Q1 2020 Earnings Call

This time I would like to welcome everyone to 80 piece first quarter fiscal 2020 earnings call.

I would like to inform you that this conference is being recorded and all lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question and answer session.

He would like to ask a question. During this time simply press Star then the number one when your telephone keypad to withdraw your question press the pound King.

I'll now turn the conference over to Mr. Christian Greyenbuhl, Vice President Investor Relations. Please go ahead.

And your Crystal good morning, everyone and thank you for joining any piece first quarter fiscal 2020 earnings calling webcast.

Today, our Carlos Rodriguez, our President and Chief Executive Officer, encompassing winters, our Chief Financial Officer.

Earlier. This morning, we released our results for the first quarter fiscal 2020 yearnings materials are available on the Fccs website, and our Investor Relations website and investors ATP Dot com.

Yes, we'll find the investor presentation that accompanies todays call as well as our quarterly history of revenue and pre tax earnings by reporting segment.

During our call today, we're reference non-GAAP financial measures, which we believed to be useful to investors.

It excludes the impact of certain items.

Description and the timing of these items along with a reconciliation of non-GAAP measures to their most comparable GAAP measures can be found in our earnings earnings release.

Today's call will also contain forward looking statements that refer to future events and as such involve some risk.

We encourage you to review our filings with the FCC for additional information on factors that could cause actual results to differ materially from our current expectations.

Before turning the call over to Carlos you will notice in today's earnings release.

I made a correction this quarter to certain P.O. zero margin pass through revenues that we had previously reported on a gross basis and what's going forward will be reported on in a basis for consistency. We also revised prior periods and the total impact the fiscal 2019 revenues and operating expenses were $65 million.

This does not materially impact our previously reported growth rates and does not impact consolidated earnings before income taxes.

Net earnings consolidated financial condition for cash flows.

Better assist you. We have also included the details of these adjustments in the appendix to the presentation that accompanies today's call.

Our supplemental schedule affordably history of revenue in pre tax earnings by Reportable segment also reflects the impacts of these changes.

Accordingly, our reported results in full year outlook and the falling commentary from both Carlson Kathleen also fully reflect the impact of these adjustments.

As always.

Please don't hesitate to reach out to do you have any questions with that let me turn the call over to Carlos.

Thank you Christian and thank everyone for joining our call.

This morning, we reported or first quarter fiscal 2020 result, with revenue of 3.5 billion for the quarter.

6% reported and organic constant currency.

We're pleased with this revenue growth, which.

Despite some higher than expected I'm favorably in FX was inline with our expectations.

Our efforts to enhance our operating efficiency along with our focus attention on transformation helped us deliver 60 basis points of adjusted EBIT margin expansion for this quarter.

This margin expansion was inline with our expectations and we're happy to see the progress that our associates continue to make and helping to improve our productivity, while also improving client satisfaction.

Particularly given the difficult margin compare given our strong performance in the first half of fiscal 2019.

Together with share buybacks and a slightly lower than expected adjusted effective tax rate. These results helped us deliver 12% adjusted EPS growth this quarter, which was slightly ahead of our expectations.

Moving onto employer services, new business bookings this quarter, we saw solid growth across her U.S. markets, which helped drive 6% growth in the quarter.

With regard to our international and multinational sales opportunities, we did see some impact from timing a certain deals that were expected to close this quarter are now expected to close slightly later in the fiscal year.

Nevertheless, we are maintaining our full year employer services, new business bookings guidance of 6% to 8%.

Now turning to client service, we continue to drive improvements in or client satisfaction scores across our businesses.

And this quarter, we were especially pleased with our progress in the up market with improvements in both our implementation and overall client satisfaction scores.

We continue to take positive steps to transform our service organization and enhance the client experience.

This continued progress in mind, we remain confident in our forecasted full year fiscal 2020 retention increase of 10 to 20 basis points.

We're pleased with our start to fiscal 2020 and with the continued momentum in advancing our strategy to simplify how we do business deliver innovative solutions for clients and associates and drive sustainable long term growth for our shareholders.

We understand that a key element of building our success in the market isn't the capacity to be agile and to anticipate and adapt to change.

Innovation is at the core of this need and it's a job it's never done.

Well, we're incredibly excited about the solutions, we are delivering in the market today to help clients meet the needs of an evolving workforce, we're even more excited about the future.

As a workforce continues to evolve organizations are looking for ways to manage their entire workforce through a single user experience.

Today companies of all sizes are using a variety of applications to get worked on what they need is an open HCM platform that allows easy integration with third party solutions and it's also flexible enough to handle the increasingly dynamic nature of work.

One were workers are organized around her work happens in teams.

Often with individuals working on multiple teams at the same time.

Aided by insights from the ATP Research Institute our next Gen. HCM platform is designed at the core to address these needs.

A few weeks ago I had the opportunity to attend the HR technology conference in Las Vegas, where our next Gen HCM platform and used innovations took center stage.

As I met with clients and HR professionals I was incredibly proud of the reception in recognition that we received for delivering innovative solutions that address how and where work is done today.

I was especially proud what our next Gen HCM platform one both the HR executive top HR product of the year Award.

And the Awesome, New Technology Award a remarkable achievement.

And a testament to 80 piece commitment to innovation.

Back in September we also had the opportunity to showcase some of the differentiating features of 80 peas Nexgen platform. The ATM industry analysts when we hosted our 2019 industry analyst day.

At this event, we spent time sharing some of them more meaningful and differentiating elements of our technology such as the use of graphs database technology that powers the unique ability to dynamically configure teams, well neighbors, enabling actionable data and insights around relationships.

For permitted data driven design approach that allows the solution to be tailored by the client why a low code rapid development through a drag and drop interface.

In addition, our solution was designed from the beginning to be public cloud native.

This among other advantages helps improve resiliency and uptime.

Finally, our solution is designed to be global companies that are expanding globally, where that would like to more effectively manage their existing global workforce.

Ideal target for ATP Nexgen HCM.

We were equally proud and excited to see the recognition of our efforts from industry experts at this event and while it is great to receive these awards and to be recognized by industry experts. It was even more rewarding when we see our efforts translate into recognition and acknowledgement from our clients and prospects.

As we work to scale our solution and its capabilities are Nexgen platform is also building momentum in the market and continues to progress in line with our expectations.

As an example earlier this quarter or industry analyst day, we shared details. It was successful go live with a 6000 employee U.S. company that chose Atps Nexgen HCM platform for the talent capabilities and the ease of integration with the clients own internally developed onboarding tool.

At the same event. We were also pleased to share that we had recently signed a 65000 employee global enterprise that was looking for an HCM platform capable of handling it's growing workforce.

With that said our focus on innovation is not limited to our next Gen HCM platform.

We have also increasing leveraged machine learning to enhance our core strategic advantages and payroll and big data.

As an example, we simplified 21 million raw job titles from our unmatched data Lake.

Normalized them down to 2400 job categories.

Ultimately enhancing enhancing both the functionality and accuracy of our ATP data cloud benchmarking.

Customers are using our compensation and each our benchmark data to make substantial changes to their business.

For example, one of our clients was able to leverage our turnover benchmark data to identify opportunities for improvement and ultimately to reduce their turnover by 20%.

While another saw its front line managers use our executive and manager insights mobile solution to help reduce its overtime costs by 6%.

These equate to real multimillion dollar operational savings that are being enabled by 80 Pease data and products.

Also to enhance the efficiency of our implementation organization, we're designing our nexgen payroll engines automatically recognize convert and classified different formats and input and inputs from prior pay rules into payroll policies.

We believe that this will give us an advantage when we onboarding new clients since it will enable the automation of various elements of the implementation process and allow us to share best practices with our clients.

And finally, we also continue to drive innovation for our front line associates in an effort to transform how we work by reducing low value client contacts while still delivering value added service.

This in mind last year or supporting innovation in the Downmarket rolled out expanded chat bought functionality, which today is capable of handling over 100 different inquiry types for more than 640000 small business clients.

80 piece unique ability to meet the needs of clients and their workers today, well anticipating their needs in the future had been hallmarks of our success over the past 70 years and I believe will drive our sustained growth in the years to come.

And with that I'll turn the call over to Kathleen for her commentary on our result in fiscal 2020 outlook.

Thank you Carlos and good morning, everyone.

That's Carlos mentioned, we're pleased with our progress in transforming our business in order to simplify innovate and brown.

Our strategy is working and we were off to a solid start to the year.

This morning, we reported first quarter revenue growth in line with our expectations at 6% on a reported and organic constant currency basis, which includes a slightly greater amount of FX on favorability than we had previously anticipated.

Adjusted EBIT increased 8%.

Also in line with expectations.

And adjusted EBIT margin was up 60 basis points compared to the first quarter fiscal 2019.

We're pleased with this margin improvement, which benefited from cost savings related to our workforce optimization and procurement transformation initiative.

As well as continued efficiencies within our hours I T infrastructure.

Benefits were partially offset by incremental brand spend as well as selling.

Asian, and P.O. pass through expenses.

Just margin performance is particularly gratifying given the difficult margin compare that we face in the first half of the here.

As a reminder, this resulted from the very strong performance in the first half of fiscal 2019.

From the outside benefits related to a voluntary early retirement program due to slower than anticipated plan to backfill that that's fine.

Our adjusted effective tax rate decreased by 100 basis points to 21.2% compared to the first quarter fiscal 2019.

The decrease was mainly due to an increase in tax incentives related to our R&D efforts.

And a decrease in reserves for uncertain tax positions.

Adjusted diluted earnings per share grew 12% to $1.34.

And in addition to benefiting from our revenue gross margin expansion and a lower effective tax rate was also aided by fewer shares outstanding compared to a year ago.

Let's move now to our employer services segment and interest on funds held for claim.

Employer services revenues were inline with expectations and her 4% reported and 5% organic constant currency.

Trust income unclaimed funds grew 13% and benefited from a 10 basis point improvement in the average yield earned on our client fund investments to 2.3% and growth in average client fund balances of 7% to 23.7 billion.

This growth imbalances was driven by a combination of client gross wage inflation and growth in or pays per control, partially offset by lower semi collections.

Our employer services same store pays per control metric in the U.S. grew 2.4% for the first quarter.

Employer services margins, so an increase of 50 basis points in the quarter.

The increase in margins. This quarter was enabled by the same factors I mentioned earlier when discussing our consolidated results.

Our P.O. segment revenues grew 8% for the quarter to $1.1 billion with average worksite employees growing 7% to 563000.

Revenues, excluding zero margin benefits pass throughs grew 7% to 358 million and continue to include pressure from lower workers' compensation and see we costs and related pricing.

Margins decreased about 70 basis points for the quarter largely due to changes in ATP indemnity loss reserve estimates, which drove about 60 basis points pressure, resulting from a smaller benefit in the first quarter fiscal 2020 compared to fiscal 2019.

As a reminder, with ATP indemnity results now reported in the P., though it is normal to expect some volatility in our quarterly PEO margins as a result of changes in our workers compensation loss reserves.

Let's turn to the outlook for the full year and start with a consolidated view, we continue to anticipate total revenue growth of 6% to 7% in fiscal 2020.

Its revenue outlook assumes a more elevated level of FX on favorability for the remainder fiscal 2020 relative to our previous expectations.

With the recent volatility in overnight and fixed interest rate. We now assume interest income unclaimed funds, a 570 580 million an interest income from our extended investment strategy is now expected to be 575 to 585 million.

With the continued negative interest rate environment in the Eurozone, we made the decision this quarter to wind down our two years only related client money movement activities in France, and the Netherlands.

As a result, the of liquidated our Dutch claims SUNS portfolio, and we will be liquidating French client funds portfolio by the end of fiscal year 2020.

Therefore, now anticipate our growth in average client funds ounces to be about 4% as compared to previous forecast of 4% to 5%.

This decision is exclusive to friends and another.

We continue to anticipate our adjusted EBIT margin to expand 100 to 125 basis points.

And we now anticipate our adjusted effective tax rate to be 23.3%.

The rate includes this quarters on plan tax benefit from stock based compensation related to stock option exercises.

It does not however include any further estimated tax benefit related to potential future stock option exercises given the dependency of that benefit on the timing of those exercises.

With the slight adjustments to our outlook, we continue to expect adjusted diluted earnings per share to grow 12% to 14% in fiscal 2020.

Moving onto the segments, let's take a look at employer services.

We continue to expect 4% to 5% revenue growth in our employer services segment.

Outlook includes the anticipated impact from my previous remarks regarding changes in FX.

Just missed her interest income unclaimed funds outlook.

We continue to anticipate pays per control growth of about 2.5%.

We also continue to expect employer services, new business bookings growth of 6% to 8% and for our employer services revenue retention to improve 10 to 20 basis points.

I'd like to remind you as I commented in the prior earnings calls that there is volatility inherent in the quarterly employer services bookings metric from larger international and up market deals.

And I'd also like to remind you of the difficult compare in the fourth quarter fiscal 2020, resulting from our strong performance in the fourth quarter fiscal 2019 due in part to a client list acquisition.

Moving onto margins.

We continue to expect or margin in the employer services segment to expand by 100 225 basis points.

As a reminder, with a difficult compare resulting from our strong margin performance in the first half of fiscal 2019, we continue to expect a much stronger margin increase in the latter half of fiscal 2020 .

Regarding our PEO segment overall, our outlook remains unchanged.

We continue to expect 9% to 11% CEO revenue growth in fiscal 2020.

7% to 9% growth in PEO revenues, excluding zero margin benefit testers.

Both driven by an anticipated drove a 7% to 9% average worksite employees.

Because of the slower growth in the fourth quarter fiscal 2019, we continue to expect the growth average worksite employees to be the lower end of our guidance range in the first half of the year with a gradual reacceleration of our growth rate of the year progressive.

As we also discussed last quarter, we continue to expect lower workers' compensation, and Soo Lee cost and related pricing to pressure, our total CEO revenue growth.

For PEO margin, we continue to anticipate margins to be flat to down 25 basis points in fiscal 2020.

Continues to include approximately 50 basis points of pressure some smaller favorable reserve adjustments in ATP indemnity fiscal 2020 compared to fiscal 2019.

Before I hand, the call back over for today I'd like to share that on February 11, we will be hosting and innovation day focused on our technology strategy and showcasing some of our latest innovations.

A few view have had the opportunity to see some of those developments during HR tech.

Others May have had a glimpse from some of the industry analysts nodes and tweets following our September industry analyst that.

February 11th event will be specifically for the investment community to share and our product and service innovations and have a dialogue around the progress that we continue to make including how these innovations helps to differentiate ATP and the market.

We look forward to welcome you done Im pleased to look out for further details in the near future.

With that I'll turn the call over to the operator to take your questions.

Thank you.

If you wish to ask a question. Please press Star then one if your question has been answered you wish or move yourself from the Q. Please press the pound key then the interest of time, we do ask that you. Please limit yourself to one question with the brief follow up.

And our first question comes from Ramsey El Assal from Barclays. Your line is open.

Hi, Good morning. This is Damian on Forensically, Hi, I.

I wanted to ask on the employer services bookings guidance I I know you you both talked about it.

At length, but I just wanted to see if you could give anymore color on just the quarterly cadence I know Kathleen you mentioned a difficult comps coming up in Q4, but maybe just you know any granularity. They could you give would be great and then just your overall level of confidence to kind of get to the midpoint of that 6% to 8% guidance.

And I'll, let a maybe kathleen make a comment as well, but again I think if you look at last year's pattern. We our second quarter last year was soft so that would be the easier compare in the fourth quarter because of the acquisition of the client base acquisition from Wells Fargo, I think will be a little more difficult.

But you know we obviously.

Try to.

Apply some judgment on these things and we obviously have information about individual unit performance and and kind of what's happening across regions and I think what we tried to.

Providing some of the color of our comments is that.

This quarter, we had very strong where I would call strong those results in our.

Core U.S. businesses.

SBS major accounts and national accounts.

And we're really had some weakness was in international and multinational and well look into the details of that there were a few large deals and prior year.

As well as some deals it didnt close in the first quarter as expected. So that's would go gave us some.

Some confidence that I think we're still on track for though for the year. Despite these kind of quarterly fluctuations because I think as Kathleen said and we said.

Many times you know for US bookings is you know.

Certainly more volatile than revenues are obviously, we have a recurring revenue model, but on bookings that you know the clock goes back to zero at the beginning of every every quarter, but we see some underlying strength that gives us some some optimism.

But we did have some weakness in the international multinational and.

You know that something that we're looking at I. I don't think that it's any major change in the economy, because it's been kind of a difficult economic climate for a while in Europe or we have a large business. So again as we looked at the detailed to just looked like typical lumpiness in our in our bookings.

Just to fall off.

You know look you're always going to have some degree of Lumpiness in your quarterly bookings number right from at least a couple of things right. You know if you've got larger multi national type deals that's kind of caused some lumpiness and then you've got the year over year comps issue, if he's got a tough tough comp or an easier comps. So you'll always have a little bit of that going on and.

So you know importantly, while the quarterly numbers, obviously important it's I think even more important to look at a longer term trend right. When you look at.

How we've been doing in particular with some you know last year, having a really.

Strong and I think record number of 1.6 billion for last year, and then 8% and then on top of that another what we think is a really solid number of 6% in Q1. When you look at that longer period of time, we're actually feeling I'm pretty pleased with the start to the year now there is of course always pockets that are stronger another.

Or is that or maybe a little slower out of the gate and Carlos mentioned on the outside of the U.S., having a little bit of Lumpiness, there, but nothing that we're pretty pleased with the starts the year.

Yeah that makes sense.

Great I, then maybe I'll zoom out a little bit and.

I'd ask on overall sort of product strategy at the at the large enterprise level I just want to dig in and see how you see your product suite evolving there just sort of in the context of you continuing to invest and vantage over time and then your strategy you initiated you're on the Liffey on offering.

Don't forget we also again one of the highlights for the for the quarter and frankly, it's been a highlight and trying to.

Kind of signal was I'm not sure how how it is its landed yet but.

Decision to use workforce now in the lower end of the up market. So call. It in that thousands of 3000, even though frankly it can go higher we have a couple of clients that have eight 9000 employees that aren't on workforce now, but that decision has been great competitively and growth wise. So we are selling.

A lot.

Of units in that kind of lower end of the of the up market and so the ability to use workforce now for.

And if it's certain types of profiles of clients and you can probably imagine generally speaking they are large but simpler and the vantage clients would be.

More complex and have more complex needs like complex benefits and talent requirements and so forth and living on its still obviously, an early adopter type of a product even though we're getting great traction.

We we told you what how we've done in terms of new new sales given the size of ATP.

It's really workforce now and vantage now that are affecting the numbers in terms of the bookings and the and the revenue and I think again and keeps it wasn't clear like that we had good quarter, even and in national accounts or in the up market, primarily as result of you know really good results from a from workforce now.

So you know the strategy is the same strategy. We've had all along which is you know I think we've we figured out that we have a really great solution 40 segment of the market I think last quarter I mentioned that we had an external third party do some analysis for us in terms of segmenting the market and as usual one solution doesn't fit the entire market and what we found.

Around was that a pretty good size percentage of the market can be addressed by our workforce now solution. So that's what we're doing and we were right and the analysis was was right and we think the vantage still addresses another segment of the market and living on is more of kind of the emerging solution.

We obviously have placed a lot of a lot of confidence in a lot of in a big bet on for the for the future, but as of today, it's really not having a big impact on though on the numbers and you know, but also just add also in terms of just to your question about market dynamic when we had this meeting and in Las Vegas free the.

HR Tech conference that I mentioned in my in my comments.

Again early positive signs we had.

Anyone who was there and I think some of our some industry analysts and some financial analysts were there I think it was pretty clear that we are arm or making an impact in the in the markets or lead flow was.

Multiples of what it has been in the past in the up in the up market because of the interest in lifting on but I just want to be cautious in terms of piece here because relative relative to our 15 billion in revenue.

This is not next quarter or.

Three quarters from now but.

Signs are very very positive and long term as as Kathleen mentioned, if you focus on the long term I think liffey on a the traction we're getting a lifting on is very very encouraging.

Yeah, that's that's really good will well keep watching thanks.

Thank you. Our next question comes from Kevin Mcveigh from Credit Suisse. Your line is open.

Great. Thank you Hey.

Able to read from the revenue despite the lower.

Noninterest on kind of funds in extended investment, which they were any kinda offset there, particularly given the incremental headwinds in FX. It seems like you're able to.

We from the Guy despite those couple of headwinds.

I think it goes back to where we were saying about the some of the underlying performance of the business. So as an example.

Even though we don't give quarterly guidance on retention.

You could tell for more comments I hope that we felt pretty good about it this quarter. So that you could probably read into that did it improved.

Prior to compared to last years prior a first quarter and as I've mentioned before retention. If you do the math has a pretty outsize impact on our business book in terms of revenue and frankly big impact on on margin because for equal growth you don't have to implement.

As much as much business and so you know theres a lot of different moving parts that go into the into the pot here, but I would point that went out as an area of of strength I think we talked about the strong performance in our core U.S. businesses. So for the first quarter, we had kind of or three core businesses.

Performing very well in terms of of bookings as well. So you know it's a process of from the ground up of US building this forecast.

The plan and the now the forecast and I think we have some some optimism that we're we're still in that in that range and but I just want to point out the retention story, because you know three or four years ago. When it was going the other way.

Pointed out that it takes four to five points of sales growth of new business bookings growth to offset one point of retention just because of the way the the math works and so you know now as retention is you get a little bit of improvement in retention that helps a lot in terms of or for growth rate.

So as Carlos mentioned Theres, a couple of things obviously gave us.

Headwind or unfavorably versus what we would.

I have been expecting particularly the FX and the interest from fire and fun. However, when you look at operationally the fundamentals.

Really got.

Hello said retention is on a steady trend upwards now it gets harder and harder the higher up you go but were happily happy to see some level of increase in the first quarter here and bookings were solid for the floor.

No just added on the client funds interest.

We do have we'd had some of this.

For the year it it it obviously has an impact because we guided we gave you the information in terms of were slightly below what we expected to be but it's not a ton of huge number for this fiscal year.

Great and then just Carlos to highlight the retention little bit more because obviously really nice progress there.

Any sense of adjusted the success across the enterprise versus the midmarket versus kind of downstream a little bit the range on those.

Yes, I do have some sense my sense is that we're improving a lot.

So we show some.

Some signs in terms of the win loss you know about what we call balance of trade some encouraging signs, particularly in our Midmarket business. So again, the the Midmarket now is performing.

You got to be cautious because this is definitely a forward looking statement, but it's performing according to script.

In a sense. If you remember we took a lot of paying a lot of effort to migrate all of our clients onto one single.

For TG platform, which is workforce now and when you looked at the history of what happened in our SBS Downmarket business.

When we did that we were optimistic and hopeful that we would have the same kind of traction in our midmarket business and it it's beginning to show now so we have.

You know improving retention now for it feels like six or seven quarters somewhere in that in that range from being told more so once we kind of finished the migrations and got to that difficulty I think are we've had steady improvements in retention.

This quarter was the second highest retention we've ever had.

In our Midmarket business and in this this quarter what was very encouraging was to see.

The level of activity and new business bookings. So you know the combination of those two things give us.

A feeling of optimism for what is one of our biggest and most profitable businesses.

Awesome. Thank you.

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

Thank you good morning could you comment on the drivers that you expect to move your PEO revenue growth up from 8% in the recent quarter to 9% to 11%.

Which is your guide for this year and then just as a follow up at your Analyst Day last year, you gave a multi or guide of 12% to 14% Cagar for your H. Aro business and your trendy well below that now do you anticipate at the time that the growth rates in the earlier years, a double digits effectively.

No would slow toward the end of that period, let's say mid to high single digit.

Well, if I can take and certainly with the second one first.

Since I was there at the analyst enough here to ask huddling I think that we as we built.

The the guidance for were I guess, the estimates for three years.

We had as I think we've mentioned this a couple of times, we had certain expectations around our pass through revenue in the inflation of those numbers that had some historical precedent both around workers compensation.

And health care.

Think literally within two months of that the picture changes that we communicated that very clearly very transparently and frankly without any anxiety because it doesn't have any impact on our S.

So if you remember the Investor Day, I think was in June and I think when we had our our August or earnings call. I think we we brought down significantly for that year at least a the growth rate for the PEO mainly.

Primarily or close to almost based on lower inflation now on top of that we have had some slowdown or worksite employee growth, which is the core driver underneath of the real real growth with the business, but I think the main driver of this.

Differential from what we communicated at Investor Day has been the lower inflation over the of the past with which again doesn't concern us.

In a big way, because it's zero margin and doesn't really affect our profitability in terms of in terms of dollars.

In terms of your question about the.

You know the behavior of the quarters and so forth.

You know probably beyond the scope of this call. But this is it's just kind of mass in terms of when we have our open enrollment for health care and kind of the May June timeframe, which we've again communicate a very transparent transparently when that happens when what happens when that occurs.

You tend to have some client churn so that drops your worksite employee growth and obviously revenue growth for the PEO and then as bookings continue to assuming the continued they continue to be robust you start to build that up again and then at the end of calendar year end you have another event at year end, where you have some turning the.

Client base in terms of clients.

Choose to leave at the end of calendar year, because that's more natural.

We also have.

Historically, a lot of bookings in in January as well I'm. So you know we've been doing this for 20 years, and we see a difference or a change we would obviously communicate that but I think we're just kind of dropping the numbers and as as they are supposed to come in terms of based on historical historical trends.

David I understood.

David I would just add so last quarter, we did say that we would expect to start the year on the lower end of the range and grow pardon me and then grow.

Into into the range as the year progresses, because obviously, we started with a.

Somewhat of a week or ending Worksite employee number in the fourth quarter last year, you know I think it's probably worth asking I mean, adding just to again in full transparency I think we said it last quarter.

Our health care renewal was slightly higher than the previous year. So I wouldn't it wasn't anything out of norm in terms of historical but it was higher than the previous year and when that when we have that happened you tend to get more shoppers and more health care costs as a large part of what a small business pays a in their overall cost structure.

All of their workforce and so they tend to shop and look around and so forth and so we had a little bit more more churn than I think than we had had in a in the prior year.

The good news, though for us is that.

No we have that issue, but we've been dealing this effort 20 years, but we don't make any risk on health care and so you know whatever we get in terms of price increases through the carriers. We pass those stood at 100%, which is what we called zero margin pass through so that that eliminates any risk or any surprises in the future, but it also means that you have to have.

Frankly, the courage to just pass those costs through and let the chips fall, where they may and the chips fell and I think you can see from the numbers that the chips didn't fall off the table because there wasn't a collapse in the business or or a huge slowed down, but we definitely had a speed bump and now it's really through new business bookings that we have to regain the moment.

And kind of have that ramp up again and reacceleration of the growth rate.

Understood. Thank you very much.

Thank you Sir our next question comes from Brian Burgeon from Cowen Your line is open.

Hi, good morning, Thank you.

Carlos I wanted to ask a macro view your outlook on the current plan on market. It sounds encouraging based on the performance of the business, but I'm curious how much of that is due to the proof competitive product position versus the underlying underlying demand you might be saying.

Great question, because it's an important one for us to keep.

Kind of asking ourselves, but we do have some things that.

If they turn on us would put pressure on us interest rates. Obviously is one of them pays per control et cetera, but we're also feeling pretty good about our product situation and I think our competitive situation in the in the marketplace going forward here. So it is that's it'd be very important question for us to stay focused on here for the next few quarters, but as of today when.

You look at our <unk>, the lagging indicators, who pays per control.

It doesn't look like there is a.

Slowdown or a big big issue.

But if you look at the same things that everyone else would look at that we have access to in the you have access to in terms of leading indicators like confidence indexes or and if I be I assume you know those types of things, Michigan confidence you know those there's some concern there and some reason for for caution.

In our numbers the only place where we've seen some a little bit of softness in pays per control and it doesn't get reflected.

Our and what we report because as we've disclosed prior this is our auto pay based which is a very large base of both large employers midsize employers and smaller employers, but we have most of our employers in our run platform and there we've seen a slight downtick in pays per control growth over the prior over the prior year. It does.

When you look over the 10 year history, I don't think if anything to be alarmed by but.

When you look at other.

Other factors, it's certainly a a cause for for caution I just happened to look I think last couple of days it up and if I be that's softened significantly but it's still.

Well above recession levels, and so I think wrong, we're all kind of trying to figure out. The same same thing here, which is a soft patch or is it kind of a trend line, but you know with the fed easing and the consumer still strong like right now our plans are that we kinda.

Work our way through this soft patch.

Okay. That's helpful. Thank Kathleen on just margin expansion progress any further details you can share on the various transformation initiatives as you look across the various sources where are you seeing that most yield and anything surprising you have as you've had just more time in the seat.

Yes, thanks to the question.

Something that I'm really focused on in the organization is really very focused on as well and just to kind of give some context and I'm kind of big picture. When you step back and take a look at what we've done the last couple of years I mean remember back in 2018, you're at a margin rate.

20.7% with a small amount of margin expansion that year and then in 29 team went fiscal 2019, when we we're executing on some really big and meaningful transformation initiatives you saw that really outsized margin expansion of 160 basis points.

And now you know as a reminder of the guide for another 100 225 basis points for fiscal 2020. So a track record here really consistent margin expansion as we start in fiscal 2020 with Q1.

That 60 basis points of margin expansion, we're really happy to see that and very happy that we're on track with how we plan. The year now there's a lot of execution on a lot of work behind the scenes going on but John I'd point out that number one as I started my comment there's a lot of energy around it and a lot of online.

Men and the energy and alignment is around both executing what I call in flight projects as well as developing the pipeline for the future. So that's really exciting <unk>.

I've talked about on the previous call that most of the margin expansion from the transformation perspective. This year is coming from what we're calling workforce optimization and procurement initiatives. Both are very much on track.

From a workforce optimization standpoint think about that in terms of spans and layers exercise, if you will and particularly targeted to management layers.

So that's that's kind of on track and already executed with most of that benefit being in fiscal two money not much from that coming beyond fiscal 2000, and then procurement transformation. There's a lot of projects. There as we look at you know across all parts of the organization and spend as we look at volume and we look at policy and we.

Look at our ability to negotiate smartly with vendors and suppliers, there's opportunity there and there's a lot of execution going on so lot of work by the organization, we're happy with what the teams doing happy with the progress but more to do.

Thank you.

Ryan I, just one thing just to add as you think about the margin because your question I think was related to margins in particular, and obviously, what's driving those but last year, the first and second quarter, but particularly the second quarter was a very strong growth and margin that's enough time and I'm. Just a reminder, we also had pressure.

From M&A at the time, so just clear that went on to it as long as you think about margin cadence last year responses.

All right. Thank you.

Thank you. Our next question comes from David Grossman from Stifel. Your line is open.

Thank you I was good morning, I Wonder if I could just follow up with a couple of questions on the PEO.

It should be or kind of larger peers in that space have identified some type of incremental issue with their health insurance book.

In their most recent reports and I know you mentioned just higher health premiums and obviously you pass everything through or in your in your model, but you know its or anything else you're seeing in the marketplace that maybe impacting you know the cost of delivering health insurance and the PDR industry.

No.

All right. So for you, it's just a straight higher premium and not seeing anything else. I guess, you don't really see the claims data is that right in terms of how clients maybe unpack that a.

Carl I don't see individual employee claims data, but we of course very very carefully look at.

Claims either to getting to get some sense with our carriers in partnership with other carriers of what's happening in terms of trends and.

Maybe I should be a little bit more clear on this premium increase issue. So.

I'm not going to give you the exact numbers I don't think we want to get down that rabbit hole, but the the change from this renewal to the prior renewal was call. It one to two percentage points higher.

On average than the prior year so if.

The previous year. The average renewal increase was 6% then the next year it was seven or eight.

And that increase that year that was slightly higher was.

Give me in line with.

The prior.

Six or seven years or so that wasn't.

So there's some ups and downs that the prior year was one it was actually exceptional I think we were very clear about that I think we talked about that in our calls that we had a really great renewal on our health care on average remember this isn't one carrier. These are multiple carriers, we use a number of different carriers to make sure that we have good coverage across the entire across the entire country and so.

So that was unusual and helped us competitively.

But but I think this renewal was not out of line with historical norms and has nothing to do with any kind of I think anything that's happening around.

Health care is is probably has to do with people's underwriting policies and their own approach to.

Bringing in business and repricing business, because it's not just about the business you bring in.

But every year if your self insured.

Are you are taking risk you have the opportunity or the option of passing through or not passing through health care costs and you actually have some judgment with your underwriters on what those costs are and so that's generally that's typically what could create a problem in health care, but it doesn't appear to us.

That that there's really anything happening broadly in the healthcare industry around peos.

And then just you know on your just based on your commentary on workers comp I mean, I think the whole industry, how the tailwind. So if you look at this year's health to increase plus the other workers comp.

At a more normalized level. This is really a more typical year a few though right I mean in terms of the piano in terms of those two items.

I think thats right, that's fair and I think on the workers comp just again to be clear. It was a I think we were clear, but one of the should we say one type of smaller positives. So we're not having.

Right surprises in terms of losses in workers' comp or any kind of and by the way we have very tight ship there in the sense that we have as we disclosed in our 10-K.

A color that limits or our risk in a fairly significant way caps or our downside on on workers comps. We have reinsurance on individual claims and then we have a color around or overall loss estimate so it's a it's quite.

Quite limited in terms of the volatility you know the the I think the other thing that I would mention is that you know our business mix hasn't changed we look at that very carefully as well. So we look at you know the mix of called White collar versus grey card, but within those categories. You have a lot of different industries and a lot of different kind.

Degrees of people and we don't see any any major change there as well.

Got it and just the follow up is kind of a bigger picture PEO question Carlos is that.

Given the relatively low penetration rates for the industry and you know that you get a lot of your new clients from.

A client that it's already using you for payroll, what's what are some major objections to somebody enrolling in the P.O., particularly if there and ATP payroll customer you already have the payroll record so that kind of disruption and transition costs then.

Time and effort are substantially lower.

I think it's you know it goes back to like.

I guess I'm bite my first the first your marketing class in graduate school, which is high involvement decision right. So the PEO the go to a small and midsize businesses and told them that.

You can create a complement relationship you're taking over their health care plan their workers compensation remember all along the way there are as an example, there could be a relationship with.

An insurance agent or a broker that's been providing the health care in the workers comp for the last 10 years that gets disintermediated.

You have to you know payables is hard enough to convince someone to switch payroll because people worry about you know are you sure you're not going to make a mistake and make sure that it's going to go accurately that we obviously have an incredibly strong reputation on payroll that helps us, but you know the traditional business that you're trying to convince them. When they give you your payroll now you're also trying to.

Convince them to give you everything around their HR.

Department, and and with a higher level of of trust and its again, what I what I remember being taught is called a high involvement decision, which takes longer to make and is more difficult to to make so I honestly don't think that that theres really anything that prevents.

Clients from becoming PEO clients and I think we've demonstrated over 20 years that.

We've convinced a lot of them and so our board asked the same question, you're asking which is can't you convince even more and we're trying like we continue to add you know improvements in the product we continue to.

Provide better tools, we continue to enhance our product we continue to do all the things we can to make it more compelling easier to use as an example, I think we've we've kind of talked about this in the last 18 months you know all new business now and the PEO starting on our workforce now platform, which has higher functionality and provides the of the above.

32 to satisfy slightly larger clients and we could before because it to midmarket platform and so there's a lot of things that we're doing to try to.

Convinces many clients to come over to our PEO solution has as possible I think it's good for them and it's good for and it's good for us, but there's really nothing that I can point to other than kind of the difficulties of of the of the convincing of the sale.

I got it very helpful. Thank you for that.

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

Hey, good morning, guys I just wanted to pick up on some of the margin commentary I mean as you rightfully pointed out the comparison there again.

Quite a bit hard are actually in the in the second quarter.

So just so that our expectations are properly calibrated I mean do expect margins to be up.

In the second quarter year over year.

Yeah, it's really tough comp in Q2 remember.

Last fiscal year Q2, we had over a 300 basis points of margin expansion. So it's going to be tough to expand in Q2.

Maybe it's flat slightly up slightly down you know hard to say exactly because there's so many moving parts, but the way I would think about it is that the bulk of the expansion to come this fiscal year will come in the second half of a year.

Yeah, Okay, that's fair.

And then just on the on the bookings prime.

Somewhat similar question, except in reverse right because you've got the easy comp there in the second quarter. So.

We need to be above the full year guidance range in the second quarter just to make sure that you stay on track to achieve the full year outlook. Because then obviously the comparisons here get a bit harder in the second half.

Above the the bookings guidance number in the second.

Do you need to be above the full year range in Q2, just to keep yourself on track mathematically, yes, so you're absolutely right I mean it.

No.

To stay on that for the full year, you'll have more growth in the second quarter and much less than Q4.

Right.

Right. Okay, and then just last quick one from me, what what will be the drivers of the anticipated acceleration in the WSE growth during the balance of fiscal 20.

Selling more new clients and losing clients.

It really goes back to the.

I mean, I hate to I'm, not trying to be be smart Alec but the it's really the pattern I think I talked about a couple of questions ago that you know when we tell our open enrollment in May and June we tend to experience some client churn.

The sales don't don't accelerate at the same necessarily the same time and so you have seen phenomenon happens sometimes at the end of the calendar year, where you may lose a group of clients and then you bring on new clients at the beginning of the year. But then you also bring on you so clients tend to not leave.

At other times of the year other than it calendar yearend and open enrollment, which is manger and that doesn't mean that none leave I'm, just saying that the that the skewing is skewed towards those two periods and the skin. The sales are skewed differently and the combination of those two things is what causes either growth or deceleration.

It looks like.

Look on any of the not any but like on a lot of these metrics. When you look at a very short period of time one quarter.

You could have some one off things happening and that's why you know as I said earlier looking at the trend and the track record over time for things like bookings and Worksite employee growth and even margin right looking at the trend over time.

It's helpful I find.

But again in this case. We also have you know we have to hit our plan, obviously as I guess of as usual when we have these calls.

If we're giving you the numbers based on what we expect right now so if we hit our new business bookings plans and retention stays where we expected to stay than you would get the outcomes that that you were talking about but its Kathleen said, there's lot of other moving parts. If if three to six months from now that the economies in the tank and pays per control.

Is declining it's going to decline in the PEO. In addition to yes or anywhere else in ATP, and then that would create a headwind but in the absence of any any new information I think we feel pretty good about the forecast we have.

Okay I appreciate it thank you.

Thank you.

Our next question comes from Stephen Walt from Morgan Stanley . Your line is open.

Hey, good morning, just maybe a follow up on the margin expansion path looking beyond sort of the next few quarters or even this year.

I was talking about the messaging and make sure we were getting a proper sense of the drivers there I think a lot of the talks been around workforce optimization and procurement over the next 12 months or so.

But I think one of the these guys have tried to talk about as the tech improvements all your investment.

As you build more those into your platform as you, adding the more into what you're doing on a day to day basis can you talk a little bit about how that scale, you are adding or that scalable.

<unk> expense base, the you're adding will show up in terms of cost reductions or margin improvement.

Well I think again back to like the company was talking about in terms of the mask. Some of this is really about the comparisons rather than.

Anything that we're doing and but we have to help you what we understand that it's important for you guys to understand that so just as a reminder, last year. What happened was we had with the voluntary early retirement program we had.

No.

A good number of people taking that and then the Backfills that we had planned which was all planned certain percentage of black backfills were delayed.

So that impacted that year, we also got off to a very strong start for a couple of other reasons. We had other what we called quick wins at the time around transformation to help us get off to a strong starting the first to in the first time and any Kathleen talked about.

No we had.

For us like incredibly strong margin improvement.

And so it's just a very difficult compare mathematically has edge as we've been going along regardless of how the math works. We continue to work on a number of initiatives.

This year, obviously, we executed on this spans and layers initiative and then we have a number of other projects around procurement is one of them, but we also have a number of kind of automation.

Digitization projects that I think we're making some progress on and when we have our industry sorry, our analyst day in February , we'll probably share a little bit more around some of those things that we're doing because those are around transformation innovation as well. So it's not just about innovating on a product side, but it's also innovating.

On the implementation in on the service side and we've gotten some good traction in some of our businesses, which allows our productivity to improve while still for our associates, well still improving our NPS scores and our client satisfaction, which by the way we're up again this quarter and no surprises retention is improving.

We usually a sign that client satisfaction is still is still high. So you know again. The trick here is you want to you want to transform your cost structure, but you don't want to like lose all the clients in the meantime for now we've been able to balance both of those and that's it that's our plan here for the next a year or two.

Yeah Fair enough and then maybe just one quick follow up.

The buyback a little bit higher than we've seen last year or so just could you provide any commentary on how you're thinking about the pace there going forward.

Yes, so I'm really no change.

How we're thinking about that and our strategy we've talked about.

The intent to buy back 1% of the share base and John .

We've been executing along those lines, so really no change.

We look all the time add to the market conditions and.

Look as there is some opportunity where there is a big downturn in the market and we want to become more active maybe we'll do not I don't know, but we constantly we watch that we look on it we talked on all the time, but as of now no no particular change because one little statistic because we happen to notice these things when we prepare for these calls because.

Now I get like it seems like 20 years of of information. So we've reduced our our share count by 30% since.

The early two thousands and so we intend to continue to stay on that.

On that pace and so obviously as a marathon for a company like we're kind of proud that it's a marathon we've been around for seven years.

And I had one per cent per year. It adds up and it certainly has added up in the last 20 years to the tune of.

30% share reduction and I think that.

Companies, they're in a different stage of development, where they're getting dilution and adding shares to their share count.

You know, we think we're going to win this marathon.

Alright, great. Thanks.

Thank you and we'll take our final question from Bryan Keane from Deutsche Bank. Your line is open.

Hi, guys, just a quick or two quick clarifications on the PEO margin. It was below street, but it didn't sound like it was really below your expectations.

And it sounds like there was a tougher comp to the ATP indemnity. So could you maybe just talk to that and how that looks going forward on the margin side.

Yeah, No I think that's I think it's a fair characterization I think that as usual there is that there's a we try to obviously be.

Thats Street as we can be.

Because sometimes there's a slight disconnect between what we're expecting versus since we don't give quarterly guidance, but.

The results I think were on that specific topic I think were in line with our with our expectations. Yeah. It was definitely in line.

With how we expected to start the year.

And then just the cadence how we think about that going forward on the margin for Pete you.

That's a good that's a good question I think that what if you will you. When you look at the annual guidance I think was down flat to 25 down down to 20 525 basis points I think that was the the guidance. If you take you know our first quarter number.

I would for now assume Ratably margin improvement over the course of the rest of the year because these quarterly fluctuations in ATP indemnity are not something that is something that we can have a crude that we don't have any real visibility into that and again just as a reminder, part of.

Why we've done this is.

If you remember a couple of years ago, we had some criticism around our disclosure. So we had our client funds interest and indemnity being.

You know handled in the kind of other category, which allowed us to not have these questions and not kind of mix up the results of those businesses, but as usual.

There there are two sites every story and so.

I think the criticism was.

Those things really belong in the results of the business unit fair enough. So we made that we made that change and now we are saddled with every quarter having to explain.

Any kind of fluctuations here, because what really matters as the underlying health of the business, we don't take enough risk in that business for it to matter, but you can get because of the size of the business. If you get a 5 million dollar fluctuation, which is what we had this quarter up or down it affects numbers, but it doesn't really say anything about what's happening in the underlying business, but it is what it is we now repair.

Indemnity and the PEO and we're gonna have to every quarter be able to give you that kind of color and likewise, you know and employer services. We now have client funds interest and so now with that that creates a some some variability in that in that business as well.

With a flat to down 25 basis points.

70 in Q1, you'll see that just mathematically it ramps, but again, it's going to depend on the ATP indemnity and how that comes through during a downturn here.

It was certainly easier when we didn't have any PMDA CEO , but [laughter] because nothing again, we've been doing that for 20 years, we handle that.

We're not bogo handle exactly the same way as we've always handle that it's just a different accounting for it that's all.

Thank you and this does conclude our question and answer question for today I'm pleased to hand, the program over the Carlos Rodriguez for any closing remarks.

Well, thanks, very much like you can tell that we feel pretty good about the the start to 2020, where obviously trying to change a lot of things we've talked a lot about transformation will share more with you. When we have our innovation day here in a in February but we're focused on execution as I think I think Kathleen alluded to there's still a lot of execution.

In front of us.

We still try to continue to be focused on our clients and our associates and ore sources are doing a phenomenal job as evidenced by our continuing improvements in our NPS scores.

You know obviously, we felt good about what happened with a with HR tech with our lithium ion debut. So I think that gives us some optimism. We're very excited about what's happened in the Midmarket business here in the in the first quarter I'm. So I mean I continue to be very proud of our organization and the resiliency of the organization and the transfer.

Emission efforts that they continue to execute on so we look forward to giving you more updates in the time to come and that we thank you for joining our call today. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program you may all disconnect everyone have a wonderful day.