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 Fourth Quarter Fiscal 2025 Earnings Call. I would like to inform you that this conference is being recorded. 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 Fourth Quarter Fiscal 2025 Earnings Call. Participating today are Maria Black, our President and CEO, and Peter Hadley, 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 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 the 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 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. We closed out fiscal '25 with a strong fourth quarter that included 8% revenue growth, 40 basis points of adjusted EBIT margin expansion and 8% adjusted EPS growth. For the full year, we delivered 7% revenue growth, 50 basis points of adjusted EBIT margin expansion and 9% adjusted EPS growth. We achieved these financial results while also making significant strides across our strategic priorities. I will briefly review some additional highlights from our results before discussing this strategic progress. We delivered approximately $2.1 billion in Employer Services new business bookings in fiscal '25, representing 3% growth. While this was below our expectations, we were able to produce another year of growth, notwithstanding the uncertainty in the macro backdrop in the second half of fiscal '25. Taking a closer look, our small business suite in our domestic enterprise offerings saw solid bookings growth in fiscal '25. We did experience a softer finish in our Employer Services HR Outsourcing business, where the uncertain macro backdrop appeared to impact client decision-making. And while our international bookings improved during the fourth quarter, it was not enough to offset the softness from earlier in the fiscal year. Importantly, our pipelines remain healthy, and we are laser-focused on accelerating Employer Services new business bookings growth in fiscal '26. We were very pleased that our Employer Services retention exceeded our expectations once again, increasing 10 basis points to 92.1% for the year and approaching a record high of 92.2%. Our strong retention stems in part from our company-wide client satisfaction scores reaching new record highs for the year. These impressive results were broad-based and are a testament to the product investments we are making to improve the client experience. Employer Services pays per control increased 1% in both Q4 and fiscal '25. Our clients continue to hire, albeit at a slightly slower pace as we move through the year. Finally, our PEO new business bookings growth accelerated in the fourth quarter and for the full year, contributing to fiscal 2025 PEO revenue growth of 7% at the high end of our expectations. And our fiscal '25 accomplishments extend far beyond our strong financial results. We drove meaningful momentum across all three of our strategic priorities. Leading with best-in-class HCM technology, providing unmatched expertise and outsourcing, and benefiting our clients with our global scale. First, it's been a great year for innovation at ADP. Since its launch, ADP Lyric HCM has continued to gain momentum in the market. Our number of clients sold increased by more than 50% in fiscal '25 with new logos representing the majority of our new Lyric sales and we secured these clients from a diverse set of competitors. Our number of live clients also doubled compared to the prior year and our pipeline has continued to grow. On the AI front, we continued the rollout of ADP Assist which provides the latest AI-driven capabilities into our products, and we're seeing fantastic engagement from our clients with millions of interactions in fiscal '25. To further build on our unmatched expertise, we have also deployed these tools across ADP to thousands of our associates, driving efficiencies in our sales, service and technology functions. By coupling our decades of experience with our significant data insights and AI investments, we are simplifying work for our associates and elevating the end-to-end client experience. Finally, we continue to benefit our clients with our global scale. In fiscal '25, we enhanced our unmatched global payroll capabilities by expanding our offer in markets with exciting growth opportunities like Japan and Saudi Arabia and by acquiring payroll businesses like PEI in Mexico. In addition, we expanded our embedded payroll offering to enhance our small business distribution ecosystem. We also acquired WorkForce Software in fiscal '25, which meaningfully enhanced our capabilities in the time and attendance space, allowing us to serve the broader workforce management needs of our clients. Now as we look to fiscal '26, we are excited to make even more progress across our strategic priorities as we advance several company-wide initiatives. The AI landscape is evolving fast, and we are making sure that we stay ahead. Our vast dataset is key to this. We benefit from the largest HCM dataset with over 1.1 million clients and 42 million workers paid. This data allows us to expand our offering from simple agents to autonomous agents and our broad and granular dataset puts us in a strong position to deliver smarter and more tailored HCM agents that will be truly differentiated in the market. To accomplish this, we have invested in establishing our own proprietary tools to help scale our agent development in a compliant, explainable, observable and secure manner. We have already rolled out a few role-based agents, and client adoption and sentiment have been strong. We will also continue to harness AI advances to drive operational efficiency, reduce service friction and deliver even greater value for our clients as we expand ADP Assist into our products and throughout our organization. By extending the reach of our Next Gen solutions, we will build on the momentum, Lyric and Next Gen Payroll are experiencing. Finally, our acquisition of WorkForce Software and the maturity of Lyric are serving as catalysts for the evolution of our global offering. We believe we have an opportunity to deliver a differentiated product and client experience that wins in the global multinational market. The success we achieved in our fiscal '25 financial results and across our strategic priorities is a testament to the extraordinary efforts of our 67,000 dedicated associates around the world, and I want to take a moment to thank our associates for their commitment to our clients, to each other and to the world of work. As I look ahead, I am energized by the opportunities in front of us. We operate in a dynamic market. It's large. It's growing. It is always evolving and we are ready for what's next. We have decades of HCM experience and a track record of leading in innovation. We have a leading go-to-market and distribution strategy and the ability to support clients of all sizes, whether it be a 1-employee small business on Main Street or the largest enterprise with more than 1 million employees. And we have an established reputation for dependability. We understand the mission-critical importance of helping our clients meet the HCM needs of their employees. At ADP, we are always designing for people. They are at the center of every decision we make. And as we move forward, we will continue to focus on people to leverage our unparalleled data insights and innovative technology, and to build a world of work that is smarter, easier and more human. We are very excited about that future. And now I'll turn the call over to Peter.

Thank you, Maria, and good morning, everyone. I will start by expanding on Maria's comments on our Q4 and fiscal 2025 results before covering our fiscal 2026 financial outlook. Our Q4 performance was strong, and this helped to drive both fiscal 2025 revenue and earnings growth to the high end of our expectations. The strength was broad-based, with revenue growth in both Employer Services and the PEO coming in at the top end of our full year guidance ranges. The end result was full year revenue growth of 7%, bringing fiscal 2025 revenue to $20.6 billion. For Employer Services, revenue in the quarter increased 8% on a reported basis and 6% on an organic constant currency basis. ES margins expanded 50 basis points in Q4, exceeding our expectations. For the full year, ES revenue grew 7% on a reported basis and 6% on an organic constant currency basis, while ES margins expanded 100 basis points. For the PEO, revenue grew 7% in the fourth quarter. During the quarter, average worksite employee growth increased 3% to 761,000, driven by strong new business bookings and stable pays per control growth. PEO margins contracted 20 basis points in the quarter, mainly as a result of higher zero-margin pass-through benefits revenues as well as an increase in state unemployment insurance costs. For full year fiscal '25, PEO revenues grew 7%, average worksite employees increased 3% and PEO margins contracted by 60 basis points. I will now share our outlook for fiscal 2026. While the macro backdrop remains uncertain, we believe that we are well positioned to deliver solid financial results while continuing to invest for future growth and make additional meaningful progress on our strategic priorities. Our fiscal 2026 outlook assumes a continued slight moderation in the macroeconomic environment. Please note that we will no longer be providing point margin forecasts for our ES and PEO segments as we do not manage our business to drive a particular segment margin results. We will continue to share our actual margin results by segment each quarter, and we will also look to provide directional segment margin commentary as appropriate. Beginning with the ES segment, we expect revenue growth of 5% to 6%, driven by the following key assumptions. We expect ES new business bookings to grow by 4% to 7% as we expect growth to accelerate from our fiscal 2025 results, based on continued investments that we are making in both salesforce headcount and tools as well as the continuing maturity of several key strategic offerings, such as Lyric, WorkForce Software, and embedded payroll. For ES retention, we forecast a 10 to 30 basis point decline from the 92.1% result for fiscal 2025. We are encouraged by our continued retention achievements and our record client satisfaction scores. However, we think it is prudent to expect some retention pressure from a continued moderate slowing in the macroeconomic environment and the potential for some increase in small business out of business levels. As we mentioned on our prior earnings call, we see the potential for below-normal U.S. pays per control growth in fiscal 2026, and our outlook assumes 0% to 1% growth for the year. This view is consistent with the trends that we are seeing of a continued graduation in U.S. private sector payroll growth. We also expect FX to transition from a slight headwind to ES revenue growth in fiscal 2025 to a modest tailwind in fiscal 2026. And for client funds interest revenue, the interest rate backdrop remains dynamic, and it is important to remember that our client funds interest revenue forecast reflects the current forward yield curve, which is likely to evolve as we move through fiscal 2026. At this moment, we expect that our average yield will increase from 3.2% in fiscal '25 to 3.4% in fiscal 2026, which contemplates the market's expectations for short-term interest rates to decrease by around 100 basis points during the fiscal year. We also expect that our average client funds balances will grow 2% to 3% in fiscal 2026. Putting all this together, we expect that our client funds interest revenue will increase from $1.19 billion in fiscal 2025 to a range of $1.29 billion to $1.31 billion in fiscal 2026. Meanwhile, we expect that the net impact from our client fund strategy will increase from $1.07 billion in fiscal 2025 to a range of $1.25 billion to $1.27 billion in fiscal 2026. We expect ES margins to expand in fiscal 2026, driven by the continued growth of client funds interest revenues, partially offset by the growth investments we are making in support of our strategic priorities. Moving on now to the PEO segment. We expect PEO revenues to grow 5% to 7%, and PEO revenues, excluding zero-margin pass-throughs, to grow 3% to 5% in fiscal 2026. Our growth outlook also assumes average worksite employee growth of 2% to 3%. We are anticipating continued healthy PEO new business bookings growth and higher retention to be partially offset by a modest decline in PEO pays per control growth. We expect PEO margins to decrease in fiscal 2026 with zero-margin pass-through growing faster than overall PEO revenues. Adding it all up, our consolidated revenue outlook is for 5% to 6% growth in fiscal 2026, and we expect adjusted EBIT margin expansion of 50 to 70 basis points. We expect that our effective tax rate will be around 23%, and we expect fiscal 2026 adjusted earnings per share growth of 8% to 10%, supported by continued share repurchases. A quick note on our margin cadence. Due to the impact of the WorkForce Software acquisition and the timing of some other investments, we are expecting some contraction in our adjusted EBIT margin on a year-over-year basis in the first quarter before margins ramp over the remainder of fiscal 2026. Thank you, and I'll now turn it back to the operator for Q&A.

Our first question comes from Bryan Bergin with TD Cowen.

I want to start with demand here and maybe just dig into the areas of the ES signings underperformance versus the plan. It sounded like HRO and international. Can you share more thoughts on the HRO softness just despite the efficiency proposition there? I'm curious on that. And is that mid-market softness specifically?

I'm glad to unpack the $2.1 million in bookings we reported, reflecting a 3% growth. We've experienced relative growth in our small business suite, which includes our insurance and retirement services offerings. Additionally, there's been strength in the domestic enterprise suite, particularly with Lyric and WorkForce Software, as well as in our Compliance Solutions, including employment tax, among other areas. However, we did notice some softness internationally. Addressing your question about HRO, our domestic HRO business targets the upper mid-market and the lower end of the enterprise space. The relevant product offerings are Comprehensive Services and Comprehensive Outsourcing Solutions, which often represent large, complex opportunities with long sales cycles involving numerous departments and decision-makers, such as in HR transformations. We noticed strength in this sector in the first half of last year, but it moderated in the third quarter. Although we headed into the fourth quarter with a significant pipeline, decision-making did not occur as expected. The positive aspect is that these deals remain active; they are not lost to competitors but rather delayed decisions. Our pipeline is strong and has increased year-on-year, and its activity and overall health remain solid as we approach fiscal '26.

Okay. That's helpful. And I guess just a follow-up on broader bookings. Just can we double-click on the confidence in reaccelerating off that 3%? I heard product maturity as part of it. Are there also some specific kind of go-to-market or pricing initiatives that you're implementing? And can you just comment on how July performed? Just curious if it was any better than the June exit?

Yes. Fair enough. So product maturity is absolutely a part of it. We're really pleased and optimistic and confident in the decisions that we've made as it relates to the investments we've made into product, that's organic builds. That's all the Next Gen offerings that you would have seen at Investor Day. In addition to that, it's things like the acquisition. So we feel confident in the Next Gen offerings as they gain momentum, combined with things like the WorkForce Software acquisition heading into '26. So that's definitely a piece of our confidence as it relates to the booking guides heading into the year. In addition to that, as you know, Bryan, we've made tremendous investments into our sellers. That's everything from headcount to the ecosystem around them, that's banks, CPAs, that's broadening the distribution ecosystem with partnerships, for example, in embedded payroll. So those investments, we also feel very confident heading into the year. In addition to that, we also make a lot of investments into our seller technology and the modern stack that our sellers use to be efficient and gain productivity each and every year. We've been on that journey for quite some time. We showcased a lot of that, specifically at Investor Day, things like the Zone, which is our proprietary, if you will, portal for our sellers to engage with things like generative AI to serve up the right lead at the right time to the right seller. So I think the combination of all our investments, coupled with, by the way, incredible service, setting out record NPS results, I think all of that makes for a solid seller environment heading into the year. I think in terms of pricing, there's always pricing activity that happens. I wouldn't say that there's anything different happening across the ecosystems. We run promos, the others run promos. That's kind of on par. I think pricing and the demand holds there? And then I think you asked me one more thing.

Just July.

Oh, July. Oh, July, yes, July. It is July 30th. I think it's too early to comment on July. I think the biggest comment I would say is the one I said earlier, which is that pipeline activity remains strong. It's healthy. It's engaged. It's up year-on-year, and that gives us confidence heading into the quarter as well as the year.

Our next question comes from Ramsey El-Assal with Barclays.

I wanted to ask about the pricing contribution in fiscal '26 whether it's more analogous to what we've seen maybe historically or whether it remains a little bit elevated just given inflation is also a little bit elevated? And I had a second question, I'll just throw it in here. It was just on the better-than-anticipated retention result this quarter, whether there was any particular callouts or drivers or reasons why you saw the outperformance?

Yes. Thanks, Ramsey. Thank you for the question. Just with respect to pricing, if you're talking about the historical norm, sort of the 50 basis points we used to talk about, I guess, sort of pre-pandemic and the post-pandemic inflation period. Our pricing assumptions for '26 are more consistent with the near term. So in that 100-basis point range, so that's our expectation. We have a slight moderation factored into our planning for '26 versus '25. But we're more in the camp, if you like, of recent pricing trends versus sort of the pre-pandemic, pre-inflationary environment increase in terms of our pricing. And in terms of the retention performance, we were really pleased with retention and the way that came in, in the fourth quarter. There's no real specific call outs. We were certainly pleased on the small business side that we did not see some of the potential small business out of business lift that we have been sort of cautioning, I guess, our guide around. But really, the performance was very much broad-based across the company, and we saw some great retention results across all of the segments as well as in our international space.

Our next question comes from Mark Marcon with Robert W. Baird.

With regards to WorkForce Software getting integrated more fully, what are you seeing in terms of just the early results from WorkForce Software? I know that they're still selling independently. And to what extent do you think you will end up getting a lift on the upper enterprise side once it's fully integrated with Lyric?

Sure. Mark, we are incredibly excited about WorkForce Software and the journey that we've been on with respect to integration. We did see WorkForce Software contribute to bookings. We did see the contribution of the overall environment as it related to going through kind of the pipelines on both sides and the overlap and seeing how the narrative started to evolve for us internationally, specific in these large, complex, multinational opportunities. And I will tell you that the receptivity amongst both client base as well as our independent opportunities as well as the shared ones has been above our expectations. And so we remain incredibly bullish on the acquisition we made as we continue that journey of integration. We do expect that it will contribute significantly to our growth narrative specifically in our MNC international space this year as well as the coming years.

Yes. And just to add on to that, I would say, Mark, you're correct. The team is continuing to sell WorkForce Software on a stand-alone basis, and that was always part of the plan, and we expect that will continue. But in terms of selling with ADP products like Lyric, like GlobalView, for example, that's already happening. That's not a future event. Obviously, we hope it continues in the future, but it's not something that has not yet arrived yet. We've already seen traction in FY '25 with respect to sort of co-selling with ADP products. So we're already well and truly off to the races, I think, with respect to WorkForce Software being part of the integrated suite from a selling perspective.

Great. And then I demoed Workforce Now Next Gen at SHRM. And I thought it was pretty impressive. And I'm wondering, to what extent are you selling the Next Gen Product Now relative to the old Workforce Now? And what sort of lift would you expect to see there from some of those improvements?

Thank you for your support. It was great to see you at SHRM and for you to experience the Workforce Now Next Gen that we presented there. This design is helping us extend our offering's reach. We have been discussing its deployment in the core market, and throughout fiscal '25, we plan to extend beyond that market, which is also our goal for '26. The unveil at the SHRM Conference was aimed at showcasing this strategy. This ties into our confidence in achieving a bookings acceleration of 4% to 7% as we approach the year, with plans to implement the Next Gen Workforce Now for a wider range of mid-market clients. We are enthusiastic about the product's development, as we have seen numerous successes and positive results. Its impact on the market is evident, and I'm pleased to know it was well received.

Yes. And also just from a downstream perspective, the client satisfaction scores with respect to Next Gen Payroll with Workforce Now are really, really robust and continuing to improve. And I was talking to our operations leader the other day. The implementation experience is getting better and better. And also from a client user perspective, the number of contacts that clients on Next Gen have to make to ADP in order to solve their needs significantly reduced versus sort of the current gen model. So in terms of what it will bring us in terms of bookings, as Maria outlined, but downstream, also really excited about the potential impacts of expanding that offering more widely across the client base.

Our next question comes from Samad Samana with Jefferies.

Maybe first, I just was curious, if you think about where the quarter shook out, how does that maybe compare to what you were thinking at the time of the Analyst Day? And did it surprise you relative to what you were expecting at that time? And then I have a follow-up question as well.

Yes. Samad, thanks for the question. Are you referring to bookings or just more generally? I think we were very happy with how the quarter kind of went through.

Yes, I was considering bookings and how you viewed them at that time. I'm curious if there has been a change in trend recently. The pipeline appears strong, but I'm wondering if anything shifted in the last few weeks of the quarter, especially since you aren't commenting on July. What did you observe during that brief period?

In terms of Investor Day, our focus was primarily on the medium term, looking ahead at a 3 to 4-year period rather than on specific quarters or individual fiscal years. Regarding bookings, our fourth quarter is our strongest for bookings, with June being the biggest month and the last week or two of June being the peak period of the year. To be honest, we weren't fixated on what the numbers would reflect for the medium-term guidance we provided. We expected a somewhat stronger finish than what we achieved, and Maria has addressed the reasons for that. I wouldn’t establish a trend or a direct correlation between this quarter's result and the medium-term guidance shared. We're still committed to the targets discussed at Investor Day. We do need to provide guidance within the fiscal year, and the macro environment remains uncertain, which means there could be more volatility—either up or down—throughout the year compared to what we expect in the long term. Therefore, I see no clear connection between how we closed FY '25 and the medium-term objectives we laid out a few weeks ago.

Great. And then Maria, Lyric has done really, really well over the last years and you guys have increasingly talked about it. I'm just curious, the product itself, I think, has been a big part of that. Help us think about distribution, though, and how much better is the sales organization at selling? And then how are you thinking about indirect distribution there? And maybe, I guess, sorry to make it a multipart question, but just could it be a bigger component of bookings in fiscal '26?

It's a great question, and you're absolutely right. We are very excited about Lyric, its strong market reception, and its contribution to bookings in both '24 and '25. Lyric has experienced substantial sales growth, and we expect that trend to continue into '26 and beyond. Currently, our direct distribution is primarily focused on the domestic enterprise market, but we are expanding our global footprint, particularly in the MNC space, through our sellers and their ecosystem. While we often discuss channels in the downmarket and mid-market, we are also already collaborating with large organizations in the upper end of the market that drive various transformations. We have partnerships with major ERP players and numerous system integrators. There is definitely an opportunity to enhance our distribution mechanism as we continue to scale the offering, though it’s too early to determine the exact impact for '26. Our goal is to keep evolving the distribution and adoption of Lyric, and we are truly impressed by its market reception. It is the most modern HCM technology platform available, flexible and adaptable. Many of you saw it at Investor Day, and it's generating a lot of attention. We are pleased with the wins we're achieving against formidable competition, and the market's response is surpassing our expectations. We are eager to continue investing in it.

Our next question comes from Tien-Tsin Huang with JPMorgan.

Just building on that last answer. Just the confidence in overall bookings accelerating in fiscal '26. Just how much is driven by head count investments that you put into place versus higher sell-through attached new products, that kind of thing versus '25?

Yes. Fair enough, Tien-Tsin. First and foremost, I would say our sales from new opportunities versus the beyond payroll, if you will, remains at 50-50. That is our plan. That's kind of held steady as long as I can remember. So I would say that is our expectation for next year. So we're not over-rotating away from kind of that. In addition, we're not over-rotating on sales head count. I think several years ago on the heels of the Great Resignation, we leaned into head count quite a bit, and we needed to because we had, just like every other company, seen an uptick in attrition. But as attrition has abated, the big strength in the seller productivity is really the lift we're getting from tenure. But we are still making head count investments. They will look largely in line with what we did in '25 and what we did in '24, which is kind of that mid-single digit, if you will. So it's an investment in head count. It's an investment in everything I talked about earlier around the sellers in terms of their ecosystem. And then it’s also this bit of a natural uplift that we get from increasing the tenure of all of our sellers, which is fantastic.

Terrific. Regarding retention, it remains very high and impressive. While it's reasonable to anticipate some decline from that peak this year, is the 10 to 30 basis points expectation based on more voluntary than involuntary attrition? I'm trying to understand if there’s anything specific you are monitoring as you enter the new fiscal year.

Yes. I mean I'd say nothing particularly specific, Tien-Tsin. I think it's probably a little more on the involuntary. But again, the macro environment, we have to see how it plays out. We were positively surprised, so to speak, I guess, in '25 and '24. We're hoping that will be the case also in '26, but we feel sort of the prudent responsible position at the moment, just given the trends we do observe and most of those trends that we're observing, obviously, we listen to what the economists and what the external sources are saying, but we see a lot and draw a lot of our conclusions from our own data. Now again, our data on retention is strong, but there are signs that we feel we should be prudent, but I would certainly not point to upticks in voluntary client attrition is again, all the indicators on that, be it client satisfaction and just the trends we've been observing are very favorable. So I would point that more to being a macro assumption that we hope does not materialize.

Our next question comes from Kartik Mehta with Northcoast Research.

Maria, just thoughts on bookings. Right now, they're in a delay. At what point does delay become cancellation? Or what signs have you seen that give you any concern at all? It seems like you don't have any concerns, but it seems like things progress and delays can become cancellations?

Sure. Certainly, we're looking at all of that. So maybe a way for me to answer the question, Kartik, is to just kind of unpack how we think about pipelines and activity in general. So if you think about the various segments, and I'll start at the small end, in the small business, it's really not about pipelines. Many of those opportunities we're able to literally onboard in hours, if you will. And so we're looking more at activity measures, right? And that's everything from leads coming in, call it, how many appointments sellers are on, opportunities that are being generated. And so we're looking at the activities, specifically, what I would say across the small business portfolio, across even the core end of the mid-market. That's a very active, healthy activity that's happening out there, and we don't see any moderation in kind of the activity out there, right? And so in the PEO space, specifically, we're looking at things like RFPs, requests for proposals, that is. We're looking at asks for benefit underwriting, lots of different measures that we look at to, again, assess whether or not the activity levels have changed. And the answers there are, they continue to remain healthy. The upper end of the mid-market heading into the enterprise and international, that's really where we're looking at pipeline. Oftentimes, these sales cycles are months, sometimes, if not years. So you can really see kind of the pipeline activity. There is some pipeline aging that's happening. That's not necessarily new news. I think we've talked about on previous calls that were kind of back to the new normal, or the old normal pre-pandemic, where you have a lot of decision-makers and the deals are moving through the motions, more in line with how they used to move through the motions, and that's definitely what we see. We do see the pipeline has aged a bit, but it's still active. The opportunities are healthy and there's – when I say active, there's still dialog back and forth, and so – and year-on-year, it is up. So what I would say is, all across, whether it's new appointments that are being done out in the field in the downmarket, RFPs that are being requested in the PEO or in the enterprise space and international space, the pipelines are continuing to grow and new opportunities are entering and the ones that are in there are healthy. All signs point to a broad-based healthy pipeline and activity backdrop for us heading into the year.

Yes, both metrics are holding steady. We’ve observed a gradual moderation through fiscal year 2025 as well as over the past couple of years. The two numbers are quite similar. In the last few quarters, the PEO has slightly surpassed the ES segment, which has historically been where the PEO stood. We have usually seen higher PPC in the PEO compared to the ES. As you may recall, this trend flipped for a number of quarters, even if not significantly, which was noteworthy since it is not the usual case. I would say that the dynamics between the two have returned to normal. Currently, we are experiencing slightly higher PPC growth in the PEO than in the ES, but the numbers and trends are very comparable. Therefore, our guidance for next year regarding ES is not too far off from the PEO.

Our next question comes from Scott Wurtzel with Wolfe Research.

Just wanted to ask on the PEO guidance and sort of the widening gap between reported revenue growth and revenue growth ex pass-throughs. I'm just wondering if you can talk about what's driving those higher expected contributions from zero-margin pass-through revenue for fiscal '26 versus '25?

Yes, Scott. There are likely two important points to consider. First, we expect strong continuation of zero-margin pass-throughs, primarily driven by health insurance inflation affecting our benefits pass-through revenue. Second, regarding the non-zero-margin pass-throughs, our outlook includes a slight moderation in wage growth, which we noticed beginning in the fourth quarter. We've experienced robust wage growth levels in both the PEO and client fund balances up until 2025. As mentioned, there was a slight decline in the fourth quarter, and we assume this trend will persist, albeit not at the same pace as in 2025. This has a minor dampening effect on non-pass-through revenues. Additionally, while we encountered elevated state unemployment insurance rates in 2025, we do not anticipate a recurrence of this situation. Consequently, we expect revenue to be somewhat lower in 2026 than in 2025, but this should not significantly impact our margins.

And then just as a follow-up on the embedded payroll side and particularly around the Clover partnership. Just wondering if you can kind of update us where you are sort of on the integration and getting that into market as well as sort of what you're expecting from the Clover partnership and other embedded payroll offerings for fiscal '26 in terms of contribution to bookings?

We are very pleased with the progress of our partnership with Fiserv and Clover. Our teams, including sales, product, and executives, have been collaborating effectively. Since we introduced the RUN offer within Clover in May, it has only been deployed to a limited portion of their client base, which we call the back book. We are excited about the potential for broader deployment as we move into this quarter and particularly into 2026. Additionally, this year we are working to integrate CashFlow Central into the RUN offer, enhancing the small business ecosystem for our mutual clients. We anticipate that this relationship will contribute to our bookings, although it may be too early to see a significant increase at this point. Overall, we are enthusiastic about the partnership and the opportunities ahead.

Our next question comes from James Faucette with Morgan Stanley.

Appreciate all the details here. Wanted to ask, Maria, you just emphasized your range of partnerships, et cetera, and I think it creates a lot of opportunity. Just wondering how that's impacting your kind of sales channel management and forecasting. Just are you seeing improvements? Does it become more reliable? Or does it become more difficult? Just trying to think through how expanded use of partnerships can impact your visibility?

Thank you for your question, James. I'm very optimistic about partnerships as a means to accelerate our strategic priorities, which include having the best technology, the most comprehensive offerings, and the largest global scale. We have partnerships that align with each of our segments to further these priorities. To me, being a modern company means excelling at what we do best while leveraging others to broaden our reach, whether through distribution or addressing client needs. This is precisely what we have been doing. We are also very deliberate in how we establish partnerships. For example, with embedded payroll, we ensure that all levels of the organization, from executives to sellers, work together. This is about refining the model to maintain clear visibility into our business and our go-to-market approach. I can assure you that our partnerships have not hindered our ability to see results, pipelines, or activity levels. In fact, they have enhanced our visibility by providing us more insights into opportunities. In the enterprise and multinational corporation space, by partnering with systems integrators, we gain greater visibility into what clients are trying to achieve, which often involves HCM. However, HCM transformation could simply be part of a larger project. In the lower market, CPAs and banks have complete visibility into their clients. We are structured our partnerships carefully to ensure we do not disrupt our established ways of doing business at ADP as we expand our ecosystem, including initiatives like embedded payroll.

Yes, I can confirm that. There's no adverse effect on our ability to forecast really. The partners really enhance our opportunity and help us to deliver. In no way does that sort of impede or make it more difficult or more easy for that matter to get our forecasting on point.

Yes, what I would say is that this is very much evidence of the dynamic nature of our overall relationships. I think we're seeing momentum in that area, which, quite frankly, is very exciting and part of our overall growth story.

Our next question comes from Ashish Sabadra with RBC Capital Markets.

This is David Paige on for Ashish. Maria, Peter, I was wondering if you could just detail what the AI contribution is to margins, either on the upside or is investing that still needs to go on to get the AI product through and up and running? Any color there would be helpful.

Yes, definitely, David. We've stated this consistently over the past few quarters, including at Investor Day, and the situation remains unchanged. We are witnessing significant productivity improvements and opportunities. Our businesses in both the downmarket and mid-market are continuing to see healthy and consistent growth in client unit counts, as will be reflected in our 10-K release next week. Importantly, we're also able to achieve some operational headcount reduction in these areas due to generative AI and similar tools that we're implementing. This impact is real, though we are not providing specific figures; however, we are certainly benefiting from it. As we have mentioned before, we are applying AI carefully and responsibly. While we are enjoying the advantages of our current deployments, we are also committed to investing in the expansion of various tools and capabilities throughout the company. We remain in a net investment position, which I would categorize in the tens of millions of dollars rather than hundreds of millions, as we invest in new generative AI capabilities while also benefiting from the productivity gains stemming from deployments over recent years. This net investment position is likely to persist through this fiscal year. Overall, we are pleased with the progress we’ve made with our deployments and remain dedicated to furthering our use of generative AI for efficiency, productivity, and enhancing client user experiences across our platforms and technology divisions throughout the enterprise, both on the front end and back end.

Thanks, Peter. That's very helpful. And just a quick follow-up. I'm assuming the answer is no, but any pushback in the international markets from working with an American company or the evolving tariff situation that's going out there any puts and takes to share?

Yes, your assumption is correct. The answer is no. In terms of our global clients, many of them are in the mid-market and upmarket segments. A number of these clients have been with us for years, and new opportunities typically take several years to develop. Although we are a U.S.-based company, we serve our clients on the ground across many of the 140 countries where we operate. This means we have a blend of being a global company while also being very local in our execution. Therefore, we have not experienced any pushback regarding decisions due to these factors.

Our next question comes from Dan Dolev with Mizuho Group.

Congrats on a great quarter. I have two quick questions. So going back to mid-market software bookings, can you maybe elaborate a little bit how it did this year versus your initial expectations? And then I have a quick follow-up.

Yes. Regarding mid-market software, Workforce Now is utilized within mid-market opportunities, particularly in the tech sector, and is also integrated into our PEO. We haven't yet discussed PEO bookings, but I want to highlight that the team worked diligently throughout 2025, focusing on boosting bookings, which we successfully achieved, including in Q4. Workforce Now effectively supports the mid-market segment as well. This segment also includes our Employer Services and comprehensive HRO offerings. From a mid-market perspective, one effective way to assess the performance of our product is to review the client count in the 10-K, where you will notice a consistent and healthy growth in client numbers, particularly concerning Workforce Now. This is likely the best indicator to evaluate the mid-market performance.

Yes, to add to what Maria mentioned about our strong PEO bookings, we were pleased with that. As she noted earlier, we had a strong first half but a softer finish on the ES HRO. The tech offering for our HCM service in the mid-market was more or less evenly positioned between the two, and we were satisfied with its performance in fiscal '25. We see a lot of positivity ahead, especially as we expand the Next Gen Payroll capabilities with Workforce Now in the mid-market moving into '26.

Got it. As a quick follow-up, we've had a significant merger. Your competitor acquired Paycor. Can you discuss the competitive landscape you are currently observing after that merger?

Yes. So following the merger, what I would offer is, I don't think a whole lot has changed. I think we've talked about in the past, we compete very well against both of those competitors on a, call it, stand-alone basis. I would say in a combined set, we haven't seen anything change in the competitive landscape. As I always say, it's always been a very competitive environment, specifically kind of in that mid-market. And we fare incredibly well. We see that in our retention rates. We see that in our service offering. We see that in client count growth. We are really confident in the evolution and maturing of our Workforce Now Next Gen that serves that space. So I think we have a good story in that space, and we haven't seen anything change specifically on the heels of that acquisition or merger, if you will. Thank you very much.

Thank you.

And we have time for one last question. And that question comes from Daniel Jester with BMO Capital Markets.

I just wanted to follow up with Peter on a question earlier on the margin front. I appreciate kind of AI is still in the net investment position. If you think about maybe some of the other puts and takes on margin, it looks like maybe you're maybe lapping some of the investments and integration of WorkForce Software in the forward year. You have a little bit of FX volatility. So any sort of other things you'd call out with regards to the margin guidance that we should be considering? And just with regards to the seasonality, you talked about how margin is going to ramp throughout the year. Maybe what are the drivers of that?

Yes, Dan. Regarding the integration of the WorkForce Software acquisition, we will continue to invest in the product and its integration with Lyric and Workforce Now, as well as our global payroll services throughout the fiscal year. While I can’t provide comments beyond that, we believe there is significant opportunity that we are committed to pursuing in order to deliver top-notch integrated solutions for the upper mid-market enterprise and global sector. Currently, what we are addressing is the amortization and interest expense related to the bond we took out for the acquisition, which impacts the October period. Additionally, we are experiencing some revenue growth due to foreign exchange, although this poses a margin challenge since the margin from FX is lower than the average margin for Employer Services and the company overall. This does have a slight negative effect on margin percentage but contributes to increased revenue and earnings per share. In terms of margin drivers, we have strong client fund balances benefiting from our laddering strategy, which is boosting client fund interest. We are also seeing productivity improvements from various initiatives, including our AI projects across different parts of the company. Our commitment extends beyond WorkForce Software to other key strategic offerings like Lyric. We've had a successful sales year, resulting in significant backlog, and we are onboarding operational resources to ensure that this backlog is implemented effectively to generate revenue from our clients. Therefore, we continue to invest in Lyric and WorkForce Software, as well as generative AI, while being mindful of balancing these investments with margin expansion and delivering healthy returns for our shareholders. This sums up the margin dynamics.

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.

Thank you, Michelle, and thank you again, everyone, for joining this morning and for your interest. I had the opportunity earlier to thank our associates. I'd like to do that once again and also to all of our stakeholders out there that support us in our journey. We had a solid 2025, and it couldn't be done without our associates, our clients, our analysts, our investors. I'm incredibly grateful for the support, and I'm also incredibly optimistic for our future as we head into '26 and beyond. Thank you very much.

Thank you for your participation. You may now disconnect. Everyone, have a great day.