Don McGuire
Chief Financial Officer at Automatic Data Processing
Thank you, Carlos. And to everyone on the call, good morning and nice to meet you.
Our first quarter represented a strong start to the year with 10% revenue growth on both a reported and organic constant currency basis. Our adjusted EBIT margin was up 140 basis points, much better than expected, and was supported by higher revenue and overall cost containment. Our tax rate was up slightly in the quarter versus last year, but we also benefited from the elevated pace of share repurchases following our debt issuance in May. Combined, those factors contributed to a 17% increase in our adjusted diluted earnings per share.
Moving on to the segments. Our Employer Services revenue increased 8% on a reported and organic constant currency basis. Our strong Q1 ES bookings performance and record retention contributed to this performance, though, as a reminder, we did continue to lap some of the lower revenues we had last year in some of our volume-related businesses, including recruiting and background screening. Our clients funding interest represented only a slight headwind in the quarter as our 40 basis point decline in average yield was offset by fantastic balanced growth of 22%, driven by client growth, employment growth, higher wages and the lapping of the payroll tax deferral last year. ES margin increased 150 basis points on strong revenue performance and overall cost containment.
As Carlos mentioned, our PEO had another terrific quarter. Average worksite employees increased 15% year-over-year to 629,000 and revenues excluding zero-margin pass-throughs grew 20%, supported once again by favorable mix trends within the PEO employee base, as well as improving SUI rates. Total PEO revenue grew 15%, which included a modest drag from lower zero-margin pass-through growth and worksite employee growth, as expected. PEO margin was up 70 basis points in the quarter, driven by operating leverage.
Overall, our Q1 results reflect a very strong start to the year and delivered ahead of our expectations on practically all fronts.
Let me now turn to our updated outlook for fiscal 2022. For ES revenues, we now expect growth of 5% to 6%, which we're raising 50 basis points at the midpoint. This is driven by several underlying factors. We're raising our expected range of ES new bookings growth to 12% to 16%. As we mentioned, we had a better than expected performance in Q1 and reached pre-pandemic productivity earlier than we had forecasted. We haven't made significant changes to our rest of year outlook at this point, but if momentum remains as strong as we've seen it, then we may see opportunity to deliver additional upside.
We are also raising our ES retention and we are now assuming a decline of 50 basis points off of FY '21s all-time highs versus our prior outlook of a decline of 75 basis points. As with bookings, this is primarily a function of the strong Q1 performance. Our continued assumption is that as clients continue to reengage in the marketplace, we may experience a slight decline over the course of the year. We expect to have significantly more clarity once we get through the calendar year end period where we typically see most of the switching activity. For U.S. pays-per-control, we're making no change to our outlook of 4% to 5% growth. We continue to expect a gradual recovery in the overall labor market, and the 7% growth in Q1 was about in line with our expectations.
And then for our client funds interest revenue, we're raising our outlook by about $15 million to a range of $420 million to $430 million as we're raising our balance growth assumptions by about 4% to growth of 12% to 14%. Our outlook for client funds yield, meanwhile, is unchanged despite the improvement in the yield environment, primarily as our stronger balance performance actually created a temporary mix shift to overnight investments until new securities are gradually purchased. But that said, the favorable shift in the yield curve is clearly helpful to us and will certainly benefit our multi-year client funds outlook, all else equal.
For ES margin, we now expect an increase of about 75 to 100 basis points, up from our prior range of 50 to 75 basis points. While we did outperform meaningfully on margin in Q1, we are also seeing some additional expenses over the rest of the year, including higher headcounts in our outsourcing businesses. Meanwhile, we continue to expect transformation initiative benefits, including our digital transformation to offset a year-over-year increase in facilities, T&E expenses and other return-to-office expenses.
Moving on to the PEO. We now expect PEO revenues to grow 11% to 13%; average worksite employees to grow 11% to 13%; and revenues excluding zero-margin pass-throughs to grow 12% to 14%. This 2 percentage point ratings across the board is a function of both our strong Q1 bookings and overall performance, as well as an expectation from stronger hiring within our PEO base to contribute over the remainder of the year. Our PEO is very well-positioned to capitalize on growing levels of client demand coming out of the pandemic. And if we continue to drive outsized bookings performance over the rest of the year, that could represent further upside to our outlook.
Following our strong start to the year, we now expect a range of flat-to-down 50 basis points for the year for an improvement from our prior expectation of down 25 to 75 basis points on our margin. As a reminder, we are growing over a very strong margin result in fiscal 2021 and are also expecting elevated selling expenses this year from strong bookings performance.
Putting it all together for our consolidated outlook, we now expect revenue to grow 7% to 8%. Following the strong 10% Q1 performance, we now expect the remaining quarters to grow closer to 7%, which is higher than our prior forecast. For adjusted EBIT margin, we now expect an increase of 50 to 75 basis points. As we shared last quarter, we expect our margin improvement to be back half-weighted, most specifically in the fourth quarter. Our current expectation is for a slight margin decline in Q2 and Q3. We're making no change to our tax rate assumption. And with these changes, we now expect growth in adjusted diluted earnings per share of 11% to 13%.
As I think you've heard us say a couple of times now, we are very pleased with our Q1 results and we're happy to be raising our guidance this early in the year. This is still a dynamic environment and there are a wide range of potential outcomes, and we believe our guidance is appropriately balanced, given these conditions. However, should our associates continue to drive better than expected sales results, client satisfaction, efficiency and service implementation, we would see opportunity to deliver additional upside to our outlook.
Before we move to Q&A, I wanted to share two things. First, I look forward to meeting everyone, perhaps virtually for now, but eventually in person as we get back out on the road to meet our shareholders and the investment community. And second is that we are very much looking forward to our upcoming Investor Day in a couple of weeks on November 15. Having run one of our largest businesses for years, I can tell you, there is always much happening here at ADP underground. And although it all tends to roll up to a very stable financial picture, I can tell you, there is really a lot of excitement among our associates for the things they're working on. We hope to share some of that excitement with you in November.
And with that, I'll now turn it back over to the operator for Q&A.