Q2 2021 Automatic Data Processing Inc Earnings Call

[music].

Good morning, My name is Michelle and I'll be your conference operator at this time I would like to welcome everyone to Adp's second quarter fiscal 2021 earnings call.

I would like to inform you that this conference is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.

I'll just draw your question press the pound key.

I'll now turn the conference over to Mr. Daniel Hussain Vice President Investor Relations. Please go ahead.

Thank you Michele good morning, everyone and thank you for joining Adp's second 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 SEC's website, and our Investor Relations website at investors on ADP Dot Com, where you will also find the investor presentation that accompanies 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. A description of these items along with a reconciliation of non-GAAP measures to the most comparable GAAP measures can be found on 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 SEC for additional information on factors that could cause actual results to differ materially from our current expectations 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 you everyone for joining our call. This morning on reported results, reflecting our continued strong business performance and momentum with our second quarter revenue and margins day outperforming our expectations as our business continued to demonstrate resilience in the face of ongoing economic headwinds.

We reported revenue of $3 7 billion.

Up 1% on a reported basis and flat on an organic constant currency basis with adjusted EBIT margin down 30 basis points.

Coupled with a slight increase in the effective tax rate versus last year, a share count reduction or adjusted EBITDA.

Diluted EPS was flat versus last year much better than the decrease we were expecting.

During the second quarter, we continued to see signs of improvement in the overall operating environment with positive implications for pace per control new business bookings and retention.

Our pays per control metric performed slightly better than expected as it improved sequentially to a decline of 6% versus the larger declines we experienced in Q1 in the latter part of fiscal 2020.

Underlying employment trends in Q2 were consistent with what we experienced in Q1 with larger enterprises somewhat Florida show improvement, but with small and mid sized businesses, demonstrating a healthy level of hiring.

We performed well on employer services new business bookings.

Even though bookings declined 7%. This quarter. This was well ahead of our initial expectations earlier this year and in line with our revised expectations, we communicated last quarter.

And it's important to point out that our new business bookings for the first half nearly matched last year's half despite the very difficult environment.

As we had anticipated more modest sales contributions from items, we noted last quarter, such as new business formations on multinational deals coupled with the resurgence in virus case levels contributed to lower growth rate compared to Q1.

But underlying trends have remained strong including improving demand in our mid market and each of our <unk> solutions as well as continued acceleration and leading indicators and a solid sales pipeline more broadly.

Moreover, with the change in U S administration, and the continuing dynamic regulatory environment, we expect momentum for our solutions to improve as companies continue to recognize the value of partnering with ADP, given our deep compliance expertise and reliability.

And as a final point with what we believe to be the most challenging six months of the fiscal year behind US. We are now even more confident in our expectation for bookings performance to improve further.

As a result of all these factors we are raising our new business bookings guidance range by another 5% to 15% to 25%.

Please for controlling bookings trends were both positive but retention was the main highlight for us the second quarter with Es and PEO retention, both reaching record levels.

We saw strong performance across the board with the biggest improvement for the Es segment coming out of the U S Downmarket and mid market businesses as our client satisfaction scores remained at record levels across the board.

Following this incredibly strong performance and an early read of Q3, we're very pleased to be able to raise our retention guidance significantly a sign of our improving competitive position.

And the retention we are now expecting would represent a record high es retention for the full year.

Now onto another critical topic and one that remains a key focus for us are.

Our product teams continue to execute well and we reached a number of milestones this quarter.

I'll start with run and workforce now our two highest revenue platforms.

For <unk>, we continued to make a range of enhancements to meet client onboarding seamless and in some cases digitally automated improving the implementation process for tens of thousands of run clients, we bring on every year.

We also made further enhancements this quarter to our accountant connect platform already a big differentiator for us and we now provide even more insights to our critical accounting partners.

For workforce now we continue to build momentum by leveraging our next gen payroll engine and as we discussed earlier. This year, we are alive with hundreds of clients who have been very pleased with the solution and continue to rate their experience very highly.

In addition, we launched a new workforce management solution that along with our next Gen payroll engine enables real time punch the net payroll calculations all delivered from the public cloud.

And based on feedback from our clients and sales associates, we believe a significant portion of the hundreds of sold next gen payroll clients were incremental to what we would have sold without nexgen, which of course has positive implications from market share on competitiveness in the mid market as long as we continue to execute.

Also we continue to scale up our next Gen HCM.

In this quarter, we went live with our first client in Mexico.

Importantly, we did this with enhanced speed to market as we partnered with a third party to localize and implement which speaks to the power of our Federated architecture and the need of global capability of our next Gen HCM and Nextgen payroll platforms.

For our data cloud data cloud platform, we had a number of exciting new launches.

To support our clients around ESG objectives, we launched a pay equity story board that allows clients to identify equal pay gaps and calculate effective distribution model to close these differentials across their organization.

We also continued to leverage the power of data cloud outside our core HCM base and earlier. This month launched a partnership with New York Stock exchange owner ice, which will per ice data services market expertise with Adp's HR on compensation data.

We are very excited about continuing to explore opportunities related to our differentiated and robust dataset, which is the most expensive in the industry to drive both to drive insight both within and beyond traditional HCM use cases.

This quarter. We also continued to receive industry accolades and won a number of awards for our solutions, including <unk> and kept Cara Award for the number one user rated workforce management solution.

We continue to reach all time high client accounts on all of our key platforms.

Including run workforce now vantage global view and of course next Gen HCM.

And within our HCM platforms, we continue to reach new client count milestones for individual solutions, such as retirement services.

Moving on I'd like to once again acknowledge our associates for their ability to stay focused on finding innovative solutions and driving higher NPS and what has been an incredibly challenging and dynamic environment.

It's because of this execution that we were able to demonstrate such resilience such resilient performance year to date with revenue flat adjusted earnings per share up and retention at record levels.

Now with the worst of the pandemic related headwinds hopefully behind us and vaccine programs positioning us for continued recovery. We are increasingly focused on re accelerating growth in the quarters and years ahead.

To that end, we have already reinvested some of our Q2 outperformance into product development acceleration of digital transformation push and selective sales and marketing expansion ahead of our key selling quarters.

While it's too early to talk about fiscal 2022, and any detail, we expect our fourth quarter revenue growth to accelerate significantly and our goal will be to sustain that momentum.

We are very pleased with our performance year to date and the fundamental strength of our business and we are very optimistic about the quarters ahead on.

That I will turn it over to Kathleen.

Thank you Carlos on good morning, everyone.

Q2 was another strong quarter across every major business metric.

Well, we will still face some pandemic related headwinds for the balance of the year. We are more confident in our outlook given we believe the toughest part is behind us.

Our performance, thus far into the year reaffirms the resilience of our business model the strength of our products.

Ability of our sales and services.

To perform even on the toughest other environments.

We remain confident in our ability to execute as we move forward.

In the second quarter, our revenues grew 1% on a reported data.

Flat on an organic constant currency basis.

Which is significantly better than our expectations coming into the year and better than even the revised expectations, we had last quarter.

Once again, yes retention rates represented favorability.

Very good very strong performance from our PEO.

We manage expenses prudently, while making important incremental growth and productivity investments and.

And delivered margins that were better than our expectations.

Our adjusted EBIT was down just 1% despite pressure from a decline in client funds interest.

Our adjusted effective tax rate increased 20 basis points compared to the second quarter of fiscal 2020.

Our share count was lower year over year, driven by share repurchases.

And as a result, our adjusted diluted earnings per share of $1 52 was flat versus last year's second quarter.

Moving on to the segment.

Our revenues declined 1% on a reported basis.

2% on an organic constant currency basis, representing continued sequential improvement driven by record level retention and a more modest 6% decline on pays per control versus 9% last quarter.

Client funds interest declined 23% as average yield declined 50 basis points versus last year.

Our balance growth, however, improved significantly to be flat this quarter.

Courted by better retention.

Better pays per control.

And the lapping of our Netherlands money movement operation closure in October of 2019.

Employer services margin was flat for the quarter significantly ahead of our expectations.

Sorted by stronger revenue and prudent cost control.

Our PEO also had another very strong quarter.

Total PEO revenue has increased 5% to $1 2 billion.

With average worksite employees, improving sequentially to $571000.

One 2% year over year.

The strong results were also driven by better retention, which was at record levels as well as slight sequential improvement in pays per control.

It remains down mid single digits versus last year.

Revenues, excluding zero margin benefits pass throughs.

Proved to up 2% well ahead of our expectations.

This outperformance was driven partly by better WSB performance.

But also due to favorability in wages paid per wsh during the quarter.

PEO margin increased 100 basis points in the quarter, driven by better revenue as well as continued expense discipline.

Given our over performance in the first half of the year, we have taken the opportunity to ramp up certain investments to supplement growth and productivity coming out of the pandemic.

Relative to our expectations heading into the year, we are investing to accelerate certain R&D initiatives.

We are also increasing investment in digital transformation.

We continue to apply technology to enhanced self service and take work out of the system.

Additionally, we are investing further in sales head count and in certain marketing programs ahead of our key selling season in the back half of the year.

Let me turn now to our updated guidance for fiscal 2021.

We said with two quarters now behind US, we feel more optimistic about the full year.

Although we still anticipate certain pandemic related headwinds to persist for the rest of the year. We do expect some of these headwinds to moderate.

For pays per control, we continue to expect a decline of 3% to 4% per year.

For the first half of the year pays per control performed slightly better than our expectations.

But with the improvement seeming to moderate into the calendar year, and we are making no change to our full year outlook at this point.

Out of business losses have been better than expected throughout the first half.

And at this point, we see minimal risk for a significant deterioration during the year given what we've seen early in Q3 and with stimulus potentially providing additional support to small businesses.

On client funds interest while the U S. Treasury yield curve has recently steepened there was no material change to our expectation for a realized average yields for the current fiscal year.

However, we are again revising our balance growth higher primarily on stronger client growth.

Let's now look on our revised fiscal 2021 guidance.

For <unk>, we now expect revenue to be flat to up 2% from full year versus our previous expectation for flat to down 2%.

That's driven by a few factors.

Having had strong bookings performance six months into the year and seeing continued improvement in leading indicators.

We now expect our new business bookings to be up 15% to 25% compared to our prior forecast of up 10% to 20%.

This additional 5% raise reflects the incremental investments we've made on sales and marketing.

As well as an overall increased confidence for the next two quarters, particularly as our clients and prospects continue to deal with changes in legislation governing the workplace, making the payroll and HCM solutions, we offer and the compliance expertise, we provide even more compelling.

We now expect our es retention to be up about 100 basis points versus flat to down 50 basis points.

This improvement is driven by both the strong Q2 performance.

As well as reduced concerned about Q3 losses.

Early signs indicate continued strong performance.

This full year outlook would represent a new record EPS retention level and we are very focused on achieving that goal.

And for our client funds interest, which primarily impacts the results of our EES segment we.

We are again, raising our outlook on a higher average balances expectation following a strong Q2 retention performance as well as continued recovery in wages paid.

There was no change to our expectation of an average yield of one 6%.

We now expect our margin in the employer services segment to decline 50 to 100 basis points per year, representing a 50 basis point improvement versus our prior forecast.

For our PEO, we now expect revenue up 3% to 5% versus our prior forecast of flat to up 3%.

And we expect average worksite employees flat to up 2%.

Our prior forecast of down 1% to up 1%.

We continue to expect our average worksite employee metric to be negative in Q3, and then turn positive in Q4.

Our revenues, excluding zero margin pass throughs are now expected to be up 3% to five per cent compared to our prior forecast of down 1% to up 1%.

This significant increase is due to factors consistent with what we described for the second quarter.

Higher WSB count, but also higher wages and therefore more revenue on a per WSB basis.

For PEO margin, we now expect to be up 50 to 100 basis points in fiscal 2021 versus our prior forecast for down 50 basis points to flat.

This range is driven primarily by stronger revenue performance.

For our consolidated outlook, we now anticipate total ADP revenue to be up 1% to 3% in fiscal 2021.

Versus down 1% to up 1% prior.

And we anticipate our adjusted EBIT margin to be down 50 to 100 basis points.

Versus our prior guidance of down 100 to 150 basis points.

We now expect our effective tax rate to be slightly lower at 23% for the year.

And we continue to assume a net share count reduction in our guidance.

Net of all these changes we are raising our adjusted diluted EPS guidance to be down 2% to up 2% versus our prior guidance of down 3% to 7%.

We are very pleased to have been able to raise our guidance again, given the combination of better than expected macro conditions and our strong execution six months into the fiscal year.

We remain confident in our strategy growth prospects and ability to execute.

Coming into the fiscal year, we had grace for a number of economic headwinds, but stay focused on our strategy and growth and we maintained our investment in our product our sales force and our associates in order to support our key goals of delivering excellent client solutions and growing market share.

As we have done since the pandemic started we plan to continue to support investment in product and sales.

We look forward to keeping you updated on our progress and with that I will turn it over to the operator for Q&A.

If you wish to ask a question. Please press star one please be aware of the allotted time for questions. Please ask one question with a brief follow up.

We'll take our first question is from the line of Bryan Bergin with Cowen Your line is open.

Hi, Good morning. Thank you I'll ask two upfront here. So first on bookings can you just talk about composition of bookings in <unk> versus <unk> and give us a sense. If you can dissect the strongest on weakest demand across client size.

And then just looking at the SG&A level. This quarter can you comment on the drivers of the sequential dollar growth there I heard the comments on accelerated investment is that primarily sales force head Count addition, or other areas of spend.

Sure let me take the I'll take the bookings, maybe and I'll, let Kathleen talk about the SG&A on.

On the bookings I think some of this is just.

Lumpiness if you will of of the results because there is no. There are a couple of things that happen, but it's hard to call. It a trend right because we only have really two quarters. If you will of kind of post pandemic result, but.

In essence, our mid market business performed a lot better.

So workforce now on the mid market business that.

Much better on this in this quarter than in the last quarter and then if you remember last quarter, we talked about that we got some help from our international business and in particular, we called out multinational deals.

And that was I'm not sure we gave any color around that but that was strong double digits. The way I would put it last quarter helped to last quarter's growth and this quarter. It was kind of slightly negative now in the context of what's happening in Europe, which.

Really started to shut down and starting to have challenges before the U S. In terms of the resurgence of the virus, we're pretty happy with that like we're pretty proud of our sales teams over there that they were able to accomplish what they did in the second quarter, but sequentially. It was <unk>.

Not as strong as I hope we got in the.

The first quarter.

We also had really strong.

Bookings in the first quarter in our Downmarket business, we had some what I would call modest help from some what we call client conversions or we call client base acquisitions, which we do on a regular basis, but they don't they don't come in every single quarter. So we got a little bit of help from that and I think I also mentioned last quarter I think I've been.

On this for nine years mentioning that whenever we have a strong finish to a year, we typically get off to a slower start.

And the opposite is also true when we have a really bad year, we tend to get off to a stronger start a lot of our business is counted at the time of sale and start but some of our business as you know like in the upmarket.

As some flexibility if you will on the sales force, we don't necessarily endorsed debt but.

There is some flexibility for salespeople to book something in call. It July versus in May and because of the way the incentives work and so forth, sometimes we get a little bit of movement from.

Sales into into into into the next fiscal year. If we have a bad fiscal year and the opposite is Austria will have a strong fiscal year. We tend to have a hard time getting started in in July but I think we've been so this is nothing new we've been I think transparent in giving you all the kind of the color that we can around bookings I would tell you that when we cut through all that so we're trying to look.

Yeah.

No different than you would do with for example earnings where we're trying to see what's the core business doing excluding client funds interest.

It's happening with the core business, excluding pressure from pays per control. We do the same thing in bookings on what's happening in the core underlying bookings and we see very positive momentum there in terms of lead generation digital leads coming in activity by the sales force.

So we're optimistic that the momentum will continue into the third and fourth quarter of course.

The caveat being the.

The virus has to cooperate in terms of in the vaccine rollout how to continue to stay on track, but but I think overall, if you cut through all the software to call them onetime items, but if you cut through all the noise our momentum in the second quarter in terms of bookings was stronger than it was in the first quarter, even though it might not be what they are.

Number shows.

And I'll, let Kathleen talk about the SG&A.

Sure. So on the SG&A side, I mean, you do have a lot of things.

Within the SG&A, but.

I would think about it this way the overall.

View, our picture is that from a selling standpoint.

Talk about kind of full year and then we can talk about linearity, but from an overall standpoint, we continue to invest in sales.

Mentioned and that is both.

Head count investment as well as continuing to look at.

Marketing investing and doing some of that.

<unk> got that investment in sales, but you've also got the work we're doing around transformation.

Which would be offsetting that investment.

As well as just discretionary cost control that we're very focused on doing as well so kind of.

Overall, you've got investment.

Head count on marketing you've got transformation work that we continue to do and discretionary cost control.

That does change if you look at or not change, but the skew first half to second half is a little bit different.

We do have significant bookings growth in Q4, our expectation and so of course, that's going to result in higher acute core selling expense for us.

Thank you.

Our next question comes from Bryan Keane.

With Deutsche Bank. Your line is open.

Hi, guys good morning.

Just wanted to make sure I understood the employee services bookings for the quarter came in line with expectations, but you guys did decide to raise the full year. So.

Just wanted to make sure I understand the pipeline the visibility there that's causing that raise and then on on retention to record levels are you seeing anything in particular on the competition front that is having less of an impact in years past, that's driving the higher retention. Thanks, so much.

Sure on the pipeline on the pipeline question, we do have some visibility, but some of this is really about extrapolating momentum because in the down market, it's really more about head count and productivity than it is about pipeline, whereas on the MMC in the upmarket.

Not telling you anything you wouldn't be able to figure out yourself. So we have a fair amount of visibility on some part of our business, but in other parts of our business. We based on our experience about productivity metrics in head count and so forth.

We have confidence obviously in the guidance that we're giving in the range of otherwise we wouldn't be giving it but.

Things that have changed since last quarter.

Last quarter, we had what we thought was much better results than we had expected and we thought we had positive momentum and then on top of that now we have vaccine rollout. So that was not something that was talked about but this is now a reality.

We also had an election that was still in front of us and that's been resolved.

We also.

And people speculate that there will be more stimulus and now there is even though there is even more stimulus being debated just as a reminder, there was a 900 billion stimulus package that was.

Approved so I think if you look at.

Which we try to do we try to do a little bit of tenant correlation regression whatever you want to call it between GDP and economic growth in our bookings because we do believe there is some connection there like there's other things like the training of our sales force the tools. They have the quality of the sales force turnover, but GDP is a powerful force.

And the GDP numbers are looking pretty strong here on a go forward basis with perhaps the exception by some of our some analysts out there was a third of our third quarter to quarter. We're in right now.

But if you look at fourth quarter or fourth quarter or the first half of next fiscal year for us and in the next calendar year. After that I mean, even this full calendar year GDP expectation has been raised I think across the board bye bye.

By everyone. So I think it's partly visibility and pipeline and partly our experience. We know for example, what a reasonable expectation is for productivity per DM per sales rep. We know how many sales reps. We have we know how many new ones we're hiring.

What we're generating in terms of leads and digital marketing and I think we put that all together and that comes out to tour our guidance and so I think we're confident in it and we're actually very excited and positive that we were able to do that and we're just glad that things are looking much better than they were last.

Quarter on certainly better than they were looking in March.

On April on.

And Brian the only other if I could just interject the only other.

Detail I'd add on all of that data on that Carlos mentioned that we do look at an ongoing basis is that when we look at the leading indicators.

In terms of the data we have so appointments with barrels demos opportunities created.

Our sales team are including these into the system on.

All of those are trending better going into the second half than they were for sure going into the year and so we're feeling really.

Very optimistic as you can tell from the raise bookings guidance, we're feeling optimistic going into the second half of the year in particular, the digital leads are up significantly so.

Again, just wanted to provide that transparency for you.

And then on the on the retention side I would say, there's probably two data points that I would look at.

The retention, obviously is incredibly strong and it's going to be record retention for the year, assuming we hit the guidance that we've just provided we've never been at these retention levels and I think theres a number of factors I mean, I think our product set is much stronger and it's not just the products themselves, but it's our commitment to moving our clients onto on.

<unk> platform. So we have a lot more clients on newer platforms today than we had a year ago, two years ago, whether a quarter ago or a year ago. It's just a continuing.

Progression that we've talked about now for many many years, but we've made a lot of progress.

We know that the retention on our new platforms is higher than on some of our older platform. So that's helping.

Probably some tailwind from this pandemic related we just can't put our finger on it the clients from maybe not moving as much but if you look at each business unit like for example on our down market the retention in our down market as a result of better product and better execution has been going up for <unk>.

Probably six or seven years and is up.

Almost 500 basis points pre pandemic and now its gone up even more so the fact that we've had this positive momentum in the Downmarket and it's a similar story in workforce now from that 500 basis points, but in the Midmarket. We've also had three years of improving retention pre pandemic. So I think those are signs that there is something happening.

From our execution and our product right. So execution is part of it is why we have to deliver I think on the commitments, we make to our clients to resolve issues for them and answer questions. On this open so a combination of.

Better service excellent service.

And really better products and migrating clients I think is is helping and then secondly, the other data point that I would point to which is moving on the booking side.

The combination of bookings and retention debt our balance of trade is improving with several of our major competitors for the first time.

On a while and I think it's again related to this effort that we've made to improve product continue to deliver great service statement on on execution.

And I think it's showing up now on some of these balance of trade numbers, we're showing some improvement. So the reason I bring that up is because balance of trade would be a combination of what we're bringing in terms of from some of our competitors, but also what we're moving to those same competitors. That's why we call it a balance.

Our balance of trade. So there's a number of metrics that would tell me that our competitive position is getting better and then resulting obviously in higher higher retention and hopefully also a growing bookings here in the future.

Helpful. Thanks for taking the questions.

Our next question comes from Jeff Silber of BMO. Your line is open.

Thanks, So much for taking my question. Two part question first is on pricing I believe it was last quarter, maybe the quarter before you talked a little bit about some of your competitors offering operating some pricing concessions to clients I'm. Just wondering if that's been continuing and as a follow up I'm just wondering if youre seeing any diverging trends by geography, especially in certain areas, where we are.

Being higher public cases.

So on on the on.

Let me take the second one first on on divergence.

Yes.

We would see what you would expect to see because we are I think we're big enough that we.

Can't really escape again, the gravitational pull of overall GDP, but also of specific geographic challenges. So in southern California. For example, we did see some challenges in terms of our bookings.

On the down market and into the mid market. They are still impressive if we were able to sell as much as we did as a footnote we sold a lot of to say that we're flat almost flat for us as at least we are impressed with ourselves that our bookings are flat for the first half of the year versus last year, but there clearly are pockets of challenge southern.

California would be a challenge the Midwest was in the central part of the country was incredibly challenged for several months.

But we've had other places that things were better as a result of maybe more economic activity or continuing opening regardless of the controversy around that and then again Europe would be a place where I would call out where I think we started to encounter some real headwinds.

No.

Because geography for US is not just about the U S. It's also.

Global So the answer is yes, and that you should assume debt.

Debt, we would be impacted by whatever youre seeing in the news and so when you have.

Hard lockdowns in very large metropolitan markets that would that would affect us, but fortunately, we're very diversified geography, geography geographically and across segments. So remember we operating all the way from small to upmarket to international and so we obviously, we try to find a way to keep all of these things in balance.

And have some things helping us when other things may be working working against US. So we did see some of that volatility as you described on the price on the price side. So one other thing we did talk about last quarter, we did talk about competitors and what we heard anecdotally about competitive pricing action.

But we did we also said last quarter that we didnt get any help from price last quarter, we did get a little bit of health was not cigna.

Significant but call it around I think it was around 30 basis points of help which is about normally what we would be getting.

In terms of revenue growth help from from price and so I think what that tells you that we're trying to signal to you. There is to tell you that it was.

As appropriate for us to pause for.

Call it four to five months, our normal price increases by the way our normal price increases would have been July one would have been one of.

One of the one of the main time do we do pricing.

Price increases and remember our price increases are much more modest than they were 510 years ago, but at our scale. It does it does matter, but we delayed those price increase because it was not appropriate to do that given the circumstances that we were that we were under but you fast forward to September October we felt that given the.

The additional services that we're providing so we're providing a number of incremental services at no additional cost to our clients and I believe our competitors are not providing and so we thought debt going back to our normal modest.

Price increases was a reasonable thing to do and we did that and you can see the impact on retention which has been.

And so that would be I think a good sign for us.

That's great day here. Thanks, so much for the color.

Our next question comes from Pete Christiansen of Citi. Your line is open.

Good morning, Thanks for the question nice trends here Carlos given the lift the view on on Es bookings and retention how would you characterize some of the trends you're seeing in the attach rate for four additional add on modules those sorts of things and.

And how should we think about the runway for the next two to three quarters on on how you see that evolving, particularly with some of your new.

Some R&D developments, new product and then all of that.

It's a great question because there is still on a room for US there like we're very focused on market share and new unit growth but.

We don't mind additional share of wallet and additional attach rate because that that's helpful too and as you know our bookings have generally been balanced for many many years about half of it coming from new logos and half of it coming from.

Incremental attach so we love that business I happen to be looking at those figures.

Last night and it obviously varies by business unit, but.

But as an example on the mid market, we're kind of in the 60% to 70% range in terms of attach rate for things like <unk>.

Workforce management, which we used to call time on labor management and benefits administration, and we have things like data cloud and other items that we can attach as well, but I think the best color to put on that is that there's still a lot of room I mentioned, how we are doing well not just in our new strategic platforms.

But we're also doing well on some of our products that we don't always talk about a lot on these calls like.

Retirement services insurance services, where those attach rates are very low in comparison to what I think is the potential for our client base because when you have.

A tightly integrated solution.

It really is a much better experience for our clients.

So it's good for us, but it's also good for our clients, which is always an important an important thing. So I guess the color I would put there is we've got really good attach rates on some of the core HCM modules like.

Workforce management Ben admin.

So HR payroll Ben Admin work Force management those are kind of the core talent management is a place where we've been seeing growing attach rates and there is a lot of room still there for people to adopt those those solutions. So we're very optimistic on this as a key strategy for I think my predecessor predecessor.

For that which has been great for us, but we have a very broad industry part of our reason for concentrating on HCM and <unk>.

Focusing the company away from some of the other businesses, we have like the brokerage business.

And dealer services and so forth is this is a growing robust space globally and there is plenty of room to grow.

We definitely want to still focus on net take our eye off of market share and logo growth, but there is an enormous opportunity for us in terms of incremental.

Incremental attach rate.

Great. Thank you.

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

Hi, good morning, Thanks for taking my questions maybe.

Maybe stepping back.

For a big picture question, a little bit on the time machine, but if I think back to the analyst day on 2018, and some of the company's key initiatives around the service alignment in taking costs out of the business.

And getting to call it.

Mid twenties EBIT margin I guess.

From the world being very different with what happened with Covid, but I'm curious Carlos if you could just think.

As far as those initiatives went in getting the margin structure of the business toward that would you say that were X what happened with rates and what's COVID-19 would we be in that shape today and I guess, maybe thinking forward how should we think about the structural margins of this business.

Post recovery.

<unk> be at those long term levels that we've talked about before and then I have one volume.

Yes, So let me give you a little bit of color on that because again coincidentally I was doing my homework last night. So it didn't go back that's something that I actually have fresh on my mind, So and Danny will correct me if I'm wrong.

Wrong here, but I think our margin in 2018, which you would've seen in that.

Our analyst day was 27.

And we're now I think forecasting for fiscal year 'twenty, one I'm not sure that we're forecasting it but I think you can extrapolate based on our guidance I'll just throw out a number so call. It 20 to $3 22, five somewhere in that in that range for fiscal year 'twenty, one that's with a significant drag from client funds interest as you.

<unk> and some drag from Covid as a result of slower than we would've thought it would've expected revenue growth. So I would say that on the margin side, we would be well ahead of what we talked about at analyst day.

Excluding these items on a revenue side clearly, we're not anywhere near that and it's why we had to withdraw the three year guidance that we had provided.

Because obviously the COVID-19 headwinds with what happened with cash control and just the economy in general made it very difficult, but again it feels like this would this is a transitory event as we've talked about now for two or three quarters.

Full devastating for many people for our country for the economy and for the world, but it is transitory and not an existential threat and so we expect to get right back on the track that we were on before and I happen to think that the fact that we are.

A couple of hundred basis points higher in margin, even with everything that's happened and we were in 18 I think tells you something about the structural margin opportunity in the business, but clearly a very important part of that picture is growth we need to grow the business long term because.

It does require investment and so you should be hearing from US is we care about margin and we think there's opportunities from the structural margins here going forward, but the most important thing we can do to drive long term shareholder value here is to also grow the top line and we're focused on that just to clarify some on our formal margin expectation is 22.0 to two.

22, 5%.

Great. Thanks, I appreciate it that's why I asked it.

To us it sounds like the business is healthier adjusting for non controllable factors in and maybe just as a follow up on that on the bookings in this quarter and just as you think about bookings from maybe the next couple of quarters.

When you think about the performance is there a way to think about it.

Terms of.

Driven by field reps versus digital inbound through marketing or their channels. So not by customer size, but are there channels that are doing better or worse in terms of bringing more customers into the top of the funnel and driving new bookings.

Yes.

Maybe I'll just interject on for.

Carlos responds to that one I want to interject and just to follow up a little bit on the margin story, because Carlos gave a really good kind of recap in summary over the last couple of years right. When you think about.

We're in.

20% margin in 2007 to pre Covid, 23% with the various big initiatives that we've pursued and you've heard us talk about that over time, but I want to add that.

One of those really important initiatives that we are now working very hard is digital transformation, which has been helping us as we look at our transformation initiatives.

We've talked about digital and procurement really driving a lot of the debt benefits kind of today, if you will.

Lot of that procurement does get harder as you go from a digital transformation perspective, that's an initiative that we believe is going to be with us for some period of time because these projects are.

<unk>.

Not past projects to execute they do take time to execute and so we're optimistic that we've got a pipeline of projects and that they will continue to yield benefits for us.

And I think that.

Pile on to that that your comment I think earlier. After you ask your question. Then you summarized my comments the business is definitely performing much better than it looks because we have this client funds interest headwind as noted the headwind on margin, it's a headwind on revenue growth as well as almost a full percentage point and as an example on the margin impact on <unk>.

I think in Es would've been.

Up.

ADP overall emerging would've been up 40 basis points instead of down 30 basis points for the quarter. So clearly on the margin side. The picture is clouded and that picture will I mean interest rates go up and down as you know and everyone's always convinced that rates are going to stay low forever or theyre going to stay high forever, depending on where they are.

But we.

We believe that at a minimum debt headwind will abate unless interest rates continue to go down and then turned negative for the next 10 years, which is very unlikely as we all I think as we all know in at least in the U S. Thats unlikely on your question about bookings.

One thing Thats important to note is we do have record leads from true digital marketing coming in so we have increased our investment in digital marketing, but we're very careful to do that to make sure that we're getting the proper ROI.

But that is something that is certainly helping our sales force, but they are really the message for our sales force is that we want them to meet our client to clients on the prospects, where they want to be met and they have all the tools all modern tools that any sales force uses.

The reality as I said this before people steal our sales force and so.

We have to understand we have the best sales force in the industry. There is no question about it and they have all the tools they need to compete effectively and they had obviously moved to being mostly a virtual sales force over the last six months.

And we make sure they have the tools to be able to do that and that's where clients want it to be met and if in six months, we anticipate that some of our upmarket and multinational clients will be okay, having some digital meetings with virtual meetings, but they might want to have people visiting some of them again, we will be ready for that as well assuming that it's safe and that people.

Who are vaccinated. So so there are a number of channels that we can pursue but you should understand that our kind of our strategy is really to meet the client where they want to be met as an example in the down market our clients rely on trusted advisers like accountants and brokers, we are very very strong.

Partner relationships with those channels and that's how we drive results in that channel. So it really varies channel by channel, but you should understand that we are pursuing every channel.

Channel every avenue, including upping, our digital marketing investments to make sure that we're getting our fair share of that without throwing money away.

Great. Thanks, again for taking my questions I really appreciate the thoughtful answers.

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

Hey, Good morning, Carlos you talked about net gains I'm wondering if that's related strictly to ADP, having a better set of products or is that related to the competition doing something else and just my second question. We've talked you've talked a lot about the sales process and I'm wondering if you believe afterward through with it.

Got the vaccination is done that fundamentally.

Sales process will change and that you will use more digital versus face to face.

I think that.

I'm in the same campus as I think many other ceos of companies that.

And again, there's not a lot of companies like ADP that operate all the way from the down market into the upmarket. So it has to be balance here in terms of it's not one clear cut answer.

But on Mccann for example in the upmarket on some of my other competitors and Ceos, who believe that there will be face to face meetings, again, and particularly sales meetings, but I'm also on the camp of believing with lots of others that we shouldnt assume that.

Things are going to go back exactly the way they were before but whether it's with the way people are working or the way people are selling we're going to have to adapt to what inevitably is going to be some change having said that I believe I saw statistically other data said that prior to the pandemic about 10% of the U S workforce was working from home.

And it went up to 33% at the worst part of the pandemic and then came back down to 25% and I kind of monitor this through other sources that show that.

Kicked up slightly again.

Number of people working from home as the virus continues to surge.

You would expect that 25% to probably go back to <unk>.

15%, 20%, but not probably back to 10%, but remember that the other 70% never worked from home.

And today, 75% of the people are not working from home and so but that doesn't mean that we haven't learned new techniques for example.

On an initial meeting or a follow up meeting or maybe even an implementation meeting with a client.

I think we've all learned that it's much more effective to do that for both parties.

Virtually but it's hard to believe that we're going to go back exactly to where were before and it's also very hard to believe that we're going to stay exactly the way. We are today and again I hate to give you a wishy washy answer because I think we're going to have to let that play out but we are like a lot of other things we're maintaining optionality.

On equipping our sales force to be prepared for either of those eventualities.

And I think you had a first part of that question on the client growth, whether it's product Oh client on the client growth side.

Again, we are I think I mentioned in one of my in my script that all of our strategic platform. So if you think about run workforce now global view I forgot what the other ones I mentioned, but the platforms that we are that are strategic that we're investing in not just the next gen ones are all growing.

And they are growing very robustly.

On other people understand that and part of the challenges that we are a large company and we have other things that maybe aren't growing as fast or we have.

A drag from a platform that we're trying to get off of and we unlike some others.

Try to report the facts as they are ratio, but maybe taking a little bit of liberty like others are doing.

And give me a little bit more color about just the things that are going well, so but if we did that because we only focused on the growth of for example, nexgen it would be 800% growth, whereas we focused on the growth of workforce now across the board not just from the mid market because we also use workforce.

Now on the upmarket and we use workforce now on our PEO you would see.

Robust growth even in the middle of a pandemic on our workforce now so I think we're making progress, but we are a large organization.

With large market share and clearly that exposes our flanks and we have to be very good at making sure that we protect our flanks, which I think we're doing a good job of as evidenced by retention, but when you look at the go forward in the growth of our of our strategic platforms. There is a lot of reason for optimism that we will I think be able to.

Pete effectively on a go forward on a go forward basis. So I'm not sure I can give you a lot more detail on that because this is more detail than we normally give because we like to just be straight shooters and the growth is what it is whether it's on client accounts on our revenue, but if you want on a little bit of additional color underneath the covers.

The strategic platforms are doing very well against our competitors.

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

Hey, good morning, and thanks for taking my questions.

So.

Questions basically about Nextgen.

Nextgen.

On the first part is can you can you talk a little bit more give us a little bit more color with regards to next gen payroll just in terms of the.

Number of clients that have been sold what percentage of the existing workforce now base has been.

<unk> and how you're thinking about that going through.

And the kind of what youre seeing in terms of the satisfaction. Once you have that in place you've made some initial comments.

It sounded really positive and then the.

The follow up is just basically on next Gen HCM.

Just in terms of what the outlook is there.

In terms of new sales or new bookings. Thank you.

Sure. Thanks for the question because if you thought I was optimistic before prepare yourself.

The story on next Gen payroll and HCM is quite positive for us in terms of the future.

If you look at next Gen payroll, we have I think I would say a couple of hundred so let's say over 200 live clients. So not just sold but life clients. We have over 500 debt are sold I think we said on our comments that you may not have picked up on that debt.

We think that it's possible even though this is not scientifically provable debt up to 25% of the sales. We've had so far of next gen payroll, we would not routine without next gen payroll. So I think that bodes well for I think our competitiveness and our market share and our plans are to have call. It somewhere around a couple of <unk>.

I think.

For this fiscal this fiscal year so.

Positive momentum again.

The caveat there is.

Next Gen. HCM, we are generally going after very large clients.

And in the case of next Gen payroll it is really a platform that solves.

Kind of next Gen payroll needs across the border and we started in call. It the core of our mid market. So call. It between 50 and 150 employees has really has been our focus.

So, but having said that it's still pretty impressive and we're pretty pretty happy and pretty positive satisfaction levels are very high.

And I think we've just got great momentum in our sales force is obviously incredibly excited even though remember it's still this is still a backend engine right. So it's still workforce now and in the future will be lithium on that are using pi as a as an engine, but it does provide some some additional.

Benefits to the client and a lot of physical as well as we noted that matters as well given how some of our competitors I think have used sizzle in there and their sales process and so we're able to use some simple now with with next gen payroll. So very excited about that rollout on about the.

The progress there on next Gen HCM you heard about.

Our our rollout in Mexico, which is really next gen HCM with Pi. So we have.

On a handful of clients now in four countries that are actually running on next gen HCM with Pi.

Again very early we like to talk about only a handful of clients isn't a lot, but what was most encouraging is that on a couple of those situations. We were able to use what we're calling a federated development process, which is one of the intentions, whether the investment in the platform, which to be able to build rapidly. So the Mexico client was on boarded.

In from soup to nuts in terms of building platform getting the client and getting them on boarded in call. It six to nine months, so very very impressive for for us to be able to do that so we were optimistic that this will continue to hopefully help us.

<unk> competitively and I think you also asked about how many clients. We have migrated off of work force now onto the pie and remember that it's really not migrating clients off of work force now you just changing the underlying payroll engine theres still on workforce now.

The answer to that is I think not many like this is mostly new logo sales.

In the case of next Gen payroll again.

Underneath workforce now so as we go to market. It is still work force now with the Pi payroll engine beneath it and just to again footnote I think I said this last quarter workforce now is a next gen platform. We don't talk about it that way because we haven't been talking about it that way.

But workforce now with Pi is a nexgen platform.

Got it appreciate it sounds very optimistic thank you.

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

Great. Thank you Hey, Kevin.

Kathleen you talked about the digital transformation a couple of times.

Where are you kind of in that process and I think the last number you referenced was about $150 million benefit is that still the way to think about it in the $1 50 range or does that get accelerated based on some of the investments that you pull forward as a result of the Q2 outperformance.

Yes, Kevin Thanks for that question.

That 150, it still follows.

On estimated benefits for the year.

Fiscal year from digital.

Other transformation effort.

Price.

Where are we at.

Journey.

I'd say, we're in the early days early.

You know I mentioned.

These projects are not.

To implement the project.

<unk> projects that you roll out these are.

How do we.

Procure or build the right tools to take work out and out of the system.

How do we well some of it can be a little cash flow license data loss.

On the chatbot functionality and how many inquiries.

Some of those could go faster, but some of them could be longer projects like.

Supporting our implementation teams with tools that we're building.

So my view is we're in the early innings here, we've had some good success thus far.

We continue to stay very focused on building pipeline of projects and every single part of the company that we expect and that we go to to say what are you doing to digitally transform what you do how do you take work out of the system minutes.

Front office on its back office. So we got a lot more work to do there and I think that's a really good thing.

And just one quick follow up maybe three Carlos as it relates to that.

Does that impact the addressable market because I'd imagine it probably stands at in terms of average client size and price that is there any way to frame what the transformation, it's going to mean in terms of addressable market longer term.

And it's a good it's a good question in terms of something that we think about a lot right is I think one of the things we want to try to get as we talked about share of wallet, new logos, but if we can expand our addressable market that is very helpful and it's really it varies business by business, but as an example, we are I think.

In the early stages, I would say still not ready I think on multiple sustaining about it but we think that on the down market. There is part of the addressable market that we could do better with if we had a more kind of end to end digital product. If you will in terms of so this would be a complement to run that.

Would compete in a segment of the market that we don't compete in today.

Likewise, if we go all the way to the upmarket and.

In international the acquisition of <unk> was intended to kind of bolster I think a market debt.

That is growing and I think it has expanded by our acquisition of solar ago.

And in the next Gen platforms. If you will are for sure intended to expand the addressable market. So for example.

The next Gen payroll engine.

Again with workforce now would probably be.

Have more appeal to.

And in house user, even though we don't think there's a lot of those left there are still people who use kind of in house software. If you will and I think that this next gen payroll platform combined with work force now provides more control, which is something that for the last 20 years when we survey.

The market if you will to assess what's addressable there was always this kind of outsourcing versus in house and I think what's happened is that cloud technology has blurred that line, but theres still a line there and the ability to have the payroll platform.

Perform some other things that people want from a control standpoint, when they are in house I think expand that addressable market and then lastly in terms of next Gen. HCM I mean, clearly the big play there in the big investment was to expand the addressable market in the upmarket for us both the larger more complex clients, but the clients will also.

Had.

HR needs debt.

We were not necessarily able to satisfy some of our older platforms. So definitely I think a lot of opportunity and it's a focus on key focus of our strategy in terms of how we develop our products is to expand the addressable market, yes, Kevin you could think about as our.

Digital work, our digital transformation is net too.

Improve and accelerate on both top line and from an efficiency productivity standpoint from a top line perspective, whether it's.

The addressable market and accessing that through nexgen or other feature.

Improvements that we're making sales cycle times shortening that cycle time to get something through the sales process. We're working on that in our PEO business.

Improving the digital work improving service.

With improved service, therefore improved MTF, therefore improved retention. So it's meant to target both acceleration from a top line perspective, and as we've talked about taking work out of the system on productivity.

Thanks, so much.

Yeah.

We have time for one more question.

Last question comes from Tien Tsin Huang of Jpmorgan.

Your line is open.

Hey, Thanks, so much good results on.

Appreciate the.

Very clear guidance as well just a question on a follow up clarification just on the Kpis.

Carlos that you're most focused on the second half just hearing everything you've talked about positive revisions to retention bookings I'm curious if there are any underappreciated kpis at this point.

Over the cycle that we should be tracking.

Gauge the sustainability of.

The improvement that Youre talking about as we get through the.

The second half of the year and just a clarification I think you touched upon it in the and the last comment here just a 25 percentage of sales.

Of next Gen payroll that would that have been attained without without it.

Are those.

On a cloud platform that are looking for a cloud.

Like the controls and what not that Youre talking about debt that that was the condition for considering.

Considering I'm just trying to understand.

Why they didn't consider it before if that makes sense.

Yeah listen I think unfortunately, I don't have that level of detail on I'm afraid to say, we could probably maybe follow up to give you a little more color and that's why I tried to use the words not scientific so our sales force. We obviously are very very focused on the rollout of our next gen platforms and so as we we try to keep close communication.

Keep close tabs with our sales force on how it's going and they came to US and said, we think we got 25% more logos as a result of Nextgen.

Payroll then we would have gotten in the past I'm guessing they're going to be a number of different reasons for that including there may be a little bit of a simple factor there right in terms of because we as you know we run fully compliant payrolls, we help our clients with PPP loans I mean, we were able to do everything like our existing.

Platforms are the most robust most comprehensive most effective I believe of course on bias in the in the industry, but there are incremental improvements right that give people whether it's the control aspect that I mentioned or the sizzle that help sales and it's no different than you go buy a car.

Car and there is five different models of the same car and people buy the five different.

Cars, and but you have to have new cars every now and then.

I think it's every five years whenever that cycle is.

And I think that's maybe some of what's happening here, but we'll get we'll try to get you a little bit of additional color. If we if we can but that wasn't intended to spark a kind of a new level of disclosure. If you will about what percentage of our 25% came as a result of which feature but we'll try to provide some color either in the interim or certainly on the next.

Call when we're going to have many more clients on next gen payroll on will have a little bit more.

Data for you on the question you had about Kpis I would say you hit on all of them like Theres a lot of important ones that you just that you touched on that we watch on that we share with you. The other ones that I think are important are ones around productivity. Both for sales, but also for our service and implementation associates and in particular on sales that's part.

Why I was talking about the kind of the underlying trends improving and us being so optimistic about the future is.

There is no reason why our sales force cant get to the same productivity. They were pre pandemic and then continue to increase their productivity as they had been doing for many many years and so that's one of those kpis that we watch very carefully is what's happening to that sales force productivity number quarter on quarter and whats it.

Expected during the third quarter and in the fourth quarter and Luckily it's on track and it's something that we watch very carefully likewise.

Likewise, the productivity per service Rep productivity.

Productivity of implementation. So as an example, how many new clients can and implementation Rep on board and these were all impacted by the digital transformation that Kathleen was talking about because our goal is to make it easier and better for our clients and as a byproduct hopefully reduce our operating expense is not reduce our <unk>.

<unk> expenses, and then figure out what happens after that because the most important driver of long term value here.

Client retention.

And I can tell you that if we maintain these client Retentions you guys should go through the math on how much faster our revenue will grow on a normal steady state basis with the same bookings.

It's pretty powerful right and obviously, that's incremental revenue growth that doesn't have incremental sales expense or implementation expense. So the most important thing for us to do is to make good on our commitment to our clients, but having said that those productivity metrics are important too in determining kind of our ability to drive margin.

Into the future, but those are two big buckets of expense, our service and implementation costs and again, that's another item, where the <unk> would really be around not just NPS on retention, but around productivity and the good news. There is that we've been showing really good productivity improvements while we've also been dry.

Giving very good retention, which speaks to the success of our digital transformation efforts.

Very clear thanks, so much.

This concludes our question and answer portion for today I'm pleased to hand, the program over to Carlos Rodriguez for closing remarks.

Well I think I mentioned already that it's hard to imagine.

When we were just a quarter ago, because I think on the same same call a quarter ago. There was no vaccine.

There was no.

Emulous approved and there was no new administration in Washington, We were still waiting for or looking forward to an election. So besides all of the great things that our associates are doing in terms of execution, our sales force and all of our associates in terms of helping our clients through this and helping each other.

I just thank God for where we are today versus where we were last quarter. Because we know now we think we knew some of us new debt, we would be okay. Eventually, but now we know for sure that we're going to be okay.

In terms of our friends our families, but also our economy and I think our companies on the things that we that we also value on a professional on the professional side. So.

Very excited about.

The prospects of getting through the next month or two which I know, we're going to be challenging for all of us.

But also looking forward to much better times ahead to plenty of pent up demand to growth and productivity to strong GDP and all the great things that are going to happen. Once we finally defeat the virus and move on so I would just close by saying Thank you to the scientist the pharmaceutical companies and everyone else.

Who got us to where we are today on that continue moving forward as a country and as a globe and I. Appreciate you all joining the call on listening to US today. Thank you.

Ladies and gentlemen, this does conclude the program you may now disconnect everyone have a great day.

[music].

Yes.

Yes.

[music].

Yes.

Sure.

[music].

Yes.

[music].

[music].

[music].