ADP Surpasses Revenue and Margin Expectations — But PEO Growth Slows

Date of Call: Jan 28, 2026

Financials Results

• Revenue: 6% growth, up slightly ahead of expectations
• EPS: 11% adjusted EPS growth
• Operating Margin: Adjusted EBIT margin expanded 80 basis points, up slightly ahead of expectations

Guidance:

• Employer Services revenue growth outlook increased to about 6% for the full year.
• Employer Services new business bookings growth guidance maintained at 4% to 7% for fiscal 2026.
• Employer Services retention decline forecast unchanged at 10 to 30 basis points.
• PEO revenue growth forecast maintained at 5% to 7% (3% to 5% excluding zero-margin pass-throughs).
• Average worksite employee growth forecast adjusted to about 2% for fiscal 2026.
• Consolidated revenue outlook raised to about 6% growth.
• Adjusted EBIT margin expansion forecast maintained at 50 to 70 basis points.
• Adjusted EPS growth forecast raised to 9% to 10%, supported by share repurchases.
• Expect more margin expansion in Q4 than in Q3.

Business Commentary:

Revenue Growth and Strategic Priorities:

• Automatic Data Processing, Inc. reported a 6% revenue growth for Q2 2026, with an 80 basis points of adjusted EBIT margin expansion and 11% adjusted EPS growth.
• The growth was driven by progress across strategic priorities, particularly in Employer Services, where new business bookings showed broad-based strength.

Employer Services Bookings and Retention:

• Employer Services new business bookings grew with the fastest growth in international U.S. enterprise and compliance businesses, while retention rates matched expectations with a modest decline.
• The stable business environment and high client satisfaction supported the bookings growth, with particular strength in small business and mid-market segments.

PEO Revenue and Worksite Employee Growth:

• PEO revenue increased by 6% in the quarter, supported by growth in zero-margin pass-throughs and new business bookings, but average worksite employee growth moderated to 2%.
• The growth in revenue came despite a slight decline in PEO new business bookings and some moderation in pays per control growth.

International Business and Profitability:

• ADP's international operations showed promise with a significant win in the European bank sector, highlighting the power of its global payroll platform.
• While international business is lower margin compared to domestic operations, it benefits from high retention rates and lifetime client value, aligning with strategic investment priorities.

AI and Technology Integration:

• ADP is leveraging AI in its technology strategy, with the launch of new AI-driven solutions like ADP Assist in payroll and HR analytics.
• The integration of AI is aimed at enhancing client experience and operational efficiency, reflecting a focus on innovation to maintain competitive advantage.

Sentiment Analysis:

Overall Tone: Positive

• Management reported 'strong second quarter results,' including 6% revenue growth and 80 basis points of adjusted EBIT margin expansion. They highlighted 'broad-based strength' in new business bookings, high client satisfaction (the 'single best quarter in ADP history'), and progress on strategic priorities. The outlook was raised across revenue, EPS, and margins, reflecting confidence.

Q&A:

• Question from Mark Marcon (Robert W. Baird & Co. Incorporated): Can you talk about the international opportunity, current progress, profitability relative to the U.S., and the PEO WSE growth slowdown and long-term outlook?
  Response: International is a strategic priority with strong bookings and a win like the 75,000 employee European bank; profitability is lower margin but with very high retention and comparable lifetime value. PEO bookings were solid but slightly below expectations, with pays per control softening; despite this, long-term opportunity remains large.

• Question from Tien-Tsin Huang (JPMorgan Chase & Co): Are you doing anything differently to spur PEO growth, and any impact from higher health care costs? Also, any change in margin cadence or investment approach given higher float?
  Response: Investing in seller tools and technology to target the right leads; the PEO value proposition remains strong. Margin cadence is back-half weighted due to timing of expenses and float portfolio dynamics, with Q3 facing some margin pressure from lower Fed funds rates.

• Question from Scott Wurtzel (Wolfe Research): How was the bookings environment in Q2 relative to Q1 and the prior slowdown? Any updated view on AI impacts on hiring and the labor market?
  Response: Bookings growth was solid and broad-based across all businesses in Q2. Empirical data does not show discernible AI impact on hiring or layoffs; labor market remains stable with muted job openings but lower layoffs.

• Question from Bryan Bergin (TD Cowen): How is international ES revenue/bookings growth relative to U.S. ES? Can you comment on the ES PPC pickup and full-year outlook?
  Response: International bookings contribution is growing but revenue mix remains consistent; large wins take time to convert. ES PPC growth was broad-based, and full-year outlook is still around flat, with back-half results determining the exact rate.

• Question from Ramsey El-Assal (Cantor Fitzgerald): Confidence in margin cadence for the back half and any underappreciated levers? Also, comment on the pricing environment.
  Response: Confidence in margin expansion range, with underlying momentum strong but Q3 facing some pressure from float portfolio yield reduction. Pricing environment is consistent, with ~100 basis points contribution expected from price in fiscal 2026.

• Question from Ashish Sabadra (RBC Capital Markets): Have you seen lower revenue per client or product adoption trends? Any PEO bookings softness by region or vertical?
  Response: No evidence of lower revenue per client; Retirement and Insurance Services are strong performers. PEO bookings were solid but slightly below expectations, with performance broad-based across industries and health benefit participation remains healthy.

• Question from Kartik Mehta (Northcoast Research): Any change in PEO client type over the last 12 months? Has AI changed sales headcount or investment?
  Response: No noticeable change in PEO client type; focus remains on strategic fits. AI tools enhance seller efficiency and effectiveness but have not changed headcount investment strategy; continued investment in sales and tools is expected.

• Question from Daniel Jester (BMO Capital Markets): Can you share color on winning large Lyric deals and the enterprise opportunity? How does strong client satisfaction compare with retention trends?
  Response: Lyric wins driven by AI-centric, human-centric platform with flexibility; 70% of new business is new logos. Record client satisfaction reflects product investments; retention decline is modest and in line with expectations, partly due to macro factors like out-of-business normalization.

• Question from Bryan Keane (Citigroup): What drove the 300 bps drop in PEO revenue ex-pass-through growth from Q1 to Q2, and should we expect the lower end of the guidance range?
  Response: Drop due to softer bookings, pays per control moderation, a tough compare from prior-year revenue pull-forward, and slightly less wage growth. Guidance range remains, with outcome depending on bookings, pays per control, and retention in the back half.

• Question from Dan Dolev (Mizuho Securities): Discuss contribution and timing of the CashFlow Central partnership. Any long-term concerns on AI-driven job reduction and ADP's terminal value?
  Response: CashFlow Central integration is recent with minimal current contribution; it enhances the RUN platform as a one-stop shop. ADP's core value is non-discretionary payroll, which is imperative; AI will change workflow but human centricity remains, ensuring continued relevance.

Contradiction Point 1

PEO Worksite Employee (WSE) Growth Outlook

Guidance for PEO WSE growth is adjusted lower despite prior positive momentum.

Can you discuss ADP's international opportunities, current position, growth potential, and profitability compared to the U.S., as well as the factors affecting the slower growth of PEO and WSE and their long-term outlook? - Mark Marcon (Robert W. Baird & Co. Incorporated)

2026Q2: The guide for average worksite employee growth was adjusted to about 2% due to bookings softness and pays per control moderation. - [Peter Hadley](CFO)

Did PEO worksite employee (WSE) growth meet Q1 expectations, and what factors drive confidence in accelerating to the midpoint? - Jared Levine (Cowen)

2026Q1: PEO WSE growth was ~10 basis points above expectations in Q1. Confidence in a slight ramp in the second half is bookings-driven. - [Peter Hadley](CFO)

Contradiction Point 2

International Business Opportunity and Growth

The description of international business performance shifts from "lumpy" and softer to a "strong rebound" and strategic priority.

Can you discuss ADP's international market position, growth potential, profitability compared to the U.S., and the factors affecting PEO and WSE's slower growth, along with their long-term outlook? - Mark Marcon (Robert W. Baird & Co. Incorporated)

2026Q2: International is a strategic priority with strong rebound in bookings. ADP shows up well with a unique balance of on-the-ground associates and integrated products... - [Maria Black](CEO)

Do U.S. and international markets show differences in demand? - Daniel Jester (BMO Capital Markets)

2026Q1: International bookings are "lumpy" due to large, complex deals. Q1 was softer following a strong finish in Q4 FY25... - [Maria Black](CEO)

Contradiction Point 3

Pays Per Control (PPC) Growth Guidance

The full-year PPC growth guidance is lowered from the 0-1% range to approximately 0.5%.

How is international focus impacting revenue and bookings growth compared to U.S. ES, and can you comment on the ES PPC growth pickup and second-half outlook? - Bryan Bergin (TD Cowen)

2026Q2: The full-year outlook is still around flat (0.5%), with Q2 at 1%. The back half may see growth either just above or just below that mark. - [Peter Hadley](CFO)

What caused the Q1 U.S. PPC decline and what indicates it won't worsen? - Jinli Chan (Wells Fargo)

2026Q1: PPC growth is now guided to the low end of the 0-1% range (~0% for the year). - [Peter Hadley](CFO)

Contradiction Point 4

Employer Services (ES) New Business Bookings Outlook

Contradicts the primary driver of bookings softness.

What is the current status, growth potential, and profitability of ADP's international operations compared to the U.S., and what factors are driving slower growth in PEO and WSE along with their long-term outlook? - Mark Marcon (Robert W. Baird & Co. Incorporated)

2026Q2: Bookings were solid but slightly below expectations, and pays per control softened modestly. - [Maria Black](CEO)

Can you elaborate on the factors behind HRO's mid-market softness despite efficiency gains and provide specifics on the confidence in reaccelerating ES bookings from 3%, including go-to-market or pricing initiatives and July's performance? - Bryan C. Bergin (TD Cowen)

2025Q4: The softness in Employer Services (ES) new business bookings was attributed to delays in the domestic HRO business, which involves large, complex opportunities with long sales cycles. - [Maria Black](CEO)

Contradiction Point 5

PEO Revenue Growth Deceleration Explanation

Provides different primary reasons for the slowdown in PEO growth.

What caused the sequential decline in PEO revenue ex-pass-through growth from 6% in Q1 to 3% in Q2? Will the back-half growth be at the lower end of the 3-5% guidance? - Bryan Keane (Citigroup Inc.)

2026Q2: The deceleration was due to slightly softer worksite employees, a year-over-year pull-forward of SUI revenue in Q2 2025, and a bit less wage growth in Q2. - [Peter Hadley](CFO)

What is driving the widening gap between reported PEO revenue growth and growth excluding zero-margin pass-throughs for fiscal 2026, and can you provide an update on the embedded payroll (Clover/Fiserv) partnership and its expected contribution? - Scott Darren Wurtzel (Wolfe Research)

2025Q4: The PEO pass-through gap is driven by: 1) Continued strong health insurance inflation (a zero-margin pass-through), and 2) An expected moderation in wage growth (impacting non-pass-through revenues) and lower elevated state unemployment insurance rate changes compared to '25. - [Peter Hadley](CFO)