Q1 2025 Summary
Published Jan 28, 2025, 9:22 PM UTC- ADP reported a record first-quarter new business bookings in Employer Services, with strong demand and healthy pipelines, supporting their 4% to 7% full-year growth guidance.
- The company expects continued growth in PEO pays per control this year, supported by strong PEO new business bookings which are outperforming due to strong execution and the increasing value of the PEO proposition.
- The acquisition of WorkForce Software is expected to expand ADP's offerings in workforce management, tapping into a large total addressable market, and is anticipated to contribute significantly to revenue growth in fiscal 2025.
- ADP expects growth in PEO pays per control to be lower than Employer Services and experiencing softness, forecasting PEO pays per control growth to be "softer than the 2% at the high end" expected for Employer Services.
- The acquisition of WorkForce Software is anticipated to cause near-term adjusted EBIT margin pressure of approximately 50 basis points and EPS growth drag of more than 1% in fiscal 2025 due to integration costs, amortization of intangibles, and interest expense. Additionally, significant expense synergies are not expected from this transaction, which may negatively impact profitability.
- ADP forecasts a 10 to 30 basis point decline in full-year retention rate, partly due to expected higher out-of-business rates among small business clients, indicating potential churn and challenges in client retention within that segment.
Metric | Period | Guidance | Actual | Performance |
---|---|---|---|---|
Consolidated Revenue | Q1 2025 | 5% to 6% YoY | 7.1% YoY (4,832.7Vs 4,512.4) | Beat |
Employer Services (ES) | Q1 2025 | ES Revenue Growth: 5% to 6% | 7.0% YoY (3,261.0Vs 3,046.4) | Beat |
PEO Services | Q1 2025 | PEO Revenue Growth: 4% to 6% | 7.1% YoY (1,574.5Vs 1,469.6) | Beat |
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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.