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    Automatic Data Processing Inc (ADP)

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    Business Description

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    Q1 2025 Summary

    Initial Price$239.30June 29, 2024
    Final Price$272.88September 29, 2024
    Price Change$33.58
    % Change+14.03%

    What went well

    • ADP's acquisition of WorkForce Software, which serves over 1,000 clients in more than 100 countries, expands ADP's presence in the sizable workforce management market and offers significant growth opportunities by leveraging ADP's scale, distribution, and brand. , ,
    • The launch of ADP Lyric, the new name for Next Gen HCM, introduces a flexible, intelligent, and human-centric global HCM platform that has generated strong interest, received great analyst reviews, and is expected to drive future growth. ,
    • Client satisfaction scores are at all-time highs for a first quarter, leading to favorable retention results, and ADP maintains a strong pipeline with no changes in buying behaviors, indicating continued business momentum. ,

    What went wrong

    • ADP expects PEO pays per control growth to be lower than Employer Services, indicating softer growth in the PEO segment.
    • Retention is expected to decline by 10 to 30 basis points for the full year due to higher out-of-business rates among small businesses, potentially impacting revenue growth.
    • The WorkForce Software acquisition is expected to pressure adjusted EBIT margin, and there is uncertainty around its future revenue contribution as it's too early to quantify.

    Q&A Summary

    1. WorkForce Software Acquisition Impact
      Q: What is the financial impact of the WorkForce Software acquisition?
      A: ADP acquired WorkForce Software to enhance its workforce management solutions, expecting it to contribute about 0.5% of EBIT margin pressure in fiscal '25 due to integration costs, amortization, and interest expenses. The acquisition accounts for half of the 1% increase in the revenue growth outlook, with the remainder from strong business results.

    2. Employer Services Demand and Bookings
      Q: How did Employer Services perform in terms of demand and bookings?
      A: Demand remains strong with a solid and broad-based sales quarter. Strength was seen in retirement services in the down market, HR outsourcing in the mid-market, and continued growth internationally. Pipelines are healthy, and ADP is sticking to its 4–7% guidance for Employer Services bookings growth for the full year.

    3. PEO Margins and Pays per Control
      Q: What drove the PEO margins and pays per control growth?
      A: PEO margins improved due to stronger-than-expected revenue, driven by strong worksite employee growth and higher wage rates. PEO pays per control is expected to grow this year but at a lower rate than Employer Services. A small $4 million reserve release occurred in the quarter, but no further releases are anticipated.

    4. Retention Rates and Drivers
      Q: What are the drivers behind retention performance?
      A: Retention remains strong, correlating with all-time high client satisfaction scores. Investments in product and service improvements have paid off. While retention declined slightly, the Small Business Services segment held up well. ADP expects retention to be prudent in future guidance.

    5. Lyric HCM Launch and Impact
      Q: What is the outlook for the new Lyric HCM product?
      A: ADP launched Lyric HCM, previously known as Next Gen HCM, a flexible and intelligent global HCM solution designed with humanity in mind. The product has generated significant interest, and pipelines have increased, but it will take time before it has a meaningful financial impact.

    6. Cross-sell Opportunities with WorkForce Software
      Q: Are there cross-sell opportunities with the WorkForce Software acquisition?
      A: ADP sees significant opportunities to leverage its scale, distribution, and brand to enhance growth with WorkForce Software. The acquisition should help both companies access each other’s client bases and pursue new logos, particularly in the global enterprise space.

    7. Small Business Health Outlook
      Q: How is the health of small businesses affecting ADP?
      A: The health of small businesses remains strong, with overall strength in demand. New business formations have declined year-over-year but are still elevated compared to pre-pandemic levels. ADP continues to see solid execution in the small business segment.

    8. Pricing Strategy
      Q: Has there been any change in ADP's pricing strategy?
      A: ADP's pricing strategy remains consistent, aiming for price increases of about 100 basis points as inflation moderates. There were no significant changes or contributions from price beyond initial expectations.

    9. Generative AI Investments
      Q: What is the progress on generative AI initiatives?
      A: ADP continues to invest modestly in generative AI, seeing good results in call summarization tools, sales support, and technology development. No significant incremental investments are planned at this time.

    10. Capital Allocation and M&A Strategy
      Q: Is ADP becoming more acquisitive with larger deals?
      A: ADP's M&A strategy remains unchanged, focusing on acquisitions that complement its offerings without complicating them. The WorkForce Software acquisition aligns with this approach, and future M&A activity will follow the same disciplined philosophy.

    Guidance Changes

    Annual guidance for FY 2025:

    • Employer Services (ES) Revenue Growth: 6% to 7% (raised from 5% to 6% )
    • Employer Services (ES) Full Year Growth Guidance: 4% to 7% (no prior guidance)
    • Employer Services (ES) Retention: 10 to 30 basis point decline (no change from prior guidance )
    • Employer Services (ES) Pays Per Control Growth: 1% to 2% (no change from prior guidance )
    • Client Funds Interest Revenue: Reduced by $10 million (lowered from $1.13B–$1.15B )
    • Employer Services (ES) Margin: Increase of 40 to 60 basis points (lowered from 100 to 120 basis points )
    • Professional Employer Organization (PEO) Revenue Growth: 5% to 6% (raised from 4% to 6% )
    • Professional Employer Organization (PEO) Average Worksite Employee Growth: 2% to 3% (no prior guidance)
    • Professional Employer Organization (PEO) Margin: Down 70 to 90 basis points (raised from down 90 to 110 basis points )
    • Consolidated Revenue Growth: 6% to 7% (raised from 5% to 6% )
    • Adjusted EBIT Margin Expansion: 30 to 50 basis points (lowered from 60 to 80 basis points )
    • Corporate Interest Expense: Increase by about $40 million (no prior guidance)
    • Effective Tax Rate: Around 23% (no change from prior guidance )
    • Adjusted EPS Growth: 7% to 9% (lowered from 8% to 10% )

    Key Metrics

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    Executive Team

    NamePositionStart DateShort Bio
    John AyalaChief Operating Officer (stepping down)January 2022John Ayala joined ADP in 2002. He has served in various roles, including President, Employer Services North America, and President, Major Account Services and ADP Canada. He was appointed Chief Operating Officer in January 2022. Ayala will be stepping down from his role as Chief Operating Officer effective January 1, 2025 .
    Maria BlackPresident and Chief Executive OfficerJanuary 2023Maria Black is the President and Chief Executive Officer of ADP. She has been with ADP since 1996. Before her current role, she served as President of the company from January 2022 to December 2022, and held various leadership positions, including President of Worldwide Sales and Marketing .
    Paul BolandChief Human Resources OfficerJune 2023Paul Boland joined ADP in 2017. Before his appointment as Chief Human Resources Officer, he served as Interim Chief Human Resources Officer and held various HR leadership roles within the company .
    Michael A. BonartiChief Administrative OfficerJuly 2021Michael A. Bonarti joined ADP in 1997. He was appointed as Chief Administrative Officer in July 2021, after serving as Corporate Vice President, General Counsel, and Secretary .
    Chris D'AmbrosioChief Strategy OfficerJune 2021Chris D'Ambrosio joined ADP in 2014. He was appointed as Chief Strategy Officer in June 2021, having previously served as Senior Vice President, General Manager, Insurance Services, Small Business Services .
    Joe DeSilvaPresident, Global SalesJanuary 2022Joe DeSilva joined ADP in 2003. He was appointed as President, Global Sales in January 2022, and previously served as President, Small Business Services, Retirement Services, and Insurance Services .
    Sreeni KutamPresident, Global Product and InnovationJanuary 2023Sreeni Kutam joined ADP in 2014. Before his current role, he served as Chief Human Resources Officer and held various HR leadership roles within the company .
    David KwonChief Legal Officer/General CounselJuly 2021David Kwon joined ADP in 2011. He was appointed as Corporate Vice President, Chief Legal Officer/General Counsel in July 2021, after serving in various legal roles within the company .
    Jonathan LehbergerCorporate Controller and Principal Accounting OfficerJuly 2024Jonathan Lehberger joined ADP in 2004. He was appointed as Corporate Controller and Principal Accounting Officer in July 2024, having previously served as Senior Vice President, Financial Strategy and Planning .
    Don McGuireChief Financial OfficerOctober 2021Don McGuire joined ADP in 1998. He was appointed as Chief Financial Officer in October 2021, after serving as President, Employer Services International and other leadership roles .
    Joseph DeSilvaExecutive Vice President, North America and Chief of Operations (future)January 1, 2025Joseph DeSilva joined ADP in 2003. Prior to his upcoming role as Executive Vice President, North America and Chief of Operations effective January 1, 2025, he served as President, Global Sales since January 2022 .

    Questions to Ask Management

    1. With the sizeable acquisition of WorkForce Software, how do you plan to integrate their offerings without complicating your existing platform ecosystem, and are there risks that this could potentially confuse your go-to-market strategy, especially since you have spent the last decade reducing platform complexity?

    2. Given that new business formations are down year-on-year and fiscal year-to-date, how do you plan to sustain growth in the small business segment, and what strategies do you have in place to mitigate the potential slowdown in small business demand?

    3. You mentioned that PEO pays per control growth is expected to be softer than Employer Services; with further deceleration observed, what concrete steps are you taking to bolster growth in the PEO segment, and how confident are you in achieving your PEO targets for the year?

    4. Considering that the Employer Services retention rate declined slightly, despite record client satisfaction scores, what factors led to this slight decrease in retention, and how are you addressing any underlying issues to ensure retention rates improve?

    5. With the issuance of $1 billion of notes at 4.75% to finance the $1.2 billion acquisition, how will the additional interest expense impact your earnings going forward, and are you concerned about the increased leverage on your balance sheet?

    Share Repurchase Program

    Program DetailsProgram 1
    Approval DateNovember 2022
    End Date/DurationNo expiration date
    Total additional amount$5 billion
    Remaining authorization amount$2.706 billion
    DetailsThe program was authorized to repurchase $5 billion of common stock. The purpose includes returning capital to shareholders and offsetting dilution from stock-based compensation, considering factors like acquisition activity and market conditions.

    Past Guidance

    Q1 2025 Earnings Call

    • Issued Period: Q1 2025
    • Guided Period: FY 2025
    • Guidance:
      1. Employer Services (ES) Revenue Growth: 6% to 7%
      2. Employer Services (ES) Full Year Growth Guidance: 4% to 7%
      3. Employer Services (ES) Retention: 10 to 30 basis point decline
      4. Employer Services (ES) Pays Per Control Growth: 1% to 2%
      5. Client Funds Interest Revenue: Reduced by $10 million
      6. Employer Services (ES) Margin: Increase of 40 to 60 basis points
      7. Professional Employer Organization (PEO) Revenue Growth: 5% to 6%
      8. Professional Employer Organization (PEO) Average Worksite Employee Growth: 2% to 3%
      9. Professional Employer Organization (PEO) Margin: Down 70 to 90 basis points
      10. Consolidated Revenue Growth: 6% to 7%
      11. Adjusted EBIT Margin Expansion: 30 to 50 basis points
      12. Corporate Interest Expense: Increase by about $40 million
      13. Effective Tax Rate: Around 23%
      14. Adjusted EPS Growth: 7% to 9% .

    Q4 2024 Earnings Call

    • Issued Period: Q4 2024
    • Guided Period: FY 2025
    • Guidance:
      1. Client Funds Balances: 3% to 4% growth
      2. Client Funds Interest Revenue: $1.13 billion to $1.15 billion
      3. Net Impact from Client Fund Strategy: $1 billion to $1.02 billion
      4. Employer Services (ES) Margin: Increase 100 to 120 basis points
      5. PEO Revenue Growth: 4% to 6%, excluding zero margin pass-throughs 3% to 4%
      6. PEO Margin: Decrease 90 to 110 basis points
      7. Consolidated Revenue Growth: 5% to 6%
      8. Adjusted EBIT Margin Expansion: 60 to 80 basis points
      9. Effective Tax Rate: Around 23%
      10. Adjusted EPS Growth: 8% to 10%
      11. ES Revenue Growth: 5% to 6%
      12. ES New Business Bookings Growth: 4% to 7%
      13. ES Retention: Decline 10 to 30 basis points from 92%
      14. Pays Per Control Growth: 1% to 2%
      15. Price Contribution to ES Revenue Growth: Closer to 100 basis points
      16. FX Impact: Transition from a modest tailwind to a slight headwind
      17. Average Yield on Client Funds: Increase from 2.9% to 3.1% .

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: FY 2024 and FY 2025
    • Guidance:
      1. Fiscal 2024 Consolidated Revenue Growth: 6% to 7%
      2. Adjusted EBIT Margin: Increase 60 to 70 basis points
      3. Effective Tax Rate: Around 23%
      4. Adjusted EPS Growth: 10% to 12%
      5. Employer Services (ES) Revenue Growth: 7% to 8%
      6. ES Margin Growth: Increase 180 to 190 basis points
      7. ES New Business Bookings Growth: 4% to 7%
      8. ES Retention: 20 to 30 basis point decline
      9. ES Pays Per Control Growth: Around 2%
      10. PEO Revenue Growth: 3% to 4%
      11. PEO Worksite Employee Growth: 2% to 3%
      12. PEO Margin: Decrease 120 to 140 basis points
      13. Client Funds Interest Revenue: Revised outlook
      14. Fiscal 2024 Average Client Funds Balance Growth: About 3% .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Revenue Growth: 6% to 7%
      2. Employer Services (ES) Revenue Growth: 7% to 8%
      3. PEO Revenue Growth: 2% to 3%
      4. Adjusted EBIT Margin: Increase 60 to 70 basis points
      5. Adjusted EPS Growth: 10% to 12%
      6. Employer Services Retention: 40 to 60 basis point decline
      7. Pays Per Control Growth: 1% to 2%
      8. Client Funds Interest Revenue: $985 million to $995 million
      9. PEO Margins: Down 80 to 100 basis points
      10. Effective Tax Rate: Around 23% .