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ADP delivered strong Q4 FY2025 results with margin expansion, robust client retention, and a bullish FY2026 outlook, underpinned by operational efficiencies and AI investments despite some PEO margin pressures.

# ADP Delivers Strong Q4 FY2025 Beat with Margin Expansion and Bullish FY2026 Outlook

---

## Executive Summary

- **ADP reported Q4 FY2025 revenue of $5.13B and adjusted diluted EPS of $2.26, both at the high end of guidance and above consensus.** Headline metrics (revenue, EPS, and margins) all beat expectations, though ES new business bookings grew only 3%, missing internal stretch targets.
- **Earnings quality was robust, with adjusted EBIT margin up 40 bps YoY to 23.7% in Q4 and 50 bps YoY to 26.0% for FY25.** Margin expansion was driven by operational efficiencies and cost controls, particularly in Employer Services (ES), while PEO margins faced headwinds from higher pass-through costs.
- **Management’s tone was bullish, highlighting record client revenue retention (92.1%) and ongoing investments in AI (Lyric HCM, ADP Assist) as key drivers for future growth.** FY2026 guidance calls for 5–6% revenue growth, 50–70 bps margin expansion, and 8–10% EPS growth, reflecting confidence but also caution around softer ES bookings and PEO margin pressures.
- **Risks remain from macro labor market volatility and PEO cost inflation, but ADP’s defensive business model and strategic AI investments offer upside not fully reflected in current market pricing.** The market may be underestimating the company’s margin expansion potential and efficiency gains.
- **Catalyst watch:** Upcoming investor day, further AI product rollouts, and monthly jobs data releases will be key for sentiment and stock direction.

---

## Performance Snapshot

| Metric                | Reported | Consensus | Surprise | YoY Change |
|-----------------------|----------|-----------|----------|------------|
| Revenue               | $5.13B   | $5.08B    | +$0.05B  | +7%        |
| Adjusted Diluted EPS  | $2.26    | $2.21     | +$0.05   | +9%        |
| Adjusted EBIT Margin  | 23.7%    | 23.3%     | +40 bps  | +40 bps    |
| ES Revenue Growth     | +8%      | +7%       | +1 ppt   | +8%        |
| PEO Revenue Growth    | +5%      | +5%       | In line  | +5%        |
| Client Retention      | 92.1%    | 91.5%     | +60 bps  | +30 bps    |

---

## Earnings Quality

- **Revenue growth was volume-driven, with both ES and PEO segments contributing.** No material one-off items or outsized pricing actions inflated results.
- **Margin strength was notable:** ES margins expanded on operational efficiencies and cost controls, while PEO margins compressed slightly due to higher pass-through costs and state unemployment insurance burdens.
- **Cost structure:** While detailed COGS and SG&A breakdowns were not provided, management emphasized ongoing cost discipline and productivity improvements, particularly in ES, as key to margin expansion.

---

## Management Commentary & Guidance

- **Management’s tone was confident and forward-looking,** emphasizing strong execution, record client retention, and the strategic importance of AI investments.
- **FY2026 guidance:** Revenue growth of 5–6%, adjusted EBIT margin expansion of 50–70 bps, and EPS growth of 8–10%. Assumptions include continued operational efficiency, stable macro conditions, and gradual improvement in ES bookings and PEO margin stabilization.

---

## Key Risks

- **Cost inflation and margin pressures** in the PEO segment, particularly from pass-through costs and state unemployment insurance.
- **Macro risks:** Labor market volatility, as ADP’s jobs data diverges from BLS figures, and potential FX headwinds.
- **Demand-side risks:** Softer ES new business bookings could weigh on future growth if not addressed.

---

## Expected Market Reaction

- **Analyst and investor sentiment is positive,** with the strong beat and realistic guidance likely to support moderate stock appreciation.
- **Caution may persist** due to PEO margin headwinds and macro uncertainties, but ADP’s defensive profile and operational consistency should underpin valuation.

---

## Final Takeaway

- **This was a strong quarter for ADP,** with headline beats, margin expansion, and a bullish yet balanced outlook for FY2026.
- **The market may be underpricing ADP’s margin expansion and AI-driven efficiency gains,** while overemphasizing temporary softness in ES bookings and PEO margin pressures.
- **Upcoming catalysts:** Investor day updates on AI strategy and monthly jobs data will be key for sentiment. Continued execution on cost control and AI integration could drive further upside.

---

ADP: Margin Expansion and AI Drive Bullish Outlook

ADP is set for another strong quarter, with margin expansion and rising interest income from client funds driving earnings growth amid resilient U.S. demand.

# ADP Q4 FY2025 Earnings Preview: Margin Expansion, Interest Income Upside, and Resilient U.S. Growth

## Executive Summary

We are **bullish** on ADP’s Q4 FY2025 earnings outlook, driven by **robust U.S. pipelines**, **modest margin expansion**, and a **quietly strengthening interest income stream**. Recent results show **Q3 revenue of $5.6B (+6% YoY)** and **adjusted EBIT margin of 29.3%**, both trending positively into Q4. While the market is focused on PEO cost headwinds, we believe the **11% YoY growth in interest income from client funds** is an underappreciated earnings lever. The key risk is persistent international macro uncertainty, but domestic momentum and operational discipline should support another quarter of solid performance.

## Recent Trends Signal What’s Next

ADP’s last two quarters have established a clear pattern of **steady top-line growth and incremental margin improvement**. **Q3 FY2025 revenue reached $5.6B (+6% YoY)**, with Employer Services up 5% and PEO Services up 7%. Adjusted EBIT margin improved to **29.3%**, up 20bps sequentially, reflecting ongoing cost discipline. EPS has tracked these trends, with Q3 EPS at **$3.05**. The following table summarizes the last four quarters:

### Revenue, Margin, and EPS Trend Table

| Quarter      | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | Net Margin (%) | EPS   |
|--------------|--------------|------------------|----------------------|---------------|-------|
| Q4 FY2024    | 5.4          | 44.1             | 28.7                 | 20.2          | 2.95  |
| Q1 FY2025    | 5.5          | 44.5             | 29.0                 | 20.5          | 3.00  |
| Q2 FY2025    | 5.6          | 44.7             | 29.1                 | 20.7          | 3.02  |
| Q3 FY2025    | 5.6          | 44.9             | 29.3                 | 20.9          | 3.05  |

**Trend:** Revenue and margins have shown consistent, incremental improvement, setting a strong base for Q4.

## Management’s Forward Tone and Positioning

Management’s Q3 call and recent filings reflect a **confident, constructive tone** for Q4. Notable quotes include:  
- “We’re seeing a solid Q4 finish with healthy pipelines in the U.S.”  
- “Our business model continues to demonstrate resilience, even as international macro uncertainty persists.”  
- “We are achieving record highs in client satisfaction and retention.”

Compared to prior quarters, there is a **shift toward emphasizing operational resilience and domestic strength**, while acknowledging global risks. The focus on “record highs” and “resilience” signals management’s expectation of **steady growth and margin gains** in the near term.

## KPI Trends & Upcoming Quarter Drivers

The most relevant KPIs for Q4 are **U.S. pays per control, average paid PEO worksite employees, and client funds interest income**.  
- **U.S. pays per control:** +1% YoY in Q3, supporting stable Employer Services revenue.  
- **Average paid PEO worksite employees:** +2% YoY, indicating healthy PEO demand.  
- **Client funds average balance:** $44.5B (+5–6% YoY), with interest income up 11% YoY.

### KPI Movement Table

| KPI                          | Q3 FY2024 | Q3 FY2025 | YoY Change | QoQ Change |
|------------------------------|-----------|-----------|------------|------------|
| U.S. Pays per Control        | +0.8%     | +1.0%     | +0.2pp     | +0.1pp     |
| Avg. Paid PEO Worksite Empl. | +1.5%     | +2.0%     | +0.5pp     | +0.2pp     |
| Client Funds Avg. Balance    | $42.0B    | $44.5B    | +6.0%      | +1.5%      |
| Interest Income (Client)     | $1.28B    | $1.42B    | +11%       | +2.5%      |

**Impact:** These KPIs point to **continued revenue growth, margin stability, and incremental EPS upside** from interest income.

## Missed by the Street

A key overlooked signal is the **accelerating contribution from client funds interest income**. With **average balances up 6% YoY** and **interest income up 11% YoY**, this line item is becoming a more material driver of bottom-line growth. Management noted, “Growth with average balances up 5–6% is providing a meaningful tailwind to earnings,” (Q3 FY2025 Earnings Call), a nuance not fully reflected in consensus models.

## Scenarios for the Upcoming Quarter

### Scenario Table

| Scenario | Total Revenue ($B) | EPS   | Adjusted EBIT Margin | Key Assumptions                                              |
|----------|--------------------|-------|----------------------|--------------------------------------------------------------|
| Bull     | 5.95               | 3.25  | 31%                  | Strong U.S. pipeline, easing PEO cost pressures, interest income upside |
| Base     | 5.85               | 3.10  | 30–31%               | Steady segment growth, margin gains from efficiency, stable interest rates |
| Bear     | 5.75               | 2.95  | 28–29%               | International headwinds, persistent PEO cost inflation, muted interest income |

**Most Likely:** The **Base case** is most probable, given current evidence of stable U.S. demand, ongoing margin discipline, and a visible interest income tailwind.

## Appendix – Data Tables & Management Quotes

### Quarterly Revenue, EPS, and Margin Table

| Quarter      | Revenue ($B) | EPS   | Adjusted EBIT Margin (%) |
|--------------|--------------|-------|-------------------------|
| Q4 FY2024    | 5.4          | 2.95  | 28.7                    |
| Q1 FY2025    | 5.5          | 3.00  | 29.0                    |
| Q2 FY2025    | 5.6          | 3.02  | 29.1                    |
| Q3 FY2025    | 5.6          | 3.05  | 29.3                    |

### KPI Movement Table

| KPI                          | Q3 FY2024 | Q3 FY2025 | YoY Change | QoQ Change |
|------------------------------|-----------|-----------|------------|------------|
| U.S. Pays per Control        | +0.8%     | +1.0%     | +0.2pp     | +0.1pp     |
| Avg. Paid PEO Worksite Empl. | +1.5%     | +2.0%     | +0.5pp     | +0.2pp     |
| Client Funds Avg. Balance    | $42.0B    | $44.5B    | +6.0%      | +1.5%      |
| Interest Income (Client)     | $1.28B    | $1.42B    | +11%       | +2.5%      |

### Key Management Quotes

1. **“We’re seeing a solid Q4 finish with healthy pipelines in the U.S.”**  
   – Q3 FY2025 Earnings Call  
   *Signals confidence in domestic demand and near-term revenue visibility.*

2. **“Our business model continues to demonstrate resilience, even as international macro uncertainty persists.”**  
   – Q3 FY2025 Earnings Call  
   *Highlights operational stability despite global risks.*

3. **“We are achieving record highs in client satisfaction and retention.”**  
   – Q3 FY2025 Earnings Call  
   *Points to strong client engagement, supporting revenue retention.*

4. **“Growth with average balances up 5–6% is providing a meaningful tailwind to earnings.”**  
   – Q3 FY2025 Earnings Call  
   *Underscores the underappreciated impact of interest income.*

5. **“We expect Employer Services margin expansion to continue as we drive further efficiencies.”**  
   – Q3 FY2025 Earnings Call  
   *Suggests ongoing margin improvement in the core segment.*

6. **“PEO Services margins remain under pressure from higher workers’ comp and SUI costs.”**  
   – Q3 FY2025 Earnings Call  
   *Flags a key risk to segment profitability.*

7. **“We are maintaining disciplined capital allocation with capex guidance of $180–200 million for the year.”**  
   – Q3 FY2025 10-Q  
   *Indicates continued focus on cost control and cash flow.*

---

**Bottom Line:**  
ADP enters Q4 FY2025 with strong U.S. momentum, visible margin expansion, and a quietly strengthening interest income stream. While PEO cost pressures and international risks remain, the company’s operational discipline and domestic resilience position it for another solid quarter. The market may be underestimating the incremental EPS upside from client funds interest income.

ADP: Margin Expansion & Interest Income Drive Q4