Automatic Data Processing, Inc. (ADP) Earnings

Management highlights

- **Strategic Priority 1: Lead with best-in-class AI-infused HCM technology** * ADP Assist AI agents have been rolled out to nearly all 1.1 million ADP clients, with 3.1 million unique active users completing 12 million conversations in FY2026. The tool has surfaced 45,000 compliance insights to help clients address tax/regulatory risks before they escalate, and is now available on ADP Marketplace for third-party ecosystem integrations. * ADP Lyric HCM for enterprise clients saw 94% year-over-year growth in live clients, with a 50% increase in pipeline (70% of pipeline opportunities are new logos). Momentum grew in international markets, with new deals closed in France and the UK, and increased adoption of bundled offerings including Lyric, ADP Workforce Suite, and ADP Global Payroll. Global time bookings increased significantly year-over-year. * The Zone, ADP's AI-powered internal service platform, reached 48% penetration among service associates by the end of FY2026, exceeding the year-end target (up from 10% at the start of the fiscal year). 96% of service work for platform users is completed on The Zone, driving a 4% reduction in per-client contacts, indicating reduced administrative work and increased focus on high-value client tasks. Half of ADP's sales team now also uses The Zone, contributing to record-high seller productivity in FY2026. - **Strategic Priority 2: Deliver unmatched expertise and outsourcing solutions** * ADP combines AI automation for routine tasks with human expertise for high-complexity, high-stakes HR and compliance work, which management states is a key structural advantage amid ongoing workforce transformation. Multiple client examples highlight this model, including a large global auto manufacturer expanding its partnership to support AI-driven workforce transformation across 13 countries, and a small Las Vegas dental practice that reduced turnover by 40% with ADP's expert support. * ADP's unique payroll data (covering millions of workers globally) is used in partnership with the Stanford Digital Economy Lab to map AI-driven changes to work at the task level in near real-time, generating actionable workforce intelligence that helps clients navigate reskilling and workforce redesign. Early research confirms AI is reshaping work rather than eliminating jobs at scale, with higher wage premiums for tasks requiring human judgment. * ADP has built out a robust AI governance framework focused on human oversight, privacy, bias mitigation, explainability, and data quality, which management frames as a competitive advantage as global regulators enact new AI policies. - **Strategic Priority 3: Leverage global scale for client value** * ADP supports workforce management across more than 140 countries, with deep local jurisdiction expertise to address fragmented global regulatory requirements. Scale investments have also driven improvements in sales productivity, with record-high seller productivity achieved in FY2026. * Full-year results exceeded initial guidance, with 7% total revenue growth, 80 basis points of adjusted EBIT margin expansion, and 17% adjusted EPS growth in Q4 FY2026. Overall client satisfaction reached a new record high for the third consecutive year, and retention remained strong across both business segments.

Guidance

- **Consolidated Fiscal 2027 Guidance**: Expects 5% to 6% total revenue growth, 70 to 90 basis points of adjusted EBIT margin expansion, an effective tax rate of ~23%, and 9% to 11% adjusted EPS growth. Share repurchases are expected to continue at recent elevated levels, supported by the existing $6 billion repurchase authorization. - **Employer Services Guidance**: Expects 5% to 6% revenue growth, with 4% to 7% new business bookings growth, and broad-based growth across small business, enterprise, and international segments. Retention is forecast to decline 10 to 30 basis points from the 2026 level of 92.1%, a prudent assumption given current near-record retention. Expects flat to 1% U.S. pays per control growth, consistent with recent trends and the observation that AI is reshaping work rather than reducing overall headcount. FX is expected to be a slight headwind after delivering a ~1 percentage point tailwind in FY2026. Client funds interest revenue is projected to be $1.54 billion to $1.56 billion (up from $1.35 billion in FY2026), driven by higher average yields and growing client fund balances. ES margins are expected to expand further, driven by operational productivity gains and growing client funds interest revenue. - **PEO Guidance**: Expects 5% to 7% total revenue growth, 3% to 5% growth in revenue excluding zero-margin pass-throughs, ~2% average worksite employee growth, and stable retention and pays per control growth relative to FY2026 levels. PEO margins are expected to see a slight further contraction as zero-margin pass-throughs grow faster than overall PEO revenue.

Segment performance

Total fiscal 2026 consolidated revenue was $21.9 billion, with 7% full-year revenue growth overall. 1. **Employer Services (ES)**: Q4 2026 revenue grew 7% reported (6% organic constant currency), with 90 basis points of margin expansion in Q4. Full-year 2026 revenue grew 7% reported (5% organic constant currency), with 60 basis points of full-year margin expansion (including 20 basis points of acquisition-related drag from the Workforce Software acquisition). Full-year 2026 new business bookings hit $2.2 billion, growing 6% year-over-year, and full-year retention was 92.1%. ES contributed approximately 90% of total consolidated revenue in FY2026. 2. **PEO**: Q4 2026 revenue grew 7% overall, 5% when excluding zero-margin pass-throughs. Average worksite employees increased 2% to 775,000 in Q4. Q4 margins contracted 100 basis points, driven by faster zero-margin pass-through growth, higher workers' compensation and selling expenses. Full-year 2026 revenue grew 7% overall, 5% excluding zero-margin pass-throughs; average worksite employee growth was 2% year-over-year, and full-year margins contracted 110 basis points. PEO contributed approximately 10% of total consolidated revenue in FY2026. Retirement Services achieved a milestone of $1 billion in annual revenue for the first time in FY2026, serving over 210,000 clients.

Risks & headwinds

- Retention is at near-record levels across the business, so management forecasts a small potential pullback in FY2026 due to the risk of increased business failure rates in a potential economic downturn. - Forward interest rate movements could change the actual outcome of client funds interest revenue relative to the current forecast, which is based on current market forward yield curves and expectations for 25 to 50 basis points of Fed funds rate hikes in FY2027. - Large enterprise deal timelines and closing outcomes can create variability in where full-year bookings land within the stated guidance range. - FX volatility could create greater than expected headwinds for FY2027 revenue growth.

Analyst Q&A

• Q: Mark Marcon (Baird) asked about Lyric HCM win rates, and what segments will drive bookings to the top end of the FY2027 guidance range. /

  A: Maria Black stated Lyric win rates are higher than for ADP's prior enterprise platform, with particularly strong momentum in international markets, where 4 of the last 5 quarters have seen significant bookings growth contribution, all anchored by AI capabilities. Peter Hadley added that the largest contributors to FY2026 bookings dollar growth were Lyric, the Workforce Suite, and global payroll, where a small handful of large deals can move the full-year result within the stated range, and ADP will again push to hit the top end of the range in FY2027.

• Q: Jason Kupferberg (Wells Fargo) asked if ADP's increased advisory/consulting support for clients is a new revenue stream or just a competitive differentiator, and asked for drivers of the lower ex-float ES growth guidance for FY2027. /

  A: Maria Black noted ADP has always provided advisory expertise leveraging its broad client data, and growing workforce complexity has only increased client demand for this support, improving client stickiness and helping ADP win larger transformational deals. Peter Hadley explained the lower ex-float growth outlook stems from two one-time impacts: the FY2026 contribution from the recently anniversaried Workforce Software acquisition, and a shift from FY2026 FX tailwinds to expected slight FY2027 FX headwinds, with no meaningful slowdown in underlying core business drivers.

• Q: Bryan Keane (Citi) asked how AI will change ADP's pricing model and drive margin expansion. /

  A: Management confirmed AI is embedded across all ADP offerings, so it primarily contributes to top-line growth through higher bookings and retention, and to margins through improved operational efficiency. Discrete monetization includes value-based price increases for new AI-enabled functionality, and consumption-based pricing for AI tools accessed via ADP Marketplace. Management noted ADP is still in the early innings of AI-driven efficiency gains, and is already ahead of prior margin expansion expectations, with more upside to come.

• Q: Daniel Jester (BMO Capital Markets) asked about The Zone ramp plans for FY2027 and the impact of platform-driven efficiency on headcount. /

  A: Maria Black stated ADP targets full broad deployment of The Zone across all U.S. service associates and all sales teams by the end of FY2027, with thoughtful change management to ensure benefits for both associates and clients. Peter Hadley added that overall headcount has already leveled off at 67,000, with targeted hiring in sales, product, and technology offset by operational headcount efficiencies from The Zone and other AI tools; management expects overall headcount to remain relatively flat in FY2027, with continued reallocation to high-priority growth areas.