ADP Defies Expectations With Strongest Quarter Ever

Date of Call: Jan 28, 2026

Financials Results

• Revenue: 6% revenue growth, up from prior expectations
• EPS: 11% adjusted EPS growth, increased to 9%-10% forecast for fiscal 2026
• Operating Margin: Adjusted EBIT margin expanded 80 basis points; full-year forecast of 50-70 basis points expansion maintained

Guidance:

• Employer Services (ES) new business bookings growth: 4%-7% for fiscal 2026.
• ES retention: 10-30 basis point decline expected for full-year.
• ES pays per control growth: about flat for full-year.
• ES revenue growth: increased to about 6% for full year.
• PEO revenue growth: 5%-7% for fiscal 2026.
• PEO revenue excluding zero-margin pass-throughs: 3%-5% growth.
• Average worksite employee growth: about 2% in fiscal 2026.
• Adjusted EBIT margin expansion: 50-70 basis points for fiscal 2026.
• Adjusted EPS growth: 9%-10% forecast for fiscal 2026.
• Client funds interest revenue: $1.31-$1.33 billion range (up $10M).
• Extended investment strategy net impact: $1.27-$1.29 billion range (up $10M).
• Share repurchase authorization: $6 billion (replacing prior $5 billion authorization).

Business Commentary:

Revenue and Earnings Growth:

• ADP reported a 6% revenue growth for the second quarter of fiscal 2026, with an 80 basis points of adjusted EBIT margin expansion and 11% adjusted EPS growth.
• The growth was driven by strong Employer Services new business bookings, particularly in international, U.S., enterprise, and compliance businesses, alongside high client satisfaction levels.

Employer Services and Retention:

• Employer Services (ES) segment revenue increased 6% on a reported basis and 5% on an organic constant currency basis.
• The ES retention rate was in line with expectations, with a modest decline, attributed to a stable business environment and high client satisfaction, which represented the best quarter in ADP history.

PEO Revenue and Worksite Employee Growth:

• PEO revenue increased 6% in the quarter, with PEO revenue excluding zero-margin pass-throughs growing 3%.
• The growth was supported by solid new business bookings but tempered by a moderation in PEO Pays Per Control growth and a decline in average worksite employees, influenced by market dynamics and client retention factors.

International Business and Strategic Priorities:

• ADP's international operations are highlighted by a win with a large European bank, showcasing the strength of its global payroll and workforce management solutions.
• The international segment, while lower margin compared to domestic operations, offers significant long-term growth potential due to high retention rates and client lifetime value.

AI and Technology Integration:

• ADP is advancing its technology strategy with AI, launching new ADP Assist agents to enhance payroll, HR, analytics, and tax functions.
• These innovations are aimed at solving real workforce challenges through AI and automation, enhancing client experiences and operational efficiencies.

Sentiment Analysis:

Overall Tone: Positive

• The call reported 'strong second quarter results' with revenue growth, margin expansion, and EPS growth exceeding expectations. Highlights include 'best quarter in ADP history' for client satisfaction, record Lyric new business bookings, and recognition as a world’s most admired company. Management expressed excitement about strategic progress and raised full-year guidance.

Q&A:

• Question from Mark Marcon (Baird): Could you talk about the international opportunity, ADP's progress, and profitability compared to the U.S.?
  Response: International is a key strategic priority; bookings are strong, and while margins are lower than U.S. businesses, client lifetime value is comparable due to high retention.

• Question from Mark Marcon (Baird): Can you discuss PEO wage per employee (WSE) growth slowdown and the long-term outlook?
  Response: PEO bookings were solid but slightly below expectations, and WSE growth was moderated, leading to an adjusted full-year forecast of about 2%. The long-term opportunity remains significant.

• Question from Tien-tsin Huang (JP Morgan): Are you doing anything differently to spur PEO growth, and what about impacts of higher healthcare costs?
  Response: Investing in sellers, technology, and sales incentives to focus on the PEO value proposition; the market remains healthy with strong demand.

• Question from Tien-tsin Huang (JP Morgan): Can you detail the margin cadence and any changes in investment approach given higher float?
  Response: Margin expansion is expected to be stronger in Q4 than Q3 due to timing of expenses and float-related margin pressure in Q3 from lower Fed funds rates.

• Question from Scott Wurtzel (Wolfe Research): How was the bookings environment in Q2 relative to Q1 and prior periods?
  Response: Bookings growth was solid and broad-based in Q2 across all business segments, with healthy pipelines entering the back half.

• Question from Scott Wurtzel (Wolfe Research): Have you seen AI impacting hiring or the broader labor market?
  Response: Data does not show a discernible impact from AI on hiring or layoffs; current labor market trends remain stable.

• Question from Bryan Bergin (TD Cowen): How is the international Employer Services (ES) revenue and bookings growth relative to the U.S.?
  Response: Revenue mix is consistent; international bookings are growing but take time to convert to revenue, with the focus on long-term opportunities.

• Question from Bryan Bergin (TD Cowen): Can you detail ES pays per control (PPC) performance and the full-year outlook?
  Response: PPC growth was 1% in Q2, broad-based across segments; full-year outlook is about flat, with guidance unchanged.

• Question from Ramsey El-Assal (Cantor Fitzgerald): What is the confidence level for margin cadence in the second half, and are there underappreciated levers?
  Response: Confidence remains high for full-year margin expansion range; underlying momentum continues despite some quarterly timing impacts.

• Question from Ramsey El-Assal (Cantor Fitzgerald): How is the current pricing environment and contribution expected?
  Response: Pricing environment is stable; contribution is expected around 100 basis points in fiscal 2026, similar to prior periods.

• Question from Ashish Sabadra (RBC Capital Markets): Have you seen lower revenue per client or product adoption trends?
  Response: No evidence of lower revenue per client; strongest bookings performers are in retirement and insurance services.

• Question from Ashish Sabadra (RBC Capital Markets): Where did PEO bookings softness occur, and what about health benefits participation?
  Response: PEO bookings were broad-based; health benefits participation remains strong, reflecting the value proposition.

• Question from Kartik Mehta (North Coast Research): Has the type of PEO client changed in the last 12 months?
  Response: No noticeable change in client type or industry; target client profile remains consistent.

• Question from Kartik Mehta (North Coast Research): Has AI changed sales headcount or investment in sales?
  Response: No change in sales headcount strategy; AI tools enhance sales efficiency and effectiveness, and investment will continue.

• Question from Dan Jester (BMO Capital Markets): How were large Lyric deals won, and should we expect more?
  Response: Deals won due to Lyric's flexibility, AI integration, and human-centric design; 70% of bookings are new logos, indicating strong market resonance.

• Question from Dan Jester (BMO Capital Markets): Why is client satisfaction high while retention is in line with expectations?
  Response: High satisfaction is due to product investments and NPS improvements; retention decline is a planned moderation, not a result of satisfaction levels.

• Question from Bryan Keane (Citi): What drove the 300 bps delta in PEO revenue growth ex-pass-throughs between Q1 and Q2?
  Response: Factors include softer bookings, pays per control moderation, a year-over-year comp impact from prior pull-forward revenue, and less wage growth in Q2.

• Question from Dan Dolev (Mizuho): What is the contribution from the CashFlow Central partnership with Fiserv?
  Response: The integration is recent (December 2024), so minimal revenue contribution currently; represents a future embedded ecosystem opportunity.

• Question from Dan Dolev (Mizuho): How does ADP view long-term terminal value in an AI-driven job-killing scenario?
  Response: ADP believes its core payroll and HCM services are non-discretionary and essential; AI will augment but not replace human-centric work, ensuring continued relevance.

Contradiction Point 1

International Business Performance and Bookings Trends

Contradiction on the stability and performance of international bookings between consecutive quarters.

How is ADP addressing its international strategic pillar compared to the U.S. in terms of runway and profitability? - Mark Marcon (Baird)

2026Q2: Bookings rebounded strongly in Q2 after a soft Q1. - Peter Hadley(CFO) and Maria Black(CEO)

What notable differences exist between U.S. and international demand? - Daniel Jester (BMO Capital Markets)

2026Q1: International bookings are lumpy and atypical, with softness in Q1 following a strong finish in Q4. - Maria Black(CEO)

Contradiction Point 2

PPC (Pays Per Control) Growth Outlook and Macroeconomic Sensitivity

Inconsistency in the confidence and drivers for the PPC growth forecast between quarters.

Was the Q2 ES PPC pickup broad-based, and how do you view the second half with the flat full-year outlook? - Bryan Bergin (TD Cowen)

2026Q2: PPC growth was broad-based across industry groups and client segments, without a slowdown in the down market... The full-year outlook is maintained at about flat growth (around 0.5%). - Peter Hadley(CFO)

Can you explain pays per control again? - Dan Dolev (Mizuho)

2026Q1: PPC guidance has moved to the low end of the 0–1% range, a movement of tens of basis points, based on ADP’s client data showing tight hiring and very low layoffs. - Peter Hadley(CFO)

Contradiction Point 3

Performance and Outlook for Employer Services (ES) Bookings

Contradiction on whether ES bookings growth accelerated or remained soft.

What were the trends in the bookings environment in Q2 compared to Q1 and the previous six to nine months? - Scott Wurtzel (Wolfe Research)

2026Q2: Q2 new business bookings were solid and broad-based, with contributions from all segments. - Maria Black(CRO)

What areas of underperformance in Employer Services (ES) new business bookings, specifically in HRO and international? - Bryan C. Bergin (TD Cowen)

2025Q4: ES bookings grew 3% with strength in small business and domestic enterprise, but there was softness in domestic HRO and international. - Maria Black(CRO)

Contradiction Point 4

Expected Contribution from New Product Launches/Partnerships

Contradiction on the near-term revenue contribution from new partnerships.

What are the contributions and expected timelines for the CashFlow Central partnership with Fiserv? - Dan Dolev (Mizuho)

2026Q2: The integration of Fiserv's CashFlow Central into RUN... material revenue contribution is still largely in the future. - Maria Black(CRO)

Update on the embedded payroll partnership with Clover (Fiserv) and its expected contribution to FY26 bookings? - Scott Darren Wurtzel (Wolfe Research)

2025Q4: The partnership is progressing well... It is too early to see a discernible uptick in bookings from this partnership. - Maria Black(CRO)

Contradiction Point 5

Nature of International Bookings Softness

Contradiction on whether international softness is due to macroeconomic uncertainty or specific regional/product factors.

How does ADP's international strategic pillar compare to the U.S. in terms of runway and profitability? - Mark Marcon (Baird)

2026Q2: Bookings rebounded strongly in Q2 after a soft Q1. - Peter Hadley and Maria Black(Executive)

What caused the softness in software international bookings—specific regions or products? - Ramsey El-Assal (Barclays)

2025Q3: The softness in international bookings is attributed to macroeconomic uncertainty impacting large, multi-country deals. - Maria Black(Executive)