ADP’s Margin Engine Outruns Tepid Employment Gains as Float and Platforms Do the Heavy Lifting

Revenue growth holds at 6% while margin story strengthens

Automatic Data Processing entered the back half of its fiscal year with something investors in mature business-services names prize: steady top-line growth and visibly improving economics.

For the second quarter of fiscal 2026, ADP posted 6% revenue growth, 80 basis points of adjusted EBIT margin expansion and 11% adjusted EPS growth, with all three metrics coming in slightly ahead of internal expectations. Management promptly nudged full-year guidance higher: consolidated revenue growth is now pegged at roughly 6%, and adjusted EPS growth at 9–10%, up from a prior range that topped out at 9%.

Beneath the consolidated numbers, the core Employer Services franchise did much of the heavy lifting. ES revenue grew 6% reported, 5% on an organic constant currency basis, as foreign exchange added about a point of growth. ES margins widened by 50 basis points, supported by operating leverage and the expanding contribution from interest on client funds.

The smaller but strategically important Professional Employer Organization business delivered 6% revenue growth as well, though that headline obscured a softer core. Stripping out zero-margin pass-through items, PEO revenue rose 3%, compared with 6% in the first quarter. Average worksite employee growth moderated to 2%, prompting management to cut its full-year WSE growth outlook to “about 2%.” PEO margins contracted by 70 basis points, pressured by pass-through mix and higher selling expenses.

Even so, ADP kept its full-year PEO revenue guidance intact at 5–7% growth (3–5% ex pass-throughs), signalling that it views the recent deceleration as a matter of cadence rather than structural demand.

Float, pricing and the “other” segment quietly power the P&L

One of the less glamorous but increasingly material engines of ADP’s earnings story sits on its balance sheet. Client funds interest revenue—the yield on customer payroll and tax float—again surprised to the upside. Higher-than-expected average client funds balances allowed management to raise its fiscal 2026 growth forecast for those balances to 4–5%, while maintaining an average yield assumption of about 3.4%.

In dollar terms, ADP lifted its full-year client funds interest revenue outlook by $10 million to a range of $1.31–1.33 billion. The firm also increased the expected net impact from its extended investment strategy by $10 million, to $1.27–1.29 billion.

Those flows show up in a place many investors overlook: the “other” segment. CFO Peter Hadley underscored that corporate extended interest income is growing even as short-term financing costs decline, producing a positive margin contribution at the consolidated level that is only partly visible in the headline segment figures.

On pricing, ADP continues to exercise measured discipline. Hadley reiterated that the company expects roughly 100 basis points of revenue contribution from price in fiscal 2026—slightly below fiscal 2025, but above pre-pandemic norms. Price increases are staggered across the 1.1 million-client base rather than concentrated at a single point in the year, helping to smooth the revenue profile and reduce competitive friction.

Looking ahead to the second half, Hadley stuck to earlier guidance that adjusted EBIT margin expansion would be more back-half weighted, with a larger step-up in the fourth quarter than in the third. Two dynamics shape that cadence: the lap of acquisition-related drag from the Workforce Software deal, and the seasonal pattern of client float.

Calendar first quarter (ADP’s fiscal Q3) is the peak period for overnight balances, thanks to bonus payments and tax resets. This year, however, that seasonal tailwind is offset by a roughly 75 basis point decline in the yield on the short portfolio versus a year earlier, reflecting lower Fed funds. By Q4, that headwind largely falls away, leaving the underlying operating leverage to show through more cleanly.

HCM platforms move upmarket as AI shifts from hype to workflow

If the margin story reassures, it is the technology narrative that offers ADP’s longer-term upside. CEO Maria Black spent much of her prepared remarks framing the quarter as evidence that the company’s years-long investment in next-generation HCM platforms is translating into tangible commercial traction.

In the mid-market, Workforce Now NextGen continues to gain ground. The platform’s “always-on” payroll, embedded generative AI features and faster implementation times are resonating with HR teams that are under pressure to do more with fewer hands. The quarter’s symbolic milestone was the first Workforce Now NextGen deal with a client above 1,000 employees—a Midwest logistics company taking an integrated stack of payroll, HR, benefits administration, time and attendance, and learning.

In the enterprise tier, Lyric—the company’s cloud-native HCM suite—once again exceeded internal new business bookings expectations, with its pipeline expanding at what Black described as a “rapid pace.” Crucially, more than 70% of Lyric’s bookings and overall pipeline now come from new logos rather than migrations, underscoring that ADP is credibly competing for net-new enterprise mandates rather than simply defending its installed base.

Two wins in the quarter, each with more than 20,000 employees, rank among the largest Lyric clients to date. They are unlikely to move near-term revenue, given the long implementation cycles typical in this segment, but they matter for another reason: referenceability. As the roster of global names running Lyric grows, the platform’s perceived risk profile in boardrooms and CHRO offices falls, making the next wave of large deals easier to land.

Lyric’s market credibility was also buttressed by its selection as a winner in the 2026 Big Innovation Awards, presented by Business Intelligence Group, for its “transformative impact” in HCM. Black positioned Lyric as an “AI-centric, human-centric” system built with workers, managers and practitioners at the center, rather than having AI bolted on as an afterthought.

AI itself is shifting from concept to embedded workflow across ADP’s portfolio. The company is rolling out persona-based “ADP Assist” agents in payroll, HR, analytics and tax. One early example Black cited was a tax registration agent that can proactively identify missing or incomplete tax IDs and guide clients end-to-end through registration. Another: an HR agent that can initiate actions like promotions simply from natural-language input, collapsing multi-step workflows into guided prompts.

The unifying claim is that these tools are built atop ADP’s global workforce data platform, blending proprietary labor insights with automation while staying inside the boundaries of security, governance and compliance that payroll clients demand. In a space where generic AI tools abound, that differentiation may prove more than marketing spin.

ADP is also continuing its “embedded” strategy in payments and working capital. In December, it integrated Fiserv’s Cash Flow Central into RUN, its flagship small-business platform. The goal is to turn RUN into a one-stop control panel for owners: payroll, contractor payments, bill pay and invoicing in a single interface, with flows kept in sync. It is early days—Black stressed there is no meaningful revenue yet—but the move shows how ADP is trying to capture more of the financial operations surface area around payroll.

PEO: slower volumes, intact thesis

The PEO story is more nuanced. Sector-wide, growth in worksite employees has been slowing, and ADP is not immune. PEO revenue grew 6% in Q2, but that included the mechanical uplift from zero-margin pass-through items. Underlying revenue growth of 3% and a 2% increase in average worksite employees both came in below the company’s initial expectations.

Hadley attributed the softer performance to three factors. First, PEO new business bookings, while “solid,” were slightly below plan—small deviations matter when WSE growth is measured in tens of basis points. Second, pays-per-control growth in the PEO moderated and converged with Employer Services levels, whereas it typically runs somewhat hotter. Third, there was less wage growth in the PEO book in the quarter, partly due to mix and timing of client changes.

On top of that, the PEO business is lapping a tough compare: last year’s second quarter benefited from a pull-forward of certain state unemployment insurance revenues that had been expected to land in Q3, flattering the base period. Taken together, the combination yields a step-down in the ex pass-through growth rate from 6% in Q1 to 3% in Q2.

Yet neither Black nor Hadley sounded rattled. Roughly half of PEO bookings still come from ADP’s existing client base, where cross-sell economics are attractive and runway remains long, particularly in underpenetrated states. Health-benefits participation within the PEO offering remains “healthy and strong,” suggesting that the core value proposition—access to scale benefits and risk-sharing through co-employment—remains intact even as healthcare costs rise.

The company is leaning into the opportunity with more distribution investment: seller headcount, incentives, and AI-powered tools to surface the right PEO prospects inside the existing base. Management insists it remains “very bullish” on the PEO’s long-term addressable market, even as it guides investors to expect a slower near-term climb in worksite employees.

Employer Services: broad-based bookings and record client satisfaction

If the PEO is navigating some chop, Employer Services looks more like a steady tanker. New business bookings in ES were described as “solid” and “broad-based,” with particular strength in international, US enterprise and compliance solutions. The small-business and mid-market portfolios also contributed, aided by robust take-up in retirement and insurance services—an interesting contrast to some commentary elsewhere in the sector about lower revenue per client.

ADP maintained its guidance for ES new business bookings growth of 4–7% for the full year and lifted its ES revenue growth outlook to about 6%. Behind those numbers sits a labor market that is neither roaring nor collapsing. Pays-per-control growth in ES rounded up to 1% in the quarter, modestly better than Q1 but still roughly flat on a full-year view. Hadley noted that, across industry groups and client-size segments, ADP’s employment data maps fairly cleanly to external indicators: muted hiring, restrained job openings, but low levels of layoffs.

Retention is where the macro leaves more of a mark. Employer Services retention declined modestly year-on-year in Q2, in line with expectations. ADP is still guiding to a 10–30 basis point decline in full-year ES retention relative to last year’s US level of 92.1%, largely on the assumption that out-of-business rates in the small business segment continue to normalize back toward pre-pandemic levels.

What stands out, however, is how strongly client sentiment is running in the other direction. Black described the quarter’s client satisfaction results as the best in ADP’s history, with record scores across the first half and broad-based NPS improvement. Those gains reflect not just product enhancements but also internal AI tooling aimed at making ADP’s own service associates more effective. In the long run, the management team sees this service and satisfaction edge as the primary bulwark for retention once macro-driven churn stabilizes.

International and scale: global payroll as a differentiator

ADP’s third strategic pillar, global scale, received unusual emphasis on this call. The company now serves more than 70,000 clients outside the US and pays over 16 million workers across more than 140 countries. Those figures are not new, but the tone was: international is no longer just an adjacency; it is presented as a core growth platform.

The marquee win in the quarter was a large European bank with more than 75,000 employees, a deal Black highlighted both for its size and for what enabled it. The contract was secured by pairing ADP’s existing global payroll platform with the newly launched ADP Workforce Suite—an integrated workforce management solution built around the October 2024 acquisition of Workforce Software.

That integrated proposition—global time, global pay, global HR and global service, all underpinned by in-country teams—is a differentiator against both local payroll vendors and narrower SaaS competitors. Hadley acknowledged that the international business runs at somewhat lower margins than domestic operations, as does US enterprise relative to down-market segments. But he argued that very high retention rates in international markets make the lifetime value of an international client comparable to that of a US customer.

Recognition is following the investment. ADP recently picked up two gold awards in HRM Asia’s 2025 Reader’s Choice Awards for best HR tech outsourcing and payroll solution. It also extended its multi-decade run on Fortune’s list of the world’s most admired companies, marking its twentieth appearance in 2026—a reputational asset that still carries weight in risk-averse boardrooms contemplating multi-country payroll changeovers.

Capital allocation: buybacks and dividends underscore confidence

The earnings beat and guidance raise came packaged with a familiar capital allocation message. Earlier this month, ADP’s board approved a new $6 billion share repurchase authorization, replacing the remaining capacity under a $5 billion 2022 program. Combined with a recent 10% dividend increase, the move signals that the company sees durable free cash flow and limited need to stockpile capital.

Hadley reiterated that returning excess cash to shareholders remains a “key pillar” of ADP’s strategy, alongside organic investment and selective M&A such as the Workforce Software deal. The company continues to expect an effective tax rate of around 23% for the year, keeping the tax line a relatively stable backdrop to earnings progression.

For investors, the messaging is clear. The secular debates around AI, employment levels and the future of white-collar work will continue. But ADP is positioning itself less as a casualty of automation and more as its operating system: a provider of the rails on which global payroll, compliance and HR processes run, and increasingly, the AI agents that navigate them.

With revenue growth locked in the mid-single digits, margins grinding higher, and a balance sheet that throws off rising float income, the company’s story at mid-year is less about drama than about compounding. In markets that have lately punished volatility and rewarded predictability, that may be exactly what its shareholders want.