Conference Transcript - ADP 2026-05-28

Jared Levine, Analyst — TD Cowen

All right. I'm Jared Levine. I cover software and business services here at TD Cowan. With us today for a fireside chat, we have the CFO of ADP, Peter Hadley. ADP really needs no introduction, so let's get right into the discussion here. We can open it up for any audience discussions towards the end here. So with that, Peter, thank you for joining us today.

Peter Hadley, CFO

Thank you for having me, Jared.

Jared Levine, Analyst — TD Cowen

Let's start with the obligatory question on the demand environment. I guess, how would you characterize the current state of the demand environment? Where are you seeing the

Peter Hadley, CFO

strengths and weaknesses? Yeah, good question. I think the demand environment is very constructive is a word we use, consistent, not a lot of obvious sort of tailwinds or headwinds, I would say. It's a pretty stable environment. And by the way, we see that across the board, not just in one or two segments. It's really, as I'm sure many of you know, ADP covers all segments from the smallest of small businesses up to the largest of multinationals domestically internationally we have outsourcing offerings so you know really I think demand has been really consistent and stable I guess throughout our fiscal year we're in our fourth quarter at the moment as you know that's a large quarter for us in terms of in terms of booking so I'll you know touch wood and say hopefully the demand environment certainly holds out for a strong finish which we are looking forward to. But I think the demand certainly for the type of services we provide and the assistance that we're able to provide to employers and their employees continues

Jared Levine, Analyst — TD Cowen

unabated, which is great. Great. Let's touch on that employer services bookings there. It was a key focal point of investors following the recent 3Q print. ADP has guided for the year 4 to 7% growth. I guess, how's the company feeling about that 4 to 7% guide based on

Peter Hadley, CFO

year-to-date performance? Yeah, I mean, as we mentioned in our third quarter earnings call back in late April, we reiterated the guide. We've held the guide consistent all year. As I was saying a moment ago, the fourth quarter really is the largest quarter in terms of bookings for us. It's the nature of our cycle, probably to some degree the nature of the incentive systems we have in place for our more than 8,500 sellers. Three points to some might seem like a wide range going into a quarter, I would say with respect to bookings, there's still a lot to do. There always is in the fourth quarter. We feel good. Our team is fully staffed, fully motivated. We have all the incentives and so on in place in the system. Our pipelines, we mentioned, going into the quarter, continue to be healthy. I think the macro environment, like I was saying a moment ago, and demand environment continues to be stable not necessarily a tailwind or an obvious headwind notwithstanding all the things going on in the world so you know we feel good about our ability to deliver a strong bookings year certainly where that lands in the range we'll all be the wiser I guess once the year closes but a lot still to do but we have plenty of really talented sales people with great products in their hands out there doing their very level best to finish the year strongly and give us a great

Jared Levine, Analyst — TD Cowen

result. Great. Let's double click on 4Q specifically. A key question we've gotten is how to think about that dependency on 4Q. Anything you can kind of help us with in terms of thinking about that dependency, whether it's the typical mix of bookings for a year as we think about 4Q and

Peter Hadley, CFO

that dependency? Yeah, we don't disclose sort of the quarterly dependencies. All I would say is it's the largest quarter of the year. It's certainly more than 25 percent, obviously, by definition so it's a big quarter you know we obviously we had a little bit of a shortfall last year in terms of our fourth quarter finishing up not by a huge dollar amount again it's sort of missing a range is sort of unexpected with respect to ADP but there was not a meaningful drop in terms of dollars it hasn't had any real obvious effect on our revenue growth I don't think but you know there's still a lot to do and and it is the most important quarter for us the third quarter is also an important quarter the quarter we just finished we mentioned you know on our earnings call that we were pleased with the results it was a solid quarter and um and probably the most pleasing thing i think that we've seen throughout the year is it's really been broad based contribution across our portfolio we're not um we're not concentrated to the results of one or two particular segments so again we feel good but more will be uh will be revealed at our next earnings call once we uh once we do close out the year and hopefully get as many uh many fish in the

Jared Levine, Analyst — TD Cowen

boat as we can. Great. One last one on employer services bookings, and I'll promise I'll move on here. So last year, you did grow bookings 3%. This year, the company's trending to right around 5% organic constant currency export growth, I guess, which is comparable to the prior year performance. I guess based on this, is bookings implied to be accelerating off of that 3%? I think the only difference this year to probably point out was maybe slightly better pricing contribution, I guess. Can you help us kind of rectify those differences? Yeah, I mean, there's a lot of

Peter Hadley, CFO

there's a lot of drivers obviously in our revenue the model and the indicators we talk about publicly are certainly the most key ones but really there's a lot that goes on, we have a lot of different businesses that include different revenue models, some of them not all necessarily tied to bookings when I go to for example some of our data businesses and B2C offerings and so on asset type revenues in our retirement services offering, I would say Again, like I was saying before, a point or so of bookings, again, we certainly would prefer to have it than not have it, but it doesn't necessarily have a meaningful impact on a full-year revenue for employer services or certainly for ADP. I think I wouldn't necessarily draw any inference on the trends. I think the fact we're still guiding to a range of four to seven, and last year we finished at three probably implies what you're saying, that we're expecting a stronger full-year result than what we did last year. But again, we'll know more about that in a couple of months.

Jared Levine, Analyst — TD Cowen

Great. Let's pivot here to the PEO. So the health insurance enrollment period typically is the primary period for your PEO clients to churn, which for you occurs on July 1st. Some of your competitors have cited drag to retention rates from the outsized health insurance price increases that they have to pass through on the clients. I guess, how are you feeling about the level of price increases you're passing through for this upcoming enrollment period?

Peter Hadley, CFO

Yeah, so just as a reminder for everyone, you know, we operate a fully insured model when it comes to the PEO health insurance program. Not all of our competitors do that. In fact, I don't know that many of them offer a fully insured model. Again, all PEOs are a little bit different. The segment of the markets we look for, we're much more in the white collar, gray collar space for underwriting purposes, both for medical and also for workers' comp. Others perhaps play a little more in the blue-collar space. Some take risk on medical. That can give you a little bit of a boost in terms of bookings and what have you at points in the cycle. It also can come back and bite you at some points in the cycle. And I think some of the repricing maybe that's going on in other companies perhaps may be an indication of that. I don't know. I'm not inside their four walls. But for us, I think that's strictly a pass-through expense and, again, a pass-through of risk to the carriers. So it has some effect, of course, because there's an overall size of wallet that's available to companies. I would say we think about it in terms of the pricing of the rest of the PEO, if you like, the services, the administrative services, the HR support that we provide and the PEO tax support and all these other things that we do, it's one factor in our contemplation. I would say it's not the most important factor in pricing of the rest of the services because of the pass-through nature of the medical costs. Where it is perhaps a little more relevant is on retention. So again, in a high medical renewal environment, that can have some impact, downward impact on retention. We had a good news is we had a high renewal environment last year as well and we also had a slight improvement in our retention so we saw no degradation in retention last year. We don't give a guide on retention for the PEO so I don't have a specific comment on it other than to say that on a basis year to date and it's implicit in our revenue numbers for the PEO that we're satisfied with retention. It's a watch item whenever medical inflation is high, but medical inflation is high no matter how you procure it. And I think our ability to provide Fortune 500 benefits to small and mid-sized companies on a fully insured model is a winning proposition and one that we have no intent in changing.

Jared Levine, Analyst — TD Cowen

And then as PaysPerControls has moderated this year within the PEO, the company has been increasingly relying on bookings to grow WSCs. The company has been investing in sales and marketing. I think year to date, you were right around growth of 15%, falling 10% last year. Does this level of investment support an acceleration here in the WSE growth here? And what are those key investments being made in that PEO business?

Peter Hadley, CFO

Yeah, I think, I mean, on the WSEs, again, we're guiding to a full year result of 2%. I think we've had 2% in each of our three quarters to date. So I would say that's a fairly constant environment. I think on the pace per control, it's an interesting one, actually. If we could just take a little sidebar on that for a moment. It has moderated a bit in the PEO. Again, it's still positive and growing. It's sort of come off a little bit in terms of the amount of contribution through the year, which is a little bit the reverse of employer services that's got very slightly stronger, I guess. Again, very slightly, but a little bit stronger as we've moved through the quarters. It's an interesting dynamic, and I just want to take a second on it because I was talking a minute ago about our white-collar, sort of grey-collar emphasis in the PEO. I wouldn't extrapolate a trend on white-collar employment to the softening. Where we've actually seen some of the softening has been more in some of the grey-collar industries like light construction, like leisure and hospitality, like trade and transportation. We've seen, again, relative, but relative continued strength in areas like IT, professional services, financial services, health and so on within the PEO base. So there is still growth there from a same-store basis. It's definitely a lot less than what it was, you know, a handful of years ago, which, back to your question, means that – and again, if you take my comments a minute ago, Jared, on retention in the medical renewal environment, it puts a lot of emphasis back on bookings, and hence why we are happy to continue to invest heavily in driving bookings growth in the PEO to keep the engine moving, and whilst we go through what we believe is a cyclical period for the PEO with respect to the employment levels and also the medical inflation costs, again, I don't know how long the cycle will last, but we don't believe it's a structural headwind to the PEO long term, we're happy to continue to invest in trying to drive the growth engine. It does have some adverse impact on the margins, but when I look at the contribution that new business brings from a margin perspective in the PEO, it's an investment worth making.

Jared Levine, Analyst — TD Cowen

Got it. And we can't skip the topic of AI either here. ADP has rolled out ADP Assist, your AI chatbot, and has AI agents available on the ADP marketplace. How is the company approaching the monetization of AI functionality?

Peter Hadley, CFO

Yeah, we have ADP Assist. We've been talking about that now for a couple of years, I think. We have, you know, the marketplace thing is allowing some third-party agents in a very governed fashion to operate within the ADP ecosystem. And again, we protect that at great effort and interest to ourselves on behalf of our clients and their employees because of the amount of personal sensitive data we have in our systems that belong to our clients. So again, allowing third party agents in through a governed process via our marketplace is how we're dealing with that so far. We also have spoken about in our last earnings call about the deployment, the imminent deployment. There's been some deployment, but I would say it's very much at the beginning stages of our own persona-based agents. So what I mean by persona-based agents is within HR, there's not a single, it's not just a homogenous space. There's pure HR, there's HR business partner, there's compensation, there's payroll and a raft of performance management, recruiting and all of these sort of functions within HR. So our technology organization is looking at, or has been building, I should say, they're not looking at, is building and deploying some of these persona-based agents into our platforms to assist our clients, the practitioners, to be more effective, more efficient in their work and ultimately deliver benefits. So it's a multi-pronged approach. There's some of the functionality that's built into the product to help practitioners today, to help clients, sorry, client employees proactively or reactively address questions around their time, their payroll, why has things moved. and some of these persona-based agents is sort of the next level down and sort of the next phase we're entering into now that we believe will benefit our clients dramatically. And as you mentioned, through the marketplace, clients who want to use other systems that we have a partnership arrangement with, the ability for those agents to be deployed into our ecosystem in a governed way is a third method, if you like, of monetizing the opportunity.

Jared Levine, Analyst — TD Cowen

And the company has pointed to still being in a net investment position when it comes to AI deployment internally. I guess, how far along is the company in terms of deploying AI internally, and where have you seen the most promising results to date there?

Peter Hadley, CFO

Yeah, I mean, it's a good question. I think we continue to invest, and we also continue to generate results and efficiencies and reward, if you like, from that. And we spoke about that in our third quarter earnings call. We lifted our margin delivery. I think you may ask me a question, so I'll try to hold fire on interpreting my own words on the margin comment I nodded to in our last earnings call. But certainly we're seeing more and more rewards. That potentially makes us want to continue to invest more and more to try to generate more. I think we're still in the early innings, if you like, for AI deployment. So I don't really see it as a heavy drag on margins, but I think we will continue to invest because we're seeing the results and we're seeing it in a number of ways. But when it comes to margins, I would say the primary driver is making our service and our implementation teams more effective and more efficient. And the beauty of that is it costs us less money to serve. We reduce the cost to serve. In most cases, we're delivering a better client experience and more automated onboarding, for example, for clients in the down market. We're able to deliver better insights to our clients in solving problems, whether it's IRS notifications or other things that come their way in the daily life, if you like, of payroll and HR and time and things like that. So we're able to do that. We're able to realise economic benefit for ADP through being able to price for that, while at the same time generating more efficiency in the cost base and certainly influencing the headcount curve in the direction we feel is appropriate for our operations teams.

Jared Levine, Analyst — TD Cowen

Do you have a sense on terms of the timeline and when AI might ultimately flip from a net investment to a net benefit?

Peter Hadley, CFO

Yeah, a very good question, but a very difficult one to answer because, again, I think there's plenty of untapped opportunities out there that we potentially could invest in. But I would put it this way. In our medium-term guidance that we shared almost 12 months ago now at Investor Day, We showed that the contribution to our margins from float is likely to diminish, if you like, or the contribution will become smaller, just as our embedded rates in our portfolio catch up, if you like, to the rates that are available in the market. So no decline expected, for sure, but the contribution, if you like, to improvement will become smaller. And as a result of that, to be able to maintain and potentially even look to lift our margin trajectory, we need the outcome you're talking about there. And that's something that we're already starting to see and something that we nodded to on our last earnings call.

Jared Levine, Analyst — TD Cowen

Got it. And then in terms of AI, in terms of more of the risk side of things, one thing we have heard from investors is that AI could potentially cannibalize your outsourced service offerings.

Peter Hadley, CFO

I guess, how would you respond to this view? Yeah, I definitely don't see a high probability of it cannibalizing. I think it certainly can augment and support those offerings. you know the economics if you do believe and it's not our thesis but if you do believe that potentially there is some revenue pressure there I think that could be well and truly offset by the utilization of AI in the delivery of those services but and then I know AI is a different you know in a new and faster accelerating technology but you know we've been in these businesses for a long time and we've been through a number of technology cycles and automation cycles, and if anything, it's just added to the value proposition of HR outsourcing to PEO, some of our managed offerings, because it's not purely a cost play. There's a lot more to it than cost play. There's a quality play. There's a risk transfer play involved in these offerings, and I personally believe that AI will actually help augment that and enhance it as opposed to replace it.

Jared Levine, Analyst — TD Cowen

Got it. Let's talk on margin here. This has been a key area of investor focus here. With the 3Q print, you did detail for FY27, while still early in the planning process, a focus on continuing that acceleration of margin expansion as you realize productivity benefits from your AI transformation. To clarify, was that comment in relation to implied expansion guided to for 4Q relative to the FY26 guide or something else there, just to clarify that?

Peter Hadley, CFO

Yeah, so no, the intent of those comments was, so again, we lifted our margin guide quite meaningfully, I think, through this fiscal year. We started at 50 to 70. We had some pressure in the first part of the year with respect to a large, by ADP's, historical standards acquisition we did called Workforce Software. There was some pressure at the beginning part of the year on that. We got past that. We had a first quarter of flat margins as a result, really, of that acquisitions-related contribution, if you like, to the first quarter. We then had two quarters where we delivered 80 basis points of margin. We lifted our full year guide to 70 to 80 basis points, which I think if you extrapolate from a first quarter of flat and then two quarters of 80 implies some acceleration. The intent of my comments was to inform investors that we see this as not coming from some sort of temporary factor or one-time benefit that has helped us lift the margins this year and then sort of deviate back, call it to more of the medium-term guidance range, which was 50 to 70. So I would say we're at or around, maybe potentially a little above, depending on where we finish the medium-term guidance range and the intent of the comments was to say that we see that more as the go-forward level as opposed to sort of coming back. So hopefully that makes sense. And where are we getting that from? We're not just squeezing costs and potentially disrupting ourselves with a worsening client experience. We're getting that from some of the efficiencies I was just talking about. Some of it also is price contribution, that we're getting good value, we believe, for what we're delivering to our products, through AI, to our clients. It's helping us maintain our price. Again, we're not really counting on much different in the way of pays-per-control growth or same-store employment growth. So it's really top-line opportunity and productivity, primarily in our service and implementation operations.

Jared Levine, Analyst — TD Cowen

Got it. One more on margins here. As we look at the income statement, what expense line do you see the greatest opportunity for expansion over the medium term here?

Peter Hadley, CFO

Yeah, again, I think it's what I was talking about. Most of that translates into the OPEX line. So service and implementation is in OPEX. SG&A for us is a little bit of a funny line because S is very different to G&A, being sales and marketing. it's an area we continue to invest in and we've invested in for many years as part of the fabric at ADP and we still see plenty of opportunity notwithstanding our size, plenty of opportunity in this large and growing market so I would expect we would continue to invest in things like sales and marketing in R&D and product and technology G&A, I think there's efficiency opportunity but likely that'll be a little bit dwarfed by the S part of the SG&A line so net of it all, the OPEX line is the most likely way you would see that, and I think where we have been seeing that through recent times.

Jared Levine, Analyst — TD Cowen

Makes sense. ADP has cited for paying one in six employees in the U.S. for some time now, which suggests you've maintained your market share and payroll. I guess what has prevented the company from expanding its share to, let's say, one in five? And would taking share and payroll be your expectation as we look forward here in the next five to ten years?

Peter Hadley, CFO

Yeah, so we pay around 26 million workers. We've disclosed that for some time. our 26 million workers in the U.S., I think it's 41 or 42, around 42 million globally, so about 15, 16 million or so internationally. You know, it's a big jump to go. If you think about 26 million is one in six. To go one in five, that I think is 32 million. So that's six million workers. That's, you know, call it a 20% grab in market share. And when you consider the fact we don't really play in the public sector, which is about 25 million, I think, of the roughly 160 million workers out there. Some of it, perhaps, is just our absolute size and moving a metric like that. That metric is sort of meant more just to be a helpful rule of thumb for people. It's not necessarily an objective of ours to go from whenever we were, one in seven to one in six to one in five. It's not really something we think about too much as a management team, but gaining market share is certainly something that we spend a lot of time focusing on, and I think we feel like we have done pretty well there in certain segments of our market, particularly like in the down market, in the PEO business over time. I think we have some opportunity to drive more market share and we feel like we're now well-placed in an area, being the enterprise space, where we have probably seeded some market share over the last decade or so, just due to where we were placed, I think, with our product Lyric and the way it's performing. It'll take some time to bet in in terms of sales cycles and implementation cycles for enterprise companies for it to bet into the numbers and the results. But we feel good about our opportunity to continue to grow share domestically and internationally, and it's certainly something we're focused on.

Jared Levine, Analyst — TD Cowen

And it feels like messaging across public company here has been no change in the competitive environment in recent years. It remains highly competitive. Investors tend to struggle with this just due to the certain private vendors like Ripling or Gusto getting to notable private scale and still growing at rapid rates here while you've seen some deceleration organic X flow growth rates across the public comps. What do you attribute this to? Is this more so just you're competing against better public competitors or certain private competitors? I guess what drives that consistency there while you've seen such notable growth and emergence of certain private vendors? I think the competitive environment, what's the

Peter Hadley, CFO

best way to put it I would say it's not that it doesn't change of course there is changes you know some companies come in some companies go out companies are even maybe moving their their focus from their core segment to to try to identify growth opportunities in new segments so it definitely moves I think what we would say is that is it meaningfully more competitive now than what it was one two five ten years ago I would say not necessarily what I would definitely say is we don't see any unnatural behaviour or, you know, people doing unnatural things just to try to drive share. I think the net of it all is, we believe at least that it's a growing market, so there is room for opportunity for all. I think some of the companies, again, some people may be more familiar with the details of some of the private companies than others, but certainly there's not as much public disclosure, so hard for me to comment on those companies. But there is still, you know, and you mentioned Rippling, for example, more of a mid-market or the lower end of the mid-market competitor for us. We see them a little bit, not a huge amount, but we do see them around. Formidable company by the looks of things. You know, there is still opportunity, I think, for all of the name companies, whether they're public or private like the likes of Rippling, to grow. There is still, and you know, I know it raises a few eyebrows from time to time as to how can this still be the case, but the reality is there is still a meaningful size opportunity, putting the growth in the market opportunity aside, in these regional local players, whether they're CPAs or mar and par shops, those sort They may not have as much share as they did five years ago, but they still have enough meaningful share. I think there is opportunity to grow. And our focus is really not so much on what all these other companies are doing. We certainly pay attention to the competitive landscape. But our real focus is on improving our client experience, improving our retention. I think we've done that really successfully. Being out there with the best products in the market and winning business, and that will hopefully take care of itself in terms of winning share.

Jared Levine, Analyst — TD Cowen

Makes sense. And we've also gotten the question before on the risk to float revenue from the adoption of faster and lower cost instant payment methods such as stablecoins. Is this a legitimate risk over time as we think about your float revenue?

Peter Hadley, CFO

I would say we don't see any of that now. The demand, we do offer the ability for client employees to receive some or all of their net pay as they choose in a digital currency, a stable coin, for example. Again, that's a conversion done sort of what we would call post-payroll if you're getting into the payroll, sort of geeky payroll process, sort of towards the tail end. But again, they're somewhat seamless to the client employee that would receive stable coin in their Coinbase account or whatever exchange they work with. But not really. I mean, faster payments, real-time payments have been around for close to a decade. There are some advantages of those. We use some of those in our money movement operation. There are also some disadvantages, particularly to small, mid-sized businesses around the finality of payments, the cost of the transactions. No tax authority, to my knowledge, in this country or any country that we operate in and move money in will accept anything other than fiat currency at the moment. So nothing on the horizon that's obvious, and our float balances, not just the revenue from the rate side of it, but the balances coming from both wage growth and volume growth in the employee base, to me, shows that the value proposition is as strong or stronger than it's ever been, as opposed to sort of being at risk.

Jared Levine, Analyst — TD Cowen

And the company is guiding employer services retention to decline right around 10 basis points at the midpoint of the range this year. Is it just an increase in out-of-business losses in the down market driving this expected decline?

Peter Hadley, CFO

no I would say it's not that it's nothing specifically it's we've said sort of through our first three quarters then we raised our guide to flat to 20 hence your midpoint comment in our last earnings call it's just you know 10 basis points for us is a relatively small number in the context of the size of our of our employer services base and churn so we just it's hard to get very precise you know down to these levels in terms of what may happen but but it's less about macro environment or structural things it could you know we just see from time to time and we're perhaps a little bit prudent on our retention guidance as we've shown over the last few years but things can happen clients can can downgrade from you know a service level to a lower service level that impacts retention because we have a revenue retention rate a company can be acquired by another company and therefore you know need to move their provider to the parent company so there's just things that can happen that that might move the needle around 10 or 20 basis points but there's nothing structural and I certainly would not attribute our guide whether at whatever point it is flat 20 basis points or anywhere in between down to things like out of business rates or or macro or you know the the the war or oil prices or anything like that to me it's it's more just we're trying to be be prudent and cautious and and not not get ahead of ourselves on where retention will land but it's been a very strong and stable metric for us for a number of years and I think this year will be no

Jared Levine, Analyst — TD Cowen

different. Great, let's wrap it here thank you for joining us today. Excellent

Peter Hadley, CFO

thank you Jared, thank you everyone