Good morning. My name is Michelle and I'll be your conference operator. At this time, I would like to welcome everyone to ADP's Second Quarter 2025 Earnings Call. I would like to inform you that this conference is being recorded. After the prepared remarks, we will conduct a question-and-answer session. Instructions will be given at that time. I will now turn the conference over to Matt Keating, Vice President, Investor Relations. Please go ahead.

Thank you, Michelle, and welcome everyone to ADP's second quarter fiscal 2025 earnings call. Participating today are Maria Black, our President and CEO; and Don McGuire, our CFO. Earlier this morning, we released our results for the quarter. Our earnings materials are available on the SEC's website and our investor relations website at investors.adp.com, where you will also find the investor presentation that accompanies today's call. During our call, we will reference non-GAAP financial measures, which we believe to be useful to investors and that exclude the impact of certain items. A description of these items along with a reconciliation of non-GAAP measures to their most comparable GAAP measures can be found in our earnings release. Today's call will also contain forward-looking statements that refer to future events and involve some risk. We encourage you to review our filings with the SEC for additional information on the factors that could cause actual results to differ materially from our current expectations. I'll now turn it over to Maria.

Thank you, Matt, and thank you, everyone, for joining us. Before I cover our results, I'd like to take a moment to acknowledge those impacted by the devastating wildfires in Los Angeles. Our hearts go out to our clients, associates, community members, and everyone touched by this tragic situation. To begin, I'd like to highlight a significant milestone achieved during the second quarter. When ADP's Board of Directors approved the 10% increase to our quarterly dividend in November, it marked the 50th consecutive year in which we raised our dividend. We are now proud to be included among an elite group of dividend kings, a small number of publicly traded US companies with 50 or more consecutive years of dividend increases. This distinction is a testament to ADP's enduring business model and our ability to innovate over time and across economic cycles. We embrace this accomplishment and our role as a global HR technology leader and builder of a new era of workforce insight and innovation. We look forward to sharing more about where we've been and more importantly, where we're headed at our 2025 Investor Day, which will take place on June 12th. This morning, we reported strong second quarter results that included 8% revenue growth, 60 basis points of adjusted EBIT margin expansion, and 10% adjusted EPS growth. These results reflected strength across our Employer Services and PEO segments. I'll begin with some additional financial highlights before providing an update on the progress made across our strategic priorities. We delivered solid Employer Services new business bookings with record volumes for fiscal second quarter. Growth was notably strong across our HR outsourcing, compliance, and enterprise businesses as well as our small-business offerings. With the continued healthy demand backdrop and a new business pipeline that is up from this time last year, we look forward to a strong second half of the year. Employer Services retention declined slightly compared to the prior year, but once again modestly exceeded our expectations. We continued to benefit from a strong overall business environment and very high client satisfaction levels. In fact, our client satisfaction levels reached a new all-time high in the second quarter and through the first half of our fiscal year. Employer Services pays per control increased 1% in Q2, decelerating from the 2% growth in Q1. The US labor market remains strong and our clients continue to hire, albeit at a slightly slower pace. Finally, PEO revenue growth of 8% was driven by strong PEO new business bookings and faster zero margin pass-through growth. Now, let's turn to our strategic priorities, where we delivered another quarter of considerable progress. During the second quarter, we announced a strategic partnership with Fiserv that brings Fiserv's leading small-business solutions, specifically Clover, its cloud-based point-of-sale and business management platform; and CashFlow Central, its accounts payables and receivables management platform together with Run, our industry-leading small-business payroll and HR solution. Helping small businesses thrive has been ADP's mission since day one and we are excited to partner with Fiserv to advance this goal and to support the millions of small businesses that drive the US economy. Through this partnership, ADP and Fiserv will offer US-based small businesses access to an integrated all-in-one solution, combining the full power of Run and the Clover small-business management platform. In addition, CashFlow Central will be available to Run clients, enabling our mutual customers to manage their cash flow more efficiently. These integrated solutions will make it easier than ever for small businesses to manage the flow of money into and out of their business, whether they are selling to customers, paying bills, or managing payroll. We initiated mutual client referrals to our respective offerings during the second quarter and our teams are working closely to deliver the integrated solution in the coming months. Our WorkForce Software acquisition, which closed in mid-October, is progressing well and in line with expectations. We are thrilled to have WorkForce Software's associates join ADP and our teams are working to integrate WorkForce Software's time and attendance, absence management and scheduling tools with key ADP HCM platforms. While that happens, the WorkForce Software team is focused on maintaining its momentum and delivering best-in-class solutions. And in Q2, we experienced healthy new business activity across our new WorkForce Software offering as well as our other existing Workforce Management solutions. In addition, we have already started to see new business opportunities that validate the growth anticipated from the combination. For example, WorkForce Software's enterprise-focused, industry-specific solutions are a strong fit for clients, allowing us to better compete and win in a wide range of industry verticals and geographies. Similarly, we are seeing opportunities to offer ADP HR and payroll solutions to WorkForce Software clients looking for a full suite HCM solution. With the addition of WorkForce Software, ADP is uniquely positioned to provide clients with a global HR payroll service and time solution and this value proposition is generating excitement in the marketplace. We remain confident in our opportunity to accelerate our growth in the Workforce Management and enterprise spaces. Following the successful introduction of ADP Lyric, our flexible, intelligent, and human-centric global HCM platform, the product continued to generate strong interest in the marketplace during the second quarter. Lyric's new business booking volumes increased again and its new business pipeline ended the quarter up significantly compared to last year. One client that started on Lyric in Q2 is a large recreation management company in the Midwest that operates nearly 20 parks, a nationally acclaimed zoo, and nine golf courses. The client selected Lyric for a cutting-edge user experience and to simplify its personnel management activities and payroll processes. It went live with a full suite including HR, payroll time, benefits, recruiting, and talent management and is very pleased with the outcome. Since Lyric is a global platform, we remain focused on expanding its already broad international reach to capitalize on what we see as a significant global opportunity. Before I turn the call over to Don, I want to take a moment to express my gratitude to our associates for their dedication and hard work. Their unyielding commitment to our clients inspires me each and every day. It is these efforts that continue to contribute to our record client satisfaction scores. Thank you again for all that you do for ADP, for each other and for our clients. Let's continue to build on our momentum and strive for even greater success together. Don?

Thank you, Maria, and good morning, everyone. I'll start by providing some more color on our second quarter results and then update our fiscal 2025 outlook. Let me begin with our Employer Services results and outlook. ES segment revenue increased 8% on a reported and 7% on an organic constant-currency basis in the second quarter. As Maria mentioned, ES new business bookings growth was solid. With a healthy HCM demand backdrop and higher new business pipelines compared to last year, we are maintaining our 4% to 7% full year growth guidance. ES retention declined slightly in Q2 and we continue to forecast a modest decline of 10 basis points to 30 basis points for fiscal 2025. ES pays per control growth of 1% came in slightly below our expectations, but we are maintaining our forecast for 1% to 2% growth for the full year. Client funds interest revenue increased by more than we anticipated, driven mainly by stronger growth in average client funds balances. For the full year, we are increasing our forecast for client funds interest revenue and the net impact from our extended investment strategy by $25 million. Despite recent FX headwinds more than offsetting the increase to our client funds interest revenue forecast, we are maintaining our outlook for full year ES revenue growth of 6% to 7%. Our ES margin increased 90 basis points in the second quarter, reflecting operating leverage and client funds interest revenue growth. We continue to forecast ES margin increasing 40 basis points to 60 basis points for the full year. Moving to the PEO, revenue growth of 8% and average worksite employee growth of 3% slightly exceeded our expectations. Revenue growth benefited from strong new business bookings, accelerating zero margin pass-through growth, wage growth, and the timing of state unemployment insurance revenue. With continued healthy new business activity levels, we are maintaining our full year forecasts for PEO revenue growth of 5% to 6% and average worksite employee growth of 2% to 3%. PEO pays per control growth stabilized in Q2, but we continue to expect it to grow slightly slower than ES pays per control growth for the full year. PEO margin decreased by 140 basis points in the quarter, impacted by higher zero margin benefits pass-through revenue growth and an increase in workers' compensation in state unemployment insurance costs. We continue to expect PEO margin to decrease between 70 basis points and 90 basis points for the full year. Putting it all together, we are maintaining our fiscal 2025 outlook for consolidated revenue growth of 6% to 7% and adjusted EBIT margin expansion of 30 basis points to 50 basis points. We continue to expect a full-year effective tax rate of around 23%. Our fiscal 2025 adjusted EPS growth forecast of 7% to 9% is also unchanged. There are two cadence matters I would like to highlight. First, we mentioned the timing of PEO state unemployment insurance revenue and we likewise had some favorable revenue timing in our ES segment in Q2 related to the calendar. We expect these factors as well as the strengthening US dollar and the impact of lower short-term interest rates to result in a deceleration in both ES and total revenue growth in Q3, before growth trends reaccelerate in Q4. Second, we expect adjusted EBIT margin expansion and adjusted EPS growth to be lower in Q3 than in Q4 to reflect the lower revenue growth as well as the timing of integration expenses associated with the WorkForce Software acquisition. Thank you and I'll now turn it back to the operator for Q&A.

Our first question comes from Samad Samana with Jefferies. Your line is open.

Hi, good morning, and thanks for taking my questions and great to see the strong end to the calendar year for last year, Maria and team. So, congrats on that. I guess, first question is just on the Fiserv partnership, that's obviously exciting news. Is that going to be referrals between the two organizations? Is there co-development on the product? And maybe just help us think about, is there any kind of revenue share associated with it? And should we see this as the beginning of more of an ISV-driven strategy? I know it's a multi-partner, but there's a lot there.

Good morning, Samad, and thank you for the kind words about our strong finish; we're excited as well. Regarding the Fiserv partnership, we're very pleased to be entering this relationship. Both of our organizations focus on helping small businesses, and we believe in simplifying their journey in business. The collaboration between our two companies brings together our distribution strengths to address real needs for our clients. Currently, we have a referral relationship, passing leads between us. However, we are also contemplating long-term integration of our products, with the Run offering being embedded within Clover and vice versa. We're working towards creating a joint technology offering. So far, we are encouraged by our distribution teams passing leads back and forth. You mentioned whether this marks the start of more partnerships; we believe in collaboration and ecosystems. Our market approach, especially in the lower market, leverages our distribution strength, channel partners, and now this new channel with Fiserv.

Great. And then maybe just one follow-up. On the enterprise side, I know that with the rebranding to Lyric, there's been a lot of focus on that. You sounded very positive about it last quarter. You mentioned it for bookings this quarter. Are you seeing a clear inflection now? Is it fair to say that? And how should we think about the impact of bookings or what's included in the forecast this year from the enterprise side of the business?

Sure. So, it is clear that Lyric is resonating really well in the marketplace. And just real quick for everyone, Lyric is the new name for our next-gen HCM solution, and it is really anchored in flexibility, intelligence; it's human-centric in design. So, we believe it's a really strong product offering. I believe the market is seeing that as well based on what we're seeing with respect to client adds, the pipeline building. I think the pipeline is incredibly strong year-on-year. We do expect Lyric to contribute to our growth this year from a new business bookings perspective. But again, it is still early days and so it will take some time to scale and for it to overall impact the financials of the organization. But the offering is resonating with our global enterprise clients and we're really excited in terms of the receptivity we're seeing in the market.

Great. Thank you so much for taking my questions.

Thank you. Our next question comes from Bryan Bergin with TD Cowen. Your line is open.

Hi, good morning. Thank you. The first question is on demand. So, it's good to hear the continuation of a healthy backdrop here. Can you double-click on how that's progressed across the client segment size? And I'm curious that the calendar turned and just post US election, did you note any changes or anything just worth calling out in bookings specifically on what you see in the US versus international?

Sure, Bryan, and good morning. So, demand is strong. It's broad-based. We feel good about the overall HCM demand. We also clearly benefit from having a great sales and marketing organization. I would say across the various segments in the down-market, down-market companies, they're still hiring, they're still buying. They're still navigating being small-business owners as we just talked about. There are a couple of pockets. I think we're keeping a watchful eye on things like new business formations, which seems to have a little bit of pressure this fiscal year, but it's still at an elevated level, if you will, from a pre-pandemic standpoint. In the mid-market, we are seeing that strength in HR outsourcing, I mentioned that in the prepared remarks. And that's a differentiation for us in that mid-market space. Really excited to see the extension there. And then we've talked over the quarters about the investments we've made into our mid-market product, Workforce Now, the record NPS, the record retention. And so we have a nice mid-market story to meet that demand across the mid-market segment. I think with respect to global and upmarket, I tend to say every quarter, we're always keeping an eye just given the uncertainty in the global space and economic backdrops. But at this point, we don't see anything that would be alarming. And I think generally speaking, we feel really good and broad-based about the pipeline strength heading into the back half. But as we all know, we're a back-half business. We have a lot to execute against. You asked about the new administration and anything that's changed. I think it's too early to call whether or not we're seeing a demand change as a result of the new administration. But the good news is, there seems to be a lot of activity and change is good for ADP. As companies navigate change, we're there to help them stay compliant. And so we're looking forward to helping our clients sort through what undoubtedly seems to be quite a bit of change.

Thank you for the detailed information. Regarding the outlook for 2025, Don, I appreciate your clarifications on the cadence. For the full-year outlook, you mentioned the range for EPS growth. Can you share how comfortable you are within that range as we progress through the second half? How should we consider the EPS in terms of potential upside from the float, especially with the curve remaining elevated, compared to any potential FX challenges due to the strength of the dollar?

Yeah, Bryan, so I think you've touched on it right there at the end. It's the FX headwinds that are really causing us to see some slowdown. But I'd also say that particularly in the third quarter, which is by far our largest average daily balance time as the new taxes or sorry, as federal and state taxes kick in again at the start of the year, that's where we tend to have the highest balances. And all those funds, or most of those funds are short and short-term rates are down 100 basis points year-on-year. So, that's what's put more pressure on Q3, in particular, before it rebounds into Q4. So I think that's the trade-off. It's the FX headwinds are causing some grief. And then, of course, the short nature of the investment portfolio in the third quarter as a result of the various taxes we kicking in at the start of the calendar tax year.

Okay. Appreciate that and congrats on the 50 years of dividend increases.

Thank you.

Thank you. Our next question comes from Ramsey El-Assal with Barclays. Your line is open.

Hi, thanks for taking my question this morning. Don, would you comment a bit further on the drivers of the implied slower PEO revenue growth in the back-half? I know there were some timing-related issues. Can you just sort of parse that out for us and help us understand a little better why that should decelerate the way you've implied it will?

We definitely have the SUI. We mentioned in the prepared remarks that some SUI was pulled forward into Q2 due to the timing of New Year's Day and the holiday, which caused people to process at the end of Q2 instead of Q3. This resulted in some low-margin SUI being recorded in the second quarter rather than the third. Additionally, we are in our renewal period, so we are monitoring the pace per control, and we expect the pace per control growth in PEO to be somewhat slower than in ES. It's important to note that we rounded down to 1% pace per control growth in ES, meaning it was slightly below expectations but still above the 1% threshold. These factors are the main reasons for the slower PEO growth in the latter half of the year.

Got it. Okay. And then a follow-up for me. In the context of the Paychex's Paycor acquisition, do you see any changes in the M&A environment or in your appetite to do deals?

Yeah, I guess I'd say that our views on M&A really haven't changed. I think that over the years, the things we've looked at, we really haven't thought that regulatory environments really been an encumbrance to us doing anything. There's still an incredible amount of fragmentation in the industry. So I think we're going to keep to our principles. We need to make sure that things that we acquire complement our offerings and don't complicate them. But certainly, we continue to look. I mean, you should expect to see, as we've done over the years, expect to see some tuck-ins that are very important for us, and they've contributed to us getting better control over our network, et cetera. So, you may see some of those going forward, but I don't think that there's going to be any changes based on potential new regulation that would result in us seeing a much different stance in M&A than we've had to date.

Got it. All right. Thank you very much.

Thank you. Our next question comes from James Faucette with Morgan Stanley. Your line is open.

Thank you very much for your time this morning. I want to ask quickly about retention. Last quarter, you mentioned a slight decrease in retention, but it didn't seem to be linked to an increase in bankruptcies among small and medium-sized businesses; rather, it appeared to be a result of broader off-peak hiring levels. What did you observe in this quarter regarding that? Are hiring levels fluctuating at all? And do you anticipate that small to medium-sized business bankruptcies will rise again in the second half?

Yes, that is the assumption, James, in the back-half, and good morning. So, retention, as you noticed, we did beat modestly. Again, on retention, I'm very pleased to see that because the biggest piece is if we're beating modestly on retention, that does mean that ultimately small business owners are staying in business. So that makes me even happier for them as well as our results. We did see a little bit of a degradation, if you will, in the down-market. So what we believe we're almost all the way normalized. We're not quite there. It declined. It declined modestly in the first quarter, declined modestly in the second quarter. That said, we do continue to beat. So based on what we're seeing and the fact that across each one of our segments, we've really been at record retention levels, we believe it's prudent to keep our retention guide as is, but I'm optimistic as I'm sure we all are to hope that specifically small businesses stay in business.

Great. Appreciate that. And then I wanted to do a little bit of a status check on some of your AI and machine learning driven initiatives. You guys have always been very front-footed on that and I know that kind of ebbs and flows as a topic. But I'm wondering if you can just give us an update on service and sales efficiency efforts with some of your GenAI projects. And if you have any examples that you could provide of how your GenAI initiatives are impacting client retention or sales productivity or any other metric you may want to touch on?

Yeah, sure. So, I'll start and I certainly welcome Don to chime in here with respect to the results that we're seeing, but we are laser-focused on our Generative AI strategy, and our overall approach. And just to kind of level set and remind everybody, the way that we've been thinking about it is really in three specific buckets, which is putting Generative AI into our products. That's what we call ADP Assist, that's making our products more usable and better for our clients. It's putting Generative AI into our service organization. So, think of that as Agent Assist, but that's part of the overall ADP Assist umbrella. And that specifically, James, kind of answers your question around service and things of that nature. Some of the things we've spoken about in the past that are already making meaningful impact are with respect to things like call summarization. So, I think I cited before that we're shaving off a minute per call, which may not sound that exciting to everybody that a minute per call, but when you take lots and lots of calls, it adds up pretty quickly. So, we continue to make meaningful impact on some of those tools. Other things we cited in the past, digital transformation as it relates to implementation. And so the small business organization is at really record levels as it relates to end-to-end digitally onboarding clients using new tools that are anchored in Generative AI. So, that's kind of the service side. By the way, I could go on and on about this topic. Switching gears really quickly to the go-to-market. We've been undergoing a sales modernization effort and I'd argue for two decades. We have one of the most meaningful sales modernization tech stacks that exist. I think the likes of best-in-class technology to enable all our sellers. Some of the things that we've talked about is opportunity prioritization. So, think about putting the right lead in front of the right seller at the right time to drive value into the sales process. We're doing things like rapid pre-call planning. So this takes me back to my olden days when I used to have to pull everything up on the Internet or MapQuest and try to study what I should say to a certain client. These are all tools now that are helping our sellers become more effective on their sales calls. And the way that you see that and quantify it, certainly, the end game there is more sales, but it's really this balance between as we invest into sales modernization and these various pieces of technology, it's really driving productivity. So we have a natural lift right now in productivity just based on the tenure that we're seeing in our sales organization. So if you imagine, as we're bringing on new associates, we're also building tenure in the existing sales force. So new associates are able to become more productive and existing associates are also able to become more productive. Part of that is anchored in tenure. A lot of that is anchored in these tools that we're investing in and the long-term output of that is more sales and more sales productivity. So, I think I've said a lot, but I'll offer Don if there was anything you wanted to add to that.

No, I'd just add that we are seeing good efficiency and good productivity, but I would say that we still have these tools in many of our associates' hands, but there's still many more to get the tools. And when they get those tools, we expect to see even more positive results. So we'll watch the productivity improvements and hopefully we see those things reflected in the margin. Of course, we had made some minor investments in these tools themselves. So, the bottom-line impact is going to be over the longer term and certainly not short-term, but very, very positive results from everything we're seeing and everything we're doing.

That's great. Thank you so much.

Thank you. Our next question comes from Mark Marcon with Baird. Your line is open.

Good morning, Maria and Don, and congratulations on a strong close to the calendar year and on reaching the 50-year milestone for the organization. On the strategic front regarding Fiserv and Clover, it appears very promising. How significant could this partnership become in two or three years? How do you foresee it evolving? Is there potential for expansion beyond Run? I believe it could also be quite relevant for some clients using the lower end of Workforce Now. I'm curious about your thoughts on this, as I realize it's still early in the process, but I would appreciate any insight you can provide.

Thank you, Mark, for your kind words about our 50 years. Your support has been invaluable. I appreciate your interest in our future strategy. You accurately identified that we have various plans and aspirations. When considering our market approach, it mainly relies on channels. We have previously shared specific numbers about our distribution methods, including banks, CPAs, and POS or merchant services channels like Fiserv, which we see as a significant avenue for growth. We are committed to engaging with this channel. Looking ahead five years, I envision us interacting with this channel in a way similar to how we currently engage with accountants and banks. We have strong products, reputable companies, and effective distribution systems that together can enhance value in the small business sector. While it's uncertain if this will extend beyond small businesses, we will keep assessing our progress in the down-market. It's straightforward for me; our main focus is on the client. If there are opportunities to address real challenges for business owners, whether they are small, medium, or large, we are committed to that, and Fiserv shares this vision. That’s what makes this endeavor exciting. We aim to simplify business navigation and are here to assist. I think we are actively working through that from a plan perspective right now. So, I'm pleased to say everything is on track. We actually just rounded 100 days. It's amazing. Time flies when you're having fun. But last week, we celebrated 100 days in. And at this juncture what we've done is welcome the WorkForce Software associates. We folded them into the ADP family, really pleased to see the milestones that we've accomplished in the first 100 days have come along and in there, thus far, it's really taking a look at the go-to-market. So, as we talked about last quarter, they have a meaningful set of clients. And so as we look at their client base and our client base and comparing pipelines, really that ability to go to market together to ensure that we're winning consistently on the workforce software, and the time and labor management side. That's been a big piece of the focus. And then, as you can imagine, working through the integration is really the next set of pieces. So I don't think we're in a spot yet to declare necessarily exactly by when, but that is a big piece of the work that is being done. And we're really excited about what this is going to mean to us from an opportunity in the WorkForce management space, but also in the enterprise space and the global space as we bring this product also together with the Lyric offering.

Terrific. Got tons of questions, but I'll leave it there. Congratulations again.

Thanks, Mark.

Thank you. Our next question comes from Bryan Keane with Deutsche Bank. Your line is open.

Hi, guys, good morning and congrats on the solid results. Just a clarification on the Fiserv partnership. Just on the economics, how do the economics exactly work between the two companies? Is it a percentage of sales as a one-time fee? Is it a recurring fee? Just curious on how that relationship works on both sides.

So, I don't know that we want to get into the specifics of exactly how we orchestrated it, but the answer in a broad sense is both. So there is a referral piece to it. There's also revenue-share over time that really drive the financials for both of us to make this an accretive proposition for us to go to market together.

Okay. That's helpful. And then just as a follow-up, just thinking about selling season and targets for kind of new client growth and what is the pricing environment, what kind of pricing yield do you think you'll be able to get in the key new selling season?

I don’t think we’re noticing anything out of the ordinary. The competitive landscape remains largely unchanged. There are always promotions happening, both from us and others, but the overall situation feels consistent with what we’ve experienced before. So, we’re not observing anything unusual. Regarding price increases for our existing clients, we are aiming for about 100 basis points this year, which is higher than the historical rate of 50 but lower than the 150 we saw during the peak inflation years. The target of 100 basis points seems quite achievable, and our retention rate indicates that clients are staying with us. Therefore, we believe this goal is within reach.

Okay, that's helpful. Thanks, guys.

Thank you. Our next question comes from Jason Kupferberg with Bank of America. Your line is open.

Thank you, guys. Good morning. I just wanted to start on bookings. The tone there continues to sound quite upbeat. I know the guidance for the year is unchanged at 4% to 7%. I was hoping you could talk qualitatively at least about how you're tracking to that guide this year versus last year. Just wondering whether or not the visibility on the full year bookings is higher now than it was at this time last year.

The best way to address that question is to discuss the year-over-year pipelines. Overall, the pipelines are in strong condition and have increased from last year. When we refer to pipelines, we are specifically talking about the mid-market and upmarket international segments, where we can observe the progression of deals and their longevity. We are optimistic about the year-over-year pipelines. In the down-market segment, we focus more on activities, such as the number of new appointments and RFPs in our PEO. We also feel confident about these activities and the RFPs as well as the pipelines as we move into the second half of the year. I previously mentioned that across ADP, we tend to see stronger sales performance in the second half, so while there's still much execution ahead, we are satisfied with our year-over-year position.

Understood. Okay. And then maybe one for Don. Appreciate all the moving parts here in the back half of the year. But can you just put maybe a finer point on Q3 versus Q4, how we should be thinking about revenue growth and margin cadence just so that we've got the pieces calibrated.

To reiterate, I believe the most critical factor affecting revenue is foreign exchange, which will subsequently impact margins. The cash flow interest is facing some challenges due to the 100 basis point decline and the extent of the portfolio that is short. In the third quarter, we are also just beginning to incur integration expenses related to WorkForce Software. When you review the 10-Q, you will find a detailed breakdown of the goodwill and intangible assets, providing a clearer view of amortization timelines and future projections. We expect some softness in Q3 due to these factors. However, moving into Q4, we anticipate a slight acceleration in growth, maintaining our guidance for the full year.

Okay. Thanks for that.

Thank you. Our next question comes from Scott Wurtzel with Wolfe Research. Your line is open.

Hey, good morning, guys. Thank you for taking my questions. I wanted to start on the PEO segment. One of your peers has called out maybe some dynamics with clients opting into maybe lower cost benefit plans. So just wondering if you've been seeing any changes in benefits enrollment behavior recently.

So, not really, Scott. For our purposes, we are entering our renewal season in the latter half of our fiscal year and the PEO. So, there are still some uncertainties, but nothing significant so far. I want to remind everyone that the PEOs are structured differently. Some have ASO offerings and HRO offerings, while others have various ways to fund their health plans. As you know, with the PEO ADP TotalSource, we are fully insured on the health side. Therefore, behaviors don't always align, and we haven't typically noted those fluctuations in the past. We do have an HR outsourcing offering, which I mentioned earlier, and it has shown strong results in terms of bookings. We expect positive results from both that offering and the PEO. We see strength in both and don't anticipate significant fluctuations.

Got you. That's helpful. And then just as a follow-up, Don, on the softer pace per control growth maybe relative to your expectations, was that in any specific pockets of your client base?

No, it was pretty broad-based. There were no specific industries or regions affected. It was pretty broad-based.

Thank you. Our next question comes from Tien-tsin Huang with JPMorgan. Your line is open.

Hi, thanks so much. Yeah, so a couple quarters of really strong pipeline, I think you've mentioned. I'm just curious, do you see timely deal awards in the second half? And I don't know if I heard this, but are deal sizes getting larger in general? Just curious how the shape of the pipeline and the quality.

I would say deal sizes and timing on deals is relatively consistent. And so I think we've talked about several times over the last couple of years, we're kind of back to, I guess, the new normal or the old normal. So I think deal cycles move through motions very similar to how they operated prior to the pandemic. That's not to suggest that you don't hear every now and then strangeness in timing. Certainly, the holidays this year fell differently that had interesting impact to us both from a revenue perspective, but also interesting impact on the sales side, if you think about when deals kind of cross that line. But listen, large deals are sometimes lumpy as well. And so I would say, generally speaking, things seem to be moving through the motions that they usually do and it's really similar to how we think about the business pre-pandemic.

Glad to hear it. Just on the consolidation side, Maria, I feel like we've seen some SMB players invest in mid-market solutions.

Thank you for that. It's always flattering when someone tries to replicate your success. Joking aside, I recognize the consolidation you've mentioned. I believe it reinforces our strategy of having a diverse segment approach. The strength and variety of ADP continue to stand out. Regarding the two companies consolidating, we have performed well against both and anticipate that we will maintain a favorable position against them. This situation might even create a potential opportunity for us. Overall, we are confident in the strength of our products and the top-tier platforms we offer across all segments, including our Run offering for the lower market, Workforce Now for the mid-market, and our HR outsourcing solutions including PEO. With the integration of Lyric and WorkForce Software, we are very optimistic about our offerings in each of these areas.

That's great. Thanks, Maria. And way to get MapQuest into the transcript, didn't expect that. Thanks.

Old school.

Thank you. Our next question comes from Pete Christiansen with Citi. Your line is open.

Thank you and good morning. There's a lot of positive developments here. Maria, I wanted to discuss your thoughts on the longer-term potential of B2B payments and treasury management solutions. It seems like a natural fit for ADP. I am aware that the company established ADP Trust Company a couple of years ago. I'm curious about your long-term perspective on this. We have seen some integrations with other companies, including in cross-border payroll. Do you see this evolving into a significant long-term growth opportunity for ADP? Thank you.

Sure, Pete. I’ll take that as an invitation to join us at our Investor Day because we’re really looking forward to discussing the future of our strategy. We definitely consider the various aspects you mentioned, and we've had past experiences in the CFO's office. The partnership we are forming with Fiserv is expected to provide valuable insights. As I mentioned earlier, our focus remains on placing the client at the heart of our solutions. This means that if an opportunity arises to collaborate with other companies through partnerships, deeper integration, or even shared ownership to tackle real challenges, those ideas are always part of our strategic discussions. More updates will follow. This is not to imply that there will be a major reveal, but we are eager to share what we envision for ADP's future. We haven’t hosted an Investor Day since November 2021, and many things have changed in our business approach and in the industry overall. So, more to come, Pete, and it is always a priority for us.

Thank you. Our next question comes from Kevin McVeigh with UBS. Your line is open.

Great. Thanks so much. Hey, I think, Don, you talked about kind of trends in the back half with the reacceleration in Q4 as opposed to Q3. Any puts and takes on what drives that reacceleration? I think it was specifically around ES or maybe the business overall.

I think it primarily revolves around ES. The main difference lies in the client funds interest. Q3 is when we have the largest short portfolio, which will not be present in Q4. Consequently, the effects of short-term interest rates will be somewhat less in Q4 compared to Q3, which is a significant factor. Additionally, we are facing higher expenses in Q3 due to the early stages of integrating WorkForce Software, leading to greater costs this quarter than we expect in Q4. Beyond that, there isn't much more to elaborate on.

That's helpful. And then just real quick on the retention. I know typically the Q2, right, the December quarter or Q1 rather, just any thoughts on what quarter seasonally would have the most outsized retention? Just remind us, I know there's some seasonal impact just given the January start, just any thoughts around that?

I think that seasonally, retention tends to fluctuate each quarter. In Q3, there's often a lot of switching, which can lead to a slight dip. However, we measure that dip against the previous year's dip, so it's not unusual. Despite a minor decline, it was less than we expected, and we're pleased with that outcome. It indicates that our clients are satisfied and choosing to stay, as reflected in our high NPS scores. We're optimistic about improving our retention score for the entire year, but we're content with its current status.

Hey, good morning. Don, you talked about pricing and pricing being about 100 basis points up versus 50 that it's historically been, maybe down from the 150 you saw previously. But I'm wondering, do you think the environment has changed 100 basis points, something you could see net pricing for the next couple of years? Or do you think we're just in a unique period where you're getting this little bit outsized pricing?

Good morning, Kartik. I appreciate your question. It's challenging for me to speculate on this because it really depends on the economic forecasts. Some predict higher inflation, but it's uncertain. We haven't yet seen if the proposed policies will actually be implemented and affect inflation. However, I want to emphasize that if inflation rises, we will do our best to provide good value and ensure that we pass along our costs. Ultimately, our focus is on the long-term value for our clients, and we are committed to maintaining a high retention rate, as that is our top priority when it comes to pricing.

And just a follow up on the PEO. You've talked about pace per control being slightly lower in the PEO than ES. And I know that's kind of a more of a near-term phenomenon. Is there anything changing in that business or the industry where you could see this trend continue? Or is this just a bit of an anomaly where the pace per controller lower than the ES business?

I think we've been talking for several quarters about PEO and we've been happy to talk the last couple of quarters about stabilization and improvement. So, hopefully things are going to go back and look better historically. As you know, the pace per control growth in the PEO has been better than it has been in the ES segment. But I think we're happy with where we're at right now and looking for it to improve.

Thank you. We have time for one last question and that question comes from Dan Dolev with Mizuho. Your line is open.

Thank you for fitting me in. I noticed a slight change in the language regarding the macro conditions. Last quarter, you mentioned that clients were hiring at a moderate pace, but now it's described as a slower pace. From your experience, when this slowing trend begins, can it change direction? Is this just a temporary pause? I would appreciate a long-term perspective on this. Other than that, the results are really strong, and I appreciate it. Thank you.

I would respond by saying that the macro-environment remains very strong and stable, with a 4.1% unemployment rate indicating a robust labor market. The fundamentals look good, suggesting that hiring continues, companies are still making profits, and there is a significant amount of optimism in the US market. This creates a positive outlook for growth and pay control. Additionally, we have operations outside the US that provide further opportunities, allowing us to manage our portfolio effectively. Overall, I believe the macro-environment is quite solid.

Thank you.

Thank you. This concludes our question-and-answer portion for today. I'm pleased to hand the program over to Maria Black for closing remarks.

Thanks, Michelle, and thank you again to everyone for joining and for the compliments and the encouragement and the interest in ADP. I did want to share something very exciting, hot off the press. ADP has been named once again by Fortune magazine as for the 19th consecutive year on the distinguished list of being a World's Most Admired Company in 2025. This recognition for me means everything because it's a true testament to our associates that really make this company the great entity that it is serving so many clients across so many segments and so many markets in such a changing environment for our clients to navigate each and every day. So, I'm super proud to share this news with all of you and congratulations to all the ADPers on this well-earned accomplishment. Thanks.

Thank you for your participation. This does conclude the program, and you may now disconnect. Everyone, have a great day.