues to be.
be quite solid.
Thank you. Thank you.
Speaker Change: Thank you and congrats again on being a thought leader. You know HCM looks like your competitors are taking a page off your book now, so congrats again.
Thank you.
Speaker Change: Thank you. This concludes our question and answer portion for today. I am pleased to hand the program over to Maria Black for closing remarks.
Maria Black: Thanks, Michelle, and thank you again to everyone for joining and for the compliments and the encouragement.
Maria Black: and the interest in ADP. I did wanna share something very exciting, hot off the press. ADP has been named once again by Fortune Magazine as for the 19th consecutive year on the distinguished list of being a world's most admired company in 2025. This recognition for me means everything because it's a true testament to our associates that really make this company the great entity that it is serving so many clients across so many segments.
Maria Black: and so many markets and in such a changing environment for our clients to navigate each and every day. So I'm super proud to share this news with all of you and congratulations to all the ADPers on this well-earned accomplishment. Thanks.
Maria Black: Thank you for your participation. This does conclude the program and you may now disconnect. Everyone, have a great day.