We're running about eight minutes late right now, so we want to go right into the next one without trying to get back on track as best as we can.
Thank you.
Oh, they put up a chair faster than I expected. So thank you very much to everybody for joining us today here at the Morgan Stanley European Technology, Media & Telecom Conference . Very pleased to have the senior management from ADP, Maria Black, CEO. Nice to see you.
Nice to see you.
Don McGuire , CFO. Maybe I'll start, Maria, and we'll just kick things off really quickly and start at 30,000 feet. ADP, you guys hosted Investor Day back in June. Can you highlight for the audience kind of the key messages from that event?
You bet. And happy to be here. Thank you again for having us. Great to be back in London and great to be back at the Nasdaq Conference. So it seems like a lifetime ago, but it was just June 12th. We had the opportunity to host an Investor Day in Chelsea, New York, at our Innovation Lab. It was a great opportunity for us to showcase the breadth and depth and strength of ADP. So I'll frame it up kind of in three buckets. I think the first thing that we really emphasized is the scale and dependability of exactly who ADP is. So as you know, we are a company. We're 76 years old, very proud of that. We've been through many economic cycles and innovation cycles. Our scale is broad and it is deep.
We serve clients in human capital management from one employee all the way to the likes of companies that are processing a million paychecks on a given pay date and also across the world. So we serve 140 countries. So we've been through a lot as we've navigated the world of work and really set in motion this industry and the scale that that affords, the ability to lean into that in this type of a time and also certainly weather a lot of innovation cycles, economic cycles is certainly a strength of ADP's. So we were highlighting the scale of who we are. We were also highlighting the scale of the market opportunity, $180 billion of TAM that we are chasing.
And with $20 billion or so, which was our reported number last year at the end of the fiscal year, we see a tremendous runway still ahead of us in this incredibly dynamic, shifting world of work. So that was kind of the first piece that we emphasized. I think the second piece was appropriate given we were in our Innovation Lab in Chelsea, New York. We do have labs all across the world that are building our products and innovating and building our next-gen solutions and offers. And so we had a chance to showcase a lot of this, emphasizing certainly the best-in-class platforms we do have across the entire breadth that I just shared in terms of from the very small businesses to the mid-market to the beyond payroll offers of HR outsourcing to ultimately the enterprise space and then the complex global multinational space.
And we have new offers and new platforms in each one of these areas. And we had a chance to share that with our analysts and our investors at our Innovation Lab that actually helped build a lot of this. So I think the vibe of innovation was all around us and we were really proud to share the journey we've been on. Meaningful steps we took last year. We launched ADP Lyric as an offer. We also have expanded the reach of our Workforce Now, Next Gen . And again, these are meaningful steps for us in our innovation journey. I think the last piece I'll comment on, because it's how it all comes together in terms of being able to chase this incredible $180 billion TAM with these best-in-class innovative products. It really comes down to distribution.
So we had a chance to share a lot of the work that we've been doing specifically in the ecosystem of distribution. So again, because we're meeting all sorts of clients across many of these various places and segments, the key is being able to at every single turn have a modern sales force meeting a modern buyer with modern leadership. We make tremendous investments into our distribution that's inclusive of that organization, which is 8,500 sellers that meet our clients, but it's also about the ecosystem around them. We distribute through channels in the down market that looks like CPAs, banks, ecosystems through embedded payroll. In the mid-market, we're meeting clients with brokers and some system integrators that takes us into the enterprise space. All of those things are how we invest into our distribution, inclusive of a best-in-class tech stack.
So we had a chance to showcase the innovative work we've done in what we call The Zone , which is where our seller athletes show up to live in The Zone and execute on the great opportunity that we have at hand in the market that we represent as the leader with these best-in-class products that we've been innovating on for many, many decades. And we're very proud to share all of that. And I could go on and on, but I know we're a bit behind and short for time, so I'll stop there. But it was a tremendous day, one of my highlights as CEO over the last three years.
Yeah, for sure. And I think from the investment community perspective, there was a lot that was definitely eye-opening from that day and some of the things that I want to dig into from that as well as things that have transpired since that time. A few things, and we'll hit on some key ones. But one thing I know that has been top of mind for investors is just from a macro perspective. And ADP is now sharing its latest data on the employment market through its new NER Pulse publication. Can you talk about what you're seeing in the labor market today and maybe what your expectations are? And how concerned are you that AI may be reducing overall employment levels?
Sure. It is the topic du jour. We spent some time in Germany last week, Scotland earlier, as well as obviously been doing a lot of meetings. It seems to be the question of the entire market, not just our investors. So I think it's an appropriate discussion. Maybe perhaps I can start and comment on the work that we are doing with respect to the ADP research and the National Employment Report that we do monthly, coupled now with this new national employment pulse. Maybe Don McGuire, you can talk about what we're seeing inside of our base, because while they're similar in that structurally, the data starting point is from the same information, which is ADP's 42 million wage earners that we pay across the world.
The data is really based upon these 26 million wage earners in the U.S. and the subset in there of 14 million wage earners that we have an ability to track, call it over time, even as they jump around from job to job because we pay one in six wage earners. So that's kind of the foundation and starting point. Don McGuire will speak to what we see in our base. But with respect to the research that we put out to the world of work through the ADP research group in partnership with Stanford Institute, it is about giving the world of work and employers, bankers, the capital markets, the government, the information that we believe belongs to the world in terms of what is happening.
That 26 million wage earners, Stanford Institute kind of takes that and extrapolates that out to represent the broader market to really get this understanding of what's happening. Last week was the week of the monthly report. It did suggest that there was a -32,000 jobs. It's a very complex environment. That's why everyone is asking this question. You really have to double-click, triple-click, look underneath that to see what's happening. What's neat about the monthly report is it does just that. For those of you that are interested, I'd highly encourage you to go on to the site and look. What you'd see is there are some implications in the down market. It seems to be moderating a bit. Small business on the macro side seems to be moderating a bit. Wages are actually holding strong.
I think there was 10 basis points of movement in wage growth. It's still really elevated. You have to kind of look underneath to see sectors and industries. There seems to be some pressure on leisure and hospitality. Again, the question is, is that AI or is that potentially just mean reversion of growth that's happened before? And that is the question. How much of this is potentially disintermediated? Stanford has done some research using some of our data. And I think they've seen some early, early indications of certain age cohorts and potentially certain jobs, things customer service, software development, where there might seem to be some early signs with respect to AI. What I would suggest to you is it's still very much early days.
When we look at across broadly speaking, is it really about AI and call it the disintermediation of roles and jobs, or is it that coupled with other things that are still washing through, such as the mean reversion post the Great Resignation?
The Great Stay .
And I think while that's the macro story that we contribute to, and now we're even producing a National Employment Report Pulse , the NER Pulse weekly. It comes out today so that all of you can follow along in the arc of employment. So if things were to start to broadly change, I think we'd be the first to start seeing it. But as it relates to ADP specifically, our results in our base and the measure that we utilize called Pays Per Control, which is our same store measure. Maybe Don McGuire, you can comment on what we're kind of seeing at ADP.
Yeah, absolutely. Thank you, Maria. Within our base, so our base is the starting point, if you like, as Maria alluded to for the National Employment Report . But there is much extrapolation that our economists and the Stanford economists do on that in order to get to that macro view. What we see in our base, and we've seen this over many years, not a recent phenomenon, is our base tends to be more resilient with respect to maintaining and growing employment levels than what you see in the wider numbers, whether they're from the ADP Research Institute or the BLS or whoever. So what we're seeing at the moment is actually conversely to maybe some of the headlines is sort of multi-year lows in terms of layoffs of workers within our client base. We're also seeing relatively muted but still growing employment.
So we adjusted our guidance to the lower end of our range being about flat, but certainly we're in a position where we're rounding down, if you like, to that zero same store metric type organic employment growth on our clients' books. And you may wonder, okay, why does the base perform a little differently to the macro economy? Because as Maria said, we do have 26 million workers, one in six U.S. paid workers paid by ADP. I think it's due to the particularly, probably in the down market in the small business segment, companies who invest in our solutions, our services, be it payroll, be it time and attendance, HR, workers' comp, medical benefits, retirement planning solutions.
I think, and this is more an anecdotal comment, but I think proved to be more resilient than the line average of companies that may start up, see how they do for three months, six months, nine months, and perhaps either don't continue or adjust their expectations before they make the type of investments that we're talking about. So we do typically see, and I think it's important when you're looking at ADP against the macro data to understand a little bit, I think that bridge. We continue to expect a fairly stable environment in terms of relatively low hiring compared to previous years, also relatively low layoffs, at least for the time being, and as Maria was saying, continued resilient wage growth, which is important for us.
It's a driver of both our client fund interest revenue as well as our PEO revenue, which we bill on a percentage of payroll basis.
Got it. So that's a little bit of the macro commentary. I want to take that to talk for a minute about some of the specific objectives that you've set for the business for this year. And let's start on HCM, Human Capital Management. Can you comment a little bit on the state of demand in HCM across your various business segments? And I'd love to hear what kind of is inspiring the confidence in the ability that you're targeting to deliver on the 4% to 7% ES new bookings growth outlook for this year?
Sure. Happy to comment on demand. So I think broadly speaking, demand feels stable. The pipelines feel healthy. When I speak to pipelines, it does kind of vary with respect to small business all the way to enterprise. And the small business, it's less about pipelines. It's more about activity, number of appointments, the general energy that's happening in the marketplace. And I think that feels largely stable with respect to what we've seen over the last year. It doesn't feel like anything's changed. And certainly in the mid-market and up market, you get into being able to actually watch pipelines. And again, pipelines are healthy. I'd argue that perhaps year on year, they're healthier. I think overall, it feels like a very stable situation on the demand front. So what gives us that confidence to accelerate to 4% to 7% guidance that we have for bookings this year?
Some of it is, broadly speaking, demand feels solid. Pipelines feel healthy. What I would offer to you is we feel really confident in our innovation journey and the products that we have and how they're resonating in the marketplace. I spoke to some of them earlier, these best-in-class platforms. We had an incredible launch of our Lyric product, but we also had the WorkForce Software acquisition last year that's now being married to our Lyric offer. And as we take that reach and extend it into our global space, we have this ability to have global payroll, global time, global HR, and global service. That's unique to ADP. That's a competitive differentiated offer that we feel really confident in.
And so, if you think about all of that, by the way, we haven't even talked about overarching AI as we're infusing AI into each one of these best-in-class offerings. And so we feel great about our product. We feel great about our distribution. I spoke to that already. We have an incredible sales force and ecosystem that is excited to overall execute on this opportunity at hand. And I think last but not least, we did see acceleration in the first quarter. And so I think all of those things kind of married together in a broadly speaking solid environment with healthy pipelines and incredible product offering, the best HCM distribution that exists, and the momentum of seeing some acceleration in the first quarter. I think broadly speaking, we feel very confident in our ability to get to that 4% to 7% target.
Got it. So let's also talk about PEO. It's another area where you're looking for at least a medium-term acceleration. And you've set an objective there of 6% to 8%, which is a little bit above the 5% to 7% you're looking at for fiscal year 2026. Can you talk about why PEO growth, you're expecting it to be a bit slower this year and how you're thinking about accelerating that over the next few years? And I guess, is your PEO experiencing any impact from the continued rapid increase in healthcare costs?
Yeah. Do you want to take the first part? I'm happy to talk about insurance.
Yeah. I think in terms of the current year guide, I mean, I think for the most part, we're well and truly still within the medium-term guide. I think the employment outlook is obviously a little bit more uncertainty over a period of 12 months than our sort of status quo type assumption on our mid-term financial objectives range. But we reported 7% growth in the PEO for the first quarter revenues. I think the employment situation stands up well. The PEO, for those who are not familiar, also is a little bit narrower in terms of industry verticals that we cover in the PEO than what we do in Employer Services . Tends to perform and is performing a little better from a same store employment growth metric perspective than what Employer Services is. So we'll see where the rest of the year takes us.
The PEO is very much a back end of the fiscal year type seasonality to it in terms of both bookings and retention. So I think we have some time to go, but we're feeling good about the revenue profile of the PEO.
In terms of any impact that we see from the healthcare environment, of course, right? It's a tricky time in the United States. It has been for a long time as we navigate health insurance and the implications specifically to the workers, but moreover to the employers as they are the ones that effectuate the offer of healthcare to their employees. We've been for decades now solving this for the target market of the PEO. So those small to medium-sized businesses that are trying to navigate all of this complexity, the PEO is an incredible offer to help them do just that. And through the PEO, the ability to offer the Fortune 500 style of benefits in terms of number of plans, offers, and multi-states and things that are very difficult for a small business to go and get on their own, they're able to get that through a PEO.
The way that we go about that is a bit unique in our industry, specifically as it relates to health insurance. We are in a fully insured environment. So what that means is we will feel all of these things as it relates to the healthcare inflation, as will our clients, but it will all be done in a fully insured model, which is a little bit more guardrailed to the ups and downs of this environment. That's not to suggest that we're immune. I think for us, where it shows up is more impact potentially on bookings and retention than it is necessarily on margin for those that have a different construct. So we feel really solid about the way that we've been executing in kind of these times. They're not new times.
It's been a difficult market in the U.S. for quite some time, but specifically the last two years on the heels of the pandemic as I think everybody made up for lost time with respect to health insurance type of services, and as such, it's been difficult. Healthcare inflation's year on year. Our team has executed very well against that as it relates to both on the booking side and the growth side of things, as well as on the retention side, so we feel these things. I think we feel them indirectly and through the great services that we offer. We help our clients navigate it. And oftentimes, that's inclusive of guiding them toward a place where whatever this increase may be can be consumed and affordable to that employer.
Got it. So those were a couple of areas where we've had investors express questions just like, "Hey, what's behind the expectation for driving acceleration?" On the other hand, I want to touch on retention because this is an area we've continually outperformed. There had been some expectation for normalization post-COVID. But to the extent we don't see an uptick in SMB bankruptcies, which has kind of been the underlying assumption, could that retention outlook prove to be conservative again for you?
Yeah. And you use the word again. I think it's an appropriate word. It's proved to be conservative the last couple of years. We've outperformed. I think post-pandemic, we're still not all the way normalized. We're almost normalized to where we were with out-of-business and bankruptcies pre-pandemic, but we're still not all the way normalized, which sometimes you wonder if perhaps the improvements are just structural. And I think that's the magical question. But I think for us, as we think about kind of the outlook, we believe in our retention guide. We did see some moderation in the first quarter, specifically in SMB. We did still outperform our expectations from a retention.
And so our goal is, of course, to continue to lean into all of the things that create retention upticks, which comes back to product innovations, innovations into making it easier for our clients to do business with us. We are laser-focused on their experience. We do the measure of Net Promoter Score. And so we're constantly talking about these record NPS results. We saw another record for a first quarter this past quarter. And the reason that this is so significant is it comes back to making these improvements structural. And so Net Promoter Score is a direct corollary to retention. And so as we think about the outlook, we believe the outlook is prudent. But at the same time, every effort on our end is to continue to structurally make improvements so that ultimately we outperform.
Yeah. I would just, sorry, just to quickly add to that, our third fiscal quarter or the first calendar quarter of the year is sort of the biggest period for switching. So I think we'll see where we get through the next quarter in terms of the guide. But as Maria said, I think we believe in the retention guide at this point.
Got it. And here in the last few minutes to wrap up, I want to go back to kind of where we started in the Investor Day back in June. And in those presentations, it sounded like you'd seen some pretty good adoption of some of your AI features in your products. How are you planning to monetize your AI investments? And when should we anticipate showing AI-driven productivity gains, margin expansion, increased revenue? What should we be tracking as investors?
Yeah. So I'll quickly comment because I know we're up on time here, and I'll let Don McGuire talk about the monetization. We're really pleased. So we're sitting here three or so years after kind of ChatGPT came about and really consumed every discussion and platform and strategic agenda. And so as we've infused AI into our product development, into our products, into our service implementation, into our go-to-market motion, that is what we showcase at Investor Day as we're consuming it in and absorbing it into, candidly, the fabric of who ADP is and everything that we do. And we're really excited about the meaningful impact that we're making in our clients' workflow journeys, into their experience, into our go-to-market motion and productivity, which then begs the most important question, which is, when will the returns come?
I think the returns are already coming. I mean, in terms of monetization, there's sort of two ways to think about it. There is potentially add-on services or increased functionality that could result in an incremental revenue stream or a new line item on the invoice. But I think more predominantly what we're doing, at least what we're working on at the moment, is removing friction from existing elements of the process, things, services that we've been providing to clients for many, many years.
So the way I think about that is more about value-based pricing as opposed to, okay, now we're going to charge a little more because we have a better, more efficient process driven by AI, for example, to help resolve anomalies that come up in payroll processes than the previous sort of tools and services we used to use pre-AI in order to essentially surface the same thing. So there is definitely value creation there because there is less investigative work that the practitioner needs to do in order to solve challenges. How we monetize that, I think we take a long-term view and certainly make sure we don't get out ahead of ourselves and over our skis on price increases.
But to try to price for the value that we are creating helps us retain our clients for longer, gives us the ability to sell more services to them over time. So it's a bit of a two-pronged approach.
Well, that's great. Maria, Don McGuire, thank you so much for joining us today.
Great to be here. Thank you very much.
Thank you, James. Thank you.
Appreciate it.