Automatic Data Processing, Inc. (ADP) 2024 Q2 Earnings Call Summary

Optimistic Highlights

• Strong Second Quarter Results: ADP reported 6% revenue growth and 9% adjusted EPS growth, with solid Employer Services new business bookings reaching a new record for Q2.

• Healthy Growth Across Portfolios: Notable growth was seen across small business portfolios, mid-market, and international business, with a steady demand in HCM and a healthy new business pipeline.

• High Client Satisfaction and Retention: Employer Services retention was strong, slightly declining compared to the prior year but exceeding expectations due to high client satisfaction levels.

• PEO Business Momentum: PEO revenue growth of 3% for the second quarter was in line with expectations, with strong PEO new business bookings ahead of expectations.

• Strategic Priorities Progress: ADP launched a new brand advertising campaign and continued to lead with best-in-class HCM technology, including the rollout of ADP Assist powered by GenAI.

Pessimistic Highlights

• Slight Decline in Employer Services Retention: Although retention was strong, it declined slightly compared to the prior year.

• Moderate Pace of Employee Addition: The gradual deceleration in pays per control growth is due to clients adding employees at a moderate pace.

Company Outlook

• Positive Outlook for Full-Year: ADP remains on track for its full-year outlook, with expectations of continued healthy activity levels and a gradual re-acceleration of the PEO business in the second half of the fiscal year.

• Updated Fiscal 2024 Outlook: Adjustments include a slight tweak in outlook due to changes in the interest rate backdrop, with consolidated revenue growth outlook maintained at 6% to 7% and adjusted EPS growth expected to be 10% to 12%.

Q & A Highlights

• Q: Can you talk about the investment in setting up your own trust and its impact on third-party partnerships? (Mark Marcon, from Robert W. Baird)

  A: Launching in-house trust services demonstrates ADP's scale and is positive for clients and the ecosystem, including banks and CPAs. It provides better control over costs, benefits to clients, and keeps data within ADP's trusted ecosystem. (Maria Black)

• Q: How does the anticipated lower level of decline in ES retention relate to bankruptcies? (Mark Marcon, from Robert W. Baird)

  A: Year-to-date retention has been better than expected. While close to normalizing back to fiscal 2019 trends, there's planned conservatism for potential pressure from bankruptcies in the back half. (Maria Black)

• Q: On PEO, can you discuss the strong acceleration and outlook for revenues? (James Faucette, from Morgan Stanley)

  A: Stabilization in pays per control and strong bookings in PEO are positive, with no change to the revenue outlook. The focus is on the impact of these components for re-acceleration. (Don McGuire and Danny Hussain)

• Q: How should we think about the return on investment for GenAI? (James Faucette, from Morgan Stanley)

  A: GenAI investments are modest at this point, with anticipated returns in the future. The focus is on integrating GenAI into products, service efficiency, and go-to-market motions. (Maria Black and Don McGuire)

• Q: Is it becoming more expensive to compete in PEO? (Ramsey El-Assal, from Barclays)

  A: There's nothing fundamentally different about selling expenses in PEO, and ADP is not seeing any fundamental changes in the competitive landscape affecting these expenses. (Don McGuire)

• Q: Can you comment on the international value proposition and product needs? (Ramsey El-Assal, from Barclays)

  A: ADP's international offer differs from the US, with opportunities to grow beyond payroll offerings. Partnerships, like with Convera, enhance the client experience by managing global payroll and cross-border payments. (Don McGuire and Maria Black)

• Q: What's driving the drop in average balances and the outlook for ES margins? (Bryan Keane, from Deutsche Bank)

  A: The payroll tax deferral impacted average balances, but growth is expected in the back half. The ES margin outlook adjustment is due to a reduced client funds interest revenue forecast and slight increase in expected GenAI-related spend. (Don McGuire)

• Trends in the Selling Season and Competitive Nature (Scott Wurtzel, from Wolfe Research)

  A: Demand environment remains strong, with solid pipelines across markets. The competitive landscape in the mid-market hasn't shifted significantly, and ADP is executing well. (Maria Black)

• Q: On EBIT margin outperformance and GenAI investments (Bryan Bergin, from TD Cowen)

  A: Modest revenue outperformance and focus on expenses contributed to EBIT margin outperformance. There's a bit of incremental spend on GenAI than previously stated. (Don McGuire)

• Q: PEO bookings and moderating PPC headwinds (Samad Samana, from Jefferies)

  A: PEO bookings momentum is positive, with the fourth quarter of positive bookings momentum. The value proposition remains strong, and demand continues to be robust. (Maria Black)

• Q: Implementation revenue and strategy (Kevin Mcveigh, from UBS)

  A: Implementation revenue is sub 10% of overall revenue, with no significant changes or opportunities to outsource implementation impacting financials in the near term. (Don McGuire)

• Q: PEO demand and competitive tactics (Tien-Tsin Huang, from J.P. Morgan)

  A: Demand for PEO remains strong, with no significant changes in client demands or competitive tactics. ADP focuses on the PEO value proposition and execution on bookings. (Maria Black)

• Q: Pays per control growth outlook and revenue per WSC in PEO (Ashish Sabadra, from RBC Capital Markets)

  A: Expectations for pays per control growth and worksite employee growth align with the re-acceleration in the PEO business. State unemployment rates and other components are being monitored. (Maria Black)