Automatic Data Processing Inc (ADP) — Q3 2026 Earnings Call Transcript

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 Third Quarter Fiscal 2026 Earnings Call. I would like to inform you that this conference is being recorded. 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 Third Quarter Fiscal 2026 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 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 their 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. This morning, we reported another strong quarter of results with revenue growth, margin expansion and EPS growth all coming in ahead of our expectations and reflecting the significant progress we are making across our strategic priorities at a pivotal time for our industry. Before we get into the details of our performance, I want to share a few thoughts on why this is a defining moment for human capital management and why I am so excited to be leading ADP in the AI era. HCM is about helping companies manage the workforce infrastructure that makes business possible, whether you're a Fortune 500 company or a small local business. That has always been our driving mission and it has never been more critical than it is today. As AI adoption continues, businesses will only face greater workforce complexity. AI is redefining the very nature of work and how we collaborate while increasing regulatory interest around privacy and data protection. And fortunately, that's exactly where ADP thrives. We execute with precision when it matters most. In terms of rapid change and disruption, businesses need the compliance, accuracy and trust that ADP delivers at scale. Through economic cycles, shifting labor trends and waves of technological transformation, we have confidently met every moment by investing in R&D, evolving with our clients and raising the bar for what HCM can deliver. ADP was the first in HCM to deliver automation, move to the cloud, provide a mobile app and create an online marketplace. We believe it's our job to lead the industry in innovation. And now we're doing it again with AI. For us, success means leading the way in a trusted, service-driven and AI-powered HCM and setting the industry standard for accuracy, compliance and partnership around the world. Our performance this quarter shows how we're executing on that. Before I discuss our strategic progress, I'd like to review some key highlights from our results. We delivered solid Employer Services new business bookings growth in the third quarter. Results were particularly strong in international and compliance solutions. Our insurance and retirement services offerings also continue to contribute to growth in our small business portfolio. Both our Employer Services retention rate and our overall client satisfaction levels reached new record highs for a third quarter. This strong performance is the result of continued progress across our three strategic business priorities. I'll start with what we are doing to lead with best-in-class HCM technology. AI makes HCM more important, and we believe it unlocks tremendous value and opportunity for our industry that plays out in two ways. First, while AI excels at prediction and efficiency, it can't execute critical high-stakes HCM functions with a level of accuracy and consistency required. At the end of the day, payroll isn't a software function—it's a commitment to the people who showed up and did the work—and there is no room for error. Second, AI has added new layers of complexity for our clients as they manage their payroll, workforce management and regulatory compliance. These functions are rapidly evolving. And now more than ever, employers will need a trusted HCM partner who can decode the puzzle and reliably deliver these critical services. I also want to be direct about something analysts and investors are rightly focused on. AI is changing both work and the workforce. And with our business grounded in all aspects of payroll and beyond, we are working on answers every single day. Our research with the Stanford Digital Economy Lab shows that AI is reshaping work at the task level. While this could lead to job displacement in certain task areas, we expect other new job categories to be created in this tech transformation. What we know for navigating through economic cycles and labor market shifts, and the data we've gained along the way, is that even as workforces change, the work of managing them, paying them accurately and keeping compliant doesn't go away. AI is shifting how work gets done, but that doesn't eliminate the need to manage it, and managing a workforce through disruption makes HCM more complex. We are not immune to shifting employment trends, but we are built for the world they represent. What differentiates ADP's approach is that our AI is built in the very core of how we orchestrate, govern and execute HR and pay processes, grounded in regulatory logic, operational data and decades of expertise. This goes far beyond chatbots or surface-layer automation that can enhance the user experience. It's about delivering real-world outcomes where accuracy and auditability are nonnegotiable. For example, in January, we launched ADP Assist agents that apply advanced intelligence to real workforce challenges for our payroll and HR operations. These persona-based agents think, plan and act with human oversight; they are designed to handle routine tasks so people can focus on high-value strategic work that requires judgment, expertise, creativity and connection. And since that launch, we've already seen meaningful results. Our ADP Assist payroll agents have saved an average of 30 minutes per payroll. Our ADP Assist tax registration agents have helped businesses maintain compliance and avoid penalties and interest on late tax filings. Our Smart Actions search has reduced clicks and time spent by around 80% for common HR actions. And those are just a few examples. We are continuing to accelerate this work, roll out new ADP Assist agents and look for more opportunities to make work easier. ADP Lyric HCM is also saving time and effort for our clients. One senior HR leader at a supply chain firm shared that the AI tools within Lyric have significantly reduced the number of steps in the recruiting process from 23 down to just 8 by providing advanced candidate insights. Another client, a global holding company, used Lyric to replace more than a dozen disparate systems, which enabled a 71% leaner payroll operations model—and that's just the beginning. In March, we further expanded our GenTech AI ecosystem through the ADP Marketplace, our industry-leading open platform where clients connect ADP solutions with third-party applications across the HR and workforce technology landscape. We launched a dedicated space within Marketplace for carefully selected AI agents from our partner companies that give HR teams intelligent support across the employee life cycle, and all agents are aligned with ADP's principles on safe and responsible AI. Our approach is also earning external recognition. ADP was ranked #1 in HR on Fast Company's Most Innovative Companies list, and RUN Powered by ADP held its position as a top-ranked small business product by G2 for the second consecutive year. I want to congratulate our entire team on these well-deserved achievements. Our second strategic priority is to provide clients with unmatched expertise and outsourcing solutions. I'll speak to three structural advantages that together position ADP to deliver on this priority and lead the HCM industry through its AI transformation. The first advantage is our data. AI is only as good as the data it's built on, and ADP has the industry's strongest workforce data foundation built over nearly 77 years. We pay 1 in 6 workers in the U.S. and moved $3.3 trillion in the U.S. in fiscal '25. We capture payroll, HR and compliance data for more than 1.1 million clients and 42 million workers globally across roles, industries and geographies, giving us incredible insights into the workforce and its emerging trends. This advantage will continue to compound for our data and AI capabilities over time and will further widen the gap between ADP and our competitors. The second advantage is our domain expertise. Every ADP Assist agent is grounded in our unmatched institutional knowledge from decades of hands-on experience with companies of all sizes. Our deep understanding of HR processes, workflows, exceptions and regulatory nuances is built into the very architecture of our products, services and systems. Our service model delivers human expertise and guidance alongside high-impact technology, pairing AI-driven efficiency with expert judgment and automation with accountability. And as AI drives regulatory change and fragmentation, we have a true structural advantage. Let's consider the current landscape. So far this year, more than 200 HR-related compliance laws have been enacted in the U.S., including several governing the use of AI. This June, the EU Transparency Directive will take effect, and employers continue to face increasingly complex and sometimes conflicting requirements across local, state and federal jurisdictions on issues ranging from pay transparency to leave policies. But as I mentioned before, this is exactly where we thrive. Since AI entered the mainstream, ADP has operationalized an accelerating wave of changes. And when the regulatory environment accelerates as it is now, our clients will coalesce around the partner they trust to get it right, a fact that has shown up in our consistently strong retention. This has earned us expertise the kind that comes from pioneering an industry and leading the way through disruption. We are also focused on using AI to sharpen our expertise. We have continued to scale the deployment of additional generative AI capabilities across service operations through the Zone, our proprietary end-to-end solution that transforms how our client-facing teams engage, serve and support clients across the full life cycle. As of March, 20% of the total service population was on the Zone platform, and we expect to reach over 40% by the end of fiscal '26. Several high-volume service teams, including SBS and Wisely, are operating at full utilization, which means GenAI-enabled workflows are becoming embedded in our standard service operations and helping our teams create value through a more seamless experience for our clients. The third advantage is the trust in our brand. Clients have relied on ADP for the most essential HCM processes for decades because we consistently deliver through change and complexity. In the age of AI, trust is more important than ever, and we are deepening trust every day through our commitment to ethical and responsible AI development. Finally, we remain focused on our third strategic priority: benefiting our clients with our global scale. ADP supports clients across 130 countries, and 67,000 ADP associates deliver compliant HCM solutions, local expertise and trusted relationships to more than 1.1 million clients every day. We connect directly to tens of thousands of government entities, tax authorities, regulatory bodies and banking institutions globally. Our final-mile ecosystem is extremely difficult to replicate and becomes even more important as the regulatory landscape becomes more complicated and fragmented by country, state, city, town and municipality. Large businesses already recognize how hard it is to get this right. We just recently secured several new enterprise clients, including one that has tasked us to deliver a 30-country payroll transformation. These clients trust ADP for these complex processes because we understand what's required in each country, we have the infrastructure, and we can flex to support their exact needs. AI is changing work and the workforce. We know there will be new regulations, new workforce models and new risks. ADP is purpose-built for this challenge. We bring together the regulatory discipline, data integrity, process intelligence and human guidance required to productively incorporate AI into mission-critical HCM. That's why the world's leading organizations choose ADP as their partner for a rapidly changing world of work. I would like to take a moment to thank all our associates worldwide for their exceptional service and performance as we continue to advance our strategic priorities in the age of AI. Every result we report, every client we serve and every innovation we launch starts with them. We said at the top of the call that this is a defining moment for HCM. I believe that deeply, and we know just as deeply that ADP is strongly positioned to capture the opportunity ahead. And now I'll turn the call over to Peter.

Thank you, Maria, and good morning, everyone. I will start by providing some more color on our third quarter results, and we'll then update our fiscal 2026 outlook. This morning, we reported strong third quarter results that included 7% revenue growth, 80 basis points of adjusted EBIT margin expansion and 10% adjusted EPS growth. These results were all ahead of our expectations, and we are adjusting our full year guidance to reflect this performance as well as making a few other changes, which I'll detail. One thing worth noting before I get into the numbers: the margin expansion we achieved reflects disciplined investment. We are funding our AI transformation across our products, internal tools and service delivery while continuing to deliver on our financial commitments. This discipline is intentional, and it shows up in the results. I will focus on our Employer Services segment first, where I'll cover both our results and our updated outlook. Employer Services segment revenue in Q3 increased 7% on a reported basis and 5% on an organic constant currency basis with favorable FX contributing close to 2 points of revenue growth. As Maria shared, Employer Services new business bookings were solid in the third quarter, and our pipelines were healthy at quarter end. With ongoing macro uncertainty and given the typical importance of our fourth quarter, a range of new business bookings outcomes remains possible. Accordingly, we are maintaining our 4% to 7% full year growth guidance. Driven by our strong Employer Services retention performance in Q3, we are improving our guidance range by 10 basis points and now forecast Employer Services retention to be flat to down 20 basis points for the year. Employer Services pays-per-control growth remained at 1% for the third quarter, and our updated outlook calls for about 1% growth in fiscal 2026. Client funds interest revenue increased by more than we anticipated in Q3, driven by 9% growth in our average client funds balances. We are increasing our full year average client funds balances growth forecast to about 6% and are continuing to expect an average yield of approximately 3.4% for the year. As a result of our revised expectation for balances growth, we are increasing the midpoint of our fiscal 2026 client funds interest revenue forecast by $25 million to a range of $1.34 billion to $1.35 billion. We are also raising the midpoint of the expected net impact from our extended investment strategy forecast by $25 million to a range of $1.30 billion to $1.31 billion. We also now expect overall Employer Services revenue growth of 6% to 7% for the fiscal year. Our Employer Services margins increased by 130 basis points in Q3, driven by operational productivity improvements that we are realizing across our business as well as the contribution from client fund interest revenue growth. The investments that we are making in AI, in service tools and in product innovation are yielding meaningful productivity improvements in our business, allowing us to reduce our cost to serve, while at the same time enhancing our clients' experience. As an example, our continued investment in our RAM platform, along with the AI-powered tools that were deployed to support our more than 900,000 small business clients, have enabled an 8% year-over-year reduction in client contacts in fiscal Q3, our busiest quarter of the year. These outcomes help us drive faster margin expansion and a better client experience, as shown by our continued record client satisfaction and retention results. The good news is that while these outcomes are becoming more meaningful and are now starting to manifest more noticeably in our financial results, we believe that the opportunity in front of us is substantial. We are only in the very early innings in terms of what this can yield in terms of a superior client experience as well as business growth and financial benefits for ADP. Turning now to PEO: Total PEO revenue increased 7% in the third quarter, with PEO revenue excluding zero-margin pass-throughs growing 5%. Stronger PEO new business bookings growth helped offset some continued softening in PEO pays-per-control growth in the quarter, keeping growth in average worksite employees at 2% for Q3. We continue to forecast fiscal 2026 average worksite employee growth of about 2%. We also saw continued strong growth in gross payrolls as well as higher SUI revenues, both of which contributed to the uptick in PEO revenue growth in the quarter. Following the strong revenue performance in Q3, we are increasing our full year revenue growth guidance to 6% to 7% and raising our PEO revenue, excluding zero-margin pass-throughs, growth outlook to 4% to 5%. PEO margins decreased 120 basis points in Q3, driven mainly by zero-margin pass-through growth, higher SUI costs and higher selling expenses. Putting it all together, we are increasing our fiscal 2026 consolidated revenue growth outlook to 6% to 7%, and raising our adjusted EBIT margin expansion forecast to 70 to 80 basis points. Our full year effective tax rate burden of around 23% is unchanged. And finally, we are increasing our fiscal 2026 adjusted EPS growth forecast to 10% to 11%, which continues to be supported by share repurchases. As we look ahead to fiscal 2027, I also wanted to share a few early thoughts. First, we were pleased to increase our adjusted EBIT margin expansion guidance in fiscal 2026. While it is still early in our planning process for fiscal '27, we remain very focused on continuing this acceleration when it comes to margin expansion as we realize further productivity benefits from our AI transformation. Second, as a result of our laddering strategy, we remain positioned for continued tailwinds from our client funds portfolio as anticipated reinvestment rates remain above the average yield of our maturing securities, driving overall yields expected on the portfolio above fiscal 2026 levels. And finally, you will have noticed a meaningful increase in our share repurchase activity during this fiscal year to date. We expect to continue share repurchases at or above these elevated levels across the balance of this year and throughout fiscal 2027, absent major changes in the market backdrop. I would like to emphasize that this elevated buying is in addition to our long-standing commitment to growing our dividend and to the levels of investments that we are making and will continue to make in our business to best position us for success in the future. We remain laser-focused on driving growth in our new business bookings and maintaining strong client satisfaction and retention levels while at the same time investing in our products, our people and our AI capabilities to deliver sustainable revenue growth, margin expansion and shareholder returns over time. Thank you. And I'll now turn it back to the operator for Q&A.

This is actually Jared Levine on for Bryan today. I wanted to start in terms of the implied 4Q guidance. I know you're not guiding FY '27 at this time, but anything to call out in terms of using that implied 4Q revenue growth rate as we think about FY '27 growth year?

Thank you for the question. Yes. Look, we guide to a range of outcomes. So the guidance that we've increased—our revenue guidance, margin guidance and EPS guidance—we're very happy with that. I think there's still a lot to do in the fourth quarter with respect to bookings and with respect to retention in the PEO. So we're not really going to be more precise than the ranges we shared, but we feel confident with respect to our trajectory going into the fourth quarter and exiting the fiscal year. Probably the one thing I would note would be we benefited by a little over 1.5 points of FX in the third quarter in the Employer Services segment. We're expecting that to moderate a little in the fourth quarter, so a little bit less benefit from FX on the revenue side, which should help the margin profile a little bit because while it's a revenue tailwind, it's a little bit of a headwind from a margin perspective. So that's really the only specific point I would call out with respect to being different from Q3, but we feel confident with our guide and our exit point.

Understood. And then good to hear about the record 3Q Employer Services retention rate. Can you dig into if that was broad-based or specific any areas and kind of where you still see areas for opportunity to improve that retention rate?

Yes. Jared, it's Maria. We're equally pleased with the result in retention. It exceeded our expectations and we raised the full year guide as a result of that, and we feel that overall it was broad-based strength. The notable improvements that we saw were across international, compliance, enterprise and small business. We also saw strength in returns and services; it actually hit a new quarterly record for us. So it was broad-based strength and we're really pleased with what we're seeing. I think it's a direct reflection of the investments we've made into product, the investments we've made into service and how we engage with our clients, some of the things that we discussed during the prepared remarks. So really pleased with the result in retention.

Congratulations on the strong results. I'm wondering if you can talk a little bit about the bookings. You didn't change the forecast range for the year, and it's still relatively wide with one quarter to go. Can you just discuss a little bit about what you're seeing with regards to the bookings in the third quarter and year-to-date? And specifically, any areas that you're seeing really good results in, in terms of the various segments? And also, to what extent can you give some commentary in terms of whether or not you're still seeing kind of a 50-50 mix in terms of bookings as it relates to upsells versus brand-new logos? And then I've got a follow-up.

Okay. Thanks, Mark, and good to hear from you. Happy to comment on the overall demand environment and bookings. So first and foremost, we were very pleased with what we saw with respect to bookings in the third quarter. We built on the momentum that we had in the first half of the year. So pleased with where we sit heading into the fourth quarter. But as always, we have a lot to get done in the fourth quarter. I think the strength that we saw specifically in the third quarter was anchored in some of the areas that I mentioned: international—that's a highlight for us—and compliance. I think that speaks directly to some of the commentary I made around the infrastructure and final-mile connectivity that we have. That business connects a lot of the things to the infrastructure of how payroll actually gets done in the world. We also saw strength across our small business portfolio in the beyond-payroll offerings of insurance and retirement services, which again speaks to the strength that we're seeing in the down market. So overall, really pleased with the third quarter with respect to the overall performance. I would say, as we head into the fourth quarter, there's always a lot to get done. We left the range relatively wide, as you mentioned. I think all of those outcomes are possible for us. The sensitivity of it, if you will, is around $20 million to $21 million per percentage point. So if you imagine our roughly 8,500 sellers who are at the ready with all the right products, a stable backdrop from a demand perspective, all the right incentives, everybody is excited to execute throughout the fourth quarter with good solid pipelines, but we have a lot to get done as we always do at this time. To answer your question around the 50-50 mix, it's exactly the same. So it's about 50% that comes from new logos and 50% that comes from beyond payroll or additional business. So that's the backdrop, and we're pretty excited about what we need to get done in the fourth quarter.

That's excellent color, Maria. And then with regards to the financials, one, you mentioned how AI is taking you more efficient. I couldn't help but notice that the R&D or the program costs were relatively flattish despite the nice increase in terms of revenue. And I'm wondering if you can talk a little bit about some of the efficiencies that you're gaining across the board from AI and particularly in terms of new product development and the tools that you might be employing there, both in terms of reduced expenses, but also speeding up the development process.

Thank you, Mark. The R&D cost line has the usual accounting treatments, including capitalization and amortization, so quarter-to-quarter movements may not always be large. We have continued investment, and we also allocate spending across priorities. We've certainly pivoted more of our spending in R&D toward AI initiatives, both on the product side to benefit our clients and on the efficiency side. Some of the expense is also carried in operations where we're investing to deploy the Zone platform, our proprietary service built on Salesforce technology that's rolling out AI-infused workflows and helping. One example I can give: in India, where year-end is March 31, we do a lot of work for our clients validating tax-advantaged allowances and receipts. We deployed AI this year for the first time and reduced those core volumes by 35% in the year-end process, also reducing the labor required by 35%. That was deployed against a manual but very necessary compliance effort. So it's a broad-based approach. We have pointed our investment dollars in the direction of AI as well as the usual spend to bring best-in-class products to market. I wouldn't read too much into the sequential nature of the R&D program cost line in the P&L—some of that can be accounting and some of that can be reallocation of dollars either within R&D or between R&D and operating costs.

Can you provide an update on your traction in the quarter? And just in general, with Lyric's unique architecture compared to standard legacy HCM platforms, are we seeing Lyric open up new use cases or customer segments that weren't really serviceable before? Also on a related note, we've heard from enterprise customers that Lyric is being deployed in some cases as the best-of-breed payroll and compliance layer alongside existing HCM platforms. Can you just talk about how prevalent that buying motion might be and whether that's expanding the addressable market beyond pure displacements?

Yes. Thanks, Jacob. I appreciate the questions around Lyric. As always, we are incredibly excited about the momentum of Lyric. We didn't call it out in the bookings commentary, but certainly pleased with what we've seen in terms of the pipeline build and the execution on Lyric year-to-date. I had a couple of examples in the prepared remarks on the impact of AI within Lyric and some of the things we're solving for for clients. To address traction: our clients are equally as excited. You'll see this front and center—this quarter we had our annual Rethink event, which is our enterprise customers on a global scale getting together to really talk about how they're solving for things like global payroll and global time. We also had our Meeting of the Minds event just a couple of weeks ago in Orlando with about 2,000 of our enterprise customers in the U.S. getting together. Lyric is, for sure, gaining momentum and attention from analysts and clients. The architecture you mentioned creates new use cases. The way it's deployed with position management as well as traditional approaches provides an architecture that's incredibly flexible and dynamic. That's why it's resonating both with analysts and clients—not just because it's modern and AI-enabled, but because the core engine and how it's architected allows for flexibility to manage work and how work happens today. That's the conversation I'm having with clients about how we solve for this future of work, and Lyric fits squarely into that. So it is opening up new dialogue and new addressable use cases. In addition, our global time story—brought further by the Workforce software acquisition—lets us think about global time and global payroll together, and there is the ability to plug these things together in go-to-market, together with global service, and that's unique for ADP. So again, it's changing the conversation with clients who are looking to us to solve for this new world of work. We're really excited about where Lyric is taking us from a narrative perspective, a pipeline perspective and an addressable market perspective. There are use cases where we can deploy Lyric in new and unique ways that are gaining traction. Expect more as we head into fiscal '27, but really excited about the direction and the momentum.

And just a quick follow-up, too. As Lyric bookings ramp in the large enterprise, how are you thinking about scaling implementation capacity over time, whether that's investing internally or potentially working with system integrator partners in the future?

Yes. Jacob, I'm glad you asked because I left that part out, which is an important piece. The answer is both. We are scaling internally, and we also have the ability to go to market with system integrators in a more meaningful way than we have in the past. We've had relationships with mid-tier system integrators as well as global system integrators. We've learned a lot from the Workforce Software acquisition because they had deep partnerships with many system integrators such as Accenture, and we also have relationships with others like HCL, KPMG and others. We're continuing to build this out, especially as it relates to the marriage between global payroll and global time, and our ability to put that together with the system integrator that's also working with that client to solve in real time for the future of work. So it's a big piece of our strategy and we're excited to see where it leads us.

Maria, Peter—great results. Congrats, well deserved. I wanted to ask: I know there was a question about AI and R&D, but more about: I think your competitor mentioned that there was some difficulty selling software modules. I just want to see from your perspective how this looks. I think last time we talked about it, there was no problem whatsoever. Just wanted to sort of check the box on this one.

Yes, great question. I'm not sure exactly which competitor you're referring to, but from our viewpoint, based on our pipelines, our results, and time spent with our clients at events like Rethink and Meeting of the Minds, software demand is alive and well—especially core HCM functions. We see the future of work as AI-infused and AI-powered, but that doesn't take away the need to manage orchestration, payroll and compliance. While AI reshapes work at the task level, the complexity of managing work is actually increasing, which increases the value of getting HCM right. Another important distinction is the level of standards, ethics, accuracy, security and auditability required in payroll and HCM. Payroll needs to be 100% accurate, 100% of the time, and that level of reliability is a big differentiator for HCM. We've been built for this over 77 years—navigating economic cycles and transformation. We have the trust, the data, the deep domain expertise in our products, services and people to help clients through this pivotal time. At our Meeting of the Minds, we were celebrating clients with 50 years of tenure with ADP, and I believe that's earned expertise. So from our vantage point, HCM software demand remains robust, and we continue to see healthy market opportunity.

Just thinking about the outlook revision up and the good results here. Can we go through quickly the attribution of what's driving the change in the outlook? It seems like it's higher balances and some improvement in retention—is that the majority of it? I just wanted to make sure I covered that.

Thanks, Tien-Tsin. We're pleased to increase the outlook. The strong Q3 performance is a big part of it. Balance growth was better than anticipated and we've increased our balance growth expectation. We see solid underlying revenue growth opportunity in both PEO and Employer Services exiting Q3 into Q4. Some of that improvement is retention; some is pays-per-control lift in Employer Services. Another piece is price: over the last couple quarters we've been aiming for around 100 basis points of contribution from price, and our outlook now reflects a bit more—roughly 130 basis points from price. That is positive for the financials and is consistent with record client satisfaction and retention levels. So several levers—balance growth, retention, pays-per-control, and price—are more or less working in the same direction. The only item expected to moderate a bit in Q4 is the FX benefit, which was a bit larger than we contemplated for Q3.

Okay. Perfect. We're going through that, and then the pricing is definitely emerging that you're able to see more value. Maybe somewhat related to that: any change in competitive intensity? I know there's a lot of focus on some start-ups and more AI-native companies. Any change there, Maria, that you're seeing? I know your bookings are reaffirmed, which is great. We'd love a little more on what's going on on the ground.

Great question. From our vantage point, we aren't seeing any major new entrants causing increasing levels of pressure. It's always competitive—particularly in the back half of the year, which is a big bookings period for us—but the environment feels normal for this time of year. There is noise around companies going public or private, and there are incentives in the market—we're participating with incentives as well—but nothing structurally different that I'd call out. We continue to show up well with strong products, service, distribution, and ecosystem partners like accountants, brokers and system integrators. So while it's competitive, it's the kind of competition ADP is well positioned to win.

Just one for me. The commentary on ADP Assist was great to hear, but more broadly now that you've had some of these products and AI features in the market for some time, what is the overall feedback that you've been hearing from clients regarding these products? And is there anything more on the AI front from a product perspective that clients are looking for?

I'll start. The feedback has been incredibly positive. Clients are seeing the impact of changed workflows, improved efficiency and time savings, and that's reflected in our client satisfaction and retention scores and now in our efficiency and financial results. We've organized quickly over the past few years to infuse AI across product, go-to-market and service. Clients often return to these tools and continue to expand usage—Smart Actions and Smart Search are examples that get repeat engagement. Internally, we've seen deployments of these tools drive efficiency in servicing our small business clients and Wisely. We view AI as embedded in the fabric of how we operate and deliver products. Regarding pricing, Peter mentioned our value-based approach—it's not primarily about per-use fees for these agents. We think about the value created and how to capture that appropriately, whether through general pricing, specific pricing, revenue-share structures or other mechanics. Ultimately, we want to share the value with clients but also monetize appropriately for mutual benefit. We will continue to innovate and deploy more ADP Assist capabilities over time.

There's still a lot of debate in the market about how AI could impact seat-based revenue models. ADP has said in the past a 1% change in pays-per-control impacts Employer Services revenue by about 25 basis points. So can we infer from that that only about 25% of the Employer Services business, excluding float, is priced on a per-employee-per-month basis? Or is there more nuance to it? And on the PEO side, revenues are more tied to client headcount—can you clarify all that with some numbers? That would be helpful.

Thanks for the question, Jason. There's more nuance. In Employer Services, a large proportion of our revenue is base fees—around 80% of our revenue in the down market is base fee. We also have other revenue models: Retirement Services and Insurance Services are more commission or asset-based models, and there are implementation and project services. In the mid-market and upmarket, we're more seat-based, but we take a value-based pricing approach—value isn't always linear with employee count. Regarding exposure to seat-based pricing, it's indirect: we do have a lot of base-fee revenue, but the mix varies by segment. For the PEO, the predominant billing model is percentage of payroll, so number of employees, wage levels and payroll growth all affect revenue. The PEO model is less directly exposed to a simple seat-based per-employee billing mechanism than some parts of Employer Services.

Okay. That's good color. I wanted to come back on bookings: you reiterated the guide here, and it feels like the tone qualitatively all year has been consistently positive. Wanted to get your take on relative confidence in the lower end versus the higher end of the 4% to 7% range. I know it can come down to the wire in the last quarter—how are you feeling with two months to go?

If I had to be more precise, I would say all of those outcomes are on the table. We feel good about pipelines, incentives, sellers, the ecosystem and the product backdrop. The HCM demand backdrop seems stable. We're executing at the ready and are excited about finishing the fiscal year strong.

Congratulations on solid results today. The PEO segment margins came in a little below our model, and you mentioned a few drivers, including higher selling expenses. What does that mean exactly in this context? Is it concessions to new clients or higher incentives for your sales staff? Just trying to figure out what that is and what it implies.

Thanks, Ramsey. There were three main impacts on PEO margins this quarter. First, selling expenses were higher because we had a very strong quarter in PEO sales; selling costs are variable, so stronger sales drove higher selling expense. Second, SUI revenues came in stronger than expected—which is good for revenue growth—but SUI comes at a lower margin. Third, we had less positive reserve releases in workers' comp indemnity than the same time last year, which created a margin drag compared with last year. So the combination of higher variable selling expenses due to strong sales, the SUI mix and the relative worker's comp reserve dynamics drove the PEO margin outcome this quarter.

Got it. I have a follow-up: international has been a bright spot in the business for quite some time. Is there a way to accelerate that strategy—something like M&A? Could you press the gas pedal on international to bolster further?

Great question. It's certainly something we look at. We do quite a bit of smaller M&A and have acquired a number of our partners in our local networks over the years, including recent acquisitions in Mexico and the Nordics. We also gained capabilities through Workforce Software, which has global time offerings with presence in places like Canada, the U.K., and Australia. Is there more opportunity for M&A? Yes. It's about finding the right strategic fit and accretive opportunities. We have teams studying the market and contacts with many companies. As and when we find an attractive target that fits our model and adds value, ADP will pursue it, but we have nothing to announce today.

Maybe a two-parter on ADP Assist. First, have you made any comments about uptake, repeat usage or engagement levels with the customers that have access to it? Second, you commented the payroll agent saves a lot of time and Smart Actions saves a lot of time. As you roll more of these out, how do you view sharing some of the value from the time savings that these agents are providing? Maybe this ties to Peter's pricing comments—any comments would be helpful.

We're really excited about the progress across the ADP Assist portfolio. We are seeing uptake and repeat engagement—clients typically adopt these tools and continue to iterate and expand usage. Tools like Smart Actions and Smart Search show repeat engagement as clients return and continue to use them. The value shows up in retention, bookings and efficiency. Internally, deploying these tools has reduced client contact volumes and improved productivity in our service teams. Regarding sharing the value, we think about it in value-based terms rather than per-use micropricing. We look at where value is created and how it should be allocated between ADP and clients—through pricing, revenue-sharing or other mechanics. The goal is to capture appropriate value while continuing to deliver significant client benefit. So we see ADP Assist as core to the fabric of our offerings rather than a standalone per-use product, and we will continue to evolve our approach to monetization consistent with the value created.

To add: in everything we do in this area, we're looking at where the value is and the appropriate allocation. That could be specific pricing, a general pricing base, revenue share models, or bottom-line efficiency gains. We feel strongly about capturing the value we're creating through pricing and other mechanics for mutual benefit, and the efficiency savings will also flow to our EBIT and fuel further investment in this area.

And then just as a follow-up: on the Marketplace, philosophically, can you give us an update on partner versus build-it-yourself for these third-party agents? Ultimately, are you ambivalent whether a customer uses your built agents or third-party agents, or how should we think about that evolving?

Great question. We're not ambivalent; it's about putting the client first and giving them choice. The ADP Marketplace is the largest HCM marketplace, with over 800 integrated solutions globally. We expand that footprint to meet client needs—clients often have systems they want to connect, and the Marketplace enables that. For AI agents, we launched a dedicated space inside Marketplace with partners' agents that are aligned to ADP's principles for secure, ethical data use and responsible AI. So we offer both our own built agents and vetted third-party agent options. The priority is to deliver secure, responsible, client-centric solutions that meet the needs of HR teams across the employee life cycle.

Thanks, Michelle, and thank you, everyone, again, for your interest and for joining us. As you probably heard throughout the call today, I believe deeply in the world of work—I believe in everything that it represents, all the human connection and what work means to people. I also believe this is a defining moment for our industry and for human capital management. Leaders need to lead at this time and lead in this world of work, and that's exactly what ADP is doing. That is how we show up today for our clients and stakeholders with our results. I'll end where I ended the prepared remarks: every single result, every award, every client is an extension of us and our culture; every innovation we bring to market starts with our ADP colleagues and associates. I couldn't be more proud and grateful to represent ADP today. So thanks for your time.

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