Q2 2020 Earnings Call
Good morning, My name is Crystal and I'll be your conference operator today.
At this time I would like to welcome everyone to ATP second quarter fiscal 2020 earnings call.
I'd like to inform you that this conference is being recorded an 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.
If you would like to ask a question. During this time simply press Star then the number one when your telephone keypad.
To withdraw your question please press the pound King.
I'll now turn the conference over to Mr. Christian Greyenbuhl, Vice President Investor Relations. Please go ahead.
Thank you, Chris and good morning, everyone and thank you for joining ATP second quarter fiscal 2020 earnings calling webcast with me today are Carlos Rodriguez, our president and Chief Executive Officer.
Kathleen Winters, our Chief Financial Officer early this morning, we released our results for the second quarter fiscal 2020.
The earnings materials are available on the Fccs website, and or Investor relations website that investors don't ATP Dot com.
We will also find the investor presentation that accompanies todays call as well as our quarterly history of revenue and pre tax earnings by reportable segment.
During our call today, we will reference non-GAAP financial measures, which we believed to be useful to investors and that exclude the impact of certain items.
I, just corruption 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 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 I turn the call over to Carlos I'd like to remind you of our upcoming innovation day, which are scheduled for February time.
We hope to see many of you there in person for those who are unable to attend you can find more details about how to use the event that investors that he'd be dot com.
And for it to sharing or progress on our investments in innovation as was our vision for HCM technology portfolio.
As always please don't hesitate to reach out should you have any questions and with that let me turn the call over to Carlos.
Thank you Christian and thank you everyone for joining our call.
This morning, we reported our second quarter fiscal 2020 results with revenue of 3.7 billion for the quarter.
5% reported and organic constant currency.
We're pleased with this revenue growth, which was slightly ahead of our expectations.
Our adjusted EBIT margin increased 70 basis points for the quarter.
Has also slightly ahead of our expectations.
Together with share buybacks in a lower adjusted effective tax rate. These results helped us deliver 13% adjusted EPS growth this quarter.
Overall, we're pleased with our progress through the first half of fiscal 2020, following a difficult compare with the first half for fiscal 2019.
Moving on to operations and starting with new business bookings.
This quarter, we continue to see strengthen our employer services don't work at offerings and solid progress from the sales of our workforce now solutions.
We were also particularly pleased to see strong double digit bookings growth.
Yes.
With that said, we are disappointed with our 3% employer services, new business bookings growth for the quarter.
It's lower than expected growth was mainly the result of the same trends we saw in the first quarter with our international and multinational businesses.
Putting delayed decisions for some of our larger multinational sales opportunities.
As we've said before given their size. These opportunities can have an outsized impact on our quarterly bookings metric.
Just in mind, we've narrowed our full year employer services, new business bookings outlook, and now expect 6% to 7% growth that's compared to our previous guidance of 6% to 8% growth.
Last year is 1.6 billion of employer services new business bookings.
We continue to have a solid pipeline of opportunities and we remain confident in our ability to execute across our portfolio.
Looking at client service, we continue to see good progress with overall screen in or net promoter scores and retention.
As a result, we continue to expect or forecasted full year fiscal 2020 employer services revenue retention.
Increased 10 to 20 basis points.
Now, we're half way through fiscal 2020 and at the midpoint of our could be your targets, we outlined at our June 20 team Investor Day.
As we were also six months away from giving our fiscal 2021 guidance and we will not be giving any updated financial outlook or upcoming innovation day.
I want to take a few moments here to look back and share my thoughts on our progress since we provided that guidance.
Let's start with new business bookings.
You will recall that our June 2018, Investor day, we outlined that we were targeting growth for worldwide, new business bookings growth of 7% to 9% to fiscal 2021.
No we no longer regularly report a worldwide bookings figure, which as a reminder includes the results of employer services and PEO segments together.
We thought it would be helpful in that context of a midpoint looked back to share that we have seen 8% average quarterly growth since the beginning fiscal 2019.
We're pleased with this worldwide bookings growth together with our improvements and employer services revenue retention and how they demonstrate the strength and stability of our business, even as we've been going through meaningful transformation as an organization with a set of broad based initiatives, including our service alignment initiatives fiscal years 2017 and 18.
Our voluntary early retirement program in fiscal 2019, and most recently, our workforce optimization and procurement initiatives.
Meanwhile, our quarterly average consolidated revenue grew 6% reported and organic constant currency over the past 18 months.
As we look at some of the developments that have affected our recent growth relative to our expectations. We note that our PEO has not performed in line with our long term expectations driven by lower than expected pass through revenues and lower than planned worksite employee growth.
Over the past several quarters, we've discussed some of the factors impacting PEO revenue growth, including the impact from our sales incentives recent retention on favorability related to healthcare inflation and softness in workers' compensation and state unemployment insurance rates.
With the impact of these factors our average growth over the past 18 months and average Worksite employees was 8% as compared to our long term expectation of nine to 11.
And the contribution to revenue growth from pass throughs was 1% compared to our long term expectation of 1% to 3%.
Despite the slight underperformance relative to our expectations. We are confident in the overall prospects of the PEO business and can continue to see healthy demand for our offerings.
Our PEO platform is the leading fully outsourced solution in HCM market, where we combine this with best in class eight truck business partners, which together helps deliver an unparalleled service experience.
Stepping back now to total revenue we are tracking at 6% average growth six quarters, we have a solid playbook with a proven track record of driving sustained growth.
We will continue to focus on delivering consistent strong bookings growth and retention performance as key priorities.
Moving down the piano during this period, we further solidified the foundations of our business as our associates continue to transform the way we work while also delivering innovative solutions to our clients.
These transformation efforts, along with our steady topline growth and the operating leverage in our model have helped deliver robust margin expansion in an average adjusted EBIT growth of 13% through the end of the second quarter fiscal 2020.
Which is within the range of our fiscal 2021 target CAGR of 12, and a half the 15%.
This together with our disciplined share buybacks lower adjusted effective tax rate has driven adjusted EPS growth of 18%, which is tracking ahead of our targeted growth of 14 in the half to 17 and a half fiscal 2021.
As you can tell from our guidance for fiscal 2020, we currently anticipate ending the year within our fiscal 2021, three year margin target range, one year ahead of schedule.
This is no small accomplishment given our ongoing efforts to invest in the business for the long term.
Overall, I'm very pleased with our progress to date the journey that we have embarked upon.
To simplify how we work drive innovation and grow our business is a challenging one.
However, and more importantly, it is also providing us with great opportunities that demonstrate the value of our offerings to our clients as we continue to simplify the client experience.
Threes collective efforts and with the continued strength of both our R&D organization in our worldwide Salesforce, we're enhancing the depth and scale of our ability to serve our clients.
Wherever they do business with best in class products and solutions that fit their needs.
Our clients in turn our recognizing these efforts as we continue to see improvements in both our net promoter scores as well as in our employer services revenue retention.
It is due to the success of these efforts that we remain committed to additional shareholder friendly actions such as our recent dividend increases of nearly 45% over the past two years.
Our track record of annual increases in our dividend puts us in a small minority with 30 other companies in the S&P 500 that have also grown their dividend for 45 consecutive years or more.
As we look forward to the future we remain confident that our strategy is the right. One as we aim to further strengthen our resilient business model and Earth to drive sustainable long term value for our shareholders.
Before I turn it over to Kathleen for a detailed financial review.
Want to know how proud I am of the actual recognitions that we received this quarter, which reflect the strong corporate culture, which our businesses though.
As I reflect on our recent efforts I'm, especially proud to Fortune magazine again needless to their most admired companies list for the 14th consecutive time and also ranked US number one in our sector.
This is a remarkable achievement in a rewarding recognition for the efforts of our associates or focus on providing our clients the best solutions, both for today and for the future.
I am also particularly pleased to see our efforts reflected in the Wall Street Journal Drucker Institute list, a best managed companies, where we were one of the biggest movers jumping 104 places into the top quartile.
These are only some of the great recognitions that we are receiving for our efforts to create opportunities for all of our stakeholders.
And with that I'll turn the call to Kathleen from a commentary on our results in the fiscal 2020 outlook.
Thank you Carlos and good morning, everyone.
Carlos mentioned, we're pleased with our continued progress in delivering growth for our shareholders and this quarter was no exception. This quarter's reported revenue growth of 5%.
6% organic constant currency is slightly ahead of our expectations and we're particularly pleased given the difficult compare to our second quarter fiscal 2019.
Our adjusted EBIT increased 9%.
And adjusted EBIT margin was up 70 basis points compared to the second quarter fiscal 2019.
Both also slightly ahead of expectations due to the timing of our progress across our multiple transformation initiatives.
Our margin improvement continues to benefit from a combination of cost savings related to our transformation initiatives and operating efficiencies.
These benefits were partially offset by growth in PEO Euro margin benefits pass through expenses increased selling and marketing expenses and amortization expense.
Similar to the first quarter fiscal 2020, we're particularly pleased with our margin performance given the difficult compare that we faced in the first half of the year, resulting from the outside benefits in fiscal 2019 related to our voluntary early retirement program.
Our adjusted effective tax rate decreased by 260 basis points to 22% compared to the second quarter fiscal 2019.
The decrease is in line with our expectations and was mainly due to the release of evaluation allowance related to foreign tax credit carry forwards.
Adjusted Diluting earnings per share grew 13% to $1.52.
And in addition to benefiting from our revenue growth margin expansion and a lower adjusted effective tax rate was also aided by fewer shares outstanding compared to a year ago.
Moving onto our employer services segment and interest on funds held for clients.
Employer services revenues were slightly ahead of expectations and grew 4% reported and organic constant currency.
Interest income and client funds grew 7% and benefited from growth in average client fund balances of 6% to 25.1 billion.
This growth imbalances continues to be driven by a combination of client growth wage inflation and growth in our pays per control.
Our employer services same store pays per control metric in the U.S. grew 2.2% for the second quarter.
Employer services margins increased 30 basis points in the quarter driven by the same factors that I mentioned earlier when discussing our consolidated results.
RPL segment revenues grew 9% for the quarter to 1.1 billion, an average worksite employees grew 6% to 579000.
Revenues, excluding zero margin benefits casters grew 7% to 412 million and continue to include pressure from lower workers' compensation and fuel costs and related pricing.
Our value proposition in the CEO remain strong as evidenced by our double digit PEO new business bookings growth this quarter.
Our Midmarket sales channel continues to grow following the realignment of our sales incentives and we're seeing continued signs of positive traction within our Downmarket referral channel.
With these factors in mind, we remain optimistic in our ability to reaccelerate. The PEO in the latter part of fiscal 2020.
Margins in the CEO decreased about 30 basis points for the quarter largely due to a difficult compare and an increase in selling expenses resulted from our strong quarterly new business bookings growth.
Let's turn to the outlook for the full year and start with the PEO.
With six months behind Us now and our year to date average worksite employee growth and revenue is tracking slightly below our expectations. We do not expect to achieve the higher end of our previous guidance range.
As such we are narrowing our guidance and now expect 9% to 10% PEO revenue growth in fiscal 2020.
And 7% to 8% growth in PEO revenues, excluding zero margin benefits pastors.
Both driven by an anticipated growth of 7% to 8% in average Worksite employees.
As we also discussed last quarter, we continue to expect lower workers' compensation, and Sui 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.
As we noted in previous calls this outlook continues to include approximately 50 basis points of pressure some smaller favorable reserve adjustments that ATP indemnity in fiscal 2020 compared to fiscal 2019.
Moving on let's take a look at employer services.
We are narrowing our guidance to 4% revenue growth versus our prior outlook of 4% to 5% driven by a combination of continued on favorability in FX and interest rates relative to our expectations coming into the here and the lower bookings growth in the first half of fiscal 2020.
We Meanwhile, continue to anticipate pays per control growth of about 2.5% and employer services revenue retention to improved 10 to 20 basis points.
And we now expect employer services, new business bookings growth of 6% to 7%.
We continue to expect our margin in the employer services segment to expand by 102 125 basis points.
We now anticipate total revenue growth of about 6% in fiscal 2020 as compared to our previous outlook of 6% to 7%.
This revenue outlook continues to assume an elevated level of FX on favorability for fiscal 2020 relative to our expectations at the beginning of the year.
We continue to anticipate our growth in average client fund balances to be about 4%.
Average yield earned on our client fund investments to be about 2.2%.
And interest income on client funds to be between 570 to 580 million.
We also continue to expect interest income from our extended investment strategy to be 575 to 585 million.
We continue to anticipate our adjusted EBIT margin to expand 102 125 basis points.
As a reminder, this guidance also continues to contemplate approximately 100 million in cost savings for fiscal 2020 related to our workforce optimization and procurement transformation initiatives.
We now anticipate our adjusted effective tax rate to be 23.2%.
The rate includes this quarters and planned 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.
We continue to expect adjusted diluted earnings per share to grow 12% to 14% in fiscal 2020.
Finally, before we take your questions.
I wanted to let you know that shortly after our February 10th innovation day.
Christian will be moving on to take an international assignment as the general manager of one of our European businesses.
I want to thank Christian for as many contributions leading our Investor Relations program.
And also welcome Danyal Hussain, who many of you already know as our new head of Investor Relations Congratulations to both of you.
With that I will turn the call over to the operator to take your questions.
Thank you if you wish to ask a question at this time, Please press star and then one.
Please be aware of the allotted time for questions. Please ask one question with a brief follow up and again, ladies and gentlemen that star one to ask a question.
And our first question comes from Kevin Mcveigh from Credit Suisse. Your line is open.
Great. Thanks, Hey, you know I think one of things we've been focused on is the retention the improvement in the retention can you give us any sense of outcome to the first half scale relative to the full year guidance.
Given that you could talk more comments that it obviously improved in the in the second quarter. We've tried to get away from within your guidance that we started providing I think it was a year ago, we're trying to get away from quarterly guidance. The we still committed to giving you kind of a sense of kind of where where we are and I think you can tell from my prepared comments that we had a good first.
Quarter, and we also had a good second quarter. So retention is.
Definitely positive for us like we talked about last quarter.
In terms of some of the bright spots or mid market business retention continues to two improvement is.
On track to.
To really get through this year close to record levels. So that's very very satisfying because you know we went through a very difficult time back in the day, where we did all the client upgrades and migrations and then with AC at the same time that was a business, where we really had a real setback.
Retention by the way step back for US is couple percentage points now we've recovered all of that in our kind of on track to get back to kind of where we were.
Record at record levels.
Understood and then just sorry, John Coleman, who is the I think we also in the first half have had a good retention in the up market, which was another.
Yes, that's been kind of a challenge the challenge for us over the last couple of years. So I think both of those.
Businesses, when you combine them, they're significant portion of our revenues and I think or have a solid retention performance.
That's super Helpful Asian Real quick follow up you know despite the revenue adjustment seems like you're maintaining the margin guidance I guess, what's driving that outperformance given kind of the the revenue adjustments in the PEO and I guess overall.
Well, we have our business model is interesting because sometimes at least for the first half because we as you could tell we were hopefully we're hoping in the planning on a recovery in terms of or sales results for the second second half, but in general we benefited in the first half from an expense standpoint from having weaker new business book.
Things because as you know or our business has a little bit of a self adjusting factor now the new six so six rules I think when you amortize some of these costs over time.
The blunt some of that impact, but theres still some impact from that so we did benefit.
From that and we just have a large good things going on from a margin standpoint, we really want to make sure that we focus on the growth as well, but we feel pretty good about the initiatives that we put in place call. It last fiscal year that are impacting this year's cost structure and.
I think those we've talked about those that procurement initiatives also the the workforce optimization, which was a de layering exercise where we reduced spans of control. So we took three layers out.
And increased spans across the board, including all the with the very highest levels, where we had.
For for Us a a.
I would call whatever a significant decrease in.
Overhead if you will in terms of water more senior most senior levels and so I think we're benefiting from all of those items.
Thats, helping that's helping the margin so we feel pretty pretty good about where we are in terms of cost and margin we have a lot of transformation initiatives around.
Around cost in margins and obviously, we want to make sure that we've been focused on growth and new business bookings as well.
I'm not too much to add to that a lot of Carlos covered a lot of the the points, but we're seeing we're seeing the operating efficiency come through were executing on the transformation.
Projects that we have in flight right now.
So all little bit better than expected margin expansion in the second quarter, primarily some timing on some of the transformation work, but look the teams executing really nicely on that I'm, particularly on the procurement side and we're focused on continuing to do that and building the pipeline of additional opportunity.
And just one other little item in terms of color you will see from the from the Q that.
You know.
Credit to the organization, but again a lot of these transformation initiatives have been.
Some of them when we talk about them to the big ones. We have dozens of other initiatives that are really improving the way we work autumn automating things.
Picking out kind of non value added work and when you look at our Q, you'll see that really R&D and selling expense that has increased and we really are are holding the line on the rest of or operating expenses due in large part to some of these initiatives that we have underway that are making work a little bit easier for our associates and also taking some of the.
Some of the workout and so that's.
The key because we want to make sure that we keep and we are keeping our NPS scores and our retention high. So that's the magic formula There I think keeping our expenses low and improving margin. If it results in lower client satisfaction lower retention is not going to help us in the long term, but fortunately and again credit to the to the associates into the management team, we're actually pulling it off.
We are getting both of those things right now.
Super Thank you.
Thank you.
Our next question comes from 10 Gen. Wang from Jpmorgan. Your line is open.
Thanks, Good morning, and congrats to Christian and Danny I wanted to.
Ask on well I guess, a bigger picture question, maybe before for the team just balancing you're balancing that new tech investments.
You just mentioned the transformation initiatives and the pipeline there, but just given that your.
But the your early in your interest you're on track to get.
To your your fiscal year targets this year.
Sorry.
Are you more willing to invest let's say in the short to midterm to maybe energize revenue growth and get that [noise].
Up a little bit more or is your preface. This still hit the higher end of your long term margin target just trying to understand how you might be balancing revenue growth and margin expansion given where you are now.
That's a great. It's a great question that I think our board, obviously has that discussion with us as well and I think our board has very long term oriented and so as much as we're committed to hitting.
All individual components, it's about balancing all of those factors to really create long term sustainable growth and we we would love to have as much growth as possible and when I when I think about where some of those places that we could invest as an example, like in our sales organization we are.
Fully staffed I think we're probably a little bit ahead of our plans in terms of headcount. So we clearly have some execution issues there, especially as we mentioned in our international multinational businesses and some difficult compares over last year, but we've really strong performance in the downmarket and in the Midmarket and even in the domestic up market. This this quarter.
So.
Doesn't feel like we're under investing in fact, I'm pretty sure that were not under investing in sales and marketing. We also have a brand campaign that we've invested in over the last over the last year, which has added some some expense so I think we've.
We've we've put our money where a mouse is when it comes to sales and marketing and then turning to other the other obvious places, where we could invest again for growth and product in our R&D organization.
Again, our R&D group would always say that we could spend more but when I look at the year over year and even a three year growth of our investments in our next gen platforms.
And even some of the.
Additional feature functionality that we're adding to our existing.
After concluding user experience, that's again, a place where our investments are growing. So we are you can see it from our.
Depreciation and amortization line when you see it in the queue and you can see it from or in here from our words that we are you can see in our balance sheet in terms of capitalized software. So.
We believe that we are investing for for the future and that we have.
Sometimes you have these timing issues because we do have a lot of enthusiasm for example, about our next gen platforms, but relative to the size of the company.
When this is the you're the first year, where we have over the last 12 months is the first time, we've actually got clients now live on our on our next gen platforms, including Nexgen payroll and next Gen HCM, which we call Liffey on.
So we're excited we're ahead of plan, but you have less than 10 clients on one of the platforms and call. It 30 to 40 clients on another one of those preference. It just doesn't make a difference yet in terms of the sales results for the revenue results, but it doesn't dampen our enthusiasm around the around the future. So again, I guess thoughts along a short of it.
I don't think it's a lack of investment but trust us that if we see an opportunity to invest for growth. We will we will take.
Understood and then just maybe on that point with the bookings it sounds like it's more international again, so I'm curious if this is.
More cyclical or is there.
Some very broad base or is it more just a few select clients here that you're looking for a decision just trying to better understand now the visibility here on the international side.
I think the most obvious one in terms of because it's easy to see and quantify is.
Our large global view multinational deals with a very difficult compare now of course that means that 12 months ago, we were celebrating getting those deals in those sales and hopefully we talked about at that that was giving us tailwind at the time and I think I think we did but we'd have to go back to the transcripts and now. Unfortunately now we have a very differ.
Cool compare now we just had or our rethink meeting we call. It we think meeting where we have all of our large multinational prospects and clients and I think we walked away with a very solid pike pipeline and a lot of enthusiasm and so we feel we feel good about hopefully the second half and whether it's the second half for next year.
But any lessons you ask about our multinational solutions, but we just have a very difficult compares that's an obvious place. We do have a couple of Ah we call in country or best of breed locations that are also.
Having some challenges that I think also have some difficult compares but it's hard to pointed any kind of cyclical or or product issues, because we've been strengthening our products overseas as well and I think investing in or in our salesforce. So again I and the European economy in particular seems to be at a minimum stabilizing if not.
Improving so I don't think we can point anything cyclical which is why we remain optimistic about a turnaround.
So maybe I'll just add a little more color and talk about it in terms of.
Kind of yes bookings overall, you know I guess, what I would I'd say is that look as you go into the year, there's always going to be areas, where you do better in areas, where you do worse than you may have planned and thus far into the year, we've seen particular strength in down market as Weve noted our comments and.
Actually internationally, we've also seen strength in our Solaris streamline.
Product, which was quite nice to see and as you saw though the multinational global view is where we're seeing really the slowness of the weakness.
For the last two quarters now hard to say that it's we're not really seeing that its attributable to any change from an economic landscape or environment standpoint standpoint, but more so just seeing delayed decision, making and you know, it's taking time to get these larger and sometimes much more comp.
Plaques deals through the decision making process. So I'm you know we've seen it two quarters in a row the pipeline looks looks pretty decent we've got some of these deals and the pipeline, but remains to be saying exactly how much longer it takes to get them closed.
Okay. Thanks, James a couple of weeks.
Thank you.
Thank you. Our next question comes from Ramsey El US all from Barclays. Your line is open.
Hi, guys. Thanks for taking my question can I ask you to give us kind of a brief macro review in terms of what you're seeing in your various markets given everything that's going on in the world today in any call outs or any changes in the environment.
So when we look at we have a few things that we obviously look at in terms of.
Call economic macro indicators.
The ones that are.
Kind of relatively stable I would call and relatively feel or piece control and wage growth and we look at obviously our own data as we get ready for this earnings call, but we also have the ATP Research Institute the publishes its own kind of wage wage growth and from information and other factors around.
The economy I think you know all those signs positive point to what I would call stability.
Or piece control was slightly lower than it was the previous quarter and the trend, but we've seen that many times before where we go through and a half percent one quarter and then we go a little bit lower the next quarter. When it comes back to 2.5%. It does seem and we've been saying it that we've been wrong so for.
That was a LIBOR markets Titan, they're just not enough people available in the U.S. to necessary to continue to drive the kind of piece of control growth that weve that we've experienced but obviously labor force participation has been ticking up slightly and.
For a variety of reasons that continued to Hum along and again, we see the same kind of indicators that all of you see around consumer spending et cetera. So.
Well look at across all of our domestic businesses pays per control growth seems to be a reasonable indicators the economies on.
Stable funds people ground and wage growth, we think should continue to accelerate but that's moderated slightly also for the last couple of last couple of quarters, but it's still that that robust levels and should drive continued consumer spending and continued consumer confidence.
We do look at pitch control also outside of the U.S. and.
And I think there we again in our numbers to see some signs of stabilization in Europe when it when it comes through in the unemployment and pays per control metrics there. So.
For us I think that everything looks bankruptcies or we're seeing the same things in our own business that.
You see through external metrics, we don't see any kind of elevation of were increase in out of business, where bankruptcies and our downmarket business, which is the Canary in the coal mines. The first place you would.
You would see it so our sales were also strong in.
The down market in the mid market.
So.
Doesn't feel like the like the weakness we had this quarter is anything other than the lumpiness that we talked about around multinationals, because new business bookings would be another I think macro indicator that that could weaken we talked about our retention continued to improve retention doesn't improve in about economy because.
That's one of the the things that really suffers as result of out of business in the down market and that has has stayed strong and solid so no no negatives that we can see in the in the macro.
Okay, and and you if you sort of address this.
Tailing with kept things last answering your answer just now but can you talk a little bit about the competitive environment.
And that doesn't that manifesting itself as sort of pricing related actions are and intensification of maybe more more an increase in opposing bidders showing up for for contract Prost fees or new business models emerging out there I'm just trying to explore whether there's any other peripheral causes for some of.
I think what are timing related delays and things like bookings, especially maybe in Europe , but elsewhere as well.
Sure so back to maybe little bit of what castings that about there's always there is positive and there was negative when it comes to competitors. It's the same thing we have a lot of competitors in each of our each of our segments and some years, we do better some years, we do worse than we do look at the overall balance of trade and or you know our situation there is.
Is better.
You would think that based on our retention results and based on the comments. We just gave you about new business bookings in or Downmarket mid market and domestic Gulf markets business. So I think in in North America I think if you look at those results I would say our competitive situation has improved and it shows in our net balance of trade that we that.
We keep we keep track of.
No particular, I would point out besides the continued strengthen our downmarket business, which has been growing market share here for a few years.
If you look at our Midmarket business.
The last two quarters in particular were quite strong in terms of.
We called new logos.
Against.
Variety of competitors, but again, we can't put point to any one competitor because we have a large set of competitors. Some of them are geographically concentrated in some of them or our national but but I think we're very pleased with this quarter's performance.
Against those competitors in the mid market and then in the up market I would say that the addition of workforce now in the call. It. The 1000 5000 range. So the lower end of or up market, which we did a couple of years ago.
Really been.
Unimportant.
Generator of win loss and balance of trade success for us in the in the up market. So weve.
We've had a robust growth in units and revenue and sales dollars from introduction of workforce now into that one to 5000, which addresses a segment of the market where that that platform really has a lot of a lot of appeal.
That is super helpful. Thanks, so much.
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 drilling a little bit more on the commentary around the delayed decision, making have you guys been down selected for these contracts already or is the actual RFP process still kind of dragging along.
I wish I could tell you that I have that level of detail I don't.
So this is really ties back to the comment I made before about we'd have a certain number of salespeople in the field would have a certain pipeline of dollars that we track year over year, and we know what our sales results where the previous year in the same period, whether it was the first quarter, where the first two quarters over the years. So we are attributes.
The the weakness to delay decision, making but this is not we do have a large contracts, particularly multinational and they definitely move the number from one quarter to the other but we don't have 50 million hundred million dollar contracts, it's not that kind of of business. So we don't idle.
And horse sales leaders have that level of detail I don't have available.
Fingertips here, Yeah, I mean, maybe you're asking kind of have we seen any particular shift and where things are in terms of stages of the cycle and stages in the pipeline.
Nothing that we've seen or heard that we can drive conclusion from our point any trends, but we do.
Pipeline of deals I mean, right sure. We went in to rethink this year with more participants more attendees in a larger pipeline of dollar opportunity than we had the previous year.
Right. Yes, I was just curious if you were just kind of waiting for some final signatures to make the bookings official or if it really as a matter of kind of just broader pipeline conversion.
Just my second quick follow up just on the margins you had the 70 bips up overall in the quarter, which was better than you expected.
But at the segment level I know EPS was up only 30, and PEO was which was down 30, if I'm not mistaken. So I think it with some of the below the line.
Drivers that got you did the 70 can you can you elaborate on those because I know you have some some add backs in your adjusted EBIT margin calculation.
If I can help maybe a little bit without its it's as you know that broke the transformation initiatives that we are are undergoing right. Now some of those are sort of back office facing as well. So if you think about procurement and and the workforce optimization initiative. Those will have impacts two items that are what we would deem are there.
In the segment do so corporate functions for example, that's where the Delta probably sits for you.
Okay, great. Thank you guys.
Thank you.
Thank you. Our next question comes from Mark Mark Hahn from Baird. Your line is open.
Good morning, everybody I'd like congratulations to both question again with regards to.
The bookings just looking ahead.
And thinking about the the comparisons for the third and fourth quarters, although many things that we should think.
The sequencing perspective in terms of both.
You know a ones up 10% ones up 11% or is there anything that's particular and one versus the other that would make it a more difficult comp or how should we think about.
The bookings you know over the next two quarters in terms of the sequencing.
Well you know I think our number one goal is to obviously maintain the momentum we have in everything other than our international and multinational businesses and again these businesses not just because there is a big ocean between them they are fairly.
Separate right in terms of how their managed in terms of sales and sales execution is over even though we have one worldwide sales organization. So we feel good that we're going to be able to maintain the momentum we have.
In the in the rest of the the business and then hopefully we get a little bit a tailwind with some of the stuff going our way in terms of the larger deals and some of the international stuff that we that we talked about we do have in the second.
Half, particularly in the last quarter.
We do have a difficult compare because last year as you recall, we purchased it was a client base acquisition.
And acquisition of the company client base acquisition of Wells Fargo's.
Payroll business and that that helped or ours or new business bookings and obviously are translated into some revenue helping the in the down market as part of what's given us some tailwind from a revenue growth standpoint in that in that business, but since it was a client base acquisition that does and it wasn't an acquisition of a business.
It does roll through our new business bookings and that was I believe in the fourth quarter for fourth quarter.
Yes, that's.
So as well so.
Well, that's part of the leading for asking the question. So.
Arguably the third quarter should be a little bit of an easier comp.
There is only going for some reason they never feel easy, but [laughter], but mathematically you probably mathematically correct, but we have a lot of things.
You know that were cooking to make sure that we.
That we hit the the obviously our intention is to this to achieve the guidance, we provided and we Wouldnt, we don't provided lately.
Great and then.
Carlos obviously got a longstanding.
Sort of experiences with the PEO market on.
How are you feeling about growth longer term trajectory of the market. What are you see what do you think.
Next pass throughs, the sustainable growth rate is there and what are you seeing from you know, but on the competitive front seems like there's.
You know a little bit more private capital, what's coming into the space. So just wondering what your how you're thinking about that space and the legislative outlook there.
Well when when you look at the again the balance of treat information there I feel pretty good about our competitive situation right. So you always feel good about your own children and about your your business as you Gotta look at the fact right and I think the facts are are pretty good for us in terms of our our our win loss in our balanced trade so that feels pretty good.
And then the second thing that makes me feel really good, particularly this quarter versus last year and started to feel it last quarter is we really it took a while to kind of filter through to make sure that we had our incentives properly aligned to make sure that our salesforce was focused on obviously number one selling the right thing to our clients.
But making sure that they are properly incented to to to make sure that the PEO is something that they raise because it is a difficult sales into high involvement sale and so you have to have the right incentives in order for the Salesforce to really want to.
To sell it.
And so I think we did that and I think we talked about that it's got to be 12 months ago I think it was.
So that feels like it's starting to filter through and I think we talked about very strong double digit new business bookings for the quarter, which that's the most important metric to for the future to really give us confidence that that the business model is still strong and and intact so that feels pretty.
Pretty good.
Thank you.
Thank you. Our next question comes from some modest amano from Jefferies. Your line is open.
Hi, good morning, Thanks for taking my question.
I wanted to maybe ask a question about the what's been going on in terms of bookings and how you're thinking about guidance is there what's guidance updated just to reflect what bookings has done so far this year or have you may be made some changes to the guidance framework to account for some more of the variability or variance that you're seeing.
And multinational international deals closing, so I guess is guidance more conservative or using the same framework that you've historically is and maybe just one follow up.
Yes, again, just from the reminder, use given the last comment that I made about the PEO that the guidance that.
We provide for bookings is yes, only just to be clear. So if you look at.
Our combination of our PEO and yes sales there to better picture and a stronger picture in the first half than than what our guidance would.
Depicted because we we provide guidance for the PEO based on average worksite employee growth not on new business bookings.
But having said that I think the answer is just an this year like Theres no no change in our thinking or our framework given that we just think theres some.
Large deal delays that I don't think impact our view of the future, yes, no change in frame where work no change in kind of the way, we're rolling up that forecast or the data we're looking at.
For example, we look at things like Okay, whereas business coming from in terms of by segment or by geography, or new clients versus upsell to existing clients. We're continuing to see fairly consistent trends in terms of the split between now and Upsells.
So no change in the framework, it's more so just look we've seen the slower out of the gates for two quarters now.
Lower than we expected in the international and so.
We thought it was given that were six months into the year here.
We thought it made sense to give you our best view and and so.
So therefore, we now for the year. One is just one other comment that in terms of something a little bit quirky about as we changed our guidance to focus on EPS worldwide bookings versus the PEO based on average Worksite employees. The reason we gave you some color about the bookings for the PEO. This quarter is even though we're not going to change the way we do our guidance is.
As you know.
In some respects the what's good for the PEO, sometimes in the short term if business gets referred to the PEO can have in the short term dampening effect on employer services, but we still had a great.
Results in the down market into the mid market in employer services. So we definitely can't point to that but again it is kind of important to keep in mind that.
Through the combination of those two that are driving overall GDP bookings and overall GDP revenue growth.
Great. That's helpful. And then maybe if I could just ask one follow up I think theres a lot of excitement around went beyond coming up in HR Tech and ahead of the innovation day that that the company's hosting so I just wanted to see if theres any early patterns in terms of customer profile, whether its bite size or whether it's where the whether you think about existing.
Products that they're using whether its bandage your workforce now maybe where are you seeing the early adopters come from and any type of profile commentary you could give I now would be helpful. Thank you.
So again in our case everybody's maybe approaches differently, but we started off with a smaller less complex clients and now we've we've actually just so I.
I would call considered very large clients so call it tens of thousands of of employees and so we've got a couple of very large sales.
That weve that we've done and we have a bunch in the middle and then we have a few smaller ones that we did in the early in the early days.
Some of the business. We sold is obviously new logo. Some of it has been as you mentioned off of some of our existing platforms I don't think that I can point to one particular.
Platform and say that would that were not targeting because we're not trying to do migrations or upgrades were trying to go.
After clients that that have the right profile in the right needs for it so that we can make them happier.
He be clients in the long term. So we we know what the capabilities are of the of the platform and we try to target.
The clients in the prospects, whether internal or external in the appropriate in the appropriate manner. So I guess the best way to put it is kind of across the board in terms of from an internal review and then in terms of industry or size of client. Fortunately, it's also kind of wide widespread.
Great. Thanks for taking my questions I appreciate it.
Thank you. Our next question comes from David Togut from Evercore ISI. Your line is open.
Thank you good morning, There've been a few questions on bookings already but this seems to be.
The main question of the day. The one question that I like to explore here as you are still in the critical selling season, which typically runs December to February . So is there anything you see in your pipeline.
You know in the U.S. or confidence on international close rates that gives you the confidence that you can close this critical selling season.
In better shape than we've seen obviously in the second quarter and the first quarter bookings results.
So again at the risk of getting too much into the sausage, making the if you recall remember like part of our business, particularly down market in into some of our Midmarket. We report our sales when they start so there like bookings and starts or basically equivalent but when you get the very large deals that's where you are really recognizing a sale and then.
The revenue starts at easily meter data could be six months could be 12 months very large complex or national via could could be 18 months later, so to your point about the critical selling season pretty much now and done because January is the biggest month for us, particularly for our.
Downmarket business and the lower end of our Midmarket business as well and the PEO. So just because of the natural.
Cycle of the of the PEO.
Large number of clients by the it sect retention as well from a new business bookings standpoint.
January is the critical month for us So the December January period, as a critical month for us in the in the PEO and again.
We were in the middle that quarters with kind of hard to make comments about the quarters as the quarter isn't done yet, but I think in the down market and in our.
Youre in particular, we had I'd say a good start to the quarter.
The only thing the other thing I would add in this is with regard to that.
Bookings in particular, if you kind of looked at the cadence of the year last year in this year and you look at.
Six month year to date, where we're at about the same point. This year as we were last year in comparison to where we ended the year.
So in other words, you see enough in the pipeline at this point and expect to close rates.
You know that drive your expectation of the 6% to 7% bookings target is that accurate.
I think that.
Again that is a level of detail to say that we have specific things in the pipeline I think just to reiterate what we've said before so that number one driver of our confidence in our sales results in most of our business is head count and execution and believe we're fully staffed and we have that head count in place in the place where we.
I had the variability or the volatility if you will it does come down to what you're describing which is RFP is pipeline et cetera.
Yes, we do believe we have the pipeline and the visibility to that pipeline to feel that we closed the gap for for the rest of year, but that's not the in our SBS business and our Downmarket business doesn't work that way, it's really more about the volume to volume business is really related to having the proper amount.
Head count the rate digital marketing tools and spend and again there we feel we feel good and we feel confident.
Understood. Thank you.
Thank you. Our next question comes from Jeff Silver from BMO capital markets. Your line is open.
Thanks, So much time apologizing for asking another bookings related question I just wanted to clarify something.
You mean that most of your clients on calendar year end as opposed to your junior in.
When you talk about the late decision, making does this mean that decisions are being deferred until another year from now or is it something that could happen within the next quarter. So.
So good news for ATP as we have clients will all kinds of year ends because we have a lot of clients. So so really spans the gamut, but you're right that probably the average company in the U.S. has a calendar year end, but I think most large companies and particularly multinationals, which ATP would I would consider GDP to be one of those.
We typically when we are negotiating with a vendor for a large contract would be focused more on their fiscal year end, rather than our own fiscal year end and so you're right that there are some drivers around people's budgets, and so forth, but a lot of procurement departments.
Tend to focus on the vendors.
Yearend and so we've seen historically doesn't mean that will happen again this year.
Is that our fourth quarter for large domestic and especially for large multinational deals is are particularly important quarter because.
Prospects are.
Our recognize that even though we're not like a typical software company that negotiating towards a companies' fiscal year end.
Yes in their minds tends to be a good time to to sign deals or negotiate.
Okay great.
Sorry, Jeff just one just wondering minor as I know, we said it before but the 1% impact on an annual basis and business bookings equating to about 17 million I mean, these multinational particularly globalview deals.
You can imagine that if you took down a quarterly basis. It does have just pretty perspective that outsized impact. So it's just from a framing perspective it is a pretty now.
Meaningful adjustment if you have some of these deals it slow in from one quarter to the next given that that sensitivity on the so on the new business bookings results right because on a revenue as you just described the the irony of the situation is that.
It doesn't have a big impact on revenue like we're having issues with FX and with client funds interest in particular that are hurting us is not the deny that the bookings eventually will have some impact the types of bookings that we have fallen short on in the first half or not particularly revenue impactful.
Okay. That's helpful. I do appreciate the color on that and then I know you don't give quarterly guidance, but you called out I guess the comp on the I guess quote unquote acquisition of the Wells Fargo payroll business last year.
Anything else to call out between Threeq and Fourq, you that might affect the cadence of those quarters. Thanks.
In terms of new business bookings.
No no I'm trying to the overall business you the revenues are margins.
Well, I mean again back to revenues and margins.
This client funds interest issue and again going back to kind of the three year guidance that we gave a few years ago again, obviously not expecting a lot of simply from this crowd, but we're probably about $100 million less than where we expected to be in terms of client funds interest that we're obviously able to.
Two which were overcoming some of that.
As we go forward here and the so that in the second half is actually going to go into according to what I'm seeing in terms of our forecast.
That's going to start to have an impact on revenue growth as well not a huge impact, but where we were getting call it 1% lift into the revenue growth last year.
In the second quarter I think this second quarter. It was a much smaller number in the second half it goes to probably no helped actually hurting our revenue growth. So that's.
That's a headwind for us but.
When it really take out all these issues FX client funds interest and other kind of calendar noise issues. When you look at the net impact of new business bookings starts new business bookings sales of new business bookings starts minus losses. So if you take retention and new business that has started if you compare last year's second quarter to this year.
Second quarter ended hopefully the same thing continues into the second half we have a slight acceleration, it's not a huge acceleration, but a slight acceleration and so that that's what makes me feel good about the strength of the underlying business because there's a lot of noise happening in between with calendar and remember last year. We also had a onetime item that we mentioned that we called the sweet.
Pull forward in the PEO is an accounting change that we were obligated to make that helped the second quarter revenue growth.
So you know all those things you have to kind of separate all those and get them to the core of the business and how the core business is performing and on that basis I feel good about the quarter and I feel good about the second half.
The only other thing I would add.
To your question about kind of quarterly linearity in the balance of the year just as a reminder.
The second half of last year, we hadn't much much more margin expansion in Q3 than in Q4.
So therefore tougher comps for us this year Q3 versus Q4 in terms of margin expansion.
So while we don't give quarterly guidance I would expect not a whole lot in Q3 and then.
Potentially much more in Q4, but again back to like when times are what I mean, what I mentioned in terms of some of the these comparisons that were difficult versus last year's second quarter. Some of those things then get easier on a revenue standpoint, notwithstanding the issues from client funds interest. This we pull forward actually helped last years second quarter, but.
Trust, our our third quarters, that's going to make an easier comparison. So we do expect slight improvement in our revenue growth in the second in the second half.
And just sir Okay lots delivery from Andrew.
Sure. So as a reminder, so we did the client based acquisition, so that adds and amortization expense, which will lap in the fourth quarter and associated with bookings increased looking expense related to the client base acquisition as well.
So just keep that in line and then we are obviously launched our brand campaign I think in the third quarter, but most of that was really the expense was kicking off in the fourth quarter as well so that'll be lots as well so I guess, what you're saying it wasn't tailwinds in the fourth quarter, Yeah, just much yeah alright.
Thank you for clarifying.
Thanks, so much.
Thank you and we have time for one final question and our last question will come from Lisa Ellis from Moffett Nathanson. Your line is open.
Hi, Good morning, guys and thanks for squeezing in congrats to Cushing Danny for me as well Carlos you mentioned, a couple of times and I think in the presentation. The progress on those lift beyond as well as the next gen payroll and tax can you can you give an update of where you are on the deployment of the next gen payroll untaxed engine.
And how they are impacting your business, perhaps on the on the on the retention side or are some of the other impact. Thank you.
Sure. Thanks.
Yeah, we're very excited about the next gen payroll as well as well as the back office.
Tax, but the payroll engine, even though it's somewhat back office I think has some some positive qualities in terms of potentially helping us both in terms of in the future both around bookings, but also around efficiency and and costs I think we have somewhere between 30 and 40 life clients in our next generation payroll platform.
As you can imagine in comparison to the size of GDP relatively small impact in terms of revenue retention or any of the other actual metrics but.
Enormous amount of enthusiasm around what we're doing they're both at the team leveling. The team is incredibly enthusiastic and I think the rest of the of the organization is very enthusiastic as well in terms of what we're seeing in the early days, especially around the flexibility of how quickly.
We can for example, make changes and that's just related really to the investments in the in the platform itself. So.
We've we've already kind of experimented and I think we maybe talked about this in the past with kind of Federation as you call. It in and trying to have others develop and build on that platform than the same thing on on lifting on it. So now we have a team for example in Australia that is actually built Australian he will.
And we have one or two clients on that as well and so we're we're incredibly happy with what we're seeing.
Really happy that we have life clients and this is the first year that again, even though it was call. It 30 to 40 clients as the first time, we've gone through a year end, so who we actually had to go through a year end and do all the year, including activities W. Twos et cetera. So it's still very early days, just because of the size of ATP, but if we were a startup this would be.
Like really great news like this was the this is the discussion about a startup that we've got now a lot of technical risk behind us if you will and now we have.
Scaling and execution risk that's still in front of us, but thats, a hell of a lot better than than we would've been two to three years ago, and I think it could really add to our competitiveness here in the long long run not to mention could help locked in terms of our back office costs on the tax side, that's probably more focused on back office.
<unk> cost and efficiency.
But that also has an impact on our associates in terms of their ability to deliver service and also the experience that our clients have when we do things like amendments and tax notices and so again the the news there is very positive we have I think it's.
Close to 102 hundred 4200, 240000 club, but 140000 clients obviously those are smaller.
Downmarket clients in in.
Limited number of jurisdictions, but I think we've now we're up to 20 more than 20 jurisdictions jurisdictions by the way. The first the number of states. In addition to federal.
Places, where we can actually do that do the taxes and so I'd say that that's progressing also very very well again highly flexible.
Platform that very optimistic in terms of what it can do to us down down down the road and.
Seeing no scaling issues, so far in either of those platforms.
Excellent. Thank you will that seems like a good point and Don will you guys a couple of weeks.
Thank you very much.
Thank you and this concludes our question and answer portion for today I'm pleased to hand, the problem program over to Carlos Rodriguez for any closing remarks.
Thank you. So as you can tell were pretty we're pleased with the progress we continue to make on both of the financials, but also on our on our strategy, obviously as we keep saying over and over again, we're trying to build on our success in the past, but also transform for the future here. So we can continue to deliver sustainable growth for many years to come.
Also want to mentioned that this time of year at somebody mentioned about this being a busy time of the year for us from a sales standpoint. It's also very busy time for our associates, who deliver service and also our year end commitments to our clients. It very long hours and very hard work and I really appreciate the commitment of our associates and again, it's one of the great Differentiators we have.
In terms of being able to deliver that level of service, especially as very busy time of the year like we are right now.
Obviously, we wouldn't be able to be successful in the long run without.
Strong products, and so where we have our investor day, we're going to hopefully layout a plan for you or how about how the sustainability of the strength of ATP.
We will be I think.
Helped by the investments we've been making over the last five years in our next generation products. So we look forward to spending time with you on February 10th to discuss all these innovations that we've been investing in.
In addition to the Nexgen platform and also discussing a little bit of our vision for the future about how we expect work to change and the HCM industry to change and with that I want to thank you once again for your interest in GDP and for joining US 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.