Automatic Data Processing Inc (ADP) (Q3 2024) Earnings Call Transcript Highlights: Strong ...
Revenue Growth: Reported at 7% for the quarter.
Adjusted Diluted EPS Growth: Increased by 14% for the quarter.
Employer Services New Business Bookings: Achieved record bookings for a Q3 period.
Employer Services Retention: Exceeded expectations, reaching a new record for a Q3 period.
Pays Per Control Growth: Held steady at 2%.
PEO Revenue Growth: Reported at 5% for the quarter.
ES Segment Revenue Growth: Grew 8% on a reported basis and 7% on an organic constant currency basis.
Full Year Retention Outlook: Improved, now anticipating a 20 to 30 basis point decline.
Client Funds Interest Revenue: Exceeded expectations due to higher average client funds balances and a better average yield.
Fiscal '24 ES Revenue Growth Forecast: Remains at 7% to 8%, likely towards the higher end.
ES Margin Increase: Grew by 230 basis points in Q3.
PEO Margin: Decreased by 220 basis points in Q3.
Consolidated Revenue Growth: Forecast remains at 6% to 7% for fiscal '24.
Adjusted EBIT Margin Increase: Expected to increase by 60 to 70 basis points.
Adjusted EPS Growth: Forecasted at 10% to 12% for fiscal '24.
Release Date: May 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
Automatic Data Processing Inc reported strong 7% revenue growth and 14% adjusted diluted EPS growth for the third quarter.
Record Employer Services new business bookings for a Q3 period were achieved, keeping the company on track for its full-year outlook.
Employer Services retention exceeded expectations, reaching a new record level for a Q3 period, particularly led by the mid-market business.
Introduction of ADP Assist, utilizing Gen AI to enhance client and employee interactions, showing promising early results in streamlining workflows.
International expansion continues with significant growth, particularly in the APAC region, enhancing global payroll and workforce management presence.
Negative Points
PEO revenue growth of 5% met expectations but faced short-term pressures from below-normal hiring activity among clients.
Employer Services pays per control growth was steady at 2%, indicating only moderate workforce additions by clients.
PEO margin decreased by 220 basis points in Q3 due to lower workers' compensation reserve release benefits compared to previous years.
Challenges in the technology and professional services sectors contributed to deceleration in PEO pays per control growth earlier in the year.
Gen AI-related expenses are expected to create margin pressure in the upcoming fiscal year as benefits from these investments are anticipated to phase in gradually.
Q & A Highlights
Q: You're currently entering your open enrollment season for client benefit elections within the PEO. Could you talk about trends you're seeing there thus far? A: Maria Black, President and CEO of ADP, noted that it's too early to predict full-year outcomes from the ongoing open enrollment season. However, there has been a slight improvement in PEO retention this year, and they expect further improvement for the full year.
Q: Client retention continues to surprise to the upside. What are the drivers behind this trend? A: Maria Black highlighted that ADP's strong retention results are driven by investments in product development and record client satisfaction scores. Despite some variability in the downmarket, the overall retention outlook remains positive.
Q: Can you elaborate on the underlying assumptions behind the affirmation of ES revenue growth despite higher retention and PPC views? A: Don McGuire, CFO of ADP, explained that strong retention and the positive impact of client funds interest are the primary drivers behind the confidence in achieving higher end revenue growth in the ES segment.
Q: What are the strongest segments of the market for ES new business bookings? A: Maria Black mentioned that the downmarket, particularly in Retirement Services, along with the mid-market and international segments, are showing strong performance. The overall demand environment remains robust, supporting solid bookings growth.
Q: Are there any areas that stand out in driving the higher NPS scores and client retention? A: Maria Black pointed out that the mid-market segment is a significant contributor to the strong NPS scores and client retention, reflecting the successful integration of investments and execution strategies in this segment.
Q: How do you view the competitive landscape in the mid-market verticals? A: Maria Black described the mid-market as highly competitive but noted that ADP's strong product offerings and execution strategies have enabled it to perform well against competitors in this segment.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
This article first appeared on GuruFocus.