Q3 2024 Earnings Summary
- ADP is gaining market share in the mid-market segment due to investments in best-in-class products, distribution, and digital transformation, leading to high client satisfaction, record-high Net Promoter Scores, and strong client retention.
- ADP's PEO business remains strong with a robust value proposition, with 50% of PEO clients coming from existing clients, indicating strong demand and cross-sell opportunities.
- ADP sees significant growth opportunities both domestically and internationally, with ongoing expansion into markets like India and Southeast Asia, where they pay over 1 million people every payday; saturation is not a concern.
- ADP expects pays per control growth to decelerate modestly next year, leading to potential revenue pressure, especially in the PEO segment.
- Investments in Gen AI are anticipated to create margin pressure in fiscal 2025, potentially slowing margin growth.
- ADP is cautious about raising prices due to inflation concerns, which may limit their ability to offset cost increases through price adjustments.
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Margin Outlook for FY25
Q: Will Gen AI investments pressure margins next year?
A: Management expects margins to improve in FY25, but possibly at a slower rate due to increased expenses from Gen AI investments. They are not signaling a decline in margins and anticipate some tailwinds from interest rates. -
Revenue Guidance Update
Q: Is revenue growth coming in at higher end of range?
A: Yes. Strong client retention and favorable client funds interest are contributing to revenue growth, making management confident they will reach the higher end of the 7%–8% range. -
Pricing Strategy
Q: Any updates on pricing plans amid inflation?
A: ADP remains thoughtful and measured in pricing to maintain the right price-value equation. This year’s price increase of about 1.5% was well received. They will continue to be cautious with pricing and monitor the competitive landscape as they plan for FY25. -
Client Retention Trends
Q: What is driving strong client retention?
A: Record retention is led by the mid-market segment, driven by investments in product and achieving record client satisfaction. Fiscal '23 was a record year, and management is very pleased with current retention levels. -
PEO Business Outlook
Q: Has anything changed in PEO demand or growth outlook?
A: Management remains very bullish on the PEO value proposition, which is stronger than ever. Despite recent growth slowdowns, fundamentals are strong, and 50% of PEO clients come from their existing base. -
International Expansion
Q: Is international expansion a growth catalyst?
A: Yes. ADP sees significant growth opportunities internationally, especially in Asia Pacific and the Nordics. Deployment of Next Gen Payroll in international markets is expected to further boost bookings growth. -
Market Saturation Concerns
Q: Are you concerned about market saturation?
A: No. ADP believes there is still tremendous growth potential in the HCM space. Only about 50% of new bookings come from new clients, indicating significant upsell opportunities within their base. -
Mid-market Success
Q: What's driving strength in mid-market?
A: The mid-market segment is seeing strong growth due to investments in product, excellent distribution execution, and high client satisfaction. ADP is getting stronger and competing effectively in this highly competitive space. -
PEO Pay per Control Trends
Q: How are PEO verticals like tech and professional services doing?
A: PEO bookings softened slightly in Q3, but pay per control growth stabilized after prior deceleration, particularly in tech and professional services. Worksite employee growth accelerated 1% over Q2, reflecting booking success despite modest PPC pressure.
Research analysts covering AUTOMATIC DATA PROCESSING.