Automatic Data Processing, Inc. (ADP) Q2 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call presented a mixed outlook: strong financial metrics, consistent revenue growth, and positive partnerships like CashFlow Central with Fiserv. However, muted hiring levels and flat full-year outlooks for some metrics balance these positives. The Q&A session revealed confidence in margin targets and positive AI impacts, but concerns about AI's long-term labor market effects were not directly addressed. Overall, the sentiment is neutral, as the positives are offset by uncertainties and flat guidance.
Key Financial Performance
Revenue Growth 6% year-over-year increase. This growth was attributed to broad-based strength, including international U.S. enterprise and compliance businesses, as well as contributions from small business and mid-market segments.
Adjusted EBIT Margin Expanded by 80 basis points year-over-year. This was driven by operating leverage and contributions from client funds interest revenue growth.
Adjusted EPS Growth 11% year-over-year increase. This was supported by share repurchases and strong financial performance.
Employer Services (ES) Revenue Increased by 6% year-over-year on a reported basis and 5% on an organic constant currency basis. FX contributed about 1 point of revenue growth.
Employer Services (ES) Retention Rate Experienced a modest decline year-over-year, in line with expectations. The decline was attributed to stable overall business environment and high levels of client satisfaction.
Employer Services (ES) Pays Per Control Growth Rounded up to 1% year-over-year, representing modestly higher growth compared to the first quarter.
PEO Revenue Increased by 6% year-over-year, driven by growth in zero-margin pass-throughs and solid new business bookings growth.
PEO Average Worksite Employees Grew by 2% year-over-year, though this was moderated by a slowdown in PEO pays per control growth.
Client Funds Interest Revenue Increased slightly more than anticipated, driven by higher average client funds balance growth. The average yield was approximately 3.4%.
PEO Margins Decreased by 70 basis points year-over-year, mainly due to zero-margin pass-through growth and higher selling expenses.
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Operating Highlights
Workforce Now Next Gen: Strong traction with mid-market clients for its always-on payroll processing capabilities, generative AI functionality, and expedited implementation timelines. First sale to a client with over 1,000 employees achieved.
ADP Lyric HCM: Exceeded new business bookings expectations with over 70% of bookings from new logos. Recognized for transformative impact in the HCM industry.
ADP WorkForce Suite: Launched as an integrated workforce management solution, combining time, pay, and HR experience. Won several deals in the second quarter.
AI Solutions: Launched new ADP Assist payroll and HR analytics agents to streamline processes and enhance decision-making.
Global Expansion: Won business of a large European bank with over 75,000 employees. Enhanced global payroll platform with intuitive dashboards and easier navigation.
Employer Services: 6% revenue growth, modest decline in retention rate, and 1% pays per control growth.
PEO Revenue: 6% growth driven by zero-margin pass-throughs and solid new business bookings.
Pooled Employer Plan (PEP): Introduced Save4Retirement PEP to reduce administrative burden and fiduciary risk for employers.
Shareholder Value: Board authorized $6 billion stock repurchase and increased dividend by 10%.
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Risk or Challenges
Employer Services retention rate: There was a modest decline in the second quarter, which could indicate challenges in retaining clients and maintaining consistent revenue streams.
PEO new business bookings: Growth was solid but came in slightly below expectations, which could impact future revenue growth in this segment.
PEO pays per control growth: There was further moderation, which could weigh on average worksite employee growth and overall revenue.
PEO margins: Decreased by 70 basis points in Q2, driven by zero-margin pass-through growth and higher selling expenses, potentially impacting profitability.
ES retention: Declined modestly versus the prior year, with a forecasted 10 to 30 basis point decline in full-year retention, indicating potential challenges in client retention.
PEO average worksite employee growth: Now expected to grow by about 2% in fiscal 2026, reflecting a slowdown that could impact overall PEO revenue.
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Guidance & Outlook
New Business Bookings Growth: Maintaining guidance of 4% to 7% new business bookings growth for fiscal 2026, supported by healthy pipelines.
Employer Services (ES) Revenue Growth: Increasing full-year revenue growth outlook to about 6% for fiscal 2026.
Employer Services Retention: Forecasting a 10 to 30 basis point decline in full-year retention.
Pays Per Control Growth: Expecting flat pays per control growth for the full year.
Client Funds Interest Revenue: Raising full-year forecast by $10 million to a range of $1.31 billion to $1.33 billion, with average client funds balance growth forecasted at 4% to 5% and an average yield of approximately 3.4%.
PEO Revenue Growth: Maintaining fiscal 2026 revenue growth guidance of 5% to 7%, with revenue excluding zero-margin pass-throughs expected to grow by 3% to 5%.
Average Worksite Employee Growth: Revised down to about 2% for fiscal 2026 due to moderation in pays per control growth.
Consolidated Revenue Growth: Increasing fiscal 2026 consolidated revenue outlook to about 6% growth.
Adjusted EBIT Margin Expansion: Maintaining forecast for adjusted EBIT margin expansion of 50 to 70 basis points for fiscal 2026.
Adjusted EPS Growth: Raising fiscal 2026 adjusted EPS growth forecast to 9% to 10%, supported by share repurchases.
Effective Tax Rate: Continuing to expect an effective tax rate of around 23% for fiscal 2026.
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Shareholder Return Plan
Dividend Increase: Earlier this month, our Board authorized a 10% dividend increase, signaling our commitment to returning excess cash to shareholders.
Share Repurchase Authorization: Our Board authorized the purchase of $6 billion of our common stock, replacing the 2022 authorization of $5 billion. This reflects our continued focus on driving shareholder value through share repurchases.
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Key Q&A
Q:Can you talk about the international opportunity for ADP, including profitability compared to the U.S.?
A:Maria Black highlighted that international operations are a strategic priority for ADP, with strong offerings and recent wins, such as a 75,000-employee European bank. Peter Hadley noted that international business has slightly lower margins than domestic operations but high retention rates, making it comparable in lifetime value.
Q:What is contributing to the slower growth in PEO and WSE, and what is the long-term outlook?
A:Peter Hadley mentioned solid but slightly below-expected bookings and minor softening in PEO pays per control metrics. Maria Black emphasized the significant opportunity in the PEO market, with investments in distribution, product capabilities, and sales tools to drive growth.
Q:Are you doing anything differently to spur PEO growth, and are SMBs trading down due to higher healthcare costs?
A:Maria Black stated that ADP is investing in sellers, tools, and technology to target the right PEO clients. She emphasized the strong value proposition of PEOs in addressing employer complexities, including healthcare, and noted healthy pipelines and solid bookings.
Q:Can you provide insights into the margin cadence and investment approach given higher float balances?
A:Peter Hadley explained that Q2 margins were strong, with continued margin delivery expected in the second half. He noted timing of expenses and float portfolio dynamics as factors influencing quarterly margins but emphasized strong underlying margin expansion and diligent cost management.
Q:How is the overall bookings environment trending compared to previous quarters?
A:Maria Black described the environment as stable, with broad-based growth across all business segments in Q2. She highlighted strong performance in enterprise space, compliance solutions, and small business portfolios, with healthy pipelines for the second half.
Q:What are your views on AI's impact on hiring and the broader labor market?
A:Peter Hadley stated that while hiring levels and job openings are muted, layoffs are also low. He noted no discernible impact of AI on industry verticals like financial services and tech, with empirical data not pointing to significant AI-driven job reductions.
Q:How does international ES revenue and bookings growth compare to U.S. ES?
A:Peter Hadley noted that international bookings take time to translate into revenue due to large implementation projects. Maria Black highlighted strong contributions from global enterprise space and investments in global payroll, time, HR, and service offerings.
Q:What drove the pickup in ES PPC, and how does it affect the full-year outlook?
A:Peter Hadley attributed the broad-based ES PPC growth to consistent contributions across industry groups and client segments. He noted confidence in continued growth but maintained a flat full-year outlook due to small basis point variations.
Q:What is your confidence level in achieving margin targets for the second half, and are there underappreciated levers?
A:Peter Hadley expressed confidence in achieving margin expansion targets, citing strong underlying margin contributions and cost management. He noted no anticipated headwinds beyond previously discussed dynamics.
Q:What is the pricing environment like, and what contribution is expected from pricing?
A:Peter Hadley described the pricing environment as consistent, with thoughtful pricing contributing around 100 basis points to fiscal '26, slightly lower than fiscal '25 but higher than pre-pandemic levels.
Q:Have you observed lower revenue per client or changes in product adoption rates?
A:Maria Black and Peter Hadley stated that ADP has not observed lower revenue per client or reduced product adoption rates. They noted strong performance in Retirement and Insurance Services, particularly in the down market space.
Q:What are the trends in PEO bookings and employee penetration across regions and verticals?
A:Maria Black noted consistent performance across PEO markets and industries, with strong fits in property management and professional services. She highlighted healthy participation in health benefits as a key value proposition.
Q:Have there been changes in the type of clients seeking PEO services?
A:Maria Black stated that client types and industries remain consistent, with a slight increase in average client size over decades due to the PEO's strong mid-market offering.
Q:How has AI impacted ADP's sales force and investment strategy?
A:Peter Hadley noted that AI has made salespeople more efficient and effective but has not changed headcount strategy. ADP continues to invest in both headcount and AI-infused tools like the Zone to maximize sales success.
Q:What is the momentum for Lyric in the enterprise space, and are there critical mass reference customers?
A:Maria Black highlighted strong Lyric bookings, with 70% from new logos, driven by its AI-centric, human-centric platform. She noted critical mass is building, with large deals contributing to material bookings.
Q:How do strong customer satisfaction scores align with retention rates?
A:Maria Black noted record client satisfaction scores due to investments in tools and products. Retention rates are strong but slightly moderated due to macro factors like out-of-business rates, aligning with expectations.
Q:What caused the Q2 PEO revenue growth slowdown compared to Q1?
A:Peter Hadley attributed the slowdown to softer worksite employee growth, challenging year-over-year comparisons due to prior pull-forward of SUI revenues, and lower wage growth in the PEO segment.
Q:What is the outlook for PEO revenue growth for the full year?
A:Peter Hadley reiterated the 3%-5% guidance for PEO revenue growth, noting confidence in achieving the range despite back-half dependencies on bookings, pays per control, and retention.
Q:What is the potential impact of the CashFlow Central partnership with Fiserv?
A:Maria Black expressed excitement about the partnership, which integrates bill pay and payroll into a single platform for small businesses. The integration was completed in December, with future revenue and bookings contributions expected.
Q:How is ADP preparing for long-term AI-driven changes in the labor market?
A:Maria Black emphasized ADP's adaptability to innovation cycles and its focus on human-centric work. She highlighted investments in AI tools and the enduring importance of accurate payroll and benefits management, which remain human-centered.
Q:Review of Unclear Management Responses
A:Management avoided directly addressing the specific impact of AI on long-term job reductions and terminal value, instead emphasizing adaptability and the enduring human-centric nature of ADP's services.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
ADP WorkForce
ADP approach
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Clients
PEP
WorkForce Suite
agent
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client AI
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employee client
employer plan
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ADP Transcript
Automatic Data Processing, Inc. (ADP) Q2 2026 Earnings Call Transcript
Unknown1-28
The earnings call presented a mixed outlook: strong financial metrics, consistent revenue growth, and positive partnerships like CashFlow Central with Fiserv. However, muted hiring levels and flat full-year outlooks for some metrics balance these positives. The Q&A session revealed confidence in margin targets and positive AI impacts, but concerns about AI's long-term labor market effects were not directly addressed. Overall, the sentiment is neutral, as the positives are offset by uncertainties and flat guidance.
Automatic Data Processing, Inc. (ADP) Presents at 53rd Annual Nasdaq Investor Conference Transcript
Neutral12-9
Automatic Data Processing, Inc. (ADP) Q1 2026 Earnings Call Transcript
Unknown10-29
The earnings call presents a mixed picture. Financial performance and guidance show stability, but with some concerns like flat U.S. pays per control and margin pressure. The Q&A highlights positive developments in areas like AI and new bookings, but also reveals uncertainties in macroeconomic impacts and client adoption of Next Gen. The lack of specific financial details on acquisitions and Next Gen adoption timelines adds to the uncertainty. Given these mixed signals and the absence of a market cap, a neutral sentiment is appropriate.
Automatic Data Processing, Inc. (ADP) Presents At Citi's 2025 Global Technology, Media And Telecommunications Conference (Transcript)
Neutral9-4
ADP Report
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