Executive Summary / Key Takeaways

• Enduring Resilience and Strategic Innovation: ADP, a recognized "dividend king," continues to demonstrate remarkable resilience and consistent financial performance, underpinned by its mission-critical Human Capital Management (HCM) solutions and a robust, low-capital-intensity business model. The company is strategically investing in cutting-edge AI and next-generation platforms to enhance its competitive moat and drive future growth.
• Strong Q1 Fiscal 2026 Performance: ADP delivered solid first-quarter fiscal 2026 results, with 7% revenue growth and 7% adjusted EPS growth, exceeding expectations in PEO revenue and client funds interest. This performance reflects strong new business bookings, high client retention, and the initial benefits from strategic acquisitions.
• Technological Differentiation and AI Leadership: ADP is leveraging its vast HCM dataset (over 1.1 million clients, 42 million workers paid) to develop purpose-built AI tools like ADP Assist, enhancing client products and internal operational efficiency. The accelerated deployment of Workforce Now Next-Gen and the momentum of ADP Lyric HCM underscore its commitment to best-in-class technology.
• Optimistic Fiscal 2026 Outlook with Macro Headwinds: Management forecasts continued revenue growth of 5-6% and adjusted EPS growth of 8-10% for fiscal 2026, supported by strong client funds interest income and share repurchases. However, the outlook prudently accounts for a moderating macroeconomic environment, reflected in a flat forecast for U.S. pays per control growth.
• Competitive Strengths and Global Scale: ADP maintains a strong competitive position through its comprehensive service offerings, unparalleled global footprint across 140+ countries, and a differentiated PEO model. Strategic partnerships and acquisitions further extend its market reach and technological capabilities, reinforcing its leadership in a dynamic industry.

ADP's Enduring Foundation and Strategic Evolution

Automatic Data Processing, Inc. (ADP), founded in 1949, has evolved into a global leader in Human Capital Management (HCM) solutions, providing essential services from payroll and HR to talent management and benefits administration. The company's enduring business model, characterized by significant cash flow generation and low capital intensity, has enabled it to consistently innovate and adapt across diverse economic cycles, culminating in its distinction as a "dividend king" with 50 consecutive years of dividend increases. This foundational strength positions ADP as a reliable partner for businesses of all sizes, from small Main Street enterprises to multinational corporations.

ADP's strategic journey has been marked by continuous product development, market expansion, and targeted acquisitions. In recent years, the company has intensified its focus on three core strategic priorities: leading with best-in-class HCM technology, providing unmatched expertise and outsourcing solutions, and leveraging its global scale for client benefit. This strategy is a direct response to the evolving demands of the modern workforce and the increasing complexity of global HR and payroll compliance. The HCM industry itself is dynamic, experiencing rapid growth in cloud-based services and a burgeoning demand for AI-driven solutions that simplify operations and provide deeper insights.

Technological Edge: Powering HCM Innovation

ADP's commitment to technological differentiation is central to its investment thesis. The company is actively developing and deploying a suite of advanced HCM platforms and AI-powered tools designed to provide tangible benefits to its clients and enhance its competitive moat.

At the forefront of this innovation is ADP Lyric HCM, the company's next-generation global HCM platform. Lyric is engineered for flexibility, intelligence, and a human-centric design, resonating strongly with enterprise clients. Its new business bookings increased substantially in fiscal 2025, with the pipeline doubling compared to the prior year. Lyric's appeal lies in its cutting-edge user experience and ability to simplify complex personnel management and payroll processes, offering a full suite of HR, payroll, time, benefits, recruiting, and talent management functionalities. Its positive market reception was underscored by its recognition as a "Top HR Product of 2025" by HR Executive.

In the mid-market, ADP is accelerating the deployment of Workforce Now Next-Gen. This modern tech stack and its enhanced functionality are gaining significant traction, with over 80% of new mid-market clients (50 to 150 employees) adopting this version in the first quarter of fiscal 2026. The tangible benefits include faster implementation times, improved implementation satisfaction, and higher overall client satisfaction. Furthermore, Next-Gen clients exhibit meaningfully lower contact rates with ADP, suggesting enhanced productivity and a streamlined client experience.

ADP's AI initiatives, particularly ADP Assist, are a critical differentiator. Leveraging the company's "largest HCM dataset with over 1.1 million clients and 42 million workers paid," ADP Assist utilizes generative AI to analyze and resolve payroll anomalies, streamline analytics requests, and automate routine compliance tasks. This purpose-built AI aims to fundamentally shift how work gets done, moving beyond mere speed and efficiency to deliver smarter, more tailored HCM agents. Utilization of ADP Assist has surged, with over 5.5 million client conversations over the last year, reducing the need for direct client contact. The vision extends to autonomous agents managing workflows from start to finish, with human oversight where critical. Internally, AI tools provide client-specific insights to sales, implementation, and service teams, and coding copilot tools are yielding measurable productivity gains for developers.

Strategic acquisitions further bolster ADP's technological capabilities. The WorkForce Software acquisition in October 2024 significantly enhanced ADP's offerings in time and attendance, absence management, and scheduling tools, integrating with key ADP HCM platforms. This combination is generating new business opportunities, particularly for global HR, payroll, and time solutions, and is expected to contribute meaningfully to growth in the multinational market. More recently, ADP acquired Pequity, an innovative compensation management software provider, to broaden its capabilities in complex compensation planning. These strategic moves, coupled with R&D investments, aim to solidify ADP's competitive moat by offering comprehensive, integrated, and intelligent solutions that address the evolving needs of the global workforce.

Robust Business Model and Financial Performance

ADP's financial performance in the first quarter of fiscal 2026 (ended September 30, 2025) underscores the strength of its business model, even amidst a moderating macroeconomic backdrop. The company reported total revenues of $5,175.20 million, a 7% increase year-over-year, with adjusted diluted earnings per share (EPS) growing 7% to $2.49. Net earnings for the quarter stood at $1,013 million.

Employer Services Segment Deep Dive

The Employer Services (ES) segment, ADP's largest component, delivered revenues of $3,491.20 million in Q1 fiscal 2026, representing a 7% reported growth and 5% organic constant currency growth. This growth was propelled by solid new business bookings, strong client retention, increased interest on funds held for clients, and the initial impact from the WorkForce Software acquisition. Despite these revenue gains, the ES margin decreased by 50 basis points to 35.20% in Q1 fiscal 2026, primarily due to integration and acquisition-related costs associated with WorkForce Software, as well as increased selling and marketing expenses and higher costs for servicing and implementing clients.

A key operational metric, pays per control (PPC), which measures the number of employees on ADP client payrolls, rounded down to 0% for the first quarter of fiscal 2026, reflecting client caution around headcount additions. However, ES new business bookings achieved record sales volume for the first quarter, with particular strength in small business, retirement, insurance services, and HR Outsourcing. Client retention continued to exceed expectations, declining only slightly.

PEO Services Segment Deep Dive

The PEO Services segment also demonstrated strong performance, with revenues growing 7% to $1,687.50 million in Q1 fiscal 2026. This exceeded expectations, driven by a 2% increase in average worksite employees and higher zero-margin pass-throughs and wages. The PEO margin, however, decreased by 140 basis points to 13% in Q1 fiscal 2026. This contraction was mainly attributed to higher selling expenses, the timing of state unemployment insurance (SUI) costs, and one-time costs related to a retroactive change in the deadline for filing certain employee retention tax credit claims. ADP Indemnity, a component of PEO Services, recorded a pre-tax benefit of approximately $4.70 million from favorable actuarial loss development in workers' compensation reserves.

Client Funds Interest and Liquidity

Interest on funds held for clients, a significant revenue driver, increased to $286.80 million in Q1 fiscal 2026, up from $253.30 million in the prior year. This was fueled by a 6.5% increase in average client funds balances, reaching $34.90 billion, coupled with an increase in the average interest rate earned to 3.30%.

ADP maintains a solid financial condition and robust liquidity. As of September 30, 2025, cash and cash equivalents stood at $2.48 billion.

The company's liquidity is supported by existing cash, marketable securities, strong cash flow from operations ($642.30 million in Q1 fiscal 2026), and access to $10.60 billion in committed credit facilities. This strong liquidity position enables ADP to fund its operations, strategic investments, and shareholder returns, including its consistent dividend payments and share repurchases. In Q1 fiscal 2026, ADP repurchased approximately 1.20 million shares at an average price of $302.10. Capital expenditures for the quarter were $44.90 million, with fiscal 2026 expected to range between $225 million and $250 million.

Competitive Landscape: A Differentiated Approach

ADP operates in a highly competitive HCM market, contending with both specialized payroll providers and broader enterprise software solutions. Its competitive positioning is anchored in its comprehensive service offerings, extensive client network, and a strategic emphasis on reliability and compliance.

Against cloud-based HCM leaders like Workday, Inc. (WDAY), ADP differentiates itself through its deep expertise in regulatory compliance and a broader global presence across 140+ countries. While Workday is often perceived as more agile in deploying cutting-edge AI-enhanced reporting, ADP's established network and long-standing client relationships provide a dependable choice for clients with complex, compliance-sensitive needs. ADP's mature business model typically yields steady, predictable financial performance, contrasting with Workday's higher growth rates but potentially lower net margins due to aggressive R&D.

In the small and mid-sized business market, ADP competes with players like Paychex, Inc. (PAYX) and Ceridian HCM Holding Inc. (CDAY). Paychex excels in cost-effective, streamlined payroll services, appealing to price-sensitive clients. However, ADP's Employer Services segment offers more integrated, full-suite HCM solutions, including talent management and comprehensive compliance. ADP's PEO model, particularly its fully insured health benefits, provides predictability and stability, a "home run" in volatile health benefit cycles, which differentiates it from other PEOs. Furthermore, ADP's extensive distribution network, where 50% of PEO new business originates from existing ADP clients, provides a significant competitive advantage over rivals.

ADP's technological advancements, such as ADP Lyric HCM and Workforce Now Next-Gen, are crucial in maintaining its edge. Lyric's recognition as a "Top HR Product of 2025" and ADP's consistent positioning as a leader in multi-country payroll by NelsonHall and Everest Group highlight its product performance and global capabilities. The company's vast HCM dataset, powering its AI initiatives, is a unique asset that enables it to develop "smarter and more tailored HCM agents" that are "truly differentiated in the market." While competitors also invest in AI, ADP's scale and data breadth provide a distinct advantage in developing robust and effective solutions.

Strategic Initiatives and Future Outlook

ADP's strategic initiatives are designed to reinforce its market leadership and drive sustainable growth in the face of evolving industry dynamics. The company's three core priorities—best-in-class HCM technology, unmatched expertise and outsourcing, and global scale—are guiding its investments and operational focus.

For fiscal 2026, ADP maintains a consolidated revenue outlook of 5% to 6% growth and forecasts adjusted EBIT margin expansion of 50 to 70 basis points. Adjusted EPS growth is projected at 8% to 10%, supported by continued share repurchases. The effective tax rate is expected to remain around 23%.

Key assumptions underpinning this outlook include:

• Employer Services (ES) New Business Bookings: Expected to grow 4% to 7%, accelerating from fiscal 2025, driven by investments in salesforce headcount and tools, and the maturing of strategic offerings like Lyric, WorkForce Software, and embedded payroll.
• ES Retention: Forecasted to decline modestly by 10 to 30 basis points from 92.1% (fiscal 2025), anticipating some macroeconomic pressure and potential increases in small business out-of-business levels.
• Pays per Control (PPC): Expected to remain about flat for the full fiscal year, reflecting a moderation in U.S. private sector payroll growth and client caution regarding headcount.
• Client Funds Interest Revenue: Forecasted to increase to a range of $1.30 billion to $1.32 billion, with average client funds balances growing 3% to 4% and an average yield of approximately 3.4%. The net impact from the extended investment strategy is projected to be $1.26 billion to $1.28 billion.
• PEO Services Revenue: Expected to grow 5% to 7%, with average worksite employee growth of 2% to 3%. PEO margins are anticipated to decrease due to faster growth in zero-margin pass-through revenues.
• Pricing: ADP's pricing assumptions for fiscal 2026 are consistent with recent trends, in the 100-basis-point range.

ADP's strategic investments in AI, such as ADP Assist, are expected to drive "measurable productivity gains" and operational efficiencies, contributing to margin expansion, particularly in the latter half of fiscal 2026. The integration of WorkForce Software and the recent acquisition of Pequity are also integral to broadening ADP's capabilities and enhancing its global offering, with initial integration costs expected to impact margins in the first quarter before ramping up.

Risks and Challenges

Despite its strong position, ADP faces several risks and challenges that could impact its future performance. Macroeconomic uncertainty remains a primary concern, potentially affecting client hiring decisions (PPC growth), client retention, and the pace of new business bookings, particularly in international markets and for large, complex HR outsourcing deals. The moderation in U.S. pays per control growth to flat for fiscal 2026 highlights this sensitivity.

Interest rate risk is inherent in ADP's client funds investment strategy, as fluctuations in rates can impact interest income, although the company's laddering strategy aims to mitigate this by averaging through interest rate cycles. Credit risk is also present in its available-for-sale securities, though mitigated by investing in highly-rated, investment-grade instruments. Foreign currency exchange rate fluctuations can affect consolidated results, as ADP operates globally.

Competitive pressures are constant, with rivals innovating in AI and offering diverse solutions. While ADP's scale and comprehensive offerings provide a strong moat, it must continuously invest in technology to maintain its edge. Legal proceedings, such as the ERISA class action complaint related to ADP TotalSource, pose potential, though currently unquantifiable, risks.

Conclusion

Automatic Data Processing stands as a resilient HCM powerhouse, demonstrating consistent financial strength and a strategic vision for growth. Its ability to deliver robust revenue and EPS growth, even in a moderating macroeconomic environment, is a testament to its mission-critical services and diversified business model. The company's aggressive investments in AI-driven platforms like ADP Lyric HCM and Workforce Now Next-Gen, coupled with strategic acquisitions such as WorkForce Software and Pequity, are cementing its technological leadership and expanding its addressable market.

ADP's competitive advantages, including its vast client network, global scale, and differentiated PEO model, provide a strong foundation. While macroeconomic headwinds, particularly concerning pays per control, warrant careful monitoring, ADP's proactive approach to innovation and its commitment to operational efficiency are expected to drive continued margin expansion and shareholder value. For investors, ADP represents a compelling opportunity in a stable, essential industry, poised for sustained long-term growth through its blend of technological prowess, strategic execution, and unwavering client focus.