Automatic Data Processing, Inc. (NASDAQ:ADP) Q2 2024 Earnings Call Transcript
Automatic Data Processing, Inc. (NASDAQ:ADP) Q2 2024 Earnings Call Transcript January 31, 2024
Automatic Data Processing, Inc. beats earnings expectations. Reported EPS is $2.13, expectations were $2.1. Automatic Data Processing, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: 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 Second Quarter Fiscal 2024 Earnings Call. I would like to inform you that this conference is being recorded. After the prepared remarks, we will conduct a question-and-answer session. Instructions will be given at that time. I will now turn the conference over to Mr. Danny Hussain, Vice President, Investor Relations. Please go ahead.
Danny Hussain: Thank you, Michelle, and welcome, everyone, to ADP's second quarter fiscal 2024 earnings call. Participating today are Maria Black, our President and CEO, and Don McGuire, 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 will 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 that 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.
Maria Black: Thank you, Danny, and thank you, everyone, for joining us. This morning, we reported strong second quarter results, including 6% revenue growth and 9% adjusted EPS growth. I'll begin with a review of the quarter's financial highlights, before providing an update on the progress we are making across our strategic priorities. We delivered solid Employer Services new business bookings in the second quarter, reaching a new record bookings volume for Q2, and keeping us on track for our full-year outlook. Growth was especially robust across our small business portfolio, and we also experience healthy growth in our mid-market and international business. With steady demand in HCM and a healthy new business pipeline at the end of the quarter, we look forward to the important selling season ahead.
Employer Services retention was strong in the second quarter. Although it declined slightly compared to the prior year, we once again exceeded our expectations as we continue to benefit from a healthy overall business environment, and from our very high client satisfaction levels. Our Employer Services pays per control growth remained at 2% for the second quarter. The overall labor market remains resilient, and our clients continue to add employees at a moderate pace, which is resulting in a very gradual deceleration and pays per control growth. And last, our PEO revenue growth of 3% for the second quarter, was in line with our expectations, and we are very pleased to have delivered strong PEO new business bookings that were ahead of our expectations.
Based on continued healthy activity levels, we feel good about our PEO bookings momentum, and we look forward to seeing a gradual re-acceleration of our PEO business in the second half of this fiscal year. Moving on to a broader update. During the second quarter, we launched a new brand advertising campaign themed, the next anything. The campaign highlights how the world of work is always changing, sometimes gradually, sometimes suddenly, and trusted business solutions must evolve with it. The theme aligns with our strategic priorities to give our clients the advantage of our leading technology, expertise, and scale. In Q2, we continue to push forward on our first strategic priority to lead with best-in-class HCM technology. A key part of that is the rollout of ADP Assist, our cross-platform solution powered by GenAI that proactively delivers actionable insights in plain language to enhance HR productivity, aid decision-making, and streamline day-to-day tasks for our clients and their employees.
ADP Assist seamlessly integrates with ADP products across multiple platforms. Using an intuitive conversational interface, it provides valuable and contextual insights which touch every aspect of HR. For example, in addition to the features we shared with you last quarter, including our natural language reporting capability, in Q2, we integrated natural language search capabilities into our run platform, which allows it to understand intent behind the search terms and use GenAI to mine ADP's deep knowledge base to deliver easy to use and effective content. ADP Assist also helps clients validate payrolls and solve common employee challenges across HR, payroll, time, and benefits. It's a comprehensive experience that is trained on the industry's largest and deepest HCM dataset and our deep knowledge base to surface highly credible and actionable insights so that clients can make smarter decisions.
We are excited about the roadmap ahead for all of our major solutions, and we expect it to help us build on the recognition we continue to earn in the market. In Q2 alone, we were pleased to be recognized for product leadership by three major industry analyst rankings. Everest Group named ADP the highest leader out of 27 providers in its multi-country payroll solutions PEAK Matrix report. NelsonHall identified ADP as a leader in its Payroll Services Vendor Evaluation and Assessment tool in all markets. And Ventana Research named us an exemplary leader across its North American, global, and payroll management buyers guide for performing the best and meeting overall product and customer experience requirements. Our second strategic priority is to provide unmatched expertise and outsourcing solutions.
We shared last quarter that we were beginning to equip our associates with GenAI capabilities through our Agent Assist technology. In Q2, we expanded our call summarization deployment to a greater portion of our service associates and started to see productivity gains with shorter handle time and improved service quality. With our global service associates fielding millions of calls annually, we are incredibly excited to test ways to optimize those client interactions. Our third strategic priority is to benefit our clients through our global scale, and we continue to lean into this advantage. In Q2, we announced a strategic collaboration with Convera, a global business to business payments company to help our multi-country clients manage the complexity of global payroll and cross-border payments through an integrated platform.
By combining Convera’s payment solutions with our global payroll expertise, we're enhancing the client experience by minimizing the need to access various banking platforms and improving payment accuracy, compliance, and security. We also announced the launch of ADP retirement trust services to support our growing retirement services business. Standing up our own trust services entity demonstrates our scale and commitment to our retirement clients, positioning us on par with financial industry leaders and ahead of HCM competitors that rely on third parties. This commitment can really matter to financial advisors, keeps data within ADP's trusted ecosystem, and provides a cost and price benefit to ADP and our clients over the long term. Our scale also affords us the opportunity to partner with other leading technology providers in innovative ways, and we continue to expand on many of those partnerships to provide our sales implementation and service teams with client-specific insights to quickly address market shifts, drive more personalized interactions, and deepen our overall client engagement.
Overall, our second quarter represented strong outcomes on the financial front and with respect to our key strategic priorities. I'd like to thank our associates who continue to deliver exceptional products and outstanding service to our clients, particularly now, as many of them are in the middle of our most hectic time of year completing year-end work. I'm proud to share that their efforts help drive our overall Net Promoter Score to its highest level ever in the second quarter. Thank you again for all that you do for ADP and for our clients. And now, I'll turn it over to Don.
Don McGuire: Thank you, Maria, and good morning, everyone. I'll provide more color on our results for the quarter, as well as our updated fiscal 2024 outlook. Overall, we reported a strong second quarter, with our consolidated revenue growth moderating in line with our expectations, and our adjusted EBIT margin coming in slightly better than expected. However, the interest rate backdrop has changed since we last provided our full-year outlook, and we are lightly tweaking our outlook, which I'll detail. I'll start with Employer Services. ES segment revenue increased 8% on a reported basis, and 7% on an organic constant currency basis, coming in slightly ahead of our expectations. As Maria shared, we continue to grow our ES new business bookings, resulting in a record second quarter bookings volume.
Our small business portfolio and international business provided outsized growth contributions this quarter. And with a steady HCM demand environment and healthy pipelines, we feel on track for our 4% to 7% new business bookings growth outlook for the year. As mentioned earlier, our ES retention declined slightly in Q2 versus the prior year, but again exceeded our expectations. Given our first half retention outperformance, we are increasing our full-year retention outlook slightly. We now anticipate a 40 to 60 basis point decline in our full-year retention, which is 10 basis points better than our prior forecast. ES pays per control growth of 2% in Q2, was in line with our expectations, and we are maintaining our 1% to 2% growth outlook for the full-year.
And client funds interest revenue increased in line with our expectations in Q2, as a slight decline in our average client funds balance, which we discussed last quarter, was more than offset by an increase in our average yield. However, we are revising our full-year client funds interest outlook lower to reflect the change in prevailing interest rates since our last update. We now expect fiscal 2024 client funds interest revenue of $985 million to $995 million, and we expect a net impact from our client funds extended investment strategy of $835 million to $845 million, representing a reduction of about $20 million at the midpoint. In total, there is no change to our fiscal 2024 ES revenue growth forecast of 7% to 8%. Our ES margin increased 170 basis points in Q2, driven by both operating leverage and contribution from client funds interest revenue growth, but reflecting the impact of a reduced client funds interest revenue forecast, as well as a slight increase in expected GenAI related spend, we are tweaking our fiscal 2024 ES margin outlook and now anticipate the lower end of our prior margin range.
Moving on to the PEO, we had 3% revenue growth, driven by 2% growth in average work site employees in the second quarter. These metrics were in line with expectation, and we are encouraged to see signs of stabilization in our PEO pays per control growth. As Maria mentioned, our PEO new business bookings were very strong in Q2. With continued healthy activity levels, we continue to anticipate a gradual ramp in our work site employee growth in the back half of fiscal 2024, and we are maintaining our full-year growth outlook of 2% to 3%. PEO margin decreased 50 basis points in Q2. As we shared last quarter, we assume this year's workers' compensation reserve release benefit will be lower than last year's benefit, and we are further narrowing our PEO margin expectation to be down 80 to 100 basis points in fiscal 2024 versus our prior expectation of decline of 50 to 100 basis points.
Putting it all together, there is no change to our fiscal 2024 consolidated revenue growth outlook of 6% to 7%. With the two changes to segment margin, we now expect our adjusted EBIT margin to increase by 60 to 70 basis points versus our prior outlook, for an increase of 60 to 80 basis points. We continue to expect an effective tax rate of around 23%, and we still anticipate fiscal 2024 adjusted EPS growth of 10% to 12%, with the middle of that range the most likely outcome given current assumptions. Thank you, and I'll now turn it back to the operator for Q&A.
See also 15 Highest Quality Bottled Water Brands in The US and 15 Countries With The Highest Labor Shortages In The World.
To continue reading the Q&A session, please click here.
