Automatic Data Processing, Inc.

Good morning. My name is Michelle, and I'll be your conference operator. At this time, I would like to welcome everyone to ADP's fourth quarter fiscal 2025 earnings call. I would like to inform you that this conference is being recorded. After the prepared remarks, we will conduct the question and answer session. Instructions will be given at that time. I will now turn the conference over to Matt Keating, Vice President, Investor Relations. Please go ahead.

Thank you, Michelle, and welcome everyone to ADP's fourth quarter fiscal 2025 earnings call. Participating today are Maria Black, our president and CEO, and Peter Hadley, our CFO. Earlier this morning, we released our results for the quarter. Our earnings materials are available on the SEC's website and our investor relations website at investors.adp.com, where you also find the investor presentation that accompanies today's call. During our call, we will reference non-GAAP financial measures, which we believe to be useful to investors, and exclude the impact of certain items. A description of these items, along with a reconciliation of non-GAAP measures to the most comparable GAAP measures can be found in our earnings release. Today's call will also contain forward-looking statements that refer to future events and involve some risk. We encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ materially from our current expectations. I'll now turn it over to Maria.

Thank you, Matt, and thank you everyone for joining us. We closed out fiscal 25 with a strong fourth quarter that included 8% revenue growth 40 basis points of adjusted EBIT margin expansion and 8% adjusted EPS growth. For the full year, we delivered 7% revenue growth, 50 basis points of adjusted EBIT margin expansion and 9% adjusted EPS growth. We achieved these financial results while also making significant strides across our strategic priorities. I will briefly review some additional highlights from our results before discussing this strategic progress. We delivered approximately $2.1 billion in employer services, new business bookings, and fiscal 25, representing 3% growth. While this was below our expectations, we were able to produce another year of growth, notwithstanding the uncertainty in the macro backdrop in the second half of fiscal 25. Taking a closer look, our small business suite and our domestic enterprise offerings saw solid bookings growth in fiscal 25. we did experience a softer finish in our employer services HR outsourcing business where the uncertain macro backdrop appeared to impact client decision making. And while our international bookings improved during the fourth quarter, it was not enough to offset the softness from earlier in the fiscal year. Importantly, our pipelines remain healthy and we are laser focused on accelerating employer services new business bookings growth in fiscal 26. We were very pleased that our employer services retention exceeded our expectations once again, increasing 10 basis points to 92.1% for the year and approaching our record high of 92.2%. Our strong retention stems in part from our company-wide client satisfaction scores reaching new record highs for the year. These impressive results were broad-based and are a testament to the product investments we are making to improve the client experience. Employer services pace per control increased 1% in both Q4 and fiscal 25. Our clients continue to hire, albeit at a slightly slower pace as we move through the year. Finally, our PEO new business bookings growth accelerated in the fourth quarter and for the full year, contributing to fiscal 2025 PEO revenue growth of 7% at the high end of our expectations. In our fiscal 25 accomplishments, extends far beyond our strong financial results. We drove meaningful momentum across all three of our strategic priorities, leading with best-in-class HCM technology, providing unmatched expertise and outsourcing, and benefiting our clients with our global scale. First, it's been a great year for innovation at ADP. Since its launch, ADP Lyric HCM has continued to gain momentum in the market. our number of clients sold increased by more than 50% in fiscal 25, with new logos representing the majority of our new Lyric sales, and we secure these clients from a diverse set of competitors. Our number of live clients also doubled compared to the prior year, and our pipeline has continued to grow. On the AI front, we continued the rollout of ADP Assist, which provides the latest AI-driven capabilities into our products, and we are seeing fantastic engagement from our clients with millions of interactions in fiscal 25. To further build on our unmatched expertise, we have also deployed these tools across ADP to thousands of our associates, driving efficiencies in our sales, service, and technology functions. By coupling our decades of experience with our significant data insights and AI investments, we are simplifying work for our associates and elevating the end-to-end client experience. Finally, we continue to benefit our clients with our global scale. In fiscal 25, we enhanced our unmatched global payroll capabilities by expanding our offer in markets with exciting growth opportunities like Japan and Saudi Arabia, and by acquiring payroll businesses like PEI in Mexico. In addition, we expanded our embedded payroll offering to enhance our small business distribution ecosystem. We also acquired workforce software in fiscal 25, which meaningfully enhanced our capabilities in the time and attendance space, allowing us to serve the broader workforce management needs of our clients. Now, as we look to fiscal 26, we are excited to make even more progress across our strategic priorities as we advance several company-wide initiatives. The AI landscape is evolving fast, and we are making sure that we stay ahead. Our vast data set is key to this. We benefit from the largest HCM data set with over 1.1 million clients and 42 million workers paid. This data allows us to expand our offering from simple agents to autonomous agents, and our broad and granular data set puts us in a strong position to deliver smarter and more tailored HCM agents that will be truly differentiated in the market. To accomplish this, we have invested in establishing our own proprietary tools to help scale our agent development in a compliant, explainable, observable, and secure manner. We have already rolled out a few role-based agents, and client adoption and sentiment have been strong. We will also continue to harness AI advances to drive operational efficiency, reduce service friction, and deliver even greater value for our clients as we expand ADP Assist into our products and throughout our organization. By extending the reach of our next-gen solutions, we will build on the momentum Lyric and next-gen payroll are experiencing. Finally, our acquisition of workforce software and the maturity of Lyric are serving as catalysts for the evolution of our global offering. We believe we have an opportunity to deliver a differentiated product and client experience that wins in the global multinational market. The success we achieved in our fiscal 25 financial results And across our strategic priorities is a testament to the extraordinary efforts of our 67,000 dedicated associates around the world. And I want to take a moment to thank our associates for their commitment to our clients, to each other, and to the world of work. As I look ahead, I am energized by the opportunities in front of us. We operate in a dynamic market. It's large, it's growing, it is always evolving, and we are ready for what's next. We have decades of HCM experience and a track record of leading in innovation. We have a leading go-to-market and distribution strategy and the ability to support clients of all sizes, be it a one-employee small business on Main Street or the largest enterprise with more than 1 million employees. And we have an established reputation for dependability. We understand the mission-critical importance of helping our clients meet the HCM needs of their employees. At ADP, we are always designing for people. They are at the center of every decision we make. And as we move forward, we will continue to focus on people, to leverage our unparalleled data insights and innovative technology, and to build a world of work that is smarter, easier, and more human. We are very excited about that future. And now I'll turn the call over to Peter.

Thank you, Maria, and good morning, everyone. I will start by expanding on Maria's comments on our Q4 and fiscal 2025 results before covering our fiscal 2026 financial outlook. Our Q4 performance was strong, and this helped to drive both fiscal 2025 revenue and earnings growth to the high end of our expectations. The strength was broad-based, with revenue growth in both employer services and the PEO coming in at the top end of our full-year guidance ranges. The end result was full-year revenue growth of 7%, bringing fiscal 2025 revenue to $20.6 billion. For employer services, revenue in the quarter increased 8% on a reported basis and 6% on an organic constant currency basis. ES margins expanded 50 basis points in Q4, exceeding our expectations. For the full year, ES revenue grew 7% on a reported basis and 6% on an organic constant currency basis, while ES margins expanded 100 basis points. For the PEO, revenue grew 7% in the fourth quarter. During the quarter, average worksite employee growth increased 3% to 761,000, driven by strong new business bookings and stable pays-per-control growth. PEO margins contracted 20 basis points in the quarter, mainly as a result of higher zero-margin pass-through benefits revenues, as well as an increase in state unemployment insurance costs. For full-year fiscal 25, PEO revenues grew 7% Average worksite employees increased 3% and PEO margins contracted by 60 basis points. I will now share our outlook for fiscal 2026. While the macro backdrop remains uncertain, we believe that we are well positioned to deliver solid financial results while continuing to invest for future growth and make additional meaningful progress on our strategic priorities. Our fiscal 2026 outlook assumes a continued slight moderation in the macroeconomic environment. Please note that we will no longer be providing point margin forecasts for our ES and PEO segments, as we do not manage our business to drive a particular segment margin result. We will continue to share our actual margin results by segment each quarter, and we will also look to provide directional segment margin commentary as appropriate. Beginning with the ES segment, We expect revenue growth of 5% to 6%, driven by the following key assumptions. We expect ES new business bookings to grow by 4% to 7%, as we expect growth to accelerate from our fiscal 2025 result, based on continued investments that we are making in both Salesforce headcount and tools, as well as the continuing maturity of several key strategic offerings, such as Lyric, workforce software, and embedded payroll. For ES retention, we forecast a 10 to 30 basis point decline from the 92.1% result for fiscal 2025. We are encouraged by our continued retention achievements and our record client satisfaction scores. However, we think it is prudent to expect some retention pressure from a continued moderate slowing in the macroeconomic environment and the potential for some increase in small business out of business levels. As we mentioned on our prior earnings call, we see the potential for below normal US Pays Per Control growth in fiscal 2026, and our outlook assumes 0% to 1% growth for the year. This view is consistent with the trends that we are seeing of a continued gradual moderation in US private sector payroll growth. We also expect FX to transition from a slight headwind to ES revenue growth in fiscal 2025 to a modest tailwind in fiscal 2026. And for client funds interest revenue, the interest rate backdrop remains dynamic, and it is important to remember that our client funds interest revenue forecast reflects the current forward yield curve, which is likely to evolve as we move through fiscal 2026. At this moment, we expect that our average yield will increase from 3.2% in fiscal 25 to 3.4% in fiscal 2026, which contemplates the market's expectations for short-term interest rates to decrease by around 100 basis points during the fiscal year. We also expect that our average client funds balances will grow 2% to 3% in fiscal 2026. Putting all this together, we expect that our client funds interest revenue will increase from $1.19 billion in fiscal 2025 to a range of $1.29 to $1.31 billion in fiscal 2026. Meanwhile, we expect that the net impact from our client fund strategy will increase from $1.07 billion in fiscal 2025 to a range of $1.25 to $1.27 billion in fiscal 2026. We expect ES margins to expand in fiscal 2026, driven by the continued growth of client funds interest revenues, partially offset by the growth investments we are making in support of our strategic priorities. Moving on now to the PEO segment. We expect PEO revenues to grow 5% to 7% and PEO revenues, excluding zero margin pass-throughs, to grow 3% to 5% in fiscal 2026. Our growth outlook also assumes average worksite employee growth of 2% to 3%. We are anticipating continued healthy PEO new business bookings growth and higher retention to be partially offset by a modest decline in PEO pays-per-control growth. We expect PEO margins to decrease in fiscal 2026 with zero margin pass-throughs growing faster than overall PEO revenues. Adding it all up, our consolidated revenue outlook is for 5% to 6% growth in fiscal 2026, and we expect adjusted EBIT margin expansion of 50 to 70 basis points. We expect that our effective tax rate will be around 23%, and we expect fiscal 2026 adjusted earnings per share growth of 8% to 10% supported by continued share repurchases. A quick note on our margin cadence. Due to the impact of the workforce software acquisition and the timing of some other investments, we are expecting some contraction in our adjusted EBIT margin on a year-over-year basis in the first quarter before margins ramp over the remainder of fiscal 2026. Thank you, and I'll now turn it back to the operator for Q&A.

Thank you. If you wish to ask a question, please press star 1-1. If your question hasn't answered and you wish to move yourself in the queue, please press star 1-1 again. Please be aware of the allotted time for questions. Please ask one question with a brief follow-up. And our first question comes from Brian Bergen with TD Cowan. Your line is open.

Hi, guys. Good morning. Thank you. I want to start with demand here and maybe just dig into the areas of the ES signings and their performance versus the plan. It sounded like HRO and international. Can you share more thoughts on the HRO softness, just despite the efficiency proposition there? I'm curious on that. And is that mid-market softness specifically?

Yeah, good morning, Brian. Thank you. Happy to help kind of unpack the $2.1 million or billion in bookings that we had, excuse me, on the 3% growth. And the attribution. So as mentioned, we had relative growth in the small business suite. That's inclusive, by the way, of our insurance offering, our retirement services offering. We saw strength in the domestic enterprise suite. When you think about that, that's the strength we've seen in Lyric. That's workforce software. That's the strength that we see in our compliance solutions offerings, employment tax, things of that nature. The softness that we spoke to was in international companies. But specifically to your question, since you were asking about HRO, just kind of double-click on that. The domestic HRO business is a combination of the upper end of the mid-market, if you will, as well as call it the lower end of the enterprise space. Product-wise, those are two offerings named comprehensive services and comprehensive outsourcing solutions. And those are oftentimes very, very large offerings. opportunities for us are complex. They have long sales cycles. They often involve lots of departments, lots of decision makers. Think HR transformations, if you will. And we did see some strength in that area in the first half of last year. We saw it moderate in the third quarter, but we had a significant pipeline heading into the fourth quarter. But we just didn't see the decisions being made in the fourth quarter. Now, the good news is, because you asked about activities and and how that pipeline is faring, these are still active deals. So these aren't deals that said no and said a different answer, such as a competitor. These are just delayed decisions that didn't happen in the fourth quarter. So the pipeline remains strong. It is up year on year. And ultimately, the activity and the healthiness of that pipeline remains as we had into fiscal 26.

Okay. Okay. That's helpful. And then I guess just a follow-up on broader bookings. Just can we double click on the confidence in re-accelerating off that 3%? I heard product maturity as part of it. Are there also some specific kind of go-to-market or pricing initiatives that you're implementing? And can you just comment on how July performed? Just curious if it was any better than the June exit.

Yeah, fair enough. So product maturity is absolutely a part of it. We're really pleased and optimistic and confident in the decisions that we've made. as it relates to the investments we've made into product. That's organic builds. That's all the next-gen offerings that you would have seen at Investor Day. In addition to that, it's things like the acquisition. So we feel confident in the next-gen offerings as they gain momentum, combined with things like the workforce software acquisition heading into 26. So that's definitely a piece of our confidence as it relates to the booking guides heading into the year. In addition to that, as you know, Brian, we've made tremendous investments into our sellers. That's everything from headcount to the ecosystem around them. That's banks, CPAs. That's broadening the distribution ecosystem with partnerships, as an example, in embedded payroll. So those investments, we also feel very confident heading into the year. In addition to that, we also make a lot of investments into our seller technology and the modern stack that our sellers use to be efficient in getting the productivity each and every year. We've been on that journey for quite some time. We showcase a lot of that, specifically at Investor Day, things like The Zone, which is our proprietary, if you will, portal for our sellers to engage with things like generative AI to serve up the right lead at the right time to the right seller. So I think the combination of all of our investments, coupled with, by the way, incredible service, sitting at record MPS results, I think all of that makes for a solid seller environment heading into the year. I think in terms of pricing, there's always pricing activity that happens. I wouldn't say that there's anything different happening across the ecosystems. We run promos. The others run promos. That's kind of on par. I think pricing and the demand holds there. And then I think you asked me one more thing.

Just July. Oh, July.

Oh, July. Yes, July. It is July 30th. I think it's too early to comment on July. I think the biggest comment I would say is the one I said earlier, which is that pipelines and activity remain strong. It's healthy. It's engaged. It's up year on year. And that gives us confidence heading into the quarter as well as the year.

Okay.

Thank you for all the detail.

Thank you. Our next question comes from Ramsey Ellis Al with Barclays. Your line is open.

Hi, thank you for taking my question. I wanted to ask about the pricing contribution in fiscal 26, whether it's more analogous to what we've seen maybe historically or whether it remains a little bit elevated, just given inflation is also a little bit elevated. And I had a second question. I'll just throw it in here. It was just on the better than anticipated retention. result this quarter, whether there was any particular callouts or drivers or reasons why you saw the outperformance. Thank you.

Yeah, thanks, Ramsey. Good morning. Thank you for the question. Just with respect to pricing, you know, if you're talking about the historical norm, sort of the 50 basis points we used to talk about, I guess, sort of pre-pandemic and the post-pandemic inflation period, our pricing assumptions for 26 are more consistent with the near term. So you know, in that 100 or so basis point range. That's our expectation. We have a slight moderation factored into our planning for 26 versus 25, but we're more in the camp, if you like, of recent pricing trends versus sort of the pre-pandemic, pre-inflationary environment increase in terms of our pricing. And in terms of the retention performance, we were really pleased with retention performance And the way that came in in the fourth quarter, there's no real specific call-outs. We were certainly pleased on the small business side that we did not see some of the potential small business, out-of-business lift that we had been sort of cautioning, I guess, our guide around. But really, the performance was very much broad-based across the company, and we saw some great retention results across all of the segments as well as in our international space.

Got it. Thank you very much.

Thank you. Our next question comes from Mark Marcon with Robert W. Baird. Your line is open.

Hey, good morning and thanks for taking my questions. With regards to, you know, to workforce software getting integrated more fully, what are you seeing in terms of just the early results from workforce software? I know they're still selling independently and, you know, to what extent Do you think you'll end up getting a lift on the upper enterprise side once it's fully integrated with Lyric?

Sure. Good morning, Mark. We are incredibly excited about workforce software and the journey that we've been on with respect to integration. We did see workforce software contribute to bookings. We did see the contribution of the overall environment as it related to going through kind of the pipelines on both sides and the overlap and seeing how the narrative started to evolve for us internationally specific in these large complex multinational opportunities. And I will tell you that the receptivity amongst both the client base as well as our independent opportunities as well as the shared ones has been above our expectations. And so we remain incredibly bullish on the acquisition we made as we continue that journey of integration. We do expect that it will contribute significantly to our growth narrative, specifically in our MNC international space this year as well as the coming years.

Yeah, and just to add on to that, I would say, Mark, you're correct. The team is continuing to sell workforce software on a standalone basis, and that was always part of the plan, and we expect that will continue. But in terms of selling with ADP products like Lyric, like GlobalView, for example, that's That's already happening. That's not a future event. Obviously, we hope it continues in the future, but it's not something that has not yet arrived yet. We've already seen traction in FY25 with respect to sort of call it co-selling with ADP products. So, you know, we are already well and truly off to the races, I think, with respect to workforce software being part of the integrated suite from a selling perspective. Great.

And then I demoed... Workforce Now NextGen at SHRM. And I thought it was pretty impressive. And I'm wondering, to what extent are you selling the NextGen product now relative to the old Workforce Now? And what sort of lift would you expect to see there from some of those improvements?

Yeah, first and foremost, thank you. I'm glad you were at SHRM. I'm glad you had the opportunity to take a look at the Workforce Now NextGen as we showcase it there. for the exact design, which is continuing to expand the reach of that offer. So I think we've been loosely talking about it being deployed across the core market throughout fiscal 25. We continue to expand beyond the core market, and that is the plan for 26. And that was the purpose, if you will, of the somewhat of an unveil at the SHRM conference. So that's the intent. It is part of the confidence that we have in the 4% to 7% bookings acceleration, if you will, as you think about heading into the year and being able to deploy the next-gen workforce now to a broader set of the mid-market clients. We're really excited to see that product mature. We're seeing great wins. We're seeing great takeaways. We are definitely seeing it make an impact in the market and happy to hear that it shows well.

Yeah, and also just from a downstream perspective, the client satisfaction scores with respect to next-gen payroll with Workforce Now are really, really robust and continuing to improve. I was talking to our operations leader the other day. The implementation experience is getting better and better, and also from a client-user perspective, the number of contacts that clients on next-gen have to make to ADP in order to solve their needs are significantly reduced versus the current-gen model. So You know, in terms of what it will bring us in terms of bookings, as Maria outlined, but downstream, we're also really excited about the potential impacts of expanding that offering more widely across the client base.

Perfect. Thank you.

Thank you. Our next question comes from Samad Samana with Jefferies. Your line is open.

Hi. Good morning. Thank you for taking my question. Maybe first, I'm just curious, if you think about where the quarter struck out, how does that maybe compare to what you were thinking at the time of the analyst day? And did it surprise you relative to what you were expecting at that time? And then I have a follow-up question as well.

Yeah, Sanad, thanks for the question. Are you referring to bookings or just more generally? I think we were very happy with

Yeah, I was thinking about bookings, right, just in terms of, like, how you were thinking about bookings at the time and maybe, I guess, trying to figure out if there was a trend line change. And I know that, again, the pipeline sounds very good, but I'm just kind of curious, basically, if there's some change that happened in the last couple of weeks of the quarter, just as, you know, I know you guys aren't really commenting on July, but just as we think about the trend line from there, just what did you experience over that kind of couple of week period?

Yeah, so I would say in terms of investor dates, we were very much focused on the medium term so what are we going to do over you know the three to four year period it wasn't driven by you know um particular quarters or even particularly individual fiscal years what i would say with respect to bookings and i think it's been said on this call before our fourth quarter is our largest quarter of the year for bookings within the fourth quarter the june month is the largest month of the quarter and literally within the month of june the last week or two is the biggest biggest period of the year so To be candid with you, we weren't necessarily thinking of what the result would or wouldn't be with respect to the numbers we framed for our medium-term guides. Certainly, we were anticipating a little stronger finish than what we ended up with. I think Maria has outlined the reasons for that, but I wouldn't really draw a trend line or certainly a linkage between the medium-term guide that we put forward and this quarter, and certainly I would not take from this quarter result extrapolate any trend in terms of where we think our medium-term objective is. We're still very much committed to the numbers that we spoke to at Investor Day. Obviously, within a fiscal year, we have to give guidance. The macro backdrop still remains uncertain. I think there's potentially a little bit more volatility, either positive or negative, that could happen during the year versus what we're anticipating to be the case over the longer period. So that's how I would think about it, but no real discernible linkage, I would say, between, you know, how we finished FY25 and sort of the medium-term objectives that we shared, you know, six or eight weeks ago.

Great. And then, Maria, you know, Lyric has done really, really well over the last year or so, and you guys have increasingly talked about it. I'm just curious, the product itself, I think, has been a big part of that. Help us think about distribution, though, and How much better is the sales organization at selling it? And then how are you thinking about indirect distribution there? And maybe, you know, I guess, sorry to make it a multi-part question, but just could it be a bigger component of bookings in fiscal 26?

Yeah, it's a great question. And you are absolutely correct. We are incredibly excited about Lyric. It's strong reception in the market, the contribution to bookings, by the way, in 24, also the contribution of bookings in 25, as I cited. Lyric did enjoy robust sales growth, if you will, in 25, and we certainly anticipate that only to grow into 26 and beyond. In terms of the direct distribution, today it is kind of in that enterprise space, in the domestic space. We are expanding that into the global footprint as we think about the offer of Lyric kind of in the MNC space going forward. That is through our sellers and our our seller ecosystem. But even in our upper end of the market, I know we talk a lot about channels in the down market. We talk about CPAs and banks in the mid market. We talk about brokers. But even in the upper end of the market, we do already distribute and partner with whether it's big, large organizations that are driving other types of transformation. So we have partnerships with some of the big ERP players. In addition to that, we have partnerships with a lot of the system integrators, and is there an opportunity as we continue to build and scale the offering to continue to evolve our distribution mechanism? I think the answer to that is absolutely. Too early, I think, at this juncture to say what the impact of that would be in 26, but certainly our goal is to continue to evolve the distribution and uptake of Lyric, and it is definitely resonating. I will tell you, we've been ourselves just somewhat blown away by the receptivity in the market. It is the most modern HCM tech platform that's out there. It's flexible. It's adaptable. I think you had an opportunity, many of you, to see it at Investor Day. And it's definitely something that is being talked about. And we're happy to see the wins. We see them against some of the most formidable competition. And we see, again, just the receptivity in the market exceeding our expectations. So excited to continue to lean into it.

Thank you, as always, for taking my questions. Have a great day.

You too.

Thank you. Our next question comes from Tianjin Huang with JP Morgan. Your line is open.

Hey, thanks. Good morning. Just building on that last answer, just the confidence in overall bookings accelerating in fiscal 26, just how much is driven by headcount investments that you put into place versus higher sell-through, attached, new products, that kind of thing, versus 25?

Yeah, fair enough, Tenshen. First and foremost, I would say our sales from new opportunities versus the beyond payroll, if you will, remains at 50-50. That is our plan. That's kind of held steady as long as I can remember. So I would say that is our expectation for next year. So we're not over-rotating away from kind of that. In addition, we're not over-rotating on sales headcount. I think several years ago, On the heels of the great resignation, we leaned into headcount quite a bit and we needed to because we had, just like every other company, seen an uptick in attrition. But as attrition has abated, the big strength in the seller productivity is really the lift we're getting from tenure. But we are still making headcount investments. They will look largely in line with what we did in 25 and what we did in 24, which is kind of that mid single digit, if you will. So it's an investment in headcount. It's an investment in everything I talked about earlier around the sellers in terms of their ecosystem. And then it's also this bit of a natural uplift that we get from increasing the tenure of all of our sellers, which is fantastic.

Terrific. Just quickly on retention, still very high, impressive. Just I know it's reasonable to assume some decline from that high this year, but is the 10 to 30 assuming more on the voluntary versus involuntary attrition? I'm just trying to understand if there's anything more specific that you're paying attention to as you go into this new fiscal year.

Yeah, I mean, I'd say nothing particularly specific, Tingen. I think it's probably a little more on the involuntary, but again, the macro environment, we have to see how it plays out. We were positively surprised, so to speak, I guess, in 25 and 24, and we're hoping that will be the case also in 26, but we feel sort of the prudent, responsible position at the moment, just given the trends we do observe, you know, and most of those trends that we're observing, obviously, we listen to what the economists and what the external sources are saying, but we see a lot and draw a lot of our conclusions from our own data. Now, again, our data on retention is strong, but there are signs that we feel we should be prudent, but I would certainly not point to, you know, upticks in voluntary, you know, client attrition is Again, all the indicators on that, be it client satisfaction and just the trends we've been observing are very favorable. So I would point that more to being a macro assumption that we hope does not materialize.

Perfect. Makes great sense. Thanks, Peter. Thanks, Maria. Thank you.

Thank you. Our next question comes from Karthik Mehta with North Coast Research. Your line is open.

Good morning. Maria, just... Just thoughts on bookings. You know, right now they're in a delay. You know, at what point does delay become cancellation or, you know, what signs have you seen that give you any concern at all? It seems like, you know, you don't have any concerns, but it seems like things progress and delays can become cancellations.

Sure. Certainly we're looking at all of that. So maybe a way For me to answer the question, Kartik, is to just kind of unpack how we think about pipelines and activity in general. So if you think about the various segments, and I'll start at the small end, you know, in the small business, it's really not about pipelines. Many of those opportunities we're able to literally onboard in hours, if you will. And so we're looking more at activity measures, right? And that's everything from leads coming in, call it how many appointments sellers are on, opportunities that are being generated. And so we're looking at the activities, specifically what I would say across the small business portfolio, across even the core end of the mid-market. That's a very active, healthy activity that's happening out there. And we don't see any moderation in kind of the activity out there, right? And so in the PEO space specifically, we're looking at things like RFPs, requests for proposals, that is. We're looking at asks for benefit underwriting, lots of different measures that we look at to, again, assess whether or not the activity levels have changed. And the answer there is they continue to remain healthy. The upper end of the mid-market heading into the enterprise space and international, that's really where we're looking at pipeline. Oftentimes these sales cycles are months, sometimes if not years. And so you can really see kind of the pipeline activity. There is some pipeline aging that's happening. That's not necessarily new news. I think we've talked about on previous calls that we're kind of back to the new normal or the old normal pre-pandemic where you have a lot of decision makers and the deals are moving through the motions more in line with how they used to move through the motions. And that's definitely what we see. We do see the pipeline has aged a bit, but it's still active. The opportunities are healthy. And when I say active, there's still dialogue back and forth And year on year, it is up. So what I would say is all across, whether it's new appointments that are being done out in the field, in the down market, RFPs that are being requested in the PEO, or in the enterprise space and international space, the pipelines are continuing to grow and new opportunities are entering and the ones that are in there are healthy. All signs point to a broad-based, healthy pipeline and activity backdrop for us heading into the year.

And then just, Peter, on the PPC, the difference between ES and PO, if you're seeing any difference or if it's still kind of holding steady, both about the same?

Yeah, they're both holding relatively steady. Again, we've seen this sort of gradual moderation, you know, through FY25 and also over the last couple of years. What I would say is the two numbers are quite similar, I would say. What we have seen in recent couple of quarters, I think it is, is the PEO has actually gone a little above, if you like, the ES segment, which has been traditionally where PEO is at. We've traditionally had higher PPC in the PEO than what we have had in the ES. As you'll remember, that flipped for a number of quarters, not in a meaningful way, but it had flipped. It was something we noticed because it's not typically the case So I would say that dynamic between the two is returned to normal. There is a little bit higher PPC growth in the PEO we're experiencing than what we're seeing in ES, but the numbers are really quite similar, and the trends are also pretty similar. So I would say in terms of our guide next year on ES, PEO is not too far away from that. Let's put it like that.

Perfect. Thank you both very much. I appreciate it.

Thank you, Cathy.

Thank you. Our next question comes from Scott Wurzel with Wolf Research. Your line is open.

Hey, good morning, guys. Thank you for taking my question. Just wanted to ask on the PEO guidance and sort of the widening gap between reported revenue growth and revenue growth ex-pastors, and just wondering if you can talk about, you know, what's driving those higher expected contribution from zero margin pastor revenue for fiscal 26 versus 25. Thanks.

Yeah, Scott. So probably two things. In terms of the zero margin pass-throughs, we're expecting those to continue strongly. Medical health insurance inflation, really, the cost of health insurance is sort of driving the benefits pass-through revenue, obviously. In terms of the non-zero margin pass-through, what we're assuming in our outlook is, and we saw a little bit of this in the fourth quarter, we'll see whether that actually materializes, is some moderation in wage growth. So we've We've had experience in both the PEO and as well also in our client fund balances through 25. We've experienced really strong and benefited from strong wage growth levels. Like I said, we saw that come off a little bit in the fourth quarter, and again, really based on a macro assumption primarily, we're assuming that that will continue, but not at the same rate that it was in 25. So that has a little bit of a dampening effect on the non-pass-through revenues. The other piece on the PEO that we also saw, now this is low-margin revenue, but in 2025 we saw elevated state unemployment insurance rates that came out in the January period. We're not expecting the same thing again. So again, that doesn't have much of an effect on our margin, but from a revenue perspective, we're expecting that to be a little lower in 2026 than what we saw in 2025.

That's helpful. And then just as a follow-up on the embedded payroll side and particularly around the Clover partnership, just wondering if you can kind of update us where you are sort of on the integration and, you know, getting that into market as well as sort of what you're, you know, expecting from the Clover partnership and other embedded payroll offerings for fiscal 26 in terms of contribution to bookings. Thanks.

We are very pleased with things and how they are progressing with specifically the Fiserv partnership or Clover partnership. As you mentioned, I would tell you we are partnered across every aspect of our business and each of our groups, so our respective sales, product, executive teams. We've been working incredibly hard together and also incredibly well together. As you are aware, back in May was when we put the run offer inside of Clover, but it's only deployed to a subset of Fiservs or Clover's what they call their back book or their client base. And so we're really excited as we head into this quarter and specifically 26 to have a further, broader deployment across the back book there. In addition to that, we are also working this year to put the cash flow central inside of the run offer, which also will put the small business ecosystem together for our mutual clients. So what I would tell you is we do expect... bookings contribution based on this relationship, I think it's all really in front of us still. So I think this is a big year for us as we head into this opportunity. But that said, they're also, you know, from a $2.1 billion in bookings, you know, it is in that down market and it will contribute significantly to the down market ecosystem. But in terms of a discernible, you know, uptick based on this relationship, I think, you know, that's probably too early to see that at this at this juncture, but really excited about the partnership, really excited about how it's progressing, and the opportunity is largely in front of us.

Great. Thanks, guys.

Thank you. Our next question comes from James Fawcett with Morgan Stanley. Your line is open.

Great. Thank you very much. Appreciate all the details here. I wanted to ask, Maria, you just emphasized your range of partnerships, et cetera. And I think it creates a lot of opportunity. Just wondering how that's impacting your kind of sales channel management and forecasting. Just are you seeing improvements? Does it become more reliable or does it become more difficult? Just trying to think through how expanded use of partnerships can impact your visibility.

So thank you for the question, James. I think you know I'm very bullish on partnerships as a way to accelerate, whether it's, candidly, all three of our strategic priorities, which is to have the best technology, the most robust offering, and the biggest, largest global scale. So I think we have partnerships set squarely into each one of our segments to advance the strategic priorities. And all of this is in my mind, what it means to be a modern company to ensure that you're really good at what you're good at and leveraging others to extend your reach, whether it's through distribution or it's just to solve client opportunities. And that's exactly what we do. And that's exactly what we've been doing. What I will tell you is we are also very thoughtful about how we partner. And so when I say we partnered, as an example, on Embedded Payroll, at all of the levels, of the organization, whether it's the executive levels or it's the seller level, a lot of this is about perfecting the model so that we do not change, call it fundamentally, visibility into our business or at some level, like how we actually go to market. So what I would tell you is we have not seen an inability for us to have a view on results or pipelines or activity levels by virtue of our partnership. I think if anything, it's extending and expanding our visibility because we have more eyes and set opportunities. So if you imagine in the upper end of the enterprise or MNC space, as we're partnering with SIs, we have more visibility into all of the things a client is trying to actually accomplish, which at times is all about HCM, but sometimes an HCM transformation might just be a subset of a larger project. I think in the down market, CPAs, and banks, they have full visibility to those clients. And certainly, you know, these partnerships and how we're structuring them as we expand the reach of our ecosystem, such as embedded payroll, we're very thoughtful to make sure that, you know, we're not disintermediating anything that is the way that we do business as ADP.

Yeah, I can confirm that. There's no adverse effect on our ability to forecast, really. The partners really enhance our opportunity and help us to deliver. In no way does that sort of impede or make it more difficult or more easy, for that matter, to get our forecasting on point.

Great. That's really useful color and insight into how that's developing. I wanted to touch on one of those partnerships, and that's Wisely and EarnWageAccess. I don't think we've gotten much of an update on that product in quite some time. How is that attached trending? And I think more specifically, you introduced a fee-free earned wage access program with DailyPay a few years ago. And I know it's a small product in totality, but just curious to hear how EWA attached among run clients has evolved over the last 12, 18 months.

Yeah, what I would say is, you're right, it is a small part. We are pleased with the wisely member count that we have. I don't know that... you know, we're in a position to provide any more specifics around that offer than I think what we've talked about. It is attaching. It is attaching, I guess, for specific use cases for certain clients, and some of those are on the smaller side at the member count standpoint, i.e., an employee actually making choices for some of these things, and some of it is at the aggregate in certain types of industries. It seems to be significant interest in this way. I think actually we produced in our ADP Research Institute a Today at Work report that came out just this past few weeks, and in that report it talks about the frequency by which everything from generations to segmented clients, i.e. by size, want to get paid. And so it is kind of interesting to track these trends, and I encourage you to To take a look at it, James, in terms of what type of employee it is that wants to be paid, whether it's biweekly, which, by the way, is the bulk of the United States, as an example, is paid biweekly or twice a month. But in terms of this daily element or this ability to get pay, call it on-demand or early wage access, you can kind of see some of those trend lines in there. And so I think, again, for the clients that have workers that categorically fall in there, this offer – It's a fantastic solution, and we're very pleased with what we have, and I think that's probably the best color I can give you.

Great. Appreciate that, Maria. Have a good day.

You too.

Thank you. Our next question comes from Ashish Subhadra with RBC Capital Markets. Your line is open.

Hi, good morning. This is David Page on for Ashish. Thanks for taking our questions. Maria, Peter, I was wondering if you could just detail what the AI contribution is to margins, either on the upside or is investing that still needs to go on to get the AI product through and up and running. Any color there would be helpful. Thank you.

Yeah, sure, David. So we are, and we've sort of said this relatively consistently, I think, the last few quarters also at Investor Day. So the situation has not changed. We are seeing, you know, meaningful changes productivity improvements and opportunities. We have businesses, for example, in our down market and also our mid-market, you'll see next week when we release our 10K, our client unit counts continue to grow at a very healthy and consistent clip with what they have been growing in previous years, yet we are able to actually see some operational headcount reduction in those businesses as a result of generative AI and some of the other like-minded tools and things that we're deploying in those spaces. So it is real. We're not quantifying the amount of that, but it is certainly real. We are enjoying those benefits. But again, as we've said in the past, we are deploying AI in a very thoughtful, governed way. So we are reaping benefits from where we have deployed, but we're also investing in further deployment of additional types of tools and additional other parts of the company. So We still remain in a net investment position. It's not a big, meaningful number. Think of it in the tens of millions of dollars, not hundreds of millions of dollars between the investment that we're making in deploying and bringing new generative AI capabilities to the organization versus, call it the productivity opportunities, for want of a better word, that they're already reaping from deployments that have been made over the last couple of years. So likely that will continue certainly through this fiscal year and that investment position. But overall, we're very happy with the traction that we have seen from the deployments we've made. And we continue to be very focused and committed to continuing to deploy generative AI, both for efficiency and productivity reasons, but also for client user experience in our platforms, in our technology organizations and and various places across the enterprise, either on the front end or on the back end.

Thanks, Peter. That's very helpful. Just a quick follow-up. I'm assuming the answer is no, but any pushback in the international markets from working with an American company or the evolving tariff situation that's going out there? Any tips and takes to share?

Thank you. Yeah. Your assumption is correct. The answer is no. What I would tell you in terms of our global clients, many of them are in that mid-market and up-market. Many of these clients have been with us for years and new opportunities take several years. As you know, we have, while we're a U.S.-based company, we serve our clients very much on the ground across many of these 140 countries. And so I think we have this mix of a global company, but also incredibly local in terms of how we execute. So, no, we have not seen any pushback with respect to decisions as a result of that.

Thank you.

Thank you. Our next question comes from Dan Doliff with Mizuho Group. Your line is open.

Hey, guys. Congrats on a great quarter. I have two quick questions. Going back to mid-market software bookings, can you maybe elaborate a little bit how it did this year versus your initial expectations? And then I have a quick follow-up.

Yeah, so in terms of mid-market software, as you know, the mid-market software that we have at Workforce Now is deployed across the mid-market opportunities, call it tech only. It's also deployed across our PEO. We haven't talked about PEO bookings yet, so I'll do a quick plug because that team is was very busy all of 25 and laser focused on re-accelerating bookings, and that's exactly what we did, inclusive of Q4. So it's my shout-out to the all-hands-on-deck execution there. But that workforce now also serves the mid-market there. The mid-market is also inclusive of our employer services, the comprehensive services HRO offer there. And so from a mid-market standpoint, maybe – the easiest way to think about how that product is faring is you'll see it when we look at, Peter just mentioned it, but when you look at the 10K and you look at the client count there, you will see kind of an inline healthy contribution as it relates to the client count growth, specifically on Workforce Now. And so I think that's probably the best bellwether to take a look at the mid-market.

Yeah, I mean, just to add, so again, Maria's just mentioned we had strong PO bookings. We're very pleased with that. She mentioned earlier in her prepared remarks, we had, you know, a strong first half, but a softer finish on the ESHRO. I would say the tech offer, for want of a better description, our HCM sort of service offering, we call it for our mid-market, was, you know, sat more or less somewhere between the two, relatively evenly between the two. So, you know, we were satisfied with how that performed and in fiscal 25, and certainly as we were talking earlier to one of the earlier questions, we see a lot of positivity in front of us, particularly as we're able to expand the reach of the next-gen payroll capabilities with workforce now in the mid-market going into 26.

Got it. And then just as a quick follow-up, we've had a big merger. Your competitor acquired, took a page out of your book and acquired PayCore. Can you maybe talk a little bit about the competitive landscape that you're seeing right now following that merger? Thank you.

Yeah, so following the merger, what I would offer is I don't think a whole lot has changed. I think we've talked about in the past we compete very well against both of those competitors on a, call it, standalone basis. I would say in a combined, uh, set, we haven't seen anything change in the competitive landscape. As I always say, it's always been a very competitive, uh, environment specifically kind of in that mid market. Uh, and we fare incredibly well. We see that in our retention rates. We see that in our service offering. We see that in, uh, client count growth. Uh, we are really confident in the, uh, the evolution and maturing of our workforce. Now next gen that serves that space. I think we have a good story in that space. And, uh, We haven't seen anything change specifically on the heels of that acquisition or merger, if you will.

Great. Thank you. Great results again.

Thank you very much.

Thank you. And we have time for one last question. And that question comes from Daniel Jester with BMO Capital Markets. Your line is open.

Great. Good morning, everybody. Thank you for taking my question. I just wanted to follow up with Peter on a question earlier on the margin front. Appreciate kind of AI still in the net investment position. Did you think about maybe some of the other puts and takes on margin? It looks like maybe you're maybe lapping some of the investments and integration of workforce software in the forward year. You have a little bit of FX volatility. So any sort of other things you'd call out with regards to the margin guidance that we should be considering today? And just with regards to the seasonality, you talked about how margin is going to ramp throughout the year. Maybe what are the drivers of that? Thank you very much.

Yeah, sure, Dan. So in terms of the lapping of the workforce software acquisition, I would say our investing in the product and the integration of that product with Lyric, with Workforce Now, with our global payroll offerings will continue right through the fiscal year and we're not giving any comments beyond that, but I would, I would probably point you to, to beyond that, you know, there's, there's a huge opportunity we think there, and that's, that's something that we're committed to and we intend to, to see right through to, to delivering, you know, best in class integrated offerings across that upper mid-market enterprise and global space. What we're lapping is, is the, you know, is the, is the amortization and, and, you know, the, the interest expense and so on that we took out with the bond that we used to pay for that. And as you know, that's in the October period. In terms of other drivers, we have a bit of a tailwind from a revenue perspective with FX. That's actually a bit of a margin contraction item because the margin that that FX comes on at is lower than the line average, certainly of employer services and also of the company as a whole. So that's a little bit more of a negative factor, if you like, from a margin percentage perspective, but it delivers us and more revenue and some more EPS. So really the margin story I think is, and I called it out in my prepared remarks, we have strong balances, client fund balances that are delivering through our laddering strategy, increasing our client fund interest. We have productivity improvements like I was talking about in terms of some of the initiatives and AI initiatives we've put through parts of the company. But we continue to invest meaningfully, not just in workforce software, but also in our other strategic, key strategic offerings like Lyric. Maria said we had a great sales year. We were very happy with that. Now we have a lot of backlog and we have operational resources that we're onboarding in order to get that backlog implemented and get those clients to revenue generating. So, you know, we're investing in Lyric. We're investing in workforce software, as I said before, generative AI. And we're also cognizant, as we said at Investor Day, to balance that with margin expansion and also healthy returns from our shareholders. So that's really the margin mix unpicked.

Great. Thank you very much.

You're welcome. Thank you. This concludes our question and answer portion for today. I'm pleased to hand the program over to Maria Black for closing remarks.

Thank you, Michelle, and thank you again, everyone, for joining this morning and for your interest. I had the opportunity earlier to thank our associates, I'd like to do that once again, and also to all of our stakeholders out there that support us and our journey. We had a solid 2025, and it couldn't be done without our associates, our clients, our analysts, our investors. I'm incredibly grateful for the support, and I'm also incredibly optimistic for our future as we head into 26 and beyond. Thank you very much.

Thank you for your participation. You may now disconnect. Everyone have a great day.