Automatic Data Processing, Inc. (ADP) Earnings Call Transcript & Summary

Okay. Great. I wanted to ask about HRO ex pass-throughs. I think it grew 5% in fiscal year '26. That was down, I think, from 7% growth in fiscal year '25 and there was a little bit of a rebound, I think that was called out in the ES HRO segment in fiscal year '26. So just trying to think about the 2 segment growth rates of kind of HCM and should they grow similar in that kind of mid-single-digit kind of growth rate?

Yes, I don't think they necessarily need to grow it. There's no necessary linkage, if you like, to the growth rates between the portfolio and the HCM portfolio. And again, these are sort of pillars we share in our external reporting. So the HRO pillar comprises from a segment perspective, the PEO business, and also what we call the ES HRO business, which is, call it, a managed service offering for payroll and HRO and time and things like that. So a couple of things. The PEO business, which is, I think, well known to investors given it's a segment reported, we delivered 7% revenue growth, 5% X0 margin pass-throughs last year. We had some headwinds, if you like, with respect to pace per control in that business, not particularly growing. I mentioned earlier, medical insurance inflation has somewhat of an impact in terms of being able to improve retention rates when medical insurance renewals are as high as they are. But bookings have continued to perform well in the PEO space, and in the ES HRO space, which is the other part of this HRO pillar that we share in our K. We had a bit of a soft sales year in FY '25, particularly in the fourth quarter. It feels like an age ago now, but there's a lot of noise last year in the -- in FY '25 fourth quarter was liberation day tariffs. And I think it was a government shutdown too, if I remember correctly. So there was a little bit of pause, if you like, on decision-making in that space that we saw rebound quite strongly in FY '26. So again, these are larger deals, more complex deals that take a bit of time to work through backlog to become live and revenue generating. So that -- some of that will come in 2017. Some of that might feed through into FY '28. But the underlying health of the HRO portfolio is strong as is the HCM portfolio.

And so just sticking on the PEO business, the ex pass-through, I think that's growing somewhere in that 3% to 5% range. And then the WSE growth is only 2%, which is a little bit lower than maybe normal. What's it going to take to get back to the kind of midterm targets for PEO to be in that 6% to 8% growth?

Yes. So the midterm targets were a total revenue target. So we were happy last year in '26, we finished at 7%, so squarely in the range and that contemplates the 0 margin pass-through piece [indiscernible] margin pass-through as we hit 5% last year, which we felt was pretty good, all things considered. And like I mentioned, sort of growing worksite employees is a little tougher in that space at the moment just given hiring levels in the PEO client base and also medical inflation having an impact on how much we can improve our retention. We did improve our retention in '26. We also improved it in '25, but relatively modest improvements, and I think that was understandable for us given the inflation environment in health insurance. But the main driver, Brian, in terms of sort of the current PEO growth rate levels versus where they were 3 or 4 years ago is a hiring situation. So again, we were seeing sort of 4%, 5%, even 6% pace per control growth within a number of years ago, that's much more in the 0% to 1% range now, and that's having an impact on our revenue growth versus where we were in the low teens or high single digits a few years ago. But 7 and 5 last year is we were very pleased with and our guide this year, at least at the higher end is for similar levels, we'll see where we land during the year.

Yes. That WSE growth, is that a little bit out of your hands, it's kind of dependent on the market?

It's partially in our hands and partially out of our hands. So the booking side of it is very much our ability to execute and drive bookings. We had good bookings, healthy solar bookings in FY '26. We're expecting the same again or better, hopefully, in '27. That piece we can control. I think the retention we partially control through quality of service and [indiscernible] to the offering to our client base, part of it becomes a little bit -- I don't know if not controllable is the right word, but some of it is down to companies wanting to switch hoping that they can find maybe some better benefits pricing by going to a different provider. Some of it is our own declination rates on clients that don't meet our underwriting levels with respect to how they're performing in the book or potentially as prospects. So there's, I would call retention partially under our control, partially driven by the market and the pace per control piece really is client decision-making on hiring levels. So hard for us to impact on that.

Got it. Got it. ES grew 6% organic in the fourth quarter. I think you guys called out pricing was up north of 130 basis points. I think it will remain that level in fiscal year '27. Maybe talk a little bit about what's driving price. You're getting a little higher price maybe than the normal 100 basis points cadence. I know we're talking about 30 basis points. But I'm just curious, I think the market might think that there be pressure with competition in price. But actually, you guys are getting a little pricing power instead. So I just want to understand that. And then maybe about what's new client growth look like for you guys?

Yes. So I think on price, again, the world sort of changed, I guess, with respect to the pandemic period. So before the pandemic, we were more averaging around 50 basis points of contribution from price. We -- since the pandemic, we've been in more the 100 to 150 basis point range. So 26% was sort of squarely in line with, call it, the post-pandemic expectations. We expect similar in FY '27. Some of it is the macro environment and where inflation sits and obviously, as we all know, I think many things, whether it's suppliers or pricing or whatever that has all somewhat risen that rising tide has lifted all boats there. But the other piece of it, and we're very careful on price to take what's appropriate, but not to push the envelope, notwithstanding we have a very sticky business. we definitely want to retain our clients, retain them as happy clients, have them buy more from us around half of our bookings. As you know, come from our existing book of clients, headlines referring us in the market for new opportunities. That opportunity we see is larger than what we might be able to glean short term from excessive price increases, if that sense. So I think how we feel comfortable with it. The pricing equation is a little bit the macro environment. We're also very much what we're delivering to clients through our products, our solutions and our service. And back to the AI point, as I was saying earlier, we monetize a portion of that through -- just through -- as opposed to specific items on the invoice through our general price increases and adding that increase and improved functionality and capability in our solutions gives value to our clients that we feel they're happy to pay for through incremental price, and we're happy to take what we can, but not to get too greedy.

And then what about new client growth? How has that trended versus historical?

Yes, client growth continues to trend. I mean, we're a large company with getting close to 1.2 million clients. So now if I look at what we reported in our K, we had mid-single-digit growth in our downmarket solution run. We continue to see growth in our Workforce Now, solution which supports the mid-market. Both the PEO, HRO and the traditional HCM tech offering in the mid-market, we're making headway in the enterprise space now with Lyric and with Workforce Suite and our global payroll offering. So we feel pretty good in terms of where we're tracking on market share. I think we have more opportunity in front of us. We're beating a number of our competitors when it comes to our balance of trade, some competitors. We are still in a position where we're in a negative position, but generally an improving position. So more opportunity there, but I think execution has been pretty good.

New bookings growth, I think, was 6%. It felt like it came in pretty well strong for you guys in the fourth quarter. How does the pipeline look to grow in fiscal year '27. I think you guys guided to a 4% to 7% kind of new bookings growth. But what -- how does the pipeline look when you finish strong is that? Do you have to replenish the pipeline? Does it take a little more time to build?

Yes. So in terms of pipeline, that's typically more in enterprise, maybe upper end of the mid-market enterprise concept for us. We did have strong bookings in those segments, as we mentioned in the in the fourth quarter. So there is an element of replenishing, but we're always working on the pipeline. So we feel good about the pipelines entering FY '27. We're now still in our first quarter, but -- so we'll see how the results pan out. But there is an element of that, that might have a bit of a seasonal impact, if you like, or a cyclical impact in the early part of the year, but not unexpected, not something we haven't dealt with before. I think more in the mid-market, down market space, the more -- it's more of an activity-based business. And again, our sellers continue to sell well. I think we have some offerings that are really resonating, in particular, we called out our retirement services business, more than 200,000 clients now more than $1 billion in revenue. So we feel like we're well placed, both from a pipeline activity perspective, also from sales force investments in terms of head count being on board, some of the tools we spoke about earlier that have been deployed and continuing to be deployed across more and more of our sales force, and we feel like we're well placed for a good year, but there's much work to be done. The number, as you would have seen, as we delivered last year was $2.2 billion in bookings. So that's a lot of bookings larger than many of our competitors' installed revenue base. We have to sell each and every year just to grow our bookings. So much to be done, but we feel like everything is in place and we have a lot of confidence in our sales force to deliver.

So if you think about Workforce Now and Ron and Lyric and Workforce Suite that you're now selling, is there any areas that are going to have outsized growth probably that will carry a faster growth rate to it versus the other maybe segments of the business?

Yes. I think on the bookings number, I think the enterprise products are probably the ones that will contribute most to the to an improving growth profile, if you want to call it that. Some of that's a function of the fact that they're newer and the starting point is a little smaller, but -- but we called out Lyric and Workforce Suite as the two largest dollar contributor to contributors to dollar growth in the bookings in FY '26. We'd expect that likely will probably continue in FY '27. So I think that's really the hot -- relatively speaking, new hot hand for us. We continue to perform and execute really well in our established businesses in the mid-market in the down market. So I see enterprises probably the opportunity to bend the needle on bookings. Again, that's the one that takes the longest in the curve on revenue, but it's also the traditionally the longest retention business and the highest retention business on the longest client life business. So it's a long -- it's a bit of a long game when it comes to the enterprise space, but yields great rewards if you're successful, and we feel like we're making all the right steps in that direction.

How fast have you guys been growing the sales force? Or are you cutting sale? Just remind me on Salesforce for fiscal year '26 and then what are the plans for growth or for terming the sales force in fiscal year '27?

Yes. So we grew the Salesforce in '26 and we expect to grow in '27. I would say we grew mid-single digits or low to mid-single digits in '26 and '27, roughly similar, maybe slightly smaller in terms of head count growth, but not meaningful, still growing our head count we see still plenty of opportunity to add sellers, and we look to do that. But we're also investing pretty heavily in our channel alliances and distribution strategies there in more top of the funnel sort of marketing and lead generation activities. So there's really a raft of different approaches and investments we take in our sales and marketing organization. Headcount is one of those. But we have growing that head count, and we expect to continue to grow that headcount.

Okay. We got a little over a minute left, but I have to ask about the EBIT margins. Over the medium term, I think you guys have guided maybe the 50 to 75 bps of margin expansion. You've guided a little ahead for this fiscal year, 70 to 90 basis points above -- or above fiscal year. Can you just talk a little bit about what's maybe driving a little faster margin cadence? And kind of as you go out in the medium term is 50% to 75%. Is that still the right number, given maybe some of the efficiency gains you're getting on the AI side?

Yes. Yes. So we delivered 80 basis points last fiscal year. And again, as you said, we guided $70 million to $90 million this year. So we're not necessarily revising our midterm objectives that we set about 18 months ago. But I would say we're a little ahead of where we expected to be in that progression. And I made that comment on the last 2, I think it is earnings calls. So we feel that that's not a temporary phenomenon. Float continues to be very durable for us. with yields and also balances continuing to grow, so that's an important element. But really what's lifted the delivery, if you like, has been the -- some of the productivity efficiencies we've been realizing from our AI investments and also other investments we're making in products. So we feel like this is a sustainable level that we delivered last year. We expect to deliver this year. I think -- it's a bit early for me to be talking about '28 onwards, but I would consider that to be more of a -- where we're at now to be a sustainable sort of level of margin delivery, and I'm not expecting to sort of regress somewhat to maybe at least the lower end of those ranges that we gave 8 months ago from a medium-term guide perspective.

I'm going to sneak in one quick one on just capital return. Any -- we've seen some companies be a little more aggressive with stock buybacks, maybe a little more aggressive on dividend. Just quick thoughts on how you are thinking about it currently.

Yes. So we've been, at least in the ADP terminology, we've been more aggressive on stock buybacks last year. We did a little over 2% of our shares outstanding last year. Our typical cadence has been to retire around 1% of our share count. So we saw value in the stock. We still do see value in the stock. We issued a note last year in May, I think it was for $1 billion to help us continue at those rates basically through FY '27. So we expect continued elevated share repurchases, absent some sort of major change in the market condition through the rest of FY '27 as well. So the dividend continues to be very important to us, 51 years of consecutive dividend growth. We'd expect that to continue to grow. Board approval, obviously required later in the calendar year, but they're likely to grow. But certainly, on the share repurchases, we have the balance sheet capability to continue at this elevated clip without impacting our ability to invest organically in the business and also about the impinging on our ability to look at strategic M&A opportunities as well. So I would expect our shareholder returns to continue at the clip that we're delivering at the moment, at least through the end of FY '27.

Great. Well, with that, Peter, we'll leave it there. Thanks for coming.

Thank you, Brian. Appreciate it.