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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
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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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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% )
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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?
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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?
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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?
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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?
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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?
Q1 2025 Earnings Call
- Issued Period: Q1 2025
- Guided Period: FY 2025
- Guidance:
- Employer Services (ES) Revenue Growth: 6% to 7%
- Employer Services (ES) Full Year Growth Guidance: 4% to 7%
- Employer Services (ES) Retention: 10 to 30 basis point decline
- Employer Services (ES) Pays Per Control Growth: 1% to 2%
- Client Funds Interest Revenue: Reduced by $10 million
- Employer Services (ES) Margin: Increase of 40 to 60 basis points
- Professional Employer Organization (PEO) Revenue Growth: 5% to 6%
- Professional Employer Organization (PEO) Average Worksite Employee Growth: 2% to 3%
- Professional Employer Organization (PEO) Margin: Down 70 to 90 basis points
- Consolidated Revenue Growth: 6% to 7%
- Adjusted EBIT Margin Expansion: 30 to 50 basis points
- Corporate Interest Expense: Increase by about $40 million
- Effective Tax Rate: Around 23%
- Adjusted EPS Growth: 7% to 9% .
Q4 2024 Earnings Call
- Issued Period: Q4 2024
- Guided Period: FY 2025
- Guidance:
- Client Funds Balances: 3% to 4% growth
- Client Funds Interest Revenue: $1.13 billion to $1.15 billion
- Net Impact from Client Fund Strategy: $1 billion to $1.02 billion
- Employer Services (ES) Margin: Increase 100 to 120 basis points
- PEO Revenue Growth: 4% to 6%, excluding zero margin pass-throughs 3% to 4%
- PEO Margin: Decrease 90 to 110 basis points
- Consolidated Revenue Growth: 5% to 6%
- Adjusted EBIT Margin Expansion: 60 to 80 basis points
- Effective Tax Rate: Around 23%
- Adjusted EPS Growth: 8% to 10%
- ES Revenue Growth: 5% to 6%
- ES New Business Bookings Growth: 4% to 7%
- ES Retention: Decline 10 to 30 basis points from 92%
- Pays Per Control Growth: 1% to 2%
- Price Contribution to ES Revenue Growth: Closer to 100 basis points
- FX Impact: Transition from a modest tailwind to a slight headwind
- 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:
- Fiscal 2024 Consolidated Revenue Growth: 6% to 7%
- Adjusted EBIT Margin: Increase 60 to 70 basis points
- Effective Tax Rate: Around 23%
- Adjusted EPS Growth: 10% to 12%
- Employer Services (ES) Revenue Growth: 7% to 8%
- ES Margin Growth: Increase 180 to 190 basis points
- ES New Business Bookings Growth: 4% to 7%
- ES Retention: 20 to 30 basis point decline
- ES Pays Per Control Growth: Around 2%
- PEO Revenue Growth: 3% to 4%
- PEO Worksite Employee Growth: 2% to 3%
- PEO Margin: Decrease 120 to 140 basis points
- Client Funds Interest Revenue: Revised outlook
- Fiscal 2024 Average Client Funds Balance Growth: About 3% .
Q2 2024 Earnings Call
- Issued Period: Q2 2024
- Guided Period: FY 2024
- Guidance:
- Revenue Growth: 6% to 7%
- Employer Services (ES) Revenue Growth: 7% to 8%
- PEO Revenue Growth: 2% to 3%
- Adjusted EBIT Margin: Increase 60 to 70 basis points
- Adjusted EPS Growth: 10% to 12%
- Employer Services Retention: 40 to 60 basis point decline
- Pays Per Control Growth: 1% to 2%
- Client Funds Interest Revenue: $985 million to $995 million
- PEO Margins: Down 80 to 100 basis points
- Effective Tax Rate: Around 23% .