Operator:

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 Fourth Quarter 2024 Earnings Call. I would like to inform you that this conference is being recorded. After the prepared remarks, we will conduct a question-and-answer session. Instructions will be given at that time. I will now turn the conference over to Matt Keating, Vice President of Investor Relations. Please go ahead.

Maria Black :

Thank you, Matt and good morning. Before we get started, I'd like to take a minute to thank Danyal Hussain for leading Investor Relations for these past several years. He helped lead us through the pandemic and helped Shepherd our CFO and CEO transitions during his time. With Danny moving on to a broader role, it is my pleasure to officially welcome Matt Keating to his first call. Congratulations to you both. We closed out the year with a strong fourth quarter that included 6% revenue growth, 80 basis points of adjusted EBIT margin expansion and 11% adjusted EPS growth. For fiscal 2024, we delivered 7% revenue growth, 70 basis points of adjusted EBIT margin expansion, and 12% adjusted EPS growth, representing another great year for ADP. I'm excited to share the progress we've made across our three strategic priorities, but first I'll start off with some additional highlights from our results. Our sales and marketing team delivered exceptional employer services, new business bookings in Q4, on top of a strong Q4 last year. This performance was broad based, showing continued strength in our small business portfolio, as well as our mid-market enterprise and international businesses. In fact, we sold and started more than 50,000 new small business clients during the quarter, which not only reflects the strength of our run solution, but also our reputation for commitment to strong service. Similarly, in the enterprise space, client interest in our next-gen HCM solution has exceeded expectations and resulted in strong Q4 sales, and we are excited to continue this great momentum. As a result of this exceptional performance, our fiscal 2024 employer services bookings growth came in at 7%, the high end of our 4% to 7% guidance range. This growth speaks to the power of ADP's unmatched distribution model, which remains a clear competitive advantage for us. With our new business pipeline even stronger than this time last year, we look forward to building on that momentum. Overall, our employer services retention came in better than expected for the year at 92%. We drove record level retention in our mid-market business for the second consecutive year in fiscal 2024. I'm also extremely proud to share that our client satisfaction scores for our total business reached new all-time highs for both the fourth quarter and full year. These results are a testament to the strength of our entire product portfolio and our commitment to supporting our clients. We are confident that these client satisfaction gains will support our retention results moving forward. Our employer services pays per control increased 2% both for the quarter and the full year. We were happy to have seen the resilience of the US Labor market, as our clients continued to hire employees at a moderate pace. Finally, our fourth quarter PEO revenue growth of 6% exceeded our expectations despite continued pressure from slowing client hiring activity. Our fiscal 2024 accomplishments extend far beyond our strong financial results. One year ago, I laid the foundation for our three strategic priorities that will guide our future growth. Now, I'd like to recap some of the great progress we made in each of these areas. Our first priority is to lead with best-in-class HCM technology. We had a very busy year on this front as we launched ADP Assist, our cross-platform solution powered by generative AI that transforms client data into actionable insights. This isn't just another technical solution, it's an experience that combines ADP's deep data set and expertise to empower HR professionals, leaders, and employees. We deployed ADP Assist across several of our platforms, including [Roll] (ph), RUN, Workforce Now, and next-gen HCM, with enhanced capabilities ranging from report creation to natural language search to initiating HR actions. These tools streamline daily tasks and are all powered by an easy-to-use search interface that is already receiving meaningful recognition in the field of generative AI. We are very proud to share that ADP Assist earned the Generative AI Innovation Award in the 2024 AI Breakthrough Awards, and we look forward to rolling out even more features in fiscal 2025. In addition to embedding generative AI in our products, we continued to advance our next-gen initiatives. Our active next-gen payroll client count increased by nearly 50% in fiscal 2024, and we grew our number of live next-gen HCM clients by more than 30% as we continued to improve implementation times. Our next priority is to provide unmatched expertise and outsourcing. Our approach to supporting our clients has been key to our winning formula for decades. And in fiscal 2024, we focused our efforts on implementing new technology that will help make an even greater impact for our clients. To further unlock the value of our expertise, we deployed generative AI tools like call summarization and real-time guidance to support our service associates. We also invested in generative AI and other automation capabilities for our implementation teams to reduce manual data entry and minimize the risk of error during implementation. For example, out of the 50,000 new RUN clients we sold and started during the fourth quarter, about half were digitally onboarded compared to a third of our new client onboarding and run this time last year. And as generative AI capabilities advance, we are excited to further accelerate this progress. Finally, we plan to provide additional tools to help our associates deliver better, faster service and allow our client satisfaction scores to continue reaching new record levels. Our third strategic priority is to benefit our clients with our global scale. Globally, we bring together an unmatched footprint, best-in-class integrated solutions, and industry-leading service and expertise to help our clients and their employees navigate the changing world of work. In fiscal 2024, we continued to leverage this global scale to strengthen our business. We extended our global footprint, acquiring the payroll business of our partner in Sweden, expanding the scope of our Celergo payroll offering to include Iceland, and further growing our on-the-ground presence in the APAC region. Our iHCM platform also continued to scale in several European countries and now serves more than 5,000 clients and pays more than 1 million client employees. Finally, we deepened our existing partnerships with several other leading technology providers to further simplify HCM processes and broaden the spectrum of support we can provide our clients. Next, I'd like to share some new client wins from Q4 to highlight how we're leading in workforce innovation and delivering value for our clients. In US Small business, we continue to successfully onboard new retirement services clients across multiple industry verticals. During the quarter, we added the plan of a Texas-based insurance agency, which was challenged by manual processes and the management of multiple providers. ADP's advanced technology and planned [fiduciary] (ph) solutions simplified the client's plan administration, reduced its manual oversight, and lowered its plan fees. The ADP team made the transition easy and stress-free by providing the client with critical management of the transfer process, as well as regular briefings on the plan set up. This is just one of the thousands of new clients who turn to our retirement services solution every year. In fact, we recently took the top spot as the nation's largest 401(k) record keeper by Total Plans and Total 401(k) Plans in the Plan Sponsor Magazine 2024 defined contribution Record Keeping Survey. We serve over 170,000 retirement services clients and it brings me great joy to see how ADP is helping employers address the retirement savings needs of so many Americans. We look forward to continuing the momentum in our retirement services business in fiscal 2025. In our HR outsourcing business, an orthopedic device company who had grown extensively through acquisition recognized it needed a deeper HR and technology infrastructure to support its future growth. So it turned to our comprehensive services support model to integrate its acquired companies onto a common platform. We look forward to supporting this client's current needs and helping it expand in the future. Additionally, comprehensive services cost a major milestone in fiscal 2024, generating more than $1 billion in revenue for the year. This business has come a long way since its launch in 2008, and we look forward to leaning into our outsourcing business as a differentiator. In US Enterprise, we welcomed one of the largest automotive dealers in the Midwest to our next-gen HCM platform. Following several years of rapid growth, this client wanted to reimagine their HCM strategy. To help, our team went on-site and conducted a deep review of its current practices and pain points. We developed a plan that would leverage our next-gen HCM platform, flexible position management structure and other advanced HCM tools to address the organization's current and future HR strategy. Our initial solution included HR, payroll, time, and benefits, and the client later added recruiting and talent management. We look forward to helping shape the future of their workforce together. Overall, we were extremely pleased with our strong financial and strategic outcomes this past year. In fiscal 2024, ADP was recognized as the world's most admired company by Fortune magazine for the 18th consecutive year, and we also celebrated our 30th straight year on the Fortune 500. As some of you may know, 2024 is also our 75th anniversary. As I reflect on ADP's enduring impact on the world of work, the one constant on our journey is our talented associates, be it the recent accolades we received or the 75 years of support for our clients, we owe our recognition and strong financial performance to our 64,000 dedicated associates who deliver the great products and exceptional experiences and continue to drive our client satisfaction scores to new highs. I want to take a moment to recognize them for their incredible contributions. Thank you for all you do for ADP and for our clients. And now I'll turn the call over to Don.

Operator:

Thank you. [Operator Instructions] Our first question comes from Bryan Bergin with TD Cowen. Your line is open.

Maria Black:

Sure, good morning, Bryan. Great to hear from you. I love talking about bookings, especially on the heels of what was truly an exceptional performance by the overall team in the fourth quarter. To answer the first part of the question, it was broad-based. So we did see strength across our growth in small business, mid-market, enterprise, and international. So we are really pleased with the momentum that we see as it relates to the overall receptivity to the offerings, to the product, to the execution, and really proud of how the team moved through the quarter, which led to the exceptional results at 7% for the year. In terms of the demand environment overall and what we see, what I would offer is that the HCM demand environment remains strong. One of the things that's unique about HCM is what we do, it's not a nice to have, it is actually an imperative for a company to run their business. They need to have their associates pay, they need HR tools, and certainly it's not getting any easier. Whether you're in the down-market, mid-market, up-market, to navigate being an employer. And as such, we fit squarely into that. So we feel good about the momentum stepping out of the quarter. We feel good about the demand environment stepping into the quarter. Pipelines from a year-on-year perspective look strong. So we're very optimistic and proud of the performance.

Don McGuire:

Yeah, Bryan, I'll take that one. So as we look at pays per control, we do think that the labor market is still pretty resilient. I mean, there are a number of factors that we look to. And, you know, if you look at the BLS, you look at the unemployment rate, JOLTS Report came in the other day, it was down, but better than expected. Labor force participation still got some room to go, et cetera. So jobless claims are kind of neither here nor there. They're benign. So we think there's still continued good strength in the market. Having said that, we do think that pays per control is going to moderate. And we have said we're thinking 1% to 2%, as we go forward into 2025. I would say that we do expect that the pays per control growth in the PEO will be lower than it is in ES, but we are still optimistic that there's growth to be had, but certainly we expect ES to be somewhat stronger than we expect PEO.

Operator:

Thank you. Our next question comes from Dan Dolev with Mizuho. Your line is open.

Don McGuire:

Yeah Dan. So you know just to follow up on that I would say that you could will unemployment remain as low as it has been? I think there's no indication that it's going to worsen. It's still at, you know, decade lows or comparable to decade lows. There is good strength, there seems to be good strength across the broader spectrum of new jobs. So the NER report came out earlier today and we're [continuing] (ph) to see new jobs. So I think that we put out there a PPC growth number that's realistic. What could change that? We could imagine all kinds of macro issues, but I prefer not to do any imagining. I think we're trying to do what we can based on what we know today. So I think that what we have today is pretty good. But as I mentioned earlier to Bryan's question, we certainly recognize that ES is likely to be stronger than PEO.

Dan Dolev:

Great results, Thank you.

Operator:

Thank you. Our next question comes from James Faucette with Morgan Stanley. Your line is open.

Maria Black:

Good morning James. What I would offer is it is pretty status quo. We haven't really observed any of those meaningful price compression, things of that nature. Given how much we do compete, I think we would see – I’d say, that there is always some of that in terms of whether it is promotions and things that all of us run at various times throughout the year. But it doesn't seem atypical for me. And obviously, I've spent a lot of years watching the competitive landscape and the sales environment. So I haven't seen anything anomalous. I think the one thing that's changed, specifically in the competitive landscape is us. And so when I think about our ability to execute, and everything I just mentioned, best product, record retention, record NPS, incredible execution by sales. I think we are stronger than we've ever been. So I'd say, that's the shift. But from our purposes, it is still a competitive environment and we lean into it every single day.

Maria Black:

What I would offer is that the down market had incredible strength by the way on top of incredible strength last year. I think I mentioned -- or I did mention during the prepared remarks, we onboarded, we sold and started 50,000 new clients in small business in the fourth quarter alone. So we are officially got 890,000 of our 1.1 million clients are in that down market space. And so we continue just to see broad-based demand. And again, we’re executing very well on that. Our mid-market sales results were phenomenal. Just an incredible execution by the team. Again, our product has been getting newer and stronger, so feel really good about that. I mentioned also in the prepared remarks what we saw in the enterprise space, specifically with respect to our next-gen HCM offering. One of the reasons I'm so excited about this is that we are seeing record results, we are seeing more than we anticipated, quite significantly more than we anticipated. And we are not even at general availability yet. And what that suggests to me is that the market is ready for this offering -- the market is excited about this offering. We see clients wanting to buy in the enterprise space from ADP, and we are stepping into that opportunity. So that's kind of the distribution. Very strong strength. You asked about international specifically. International had a fantastic year overall. So it was really the story of four quarters. I think first quarter of last year was strong over year-on-year first quarter of 2023. Second quarter got even stronger. Third quarter got even stronger than that. And fourth quarter, you'll probably guess got even stronger than that. So overall, our international business had just a fantastic year as well.

Maria Black:

Thanks.

Ramsey El-Assal:

Hi, thanks for taking my question. I wonder if you could comment on how you're thinking about the balance -- striking a balance between pricing and retention and just sort of also speak to your confidence level about being able to take that 100 basis points of pricing, which I think is more than you took sort of pre-pandemic, although less than you've been taking in this really inflationary environment. How are you -- how confident are you that you can take that without tipping retention in the wrong direction?

Ramsey El-Assal:

Okay. And a follow-up for me is about generative AI. And just if you could talk about how we should think about the long-term kind of opportunity there in terms of monetization. Is this ever something that could contribute to revenue directly? Or is this -- is generative AI sort of more something that will drive soft dollars to retention, new bookings? Obviously, there is an expense benefit internally. But I'm just curious about how you're framing it up over the long term.

Ramsey El-Assal:

Fantastic, thank you.

Samad Samana:

Hi, good morning. Thanks for taking my question. Don, maybe one for you. Just on the PEO guidance, and I apologize if this question is kind of a dumb question, but I just want to make sure I understood it. If I look back to last year, you had actually a slightly better WSE assumption, and you guided to 3% to 5%. And this year, you are assuming lower WSE growth but actually slightly better revenue growth. And I was just trying to reconcile those two things. Is retention assumptions the big difference there? Or is there some other mechanical thing, it is easier comps? I'm just trying to understand the PEO guidance this year versus last year.

Samad Samana:

Understood. And Maria, if I take just one huge step back, the business is very strong right now, and it seems like that's happening in what is a backdrop that is slowing. And so I just was wondering, you've been at ADP for a long time, you've seen multiple cycles, can you just remind us that when you see a broader slowdown in the backdrop, just kind of how you still are able to drive value and what the performance of the business has historically been in these slowdown periods, because I think we are all impressed by the durability of the strength even as things may be slow in the backdrop?

Don McGuire:

Yes, certainly. We've talked about this before. But if we go back a year or so, I think -- or maybe 18 months, the word recession was on people's lips a lot more frequently than it is today. I think the latest survey I've seen says that there is about a 28% probability of recession in the next 12 months. I'm sure that's some survey that the rest of you have read somewhere as well. So the good news is, it looks very unlikely that we are going to have a recession over the next 12 months. But certainly, as an all-weather company, what we do isn't discretionary. You have to do it. The levers we have, if sales slow commissions slow, if implementations slow, we don't need as much headcount, et cetera, et cetera. But I think, as we saw in 2008, it took a long time for ADP to find itself in a place that looked like a lot of adjustment. So we think that we can use those tools again should we need to. But I'll just finish with hopefully, that survey is correct and nobody is thinking about a recession in the next 12 months.

Operator:

Our next question comes from Mark Marcon with Baird. Your line is open.

Maria Black:

Sure. So on the down market specifically as it relates to bookings, the bookings again are broad-based, right? So where are we getting them? We are getting them from digital inbound, we're getting them from new businesses, we are getting them through the ecosystem of our channels, so clients that are engaging with banks, CPAs. Again, we canvass the entire market. That said, some of the things that we have seen, Mark year-on-year new business formations, it is still at an elevated rate, but it is pressurized. So sorry, year-on-year, it is minus 3%, but it's still elevated compared to norm. And so as a result of that, we did see less coming this time from new business formations. Now we had a lot come from new business formation, but we also saw an increase in balance of trade, some more coming from the competition. So what I would say is mix shifted a little bit in terms of how we broadly canvass the down market. All that rolled up to this incredible result of 50,000 units in the fourth quarter. So it is broad-based, but there are tiny bit of shifts within that to answer your question specifically.

Maria Black:

Sure. The answer is both and also head-to-head against competition. So some of them are ADP upgrades. We did see more new logos than we've seen before. So we are really excited about the net new wins to ADP. Some of those were wins and takeaways from enterprise competitors. Some of them were wins head-to-head against the same said enterprise competitors, which again is probably why I'm so optimistic about it, because it appears that the offer that we have is competing incredibly well in the market and clients are choosing ADP.

Maria Black:

It is a combination of both. NPS is fantastic. So NPS for the quarter as well as the full year was a record. Almost every single business is at a record NPS. So what drives NPS? It is that both, right? So it is the investments we've made into our best-in-class products. And this is years that we've been making these investments and making our products newer and more modern taking friction out, making them more self-service. All of these things that go into having best-in-class HCM technology, those investments coupled with best-in-class service, is driving the broad NPS record that we have across the business. So as such, that is a direct correlator to a record retention. And so we are really proud of the 92%. You are right. We're prudently guiding into the year again. And the reason behind that is, as you know we've had this conversation many times, is that there is still perhaps some normalization that could happen, and also because we are executing at all-time highs almost across every single business. We just want to be thoughtful as we step into the year to make sure that the retention guide is prudent.

Maria Black :

Thank you.

Tien-Tsin Huang:

Hi. Perfect. Just want to extend on the retention, but more on the outlook side, if that's okay. Just any callouts expectation-wise across the segments, small, mid and large? I know you've commented on balance of trade already, but I didn't know if you are seeing anything different in terms of expectations on retention.

Tien-Tsin Huang:

Yes. And you did outperform, obviously the guidance you set last year this time, so okay. No, I just wanted to check. I think this -- again, you've said prudent and totally agree with that. Just my quick follow-up just is on the margin front. I know it is very typical margin expansion. I think you did call it last quarter, maybe a little bit more investment in G&A. Anything different in terms of incremental margin outlook for fiscal 2025? It does look like you have a workforce rebalancing in the fourth quarter as well. So I just want to make sure we call it the puts and takes there on the margin front. Thank you.

Tien-Tsin Huang:

Yes. No, glad to see it's typical. And congrats to Danny and Matt as well. Thanks guys.

Bryan Keane:

Hi guys. Congrats on the quarter really strong in ES. On PEO, the bookings were accelerating and recovering in fiscal year '24 but moderated towards the end of the fiscal year. So just want to understand what changed in the marketplace there.

Bryan Keane:

Yes. And just a follow-up just with thinking what would it take to get PEO back to high single-digit or double-digit revenue growth that was targeted previously?

Bryan Keane:

No, that makes sense. And congrats again.

Operator:

Thank you. Our next question comes from Scott Wurtzel with Wolfe Research. Your line is open.

Don McGuire:

No. Good question, Scott. More on the shape of expenses. Revenue expectations throughout the year are pretty consistent quarter-to-quarter. It is really some spending patterns we have in the first half of the year, but really nothing specific to call out. Just want to give folks a heads up that we think we are going to be stronger in the back half than the first.

Maria Black:

Yes, fair, Scott. It is a very large priority for us. As you may remember, our third strategic priority is to benefit our clients with our global scale. International fits squarely into that strategic priority. We've been building this business for 50-some odd years. We are well ahead of the competition, as it relates to the number of countries that we serve on behalf of our clients, and moreover the infrastructure in those countries that we've built out. So we often speak to the final mile and all the things that we do to ensure that our clients have the ability to pay across very complex, sometimes large complex clients or countries, and sometimes very small complex countries. But certainly, it is a big piece of our offer. I think companies continue to want to think about their system of record from a global perspective, as they continue to have distributed workforces across the globe, as they continue to move supply chains in this world of globalization, as they have remote employees in smaller countries and around the world. We have this incredible network and ability to support clients today in what is 141 countries, and we continue to add more, as they become prudent in terms of the -- again, if it is the growth economies or where our clients are heading. But it is a big piece of our growth story. It's a big piece of our differentiation in the marketplace. And our multi-country MNC business is a clear competitive advantage for us in the international space.

Operator:

Our next question comes from Jason Kupferberg with Bank of America. Your line is open.

Don McGuire:

Caroline, thanks for the question. So we do have a laddered strategy. So if you actually refer to the -- I think, the last page of the earnings release, I think you can see the maturity schedule for our investments. And you can see that, for example in 2025, we have $6 billion that's maturing at roughly 2.2%, and our reinvestment at this point in time is 4.2%. So there's still lots of opportunity, and this is a place where ADP's laddering strategy shows its strength. It is fair to say that over the last couple of years, because of the inverted yield curve, we did have some opportunity cost by having this strategy. But I think we are very much seeing that as yield curves start to normalize, that we still have lots of opportunity for client funds interest growth. I’d just add to that that the portfolio is continuing to grow. It's growing 3% to 4% again next year, maybe not as much as it has in the past couple of years because wages have moderated a little bit, pays per control moderated a little bit. But we are still seeing good growth in that area. So we still have lots of opportunity. And the most important thing here, the most important comment I can make on this whole fund strategy, is that we base all of these commitments or all of these expectations on the current yield curve. We're not trying to outguess the market. We're looking at what the market in general has to say. And we are using those yield curves to put together our forecasts and our guidance on interest rates.

Operator:

Thank you. Our next question comes from Ashish Sabadra with RBC Capital Markets. Your line is open.

Don McGuire:

David, as Maria has shared earlier, I mean, we're always looking to make sure that we've got the workforce at the size it needs to be and in the places it needs to be. So we made those difficult decisions that we had to make on behalf of some of those employees. But we always look at this. And if you look at ADP over the years, we've always done what needed to be done to go forward. So I would just leave it at that and say that we're very happy with the guidance we put out here and the margin guidance as well. So we will make sure that we do what we need to do to execute, and we'll see what the future brings. But as we sit here today, we've done what we need to do, and we are looking forward to the future.

Operator:

Thank you. Our next question comes from Kartik Mehta with Northcoast Research. Your line is open.

Maria Black:

Fair. It is a great question. I think we talked about it a bit last quarter and perhaps throughout the year, which is that we're really at a new normal, as it relates to the overall sales cycles. It is reminiscent of what it used to look like pre-pandemic. But arguably, there are more decision-makers involved. The process has elongated a bit from where it was during the height of the pandemic. But the deals are moving through the motions. I would say that they are moving through the motions pretty typically. But certainly, it's not as fast as it was at one point in time. But we're not seeing less modules. We are seeing a big conversation around global, a big conversation around global system of record, things of that nature, which again is where this next-gen HCM fits squarely into that demand. So the conversation shifted a bit, but that is not necessarily new news, Kartik. It's really what we've seen over the last couple of years, as a byproduct of how clients in that enterprise global space operate. So certainly, that's how we are leading what that best offer kind of across the enterprise and international space. But from a deal cycle standpoint, it is pretty similar to what we've seen throughout this year, which is more decision-makers involved and prudency, as it relates to the decisions that are being made, but not necessarily less modules or anything of that nature.

Maria Black:

Yes. Great question. So we monitor so many of these things, right? So I spoke to one of them earlier, which is the pace of new business formation. That tends to be a bit bellwether. Again, it is still elevated from norms, but it is down year-on-year. We are also monitoring our own out of business. We are looking at clients that call it suspend payroll and how many are sitting in that type of capacity. These are all things and metrics that we've monitored for years to ensure that we are kind of seeing what is happening real time, if you will. What I would say is there are little pockets, very similar to the new business formation of kind of watch items that we have our eye on. None of it at this juncture gives us great pause. Quite the opposite. But at the same time, we are monitoring these things to make sure that we don't get surprised as it relates to the shift should there be one. But there hasn't been one yet.

Operator:

Thank you. There are no further questions. I'd like to turn the call back over to Maria Black for any closing remarks.

Operator:

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

Operator:

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 2024 Earnings Call. I would like to inform you that this conference is being recorded. After the prepared remarks, we will conduct a question-and-answer session. Instructions will be given at that time. I will now turn the call over to Mr. Danny Hussain, Vice President, Investor Relations. Please go ahead.

Maria Black:

Thank you, Danny, and thank you everyone for joining us. This morning, we reported strong 7% revenue growth and 14% adjusted diluted EPS growth for the third quarter as we continued to make progress delivering against our strategic priorities and as the labor market and the overall HCM business environment remained stable. I'll begin with a review of the quarter's results and provide a brief update on our strategy before turning it to Don to update you on our outlook and share some early considerations for next year. In Q3, we delivered solid Employer Services new business bookings growth reaching record bookings for our Q3 period and keeping us on track for our full-year outlook. We maintained momentum in our small business portfolio with particularly strong growth in our retirement services offering, and in Q3, we also delivered strong bookings results in our midmarket, enterprise and international businesses. With a steady demand backdrop and a healthy new business pipeline, we are focused on continuing to execute for the remainder of the year. Employer Services retention was very strong in the third quarter and once again exceeded our expectations also reaching a new record level for our Q3 period led by our midmarket business. Our overall retention continues to benefit from ongoing investments in our key platforms and from our commitment to delivering an exceptional client experience, which together helped our client satisfaction scores reach a new all-time high for our Q3. Our Employer Services pays per control growth was steady at 2% reflecting the resilient overall U.S. labor market and the fact that our clients continue to add to their workforces at a moderate pace, and our PEO revenue growth of 5% for the third quarter was in line with our expectations despite continued short-term pressure from below normal hiring activity we've been experiencing among those clients. Moving on to a broader update, we continue to push forward on our three strategic priorities, leading with the best HCM technology, unmatched service and expertise in a broader scale to ultimately deliver the best possible experience not just to the buyers of our products but everyone that engages with ADP. We are investing with purpose to deeply understand and deliver value to a vast set of personas from small business owners that count on us to HR professionals and executives of the largest global enterprises to millions of employees and gig workers around the world who engage with our solutions through CPAs, banks, brokers and other key partners to our thousands of dedicated service and implementation associates and to our sellers who represent ADP in the market every day. It's with these personas in mind that we continue pushing forward on our strategic priorities, and in Q3, we made steady progress. Our first priority is to lead with best-in-class HCM technology. We've been rolling out ADP Assist these past couple of quarters, which as a reminder will be embedded in our key platforms and utilizes GenAI to surface insights, aid decision-making and streamline day-to-day tasks for our clients and their employees. In Q3, we were very excited to begin piloting a new feature that enables our small business clients to not only leverage GenAI to answer questions and better understand how to initiate an HR action which we outlined in recent quarters but to actually allow them to issue commands to complete that HR action. For example, users can now type I need to rehire Alex or I would like to give Alex a leave of absence and are expedited through that workflow. Our second priority is to provide unmatched expertise in outsourcing. We continue to extend GenAI capabilities to a broader portion of our service associates, and in Q3, we started rolling out a new tool for some of our implementation teams. Now they can use GenAI to take in unstructured client employee data reducing manual data entry and minimizing errors during the implementation process. While it's still early, we are excited about its potential benefits. Our third priority is to benefit our clients with our global scale. The ADP marketplace remains a differentiator for us and is a perfect example of a benefit our clients receive from partnering with the leader in HCM. As a growing number of our hundreds of partners offer AI-enabled solutions, in Q3, we established ADP marketplace AI principles that require our partners to commit for the same type of responsible AI principles that govern our own products including human oversight, monitoring, explainability and mitigating bias. Our clients put a huge amount of trust in us and this is another example of how ADP strives to ensure the responsible use of AI throughout the ADP ecosystem. We also continued to extend our market-leading global scale, and in Q3, we reached 1 million paid employees on our I-HCM platform, which continues to scale in several countries in Europe and we made further progress in growing our presence in the APAC region, where we have recently been expanding our in-country payroll and workforce management presence in a number of markets. In 2024, we are celebrating our 75th anniversary and we pride ourselves on having built ourselves into a brand that truly matters to employers, their employees and the broader world of work. Our focus on our strategic priorities positions us to deliver more value than ever for our over 1 million current clients and to the tens of thousands of new clients we welcome to the ADP family every quarter. I'd like to highlight just a few of these new client wins from Q3 to give you an appreciation for the variety of ways in which we deliver value for them. In U.S. small business, we had a new Boutique Donut Shop referred to us from one of our CPA partners. The client chose ADP for the strength of our run platform, our reputation for great service, our strong relationship with our CPA and our ability to provide retirement services. Since this was a first time small business owner, our sales team even took the time to help the business owner set up their business the right way from guiding the client on obtaining a state tax ID to making sure the client obtained the appropriate workers compensation insurance. In U.S. midmarket, we won a multistate operator of rehabilitation centers, this client wasn't happy with our prior HCM provider and Workforce Now proved a much better fit. What makes me the most proud in this example is how one of our ADP marketplace partners played a key role in the decision to switch to ADP by independently highlighting the advantages we offered in terms of ease of integrations, a capability we have invested in over the years. In U.S. enterprise, we welcomed a large luxury resort that operates multiple hotels, restaurants and retail stores on site and was dissatisfied with the prior provider's level of client service. The client was so happy following their seamless ADP implementation, which included onsite training for their HR team that they accelerated their plans to add-on features like benefits, recruiting, onboarding, wage garnishment and tax credits. In our International business, one recent win was a leading airline that utilized ADP in certain countries and asked us to help better define their global payroll strategy. Ultimately, they expanded the scope of our services to include in additional 18 countries and started that rollout in the third quarter with plans to add other countries over the next year to enable true consolidated global reporting and analytics. And as a final example, our HRO team started a New York-based design firm after its leadership team recognized the company lacked the HR infrastructure required to adequately attract and retain the right talent. They turned to our PEO offering for truly comprehensive support, attracted by the breadth of our offering including features like the MyLife Advisors program, which supports employees as they make benefit in other important life decisions. We also advise this client in the development of a comprehensive benefits strategy to support their multigenerational workforce and help them attract the talent that they need to grow. As you can tell from these examples, it's often a combination of our technology, expertise and overall breadth that resonated with these businesses, and the result is incredible diversity in our client base and a resilient overall business model. We look forward to leaning in and delivering even greater differentiation in the market going forward. Overall, we were pleased with the strong financial and strategic outcomes in the third quarter. I'd like to thank our associates who continued to deliver exceptional products and service to our clients, in whose efforts drive these client wins and retention. Thank you again for all you do for ADP and for our clients. And now, I'll turn it over to Don.

Operator:

Thank you. [Operator Instructions] Our first question comes from Ramsey El-Assal with Barclays. Your line is open.

Maria Black:

Good morning. I was going to say good morning, Owen. How about I start and I'll let Don chime in. I think the comment would be, just to start, we are smack in the middle of our open enrollment season exactly as you suggested, and so, it's probably too early to make a call in terms of what that's going to look like from a full year perspective on the retention side. But overall, we have seen a bit, a tiny bit of PEO retention improvement this year and the compares are getting a bit easier and we do expect some improvement for the full year. So with that, I'll let Don chime in.

Owen Callahan:

Great. Super helpful. And then, if I may, just on client retention continues to sort of surprise to the upside, I was wondering drivers there, I previously thought potentially fewer bankruptcies in the down market but any expectations more longer term might be helpful there?

Owen Callahan:

Great. Super helpful. Thank you.

Zack Ajzenman:

Hi, thanks. This is Zack Ajzenman on for Bryan. First question, just want to dig in on the ES revenue growth affirmation despite the higher retention at PPC views, heard that you might come in towards the higher end of the range, but perhaps you can elaborate on some of the underlying assumptions and any offset?

Zack Ajzenman:

Got it. And a follow up on demand ES new business bookings affirmed at 4% to 7% growth, what are the strongest segments of the market and any notable changes to call out versus the second quarter?

Zack Ajzenman:

Thanks very much.

Mark Marcon:

Hi, good morning, and thanks for the terrific updates. Client retention obviously really strong, obviously your scores continue to go up. Are there any areas that you would call out that are standing out in terms of driving the higher NPS scores and the higher client retention? Anything that you would particularly note?

Mark Marcon:

Great. And then Maria there's one area that investors have been asking more about and you have -- you and ADP have the broadest outlook with regards to the space, so I'm asking this on the call, but some people wonder a little bit about saturation, your new bookings continue to grow but investors are asking a little bit more about like how much room do we have for new solutions or how many clients have already upgraded, things of that nature? Your results and the results of some of your peers continue to blow their concerns, but I'm wondering if you could address those?

Don McGuire:

Yes, perhaps to add a little bit more color, I think we're very still very optimistic about growth opportunities beyond the U.S. or the North American market. So, Mark, I think we've talked before we're on the ground in 40 plus countries outside of the U.S. We're present in multiple segments in those markets as well. We've got some great things happening in Southeast Asia where we're rolling out a single platform across beginning in India but many countries surrounding India and the Southeast Asian market. We're excited, we often talk about the fact that we pay over a million people in India, every payroll, every payday. Price points are still a bit low, but we expect those things to work for us and work in our favor in the future. So, I think still lots and lots of opportunity for ADP from a growth perspective and certainly we don't worry about saturation being a limiter to our future.

Operator:

Thank you. Our next question comes from Scott Wurtzel with Wolfe Research. Your line is open.

Don McGuire:

Yes, Scott, thanks for the question. I think it's still early. I think the intent here was to give some very early guidance on what '25 could look like. So, we still expect to see some improvements in margins. It's just, do we expect to see as much of an improvement given some of the GenAI pressures, expense pressures that we may see. Of course, CFI, at this point in time, depending what the yield curve does, once again things have changed a fair bit in the last 90 days, and if I was to, not that I have a crystal ball, but I don't think many folks right now are expecting anything to change from the rates perspective in the U.S. before September, so I think we're going to get some tailwinds from that. So, we're not really trying to signal here -- not signaling a decline in our margins, what we're signaling perhaps is perhaps a slower growth in the margins as we look into '25.

Don McGuire:

Sure, so if I, you know, Maria talked a little bit about bookings, I think, so we've been, we were happy with our bookings. They softened a little bit in Q3, but we had a very, very strong Q2 on PEO bookings. We can move on kind of to the PPC growth. Back in Q1, it decelerated a little bit more than we anticipated, and a significant amount of that deceleration was attributed to the technology and professional services sector. And in Q2, that stabilized. So that was good for us. While there's still some headwinds in PPC, including from technology and service sectors, there were no surprises in Q3. So it's important to note that worksite employee growth accelerated, about 1% over Q2, despite the modest incremental pressure we had from PPC pressure. And so, and that, of course, is a function of the year-to-date booking success that we've had. So nothing really to call out. More stability, if you will, in PPC pressure than we've talked about previously.

Operator:

Thank you. Our next question comes from Tien-Tsin Huang with JPMorgan. Your line is open.

Maria Black:

In terms of, from a standpoint of our price, or pricing in the market from a demand?

Maria Black:

Yes, absolutely. So I think my general sentiments, and then Don can give the kind of a little more directional, but my general sentiments around price remain that we're very thoughtful, and very measured as it relates to how we think about price, whether that's on the new business side, or it's on the renewal side, as you mentioned. And so for us, it's about understanding kind of by segment. So you heard my commentary in the prepared remarks, just how broad and deep and diverse ADP is, with respect to our client base. As you can imagine, we think about a down market, price increased differently than perhaps an enterprise. Some of those are also long-term contracts that have indexes attached. And so all of that lends itself to a very surgical approach, right? To ensure that the price value equation remains the right one, for the market and for our clients. And obviously at the same time, what we're doing is also monitoring what's happening in the HCM space with respect to the peer group and pricing overall. And I would say from a competitive lens, we haven't seen anything unusual as it relates to price from us or the others, even though it continues to be a highly competitive environment. And so as such, our approach this year to price, which I'll let Don comment on, has been very thoughtful and I would expect us to take that same measured approach as we had into '25.

Tien-Tsin Huang:

Yes, no I'm sure it'd be thoughtful about it. Thank you for that. Just on the GenAI front, I respect the investments there. I'm curious if you were to classify it as either driving expense efficiency versus driving better sales efficiency, what are you really aiming for with some of these investments here for fiscal '25?

Tien-Tsin Huang:

Understood. Thank you.

Unidentified Analyst:

Hi, everyone. It's [indiscernible] for James. Thanks for taking our question. Just one for me today. You mentioned coming in at the higher end of the range on ES for the full year, which makes sense given some of your commentary on booking strength, better retention, pace for control, improvement in the float benefit that we're seeing. But given all of those factors, it looks like ES in the quarter came broadly in line with our expectations, despite all of those tailwinds. So I'm curious, given your commentary about price coming in towards the higher end of your historical range, what does that imply just in terms of what you're seeing on the net new side, as well as cross-sell and upsell? Thanks.

Danny Hussain:

Hi Michael, it's Danny. If you're wondering whether there is some offset somewhere else, there's a little bit from FX moving adversely relative to our prior expectations.

Operator:

Thank you. Our next question comes from Pete Christiansen with Citi. Your line is open.

Maria Black:

Yes, thanks, Pete. I think that was a solid like three, four questions in one. So I will, I'll do my best to weave through it here. But as Don mentioned, we're on the ground in 40 countries. We do payroll across 140 countries, inclusive of our partner network. In terms of the final mile or the last mile, as you referenced, the first thing I would comment on is we've building that 50 years. So when I think about international and everything we've done over the course of decades to build that infrastructure, it's a tremendous lead is what I would suggest. And you see that in our international bookings results, right? So we had a nice first quarter in international. We accelerated that in the second quarter. We had an even better Q3. A lot of that is being driven by our multinational growth. So think about our Celergo offering, our GlobalView offering. These were especially strong for us in the third quarter. And I do believe it's the overall demand environment coupled with - on the ground strategy, if you will, if you will. And by the way, the international pipelines remain healthy. And we believe it's going to position us for a solid Q4, but also next year. In terms of, where we continue to expand. I mentioned it in my prepared remarks. Asia-Pac or APAC is something that, our Asia business has been relatively modest, but we see significant growth over time. Obviously, that growth is a direct byproduct of our clients demand growth, as it relates to the activities of our clients and where they're moving associates, and where they're moving business. So, we believe that continuing to lean into Asia-Pac is important for us. And so as a result of that, we kind of are continuing to lean in there. I think we mentioned last quarter, the acquisition of a company in the Nordics, specifically in Sweden. So that's an area that also is a high growth area from a client perspective. And so I think, our strategy over time has been as we get further into a country and we see the demand, at times we will fold in our partners. And you've seen that obviously in the Nordics, and you've seen that in many countries prior to that. But that ecosystem is vast across 140 countries. Its decades of building that final mile. It's a clear competitive differentiator in the market. You can feel see and it's really palpable on the heels of the last earnings call. I was actually over at our rethink event, which is where we bring together a few hundred of our very largest global MNC clients. And the spirit of how we're executing in that market is really palpable, when you hear it directly from our clients. And I believe it's a tremendous opportunity for us to continue to drive growth. So I think, I covered all of that, Pete.

Maria Black:

Yes, of course. So next-gen payroll, for sure, our intent is to continue to drive next-gen payroll, across various international markets. We have it deployed in a few of our markets today. And that coupled with these offers that again have the lead of Celergo going GlobalView over time, will just further the growth narrative and the story over there. But that is absolutely the intention and the strategic direction of next-gen payroll.

Operator:

Thank you. Our next question comes from Ashish Sabadra with the RBC Capital Markets. Your line is open.

Maria Black:

Yes, absolutely. So the mid-market is a great segment for us. It's certainly not getting any easier to be an employer in the mid-market. It's littered with complexity and all sorts of challenges to navigate, just even if you look at the last 30 days, you can see legislation that mid-market employers are having to navigate. And so it's a strong market. It is a highly competitive space. That's not new. I think for - from a competitive landscape perspective, it's always been competitive. And I don't know that we've seen a noticeable changes in the competitive landscape. What we have seen is incredible distribution, execution, incredible satisfaction, execution on our end. We've made great investments into the product set. It's winning in the market. You marry that strategy with great execution on the seller side and great execution on the retention side. That, to me, is what's changing in the mid-market is that we've gotten stronger.

Operator:

Thank you. Our next question comes from Jason Kupferberg with Bank of America. Your line is open.

Don McGuire:

Caroline, thanks for the question. I think it just comes - continues to come back to the same concepts, and that's making sure that we offer good value to our customers over a 10-plus year lifespan. So, we're always mindful of making sure that clients are getting good value, and that we keep those clients for a very, very long time. So it's that client life cycle of the total return on the entire life of a client. So, we're always very, very careful not to overstep on pricing. Having said that, we, of course, watch what the competition is doing. We have our ear to the ground. Our salespeople have their ear to the ground. We're trying to make sure and understand what's happening from the competition. So, we will continue to look at it. We'll continue to knock around some ideas, and some models and see what the impact could be. But I don't want to signal exactly what we think we're doing, because we're still, as I said earlier, in the midst of our planning cycle here. But we always look at it. We take price usually every year where we can, not including some of the contractual commitments we have with some of our larger clients, but just something we're very, very careful and cautious about doing shots a lot of color.

Operator:

Thank you. And our last question comes from Kartik Mehta with Northcoast Research. Your line is open.

Maria Black:

Everywhere. Candidly, listen, from a mid-market perspective, again, the demand is healthy. The competitive environment is competitive, and we continue to remain laser-focused on all of the competitors specifically. The ones that have been talking a lot about us over the last few years. And I think the way that we've been focused is really about the investments we've made, investments into a best-in-class product. Investments into focus on distribution investments into a digital transformation that's driving great client satisfaction. And so, that really has allowed us to have a winning story, as it relates to really all of the players.

Maria Black:

Yes. So I'm happy to start and certainly happy to have Don chime in too on the PEO. I'm always very, very bullish on the PEO value proposition. I've been close to that business for a long time, and I will tell you it's stronger than it's ever been. So despite the strangeness that we've had in the PEO, from a kind of the componentry heading into the pandemic, during the pandemic after the pandemic and then now, call it, a little bit post, post pandemic. What I would suggest to you is it has nothing to do with the fundamentals of that business, and what we would expect over time from a growth perspective long-term. And so the value proposition is strong. Nothing from our end has changed there, as it relates to the overall demand from the business. And we see that just in the - we continue to have 50% of our clients into the PEO coming from the base. So it's resonating with our existing clients. It's resonating with the open market, and it continues to be a very strong offering for us. So I don't know, Don, if you want to add anything there?

Kartik Mehta:

Thank you very much. I really appreciate it.

Dan Dolev:

Hi guys, thank you for taking my question. And apologies, I was on a different call. But I know it's kind of maybe early, but do you have any news about - your next fiscal year, maybe something like early views as we head into the fourth quarter? Thank you.

Dan Dolev:

Okay. Appreciate it. And apologies again if this was already addressed. I was on a different call. I appreciate it.

Maria Black:

Yes. Thank you, and thank you once again to everyone who joined us today, whether the full time or late. We always appreciate the questions, the interest, and we certainly look forward to speaking with all of you again soon, and look forward to the close of the year. Thanks.

Operator:

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 Second Quarter Fiscal 2024 Earnings Call. I would like to inform you that this conference is being recorded. After the prepared remarks, we will conduct a question-and-answer session. Instructions will be given at that time. I will now turn the conference over to Mr. Danny Hussain, Vice President, Investor Relations. Please go ahead.

Maria Black:

Thank you, Danny, and thank you, everyone, for joining us. This morning, we reported strong second quarter results, including 6% revenue growth and 9% adjusted EPS growth. I'll begin with a review of the quarter's financial highlights, before providing an update on the progress we are making across our strategic priorities. We delivered solid Employer Services new business bookings in the second quarter, reaching a new record bookings volume for Q2, and keeping us on track for our full-year outlook. Growth was especially robust across our small business portfolio, and we also experience healthy growth in our mid-market and international business. With steady demand in HCM and a healthy new business pipeline at the end of the quarter, we look forward to the important selling season ahead. Employer Services retention was strong in the second quarter. Although it declined slightly compared to the prior year, we once again exceeded our expectations as we continue to benefit from a healthy overall business environment, and from our very high client satisfaction levels. Our Employer Services pays per control growth remained at 2% for the second quarter. The overall labor market remains resilient, and our clients continue to add employees at a moderate pace, which is resulting in a very gradual deceleration and pays per control growth. And last, our PEO revenue growth of 3% for the second quarter, was in line with our expectations, and we are very pleased to have delivered strong PEO new business bookings that were ahead of our expectations. Based on continued healthy activity levels, we feel good about our PEO bookings momentum, and we look forward to seeing a gradual re-acceleration of our PEO business in the second half of this fiscal year. Moving on to a broader update. During the second quarter, we launched a new brand advertising campaign themed, the next anything. The campaign highlights how the world of work is always changing, sometimes gradually, sometimes suddenly, and trusted business solutions must evolve with it. The theme aligns with our strategic priorities to give our clients the advantage of our leading technology, expertise, and scale. In Q2, we continue to push forward on our first strategic priority to lead with best-in-class HCM technology. A key part of that is the rollout of ADP Assist, our cross-platform solution powered by GenAI that proactively delivers actionable insights in plain language to enhance HR productivity, aid decision-making, and streamline day-to-day tasks for our clients and their employees. ADP Assist seamlessly integrates with ADP products across multiple platforms. Using an intuitive conversational interface, it provides valuable and contextual insights which touch every aspect of HR. For example, in addition to the features we shared with you last quarter, including our natural language reporting capability, in Q2, we integrated natural language search capabilities into our run platform, which allows it to understand intent behind the search terms and use GenAI to mine ADP's deep knowledge base to deliver easy to use and effective content. ADP Assist also helps clients validate payrolls and solve common employee challenges across HR, payroll, time, and benefits. It's a comprehensive experience that is trained on the industry's largest and deepest HCM dataset and our deep knowledge base to surface highly credible and actionable insights so that clients can make smarter decisions. We are excited about the roadmap ahead for all of our major solutions, and we expect it to help us build on the recognition we continue to earn in the market. In Q2 alone, we were pleased to be recognized for product leadership by three major industry analyst rankings. Everest Group named ADP the highest leader out of 27 providers in its multi-country payroll solutions PEAK Matrix report. NelsonHall identified ADP as a leader in its Payroll Services Vendor Evaluation and Assessment tool in all markets. And Ventana Research named us an exemplary leader across its North American, global, and payroll management buyers guide for performing the best and meeting overall product and customer experience requirements. Our second strategic priority is to provide unmatched expertise and outsourcing solutions. We shared last quarter that we were beginning to equip our associates with GenAI capabilities through our Agent Assist technology. In Q2, we expanded our call summarization deployment to a greater portion of our service associates and started to see productivity gains with shorter handle time and improved service quality. With our global service associates fielding millions of calls annually, we are incredibly excited to test ways to optimize those client interactions. Our third strategic priority is to benefit our clients through our global scale, and we continue to lean into this advantage. In Q2, we announced a strategic collaboration with Convera, a global business to business payments company to help our multi-country clients manage the complexity of global payroll and cross-border payments through an integrated platform. By combining Convera’s payment solutions with our global payroll expertise, we're enhancing the client experience by minimizing the need to access various banking platforms and improving payment accuracy, compliance, and security. We also announced the launch of ADP retirement trust services to support our growing retirement services business. Standing up our own trust services entity demonstrates our scale and commitment to our retirement clients, positioning us on par with financial industry leaders and ahead of HCM competitors that rely on third parties. This commitment can really matter to financial advisors, keeps data within ADP's trusted ecosystem, and provides a cost and price benefit to ADP and our clients over the long term. Our scale also affords us the opportunity to partner with other leading technology providers in innovative ways, and we continue to expand on many of those partnerships to provide our sales implementation and service teams with client-specific insights to quickly address market shifts, drive more personalized interactions, and deepen our overall client engagement. Overall, our second quarter represented strong outcomes on the financial front and with respect to our key strategic priorities. I'd like to thank our associates who continue to deliver exceptional products and outstanding service to our clients, particularly now, as many of them are in the middle of our most hectic time of year completing year-end work. I'm proud to share that their efforts help drive our overall Net Promoter Score to its highest level ever in the second quarter. Thank you again for all that you do for ADP and for our clients. And now, I'll turn it over to Don.

Operator:

Thank you. [Operator Instructions] We'll take our first question from Mark Marcon with Robert W. Baird. Your line is open.

Maria Black:

Thank you, Mark, and good morning. Appreciate the question and appreciate your well wishes on all of our recognition. Certainly excited to see across the board the recognition we mentioned during the prepared remarks, but also the continued momentum across all of our initiatives. Happy to comment on retirement trust services. It is really a demonstration of our scale. And so, when I think about what it means to our clients, what it means to the ecosystem that you mentioned, banks, CPAs, I think it's all incredibly positive. And trust services are a core component of any 401(k) plan. Given the size and scale of our retirement services business, what we found is that the pool of what's known as third-party trustees, if you will, that are capable of handling a business just of our size, is actually becoming shrinkingly more difficult, if you will, in terms of the number of providers that are able to offer standalone trust services to a retirement offering of our size. So, in terms of that, we made the decision to launch our in-house trust services. We believe that this is a great value to our clients, to the ecosystem. It puts us on par with other industry leaders and the financial services, and really a competitive advantage against some of our HCM competitors that continue to leverage these third-party trustees. So, for us, I think it's a big commitment to the business that we have, the retirement business that is, which really can matter to financial advisors, and as you said, CPAs and banks. Really by taking the trust services in-house, the implication is that we have better control over our costs. Ultimately, that yields a better price for our clients, a better service. We also have the ability to maintain all of the data inside of ADP's ecosystem, which as you know, is a big component of who ADP is in terms of data integrity and all those things. So, that's kind of the retirement trust services in a nutshell, Mark.

Maria Black:

So, retention is going incredibly well, right? And we mentioned that in the remarks. Year-to-date retention has definitely been better than we expected. And so, I think things are fundamentally really healthy right now. One thing to keep in mind as kind of think about the outlook, is that we are, as you mentioned, we are coming off of some of the record highs that we've seen over the last several years. And while we believe that from specifically a down market perspective, we're close to being normalized back to fiscal 2019 trends, we do also anticipate some pressure in the back half from perhaps out of business and bankruptcies having more of a material impact. We haven't seen it to date, but we certainly want to ensure that we're cognizant of the fact and we believe it's prudent - given that we have retention running at such record levels, we believe it's prudent to plan for it in the back half to have some pressure. And obviously, just like any year, Mark, retention is always noisy until we have some normal variability and conservatism in the back half. Just like you, I'd like to think that there's opportunity there. I think only time will give us the answer to that, but that's kind of how we're thinking about the back half.

Operator:

Thank you. Our next question comes from James Faucette with Morgan Stanley. Your line is open.

Don McGuire:

Yes, James, thanks for that question. We've been happy to see the stabilization in the pays per control in those sectors, the financial services and technology sector. So, although there's still a little bit of noise there, it's certainly stabilized from what we saw in the prior quarter. So, that's positive. I do think that as we looked at our sales results, our bookings for PEO, we were very happy with the bookings. Maria mentioned that already very good. I think as we kind of put those together, the improvement in the pays per control and the improvement in our bookings, I think we're going to be heading towards that re-acceleration that we've been pointing to over the last couple of quarters in the PEO. But really just trying to get the impact of those two components, those variables, is really what's going to help us get that re-acceleration going.

James Faucette:

Got it. Thanks for that, Danny. And then quickly on AI, it seems like there's a little bit of incremental investment there and certainly a big focus on this call, but wondering about how we should think about the - how you're anticipating a return on that investment and over what kind of timeframe. And maybe more qualitatively, what kinds of paybacks, whether it's increased customer satisfaction or internal operations, et cetera. Thanks.

Don McGuire:

Yes, so I think Maria just outlined some of the exciting areas that GenAI will have for us and some of the things that'll change, how they'll make the client experience better, how they'll help our associates, how they'll help us sell more, et cetera. But I would say at this point in time, what we're really talking about is some modest investments in GenAI. I think it's going to be a little while before we start to see returns from those things, but we certainly do anticipate returns. But in the near term right now, it's really a time for investing in these tools, et cetera, and we'll see those outcomes, those financial outcomes somewhere down the road.

Operator:

Thank you. Our next question comes from Ramsey El-Assal with Barclays. Your line is open.

Don McGuire:

Yes, I don't think there's - just to answer the question, there's nothing really unusual or fundamentally different about our selling expenses and how we go-to-market in the PEO. I think certainly as we see higher sales, as you know, we get a lot of our sales, half of our sales, give or take, from internal. So, some of that's a little bit of our internal housekeeping if you will, how we allocate expenses between business units, et cetera. But higher sales generally translate into higher selling expenses. So, really nothing fundamentally different in how we go-to-market. Certainly, not seeing any fundamental differences in the competitive landscape that's driving those expenses.

Don McGuire:

Yes, I'll start, and Maria can add here in a second. So, as you know, you look at our revenue as - international revenue as a percentage the total, and it’s not where we'd like it to be, even though roughly 40% of the people we bear around world are in international. So, and the reason for that is that we have fundamentally different offers in the US. We have things like PEO. We also have money movement services, tax services, pretty much broadly distributed. Some of those offers don't have the same value proposition outside of the US market. So, our opportunity there is not quite the same. Perhaps it will be as time goes on, some of those services may be available in other markets, but as we speak today, they're not there. The value prop isn't the same. With respect to Convera as a partner, just to speak to that one a little bit, we have thousands of clients, and those thousands of clients have thousands of entities spread across multiple countries around the world. And if you think about the complexity and the difficulty of paying their people in some of these small countries and then getting the payments to the various social security providers in those countries, having somebody like Convera who can help a large European or a large US multinational manage the treasury function in those small countries around the world without having to set up all the banking, et cetera. So, someone like Convera acts as a great partner for us to facilitate those cross-border payments in a very - in a compliant way, et cetera. So, I think that's very positive for us. So, we do have some partners in international like Convera as I just mentioned, but we still see it as a great opportunity for us to continue to grow.

Ramsey El-Assal:

Fantastic. Sounds like good things ahead. Appreciate it.

Ramsey El-Assal:

Okay, perfect. Thank you.

Bryan Keane:

Hi guys, congrats on the solid results. Don, I just wanted to ask about average balances. I know we were expecting a little bit of a headwind from the payroll tax deferral. Maybe you can quantify that as part of the reason for the drop of balances down 2%. And then what's the go forward there we should expect? Is there a more of a headwind from the payroll tax deferral for balances and maybe expect a similar decline in the back half of this year?

Bryan Keane:

Got it. And is that part of the moving of the ES margins to the lower end of kind of the range you talked about? I think you talked about rates there. Just what was the surprise from three months ago on rates that that maybe caused you to push the margins towards the lower end or where you think the lower end, the new margin range?

Bryan Keane:

Great. Thanks for taking the questions.

Scott Wurtzel:

Great, thanks. Good morning, guys, and thank you for taking my questions. Maybe just wanted to start off on some trends that we've seen so far in the selling season. Seems like through 2Q it was pretty positive on the booking side, but maybe wondering how we've sort of tracked into 3Q, and then also what you've seen maybe from competitors, any changes in pricing, go-to-market strategy and all that would be helpful.

Scott Wurtzel:

Great. That's helpful. And just a follow-up for Don, just on the float income guidance, sort of noticed a pretty notable increase on your outlook for the client short portfolio. So, just wondering if you can maybe give a little bit of color on sort of the changing geography on those investments for the balance of the year. Thanks.

Scott Wurtzel:

Great. Thanks, guys.

Bryan Bergin:

Hi, good morning. Thank you. First question I had is on EBIT margin. Can you comment on what drove the outperformance versus your view for that to be down I think in 2Q? I'm curious if that was an aspect of timing within the year versus better-than-expected efficiency. And I think, Don, I heard you mentioned some GenAI investments to come. Is that incremental spend versus the prior plan?

Bryan Bergin:

Okay. And then just I guess a follow-up then on GenAI and ADP Assist here. Is that a feature you're able to monetize directly or more so kind of an enhancement you're offering for free to drive the CSAT stores higher? And I guess understanding you're leaning into these developments, do you kind of view it - when you think about the monetization of GenAI products, is this a near-term dynamic or more so kind of feature and product differentiation that's a longer term monetization dynamic?

Bryan Bergin:

Okay, understood. Thank you.

Samad Samana:

Hi, good morning. Thanks for taking my questions. Maybe on the PEO business, I was curious, I know you guys called out some of the bigger verticals inside of the PEO business and that there's maybe some more softness there than you'd expected in technology and professional services. Any change in the exposure rather inside the PEO business or within like the big verticals? Are you guessing any change in the trends that you saw maybe over the last couple of quarters?

Samad Samana:

Got you. And just as you think about the pricing environment, I know that we're still not at when the company does the annual price increases, but as you think about maybe for new deals or for new customers that are onboarding, any change in the kind of price pressure or competitive nature of what your competitors are offering in terms of discounts or what ADP's is having to offer? And just as we look ahead to price increases, how are you thinking about this year's price increases?

Samad Samana:

Great. Appreciate you taking my questions.

Kevin Mcveigh:

Great. Thanks so much. Maria, I think you talked to kind of implementations a little bit. Can you remind us maybe what percentage of the revenue is done internally on implementations today, and if that's a shift philosophically, what that can be over the course of time? If I heard the remark right. Maybe I picked it up wrong, but just any incremental thoughts on that?

Kevin Mcveigh:

Yes.

Kevin Mcveigh:

And then do you see that - Don, over time, does that become less if you outsource that? And is there any way to think about the margin impact from that initiative?

Kevin Mcveigh:

Helpful. Thank you.

Tien-Tsin Huang:

Thanks so much. Good results here. Just want to dig in on your prior comments. I know a lot of people asked on PEO and the healthy activity there and the confidence in the acceleration. Is ADP doing anything differently, or is industry demand changing? I understand it’s not - it doesn't sound like there's a cost of pricing change there. So, I just want to make sure I understood that. Thanks.

Tien-Tsin Huang:

No, that's great. Thank you, Maria.

Unidentified Analyst:

Hi, this is Caroline (indiscernible) on for Jason. Thanks for taking our question. So, pays per control growth has been 2% quarterly through the first half, but the guide for full-year 2024 is still 1% to 2%. So, what are the drivers of the second half deceleration, or do you think that the high end has become more likely?

Unidentified Analyst:

Okay, great. Thank you.

Dan Dolev:

Hey, guys, great results here. Just a strategic question, obviously if you look over the next 12 to 18 months, interest rates are coming down. There is a big debate out there on the ability to offset some of those headwinds in terms of revenue. Can you talk about maybe some idiosyncratic initiatives that you could do to offset the headwind from declining interest rates? Thank you so much.

Danny Hussain:

Dan, I'll just add also, our model involves reinvesting further out in the yield curve, and as you know, we're still reinvesting at higher rates than what's embedded in the securities that are rolling off. So, even if we do start to see short-term interest rates fall next year, which is obviously consensus at this point, a lot of that will be offset by the reinvestments that we have further out in the yield curve. And so, it's too early to be talking specifically about the interest rate outlook for next year, but we would just recommend you keep that in mind.

Dan Dolev:

Great. Great results, again. Thank you so much.

Pete Christiansen:

Thank you. Good morning. Two questions. Now that we fully lapped ERTC, I'm just curious if you've noticed any changes in client demands or competitive tactics, particularly in the down market?

Pete Christiansen:

That's helpful. And then I'm curious, the combination of HCM and payments functionality, has certainly been a theme. EWA is obviously a big portion of that and now cross border. Do you see opportunities to increase penetration there or to add more capabilities either through partnership, M&A, furthering payments, and I'm thinking perhaps even like in disbursements, those sorts of things? Thank you.

Pete Christiansen:

Thank you so much. Super helpful.

Ashish Sabadra:

Thanks for taking my question. So, just a multipart question on PEO and following up on some of the commentary earlier on solid bookings and moderating PPC, sorry, paper control headwinds. As we look at the WSC growth, we have continued to see a sequential improvement there, better than what we saw last year. And just given the commentary, is it fair for us to assume that we should continue to see that improve as we go through the year? And then on revenue per WSC, I was wondering if you could comment on, looks like pricing trends are positive, but if you could comment on any other puts and takes participation, anything else that could help drive better revenue per works at employee. Thanks.

Ashish Sabadra:

That's very helpful color. Congrats on the solid results.

Maria Black:

Yes. So, really quickly, I think I'll end with how I ended my prepared remarks, which is a huge shout-out to all of the associates and the entire ecosystem across ADP. So, that's ADP associates, partners, channels, all of the stakeholders that really contributed to what was a good, solid Q2, but also a good, solid first half. I'm really excited about the back half and what we'll accomplish, not just in fiscal 2024, but moreover in calendar 2024. It's a time and it's an exciting year for ADP. This year is the year that we actually round our 75th anniversary. And then when I think about who this company is over the last seven decades and 75 years, I can't wait to see what we're going to do in the next 75. So, look forward to sharing in that celebration with all of you as we head into 2024 together. Thank you.

Operator:

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 First Quarter Fiscal 2024 Earnings Call. I would like to inform you that this conference is being recorded. After the prepared remarks, we will conduct a question-and-answer session, instructions will be given at that time. I will now turn the conference over to Mr. Danny Hussain, Vice President, Investor Relations. Please go ahead.

Maria Black:

Thank you, Danny, and thank you, everyone for joining us. This morning, we reported strong first quarter results, including 7% revenue growth and 12% adjusted EPS growth, and we made significant progress on the three strategic priorities we shared with you last quarter. Let me begin by quickly reviewing some of our financial highlights from the first quarter. We had a solid start to the year in Employer Services new business bookings with record-level volume for first quarter which was supported by a particularly strong September. Among our best performers were our small business portfolio and our compliance-oriented solutions. Overall demand in HCM has remained steady and we maintained a healthy new business pipeline at the end of the quarter across our business. Our Employer Services retention rate once again exceeded our expectations. Although, retention declined slightly versus the prior year, including in our small business portfolio, we continued to see resilience among our clients. More importantly, our overall NPS scores reached a new all-time high, positioning us to stay near these historically high retention levels. Our Employer Services pays per control growth was 2% for the first quarter as our clients continued to add employees at a pace that is gradually slowing. And our PEO revenue growth of 3% in the quarter was relatively stable versus last quarter, reflecting solid PEO bookings performance offset by deceleration in PEO pays per control growth. Don will speak to our updated guidance in a moment, but the demand environment for PEO as well as our other outsourcing services remains healthy. Moving on, we made meaningful progress across all three of our strategic priorities that we outlined last quarter. Let me start with an update on some actions we took in Q1 to lead with best-in-class HCM technology. First, we began embedding Gen AI features into our products. In Q1, we integrated Gen AI into Roll to further enhance its conversational UI and make it even easier for small business owners to quickly obtain customized Payroll and HR guidance. We also began rolling out ADP Assist, which delivers insights and recommendations to make complex HR work simple. We've enabled ADP Assist for select Workforce Now clients, beginning with a Report Assist feature that allows practitioners to easily extract the insights they're looking for. We look forward to continuing to build on the live feature set of ADP Assist to further enhance the experiences of both HR practitioners and employees. We also had some exciting product developments beyond AI. Our clients tell us they need personalized experiences and deep integrations to help them manage the complexity of running a business today. To help address this, we recently launched a new product called API Central, which enables businesses to easily and securely connect their ADP workforce data across systems using pre-populated APIs and tools. This is a feature our clients have increasingly asked for and we have already seen a strong uptake. In Q1, we complemented the launch of API Central with the acquisition of Sora, an intelligent workflow automation and data integration tool. Sora's unique capabilities will allow our clients to automate people processes by unifying various applications such as HR, IT, CRM, and more, creating a smarter and easier-to-use experience for our clients. In Q1, we also launched ADP Workforce Now for construction, a comprehensive offering designed to help clients with the unique payroll and HCM needs of the construction industry. This verticalized offering combines tailored Workforce Now capabilities and reporting with a team of dedicated specialists for the construction industry. While ADP has always served clients across the full spectrum of industries, construction stood out to us as a vertical with enough complexity to warrant a more tailored solution, and we're excited to further strengthen our offering in the mid-market. We also announced the launch of our corporate venture capital fund earlier this month, leading with best-in-class HCM technology requires that we stay attuned to the frontier of HCM innovation. And now, in addition to the organic efforts we are developing in ADP Ventures, we will invest in and partner with early-stage startups to strengthen our core business our core business and to extend into natural adjacencies. Two of our early investments focus on improving lifestyle benefits to drive associate engagement in simplifying the incredibly complex leave management process that businesses and their workers have to address. We're excited to build on these partnerships and develop new ones. Overall, Q1 was a very busy quarter on the product front with much of the work we're doing representing seeds of innovation that will position us to continue shaping the future of work. Our second strategic priority is to provide unmatched expertise and outsourcing solutions. In addition to launching the pilot of ADP Assist for our clients, we also launched the pilot of our new Agent Assist embedding Gen AI in the flow of work for ADP Associates. So far, we have enabled our call summarization capability to select associates. Thanks to this Agent Assist feature, those service associates no longer need to spend time writing up case notes after client calls, which should make our associates more effective and also allow us to quickly aggregate real-time client feedback to continuously improve our products. We are also piloting Agent Assist real-time guidance for our associates to help them with support content and guided workflows and to more easily share their accumulated knowledge in a way that's customized to individual client cases. We are excited to continue working toward additional Agent Assist features to help our implementation and service associates deliver better, faster service and to help our client satisfaction scores continue to reach new record levels. Our third strategic priority is to benefit our clients through our global scale, and in Q1, we expanded on this advantage. In August, we extended our leading global footprint by acquiring the payroll business of BTR, our longtime partner in Sweden. Acquisitions like this strengthen our multi-country payroll ecosystem while also positioning us to grow a local HCM business in countries with attractive growth prospects. In Q1, we launched Roll in Ireland, representing the beginning of an expansion into the European market, where we believe an AI-based payroll app coupled with our existing on the ground ecosystem will allow us to expand our SMB business outside the U.S. And during Q1, we also announced plans to deepen our existing partnership with Workday to deliver enhanced global payroll compliance and HR for the many clients we jointly serve around the world. Partnerships like this reflect our long-standing commitment to provide the personalization and overall experience our clients desire. Before turning it over to Don, I wanted to highlight a couple milestones in two of our businesses. Our suite of workforce management solutions, sometimes referred to as time and labor management, reached more than 125,000 clients in the first quarter, benefiting from a double-digit growth rate these last few years. Scheduling and precisely tracking time has become more important for employers over recent years in order to meet evolving legislative requirements, and we look forward to continuing to invest in our workforce management solutions to drive higher client attach rates. We also now serve more than 150,000 retirement services clients, which is up more than 20% from the 125,000 clients we served at the end of fiscal 2022. We anticipate growth for our retirement services business will remain strong in the years ahead as the provisions of the SECURE Act 2.0 and additional state mandates continue to phase in and as companies of all sizes continue to recognize the importance of positioning their workers well for their eventual retirement. I'm proud of our start to fiscal 2024 with both strong financial results and meaningful strategic progress. Our roadmap for the months ahead is keeping us incredibly busy. And with this in mind, I'd like to take a moment to recognize our associates across sales, service, implementation and technology whose efforts and outstanding performance are positioning us to consistently deliver for our clients and our shareholders. Thank you, all. With that, I'll turn it over to Don.

Operator:

Thank you. [Operator Instructions] We'll take our first question from the line of Samad Samana with Jefferies. Please go ahead.

Maria Black:

You bet. So, good morning, Samad. It's Maria here. I thought I'd kind of break down your question with respect to the PEO, call it, double-click. So I'll start by commenting on the first quarter. So, I've mentioned, we did see deceleration in PEO pays per control. So as Don mentioned in the opening comments, that is a byproduct of what we're seeing in the pressure with respect to, as you know, that business tends to skew more into professional services technology. The pays per control deceleration is happening at a faster clip in those cohorts than the broader base. And so said differently, the pays per control growth in the PEO is decelerating faster than we expected and faster specifically in those cohorts. So in terms of the contributions, that is the contribution to the deceleration or the new guide to worksite employee growth that we're seeing in the first quarter. We did have strong bookings in PEO in the first quarter. That said, it did come in slightly below where we had hoped for, so it was still higher than overall employer services. It was a good quarter for the PEO and this is now the third quarter in a row that we've seen strength in bookings in the PEO. And that's important to note because really the strength in PEO bookings is what ultimately will yield the reacceleration that you're asking about in the back half. That coupled with kind of what we're seeing in retention. So while retention is stable and stabilizing inside the PEO, it isn't back to the high growth levels that we saw, call it, a couple of years ago in the last year or so, and as such as those compares continue to lap coupled with retention continuing to accelerate, if you will versus stabilize. We will see contributions from retention, we'll see more contributions from bookings and that's really why we anticipate the worksite employee guide for the year that we've given.

Maria Black:

Yeah.

Maria Black:

Yeah. Absolutely. So I'll speak to Roll, which is what I commented on in the opening comments. So we did roll out, no pun (ph) unintended, our roll offering into Ireland. And it is an exciting bit for us, albeit it's very early days, right? It's actually only been a couple of weeks. But we're excited about it because it's the first of many countries where we intend on taking the, call it, very down market offering into our various countries throughout international. And it's really about marrying that product with what we see as still potentially greenfield opportunity within our international space and really leveraging the ecosystem that we have, that's everything from distribution to all the services call it around, the offers in various countries. So we're very excited about that. Now, in terms of the overall growth contributions in the short term of rolling out Roll into Ireland, I would say they're negligible. I would say even Roll over time this year, I think it would be, not a meaningful contributor to bookings. To me, I think this is really about a long-term investment that we're making across international and what we see as a continued opportunity for us. So you kind of mentioned is this companies that have a presence in Europe, that exist in the U.S. with folks working in or call it in international? And the answer is, this is both of that coupled also with a lot of our, what I would say, best-of-breed offerings in international. So we see growth opportunity really across the board in international and that's everything from the down market, which we're going after now with this new product offering of Roll. So we see it in the SMB space, we see it in our best-of-breed space and we also see it in our global MNC space. So really excited about the long-term growth opportunity that continues to be international. And while on international, I thought I would just mention because it's important to note, we did have a very strong quarter with respect to international, albeit that quarter is obviously off of a compare Q1 of last year that was less favorable, but it is on the heels of what was a very strong fourth quarter finish in international. And so, all the way around, I continue to be incredibly excited and optimistic about what it is that we can go accomplish and continue to build in our international offering.

Operator:

Thank you. Our next question comes from Bryan Bergin with TD Cowen. Please go ahead.

Maria Black:

Absolutely. Good morning, Bryan. So happy to comment on what we saw in the first quarter with respect to the overall performance of bookings, but also the demand. So I'll kind of start with the overall performance. I mentioned in the opening comments, we did see strength, continued strength in our down market, so really excited about that. Also saw tremendous strength in our compliance solutions offering. So think of it as all the stuff that hits compliance tax, things of that nature. So we're pleased with what we saw with respect to new business bookings. Those are the two that really outperformed. And it's exciting to see because really that entire down market offering and that's everything from our run offering to retirement services, insurance services, we continue to see tremendous strength there. We saw that all of last year and definitely the finish last year, and it makes me happy because it's a lot of the places that, well, good performance makes me happy regardless, but it's a lot of the places where we've been making meaningful investments both in the product as well as the distribution. So excited to see the continued performance there and the outperformance. The overall results do keep us in line with our full year guide. So excited to confirm that again here today. In terms of the overall demand environment and I feel like I've been saying this quarter-to-quarter, but we're not really seeing any major changes in demand. Demand is still strong, demand is still healthy. We see that in our bookings results. There are all sorts of other indicators that we look at in terms of pipelines, in the up-market, in the mid-market, certainly in the down-market. We're looking at things such as new appointments and kind of activity, excuse me, activity measures to really give us a guide on whether demand is strong. And I would tell you pipelines are healthy year-on-year and certainly activity is healthy. And so we don't see a big demand change again this quarter. In fact, it’s kind of the opposite stepping into the quarter on the heels of a strong September. We feel really good about where our pipeline sit year-on-year, which again is giving us the confidence in the full year guide. As always though, Bryan, we continue to keep an eye on the macro. We continue to keep an eye on our global space and international and making sure that we're understanding both any macroeconomic changes coupled with any demand environment that could shift given everything kind of going on in the world, if you will. So that's the current story on kind of pipelines demand in the quarter.

Bryan Bergin:

Okay.

Bryan Bergin:

Okay. That's helpful. Thanks, Don. My follow-up on the PEO. So heard you, the bookings are a little bit lighter than you expected to start, but you're also calling out, I think higher selling expenses impacting the PEO margins here year-over-year. So can you -- maybe talk about the puts and takes there driving that dynamic?

Don McGuire:

No. But I think originally, Bryan, you mentioned bookings were lighter than expected. I think our bookings came in – our bookings came in pretty good, as Maria has mentioned.

Bryan Bergin:

So the question there, you're also citing higher selling expenses impacting the PEO margin. So it seems like there's a bit of a disconnect there. Just trying to understand that.

Bryan Bergin:

Okay. Thanks.

James Faucette:

Great. Thanks. I wanted to ask just a couple of quick follow-up questions. First, I think the comment was made that you're still anticipating a bit worse performance in terms of out of business rates on a go-forward basis, but to-date those have been a little bit better than you had anticipated. Can you help provide some detail as to what you're seeing, why you think we're seeing better, survival rates, and kind of the things you may be looking at as indicators that could get worse on a go-forward basis.

Maria Black:

Yeah. I think if I may, I think the only thing I would add is that it's still very early in the year, right? So when I think about retention, we did have a record level in fiscal '23. We were near that record level a year before, we were at that record level the year before that. And so we've had this tremendous strength. And I think Don is spot on in terms of all the reasons from a macro perspective that we've had that strength in terms of client retention. And so as that normalizes, we believe it's still prudent for us to have the retention guide that we have, which is really a byproduct of how we planned the year in the back half. So I think I got the question last quarter and so I'll answer it proactively this quarter, which is, are we just being conservative? And I think the answer to that question is, it's still early in the year. And so, if we do continue to outperform retention in the way that we outperformed in the first quarter, we hope that we will outperform for the full year. It's just early to take away that conservatism sitting here just, three short months into a very long year.

Maria Black:

Absolutely. So I think I've spoken quite a bit to retirement services as well as the SECURE Act over the last year or so. And I will tell you, I was excited to report the new milestone today in part because that business continues to show strength, but also because it's a business that I know is adding tremendous value into the world of work. And so, it is an exciting time. It does come as a byproduct of the offering, the investments we've made into the offering, and also these state mandates, some of which are anchored into the SECURE Act at the federal level, some of which are anchored state by state. Candidly, I could probably spend an hour with you and go state by state in terms of all the various mandates. What we see over the next year or so is the threshold of companies that need to comply with the state mandates starts to creep into, call it, the further down market, if not the micro market. And so, as all these states, a lot of them being on the West Coast, if you're looking for headlines tracking states like California, as they continue to pull down at what level do you need to comply with the state mandates and/or the SECURE Act, the more opportunity we will have to ensure that we're helping our clients to solve for this piece, keep them compliant. But again, back to doing good in the world, it's also something that's bringing the value to each one of these employees that are engaging with these clients, so.

Operator:

Thank you. Our next question comes from Bryan Keane with Deutsche Bank. Your line is open.

Maria Black:

Yeah. So just to clarify, pays per control in PEO is actually higher. We don't give that number, but it is actually higher than employer services. So I think the first piece suggests is that the bases are actually just different, right? So if you look at the pays per control across the broader ADP, it's really a reflection of a mix of industries. As I mentioned earlier, the PEO tends to skew, by design, by the way, for the offering. It's really -- the offering is the most valuable if you will to the cohorts that we offer it to, which tends to be more professional services, tech-oriented companies that want to offer employers or their employees benefits of choice, if you will, to be employers of choice. And so that skews that base slightly differently than the overall. And what we're seeing within the PEO base is a delineation between those cohorts and the rest of the base, if you will. So we cited it in the prepared remarks, but the deceleration that is happening at the PEO is still a byproduct of within that base having professional services and tech decelerating at a faster clip than the rest of the base. So to answer your question, does it bleed across? I think, we're already hearing these headlines in the market in terms of -- and we see it within our own ADP Research Institute data with respect to professional services and tech hiring being in a different position than the rest of the market. So I think I would suggest it's already been bleeding across. If you look at the last couple of quarters of that, by the way, that also tracks BLS data shows the same thing. You see it in wages. And so all of that to suggest, I would say, the trend we're seeing in the PEO is already in the macro, but the bases are slightly different, which is why you would feel it, the impact of it perhaps more significantly in the PEO PPC than you would in the broader PPC. That was a mouthful, by the way.

Maria Black:

Yeah. What I would offer is that I'm incredibly pleased with the results in the first quarter, especially on the heels of what was an incredible finish last year. And so the pattern that we saw in the first quarter and the strength in September is not a typical of the pattern we see in this -- the first quarter on the heels of an incredibly strong fourth quarter. And so I am excited about the first quarter results, I am excited about the strength in September. But the excitement is actually less about, call it, the finish in September and more about what we see on the year-on-year demand environment, what we see in activity, what we see stepping into this next quarter. And that does give us confidence into our full year guide at that 4% to 7%. What I would also offer though is it's a long year, and when you think about where the skewing, if you will, or the contribution of new business bookings happens for us on a full-year basis, it is in that third and fourth quarter. I'll much call it larger than the first and second quarter. And so we believe it's prudent to given the line of sight that we have today, just a quarter in. But we feel confident in the guide, we're excited about the performance, we're excited about how we're stepping into the quarter. The second quarter that is but we also still have an entire year ahead of us.

Maria Black:

You bet. Thank you.

Ramsey El-Assal:

Hi. Thanks for taking my question. Could you give us your latest thoughts on the competitive environment in PEO and how that's sort of evolving over time? I think there's somewhat slower than historical growth across the industry. Are there any signs that the market is, saturated with providers or is there any competitive overlay to PEO performance?

Ramsey El-Assal:

Got it. Okay. And a follow-up for me. Could I ask you to revisit those comments you made about higher selling expenses in PEO? What does that mean exactly? And also just I wanted to make sure I understood that, Don mentioned that, there's some expectations those may continue, but they're still, in essence, sort of a non-recurring step up in expenses. It's not a permanent step up in, in expenses in the segment.

Ramsey El-Assal:

I got it. So it's headcount-related primarily. That makes a lot of sense. Thanks so much.

Ramsey El-Assal:

Got it.

Jason Kupferberg:

Good morning, guys. Just staying on PEO for a second and maybe if we can just refresh a little bit here. I'm just thinking back to the Analyst Day two years ago, we thought it was a medium-term 10% to 12% grower. Now it's 2% to 3% at the moment. There was definitely some post-COVID normalization. But maybe just, Maria, if you want to take us back through the dynamics in terms of just how the business has evolved from your perspective? And is there a potential path back to double-digit growth for this business if the macro is a little bit more cooperative?

Don McGuire:

Yeah. I think Maria covered it very comprehensively there. I would say that when we established the mid-term targets, I think a lot of things have changed since then, certainly the inflation environment and that we've seen in particular and Maria just mentioned professional services and technology, we saw incredible growth in those sector -- in those segments and growth beyond what we thought we -- or what we had predicted in the mid-term targets or spoken to. I think now we're seeing some reversion. We do, though, continue to be incredibly positive about that business. We think it definitely has a place, and we think that we will make our way back. But as Maria also said, it's a little bit early to forecast when we think we're going to get back to some of those mid-term target growth areas that we had discussed.

Danyal Hussain:

Hey, Jason. That just relates to the mix between short-term and extended in long. So in Q4, we were a little more levered to overnight partly because of this debt ceiling issue. We had to be deliberately skewed shorter duration. But in a typical Q1, we would generally have a lower short portfolio. And so there is seasonality in the average balance wouldn't read much into it. The year-over-year number is a much more relevant metric.

Operator:

Thank you. Our next question comes from Tien-Tsin Huang with JP Morgan. Your line is open.

Maria Black:

I really apologize, you actually blipped out during the first part of your question. Would you mind just repeating -- yeah, there was a word missing so.

Maria Black:

Yeah. Listen, so I'm glad you're asking this question actually because I just want to reiterate, we were very pleased with our PEO bookings. And so there wasn't softness, there was strength and growth in the PEO quarter bookings. In terms of how we skewed the year, it was slightly lighter than we had positioned our planning, which is why it contributes the way that it does to the overall worksite employee growth. But, it's -- again, the worksite employee deceleration is really about the PPC story. And so I just want to reiterate, we were actually very pleased with the quarter from a PEO bookings perspective. In terms of the industries, I think it's a mix. I think we continue to see the PEO execute with respect to the industries that we target which tend to be into those categories. As it relates to, this comment around kind of within the PEO, the deceleration that is happening faster in professional services and technology versus the broader base of the PEO. Again, I don't want to give kind of the numbers of what that is, but it isn't like the entire base is sitting in professional services. It's just that subset, if you will, of the base. And it is really, again, kind of triangulate to the macro that we're seeing and the same type of data coming out of ADP Research Institute, out of the BLS and it's really about hiring. So it's less about, call it, layoffs and it's really where the professional services and tech industries, we're doing massive hiring, call it, a year ago, six quarters ago, it's really a lack of hiring that's happening in those businesses. Did I answer that question?

Danyal Hussain:

Tien-Tsin, just on the participation piece of it, the pay per control wouldn't be impacted by participation rate, but the reported revenue would be. So to the extent, workers are taking plans, cheaper plans or fewer plans. And there's a little bit of that. You do see it in the revenue per WSE, but the WSEs themselves wouldn't be impacted.

Maria Black:

Absolutely. So listen, I have to take this question because I think you may know that I'm actually -- I was born and partially raised in Sweden. So I thought it was prudent to make it the very first country that I announced. I'm actually completely kidding. This was obviously well in motion before my time. But I -- it sounds like I might be closer to Sweden than you are. And for us, it is an exciting time for us. We have had this partnership with BTR for quite some time for us to be able to acquire the payroll business of BTR is exciting because the Nordics are growing, and this does give us a physical footprint into Sweden, which allows us to expand further into the Nordics and really take advantage of the growth trajectory of those economies. So this is obviously payroll, but also in the beyond payroll opportunities that we will have in years to come. So really excited about the acquisition not just because it's near and dear to my heart, but moreover because the Nordics represent growth, and it's exciting to think about us having a physical presence there.

Operator:

Thank you. Our next question comes from David Togut with Evercore ISI. Your line is open.

Maria Black:

Absolutely. So yes, we did have great strength in the down markets, kind of moving on up in the mid-market. Certainly, we have continued solid demand in the mid-market. That's inclusive of our Workforce Now platform. It's also inclusive of our HR outsourcing offering. So I spoke a bit about the ASO models, the HRO models earlier in that mid-market also support -- is supported by the PEO. So we do see continued demand from the mid-market. I think the way I always think about it is not getting any easier for companies in that mid-market to navigate being an employer today. And so we expect continued strong mid-market growth. I think in the up-market, since you asked about the enterprise space, one of the call-outs we made last quarter was about the strength that we saw in our next-generation HCM offering, and we did see that strength continue into this quarter, which we think is fantastic. We also see strength in the pipeline in that space year-on-year. So excited about what we're hearing from our clients, the sentiments around the offerings that we have in the enterprise space. And then I think I touched a little bit on international earlier, but our international business did grow nicely in the first quarter. Again, it was a benefit of a little bit of an easier compare year-on-year. But we also had, as I mentioned, a really strong finish and a strong fiscal '23 in our international business. Again, what I measure is partly the results. But as I think about the look forward, it's really about pipelines and what I would say, our international pipeline year-on-year have a fair amount higher than they did a year ago, which gives us the strength to really feel good about our international bookings to remain healthy through fiscal '24.

Don McGuire:

Yeah. So as we've had very favorable reserve releases over the last number of years and somebody called out last year in the K, you would have seen the favorability there. So just to be clear, we are still seeing favorable reserve releases, but we are not seeing -- we didn't see the reserve release to the extent that we did Q1 to Q1 of the prior year. So the numbers will be in the Q, but it's about $6.2 million less than it was in the prior year. So that's the quantification of it. And if you kind of translate that into the margin, it's about 60 bps to 90 bps -- 60 bps of the 90 bps decline comes from the lower reserve release. Now once again, we think that we're going to continue to see reserve releases and were favorable as the actuaries get back to us and let us know what's happening, but we're not seeing any underlying changes or large changes that would lead us to be any less optimistic about seeing continued releases in the reserve.

David Togut:

Got it. Thank you very much.

Mark Marcon:

Hey. Good morning, and thanks for taking my question. At HR tech, you got to see a lot of your new solutions, particularly focused on, the AI Assisted solutions. Maria, I'm wondering if you can talk a little bit about your philosophy with regards to, which solutions you would charge additional for -- how are you thinking about monetization? And then I've got a follow-up in terms of process improvement.

Mark Marcon:

That's terrific. And then with regards to just the productivity enhancement. I mean, particularly when we think about service and implementation, from a longer-term perspective, can you describe how much more efficient you think your service personnel could become? And how much efficiency you could end up gaining there and the implications from, continuous margin improvement as you continue to go along that journey? I know it's early days, but just how are you thinking about that?

Mark Marcon:

Terrific. Thank you.

Scott Wurtzel:

Great. Good morning, guys, and thanks for squeezing me in here. Just on the launch of the construction vertical software. I'm just wondering, is this sort of part of a bigger shift to develop more vertical specific HCM solutions for your clients? I understand, construction may be a more complex vertical, but wondering if there's more of a vertical specific strategy that could develop beyond the construction vertical. Thanks.

Scott Wurtzel:

Got it. That's helpful. And just a quick follow-up. Just wondering if you can give an update on sort of Next Gen HCM and Next Gen Payroll, attach rates and how we're sort of trending there, relative to expectations?

Scott Wurtzel:

Both.

Scott Wurtzel:

Awesome. I appreciate the color. Thank you.

Maria Black:

Yeah. So thank you, Michelle. And listen, it's hard for me not to sit here and reflect on a year ago. And so I was driving in this morning and feeling candidly a bit nostalgic because it's exactly one year ago that Carlos and I sat here and announced the transition of me becoming CEO of this amazing company. And so I'm incredibly nostalgic and proud today. I'm proud of our first quarter results. I'm really proud of the execution of the team, both with respect to the results, but also with everything that you heard in terms of the progress we are making on a very cohesive and strong strategic outline and priorities. But mostly what I would offer is that I remain incredibly humbled by the -- over 60,000 associates that I've had an opportunity to engage with over the last year who continue to make this company everything that it is and absolutely amazing. And I just wanted to say that I'd like to thank each and every one of them for inspiring me every day. So with that, that is the conclusion of our call and until we meet again.

Operator:

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 Fourth Quarter Fiscal 2023 Earnings Call. I would like to inform you that this conference is being recorded. After prepared remarks, we will conduct a question-and-answer session. Instructions will be given at that time. I would now like to turn the conference over to Mr. Danny Hussain, Vice President, Investor Relations. Please go ahead.

Maria Black:

Thank you, Danny, and thank you, everyone, for joining us. We closed out the year with a strong fourth quarter, that included 9% organic constant currency revenue growth, 270 basis points of adjusted EBIT margin expansion, and 26% adjusted EPS growth, and for a full year fiscal 2023, we delivered 10% organic constant currency revenue growth, 130 basis points of adjusted EBIT margin expansion and 17% adjusted EPS growth, representing another strong year for ADP. I'll start with some highlights from the quarter. Our worldwide sales and marketing team delivered exceptional Q4 Employer Services new business bookings growth that was well in excess of our expectations, with strong double-digit overall growth on top of a difficult comparison. The HCM demand environment has been healthy despite a gradually slowing macroeconomic backdrop and we have been capitalizing on this steady demand. Our strong bookings results were broad-based. We had continued strength in our down-market and Employer Services HRO offerings. We also had better-than-expected results in our midmarket, as well as a great finish from our compliance and international businesses. This Q4 performance brought our full year Employer Services bookings growth to 10% compared to our 6% to 9% guidance and our medium-term goal of 7% and 8% growth that we laid out at our 2021 Investor Day. We are, of course, thrilled with this result and excited to keep the momentum going. Our Employer Services retention rate was another highlight in Q4 and came in better than we expected. For the full year, we delivered a retention rate increase of 10 basis points and are back to our record level retention rate of 92.2%, all while absorbing the impact of normalization in the down-market out of business rates. This strong result was driven by record level retention rate, specifically in our U.S. midmarket and international businesses, and by record level overall client satisfaction across our major businesses in the fourth quarter. Our Employer Services pays per control growth was 3% for the quarter, as the overall labor market continued to show resilience, bringing the full year pays per control figure to 5%. We have been pleased all year to see such durable labor demand from our clients. And last, while our PEO revenue growth performed in line with our expectations this quarter, we were pleased to experience a further acceleration in PEO bookings with strong double-digit growth in Q4, representing another record level sales quarter. Moving on, while Don will cover our fiscal 2024 financial outlook, I wanted to spend a few minutes sharing our strategic priorities as we look ahead. Change and increase in complexity are secular growth drivers for the HCM industry and our breadth enables us to address nearly any HCM challenge our clients may face and meet them wherever they may be on our HR journey. From start-up to enterprise, from software-only to fully outsourced, and from local to global, we see a tremendous growth opportunity in front of us. And while our specific growth initiatives will vary by business, there are three key strategic priorities, which apply across all of ADP, that I see is critical to enabling our growth in the years ahead. The first strategic priority is to lead with best-in-class HCM technology. Put simply, our goal is to design, develop, and deliver the very best and most innovative solutions that will help our clients navigate the full lifecycle of employment from hiring employees to onboarding and training them, providing insurance for them, paying them, and filing payroll taxes, and even setting them up for retirement. As much as we offer today, we see an incredible opportunity to improve on our current and next-gen solutions, tactically use partnerships and inorganic means to further accelerate our pace of innovation and continue to offer industry-leading HCM products. And we expect to have a busy fiscal 2024. For U.S. small businesses, we are rolling out several product enhancements that will serve our 850,000 RUN clients, including a new tax ID registration service, learning management to help with small business employee training and an insurance and sector tool that utilizes AI to help clients manage their workers' compensation insurance policies and annual audits. For U.S. mid-sized businesses served by Workforce Now, our focus is to continue our great momentum in the deployment of our Next Gen Payroll and time engine and to drive our win rates and client satisfaction even higher. In the U.S. enterprise space, we expect to nearly finish the migrations of three of our remaining legacy platforms by the end of this fiscal year, representing an important step in our multi-year journey to move our clients to more modern platforms. We are also pleased to have advanced the velocity of our Next Gen HCM implementations and we expect our Next Gen HCM sales to contribute in a more meaningful way to our bookings growth in fiscal 2024. Outside the U.S., we intend to scale our iHCM midmarket platform in fiscal 2024, adding at least 1,000 clients over the course of the year. I am also incredibly excited to share that we will begin offering role outside the U.S. in fiscal 2024 to drive incremental growth. We plan to launch initially in two countries in Europe and expand its reach from there. And we intend to continue growing our Asia-Pacific business in part by leveraging our recent acquisition of a strong midmarket time product to supplement our existing payroll functionality. And across a few of our platforms, including Workforce Now and Roll, we intend to deploy GenAI-powered features to help our clients more quickly and easily tackle certain HR transactions. Our second strategic priority is to provide unmatched expertise and outsourcing to our clients. We pride ourselves on serving as a true partner to each and every one of our one million clients. Our culture of client service applies equally across our entire business from a basic payroll client to a fully outsourced client where we run part or all of the HR department. Our expertise and partnership approach has been key to ADP's winning formula for decades, and we will continue to lean into it. We expect that to manifest in a few ways in fiscal 2024. We have recently been piloting a number of tools powered by GenAI that can help our service and implementation associates deliver an even better client experience, and we will begin deploying these more broadly in early fiscal 2024. Given the significant number of clients we onboard and interact with every year, we expect to learn quite a bit this year about the longer-term benefits we and our clients might realize from GenAI. Meanwhile, demand for our HR outsourcing solutions remains very strong, and in fiscal 2024, we are focused on reaching new clients and further improving the experience for existing ones. Our Employer Services HRO businesses have been performing incredibly well and our focus for fiscal 2024 is to continue delivering strong bookings and keep client satisfaction and retention at current levels or perhaps even reach new record levels. And our focus for our PEO business in fiscal 2024 is to maintain our recent strong bookings momentum by continuing to add to our sales force headcount, grow our referral partner network and use data and machine learning to identify existing ADP clients who maybe a strong fit for an upgrade. Our third and final strategic priority is to leverage our global scale for the benefit of our clients. Our size and scale are unmatched in the industry. Across the globe, we not only offer robust platforms and a commitment to industry-leading service and expertise, but we also provide a scaled ecosystem and a unique on-the-ground presence in over 30 countries. This combination positions us to interact routinely with local governments and tax authorities, meet stringent certification and data requirements, and stay on top of complex and shifting legal requirements. Globally, we bring together our incredible data, an array of partners and integrated solutions, and one of the biggest and best business-to-business sales forces in the world to help our clients and prospects navigate the changing world of work. In fiscal 2024, we will continue to build on that scale for the benefit of our clients. Our GlobalView platform support hundreds of the world's largest multi-national companies with scaled workforces in over 40 countries and our Celergo platform helps us serve thousands more in up to 140 countries. In fiscal 2024, we expect to expand on both as we add additional countries to GlobalView's broad reach and as we potentially make tuck-in acquisitions to enhance our native in-country footprint. After establishing an ADP in-country presence in five new markets in 2023, we expect to expand further in fiscal 2024. Our world-class global scale distribution led by over 8,500 sellers is being supported by headcount and marketing investments in 2024, and as we've shared with you in the past few quarters, our sellers will continue to be paired with a best-in-class sales tech stack, which we plan to enhance with GenAI functionality in the coming months. And our ability to provide data-driven insights will continue to grow in fiscal 2024. ADP serves more clients and pays more people around the world than ever, and as we continue growing the number of employees we serve globally, the power of our insights will likewise continue to increase and benefit our clients. I am incredibly excited about these three strategic priorities for ADP and the differentiation and growth they will continue to drive. But before turning it over to Don, I wanted to take a moment to recognize our associates for their effort and performance over the course of this year. Our associates embody our core values, like insightful expertise, service excellence, and being results-driven. In fiscal 2023, ADP was recognized as the World's Most Admired Company by Fortune Magazine for the 17th consecutive year, signifying the incredibly strong culture we have and the important role we play in the world. Additionally, we were recently recognized, for the first time, as one of the Best Companies for Innovators by Fast Company, a true testament to the direction we are headed in. We owe these accolades as well as our strong consistent financial performance to the commitment and effort of our 63,000 associates that make-up the ADP family. With that, I'll turn it over to Don.

Operator:

Thank you. [Operator Instructions] Our first question comes from Ramsey El-Assal with Barclays. Your line is open.

Don McGuire:

Hi, Owen, thanks. Yes, I'll answer the question. We had a very, very strong sales bookings result in Q4. So we're very happy with that, and we've seen the sales reaccelerate. I think as we said in the prepared comments, we are seeing continued growth in clients. I think if there is a challenge that we're facing a little bit as we're seeing a little bit softer pays per control growth in the PEO than we would have expected. But back to what we've been saying for some time, we think the underlying value proposition is very, very strong and we look to that business continue to grow for us and be a big part of our portfolio.

Operator:

Thank you. Our next question comes from Samad Samana with Jefferies. Your line is open.

Maria Black:

Yes, fair enough. Thanks, Samad, and I appreciate the congratulations on the quarter and the year. We're, obviously, pretty proud over here. So with respect to Roll, it is exciting. It's been an exciting product for us to rollout, no pun intended, across the down-market here in the U.S. We're excited to take it into international. As mentioned, the initial goal is to put it into two countries. And it is an incremental add for us because it's really initially into these two countries. We're thinking more kind of the down-market SMB space, which is an area of opportunity for us across many of the markets that we serve. But we're also excited about Roll long-term beyond that space. So excited to dip it into our international space as we continue the overall rollout of Roll. In terms of factoring it into the overall bookings, not really. I think the - by the time the launch happens and as we're thinking about the full year for our international business or full year for new business bookings, I'd be surprised if it ultimately makes a dent, but to us, it's really about the long-term value that that offer will bring as we seek to expand the addressable market for us into these various places. Last but not least, Samad, you mentioned the complexity of being international. And I have to tell you, I spoke to it a little bit in the prepared remarks. There's a lot that goes into being in each one of these countries. To your point, there is complexity country-by-country. Many countries put many of the states that are complex here in the U.S. to shame in terms of the complexity that provides, and that's everything from government entities, legal and tax attorneys, who's the tax authority and how do you get to them. We often think of it as an ecosystem. We think about it as kind of that final mile, if you will, and that's the complexity and that's what we've been building over the last couple of decades in our international business. So it's a lot more than dropping off software at a country border and hoping that it works. There's a lot to be said for the ecosystem around it. Again, whether it's tax authorities, data lodgement, things of that nature. So excited to take advantage of the footprint we've built and put in our product into that footprint as we expand Roll internationally.

Don McGuire:

Yes, thanks for the question. I'll start here and I think I'll turn over to Maria for the bookings. But we certainly saw strength across the Board. I think once again, in the prepared remarks, we called out the - our tax business and our international business. So they were very strong amongst all the ones that were strong and the down-market was also quite strong. So it was really a contribution from across the Board in the fourth quarter. We talked for some time about how the pipelines are healthy and whatnot, and you had questions before about times to get signatures on deals, et cetera, things came together in the fourth quarter and we were very, very pleased with the final result.

Samad Samana:

Great. Thank you. Appreciate you taking my questions.

Bryan Bergin:

Hi, good morning. Thank you. I wanted to follow-up on U.S. bookings here. So you cited several areas of strength, midmarket compliance, international. On the midmarket, specifically, can you talk about what's driving that better-than-expected performance, do you think that's driving improved competitive performance versus kind of rising tide environment? And then just - I heard your comment on Next Gen HCM contributing more in the current fiscal year to bookings. Maybe talk about the initiatives in the product development that you think is going to drive that.

Bryan Bergin:

Okay. Understood. And then just on pricing, can you comment on where that ended up in fiscal '23 and what you're assuming in ES growth from a pricing standpoint in fiscal '24?

Bryan Bergin:

Thank you very much.

Tien-Tsin Huang:

Hi, thanks so much. Yes. With the great bookings here, I'm just thinking around the conversion. You mentioned implementation cycles. I'm just curious if you've seen any change from clients and their desire to implement. And then similarly, just maybe based on your comments there on next-gen HCM, I'd love to hear a little bit more around the appetite from your prospects to upgrade now at this point in the cycle. What's the pitch here given some of the macro uncertainty?

Tien-Tsin Huang:

Yes.

Tien-Tsin Huang:

Okay. No, that's great. You answered it better than I asked the question. So thanks for that. Just on the - as a quick follow-up, just I heard a lot about the sales and the go-to-market investments that makes sense. Just how about R&D growth here in the upcoming year versus fiscal '23? How might growth be different? And also, how might the composition be different in terms of where you're placing your bets on R&D? Thanks, that's all I have.

Tien-Tsin Huang:

Thank you.

Mark Marcon:

Hi, good morning. And let me add my congratulations, particularly on the strong new bookings. Maria, you went through your three key strategic initiatives and all the subsections - of the various initiatives which ones are going to be the most impactful do you think from a near-term perspective? And then one specific question. Within the mid-market, you mentioned not only deploying next-gen payroll, but you also talked about the time engine. And I was wondering if you could elaborate a little bit on that?

Mark Marcon:

That's great. And then, Don, you mentioned the margin expectations for the full year. And you mentioned that in the first quarter, it's probably going to be a little bit lower and then feather up over the course of the year. How much lower during the first quarter? And what's the driver there? And then how should we think about the pacing of the improvement quarter-to-quarter?

Mark Marcon:

Great. Thank you.

Eugene Simuni:

Thank you. Good morning, guys. I want to come back to the PEO for a second. So great to hear about strong PEO bookings in the fourth quarter and going into the New Year. Can you provide a bit more color on what helped generate this reacceleration in bookings? I know you talked in the past, Maria, about some of the actions you guys have taken to generate PEO sales, I would love to hear what caused the acceleration in bookings? And are those initiatives that as kind of levers you're pulling now completely pulled or is it still work in progress and will continue into FY '24?

Eugene Simuni:

Got it. Okay. Thank you. And then for my follow-up, probably for Don. We talked about margin costs a little bit. So you expect another year of robust margin improvement next year. But obviously, you're not going to have as much tailwind in revenue growth as you had this year. And if you kind of do some of the [bet and Roll] math, it looks like your adjusted OpEx will need to grow slower next year than it did this year for you to hit your goal. So just hoping maybe you can talk a little bit, what are, the areas of spend where you will temper next year or maybe pullback, especially if macro conditions are not as good as kind of we expect them to be?

Eugene Simuni:

Got it. Very helpful. Yes perhaps.

Scott Wurtzel:

Hi, good morning guys. And thanks for taking my questions. Maybe, Don, first on the cadence of revenue growth. I know you said it should be relatively stable throughout the year, but wondering if you can maybe sort of parse that out between ES and PEO if there's any differences we should think about there?

Danyal Hussain:

Yes, Scott, there is a slightly different cadence for the two, it's not a huge difference. For PEO, we do expect an acceleration over the course of the year. So, the contribution we get from our bookings and from the improvements in retention, we're expecting gradually overcoming slowing pays per control that should lead to an accelerating PEO revenue growth. And on ES, we're expecting some deceleration assuming pay per control decelerate and assuming the contribution from client funds interest starts to fade gradually over the course of the year. So you end up with two different-looking ramps, but they offset and that what nets us to a very stable revenue growth overall.

Maria Black:

Yes. And so said differently, the good news is we just went through our strategic plan process in the last six months. And so, we had all of our priority sequence in all of our investments and incremental investments lined up. As we marry that to Gen AI, we have a very clear lens on where some projects may get enhanced and where some projects may look different and perhaps get replaced by a new way of thinking about it. And so candidly speaking, we're going through a lot of these opportunities at this juncture kind of thinking through the bets and there will be incremental investment. And there will be other investments that we repurposed to go do some of these things - in a new way. So, the answer is both.

Maria Black:

Thank you.

Peter Christiansen:

Thank you. Good morning. I'll also add to the congratulations ratio. Nice trends. Maria, a question on the international scaling effort here. I was just wondering if you could - in this context, if you could put some parameters on expected investment spend, I guess, over the next one to two years? And do you see M&A as an important contributor to the growth algorithm there?

Peter Christiansen:

Correct.

Don McGuire:

Yes, maybe just to add, I think what we've been doing, Peter, over the last number of years is we have done a number of acquisitions. They've been mostly tuck-ins, but we did have three interesting ones over the last year. We acquired an Italian company that has a good budget payroll - budgeting software tool that's very prominent in the Italian market. We acquired our - so it streamlines [indiscernible] partner in South Africa. And we also want a very exciting mid-market time-and-attendance product called SecureX in out of Bangalore in India. So - and that product is available in India, most of Southeast Asia and the Middle East. So, I think that's a demonstration of what we've been doing, we've been looking at and focused on to continue to make sure we grow that footprint, and we do think it continues to be an exciting space for us.

Don McGuire:

Yes. So I think as those - investments mature, you're going to see those investments reinvested at higher rates, and we do expect to see our average return go up over the course of the year. The current reinvestment schedules, overnights are reinvesting at 5%. The extended in the loan portfolios are being reinvested at about 4%.We don't expect to see a huge change in the mix. Although the average duration of our investments has shortened a little bit over the last couple of years. But you can pretty much look at those yields, look at the maturity schedule that we provided and then look at the composition of our portfolio across the overnight, the extended and the long and pretty much come to a conclusion or come to some numbers on where you think we're going to end up.

Don McGuire:

Yes. We've had this question a few times, and - the answer is we've been very successful with the strategy that we've had for the last 20 years. We certainly see that there is an opportunity cost not ever having everything in short today. At the same time, we do believe that the yield curve will normalize and the strategy we've had in place will come back and be beneficial to us over the longer term. So you shouldn't expect any significant change in our investment strategy.

Operator:

Thank you. Our next question comes from James Faucette with Morgan Stanley. Your line is open.

Maria Black:

Yes, fair. It's a fair observation, James. Appreciate it. I think the we thought about - by the way, I wish I knew the answer, right? So the question you're asking which is how much conservatism is in there? And that's all to say and you hit the nail on the head, we set into this year guiding minus 25 to 50, we're stepping into fiscal '24 with a guide of minus 50 to 70 - and we hope - I'll end - or I'll start with, we're very happy with where things are. We're firing on all cylinders. We have many businesses that have record MPS results, record retention results and everything is good. And so as we step into the year, the way that we are modeling what you would see in pays per control. The way we're thinking about the potential macroeconomic tempering, if you will, specifically in the back half, is really a byproduct of how we see retention. Part of what we saw in the fourth quarter that led to the incredible results that we had was that the normalization that we've been seeing in the down-market, we did actually see the down market bounce a little bit. So even while it was down year-on-year, it came in stronger than we expected. And so we do anticipate that we may need to give some of that back, which is why we believe it was prudent to align our retention targets through our medium-term targets that we gave back in the Investor Day of 2021. So I wish I knew the answer to your question in terms of how much conservatism, why we are guiding to what we're guiding is really about the economic outlook, whether that's GDP, unemployment is still at record lows. We haven't seen unemployment rates that low since the 60s. And so our guess is as good as yours at some level, but we did build in some tempering of the economy in the back half, and that's really what's yielding that guide on the retention.

Don McGuire:

Yes, James. So in terms of what we're targeting, what we're talking about, there's always things kicking around, of course, but we want to make sure that anything that we do acquire either fits well in the core and gives us additional capability, or it's something that really exceeds some functionality capability that we currently have, so that we're not stacking on more and more product on top of what we already have. The other area, of course, is to make sure that - we do things that are natural adjacencies - are very strong adjacencies to what we already do so that they fit well. And then thirdly, of course, is making sure that we can sell these things and run these things in a recurring model, so that we can sell them the way we sell everything else we sell today and operate them and expect to get revenue anticipation and good model from what we buy. So I think those are the things we think about. I think we're hearing a lot around valuations coming down in the press, certainly a little bit of a dearth of activity, if you will, in the M&A space these days. But we do have lots of conversations about acquisitions and whatnot. I still think, of course, everybody is looking to get a premium what they have. And we're trying to make sure that if we're going to buy something, we're paying the right price. But we don't actually get to the point of many of these conversations given the conditions that I stated at the front at the outset to actually have a view on overall valuations in the market. We likely get to talking about valuation in a very, very few number of cases. Remembering, of course, very, very few of the opportunities we get even get to that conversation. So I don't think I can say we have a general view. But we are focused on what we would have to pay and how things would fit into ADP.

Operator:

Thank you. Our last question comes from Kartik Mehta with Northcoast Research. Your line is open.

Maria Black:

The PEO has a tremendous value proposition. I think we always refer to ADP as an all-weather company. I would say the most durable of our all-weather businesses is the PEO. And a lot of that has to do with the ability to flex that value proposition in a downturn pretty quickly. So if you think about clients that are growing, they enjoy the PEO because it's a quick go-to-market. On the downside, if you will, as clients are potentially trying to work through economic headwinds, the PEO serves as a place that has a clear return on investment, has a total cost of ownership that's very again, very clear. And so I think it's a business that not to suggest that it's not impacted by a downturn, but it's a business that kind of works in both. What I would say is our sales force, we're able to pivot that narrative and that value proposition as warranted. I don't believe that has happened. So to answer the question, our clients at this point, hesitant to purchase something such as the PEO that's so comprehensive because of the macroeconomic challenges. And my view would be, no. I think that's substantiated by the record results that we had in the PEO bookings in the quarter. We also saw that strength in bookings in the third quarter. So I think that value proposition is holding firm. And I think it's a business that should - should the economic wins ever come to life that we've been expecting for so long. It's a business that can pivot pretty quickly and the demand for the offer remains.

Don McGuire:

No. We're certainly not anticipating this as you go negative. We do, though, think it's going to go to somewhere ever 1% to 2%, which is a little bit less than our historical average. However, I just want to make sure that everybody understands, we're exiting the year pretty healthily. So we figure we're off to a pretty good start, but we do expect that we're going to see a bit of a decline over the next three, four quarters. And once again, we're aligning ourselves to the best we can with unemployment forecasts and et cetera.

Kartik Mehta:

Okay. Perfect. Thanks Danny. I appreciate it.

Maria Black:

Thank you, and thank you, everyone, for joining today. As you've heard, Don and I, the entire leadership team we're incredibly pleased with fiscal '23, specifically the fourth quarter and the finish. So I'll kind of end where I started, which is, I want to take the opportunity to once again thank the associates that create this performance. It's an unbelievable magical thing to watch it all come together and deliver what we just delivered. And so my gratitude and I celebrate each and every one of them. I also want to thank all of the stakeholders, including all of you who listen today, appreciate the support. We're certainly excited for fiscal '24. So cheers to that.

Operator:

Good morning. My name is Michelle and I will be your conference operator. At this time, I would like to welcome everyone to ADP’s Third Quarter Fiscal 2023 Earnings Call. I would like to inform you that this conference is being recorded. [Operator Instructions] I will now turn the conference over to Mr. Danny Hussain, Vice President, Investor Relations. Please go ahead.

Maria Black:

Thank you, Danny and thank you everyone for joining us. For our third quarter, we delivered strong results, including 10% organic constant currency revenue growth, 110 basis points of adjusted EBIT margin expansion and 14% adjusted EPS growth. Our continued solid financial performance underscores the power of our innovative and mission-critical HCM solutions that serve over 1 million diverse clients around the world as well as our highly recurring revenue business model. As usual, I will start with some highlights from the quarter. The demand environment was healthy overall. And in Q3, we drove another quarter of solid Employer Services, new business bookings growth, representing a record Q3 bookings amount. Bookings performance continues to be particularly strong in our downmarket portfolio. In Q3, we sold and started over 60,000 new run clients, where a new user experience has helped us reach record level new client satisfaction rates these past few quarters. We also had strong bookings results in our insurance and retirement services offerings supported not only by legislative tailwinds, but also by the competitive positioning of our downmarket HCM ecosystem. Demand for our employer services HR outsourcing solutions remained high and we have recently reached the 10,000 client mark. We also saw continued booking strength in our compliance-oriented solutions, including tax remittance and wage payments, which have always been key differentiators for us. On a year-to-date basis, we are within our bookings guidance range and are trending in line with our expectations from the outset of the year and we look forward to finishing the year with a strong close. Our employer services retention rate came in better than expected once again. While we continue to experience normalization in our downmarket out of business rates, this was offset by the strong retention rates in our U.S. mid-market and international businesses, both of which continue to benefit from years of improving client satisfaction. As such, we are pleased to be raising our full year retention guidance. Our employer services paid for control grew 4% for the quarter and continues to decelerate at a very gradual pace. As we have seen for several quarters now, layoffs at many larger companies have been offset by the labor demand elsewhere, which in total has resulted in year-over-year employment growth. With this continued resilience, we are pleased to expect the higher end of our previous pays per control guidance range. Last, on our PEO, while growth in revenue and average works on employees continued to decelerate this quarter, we were pleased to see PEO bookings growth reaccelerate nicely in Q3, especially in March. This represented a much better performance than we experienced in Q2 and resulted in our largest quarter for PEO bookings ever. Despite the current inflationary environment and broad-based macroeconomic uncertainty, we are focused on our PEO sales execution and on delivering continued strong client satisfaction and we remain confident in the long-term secular growth opportunity. Stepping back, while we are pleased to be on track to deliver very strong full year financial results, we are even more excited about how we are leveraging our unmatched scale and decades of innovation experience to drive continued progress on our important modernization journey. We are making our solutions more powerful and easier to use and we are making our unparalleled insight and expertise more accessible than ever. In doing all this, we are delivering an experience that’s better for our clients, better for their employees and better for ADP. I mentioned the tens of thousands of new clients we onboarded in our downmarket, over a third of those clients utilized our digital onboarding experience, yielding a faster time to start, happier clients and greater productivity for our implementation team. We just completed our busy year-end period during which we helped our clients with over 75 million U.S. tax forms and to further enhance the client experience, we proactively service critical year-end data to our clients before they had to search for it. This not only reduced friction for them, but also reduced the number of calls and interactions with our service teams. For years, we have directly engaged and served our clients’ employees through channels like Wisely. As we focus on the overall employee experience we can offer, we continue to add valuable functionality like a savings envelope that employees have used to move more than $1 billion into savings over the last 12 months and a new financial wellness hub with tips, tools and education to drive better financial outcomes. With our new intelligent self-service solution, we are already interacting with over 3 million client employees per month through our action card feature. And our voice of employee solution is helping thousands of clients obtain better insights from their employee population, which can drive higher engagement and satisfaction for those employees. The opportunity to continue creating value and efficiency in the world of work is meaningful and we believe these modern approaches that reduce friction and exceed client expectations will help us deliver on that in the coming years. With that in mind, I want to provide some perspective on how we are strategically positioning ourselves to invest over the near-term given the economic backdrop. As we shared earlier this year, in fiscal 2023, we were impacted by higher wage inflation. We also added to our service and implementation capacity to meet the expectations of our growing client base and we invested throughout the year in sales and product. As we position for potential economic slowdown beyond this fiscal year, we are being thoughtful about how we prioritize our investments. At the same time, we are very much committed to our ongoing modernization journey, which is critical to our sustainable growth and that will require continued steady reinvestment into the business. In the coming quarters, I look forward to updating you on near-term growth priorities for ADP. Before turning it over to Don, I want to take a moment to recognize our associates for their continued focus on helping our clients through the many challenges they face each day, especially amid these uncertain times. Resiliency and partnerships represent core components of the ADP brand promise and are among the many reasons businesses around the world choose to partner with a leader in the industry. Our unrelenting support through years of growth, years of challenge and the years in between is something they have grown to count on and we are honored to support them. With that, I’ll turn it over to Don.

Operator:

Thank you. [Operator Instructions] We will take our first question from Bryan Bergin with Cowen. Your line is open.

Don McGuire:

Yes, Brian, good morning. Thank you for the question. It’s still early. We are still in the middle of our planning process. I think we have a lot of things going in our favor sales. We are – we still have relatively high client fund interest. Pays per control have been good and strong. Bookings continue to be strong as we said earlier. So as we get into ‘24, I think we are going to be in a pretty healthy spot with what we know today. I guess the challenge we all have is trying to guess what’s coming in terms of the broader macro situation. We continue to see strong demand. Retention continues to be pretty good, although it’s normalizing a little bit in the down market as we did expect. But I think things feel pretty good at this juncture. So I am going to have to ask you to bear with us a little bit as we make our way through our plan and we stay tuned to what’s going on in the macro environment even closer as we get forward or closer to our July 1 beginning of the year.

Don McGuire:

So the – we did have, as you mentioned, we had a particularly strong PEO bookings month in March, which we are optimistic is going to continue and help us as we go forward. Certainly, we are going to have to see how those bookings continue through the balance of the year, trying to anticipate how those are going to actually result in revenue. Things do start relatively quickly in the PEO business, but it’s going to take some time once again to see how that stuff rolls from bookings into revenue. But we are pretty optimistic about how things went in the third quarter, especially with the finish and we do expect to see that reacceleration as quickly as we want to. And by the way, back to your earlier question a little bit, we talked about high single-digit growth in our mid-term view and we won’t be happy if we don’t get something like that.

Bryan Bergin:

Okay. Is that just a function of the type of client within PEO?

Bryan Bergin:

More white collar?

Bryan Bergin:

Okay, thank you.

Bryan Keane:

Hi, good morning. Thanks for taking my questions. I guess just trying to look at Employer Services, really strong growth in the quarter, 12% organic. If you back into the guidance for fourth quarter, it looks like a little bit of a deceleration. I think you get to something around 8% growth. So just trying to understand the puts and takes there for the fourth quarter guide versus the strong results in the third quarter?

Bryan Keane:

Got it. Got it. And then on the bookings side, although bookings were strong, I think you commented maybe towards the lower end of the range of 6% to 9% and just can you help us maybe think about how bookings will translate into future revenue growth for the employer services? If you can just remind us, just as we get our models set or start thinking about fiscal year ‘24.

Don McGuire:

Yes. So on the modeling side, roughly a 1% change in ES bookings growth impacts us in the $17 million to $20 million annually on revenue growth. So that’s kind of how we think about your models. I think that’s been pretty consistent.

Bryan Keane:

Great. Alright, thanks for the color.

Eugene Simuni:

Hi, guys. Good morning. Maria, I wanted to pick back up on your comments about the break down market. Maybe elaborate on that a little bit, what are the macro factors, your competitive positioning that’s still supporting that? And if you could contrast that for us a little bit with what’s going on in the mid-market. I know it’s still doing well. But if the question is, is there a path for mid-market to get to as strong of a point down market? And what are the levers that maybe you’re able to pull to get you there?

Eugene Simuni:

Got it. Very helpful color. Thank you. And then for my follow-up, I want to quickly come back to the PEO. Can you talk a little bit about the kind of the macro headwinds for the PEO order? I think we discussed last time, specifically the insurance attach rates, insurance premiums, kind of blocking PEO growth. Is that still a factor or not any long-term?

Eugene Simuni:

Got it. Thank you very much.

Kevin McVeigh:

Great. Thanks so much. Hey, Maria, I think you talked about 60,000 new run clients in the quarter. Can you help us dimensionalize that? Where would that typically be? And how should we kind of expect that to evolve going forward?

Kevin McVeigh:

It did. I guess I was just – I know Q3 is a high watermark. How should we think about 60,000 maybe relative to Q3 of last year? Was it 40? I mean, just trying to understand like how the momentum is accelerating there? And then just what’s the profitability? Because it sounds like a third were digital onboarded, like the ones that are digitally onboarded, how much more profitable are those than a traditional client that’s onboarded? Just trying to get a sense of if we’re an inflection point in terms of the growth there.

Kevin McVeigh:

Helpful. Thank you.

James Faucette:

Great. Thanks very much. I wanted to quickly Maria, ask a clarifying question. On the mid-market, you kind of talked about some of the things that you’re doing there. But just to be clear, it sounds like from your perspective that it’s more issues or things that ADP can do to address versus macro? I just want to make sure understanding kind of your list of objectives and things to do in that segment.

James Faucette:

Got it. Got it. And then I guess maybe dovetailing with that, can you speak a little bit about the competitive environment? And any changes you’re seeing there? Or what are you seeing from customers? Is there a flight to quality versus maybe some of the regional players and what is the impact of newer entrants? Just can you give us kind of a state of the competitive landscape?

James Faucette:

That’s great. Thank you so much for that color, Maria.

Operator:

Thank you. Our next question comes from Kartik Mehta with Northcoast Research. Your line is open.

Don McGuire:

Yes, Kartik, it’s a good question. So certainly, talked about pays per control growth decelerating. We called that out. And we’ve also – I mentioned earlier, for ‘24, I think there is a risk that it decelerates further. So we will have to watch and see what happens there. On the inflation side and pricing, we’re still in the early days of our FY ‘24 plan. So we’re watching it carefully. I think we can say that we are happy with the impact of the results of the price pricing decisions we took in ‘23. We had those readily accepted, I guess, with – reflected by our higher NPS scores by our continued strong retention. So we have an ability to take price. But as we always come back to, we’re in this for the long haul with our clients, their long-term retention is the most important thing to us. So we need to make sure that we continue to have that good value proposition between what the absolute prices, how much price we can take, etcetera. But once again, Kartik, it’s definitely something we’re looking at and trying to evaluate as we get closer to putting the plan to bid.

Maria Black:

I would say that’s always the case. I think every year, as we go through renewals, as we go through the year-end cycle, you have clients that are choosing to buy into the PEO and you have clients that are choosing to exit the PEO. When I look at where we get our clients from, obviously, I think we’ve cited multiple times that about 50% of the new business that comes into the PEO comes from our existing ADP base that would suggest that at least 50% come from a non-PEO environment, and we somewhat tend to return them the same way. So that’s not to say that clients don’t, at times, we don’t trade customers between us and the other PEOs. But generally speaking, I think that’s always the case. I don’t believe there is a larger trend toward that this time than there has been in the past. I think, really, in the end, it’s really a byproduct again of kind of what we saw with the renewal post pandemic and what the impact of that as we headed into this selling cycle, if you will.

Operator:

Thank you. Our next question comes from Ramsey El-Assal with Barclays. Your line is open.

Maria Black:

Fair. Thank you, Ramsey. We are excited about the PEO reacceleration, specifically what we saw in March and obviously, how we feel stepping into this final stretch. I think it is too early to comment on the finish, but the pipelines are strong. What I would tell you is that I’m bullish about the demand in the market for the PEO and the overall value proposition. So all things being equal, I think we’re positioned well as anybody else as it relates to the overall PEO, I guess, demand, if you will, right? So I don’t think it’s a – the reacceleration was really, in my mind, more a byproduct of top of funnel filling the pipeline. We made a lot of investments into our seller ecosystem and the PEO. We have incentives that we can pull. In addition to that, we’ve invested into – and I think I’ve talked about it a couple of times on these calls. We’ve invested into artificial intelligence that actually looks across our base to a project where we are actually looking at the ADP base to try to serve up the right, call it, PEO seller at the right time to the right ADP clients. So we’re getting smarter. I am not doing a good job saying it outside of we are getting smarter in terms of who we are actually targeting on the PEO using technology today that didn’t exist. So, I think all of that has kind of yielded to what I would say is a strong execution by the PEO sales team to drive the reacceleration that we would expect and that we are excited to see and optimistic that it will continue.

Maria Black:

Are you referring to the PEO specifically or the overall macro?

Don McGuire:

Yes. Maybe I will jump in. I think in terms of verticals, certainly seeing all the reports and reading all the things about commercial real estate that everyone else is. That’s – we look at the breadth and the distribution of our client base, it’s pretty broad. So, I am not so sure that we are seeing any particular verticals that are causing us any undue concern at this time. I would say, has been reported, Maria mentioned it in the prepared remarks, certainly, the enterprise space, the up-market space is where there has been a lot more layoffs announced, etcetera particularly in tech. So, we are looking at that. We have said in the past though that’s not the biggest part of our business. So, even though there is some more softness in that end of the market, it’s being more than offset by the success we are having in the down in the mid-market. So, from a particular vertical, nothing in particular.

Operator:

Thank you. Our next question comes from Samad Samana with Jefferies. Your line is open.

Maria Black:

Yes. Thanks Samad and good morning. I am happy to talk about modernization. It’s one of my favorite topics as all of you are probably learning from my prepared remarks. And I think it’s important to think about the modernization journey we have been on and how it really can set us up for kind of future growth and future margin, if you will, as a company. And that’s really what it’s all about for us. I think we have been undergoing transformation. We have been undergoing modernization for years. I would actually suggest that ADP has been modernizing for the last 73 years as we have invested in technology to make things better for us as a business to become more efficient, and we have been investing in our clients and in product to make it easier for them. And so I think that’s not a new cycle. The way I think about modernization is really a client first lens, right. So, it’s really about all the things that I cited. It’s about taking out friction. The way I think about the investment, which is your question, Samad, is it’s an imperative for us to continue to invest in modernization because it’s the modernization that over time has really allowed us to reinvest in growth and reinvest in the business. And we are committed to a continued journey of growth and margin. And as a result of really the way we have been able to do this. So for us, it’s really about both. It’s really about the end, right. So, it’s about growth and margin expansion. And I think this virtuous cycle that we have been on really as a company for a very long time, which is we make things easier, we make them better. We become more efficient. We make things better for our clients, and that allows us to invest in growth and it allows us to invest in – back into our shareholders, if you will, in margins. So, it’s really an end story and it’s key to who ADP is and it will be a key for us as we go forward. In terms of the commentary that I made around how we are thinking about it and the macroeconomic backdrop, it is an important time to make sure we are making the right choices and the right trade-offs. I mentioned earlier, we have been in the middle of our strategic planning process the last quarter. And as we have gone through the business, if you will, end-to-end, rest assured that we are trying as a company to make the very best decisions to have the very best outcomes as it relates to growth and margin.

Don McGuire:

Yes. I think there is a couple of things going on. One, certainly, we are continuing to benefit from bookings growth, retention, price pays per controllers all a little bit stronger. And we certainly are getting lots of tailwinds. We have lots of tailwinds in Q3, in particular, from client fund interest. So, that’s been very helpful for us. The things slow a little bit from a client from an interest perspective in Q4. So, that certainly is not as helpful as it was. And we are of course, as Maria just mentioned, we are taking advantage of some of those extra flow funds that we have to invest – reinvest in the business or continue to invest in the business on modernization. So, it’s all about I think trying to find the right balance and still delivering the – as we mentioned, higher end of the earnings per share prediction or guidance. So, it’s all to find the right balance, and we will continue to invest in modernization and deliver improvements as we go forward.

Operator:

Thank you. And our next question comes from David Togut with Evercore ISI. Your line is open.

Danny Hussain:

It was $17 million. You will see it in the Q compared to $7 million last year. So, it wasn’t a huge amount.

David Togut:

Got it. And then just as a follow-up, Don, could you walk through your strategy on managing the tax filing float going forward? We have got a pretty steeply inverted yield curve right now, which means it’s actually more expensive for you to borrow in the commercial paper market and invest flow medium-term duration bonds. Are you thinking of shifting the investment portfolio at all in the year ahead?

Danny Hussain:

David, one point worth clarifying because this has come up before. If you look at the last slide of our earnings presentation, you will see a disaggregation of client short extended and long. And one thing I think is worth emphasizing is that we are net long exposed to the client short. In other words, if short-term interest rates went up and up and up, that would actually be beneficial to our earnings and our margins. It just shows up in two different places, which can often cause confusion. But it’s actually not hurtful to us to have these higher borrowing costs because we have more dollars invested long in the client short portfolio.

Operator:

Thank you. Our next question comes from Mark Marcon with Baird. Your line is open.

Maria Black:

Sure. So overall, I think modernization is really about end-to-end. So, think of it as product and continuing to make investments in ensuring our products are next generation, if you will. And that’s certainly the case across many pieces of our portfolio, and you are well aware of the investments we are making in next-generation technology. I think product is a big piece of it. I think other is the internal modernization. So, that would be everything from go-to-market to call it, the seller ecosystem modernization. I think I have spoken to that quite a bit in the past as well as how we actually serve our clients. And again, we reference that today. So, kind of going back to modernization specifically in our opportunity in international, we are very excited about our position in international, very excited about the opportunity that we have. And this is definitely an area that we have been modernizing. So, if you think about each and every country that we serve over 140 countries today that we have offers over time, we have been modernizing the platforms, and we have been consolidating platforms. But to your point, Mark, that work is not done. And so we still have that journey that we have been on is the journey that we are going to continue. But as we do that, we are also focused on ensuring that we continue to make the investments to the platforms, and we continue to make the investments into the overall ecosystem of how we serve our clients international to really drive further, call it, opportunity. And so there are still places in international, and I will probably leave it with, we will be back next quarter to talk more about things such as our growth strategy. But I think as it relates to international all of that modernization should also yield a growth opportunity for us because it’s still a big world and there are places that we – even though we are in more countries than anybody else, there are countries that we don’t exist, there are segments within certain countries where our offer still has opportunity. And so we were incredibly excited about the overall international space where we are, the work that we are doing and where we are going.

Maria Black:

What I would suggest, Mark, is that over the last few years, the conversation in the international space has definitely shifted a bit, and I could suggest the same thing, which is that it’s picked up. And so that conversation today tends to lead with more of a global offer, global system of record kind of conversation. So, we walk in today and we have a conversation with a client more often than not about how many countries are you in and where can we help serve you and how can we tie it all together to make an ability for that client to really see across multiple countries and have more of a unified experience versus, I would say, perhaps 5 years, 10 years ago, it was more of a country-by-country conversation. Today, it’s more – it starts with a multi-country conversation. And so I think all of that suggests, but it appears you have heard from others, which is the narrative in the international is shifting. I think there is greater demand for HCM offerings in international as it relates to companies now that are more global than they have ever been. And certainly, the hybrid environment has accelerated that a bit. And the ability for companies to be able to see their workforces and make talent decisions, headcount decisions across multiple countries. That’s a very different conversation today than it was just a few years ago. And we see that when we have, we just recently, actually, this quarter, we had all of our international clients together at an event. And the topic is about their transformation. It’s about their HCM transformation and the partnership that we have with them to solve for them. And I think the beauty of ADP is that we have the ability to solve the MNC, the multi-country piece. And we also have the ability to solve the in-country. And a lot of times, for clients, it’s a mix of both. And so it’s really about the flexibility we have in our partnership options to serve these clients in a very unique way.

Operator:

Thank you. We have time for one more question. And that question comes from Tien-Tsin Huang with JPMorgan. Your line is open.

Maria Black:

So, we have leaned into the down market in terms of the investments we have made. So, when I think I referenced earlier the seller headcount as we head into the final stretch here and how pleased we are with the investments we have made in headcount and the ecosystem around them, so investments into the channels, things of that nature. And as all of that turns into more productivity because the headcount is actually gaining tenure. It is primarily setting those investments have been in the down-market. So again, think our SPF platform, the retirement services, insurance services, most of that also comes into our digital sales organization, also known as the inside sales. So, we are making investments into inside sales to really serve the down market. And what I would suggest is that from our viewpoint at this point, the demand is there. We have leaned into that demand and we will continue to lean into the demand to drive the growth that we are driving out of the down-market as long as it exists, if you will.

Maria Black:

Yes. Thank you, Tien-Tsin. I am actually – I am thrilled you asked this question because I was counting on it during this call because it definitely seems like it’s the topic du jour. But the real answer is, just like everybody else, we are incredibly excited about generative AI. We have been very excited about AI for quite some time. You mentioned what we have been doing for our sellers in the PEO, that’s broad-based work that we have been doing for a long time and continued to invest in AI into making us more efficient. That example is about our sellers. We are making similar investments even with the new technologies that are out there to really look at how we can make our service associates as well as our sellers more productive. So, you think about all the things that an agent, if you will, does today to support a client and some of the generative AI tools that can drive a different level of efficiency. And we are very excited. We have I think it’s something around like 44 different work streams that are underway currently to take a look at different ways that we can leverage these tools internally. That’s also notwithstanding the opportunity that it creates for our industry, right. So, if you think about the HCM industry, there are still very many things inside of HCM that are administrative in nature in terms of whether it’s job descriptions, performance reviews, things that are maybe handbook, things that are very tactical that really a time pulled back the practitioner from doing what they want to do, which is be a strategic partner. And so we are really excited to put these tools also into our product for our clients and our practitioners to be able to lean into. So, all that said, we are very excited about the opportunity. One thing I would point out because it’s important, and it’s also very topical right now, which is that the good news is we have been doing a lot of this work. And as such, we have standards. We have a way to think about the ethical nature and that kind of comes at parity with who we are, given that we have the big data, if you will, behind ADP and the 40 million wage earners that we pay. And so when we think about all of this, also with the lens of doing it the right way and making sure that it’s applicable, it’s secure, it’s compliance, all the things that you would expect from ADP. But no doubt, Tien-Tsin, that we are excited about the opportunity it creates for us internally and the opportunity that it creates for us and our product to really serve the industry, right, and make this entire industry that much more strategic and not much more exciting. So, great question.

Operator:

Thank you. This concludes our question-and-answer portion for today. I am pleased to hand the program over to Maria Black for closing remarks.

Operator:

This concludes the program. You may now disconnect. Everyone, have a great day.

Operator:

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 Second Quarter Fiscal 2023 Earnings Call. I would like to inform you that this conference is being recorded. After the prepared remarks, we will conduct a question-and-answer session and instructions will be given at that time. I would now like to turn the call over to Mr. Danyal Hussain, Vice President, Investor Relations. Please go ahead.

Maria Black:

Thank you, Danny, and thank you, everyone for joining us. ADP delivered strong Q2 results headlined by 10% organic constant currency revenue growth; 120 basis points of adjusted EBIT margin expansion; and 19% adjusted EPS growth. We continue to deliver exceptional value in the HCM market as we invest in ourselves and innovate to continuously meet and exceed the changing needs of our more than 1 million diverse global clients. I'll start with some highlights from the quarter. In Q2, we drove very strong ES new business bookings growth, which included an incredible finish in December. We have continued to see robust demand across our downmarket portfolio and our ES HRO offerings and our international sales performance, especially our GlobalView platform was much stronger in Q2 after a softer Q1. Overall, we are pleased with our sales results for the first half of the year, and although clients are still dealing with a number of uncertainties, our pipelines are healthy, and we feel well staffed, and well positioned to deliver solid bookings growth for the remainder of the year. Our ES retention was once again a source of outperformance with modest year-on-year improvement in Q2 overall despite continued normalization in down market out of business rates. This strong result was just shy of the record retention set during the pandemic and was led by our mid-market, our upmarket, and international businesses. And we're pleased to be taking our full year guidance up slightly. Our pays per control metric was 5% for the quarter, decelerating slightly from Q1 as we had anticipated. Job growth in the U.S. labor market has been slowing, but clearly remains solid, which you see reflected in our client base. Despite recent headlines noting job cuts by number of companies, we have yet to see broad-based softening in the labor market. Last, on our PEO, our growth in average worksite employees was solid at 8%. While we have been expecting growth to decelerate over the course of this year, the pace was a bit faster than we previously assumed and we're adjusting our outlook accordingly. With that said, demand for the PEO solution remains healthy. The secular growth opportunity is unchanged, and we are well positioned to reaccelerate our worksite employee growth. Stepping back from the quarter, I want to provide a quick update on our broader strategy. Over the last several years, you've heard us talk a lot about the modernization of our products. Our simpler user experience enhances ease of use for our key platforms like RUN and Workforce Now, and enables a more seamless integration to complementary solutions like insurance, retirement and payments. Our Next Gen Payroll engine is a prime example of how we're modernizing the back-end of our solutions, and we continue to offer it to a broader set of new mid-market clients. And brand new solutions like Roll in our Next Gen HCM platform position us to address certain HCM opportunities more fully than before. These product enhancements are designed to drive win rates and retention even higher, and we have tremendous opportunity in front of us. But our strategy has always been about much more than just offering HCM software. ADP clients want us to help them find, hire, pay, engage, and provide for the retirement of their workers in a thoughtful and compliant way. To truly solve for these needs, we are modernizing all aspects of the client relationship. That starts with product, but also extends to our go-to-market approach, how we onboard our clients, and even how we advise and support them on critical issues. We refer to this collective effort as our Modernization Journey. And as with our product journey, the opportunities here are incredible. We are removing friction and enhancing the client experience in many ways. In our U.S. down market, we continue to digitally onboard tens of thousands of clients every year, making onboarding easier for our clients and accelerating time to start. We have seen this success in the U.S. and we're beginning to scale the same capability in Canada. Our Intelligent Self-Service capability launched only last quarter is already helping a portion of our client base answer millions of questions from client employees through a completely automated process. And now in our international portfolio, we're implementing chatbots to reduce work for those clients as well. We continue to invest in our robust partner ecosystem, cultivating deep relationships and integrations with financial advisers, CPAs and benefits brokers to provide a seamless experience for our mutual clients. And we're using the power of our extensive data to deliver insights to bring greater value to clients from better aligning pays to market trends, to reducing the frequency and severity of workers compensation claims, to identifying tax credits and other legislative incentives. To bring this large-scale Modernization Journey to life, I'll speak to one of our fastest-growing businesses. ADP retirement services, which helps employers establish and administer retirement plans. Businesses today face a complex environment with significant legislative change and our clients look to us to help them navigate these changes, stay compliant and address talent challenges. For example, in the retirement space specifically, the recently passed SECURE Act 2.0 alone has over 90 provisions for businesses and employees to consider. And what we've designed makes life easy for our clients and partners, improves the financial wellness of their employees, and sets us apart in the market. Our robust 401(k) solution with thousands of different investment options is not only clean and intuitive, thanks to our new UX framework, but is also deeply integrated with RUN and Workforce Now. Our highly tenured, licensed, retirement services sales force understands our clients and understands which solutions to make a meaningful difference in a client's unique talent strategy. To expand on our partnerships with financial advisers, we recently developed a platform called Advisor Access, much like the Accountant Connect platform we developed for the CPA community years ago. This positions us better to serve our mutual clients and their employees. And our tax credit team, full of experts in their field, is there to help our clients or their CPAs apply for, and obtain the appropriate legislative incentives. Our goal in our Modernization Journey is to consistently improve the full end-to-end experience for our clients and their employees, which will in turn contribute to our long-term sustainable growth and profitability. We look forward to keeping you updated. And now over to Don.

Operator:

Thank you. [Operator Instructions] And we'll take our first question from Ramsey El-Assal with Barclays. Your line is open.

Maria Black:

Thank you, Ramsey. I appreciate the question. So I'll try to cover all the ground on the PEO that you asked about. So specifically, what we saw with respect to the first half, we did see, as mentioned in the prepared remarks, we did see that booking did come in softer. We saw that retention came in a bit softer as well than our expectations. In terms of the lingering effect that we cited, all of our businesses had an impact from the pandemic. I would say the PEO is probably the one that had the most impact. If you think about all the drivers that constitute the PEO, it's everything from average wages to worker mix to paid unemployment to certainly the lines of insurance, workers' compensation and health benefits. So I would say it's the business that had the most impact as the pandemic came into the business. And as the pandemic gets flushing out, it is having a lingering effect on the business. I think you touched on what we're seeing with respect to pays per control in the PEO in the context of ES. But I would say is, pays per control is -- the growth rate is decelerating in the PEO. That was expected. If it contributes to the slighter softer performance in the first half and is contributing to the second half. But the two main drivers really behind the performance in the first half as well as the outlook for the second half are bookings and retention. One thing I would say, though, because I want to go back to the strength of that business. We have incredible faith in that business as it relates to the growth from a long-term outlook perspective. The demand is still there. In absolute form from a bookings perspective, the PEO did have growth year-on-year, albeit it was softer than ES and softer than our expectations.

Don McGuire:

Yes, Ramsey, it's a good question. I think it's hard to avoid all the headlines that we're seeing day in, day out. And it's fair to say that there's been a number of large names that have announced major layoffs, I'd also with the -- tough to say that some of those clients are -- or some of those people making those layoffs are our clients. But those layoffs are happening around the world in some cases, they're not necessarily our clients in all of our markets. So I think it's fair to say that we have yet to see any significant impact from all those announcements. And I guess I'll just round it out by saying, we're still seeing stronger or strong demand. We've taken up our pays per control assumption for the back half. And we're doing that not just on our own internal perspective, but we're also looking at the BLS reports, the JOLTS reports. Everywhere you look continues to suggest that there's still strong demand for employment. Unemployment continues to be very low. Unemployment applications are still in record lows. They're not increasing. So the macro environment continues to be very, very favorable for us, irrespective of some of those headlines that we're seeing.

Operator:

Our next question comes from Eugene Simuni with MoffettNathanson. Your line is open.

Maria Black:

We were very pleased with our overall new business bookings for the second quarter. Definitely saw an acceleration in pipelines. I'll get the pipelines in a minute. I did cite the downmarket, the strength that we're seeing in the downmarket, that's really our entire downmarket portfolio. So thinking about our -- obviously, our RUN offering, but all the things that tether off of the RUN offer, which is the retirement services that I spoke to at length during the prepared remarks, Insurance Services. We did see strength in Employer Services HRO. And then last but not least, one of the other things that I was most pleased to see was the bounce back in international in the second quarter, both in pipelines as well as results. And that was, as mentioned really in our GlobalView space. So very happy with the results, very happy with the strengthening of pipelines. That's what gives us confidence, stepping into the back half as we think about heading toward our guidance of 6% to 9%. In terms of -- I think you also wanted to know about the mid-market because I didn't cite that specifically. We had very solid yes, very solid mid-market sales, and we continue to see the demand there as a byproduct that is certainly not getting easier for anyone to be an employer, both from a legislative perspective as well as a talent perspective. We have incredible strength in that business as it relates to the product investments we've made. So think about user experience to what we're attaching with the Next Generation Payroll engine. So we made good product enhancements. We had strong NPS. We have incredible retention results. So the mid-market in general had also a solid sales performance. What I would say is, as you contemplate the mid-market, don't forget that Employer Services HRO, the offer that we call Comprehensive Services fits squarely in that market, and that's an area that experienced tremendous growth during the pandemic, and that growth has sustained and is exceeding the overall Employer Services growth. So altogether, the net results for the mid-market are very, very solid for us.

Don McGuire:

Yes, it's a good question. But just to remind everyone that, that number is really a mid-market number. So we focus on the mid-market when we provide that pays per control number. And it has been strong. As I mentioned in the earlier answer with respect to the macro environment, the labor market continues to be strong. We're continuing to see our existing clients add employees. As Maria said, bookings are strong. And I think it's the kind of the $64,000 question about how long the labor market can continue to grow. Unemployment can stay so low as we look at some of the headlines and will those things start to converge at some point in the future. But for now, I think we're comfortable with what we've done in terms of taking up the pays per control growth for the back half.

Eugene Simuni:

Got it. Very helpful. Thank you, guys.

James Faucette:

Great. Thank you so much. I wanted to quickly just revisit a little bit, I think you touched on it. But retention and it's an area where we had at least been expecting to see some normalization but -- especially from a company perspective, but it seems to continue to improve or tighten. Obviously, you made technology advancements, et cetera, but what are some other areas, if any, that you'd point to -- that are helping drive that retention performance.

James Faucette:

So Maria, that's an interesting point that you're already kind of at least what you think were -- where we should be from a attrition perspective, et cetera, at least compared to where we were pre-COVID. What are you seeing now from the competitive environment, especially, as we see companies expressing more concern. Are you seeing flight to quality versus some of the regional players or newer entrants? Is that helping you? Just love an update of how the competitive environment factors into what you're seeing overall?

James Faucette:

Great. Thank you.

Mark Marcon:

Hey, good morning. Thanks for taking the questions. Maria, you mentioned there was a modernization initiative. I'm wondering if you can expand a little bit on that, just in terms of what we should expect over the next six to 18 months in terms of new offerings or increased offerings. And how would that end up impacting both from a revenue as well as from expense perspective? How should we think about that?

Don McGuire:

Yes, Mark, I'll just follow up on Maria's comments. I think the adoption of these products is exciting and doing well. And as we have the adoption increase quarter-to-quarter, we expect to see improvements in revenue from these new offers. But I think at the same time, the penetration rate within our 1 million existing clients is going to take some time to achieve. So the margin impacts from those new sales and those clients is going to take some time to make its way through to the bottom line, so to speak. But I would say that we -- you've heard us often speak about transformation of these calls over the last few years. And I would say that internally, I think our biggest transformation exercise, our biggest transformation opportunity is coming from these new products themselves. So we are excited about these new offers, and we do think they're going to -- they're going to help us out in the future.

Maria Black:

We do have a recession playbook, if you will. I think the first thing that happens is, we adjust things such as our go-to-market. When you think about how we address talent needs on the way up in an economy, it's kind of the converse on the way down. So that's not to suggest that the business wouldn't be impacted. The things that would be impacted are things like bookings. And the reason I bring that up is, it is somewhat self-adjusting, right, as it relates to the action. So in the absence of bookings, there is also the absence of expense. So some of that self-adjust, thinking selling commissions, overall incentive comp. We could also, as a byproduct of that, if there's lower volume on the sales side coming in, we would have lower volume on the implementation side and potentially lower volume on the service side. And so there will be, maybe a pullback in hiring things of that nature. And these are all playbooks that we've run before, a few times in my lifetime. We may add that juncture, choose to prioritize key investments differently, depending on what's happening. But we're going and we're very committed to continuing the work we've been doing on Modernization and on transformation. And I think one of the big lessons for us whether it was this most recent pandemic downturn, if you will, an event or it was the last -- the financial crisis or even the -- I've been here long enough to be a part of the 2000, call it, dot-com, et cetera, bust. And what I would say is, our investments in growth will be maintained. I think that's the key is ensuring that we make smart decisions during a downturn so that when we come out of the downturn, we're positioned to execute quickly. I think we made some very wise decisions, specifically, on the go-to-market, on the seller side during the pandemic that allowed us -- we were lucky because it was short and steep and fast. And as everything opened back up, we were well positioned to take advantage of that market because of the investments that we continue to make. So to answer your question, I think most of the changes that we would make are somewhat self-adjusting in their nature, if bookings were impacted.

Operator:

Our next question comes from Bryan Bergin with Cowen. Your line is open.

Don McGuire:

Yes, Bryan, thanks for the question. I think it's a relatively short answer. The fact is our prices are holding well. As a matter of fact, I would say that we are kind of at the high end of the guidance we gave previously, and we're comfortable with that. I think if we look at our retention, we look at our NPS scores, it appears that those price increases have been understood and accepted as well, as could be expected.

Maria Black:

We were very pleased by the improvement that we saw in international bookings. It was driven mainly by our GlobalView offer and a bit of our in-country business. So very excited about what we saw specifically, as it relates to performance in the second quarter. But also about pipelines, right? So a quarter ago, I was on this call citing that we believe that there was some pipeline depletion that happened specifically in international. So pipelines that were pulled into last fiscal year. International was one of the businesses that had an incredibly strong fourth quarter finish. And so we did see a need during the first quarter to rebuild pipelines. The great news is those pipelines were rebuilt and we saw that execution in the second quarter. It's also what gives us optimism as we head into the back half. So very excited about international. And as optimistic as I am, it is an area that we're still continuing to watch for all the obvious things, I said. Last quarter, which is, there's still the crisis in the Ukraine. There's still the energy crisis. It is also an area that we see a tiny bit of pipeline aging. And so international remains a watch item for us, albeit, very excited about the pipeline build and the results in the second quarter. And I think you asked about pays per control in international?

Don McGuire:

Yes. So just maybe -- so the government programs that are in place and the kind of the social aspect, if you will, of European employment means that things don't go down very quickly. And as a result, they don't recover very quickly as well because they don't have much to recover from. So that's a good for consistency, if you will, continuity of earnings. So that's -- that works in our favor in these -- when times are trying.

Operator:

Our next question comes from Tien-Tsin Huang with JPMorgan. Your line is open.

Maria Black:

The comment that I made was really about bookings. And so we are looking to reaccelerate bookings in the back half. For PEO, as mentioned, it was a bit softer in the first half. In terms of the question of when we anticipate the reacceleration, the well-positioned reacceleration and worksite employee growth, we don't anticipate that it will be in the next couple of quarters. So not a position to necessarily give guidance for next year. But we are lapping -- as mentioned in the remarks, we are lapping record retention, record bookings. And as some of that lapping happens, we believe we're well positioned to reaccelerate works on employee growth into next year.

Maria Black:

Sure. So it's safe to say that business is outperforming its targets. It has great growth. We do have -- and last week, we talked about it, we do have 125,000 plans across that business. It's primarily an SMB space, a little bit into the mid-market and even upmarket. But nonetheless, if you just think of it in the SMB context and with the new SECURE Act and -- which is the 2.0 version of the 1.0 and all the state mandates. At this juncture, we have 125,000 of 800,000-ish RUN clients that take advantage of the offer. So you can kind of think about the opportunity in that way. That's not to suggest that every single one of those RUN clients could be a retirement plan, but even if we were to capture a bit of that. We do believe, and it's part of the reason I'm so excited about it is because it does continue to outperform its growth targets. And we believe there's tremendous runway for growth in Retirement Services over the coming years.

Operator:

Our next question comes from Samad Samana with Jefferies. Your line is open.

Don McGuire:

Okay. So let me talk about the two volume businesses that we referenced in the prepared remarks. The first one would be the RPO business, the recruitment outsourcing. That business was down and that business is not a very big business for us. And most of it is focused in the upmarket. Most of the clients we have there are in the enterprise space. And I think that is an area, of course, where we are seeing something internally that correlates more with some of the headlines that we're seeing in the press. But it's not a very big business for us, and it did come down. On the employment verification business, of course, mostly and significantly related to the mortgage market. We don't share the number that EV business is part of our broader $1 billion comprehensive services business. It's meaningful for us. From a revenue perspective, it's more meaningful for us, if you will, from a margin perspective because it's above-average margin business. Hence, we called it out. But our expectations as we look forward is, we do expect there to be softness in the mortgage market in the back half of the year. And we've reflected those expectations and those forecasts into the numbers that we're sharing with you today.

Don McGuire:

Yes. So since we presented -- since we gave guidance last quarter, rates have come down, particularly on the mid and the long rates. And even though short-term rates have increased, some of our short-term borrowing costs in our commercial paper program. So the rates that we're giving and the reason we take in our client fund interest forecast down a little bit at the midpoint, is to reflect those increased borrowing rates and the softening, if you will, of interest rates in the mid and the longer term.

Samad Samana:

Great. That's helpful. Thanks for clarifying that. Appreciate it.

Jason Kupferberg:

Hey, thanks, guys. I wanted to come back on PEO for a second and maybe piggybacking on Tien-Tsin's question. Just as we think about the second half of the fiscal year. It looks like the revenue growth is going to come in 5%, 6%. And then you talked about getting to some easier comps and some reacceleration. But are you thinking any differently about the medium-term guide for PEO? I think that was 10% to 12% when you provided that at the Analyst Day.

Don McGuire:

Yes. Sorry. And at the same time, remember, at Investor Day, we said that we were expecting high single-digit growth in average worksite employees. So I think we're still very much on that track and pretty much committed to that.

Danyal Hussain:

Yes. Jason, I think --

Danyal Hussain:

Yes. Jason, exactly to that point. It's one of many leading indicators that we look at. And for sure, things are slowing, given where we are with employment and 3.5% unemployment rate. So it's not a question of whether we expect the monthly jobs growth to slow over the next several months, I think that's more or less assumed. But the question is, at these employment levels to get that type of growth is still a very healthy outcome. And so I think that's how we would characterize the overall environment today.

Operator:

We have time for one more question, and that question comes from Kartik Mehta with Northcoast Research. Your line is open.

Maria Black:

I think the business was so strong. I think the compares were difficult. We plan for deceleration. It happened faster. We do not see a competitive change or landscape that exists. Again, in terms of where that business gets its business from, that 50-50 split between kind of new clients coming in as well as upgrades as well as where we actually return clients that leave. Certainly, there is PEO to PEO switching, but it's a very small piece to the overall results on the booking side or the impact on retention. And we're not seeing -- again, we look at balance of trade, we look at win rates and we do not see a meaningful change in the competitive landscape.

Don McGuire:

Yes. I mean, I think the way we look at that, Kartik, is through the pays per control growth. And so as we went from 7% growth in Q1 down to 5% and we were looking to be a bit flatter in the back half, although we've become a little bit more optimistic on that as time has gone on. So I think that would be the key area where we kind of take a look and see what the demand is with our installed client base.

Kartik Mehta:

Well thank you very much. I appreciate it.

Maria Black:

Thank you, Michelle, and thank you to all of you on the phone today for your thoughtful questions. As you heard from our tone today, very pleased with the first half, excited about how we're positioned for the second half against our updated guidance. Again, everything that we do every day is all about solving for clients in the world of work. And with that, I think it'd be appropriate for me to thank the 60,000 plus associates that are out there every day doing that work for our clients, for their workers and bringing meaningful value into the world of work and into the world of HCM. So thank you to all the associates. Thanks to all the analysts and the investors for your support and your continued support. We certainly appreciate it and we look forward to keeping you updated and speaking with you again soon. Thanks so much.

Operator:

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 First Quarter 2023 Earnings Call. I would like to inform you that this conference is being recorded. [Operator Instructions] I will now turn the conference over to Mr. Danyal Hussain, Vice President, Investor Relations. Please go ahead.

Carlos Rodriguez:

Thank you, Danny, and thanks, everybody, for joining the call. As you saw this morning in the news, we have a little bit more excitement than normal, but I promise you that 1.5 hours from now, we'll go back to our boring cells because we do have a business to run. But before I talk about the quarter, I thought it was appropriate to just share a few thoughts given the transition from me to Maria as our new CEO. As you know, I'm going to continue as Exec Chair, but obviously, that's going to be a role primarily to supporting Maria and also helping the Board and not really involved in day-to-day operations. So it's definitely going to be my last earnings call, which is hard to say because it’s been 44 earnings calls for me. But it's really been an incredible ride. Obviously, I could thank a lot of people. One person in particular that I do want to call out is John Jones, who is going to remain our Lead Independent Director. And the combination of John and Les Brun before him were incredible mentors to me, incredibly helpful in providing advice and guidance on behalf of the Board. And also, I'm proud to call them friends. And I also want to thank Gary Butler and Art Weinbach, my predecessors who gave me the opportunity to be here today and also help me a lot in terms of making me the person I am and the leader that I am today. I'm proud of a couple of things. I'll just mention a few. One of them is I'm proud of our growth. We doubled our revenues over the last 10 or 11 years. And today, as you know, we reached an important milestone of 1 million clients. So I appreciate -- I wish I could say that it was anything other than a coincidence. But however it happened. It's a great thing to have happened here on my last earnings call. We made it through a lot of challenges, economic. We went through, what I would call financial repression in terms of interest rates, which fortunately now we have a little bit of the opposite situation, which we'll talk about today. So there's many QEs. I think there were three QEs over my tenure. And then the final straw that almost broke the camel’s back was interest rates. Even on the 10-year going, I think it was like under 0.5% in the pandemic, which was really kind of incredible to see happen. We also made it through a pandemic that hopefully only happens every 100 years, and we had some dissident shareholders that also had some opinions about how to run ADP that we had to deal with. I'm also proud of our associates. I'm proud they've always said about their commitment to our clients and to ADP. There's something that my predecessors and the culture have around our client centricity, which is really remarkable, and our associates always step up to the plate and deliver in a business that, again, we don't get a lot of credit, and I know that we're not quite up there in terms of the list of first responders and people who save lives. But we do keep the economy going, and we do, I think, make sure that commerce worldwide operates smoothly. So our associates are the ones who get that done, and I'm proud of them. The person I'm most proud of is Maria. She's now been tested. She's prepared. She's been through a very thoughtful and long succession process, and she's going to be the -- what is only the seventh CEO of ADP. And I know that she's the right person starting from the ground up. I wish I could have said that because that's what makes this special, this place special. We love to bring in talent from the outside but we have some incredible people that grow up and know this place, understand this place and know how to make it continue to hum the way it's been humming for more than 70 years. Most importantly, she not only knows our industry, but she knows our clients' needs deeply and takes great interest in that. And that is going to serve us well, as well as for growth orientation, which I think is going to be very important for ADP's future. Last thing I'll say is that I recently told our team at a senior meeting that I tried -- I strive to be what I learned about many, many years ago, something called a servant leader. And I tried to be that way to my team and to my organization here at ADP. But I want all of you to know that I tried to be that also to all of you and to our shareholders, as much as I tried to be that way for our clients and our associates. It's been truly an honor of a lifetime to serve ADP’s CEO. And we are kind of a company that likes to fly under the radar. We kind of like it that way. So I know that nobody is going to write any books about us or they may not be even writing articles about us today, but this is one of the most successful commercial enterprises in history. All I have to do is go back and look at the track record. Most people don't do that. They don't go back and look at the 10-year to 20-year and, in our case, the 50 year. The company went public in 1961. I encourage you to look at our history, our results and our TSR and compare it to some of the greatest investors and investments of all time. And I think you'll see that ADP ranks right up at the top. Anybody who knows me knows how much I love sports and how -- what a sports -- I am. So I was trying to think of an analogy. And I feel like not only did I join the championship team, but I won the Super Bowl being here at ADP. It's really been an incredible ride. But right now, it's time to pass the torch. It's always great to have change, especially in a company like ADP because I know you can rely on our consistent, predictable results, but we also have to continue to grow for decades to come. And the only way to do that is to bring in fresh thinking and to have change. And that's exactly what we're doing with Maria. So before I talk about the quarter and the results, I'm going to turn it over to Maria and let her say a few things.

Carlos Rodriguez:

Thanks, Maria. Speaking of consistent value creation, let me start talking a little bit about the results here so we can get to the questions. We got off to a really strong start in fiscal 2023, with strong results that reflected the momentum we've been building for several quarters now. In Q1, we delivered 10% revenue growth, 11% on an organic constant currency basis, and this was driven by strength in a number of our businesses. And on top of that, we delivered 30 basis points of adjusted EBIT margin expansion as our revenue outperformance helped us overcome elevated expense grow over from last year's first quarter as well as continued investments in the business, which we anticipated and communicated to you last quarter. We delivered 13% adjusted EPS growth in the quarter, and we remain well positioned as we move ahead for the rest of the year. I'll cover a few highlights for the quarter before I turn it back over to Maria. Our new business bookings, we showed continued momentum through Q1 with demand strongest in our downmarket offering like RUN and our retirement services businesses, and we also continue to see strong traction in our PEO solution. At the same time, bookings growth in our international business started a bit softer than we had hoped. We're continuing to watch the demand environment in international markets as clients and prospects there are dealing with a number of uncertainties, as you know. We are keeping an eye on the macroeconomic environment as well, but overall demand remains strong, and our pipeline looks solid. We'll share further updates on what we're seeing with bookings as we progress through the year. Our ES retention was very strong with a new overall Q1 record level led by great performance in our mid-market. We accomplished this year-over-year improvement despite further normalization in small business out of business rates in the quarter. We assume we will continue to experience normalization in out-of-business rates towards prepandemic levels as the year progresses, and we are clearly very pleased with the Q1 results and -- that were better than expected. Our pays to control metric was 6% for the quarter, in line with our expectations as strong hiring that our clients have conducted these past few quarters has carried through to strong pays per control growth this quarter. We continue to expect deceleration in pays per control growth later this year, and we've seen sequential employment growth begin to slow both in the National Employment Report and in public data. But that said, job postings and other leading indicators within our client base suggest that, at the very least in the short term, demand for labor will remain solid. And moving on to our PEO. We saw a modest deceleration in average worksite employee growth in the average worksite employee growth rate, which was anticipated, but the 12% growth was slightly ahead of our expectations for the quarter, and we're very pleased with that growth. Demand for both our PEO and our ES HRO offerings remains high as the value proposition for a fully outsourced model continues to resonate in the market. And in fact, our HRO businesses combine now to serve over 3 million worksite employees out of the 40 million total workers paid by ADP. Q1 not only provided a strong start to fiscal 2023 but also represented a major milestone in our company's history. As we -- as I mentioned earlier, we crossed the 1 million client mark during the quarter. What an incredible accomplishment. We accomplished this by driving improvement and growth on a consistent basis through decades of different employment cycles, business environments and technology shifts. It's a proud moment that was made possible only because of our relentless focus on meeting the needs of our clients, as Maria mentioned, both by delivering exceptional service and providing leading HCM technology. underpinning all of this is the dedication of our associates who ultimately make ADP a company it is today. As we look ahead, we recognize the need to remain agile in this unique and dynamic economic environment. And it is certainly our hope that inflation normalizes soon without significant harm to the global economy. But if macroeconomic conditions instead prove more challenging than we'd all like, we believe our stable business model should allow us to maintain our focus on innovation and our steady approach to investment, positioning us to continue driving long-term sustainable growth for many years to come. And it's for that reason that while I am incredibly excited to have reached 1 million clients, I'm even more excited about the opportunities ahead for ADP. And I'll now turn it over to our new CEO, Maria.

Don McGuire:

Thank you, Maria, and good morning, everyone. Our first quarter represented a strong start to the year with 10% revenue growth on a reported basis and 11% growth on an organic constant currency basis. Our EBIT margin was up 30 basis points, coming in above our expectations as strong overall revenue growth and growing clients fund interest revenue contribution as well as favorable workers' compensation reserve adjustments in our PEO overcame inflation-related cost pressures and higher-than-typical year-over-year headcount growth. Our robust revenue and margin performance combined to drive 13% adjusted EPS growth for the quarter supported by our ongoing return of cash to our investors via share repurchases. In our Employer Services segment, increased 9% on a reported and 11% on an organic constant currency basis. Key drivers to this growth were strong bookings and retention performance we delivered in recent quarters as well as solid contributions from price and pays per control. And of course, client funds interest, which mostly benefits the ES segment, grew nicely in Q1 with 39% growth driven by a healthy 9% balance growth and 40 basis point improvement in average yield. Partially offsetting that was FX, which was a slightly bigger headwind than we had anticipated. Our ES margin increase of 50 basis points was higher than planned primarily as a result of that strong revenue growth. For our PEO, revenue in the quarter grew 13%. Average worksite employees increased 12% on a year-over-year basis to $704,000 as bookings and same-store pays both continue to perform well, though the same-store pays contributed less than it did in recent quarters as we expected. PEO margin increased 80 basis points in the quarter due primarily to revenue growth and favorable workers' compensation reserve adjustments. Let me now turn to our updated outlook for fiscal '23. I think, overall, you'll find a very steady outlook compared to our prior guidance with upside due in part to higher interest rates. Beginning with the ES segment revenues, we now expect growth of 7% to 8% and driven by the following key assumptions. First, we continue to expect ES new business bookings to grow between 6% and 9%. And as Carlos covered, we see a stable overall demand environment at this time, but it's still early in the year. And with a wide range of outcomes and we will continue to watch for impact from a potentially slowing global economy as we progress from here. For ES retention, we were happy to deliver another strong quarter, but we believe it's prudent to anticipate further normalization of small business out of business rates as we move through fiscal '23. As such, at this time, we're leaving our outlook unchanged at down 25 basis points to 50 basis points. Meanwhile, we will look to maintain our strong retention levels in our other business units. For pays per control, we had healthy 6% growth in Q1, in line with expectations, and we continue to anticipate a return to a more typical 2% to 3% growth rate for the full year as employment growth moderates. As we discussed last quarter, our pays per control growth outlook assumes a deceleration in growth in Q2 and very little growth in the second half of fiscal '23. This could, of course, prove to be either too conservative or bullish depending on how macroeconomic factors develop, but it still feels like a reasonable assumption to make at this point. Last quarter, we spoke a bit about price, and there is no change to our expectation for price to contribute about 100 basis points to 150 basis points to our ES revenue growth in fiscal '23. Our clients understand these price increases and recognize that they reflect our own cost pressures. And for client funds interest revenue, we now expect higher average rates compared to our prior outlook. Our client funds short portfolio will continue to benefit as the Federal funds rate increases over the balance of the fiscal year, and our new investments in our client extended and loan portfolios are now expected to yield about 4.3%. Between those two drivers, we now expect the average yield on our client funds portfolio to be 2.4% in fiscal '23, which is about 20 basis points higher than our prior outlook. We continue to expect our client funds balances to grow 4% to 6%. And putting those together, we now expect our client funds interest revenue to increase to a range of $790 million to $810 million in fiscal '23, up $70 million from our prior outlook. Partially offsetting this revenue upside is higher short-term borrowing costs associated with our client funds extended strategy. With higher expected commercial paper and reverse repo rates over the rest of the year, we now expect the net impact from our client fund's extended strategy to be $720 million to $740 million in fiscal '23, up $45 million from our prior outlook. One last factor to consider is our ES -- in our ES revenue outlook is FX headwind, which has unfortunately become a more meaningful drag over the last three months. We're now factoring in an FX headwind closer to 2% for fiscal '23 ES revenue, up slightly from our prior assumption. For ES margin, we now expect an increase of 200 basis points to 225 basis points, up 25 basis points from our prior outlook. We continue to expect our margins to benefit from our strong revenue growth outlook, including growth in client funds interest revenue, and we're pleased to be able to increase our outlook accordingly. Moving on to the PEO segment, where we're making very few changes. We continue to expect PEO revenue and PEO revenue excluding zero margin pass-throughs to grow 10% to 12%. The primary driver for our PEO growth is our outlook for average worksite employee growth of 8% to 10%. We now expect PEO margin to be flat to up 25 basis points in fiscal '23, narrowing our prior range higher due in part to the strong Q1 margin performance. Adding it all up, we now expect consolidated revenue growth of 8% to 9% in fiscal '23 and adjusted EBIT margin expansion of 125 basis points to 150 basis points. We still expect our effective tax rate for fiscal '23 to be about 23%, and we now expect adjusted EPS growth of 15% to 17% supported by our steady share repurchases. And now I'll turn it back to the operator for Q&A.

Peter Christiansen :

First, congrats to Maria. Looking forward to seeing your touch on strategic vision here and certainly to Carlos for such a successful tenure as CEO, particularly through some volatile events in the last couple of years, for sure. I just had a question as it relates to bookings trends certainly see that the outlook is held steady. And I know that we're kind of early in the selling season. But if there's any -- just wondering if you could put any color on any differentiating trends you're seeing at this point of the year, maybe perhaps versus the last year or two, maybe attach rates or on ancillary modules or even going to more outsourced models, seeing any changes in behavior there? And then as it relates to the pricing discussion that we just had, do you feel like you have any more room? It seems like your clients are responding well and things look good. But do you still -- do you think that there's potential upside to the pricing strategy? Sorry.

Don McGuire :

Yes. And with respect to the pricing, we've been very happy with our ability to execute the price increase in the way we did. And as we've said on prior calls, we're mindful of the fact that these are incremental costs for our clients as well, and we need to be competitive. So we made sure that we've price increased and passed on the costs we have in a way that keeps our customers with us for a very, very long time. Having said that, we said 100 basis points to 150 basis points. And I would tell you that, currently, we're pushing towards the upper end of that range in the price increase. So we've done very well against expectations and executed, as I said, well across the business. Of course, is there more available? Good question. If we look at our client base, particularly with the large clients, we do have contractual obligations that come due from time to time. And a number of those are tied to various price indices, et cetera. So that limits the ability to do anything beyond some of the pricing indices that drive or undermine or underlay, if you will, the price that we have. But I guess I would say we've been very happy with where we are now, and we'll always look to see if there's an opportunity. But I think that we want to make sure -- we will continue to make sure that we do what's best for ADP in the long term as opposed to being too overzealous, if you will, with short-term price increases.

Tien-Tsin Huang :

Great. Carlos, I want to say, again, again, grateful to have worked with you and share the time and learn from you from, I guess, over 40 earnings calls and meetings and stuff. So I appreciate that. And of course, congrats to Maria. I want to just ask, if you don't mind, 100% agree from the release, Carlos led the transition from payroll to HCM. So I know you can't tell us everything in terms of what's next here, but is it fair to think the focus might be more so on the employee now in addition to the employer, in addition to modernization, maybe data? Just maybe some thoughts there would be great. Love to hear it.

Maria Black :

Fair enough. Thank you for the chance to comment a little bit. Obviously, early days as it relates to -- I mean essentially starting as early days as it relates to having conversations around long-term strategy. I think the first thing I'd like to reiterate, I know I talked about my 26 years here. I have spent eight of those as part of the incredible management team that Carlos alluded to earlier, and that's been a part of the journey that we've been on as it relates to the overall modernization journey. So I think you mentioned the transition from payroll to HCM. That is a piece of that modernization. But in my mind, it's more broad-based than that. It's really been about the decisions we've made, everything from our strategic locations to early days of platform migrations to configuring our organization to really create a technology organization. We've been actively modernizing our service organization. You hear me speak about that all the time in terms of continuing the modernization of tools but also making sure that we're taking the work out for our clients. We've been making a transition to the public cloud. And then one of my favorite topics is the modern selling approach that we've been embarking upon that really, as we go on for many years as we found it inside sales, if you will, 20 years ago to the most recent during the pandemic, really focused on digital selling and meeting the buyers in a different way. So I think all of that is really about our modernization journey. And I think as I look forward into the next decade, if you will, in the next chapter, it is really about continuing the great work and the foundation that you mentioned that Carlos laid. I have a lot of passion around our clients. I have a lot of passion around the 40 million workers that they pay and how we can create value for each one of those stakeholders, both the workers as you mentioned, the clients' employees as well as our clients. And my ultimate goal, Carlos touched on it, I think I mentioned it as well upfront, when I think about client centricity and really solving meaningful things for our clients, I think the last decade in this modernization journey has really been about setting us up to be able to deliver value in a very different way for our clients. My goal would be to continue that journey and, in the end, make sure that our clients are in love with our products and in love with the experience that they have with ADP and the true evangelists of what it is that we bring. And I feel confident in how we've been set up to embark on that journey, and I look forward to sharing more with you on it as we move forward.

Kevin McVeigh :

Great. And my congratulations all around as well. Carlos, I guess, why is now the right time? I mean you've done an amazing job, you're still incredibly young. Just any thoughts as to why transition now?

Kevin McVeigh :

That makes a lot of sense. The numbers speak for themselves. So I'll leave it there. Congrats again.

Operator:

Our next question comes from Kartik Mehta with Northcoast Research.

Carlos Rodriguez:

So we obviously don't have the market cornered on economic forecast. We do have a reasonable amount of data, particularly on what I would call the near-term next few quarters, I would say. But when you look at the last two, three, five years, 10 years, really, as long as I've been doing this, you have to be really careful about taking economic forecasts at face value. So you have to be careful. You have to be prepared for all eventualities. And that's why we like to call ourselves an all-weather business model because I think we actually perform, I think, through a variety -- obviously, better in some than others. But I guess that's the way of saying we're not obsessed with economic forecast because if I had taken economic forecast at face value over the last three or four years, we would have made numerous mistakes. And I think all I have to do is go back. I know nobody does this because otherwise there wouldn't be -- economists wouldn't exist. But if you look at what economists forecast 12 months prior and then what actually happened or 20 months prior to what actually happened, that's not really the right way to run a business. But it doesn't inform our decisions right, and our planning. And as you mentioned, what happened this year in terms of our fiscal year planning is we thought -- kind of common sense told us that some of these things were going to happen like normalization of downmarket retention, right, towards hopefully still above pre-pandemic levels but not at the kind of levels they were when the government was providing so much support for small businesses that you could just see it in the data in terms of the drop in bankruptcies and out of business and so forth. So we expected some normalization there. Likewise, pays per control, it's not -- you just don't make numbers up. Like we -- if you assume that you reach kind of "full employment", and that the population and employment [Audio Gap] employable people is growing at a certain rate, you can kind of back into kind of a normalized pays per control rate, and then you sprinkle in a little bit -- maybe there's going to be some economic weakness in the back half. And I think what we signaled and what we have in our plan is, I think, kind of flattish pays per control growth, which to me personally is feeling conservative right now based on the -- we feel like we have this kind of continued strength into this quarter, and that typically doesn't fall off the cliff right away. But maybe that happens in the first quarter of '24 that it becomes flattish. I don't know. But I know that right now, there are definitely still -- we got back to what employment was pre pandemic, but the population also grew and the employable number of people grew. So labor force participation is still below where it was before. So there is definitely still room for some employment growth there. So this could be a very strange slowdown, right, or if you want to call it a recession, where it's, I think Danny calls it a labor full recession where it doesn't feel like employment, at least the stuff that we look at background checks, job postings, et cetera. I mean if you look at the jokes, you look at everything, there's still a lot of -- we had 260,000 jobs created -- and that wasn't 500,000, it wasn't 1 million, but in any other environment, that would be like an incredibly strong number, but it's clearly is clearly slowing, but everything we see is that the labor markets remain, again, in the time horizon that we have visibility to pretty strong or certainly not as strong as a year ago or when we were in the middle of the recovery from the pandemic, but that's really more of the comparisons than kind of anything underlying. So I think we're just heading back to kind of more normal rates, but in an unusual way where the labor market doesn't appear to be the leading the leader in the slowdown. It appears to be people spending less on stuff that they spent a lot of during the pandemic, if I can be bold. That might be like exercise bicycles. It might be things like grills, like -- and maybe even, unfortunately, for a company that's close to my heart, software, right, and some things that are -- that you have these kind of, unfortunately, fluctuations of demand that we've never seen before. And so the now how do you predict and forecast how that all kind of lands in the medium to longer term. It's very, very hard for any company to do. But specifically for us, labor is still strong. As long as labor is strong, our clients are still looking for tools to employ, to hire and to manage that labor. And we have this other little weird thing happening to us, which is really fantastic, which is interest rates are rising. And they’re rising in the face -- I mean, typically, when interest rates are rising, the economy is slowing, and that's exactly obviously what the intent of the Fed is. But right now, you're kind of at this point where we're getting this big tailwind from interest rates, and it doesn't feel like that's going to change again in the near term. It doesn't mean that rates won't stop increasing, but if rates stop increasing, like, for example, like in the spring of '23, and they stay there, home run for ADP. All of you and everybody internally here at ADP make fun of me when I used to talk about how our balances in 2008 were like $15 billion and they had grown to $30 billion, but our client funds interest had been cut almost by 2/3 because of interest rates. And I used to say, "Can you imagine if interest rates go back to where they -- near back to where they were back then, but our balance is now are $33 million and growing, I think it was 9.5% this quarter, wouldn't that be amazing?" And that's exactly what's happening. So I'm leaving a little bit of gas in the tank for Maria. Well, actually, I can't take credit for that. I appreciate Chairman Powell helped with that. But we -- I think we have some gas in the tank here with interest rates as well, which again, is a little unusual, but I don't know if you want to call it a hedge to our business model, but -- it's definitely welcome because we are -- as you know, we always carefully watch our expenses and everything in ADP, but it's a much better place to be from an ability to invest and an ability to weather when you have this significant tailwind, which is not a secret. I mean I think Don laid out the numbers, and you can do the math. It's a pretty big tailwind.

Jason Kupferberg:

Congrats Maria. Congrats to Carlos as well. I had two questions. The first one, just, Maria, picking up on your comments around some of the Intelligent Self-Service offerings. I think you made mention of the potential for customer service cases to be cut by 30%. I was just curious to get a little more color around that, what might be the time line for achieving that goal. And is that any kind of rough proxy for how much your customer service costs could be reduced over time if this is successful?

Jason Kupferberg :

Just one quick follow-up. Just if nothing had changed in the rate environment since the time of the last earnings call, would you guys have raised revenue or margin guidance for fiscal '23?

Carlos Rodriguez :

Well, that's fair. But I'm pretty happy with the results because we -- Don, this is just the way our culture is. So everybody is talking about all the positives that we have, like interest income and so forth. But we had some headwinds as well. Like our T&E is up significantly. Remember, last -- it's hard to remember that last year, this quarter, I think we were still in the whole Omicron thing. It was just starting and we really hadn't opened up most of our buildings. I think our salespeople were for sure in the field but not traveling and spending the way they are now. By the way, we were very grateful that we have them back in the field. . So like there are a couple of things like T&E is the smallest of them. The biggest one is when you look at our headcount numbers, it hasn't come up yet, but our sales force is I think, more than fully staffed. And as you probably heard from our comments six to nine months ago, it was difficult to get there back then. Now not only are we fully staffed but our turnover is coming down across the board not just in sales but also across the rest of the organization. So all of a sudden, if you look at our headcount growth for this quarter, it is what I would call a peak and the highest I have ever seen since I've been here at ADP. That was necessary because there was some catch-up, which is why we -- I called it a grow-over issue from last year's first quarter, where we were definitely understaffed, didn't have enough people. And then all of a sudden, our revenues actually were outperforming. The number of clients is outperforming, and you know how important retention is to us. So we set to basically stop up across the Board implementation, service and sales. And that's when you had that whole great resignation thing happening at the same time. And it was -- I mean, again, I don't think most companies go around talking about this, but we were trying to hire as fast and as many people as we could at that point. The good news is we were successful. I think the better news is that puts us in, I think, in a good position in terms of staffing and sales, but also in terms of our service and implementation organizations. And now with declining turnover again, from a plan standpoint, besides planning for patient for control to be "flattish" in the second half, our headcount growth declines -- the growth of headcount declines every quarter for the next 4 quarters. And I think that, I think, should help us feel good about this quarter and also about the fiscal year. So I think technically, Don is correct. By the way, if you go back to ADP's 10-year history, this has been a weird two or three years like us not raising as we hadn't raised in the quarter, again, I don't know what you would have thought of that or what it would have meant, but I think that's pretty -- any maybe can confirm or tell me I'm wrong, but like we weren't in the habit of changing a lot in the first quarter because this is -- how can we say this is a predictable, stable business that we know what we're doing and then changing set every quarter. It doesn't make sense. Now we have a pandemic, that's a different story. Like we struggled like everyone else to kind of keep a handle on what things were happening -- how things were happening on the way down and also on the way back up. But this is going to be a much more stable environment. I would hope some of you would welcome that. But with 10%, 11% growth organic and our headwinds from expenses abating here a little bit, I think we're in a pretty good position.

Operator:

Our next question comes from Bryan Bergin with Cowen.

Carlos Rodriguez :

Yes. I think Maria can talk about -- I think she's actually been looking into a lot of the details around pipeline disorder. The only thing that I would add is color commentary. I was trying to defer to Maria on kind of the big picture in terms of bookings. But since I've been doing this for a long time, 44 quarters and then many years kind of watching from, I guess, a year before that as not quite a year, but as President, and before that, I really paid close attention to all this stuff. And Maria mentioned it, but the problem with the crystal ball right now is that when we have the kind of finish we had, you saw how enthusiastic we were and how bullish we were in terms of our finish and whatnot. And almost predictably, when we have that kind of finish, about half of our business, we count the bookings when we sign a contract. And the other half, we only count the bookings once the client starts. And that portion of the business that -- like, by the way, that's the way most companies that sell to larger clients book their bookings, which is when you sign a contract. That's why it's called bookings. That has always been an issue when we have this very strong quarter and very strong finish, the pull-forward stuff has been driving me crazy forever because we have very strong incentives and what we call accelerators in terms of commissions and so forth that drive, and we want that because we want to get the revenue as quickly as possible, but that sometimes leads to kind of a weaker start. The problem here is that on top of that, now you have a macroeconomic challenge potentially, we definitely have a macroeconomic challenge in Europe. Luckily, it's not a huge part our bookings. So it's hard to differentiate. But what I would tell you, again, back to color, the businesses that we count the bookings when they start are mostly the downmarket businesses. So that would be SBS, PEO, et cetera. We had double-digit bookings growth in those businesses. That makes me think that it's unlikely that, all of a sudden, we have an economic whatever challenge or disaster because why would those businesses still be performing the way they are. But I would just -- a forward-looking statement, I would say I don't know for sure that that there isn't a problem in terms of demand or the economy or whatnot, but it doesn't feel from the first quarter like we could put our finger on something that says, holy cow, we have to put the kind of the red flag or the yellow warning flag up just yet. And I don't know, Maria, if you have comments in terms of a little bit more tangible…

Carlos Rodriguez :

And one of the -- if I can just add like one of the beauties of our business model is that bookings are, for sure, an incredibly important thing, especially kind of over the longer term. But I mean, I hope it's obvious that, from a revenue standpoint, again, with visibility only for the next two, three quarters, we have -- it's really about converting prior sales, which were incredibly strong in prior bookings. I mean you saw what our bookings results were for the fourth quarter and for the year. So that's the stuff that now turns into revenue in those businesses where we recognize the booking at the time we sign a contract. So that -- it's just -- I know it's obvious but just a reminder because this business doesn't -- we're not selling widgets, where if you stop selling widgets, like all of a sudden you're back to zero next quarter, like the -- I think we have a solid revenue plan that I think reflects, as Maria said, what I think was already a pretty conservative number in terms of bookings growth, particularly in the back half of the year. So we may have other issues like FX on the negative side, clients fund interest may help even more or may help less, but I don't think the bookings issue is a fiscal '23 focus item in terms of impact on revenue.

Carlos Rodriguez :

It's really -- I think it's -- the controllable factors, I think, are the most satisfying part of the whole story because the story is kind of playing out a little bit the way we expected, which is small business is kind of in the process of kind of normalizing. But the really -- by the way, positive ironically in our international business, which might not be so ironic because the challenges economically, there are probably getting -- convincing people that they stay put. I don't want to say that it's not all great execution because we have a great leader in international, and we have the former great leader of international here, which is Don McGuire. So there's a lot of great things that have happened in that business that are probably powering some underlying improvement in retention. So some of it is probably inertia as a result of what's happening in the economic environment there. But the most satisfying part of the whole story here is what's happening in the mid-market, where I think some fundamental improvements that we made pre-pandemic, you remember all the pain in terms of the migrations and then the improvements in product, the UX experience improvements, all those things, it just seems like it's ratcheted up the "potential", the maximum potential retention, if you will, for our mid-market business, which was a record this quarter as well. Clearly, the down market -- the pace of normalization of the down market has some impact. But the big story, I think, this quarter was really the mid-market, and our international business has helped a lot on the retention side.

Operator:

Our next question comes from Samad Samana with Jefferies.

Maria Black :

I have a lot of time for our new UX. I can't boast about it enough. And the majority of that reason is all of the above. We expect this to impact our clients' satisfaction, their retention, our ability to demo more, sell more. In terms of teasing out the specific results difficult, but the answer to your question is all of the above.

Don McGuire :

Yes, I'm going to start on this, but something tells me Carlos won't be able to resist following up on whatever I have to say here. So I guess I would say that the laddering strategy that was implemented a number of years ago has delivered great returns. And while I think everyone can see the temptation of changing the duration and trying to benefit more from short-term rates, rates will either normalize or they may even come down again at some point in the future. So this laddering strategy that's been deployed over the number of years has served us very well, and we expect it will continue to serve us well. And not to say that this question doesn't come up from time to time if we discuss it. But every time that we look at it, we -- you really either -- you're making a bet for today as opposed to for down the road. And given the positive experience we've had, it doesn't really behoove us to make any substantial changes to a policy and a program that has been doing very, very well. Carlos, I'm sure...

Samad Samana :

I think we all appreciate the institutional continuity as the transition occurs.

Mark Marcon :

Carlos, congratulations on a great tenure not just as CEO but everything that you did prior to that. And Maria, look forward to working with you and getting to know you even more over the coming years. I'm wondering, can you talk a little bit about how you're set up for this current fall selling season? Certainly, you've got a number of big product improvements. Which ones could we end up seeing like being incremental in terms of PEPM? And just how strong do you think the sales momentum could be? How are you thinking about your marketing efforts, particularly with all the improvements that you've got in place?

Mark Marcon :

That's great. And then with regards to Next Gen Payroll, can you give us an update in terms of what percentage of the new Workforce Now clients are now getting Next Gen Payroll?