Q1 2021 Automatic Data Processing Inc Earnings Call
[music].
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 speakers remarks, there will be a question and answer session. If you would like to ask a question. During this time and take like Star then the number one on your telephone keypad to withdraw your question press the pound key.
I will now turn the conference over to Mr., Daniel Hussain Vice President Investor Relations. Please go ahead.
Thank you Crystal good morning, everyone and thank you for joining 80 piece first quarter fiscal 2021 earnings call and webcast.
Participating today are Carlos Rodriguez, our President and Chief Executive Officer, and Kathleen Winters, Our Chief Financial Officer earlier. This morning, we released our results for the quarter. Our earnings materials are available on the Fccs web site and our Investor Relations website at industry thought ATP Dot Com, where you will also find the investor presentation that accompanies it.
Today's 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 believe to be useful to investors and that exclude the impact of certain items I.
A description of these items along with a reconciliation of non-GAAP measures to the 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 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 expectation.
As always please do not hesitate to reach out should you have any questions and with that let me turn the call over to Carlos.
Thank you Danny and thank everyone for joining our call. This morning, we reported excellent first quarter fiscal 21 results Im very pleased to say that across the board. We delivered a very strong start to the year that was well in excess or expectations.
For the quarter, we delivered revenue of $3.5 billion down just 1% on both reported and organic constant currency basis, and our adjusted EBIT margin was up 120 basis points.
Coupled with a slight increase in the effective tax rate versus last year and a share count reduction our adjusted diluted EPS grew 5% much better than our expectations three months ago, which was for a meaningful decrease in EPS on.
On this call will discuss the changes that drew bps better than expected start to fiscal 2021.
In Q1 macroeconomic conditions continue to gradually improve and we executed extremely well in several key categories, including better than expected sales performance.
A continued commitment to client service and prudent expense management.
Let me start by covering key macro related trends to provide context to our results specifically on pays per control out of business losses and client funds interest.
During the first quarter pays per control, which as a reminder declined 11% in the fourth quarter was in line with our expectation for high single digit decline with the year over year decline of 9%.
In a continuation of the trend we saw into our fiscal 2020 year end employment at small businesses continued to show the most improvement for our large businesses actually showed some degradation as we exited the first quarter.
Out of business losses performed better than expected as small business losses stabilized and a substantial number of clients that had gone in active last quarter have restarted processing activities over the last three months.
Finally average client funds interest rates declined in line with our expectations for the quarter.
But client fund balances were favorable to our expectations declining 7% compared to our double digit expectation.
With that said, let me shift to the highlights resulting from our own execution.
We delivered positive 2% growth in employer services, new business bookings, which was significantly ahead of our expectations and marked a record Q1 performance.
As you may recall from our commentary last quarter, we did expect some amount of sequential improvement relative to our Q4 bookings performance as economic conditions stabilize however, we delivered a much faster we acceleration as our sales force started strong in July and carried that momentum through the end of the quarter.
We attribute the rapid reacceleration to a few key factors first.
First we did see our clients and prospects show greater willingness to engage and purchase.
But second and most importantly, we took action.
By maintaining our overall investment in sales and marketing applying our best in class insight sales expertise to continue training our field sales force.
And utilizing innovative demos and other HCM context content to start conversations we've designed a client acquisition funnel that is successful even in the current environment.
Our teams delivered across the board.
Thats everything from the Downmarket were run continues to grow and in fact, we've now exceeded 700000 run clients for the first time, surpassing pre cope with levels to the mid market, where we're seeing clients showing more interest in fully outsourced HR solutions.
So the enterprise space, where we had strong traction in compliance related solutions.
Our international sales were also strong as we closed several larger deals that were previously put on hold as prospects were waiting for a more stable environment to proceed.
And our tax rate on many of our solutions continued to increase as well this quarter. Our workforce management solutions also referred to as time and attendance reached the 90000 client milestone for the first time and were pleased to see that continue to grow.
Our revenue our performance was also driven by stronger retention.
We're very proud to report that we hit record employer services retention levels for Q1 period, and our performance Likewise experienced in our PEO performance likewise experienced stronger than expected retention.
Well, our retention likely benefited from having some clients the lead decisions to switch HCM vendors given elevated uncertainty higher client satisfaction clearly contributed as well.
You may recall that last quarter, we delivered record NPS scores across our businesses as we helped our clients manage to the government programs like the PPP.
This quarter I'm happy to say that across our businesses, we either maintained or reached new record NPS levels. We.
We believe these results show that our commitment to providing outstanding service to our clients is paying off and we'll continue to do so.
Combination of stronger bookings and retention in Q1 drove better revenue performance and the high incremental profitability associated with those revenues plus prudent expense management ultimately drove stronger margin performance as well.
This is another great.
Example of execution by our associates.
And in a few minutes Kathleen will cover our margin performance in more detail.
I'd like to now provide an update on the progress we continue to make in driving innovation.
Earlier this month as part of the annual HR Tech Conference ATP was given the top HR product Award.
This marks a record setting sixth consecutive year that we had been recognized at the conference for our breakthrough technology innovations, which is representative of how we remain committed to leading the industry with the Premier HCM technology.
This year, we were recognized for our next Gen payroll engine and as we highlighted in our February innovation day. The benefits the benefits of this new engine include a policy based framework that enables easy self service.
And powerful transparency that allows practitioners and employees to more easily understand the effects of regulatory policy or potential life changes and is designed to be scaled globally.
We continue to deploy our next Gen engine to the market and we added another 100 clients during the first quarter.
We remain excited about expanding its availability and driving adoption and the feedback so far has been overwhelmingly positive.
Ultimately, we expect a higher level of satisfaction to generate even better retention and higher win rates supporting our long term revenue growth trajectory.
And we continue to innovate throughout our ecosystem. This.
This quarter the ATP marketplace reached 500 after listings and we are pleased to offer an expanding suite of offerings. As we continue to drive millions of daily CPI transactions for tens of thousands of clients that are current users.
And just this past week, we hosted our annual ATP marketplace partner Summit, where we further strengthened our partner relations and provided actionable ideas to help our partners grow their business.
Also earlier in Q1, we released our return to workplace solution that helps clients bring their employees back to work safely through a comprehensive set of tools designed to streamline and manage the process.
We now have thousands of clients using the return to workplace solution and we expect usage to grow overtime as more clients start to gradually bring their employees back to the office for the Worksite.
As I said, we are very pleased with the start of into the year and I'd like to recognize our associates from sales to service to implementation and all the others, who support them for their continued efforts and outstanding performance. During this time.
They continue to come through for our clients when it matters most.
And with that I'll now turn the call over to Kathleen.
Thank you Carlos and good morning, everyone.
We had a great Q1, with the combination of gradually improving macroeconomic conditions and outstanding execution, driving better sales retention and overall volume.
Do you expect to continue to face a number of headwinds over the course of fiscal 21 as the global economy continues to recover from the effects of the COVID-19 pandemic.
But with our strong first quarter, we now see the potential for a better full year outcome compared to our outlook three months ago and our updated guidance reflects this view.
For the first quarter, our revenue declined 1% on a reported and organic constant currency basis, clearly a nice start out of the gate and better than we were expecting three months ago.
Better bookings and retention rates were the main drivers of revenue favorability.
And that coupled with expense favorability resulted in a year over year increase of 120 basis points in our adjusted EBITDA margin.
As you will recall, we anticipated that first quarter would have a modest acceleration in bookings compared to the previous quarter, but a greater year over year revenue decline than we experienced in the previous quarter.
That much of this lost revenue would be at very high margin.
Instead, our bookings swung to a year over year increase.
Revenues declined only modestly and our margins expanded even with the sales and implementation expense generated by a much stronger than expected bookings quarter.
Several factors drove this margin favorability.
First with a more modest revenue decline than expected in Q1, we saw less associated margin pressure than expected.
In addition, the better retention we had in Q1 also translated to lower bad debt expense than we had originally contemplated.
We also continue to execute our downturn playbook with our entire organization carefully managing head count and discretionary expenses.
And lastly, we make great progress on our digital transformation and expanded procurement initiatives in Q1, and effectively reduced operating expenses and overhead faster than anticipated.
We are encouraged by what we've seen so far and are making a modest increase in our expected full year cost benefit from these transformation initiative.
And now expect $150 million in benefit for fiscal 21 up from $125 million.
That revenue and margin performance together drove adjusted EBIT growth of 5%.
Our adjusted effective tax rate increased 10 basis points compared to the first quarter of fiscal 2020% to 21.3% driven by lower tax benefit on excess stock compensation.
Our share count was lower year over year, driven by both share repurchases that took place pre covance as well as the resumption of buybacks during the quarter.
All of this combined to drive 5% growth in adjusted diluted earnings per share to $1.41, a great start to the year.
Now some detail on the segments.
For EPS, our revenues declined 3% on a reported basis and 3% on an organic constant currency basis.
Great result, considering this quarter included the effects of a 9% decline in pays per control and a 20% drop in client funds interest revenue.
Plus the impact from last quarter's lower bookings level.
Our client fund balances were down only 7% better than the double digit decline expected and that outperformance was driven by the same bookings and retention related factors that supported revenue.
The year over year decline in average balances continued to be impacted by lower pays per control lower state unemployment insurance rates continued payroll tax deferrals, among some of our clients and the closure of our Netherlands money movement operation in October of 2019.
Our average yield for our client funds interest declined by 30 basis points about in line with our expectations in this low interest rate environment.
Employer services margin was up 120 basis points for the quarter well ahead of our most recent expectations driven by the same factors I mentioned earlier when discussing consolidated results.
For PEO also a strong quarter out of the gate.
Total PEO segment revenues increased 4% for the quarter to $1.1 billion and average Worksite employees declined only 3% to 547000.
This revenue growth and Worksite employee performance. We're both ahead of our expectations, driven primarily by better retention and stronger than expected bookings in Q1.
Same store employment at our PEO clients performed in line with our expectations for a mid single digit decline steady from last quarter.
Revenues, excluding zero margin benefits pass throughs declined 1% and in addition to being driven by lower WSE. It continued to include pressure from lower workers compensation and sui costs and related pricing.
CEO margin increased 40 basis points in the quarter doesn't.
This included about a 60 basis points of favorability from ATP indemnity pertaining to changes in the actuarial loss estimates.
Let me now turn to our updated guidance for fiscal 21.
We are very encouraged by our strong Q1 performance.
Yes, we are still somewhat cautious about the balance of the year.
You will see that the implied increase in guidance for the next three quarters builds and some ongoing momentum for the balance of the year, but does not anticipate the same level of outperformance, we just experienced in Q1.
This reflects both our confidence in the fundamental strength of ATP as well as a realistic assessment of the lingering uncertainties ahead for the global economy income.
Including uncertainty around the rate of continued economic improvement the labor participation rate and the timeline for a vaccine.
For the details of our outlook I'll start by updating you on some of our key macroeconomic assumptions.
For pays per control, we continue to expect a decline of 3% to 4% for the year.
And as we mentioned pays per control performed approximately in line with our expectations in Q1.
We continue to assume a modest pace of improvement from this point.
With mid to high single digit decline in Q2, improving to a mid single digit decline in Q3.
By a mid to high single digit increase in Q4 on the easier compare.
And as you are aware the reported BLS unemployment rate has trended better than most people's expectations. These past few months.
Factors like a reduced labor force participation rate are creating an offset which is why our pays per control has actually been in line. So far.
Out of business losses outperformed our expectations and contributed to our record Q1 retention levels we.
We are raising our retention guidance accordingly.
While we have seen effectively no incremental pressure so far this year from increased bankruptcies among our clients.
With continued uncertainty as to further stimulus and strain in parts of the economy remaining from partial shutdowns.
We believe it is still prudent to assume some effect from higher out of business losses in the coming quarters.
On client funds interest there is no material change to our expectation for average interest rates for the year, though we are revising our balanced growth higher given the better start the year with stronger sales and retention.
We continue to expect the client fund balances to return to year over year growth in Q4.
Let's now look at our revised fiscal 21 guidance.
Ill start with EPS.
We now expect revenue to be flat to down 2% for the full year versus our previous expectation for a decline of 3% to 5%.
Ill break that down into some of its components.
We now expect our new business bookings to be up 10% to 20% compared to our prior forecast of flat to up 10%.
That 10% increase in guidance reflects the impact of our Q1 outperformance.
As well as a slight increase in our bookings expectation over the rest of the year.
We are still contemplating a modest year over year bookings decline in Q2 as instances of partial economic lockdown in Europe, plus uncertainty from the us election keep us somewhat cautious, but this Q2 outlook is certainly better than what we contemplated three months ago.
We now expect our EPS retention to be flat to down 50 basis points versus down 50 to 100 basis points previously.
As again, we had stronger Q1 retention than expected and believe our strong client satisfaction will translate to continued strong controllable retention, though.
So we continue to assume elevated out of business losses in Q2 and Q3.
And for our client funds interest, which primarily impacts the results of our EPS segment, we are raising our average balances expectation on the strong Q1 sales and retention performance and.
And accordingly, raising our client funds interest range by $10 million now to $400 million to $410 million.
We now expect our margin in the employer services segment to be down 100 to 150 basis points for the year versus our prior forecast of down 300 basis points driven by the stronger Q1 performance.
A stronger revenue outlook and continued expense discipline.
For our PEO, we now expect revenue to be flat to up 3% versus our previous forecast of down 2% to up 2% and we expect an average worksite employee count down 1% to up 1% versus our previous forecast of flat to down 3%.
We continue to expect average worksite employee growth to be negative during the first three quarters and turned positive in Q4.
Our revenues, excluding zero margin pass throughs are expected to be down 1% to up 1% versus our previous forecast of down 4% to down 1%.
We continue to expect lower workers compensation and Sui revenues on a per worksite employee basis.
For PEO margin, we now expect to be down 50 basis points to flat in fiscal 21 versus our prior forecast for down 100 basis points. This.
This increase in our guidance is driven by stronger revenues and a more favorable benefit from ATP indemnity.
Moving to our consolidated outlook.
We now anticipate total ATP revenue to be down 1% to up 1% in fiscal 21 versus down 4% to down 1% prior and we anticipate our adjusted EBIT margin to be down 100 to 150 basis points versus our prior guide of down 300 basis points.
As I mentioned earlier, we now expect about $150 million in savings from the combination of our digital transformation as well as our procurement transformation initiatives and we will continue to manage our expense base prudently.
As we saw in Q1, you should expect that further upside to our revenues whether from macro related factors or our own execution should drive upside to our margins as well.
In August we refinanced 1 billion of notes maturing in 2020.
And as a result, we will benefit from approximately $5 million in interest expense savings this year.
For our effective tax rate, we continue to anticipate 23.1% for the year.
We resumed our share repurchases in Q1, and we assume a net share count reduction in our guidance.
Net of all these changes we are raising our adjusted diluted EPS guidance to a decline of 3% to 7%, which represents a much more modest decline compared to our prior guidance of down 13% to 18%.
I'd like to wrap up with a few comments on longer term margins.
To be clear there has been no departure from our focused and consistent approach to continue to drive margins higher over the long term.
Looking beyond fiscal 21, a continued economic recovery should support employment growth and above normal pays per control growth and we would expect such a trend to contribute incremental incremental margin uplift to our results all else being equal.
The impact of lower interest rates will also begin to moderate in the coming years.
In addition to these macroeconomic factors, we expect our underlying margin performance to continue to be supplemented by our ongoing efforts to transform our organization and client service operations and to be supported long term by next gen platforms that are more efficient and less expensive to make.
Chain.
As as you have seen from our Q1 results, we are committed to protecting and driving margins, even as we maintain our steady approach to investing for the long term.
We remain confident in our long term growth prospects and our ability to execute and I look forward to continuing to update you on our progress.
With that I will turn it over to the operator for QNX.
Thank you.
If you wish to ask a question. Please questcor and then one quick.
We stay away from the allotted time for questions. We kindly ask that you. Please ask one question with a brief follow up.
First question comes from David Togut.
From Evercore ISI your line is open.
Thank you good morning, and good to see the upgraded guidance as we enter the critical year end selling season I hear the caution around factors like parcel lockdowns in Europe, and the us election, but can you give us.
Some more detailed kind.
Kind of insight around your expectations for new bookings potentially of Ron.
Workforce now and vantage in our surveys of your customers pre call that we were hearing a lot of demand for workforce now, especially.
Into the bottom of the up market up to four to 5000.
Employees per company.
Yes, I mean I think that.
We'd like to be given the momentum we just demonstrated we'd like to be really optimistic. Unfortunately, we all watch the same news and the backdrop in terms of these issues. It's not just Europe I think there are some concerns here in the us as well and what we saw from April March.
April may is that we stick to our story that our clients of our clients are hunkering down and are unable to make decisions.
It impacts us. So so we remain positive because it doesn't feel like there is going to be a full lock down across the board nationally like there was here in the US last time and we've clearly adopted I mean, we've you can see it in the quarter how much progress we've made in terms of being able to sell virtually in U.S.
Online tools, and really ramp up or digital marketing in a lot of other things that we can talk about that we've done to adjust our sales force, but for us to tell you what our view is of run workforce now in enterprise enterprise sales in the next two or three months honestly is is difficult other than to stick to our story around our guidance which is.
Really more about the full year and and coaching in optimistic positive and good execution terms, but also with some.
Some level of caution because we are still dependent I think on on the healthcare situation.
And to some extent on the economy as well one of the questions that you're not you didnt ask but I'm sure people are wondering is about this question of stimulus and Thats. Another one that I wish we could tell you that we have kind of a scientific place holder in our forecast around how much stimulus and whether the risk stimulus or not and we don't but thats. Another factor that I think we just.
Create the kind of the overall picture that would either be supportive are not supportive of our sales efforts because clearly if you look at the last 2030 years of ATP. There is just some general correlation between GDP and our sales results, our new business bookings and that is impacted by not just the economic.
Activity related to the health care crisis will also to things like stimulus because obviously the government can offset.
Down pressure on the economy through stimulus as it just as it just did but theres also uncertainty around around that as well. So I wish I could give you a more concrete one thing I can tell you for sure is we're maintaining our our sales investment we're maintaining our optimism and we are gradually getting.
Some people back into the field in terms of selling and we're certainly pivoting in a big way in terms of using the large resources, we already had with inside sales to really train a lot of our traditional fuel sales to be able to so virtual and I think you saw.
Great execution and great results in the quarter as a result of that.
I'd add one other one other thought here a comment here in addition to what Carlos on and look obviously, we're very encouraged and we're optimistic because of the great outperformance in Q1, but as you know as you heard US say, we're very cautious because of the various these areas.
Uncertainties that we mentioned, but I would also say we're cautious because as we look back in history and as we look at how in other recessions, how we recovered from that.
We do see a period of Choppiness, if not all kind of a straight line up in terms of the recovery during the great financial recession after that we had.
I believe it was six quarters of negative sales growth after that and it was quite choppy actually so we're expecting there to be some choppiness here as well. So I just wanted you to be aware of that.
Understood as a follow up how do you see the current economic environment affecting the case for outsourcing payroll and HR services in other words do.
Did the economic challenges that businesses face.
Make them want to focus more on their core business and outsource payroll and HR services.
Yes, I mean, I think thats safe to assume that we would probably be on the side of the ledger of businesses that would benefit quote unquote under normal circumstances post pandemics in other words once we get through the transitory nature of the challenge I don't see how it's not a positive backdrop for.
Companies like GDP, and Outsourcers, who help people first of all maintaining business continuity and second of all focus on their core business as you implied so I think it has to again, but do we have.
What do we how many points of growth is that.
Only history will tell but we think it will we think will be a positive.
Understood Thanks very much.
Thank you. Our next question comes from Lisa Ellis from Moffettnathanson. Your line is open.
Hi, Good morning, guys. Thanks for taking my question.
While the recovery in bookings is pretty fantastic I know you provided a little color around.
Using your inside sales of train your outside sales can you just even provide a little like what is your sales model looking like right now to what extent are you using digital marketing and digital Onboarding can you just give a little bit more color around kind of what happened and what changed over the course of the three months to drive that recovery.
Sure I'm going through the call long enough, though to be able to give you all that because.
[laughter] one of the difference between us and some of our competitors, which I would see it as a positive if I were all view is that we're very diversified both geographically and also across segments. So the answer Unfortunately is complicated and it goes area by area. So in International for example were very high.
B with very strong.
Results versus expectation, but also frankly very strong results versus the prior year, but there were a few larger deals. There I think there were few global view deals that helps and when you look at the core best of breed like in country solutions, we also outperformed their versus expectations, but not as well in terms of versus the prior.
Year, which is obviously understandable given the pandemic. So thats International and then you move to the U.S. and the story in the down market is different than the mid market is different in the up market, although across the board we were better than expected but.
But the growth year over year varied because I think thats. The the biggest surprise, which were frankly very excited about is that we had positive growth, but if you decompose that it's a different story in each in each area and we had a tailwind in the in the down market I think as a result of that.
Big recovery that was probably some pent up demand you know the PPP loans, probably frankly saved a lot of small businesses and provided a lot of cash to small businesses to continue to kind of run their businesses and and make decisions around purchasing solutions like what we provide to help them run their business better.
Better so it really only our up market was also.
Good and strong so that was.
Very encouraging the mid market I think performed also better than our expectation. So I wish I could give you a simple simple answer I personally see it as a positive because if it was one thing that we could point to I think it would be.
It would be problematic because that could easily change overnight, but there there really isn't it's just a lot of execution across the across the board I do think that we got a little bit of help again, we don't have a scientific way of estimating it but I've been consistent in the nine years that I've been in this job because of knowing our our culture and how we operate.
The fact that our fiscal year ended where did we clearly had a little bit of pent up demand from.
Paul It May June that carried over into July I would say that that was some somewhat minor in this case because.
Getting companies to make decisions on your timeline is probably not as easy to do now as it has been in prior years, but historically when we have a bad year, we get off to a good start and in some segments that didnt affect probably international business didn't affect the downmarket because the downmarket doesn't really have.
That ability to to kind of hold off on something and started in the next fiscal year, but may have had a little bit of a of an impact, but we're pretty convinced that that's not a major story, but I thought I'd is important for me to be consistent because I've been saying that for nine years. Finally, likewise, we have a blow out fourth quarter, we end up usually.
We are struggling at the beginning of the next fiscal year.
Okay, and then for my follow up I know you called out the payroll engine and adding 100 additional clients. This quarter can you just remind us or update us on sort of where you are in that overall rollouts and what the kind of rate and pace of that is.
So I think we have a total of a couple of hundred club.
Clients and I would describe that as still.
We're very early compared ATP size. So if we were a startup you'd be really excited and I think we have a $20 billion market cap right now.
With only 200 clients given what I've been seeing in the in the market, but the reality is that relative to GDP size and given our profile of the company and so forth you got to take it.
Context, but we can't help will be excited because.
Two years three years five years 10 years down the road. This is going to be a big difference maker I think it is and that was our plan. When we built the business case, we've been at it for three or four years. This is a global scalable.
New payroll engine, it's incredibly exciting in terms of what it's going to do in terms of feature functionality.
And hopefully client satisfaction, but also cost to maintain cost develop but as you know we have approached.
Approximately 800000 clients, sorry, $900, an unfair because run this has nothing to do with run but a large portion of Atps business is still on our current versions of our payroll engine, which by the way all of these payroll engines are transparent to the clients I don't know if any you guys understand that but.
Workforce, now and vantage and lithium and all of our products are the front ends or really what our clients experience. It's just important to remember that this is not like the transitions, we had with workforce now or even with run because this is a gross to net engine that is really kind of underneath the hood.
If you will of what the clients are experiencing on the on the front end. So that's positive too because we don't anticipate a major.
Migration effort, if you will when we get to that which is still at some point in the in the future.
Terrific. Thank you Jeff.
Thank you. Our next question comes from 10 Gen. Wang from JP Morgan Your line is open.
Thanks, So much good morning, really terrific new sales results just to add to what Lisa asked at the beginning there just just thinking about.
ROI on your sales investments did you lean in really hard in this quarter. There I'm sure everyone is motivated to drive sales, but could we see more return on some incremental investments as you go throughout the fiscal year, just trying to understand the timing of some of the.
Vestments you put in place and also if there is any call outs on pricing on new deals, especially on the enterprise side.
Yes, so on on the sales investment what I would say is maybe think about two big buckets in terms of investment from a head count perspective, and continuing to invest in.
Marketing and digital marketing.
The headcount investment, we kind of try to do that on a very steady pace over time and thats been consistent with how we thought about it and approached it it was somewhat modest headcount investment in Q1 and that will ramp up during the course of the year, we're planning to continue to focus on and do that and.
For sure have committed.
Funding and resources, if you will from a digital marketing perspective to help support the bookings.
Terrific and then on pricing anything any call outs there.
No.
Really we really don't see any.
I'm sure I know, we did and I think some of our competitors. This thing to try to help our clients and even in some cases prospects like there was a couple of examples of people, giving away like three four months and I think one competitor. It was doing six three months et cetera, but in one competitor changed their pricing online, but then change the back.
A couple of months later.
So I would say there's nothing to report.
There's really very little change in the pricing environment. This is not I don't think this is really a question of pricing I don't think you can impact in demand in a significant way.
In this environment through through that that would not be certainly wouldn't be it would be our view that thats not how to.
How to drive growth.
Great to hear great to hear just my quick follow up just on PEO and sort of the sales outlook. There given some of the same caution and uncertainty with the election and maybe insurance do you are you more bullish or less bullish on PEO here as we go into a.
The second quarter here versus 90 days ago.
I'm always bullish on the PEO I was born in the PEO, Yes, and as you know so the.
I think the I think as usual my answer has to be.
If you look at the short term, we have a lot of pressure in some parts of our business because of the healthcare situation and the question is do you want to look through that or do you want to stay focused on US for example in the PEO when you have.
Clients shrinking we from a discipline standpoint have some some rules around that can sometimes effect.
Crease adjustments if you will in our sales results that puts a pressure in the short term on the sales results E.
Call. It audits if you will so the client was sold and was valued at $1000 in.
12 months later, they are now valued at $900 because their pain fewer people mean, we're earning were collecting less revenue, which as you can imagine is happening with the majority of our clients that affects our PEO sales.
Sales results. So I would say that the fact that workers compensation wheat prices and costs have come down which is part of the revenue picture. There's a lot of short term transitory things, but I would say on a unit basis. Our results were very good in the in the quarter and we're very happy with that.
And I would say that again, if there is any businesses that are going to be even more.
From a from a pure positioning standpoint stronger coming out of the pandemic. The comprehensive outsourcing businesses, which PEO is one of them should be very compelling value proposition because as people look back a year or two from now they might be thinking I really don't want to go through that again, I don't want to be figuring out how to.
Uhhuh process for Unum payroll because that we have that covered but most people a lot of our clients do not use us for help health benefits processing or or management of open.
Open enrollment.
Use us for time and attendance use us for workers compensation in our comprehensive solutions take care of the entire picture and I think if you're a small midsize business. If I were you I'd be thinking about mix.
Making that change maybe not right now because you got other things you're focused on but I think six to 12 months from now I would expect people to be seriously considering.
Any options they have to.
Deal with multiple things that are very critical to the ongoing operations into their employees, but that they may or may not have thought of pre pandemic.
Got it okay.
Could you on the phone to start selling ma'am. Thank you for that update.
Thank you. Our next question comes from Jason Kupferberg from Bank of America. Your line is open.
Hi, this is a bit here on for Jason Thank.
Thank you for taking my question, maybe I could just follow up a little bit on the booking.
If you could maybe just talk little bit about trends you saw on.
Given what you're seeing even now I guess between small medium and large anything worth calling out that we should be considering and then just related to me on booking was there any negative booking adjustments in Q.
I am sorry, a negative adjustment in which Q.
And the growth in the booking numbers this quarter like.
In terms of looking from this call.
Like I know you all know we had a minor I would say we had a minor we talked about last quarter that we had taken some reserves.
Because we expected to have obviously clients and we're going to.
Cancel their orders and so forth Dubuque, Laypersons terms and I think thats exactly what happened and I think are the reserve we did reversed some of that reserve, but it was actually very much in line with the actual client that we had identified we didn't do this kind of at a at a very high level. We had specific clients. When we book that reserve in our quote unquote bookings.
We had identified a list of clients that we thought were probably going to cancel in this first quarter and I believe the two things yet until we utilized we basically utilized a portion of that reserve, which is a normal course of how it happens.
I guess Q4 was just an outsized amount for that we call the backlog adjustment.
Just outside obviously because of the cobot impact and a portion of that was utilized in Q1.
But nothing significant other than that I think it's safe to say would not have made a difference and I mean, it clearly would have made a difference if we hadn't had the region right, but if you want to know what our gross bookings performance.
Performance was it was not affected by our gross bookings perform that did not affect our gross bookings perform as you would have had basically the same picture.
Understood and then just any trends between.
Small medium or large businesses, what what you'll see is gone.
Other than noise I think we probably the strongest performance was in the down market because.
Much to everyone's surprise. It takes there is strong business formation and.
We saw that as kind of we think we talked about on our last call remarkable recovery in small business very quickly at the beginning of the pandemic. Both in terms of pays per control in kind of all categories, including this kind of new business formation, and I would I would probably add a note of caution there.
That to me is counter intuitive and whenever in my career I've seen something that doesn't make sense generally.
I think there's probably a little bit of payback at some point.
Hoping I'm wrong, because if there is a relatively quick solution to the healthcare crisis, it's possible that the government managed to get small business through this relatively unscathed through PPP and all the other things that they've they've done, but but in general with the counter intuitive.
Kind of situation, but we'll take it.
It was positive yes, the other areas, where we saw some particular strength I think we mentioned already on the international side.
Particularly Canada was very strong for the quarter and also.
Our compliance.
Services area, so things like employment verification unemployment claims things like that more compliance services related stuff saw very strong.
Performance in the quarter degree point like we don't we don't always talk about some of these businesses that we have that are.
Very good businesses that are we call them Standalone businesses and we did have some good tailwinds from some of those those businesses forward, but again I would I would tell you that they don't change the overall picture, but important to note that those were were hopeful.
And then just if I could follow up real quick on your EBIT margin guidance, you laid out a pretty nice re is.
In the guidance and I was just wondering how much of that is driven by the strong top line.
This is changes in your expectations for expenses I know you mentioned, an extra 25 million in transformation savings, but what the other factor because it doesn't look like you know its just.
Open couple didn't change all that much so anything else that could give on that thank you.
I would say, it's safe to assume that most of it is it is as a result of that but that I want to take away from us in terms of our execution. Because you know if we have higher revenue. We also frankly have more clients more employees. The peso is to the extent that we believe we can hold the line on expenses.
Some companies you have to cut expenses in our case, we just have to hold the line and that's probably good news, but I would say that mathematically you're on the right track, which is that's a big factor. The incremental revenue is a lot of it is flowing to the bottom line and helping our margins, yes definitely that incremental high margin rate.
Revenue is the biggest contributor but also as we said look we've been really focused on.
Making sure we're doing a good job on cost control, we're keeping a close watch on headcount.
Talked about investment in sales, but other than sales are really controlling everywhere else from a head count perspective very.
Very tight on discretionary costs transformation.
Work is coming along very nicely.
We get a little bit better, but the higher retention better on bad debt expense in Q1, we think we're cautious about that because we think it could come come and hit us in Q2 and Q3, so we've built that into our expectations.
But.
Those were the contributors.
Thank you.
Thank you. Our next question comes from Ramsey El Assal from Barclays. Your line is open.
Hi, good morning, and thanks for taking my question.
I wanted to ask about the contribution to bookings performance of delayed kind of bookings getting realized this quarter versus sort of net new bookings I'm just trying to understand the contribution from maybe sort of a backlog of delayed bookings and how material that was and then also to just understand what it is sort of a a pipeline of these delays that should flow in.
And kind of continue to flow in as we get a little deeper into the year or was there more of sort of a onetime catch up that happened in the quarter with some of these these delayed deals that makes sense I suppose the only place where it's really meaningful unquantifiable is probably in the in the international space, where we had I think I mentioned a few globalview deals that were delayed if you will but that's really not a.
I wouldn't call it that that's not something that was in the in necessarily in the backlog because we hadn't sold that yet. So we don't we don't actually booking sales until it doesn't go into the backlog until we get a contract and so these were.
Things that were in process, if you will or in the sales process and maybe we thought it was going to close in may or June but by the way maybe it wouldn't have with even without a pandemic like this there's really no way to this is all frankly speculation stuff that we're that we do when we get into these kinds of conversations, but I'd say, that's the place where.
Feels like we had a few large deals that we thought were going to close in the fourth quarter and didn't by the way client decisions not us trying to move them from one quarter to the other we want to get business as fast as we can so we are always trying to book everything as quickly as we can but couple of some client delays in the international space, It's really not.
Honestly a factor in the down market and very small factor in the Midmarket.
Terms of control ability like we can't really sway our clients that easily from one way or the other maybe a little bit of that in the up market in international but you really can't do that in a down market in the mid market. So I would say there's difference between I guess I'm not.
I'm not sure what the nature of the question is I think I already said that there could have been some in some segments of our sales force. If you have a terrible year on year in the last month, and you're not going to make the year. There is sometimes a tendency for people to hold and start that business in July but I think you saw in our comments that August and September.
Number were also strong so it doesn't feel like if you don't like hold something from May and June and then looking at the last day of September slightly typically put it in the first week of July and so.
I guess again based on my experience what I've seen here over the years, there was probably a little bit of that didnt make a material difference in the sales results and.
It is where it is we have great. We had a great start and I think great execution, and besides up meaning into our sales investments really big difference maker here is our sales force leaned in to drive results right and we're incredibly grateful to to them for that.
All right that helps a lot I appreciate it and just a quick follow up on the.
If you could give us an update on the rollout of the Nexgen HCM and payroll engine.
Relative to let's say three months ago or four months ago, how do you think curve, it's going to impact.
The rollout of some of the next Gen technology is going to be you'd mentioned some delays I think previously but how is it looking now.
Well, we had to I think we had a good quarter like I was frankly any clients to me is a good point is good news and I think we had three or four I think Danny phone right now we've had a couple of 'em we.
We had some say like closed in other words, we got people to sign contracts in the quarter like I don't know about anybody else, but I'm not spending a lot of contracts in this kind of environment like we just read the whole focus of this call is how we're focused on prudent expense management trying to keep expenses down. So when people are coming to me. So me things I'm generally not a big sign or.
On those types of things are just shows I think was the value of our of our or value proposition that people are still finding up because I think they believe that it will not only help them in the short term, but that perhaps it can make them more efficient even in the in the short term. So I think that is a good sign right of the strength of our products and the solutions and the and the and the pitch that we have.
But that was good news I mean again, we're pleasantly surprised and we have several dozen I think in implementation active implementations right now so the sales are continuing.
The backlog the implementations continue to scale up.
So really no no significant or substantial change in the outlook I think you cited the sales we actually started I think a number of clients well three or three or four also yes.
Yes, we're in the double digits. Now. These are these are quite so we actually sold new clients. This new contract that are now going to go into the implementation process, but we had clients that we're in the implementation process, a few of which delayed starting in the fourth quarter, but then we started them here in the first quarter. So I would say that's all good news and on on next Gen payroll you heard what we said.
Sold 100, which again I think is pretty damn good news like in this kind of environment.
Great. Thanks.
Christian your answers thanks, so much.
Thank you.
Our next question comes from Stephen Wong from Morgan Stanley. Your line is open.
Great. Thank you good morning.
So I'd love to come back to the margin I know some being over the head, but maybe just a couple other sort of ways to look at it seems like the way you are looking at it going forward is if macro cooperates and the higher margin pieces of the revenue could drop to the bottom line drive incremental upside from here is that the right way to think about it and generally.
Should we assume that imply.
Implicit in the remaining three quarters of the year, the lower margin implicit assumption for at least a couple of those quarters is really more dependent on the macro than it is on your pace of investment, which I think we maybe a collective we thought was going to be more robust and the headwind relative to what it ended up being this quarter.
So.
Just to clarify I remember, we outperformed not because we stopped investing or didn't invest as much as we said we were going to invest is because we outperformed on the top line right in terms of our revenue even though some of it was clearly expense management and so forth, but I would say that the answer to that question is that you know it's.
It's hard to wrap your head around.
Our economic I know, it's hard because most companies don't operate this way, but for example, the better things get in terms of the macroeconomic the the more we're going to invest.
And I know, that's not going to make some people happy but like for example, our fourth quarter.
Our fourth quarter like if things play out the way we planned in terms of the original guidance. This is not we're not changing anything on you but.
Like our fourth quarter, where we have easier comps. We would also expect to have great sales results right in those great sales results on a comp basis will also bring with them sales expense and to the extent we can get some of these clients started and our sales results improve we're going to start also investing more.
And stepping on the accelerator on implementation expenses. So this is all carefully planned carefully controlled as Kathleen was alluding to is like this is not some kind of free for all in terms of expenses, but this is a an amazing economic model I don't I don't know if you can see what we just delivered and what we're telling you that.
Assuming.
That's the situation cooperates with us, we probably will be either flat to slightly up in terms of revenue for the year, So that would mean that.
We'll continue our streak of ATP of never being negative revenue growth, which is pretty remarkable rate. We had a massive decline in volume in the last quarter massive declines in new business bookings and you see now.
Now granted this is not what we are targeting like we'd like to have high single digit revenue growth. So it's kind of weird that that we're excited about flat, but it's all about the context and it's all about relativity. So it's really a great economic model, but the economic model as a long term economic model you have to invest in sales.
Patient and products to drive the results. This is not we're not running the business quarter to quarter and what that means is the minute. We see the sunshine the Sun shining, we're going to be combos that doesn't mean that our expenses were going to get out of control, but you will see our sales and our implementation expenses.
Gradually come up and along with that some point, our service expenses as well, but thats great because the most important driver of long term value of this company is growth, it's not with the margins next quarter or this year.
Okay I understood, yes, sorry.
Some more color from my perspective, I mean, I would just say look we continue to be as we always have been very very focused on growth and efficiency and becoming more and more efficient every day. So we're going to continue to invest where it makes sense for growth effort efficiency. So we talked about.
Sales head count and continuing to support that.
Vesmen investment in product.
And we invest in efficiency all of the digital work that we're doing isn't it doesn't come for free you have to make investments to be able to drive that efficiency improvement.
So were focused on all of that and we're going to continue to do that and Steve just one last thing to tie it back to our guidance.
Certain macro factors will have an outsized impact for the next two quarters and so what weve contemplated is pressure in retention and pays per control both of which come at high incremental margins. If ultimately those come out better than forecast and then as you suggest it would represent upside to margins and as a few others like Kathleen mentioned bad debt expense is also something that Frank.
He has been shocking in the last six months, where we've had.
Honestly like decreases in our bad debt expense, which makes no sense at all so hopefully that will continue but we didnt plan for that I think we didn't roll forward three quarters of lower bad debt expense right.
Right. Okay Thats all Thats all very helpful. Thank you and then maybe as my follow up there I think it was asked a little bit before but Carlos you. Just you were just talking about it a little bit I go there of just kind of wanting to grow mid to high single digits.
If we rewind the tape back to January and you guys talked about the markets you are in and how you are growing sort of seemed like the way to think about it was you were generally growing in line with the market and I think your earlier comments indicated next few years should be an uptick, but theres going to be Choppiness of course, I guess I'm curious how you guys think of Atps positioning relative to other platforms.
Obviously, you had a really strong quarter, but.
But for the last several years, you've seen a lot of other platforms growing.
In excess off of much lower base is I'm just curious how you think about it today versus six months ago versus a year ago. If we are to see this uptick in HCM demand an outsourcing demand where do you feel about it.
The peace positioning in that in that market.
Well I would answer that question just by saying that we just invested hundreds of millions of dollars in new platforms in our key markets, because we intend to take market share.
Couldn't be clear than that okay.
I'll leave it there thanks guys.
Thank you. Our next question comes from Kevin Mcveigh from Credit Suisse. Your line is open.
Great. Thanks, Hey.
They kept when you talked about kind of ahead of business in the guidance looks like its it calls for kind of elevated losses in Q2 in Q3.
Did it bottom in Q1 and gets better and then I guess just along those same lines.
Can you talk about is there we'd also frame client state or maybe still in business, but not processing at this point. So I guess two different questions was trying to get a sense of a worthy at a business did a bottom Q1, and then improves in Q2 Q3, and then there is there a way to frame no clients still in business that may be on processing at this point.
Yes, so on the first thing the out of business I would not say it bottomed at all in fact, we did not see a significant impact from out of business in Q1, I think the shoe has yet to drop there is how I would say.
And that's what we are forecasting and guiding that we're going to see some pressure from that in Q2 and Q3 tend to come in Q2.
More stimulus that help support it and we don't see in Q2, and maybe doesn't come till Q3, I don't know what were planning I think.
Well, we're cautious about it.
We're planning to see that in that.
That pressure in Q3, Q2, and Q3, sorry and on your question about clients not processing, we did mention that a number of small businesses.
Really started in the first quarter, but there is still a sizable chunk of companies that have gone in active and remain in that state and to be clear Theres. Just in case, there's a misunderstanding there that does have some that has nothing to do with our business bookings right. So that affects our revenue and affects our losses to some extent but is unrelated.
Two business bookings those because the word restart might confuse some some people yes, so it's higher than it would be in a normal period, it's come down from where it was at the peak in probably in our April May June it's come down from there, but still higher than.
Normal situation got.
Got it and just to wrap that point Carlos It's fair to say that you know.
With with the stimulus it probably helped those inactive is a little bit that maybe would have fallen to bankruptcy is is that a fair way to think about it too no question about it.
Cool and then just real quick it looks like the midpoint of the revenue guidance.
For for Mds is a 300 basis point improvement versus 150 basis point improvement for the PEO any puts and takes to kind of I know, it's not one to one but is it just kind of the client mix that where you're seeing a little bit more upside on EPS as opposed to PEO or just any thoughts around that.
No other than that's actually a great question, which will go back now.
And decompose that we had looked at it that way at least I had.
I would say my instincts would tell me that has more to do with how the operating plan is built than any macroeconomic or other major.
Explanation, so I honestly I wouldn't read much into that.
Okay. Thank you.
Thank you and welcome.
Take our last question from Mark Marcon from Baird. Your line is open.
Hey, good morning, and thanks for taking my questions.
Just with regards to the bookings performance this quarter to what extent do you think it was due to.
The sales force, basically recalibrating and being able to get out getting more at bats relative to.
Higher batting average so.
In terms of thinking about the win rates and then I will follow up with regards to nexgen.
That's a great question.
I have some some sense of that from looking at the data right from the quarter and I would say that our win rates are in line I think a little bit better in some cases against a few competitors, which is makes us very happy but I would say there is not a lot to report there that that is.
I think good news, but consistent if you will in general so its probably more the former rate which is the at bat Tonight, you could almost used the what I call as the.
Traffic analogy right so those.
Ever since the pandemic started whenever I go out on the roads I do the the traffic check and.
Traffic is much higher and has been much higher over the last two or three months than it was in March and April and that probably has something to do with southern just people on the street, but people on the streets turn into people buying things and people going to restaurants and people going back to their to their workplaces and.
So forth so I hate to be so crashing so simplistic, but I think that it is a very large company, which we're very proud of.
And the gravitational pull of GDP and economic activity is strong in both directions and I think we benefited a lot from I think it's safe to say better than most people I mean I think this is not an ATP issue I think most economists have raised their expectations about GDP.
Unemployment is lower than everyone thought even though labor force participation is lower in general things are better than people thought they were going to be in call. It may June at this point and we have benefited from that I think thats I wish I could take more credit and give you a more complicated answer but I think that is the that is actually what's happening at the traffic.
Yes for sure.
Great and then just a short term and a long term question, but the short term one is basically just as we're here in the in the key fall selling season, how do you how do you view Carlos the kind of the mix dynamics with regards to say there's more uncertainty there's this resurgence.
With regards to coal did serve.
Serves the election, perhaps not a lack of lack of stimulus but at the same time things are more complicated HR is more central how does that end up impacting.
You know kind of the.
The new sales bookings expectation just hearing that in the core selling season and then the longer term question is.
Nexgen pay rules.
Let's see on the continent really nice awards.
You've obviously been inhibited by the.
By the pandemic in terms of being able to go out there and talk about it with with clients, but when things get a little bit back to normal how how would you expect the penetration of those elements to go over the next year two years three years like when would we see a big a bigger penetration because.
Because they've gotten really good rewards.
Yes, I think on the first part of your question its.
Of course, the last question of course have to be the donor question because I think that's a hard one for me to.
So optimistic the whole call so I hate to like.
Bring us all down but based on what I'm seeing right now both in the us and in Europe.
And you know.
That and the fact that this is our key selling season I wish I could tell you that.
I'm incredibly excited and bullish and so forth I just want to get through this damn thing right and get out to the other side and I'm looking forward more to the third and fourth quarter and the fourth quarter in the next fiscal year than I am to the next two or three months because the combination of the election with I mean, you guys will see the same thing that we're seeing and again.
Got to apply the test of common sense and Thats. The custom common sense would tell me that this is a let's just try to keep us up beat this has put a fluid situation.
But it is flowing through is going to be choppy right. I mean, we thought it'd be aren't recovered from the last recession that it was choppy and I'm fully expecting it's going to be choppy. This time around to particularly right were in Q2 were in the fall down into the winter. It's called we've got areas, where theres resurgence is that people might be hunkering down again.
So Q2 might be challenging but.
Even in normal situation is normal years, right bookings are going to be lumpy quarter to quarter I focus more on the.
The full year, the annual and the longer term view and again of course, we also thought that the first one is going to be terrible it turned out to be home runs. So they could easily go the other way, but I'm I'm a man of like I speak the truth right in terms of what I know and what I think at the time and I spoke the truth in our last earnings call and obviously I was wrong because.
Things turned out to be much better and I hope that that happens here again, but thats my story and I'm sticking to it but one quarter or two quarters or three is not going to make a difference in ATP is long term trajectory. What matters is the second part of your question, which is what do we intend to do what do we expect in terms of penetration rates and rollout of kind of our.
Next Gen plans.
Platforms and by the way, it's not just about next gen. Like I Hope you guys understand that we're making some fairly sizable investments ongoing investments in workforce now workforce now now.
We have a a version if you will on upstream color version, but workforce now.
It is also on eight of us in the cloud.
So weve completely rebuilt workforce now to be as modern as next gen as lithium ion and as as our next Gen. Payroll engine. We also have been doing an enormous amount of work on run.
In the same vein both at the guts of it in terms of the technology stock, but also on the user experience you know with the investments we made in data cloud you know what we have with ADP marketplace was has been across the board increase in investment over methodically over the last six to seven years that Ive just summarize it.
By saying, what I said once before our intention is to have all of these things parlayed into taking market share and growing GDP faster than market and faster than the economy.
That's great. Thank you.
Thank you Bill.
Concludes our question and answer questions on today's call I'm pleased.
Im over to Carlos Rodriguez for closing remarks.
Well. Thank you for all of you for listening again in summary.
I just want to once again I think complement the our associates and our leadership team for incredible execution in the short term, but I hope you also heard our commitment to the long term and both in terms of sales R&D client service and all the things that drive growth and long term value for our shareholders and hopefully for all.
Who represent represent them, we remain committed to expense management digital transformational things that Kathleen.
But we are somewhat beholden to obviously the circumstances around the economy and the healthcare crisis, but we remain optimistic that this is us and it's the reason for optimism, but this is a transitory.
Situation that we're going to get through it hopefully in the next three to six months to the point, where things gradually start to get back to normal and then if you can get back to normal.
The normal growth rates that were that were used to.
So thank you again and appreciate your support and your listening to us and I hope that all of you continue to stay healthy and unsafe. Thank you.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
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