# How ADP makes money

CXProWealth Business Lens · ADP (ADP) · Q1 FY2027

Read from the 10-Q for the period 2026-07-01 to 2026-09-30, filed 2026-10-30 with the SEC (accession 0000008670-26-000044): https://www.sec.gov/Archives/edgar/data/8670/000000867026000044/

Business Lens explains how a company earns, spends and keeps its money, from its own filings. It is insight and context, never a view on the shares, a target, or advice. Figures are raw units as filed; percentages are percentage points.

## Headline figures

- Revenue: $5.5B (+6.1% on the year)
- Operating income: — (operating margin —)
- Net income: $1.1B (net margin 20.5%)
- Gross margin: 46.0%
- Free cash flow: —
- Cash conversion (operating cash flow / net income): 0.58x
- Capital expenditure: — of revenue

## Where the money goes (Q1 FY2027)

- HCM → Revenues: $2.3B
- HRO, excluding PEO zero-margin benefits pass-throughs → Revenues: $953.1M
- PEO zero-margin benefits pass-throughs → Revenues: $1.2B
- Global → Revenues: $724.3M
- Interest on funds held for clients → Revenues: $329.3M
- Revenues → Total expenses: $4.2B
- Total expenses → Selling, general, and administrative expenses: $1.1B
- Total expenses → Total costs of revenues: $3.0B
- Total expenses → Interest expense: $148.1M
- Revenues → Earnings before income taxes: $1.3B
- Other (income)/expense, net → Earnings before income taxes: $140.3M
- Earnings before income taxes → Provision for income taxes: $329.7M
- Earnings before income taxes → Net earnings: $1.1B

## Where the revenue comes from

### Products and services (Revenue - Schedule of Disaggregation of Revenue (Details))

| Member | Value | Share |
|---|---:|---:|
| HCM | $2.3B | 41.1% |
| PEO zero-margin benefits pass-throughs | $1.2B | 22.4% |
| HRO, excluding PEO zero-margin benefits pass-throughs | $953.1M | 17.4% |
| Global | $724.3M | 13.2% |
| Interest on funds held for clients | $329.3M | 6.0% |

The members sum to total revenue.

### Segments (Revenue - Schedule of Disaggregation of Revenue (Details))

| Member | Value | Share |
|---|---:|---:|
| Employer Services | $3.7B | 67.1% |
| PEO | $1.8B | 32.9% |

The members sum to total revenue.

### ConsolidationItems (Revenue - Schedule of Disaggregation of Revenue (Details))

| Member | Value | Share |
|---|---:|---:|
| Operating Segments | $5.5B | 100.1% |
| Intercompany eliminations | -$2.8M | -0.1% |

The members sum to total revenue.

## Income statement, as filed

| Line | Q1 FY2027 | Of revenue |
|---|---:|---:|
| Revenues | $5.5B | 100% |
|   Revenues, other than interest on funds held for clients and PEO revenues | $3.4B | 61.1% |
|   Interest on funds held for clients | $329.3M | 6.0% |
|   PEO revenues | $1.8B | 32.9% |
| Operating expenses | $2.6B | 47.1% |
| Research and development | $251.3M | 4.6% |
| Depreciation and amortization | $129.0M | 2.3% |
| **Total costs of revenues** | $3.0B | 54.0% |
| Selling, general, and administrative expenses | $1.1B | 19.4% |
| Interest expense | $148.1M | 2.7% |
| **Total expenses** | $4.2B | 76.1% |
| Other (income)/expense, net | ($140.3M) | 2.6% |
| **Earnings before income taxes** | $1.5B | 26.5% |
| Provision for income taxes | $329.7M | 6.0% |
| **Net earnings** | $1.1B | 20.5% |
| BASIC EARNINGS PER SHARE (in dollars per share) | $3 | 0.0% |
| DILUTED EARNINGS PER SHARE (in dollars per share) | $3 | 0.0% |
| Basic weighted average shares outstanding (in shares) | 396,500,000 |  |
| Diluted weighted average shares outstanding (in shares) | 397,600,000 |  |

## History

| Period | Revenue | Operating income | Net income | Operating cash flow | Capital expenditure | Free cash flow |
|---|---:|---:|---:|---:|---:|---:|
| FY2008 | $8.7B | — | $1.2B | $1.8B | — | — |
| FY2009 | $8.8B | — | $1.3B | $1.6B | — | — |
| FY2010 | $8.9B | — | $1.2B | $1.7B | — | — |
| FY2011 | $9.8B | — | $1.3B | $1.7B | — | — |
| FY2012 | $10.6B | — | $1.4B | $1.9B | — | — |
| FY2013 | $9.4B | — | $1.4B | $1.6B | — | — |
| FY2014 | $10.2B | — | $1.5B | $1.8B | — | — |
| FY2015 | $10.9B | — | $1.5B | $2.0B | — | — |
| FY2016 | $11.7B | — | $1.5B | $1.9B | — | — |
| FY2017 | $12.4B | — | $1.8B | $2.1B | — | — |
| FY2018 | $13.3B | — | $1.9B | $2.5B | — | — |
| FY2019 | $14.1B | — | $2.3B | $2.7B | — | — |
| FY2020 | $14.6B | — | $2.5B | $3.0B | — | — |
| FY2021 | $15.0B | — | $2.6B | $3.1B | — | — |
| FY2022 | $16.5B | — | $2.9B | $3.1B | — | — |
| FY2023 | $18.0B | — | $3.4B | $4.2B | — | — |
| FY2024 | $19.2B | — | $3.8B | $4.2B | — | — |
| FY2025 | $20.6B | — | $4.1B | $4.9B | — | — |
| FY2026 | $21.9B | — | $4.4B | $5.4B | — | — |

Latest trend (the newest full year against the year before; a reading, not a forecast):

- Revenue: +6.7% (year before +7.1%): steady
- Operating income: — (year before —): too short a history to read
- Net income: +8.2% (year before +8.7%): steady
- Free cash flow: — (year before —): too short a history to read

## Operating figures stated in the filing

- U.S. pays per control growth, year over year: 2.0% (as of 2026-09-30). "an increase in our pays per control when measured on a same-store-sales basis of 2%" (Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations)
- PEO average worksite employees growth, year over year: 2.0% (as of 2026-09-30). "PEO average worksite employees increased 2% for the three months ended September 30, 2026, as compared to the three months ended September 30, 2025." (Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations)
- ADP Assist clients added in the quarter (more than): 100,000 clients (as of 2026-09-30). "adding more than 100,000 clients during the quarter" (Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations)
- Average client funds balance: $36.9B (as of 2026-09-30). "an increase in our average client funds balances of 5.7% to $36.9 billion" (Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations)
- Average client funds balance growth, year over year: 5.7% (as of 2026-09-30). "an increase in our average client funds balances of 5.7% to $36.9 billion" (Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations)
- Average interest rate earned on client funds: 3.6% (as of 2026-09-30). "coupled with an increase in our average interest rate earned to 3.6% for the three months ended September 30, 2026, as compared to 3.3% for the three months ended September 30, 2025" (Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations)
- Average interest rate earned on client funds: 3.3% (as of 2025-09-30). "coupled with an increase in our average interest rate earned to 3.6% for the three months ended September 30, 2026, as compared to 3.3% for the three months ended September 30, 2025" (Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations)

## Key insights

### Interest on client float equals 22.6% of pre-tax earnings

Interest on client funds, $329.3M, is 6.0% of revenue but equals 22.6% of pre-tax earnings, and it grew fastest of any line, 14.8%.

Interest on funds held for clients rose to $329.3M from $286.8M, up 14.8%, against total revenue growth of 6.1%. The filing gives two causes: average client funds balances up 5.7% to $36.9B, and the average rate earned up to 3.6% from 3.3%. The line gained 0.46 points of revenue share, to 6.0%. _(from the filing)_
Set against pre-tax earnings of $1.45B, the line equals 22.6%, up from 21.9% a year earlier, when it was $286.8M against $1.31B. ADP's own cash adds more: other income, mostly interest on corporate funds, was $140.3M against $110.1M, equal to 9.6% of pre-tax earnings. _(from the filing)_
Analysis: this compares a revenue line with a profit line, so it is not the share of profit the float earns; the borrowing and running costs behind it are not split out here. The point is sensitivity. A line this small in sales terms moves pre-tax earnings far more than its share of revenue suggests. _(analysis)_

### 22.4% of revenue is benefits passed through at cost

PEO benefits pass-throughs, $1.23B, grew 8.6% against 2% more worksite employees, lifting reported revenue growth while the fee lines grew 4.6% to 4.9%.

In the PEO, ADP is co-employer of a client's staff. Wages and payroll taxes are netted out of revenue, but the benefits bought for worksite employees are not: $1.23B of the $1.81B in PEO revenues, or 68.1%, are zero-margin benefits pass-throughs. They are 22.4% of total revenue, up 0.52 points. _(from the filing)_
Pass-throughs grew 8.6% while HCM grew 4.6%, HRO excluding pass-throughs 4.6% and Global 4.9%, each losing revenue share. The filing names increased zero-margin pass-through costs as the offset to this quarter's pre-tax margin gain, and credits PEO revenue growth to the pass-throughs and a 2% rise in average worksite employees. _(from the filing)_
Analysis: because these dollars carry no margin, revenue growth of 6.1% overstates how fast the fee business grew, and margins computed on total revenue understate the margin on the services ADP charges for. Pass-throughs growing faster than covered workers points to rising benefit costs per worker, an inference from the two figures rather than a cause the filing states. _(analysis)_

### Pre-tax earnings grew 11.3% on 6.1% revenue growth

Costs of revenues grew 4.55% and research spending was flat, so pre-tax earnings rose to 26.5% of revenue from 25.3%.

Total costs of revenues grew 4.55% to $2.97B and fell 0.8 points to 54.0% of revenue. The filing credits "operating efficiencies for costs of servicing and implementing our clients on growing revenue". Selling, general and administrative expenses grew 5.61%, which the filing ties to investments in its sales organization. _(from the filing)_
Research and development was $251.3M against $251.2M, 4.6% of revenue against 4.9%. The filing attributes the flat line to more capitalizable spend on internally developed software, while depreciation and amortization rose to $129.0M from $123.3M, partly from amortizing that software. _(from the filing)_
Not all of the gain is operating. The filing also names higher interest on corporate funds and client funds interest among the reasons pre-tax margin rose. Fewer shares added a further step: diluted shares fell to 397.6M from 406.5M, and diluted EPS rose to $2.83 from $2.49, on net earnings of $1.13B against $1.01B. _(from the filing)_
Analysis: capitalizing software moves cost from today's research line to later amortization, so part of the flat research figure is timing. Read research and amortization together for a cleaner view of what product development costs. _(analysis)_

### First-quarter operating cash was 57.9% of net earnings

Operating cash of $651.0M against $1.13B of net earnings is seasonal: the prior first quarter was 63.4%, and FY2026 closed at 123.3%.

Net cash from operating activities was $651.0M, against $642.3M a year earlier, while net earnings rose to $1.13B from $1.01B. The filing attributes the gap to growth offset by "a net unfavorable change in the components of operating assets and liabilities primarily due to timing of collections and payments". _(from the filing)_
Over full years the relationship reverses. Operating cash flow was $5.44B against net earnings of $4.41B in FY2026, or 123.3%, and $4.94B against net earnings of $4.08B in FY2025, again more cash than earnings. _(from the filing)_
Analysis: cash trailing earnings in the first fiscal quarter is ADP's normal pattern, so this quarter's ratio says little on its own. The test is the full year: a fiscal year in which operating cash flow fell short of net earnings would be the change worth understanding. Quarterly free cash flow is not available here, because the filing reports cash flow year to date. _(analysis)_

### Competitive edge

- **Scale of client funds turns payroll timing into income** ADP held an average $36.9B of client funds, up 5.7%, invested on a maturity ladder the filing says lets it average through rate cycles.
- **Net margin widened from 16.2% to 20.1% since FY2019** Revenue rose to $21.95B in FY2026 from $14.11B in FY2019, while net earnings nearly doubled to $4.41B from $2.29B.
- **ADP Assist added more than 100,000 clients in a quarter** The filing says its generative AI assistant, built on ADP's payroll data, became more deeply embedded in client workflows, adding more than 100,000 clients.

### What to watch

- **Falling rates would reach profit faster than sales** Float interest is 6.0% of revenue but equals 22.6% of pre-tax earnings, so the 3.6% rate earned matters more than the revenue mix suggests.
- **Slower hiring would cut fees and float together** Pays per control and worksite employees each grew 2%; fees and client fund balances both depend on the same payrolls, so job losses would hit twice.
- **PEO benefit costs are rising faster than covered workers** Pass-throughs grew 8.6% against 2% more worksite employees; ADP earns nothing on them, but small-business clients pay the whole rising bill.

## Investor view

**Interest on clients' payroll cash grew 14.8%, the fastest-growing revenue line in ADP's quarter**

### How it makes money

Most of ADP's revenue is recurring fees for running payroll, HR and benefits administration for employers. In the quarter, HCM brought in $2.26B, 41.1% of revenue, HRO excluding PEO pass-throughs $953.1M and Global $724.3M. The filing says these services are invoiced "monthly either as services are provided or in arrears", so revenue follows how many clients ADP serves and how many employees each one pays. _(from the filing)_
In the PEO, ADP becomes co-employer of a client's staff. That business produced $1.81B of revenue. The wages and payroll taxes it processes are netted out, but the benefits it buys for worksite employees are not: $1.23B of PEO revenue, or 68.1%, is "zero-margin benefits pass-throughs", money that passes through at cost. The PEO earns its profit on the remainder. _(from the filing)_
ADP also earns on money it holds. Clients fund payroll and tax payments before they are paid out, and the company invests the balance in a ladder of maturities designed to "average our way through an interest rate cycle". Average client funds of $36.9B earned 3.6%, producing $329.3M of interest on funds held for clients: 6.0% of revenue, and equal to 22.6% of pre-tax earnings. _(from the filing)_
Costs of revenues took 54.0% of revenue, leaving a gross margin of 46.0%. Selling, general and administrative expenses took 19.36% and research and development 4.6%. The company's own cash earns too: other income, mostly interest on corporate funds, added $140.3M on top of the operating lines. _(from the filing)_

### What shifted

Revenue growth was uneven across the lines. Interest on funds held for clients grew 14.8% to $329.3M, from $286.8M, and gained 0.46 points of revenue share. The filing gives two causes: average client funds balances up 5.7% to $36.9B, and the average rate earned up to 3.6% from 3.3%. _(from the filing)_
The fee lines grew more slowly than total revenue: HCM 4.6%, HRO excluding pass-throughs 4.6%, Global 4.9%. Each lost share of revenue, HCM by 0.58 points. The filing credits new business bookings, client retention, pricing, and pays per control, which rose 2% on a same-store basis. _(from the filing)_
PEO zero-margin benefits pass-throughs grew 8.6% to $1.23B, faster than the 2% rise in average worksite employees, and gained 0.52 points of revenue share. Because these dollars carry no margin, their growth lifts revenue without lifting earnings, and the filing names them as the offset to this quarter's margin gain. _(from the filing)_
Costs grew slower than revenue. Total costs of revenues fell 0.8 points to 54.0% of revenue. Research and development was flat at $251.3M against $251.2M, which the filing attributes to "an increase in the capitalizable spend related to internally developed software", while depreciation and amortization rose to $129.0M from $123.3M. Selling, general and administrative expenses grew 5.6%, with selling costs up from "investments in our sales organization". _(from the filing)_
Pre-tax earnings rose 11.27% to $1.45B, and their share of revenue rose 1.23 points to 26.5%. The filing names "operating efficiencies for costs of servicing and implementing our clients on growing revenue", higher interest on corporate funds and client funds interest. Diluted shares fell to 397.6M from 406.5M, so diluted EPS rose to $2.83 from $2.49. _(from the filing)_

### Risks in the filing

The quarterly report says its risk factors have not changed materially since the annual report. The factors it lists start with the core business: obtaining and retaining clients, selling more services to them, the pricing of its products, the success of new solutions, competitive conditions, and its ability to respond to changes in technology, "including artificial intelligence". _(from the filing)_
Client money carries its own risks. The company names liquidity risk, including having to sell securities in time to meet client obligations, and warns that reduced financing in periods of economic turmoil "may limit our ability to access short-term debt markets". It also states: "When we don't impound client funds in advance of paying such client obligations, we are at risk of not recovering such funds or material delay in such recovery." _(from the filing)_
Interest rates, the credit quality of its investments, foreign currency and the company's own credit ratings, which set its funding costs, are named as market risks. So are security or cyber breaches, including those enabled by artificial intelligence, fraudulent acts, system interruptions and failures, and changes in legislation or regulation or in how they are interpreted. _(from the filing)_
Employment and wage levels and the availability of skilled associates are listed, along with economic and political conditions, inflation, acquisitions, natural disasters and supply-chain disruptions. In the PEO, ADP also carries workers' compensation exposure, which it reinsures and estimates using "historical loss experience and actuarial judgment". _(from the filing)_
Two of these risks are already visible in the numbers. Interest rates matter more than the revenue mix suggests: float interest is a small slice of revenue but a much larger slice of pre-tax earnings, so a rate decline would reach profit faster than it reaches sales. And employment matters twice, through per-employee fees and through the size of client balances. _(analysis)_

## Founder view: mechanisms

### Payroll float earns interest

Employers send ADP the money for wages and taxes before it is due to employees and tax authorities. In the gap, ADP holds that money in a trust and invests it in a ladder of high-grade securities. The client pays a fee for payroll; the float income is a second revenue stream on top, earned from the timing of the service rather than from the service itself. _(analysis)_

### Fees ride client headcount

Much of ADP's pricing scales with the number of employees a client pays. When clients hire, revenue grows without a new sale; when they cut staff, it shrinks without a lost client. The base moves with the labour market, and bookings, retention and price increases stack on top of it. _(analysis)_

### Co-employment with pass-through benefits

In the PEO, ADP becomes co-employer of a small business's staff, so those workers join ADP's large benefits and workers' compensation pools. The client gets big-company benefits and HR support; ADP charges for the service. The benefits cost passes through at zero margin but is still recorded as revenue, which makes the PEO look larger and thinner than its earning engine is. _(analysis)_

### Costs grow slower than revenue

Payroll is the same job every pay period, so once a client is implemented, serving it again costs far less than winning it. As the recurring base grows, servicing and implementation get cheaper per client, which the filing credits for this quarter's margin gain, and software built once is spread across more clients. _(analysis)_

## Member research

Signed-in members read, on the page: what ADP's numbers depend on from here, and the playbook behind each mechanism (what needs scale, what transfers, how to test it, the metric that would show it).

## Sources

- ADP 10-Q for the period to 2026-09-30: https://www.sec.gov/Archives/edgar/data/8670/000000867026000044/ (2026-10-30)

Methodology business-lens-1.0 · schema 1.2.0 · run business-lens-2026-11-02 · as of 2026-11-02