Q2 2025 Summary
Published Feb 7, 2025, 7:58 PM UTC- ADP's sales pipeline is strong and growing year-on-year across all segments, indicating healthy demand and promising future bookings.
- New product offerings like ADP Lyric are resonating well in the marketplace, contributing to growth and expanding ADP's position in the enterprise segment.
- The company is successfully implementing price increases of about 100 basis points, higher than historical levels, positively impacting revenue without negatively affecting client retention.
- Softer pays per control growth: ADP experienced softer pays per control growth than expected, which was broad-based across their client base, indicating a potential slowdown in hiring by clients.
- Expected softness in Q3 revenue and margins due to FX headwinds, lower client funds interest revenue from a 100 basis point drop in short-term rates, and higher integration expenses related to the WorkForce Software acquisition. This could impact short-term financial performance.
- Increased competition from SMB players investing in mid-market solutions may intensify competition for ADP, potentially impacting market share and pricing power.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | +8% | Strong new business bookings and buoyant client retention both drove higher sales, while market demand for payroll and HCM services remained solid. Forward-looking, sustained economic activity and potential upsides from international expansion may support continued revenue momentum. |
Employer Services | +8% | Robust new client signings, stable client retention, and a 2% increase in pays per control contributed to the segment’s growth. Looking ahead, ongoing digital enhancements and product expansions could further boost ES demand, especially in an environment where businesses seek to streamline payroll and HR processes. |
PEO Services | +8% | Average worksite employees rose by around 3%, aided by intensified sales efforts and steady labor markets. Market conditions in tech and professional services have stabilized somewhat, and rising adoption of outsourced HR solutions supports continued PEO expansion, though competition in the PEO market remains a factor to watch. |
Interest on Funds Held for Clients | +21% | Higher average yield of approximately 3.1%, combined with a 5%+ increase in client funds balances, drove a notable income jump. Should interest rates remain elevated, ADP could further benefit from higher yields, but shifts in global monetary policy could temper or amplify these gains. |
Operating Income (EBIT) | +48% | Significant margin expansion propelled operating income growth, supported by increased client funds interest and cost management initiatives. Future margins may remain healthy if expense discipline continues, though acquisition-related integration and R&D investments could affect profitability. |
Net Income | +10% | Increased top-line growth and operating efficiencies lifted net income, with PEO and ES segments both contributing. Continued investments in growing service lines and a stable tax rate may keep net income growth on track, barring shifts in the economic climate or unexpected cost pressures. |
Diluted EPS | +11% | Higher net income and ongoing share repurchases supported the EPS increase, coupled with improved operating margin. Going forward, further buybacks and solid organic growth could sustain EPS momentum, though changes in capital allocation or market volatility might influence per-share results. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Revenue Growth (Consolidated) | FY 2025 | 6% to 7% | 6% to 7% | no change |
ES Revenue Growth | FY 2025 | 6% to 7% | 6% to 7% | no change |
PEO Revenue Growth | FY 2025 | 5% to 6% | 5% to 6% | no change |
Adjusted EBIT Margin Expansion | FY 2025 | 30 to 50 bps | 30 to 50 bps | no change |
ES Margin Expansion | FY 2025 | 40 to 60 bps | 40 to 60 bps | no change |
PEO Margin Decline | FY 2025 | 70 to 90 bps | 70 to 90 bps | no change |
Adjusted EPS Growth | FY 2025 | 7% to 9% | 7% to 9% | no change |
Effective Tax Rate | FY 2025 | ~23% | ~23% | no change |
ES Pays Per Control Growth | FY 2025 | 1% to 2% | 1% to 2% | no change |
PEO Pays Per Control Growth | FY 2025 | Below 1% to 2% | Slightly slower than ES | no change |
ES Retention Decline | FY 2025 | 10 to 30 bps | 10 to 30 bps | no change |
Average Worksite Employee Growth | FY 2025 | 2% to 3% | 2% to 3% | no change |
Client Funds Interest Revenue | FY 2025 | Reduced by $10 million | Increased by $25 million | raised |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Revenue Growth (YoY) | Q2 2025 vs Q2 2024 | 6% to 7% | 8.2% (calculated from 5,048.4Vs. 4,667.9) | Beat |
EPS Growth (YoY, Diluted) | Q2 2025 vs Q2 2024 | 7% to 9% | 10.8% (calculated from 2.35Vs. 2.12) | Beat |
Operating Margin Expansion | Q2 2025 vs Q2 2024 | 30 to 50 basis points | +7.4 percentage points (from ~20.3% (947.3/4,667.9) to ~27.7% (1,399.1/5,048.4)) | Beat |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Pays per Control Growth/Softness | Q1 2025: 2% growth, meeting forecasts. Q4 2024: 2% for FY24, expected to moderate to 1%-2% in FY25. Q3 2024: stable at 2%. | 1% growth, slightly below expectations, softer than Q1. | Recurring topic, sentiment slightly softened |
PEO Segment Performance | Q1 2025: 7% revenue growth, margin pressured by workers’ comp. Q4 2024: revenue up 6%; margin contraction 240 bps. Q3 2024: 5% revenue growth, margin down 220 bps. | 8% revenue growth, margins down 140 bps, pays per control slightly slower than ES. | Recurring topic, stable growth but margin bear |
New Business Bookings | Q1 2025: Record Q1 volume; broad-based performance. Q4 2024: 7% full-year bookings growth. Q3 2024: record Q3 bookings, broad-based. | Solid ES bookings, pipelines up y/y, record volume in compliance, HR outsourcing, and SMB. | Recurring topic, consistently strong |
Retention & Out-of-Business Rates | Q1 2025: Slower retention y/y, expecting 10-30 bps decline. Q4 2024: 92% retention (record), watching small biz closures. Q3 2024: record Q3 retention overall, downmarket variability. | Slight retention decline but beat expectations, modest downmarket softness. | Recurring topic, still strong overall |
International Expansion | Q1 2025: Strong global momentum, WorkForce integration boosting growth. Q4 2024: expansions into Sweden, APAC; robust iHCM in Europe. Q3 2024: strong bookings in Celergo, GlobalView, APAC focus. | No mention of specific international updates beyond stable macro backdrop. | Mention dropped this period |
Next-gen HCM Solution | Q1 2025: Rebranded as ADP Lyric, strong analyst reviews, still early. Q4 2024: Gains before GA, >30% client growth. Q3 2024: Focus on ADP Assist with Gen AI, no explicit Lyric naming. | Renamed Lyric, generating interest; early but positive new-business pipeline. | Recurring topic, name rebrand and scaling up |
Price Increases | Q1 2025: ~100 bps, no major change from prior. Q4 2024: 150 bps in FY23/24, moderating to 100 bps in FY25. Q3 2024: 100-150 bps for FY24. | Targeting 100 bps increase, more than historical 50 bps but less than earlier 150 bps. | Recurring topic, moderation continues |
WorkForce Software acquisition & integration | Q1 2025: Early integration stage, 0.5% lift to ES revenue outlook, ~50 bps margin drag. Q4 2024: No mention. Q3 2024: No mention. | Integration progressing, new cross-selling opportunities, higher Q3 expenses. | Newly recurring, potential long-term impact |
Competition from SMB/mid-market players | Q1 2025: No mention. Q4 2024: Competitors’ pricing mostly status quo, ADP remains well-positioned. Q3 2024: Highly competitive but ADP invests in product/distribution. | Consolidation among SMB competitors observed, ADP confident in segment approach. | Recurring with stable to positive sentiment |
Generative AI | Q1 2025: Tools for call summarization, appointment setting, stable investments. Q4 2024: Embedding AI across products (ADP Assist), potential monetization. Q3 2024: AI for service efficiency,client experience. | Focus on three areas (product integration, service org, sales), seeing call time reduction. | Recurring, expanding use cases |
ADP Lyric Product Launch | Q1 2025: Official rebrand and strong early reception. Q4 2024: No mention by Lyric name. Q3 2024: No mention by Lyric name. | Continues under Lyric brand, large Midwest client success story. | New branding from Next-gen HCM |
FX Headwinds | Q1 2025: No mention. Q4 2024: Turn from slight tailwind to headwind in FY25. Q3 2024: Minor adverse FX movement vs. prior forecast. | Affecting Q3 revenue, but Q4 reacceleration expected. | Recurring, modest headwind persists |
Client Funds Interest Revenue | Q1 2025: Up but forecast lowered $10M due to yield curve changes. Q4 2024: Expected $1.13–$1.15B in FY25, with higher yields. Q3 2024: Exceeded outlook, revised upward. | Higher than expected, outlook raised by $25M, partial FX offset. | Recurring, but guidance adjusted frequently |
Margin & EPS Pressure | Q1 2025: 30-50 bps EBIT margin expansion, WorkForce costs drag ~1% on EPS. Q4 2024: Anticipated margin pressure from slower pays per control. Q3 2024: PEO margin down, Gen AI investments. | 60 bps EBIT margin expansion in Q2, short-term interest rates & FX slow Q3, reacceleration in Q4. Full-year EPS +7% to +9%. | Recurring, short-term drag but stable outlook |
Small Business Segment Churn | Q1 2025: Retention declined slightly but out-of-business rates still near normal. Q4 2024: No major changes, 92% overall ES retention. Q3 2024: Downmarket retention expected to normalize. | Slight downmarket softness, better than expected retention. | Recurring, remains resilient |
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Fiserv Partnership
Q: How will the Fiserv partnership impact growth?
A: Maria Black explained that the partnership with Fiserv is a referral relationship where both companies will integrate products, with ADP's RUN offering embedded inside Clover and vice versa. They anticipate revenue sharing over time and see this as a significant channel for growth in the small business market. -
Lyric Adoption
Q: Is Lyric causing an inflection in enterprise bookings?
A: Maria Black stated that Lyric, their new name for the Next Gen HCM solution, is resonating well with clients, leading to strong additions and pipeline growth. They expect Lyric to contribute to growth in new business bookings this year, though it will take time to scale and impact financials significantly. -
PEO Revenue Guidance
Q: Why is PEO revenue growth slowing in the back half?
A: Don McGuire attributed the implied slower PEO revenue growth to timing-related issues, including the pull-forward of low-margin State Unemployment Insurance into Q2 due to calendar shifts, and anticipated slower pays per control growth in the PEO compared to Employer Services. -
Demand Trends
Q: How is demand trending across client segments post-election?
A: Maria Black reported strong, broad-based demand across all segments. Downmarket companies continue hiring and buying, though new business formations show slight pressure. The mid-market shows strength in HR outsourcing, and while they remain watchful in the upmarket due to global uncertainties, overall pipelines are strong heading into the back half. The new administration hasn't yet caused noticeable changes in demand. -
Retention Outlook
Q: What are expectations for retention and SMB bankruptcies?
A: Maria Black noted that retention beat modestly again, indicating small businesses are staying in business. They observed a slight degradation in the downmarket but are nearly normalized. The assumption for the back half remains that small and medium-sized business bankruptcies may pick up, but they are optimistic and see no alarming trends. -
AI Initiatives
Q: How are AI projects impacting efficiency and margins?
A: Maria Black highlighted that their generative AI strategy is improving service and sales efficiency. Examples include call summarization reducing call times by a minute and digital transformation in implementation leading to record onboarding levels. Sales modernization tools are enhancing productivity, and while initial investments are being made, they expect long-term positive impacts on margins. -
Revenue and Margin Outlook
Q: How should we view revenue growth and margins in Q3 vs. Q4?
A: Don McGuire explained that FX headwinds and lower short-term interest rates are pressuring Q3, especially with the highest average daily balances due to tax season. Integration expenses from WorkForce Software are also heavier in Q3. Growth is expected to accelerate in Q4, aligning with their full-year reiterated guidance. -
Pricing Environment
Q: What's the outlook for pricing yield in selling season?
A: Don McGuire indicated that the competitive environment remains consistent, with no unusual pricing pressures. They are targeting about 100 basis points of price increases this year, higher than the historical 50 basis points but lower than the 150 basis points during periods of high inflation. -
M&A Appetite
Q: Has the Paychex Paycor deal changed your M&A approach?
A: Don McGuire stated that their M&A views haven't changed, and regulatory environments haven't been an obstacle. They see industry fragmentation as an opportunity and continue to seek acquisitions that complement their offerings without complicating them, focusing on tuck-in acquisitions as part of their strategy. -
WorkForce Software Integration
Q: How is the WorkForce Software integration progressing?
A: Maria Black reported that the integration is on track, having just reached 100 days since the acquisition. They are focusing on go-to-market strategies, aligning client bases, and pipeline opportunities. Integration efforts are underway, and they are excited about the potential impact in workforce management and the enterprise and global spaces, especially as they combine the product with their Lyric offering. -
Bookings Visibility
Q: How does bookings visibility compare to last year?
A: Maria Black noted that pipelines are in good shape and up year-over-year. They feel good about their position heading into the back half, although they acknowledge the need for continued execution. Visibility on full-year bookings is consistent with previous years. -
B2B Payments Opportunity
Q: What are your thoughts on entering B2B payments?
A: Maria Black acknowledged the potential in B2B payments and treasury management solutions as natural adjacencies. While she didn't provide specifics, she indicated that these opportunities are top of mind and that more information may be shared in future strategy discussions.