Q1 2022 Automatic Data Processing Inc Earnings Call
Yeah.
Good morning, My name is Michelle and I'll be your conference operator at this time I would like to welcome everyone Adt's first quarter fiscal 2022 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 answer session.
We would like to ask a question. During this time simply press Star then the number one or your telephone keypad to withdraw your question press the pound key.
Thank you I will now turn the conference over to Mr. Daniel Hussain Vice President Investor Relations. Please go ahead.
Thank you Michelle and good morning, everyone and welcome to Adp's first quarter fiscal 2022 earnings call participating today are Carlos Rodriguez, our president and CEO and Dan Maguire our CFO.
Earlier. This morning, we released our results for the quarter our earnings materials are available on the SEC website, and our Investor Relations website at investors ADP Dot Com, where you will also find the investor presentation that accompanies today's call.
During our call, 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 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 SEC for additional information on factors that could cause actual results to differ materially from our current expectations and with that let me turn it over to Carlos.
Thank you Daphne and thank you everyone for joining our call.
Like to start by welcoming Don Maguire, our new CFO, Dan has been with ADP since 1998, when he joined the ADP, Canada team as VP of finance.
He has held a series of roles with increasing responsibility. Most recently, serving as president of our international business, where he's done a phenomenal job of driving growth and profitability in a very complex environment.
I know he's looking forward to meeting all of you.
Now moving onto the quarter. We are pleased to have delivered a very strong start to the year with 10% revenue growth and a 140 basis points of margin expansion, resulting in a 17% increase in adjusted diluted EPS.
While we did expect our Q1 revenue growth to be above our prior full year guidance range. This result was still above our initial forecast and underscores the strong position we're in as we emerge from the pandemic.
I'll, let Don go through the details after I cover some highlights.
Our es new business bookings results were very strong representing another record Q1 bookings amount and we're ahead of our expectations with outperformance driven by continued strength in our HR portfolio and our international business.
With this impressive bookings performance across the enterprise, we're pleased to raise our es bookings guidance for the year. After just one quarter as we're now feeling even more confident about our sales momentum.
Even stronger was our CEO bookings performance, which was also well ahead of our expectations and a key reason that we are raising our guidance for average worksite employee growth for the year as Don will outline for you.
As you will recall, we've been sharing our sales productivity trends over the course of the pandemic and I am pleased to report that in Q1, we were well above pre pandemic levels.
We reached this result, several months sooner than we expected and we expect this to continue as we look ahead.
Our es retention remained incredibly strong as well as we shared last quarter. We believed it was reasonable to assume a slight step back in retention from the record 92, 2% level, we experienced last year, but in Q1, we did not see meaningful deterioration.
Instead, we actually saw further improvement in our overall es retention to a new record Q1 level. Despite a modest decline in our small business division where out of business losses started to trend back to more normal levels compared to the below normal levels last year.
We're continuing to assume a slight decline in our retention outlook for the year, but clearly we are pleased with our performance so far and the upward revision in our retention outlook reflects the strong Q1 performance.
Our es pays per control was solid with 7% growth in the quarter about in line with our expectations.
We feel that a number of questions. These past several months about what we think might drive workers back into the labor force while.
While we don't have an answer to that question, but we can tell you is that we continue to see positive trends are.
Our clients are eager to hire and we are seeing workers returned to the labor force, even if it's gradual.
As a result, we expect to benefit from above normal above normal level of pace per control growth over the course of the year.
There were multiple drivers to the outperformance in the PEO, including the strong level of hiring within the client base.
William retention and the improved bookings performance I mentioned earlier.
We're very pleased with the momentum we see building in the PEO and we're raising our full year guidance accordingly.
In addition to the financial highlights there are a few product highlights I wanted to share with you.
First I am excited to share that we completed the initial rollout of our new user experience for run.
As we shared with you last quarter. This represents the most comprehensive refresh we've done since the launch of run and we're very proud that in a matter of a quarter, we were able to seamlessly move hundreds of thousands of clients to a new and better user experience.
Early signs indicate the client satisfaction scores should trend even higher than the record levels, we already have in our small business division.
So it's a really great outcome and represents a very strong execution by the team.
I'd like to also share that at the annual HR Tech conference a few weeks ago, our innovative diversity equity and inclusion tool on the data cloud platform was named a top HR product.
This recognition adds to Adp's long standing history of award wins at the conference, marking an unprecedented seventh consecutive year ADP has been honored for its innovative HCM technology.
You can probably tell from the number of times, we've highlighted data cloud that our velocity of innovation has increased significantly there.
With this the Eni solution as an example, we've seen over 50% of active users of the solution to take action and realized positive impact on their D. Eni measures.
I am proud that we provide solutions that drive real positive change for our clients.
This seven year track record demonstrates that innovation is part of Adp's DNA and then we have a strong growing agile R&D team committed to delivering solutions in the market that continue to push the boundary of what HCM solutions can do for employers and their employees.
As I said before we're very pleased with a fantastic start to the year, we look forward to sharing even more of the ADP story with you at the upcoming Investor Day in November and now I will turn the call over to Don for more detail on the quarter any outlook.
Thank you Carlos and to everyone on the call good morning, and nice to meet you.
Our first quarter represented a strong start to the year with 10% revenue growth on both a reported and organic constant currency basis. Our adjusted EBIT margin was up 140 basis points much better than expected and was supported by higher revenue and overall cost containment our tax rate was up slightly in the quarter versus last year.
But we also benefited from an elevated pace of share repurchases following our debt issuance in may.
Combined those factors contributed to a 17% increase in our adjusted diluted earnings per share.
Moving on to the segments, our employer services revenue increased 8% on a reported and organic constant currency basis, our strong Q1 bookings performance and record retention contributed to this performance.
As a reminder, we did continue to lock some of the lower revenues, we had last year in some of our volume related businesses, including recruiting and background screening.
Our clients finding interests represented only a slight headwind in the quarter as our 40 basis point.
The decline in average yield was offset by fantastic balance growth of 22% driven by client growth and employment growth higher wages and the lapping of the payroll tax deferral last year.
<unk> margin increased 150 basis points on strong revenue performance and overall cost containment.
As Carlos mentioned, our PEO had another terrific quarter.
Average worksite employees increased 15% year over year to 629000 and revenues, excluding zero margin pass throughs.
2% supported once again by favorable mix trends within the employee base as well as improving sui rates.
Total PEO revenue grew 15%, which included a modest drag from lower zero margin pass through growth in Worksite employee growth as expected.
<unk> margin was up 70 basis points in the quarter driven by operating leverage.
Overall, our Q1 results reflect a very strong start to the year and delivered ahead of our expectations on practically all fronts.
Let me now turn to our updated outlook for fiscal 2022 four.
For Es revenues, we now expect growth of 5% to 6%, which were raising 50 basis points at the midpoint. This is driven by several underlying factors.
Raising our expected range of Es, new bookings growth to 12% to 16% as we mentioned we had a better than expected performance in Q1 and reached pre pandemic productivity earlier than we had forecasted.
We're also raising our es retention and we are now assuming a decline of 50 basis points off of FY 'twenty, one all time highs versus our prior outlook of a decline of 75 basis points.
As with bookings this is primarily a function of the strong Q1 performance.
Our continued assumption is that as clients continue to reengage in the marketplace. We may experience a slight decline over the course of the year, we expect to have significantly more clarity once we get through the calendar year end period, where we typically see most of the switching activity.
For U S pays per control, we're making no change to our outlook of 4% to 5% growth. We continue to expect a gradual recovery in the overall labor market and the 7% growth in Q1 was about in line with our expectations.
And then for our client funds interest revenue, we're raising our outlook by about $15 million to a range of 422 $430 million as we are raising our balanced growth assumptions by about 4% to growth of 12% to 14%.
Our outlook for client funds yield. Meanwhile, is unchanged. Despite the improvement in the yield environment, primarily as our stronger balanced performance actually created a temporary mix shift the overnight investments until new securities are gradually purchased but that said the favorable shift in the yield curve is cooler.
Very helpful to us and we will certainly benefit our multiyear client funds outlook all else equal.
For Es margin, we now expect an increase of about 75 to 100 basis points up from our prior range of 50 to 75 basis points.
While we did outperform meaningfully on margin in Q1, we are also seeing some additional expenses over the rest of the year, including higher head count and our outsourcing businesses.
Meanwhile, we continue to expect transformation initiative benefits, including our digital transformation to offset a year over year increase in facilities <unk> expenses and other returned to office expenses.
Moving onto the PEO we.
Now expect <unk> revenues to grow 11% to 13%.
Average worksite employees to grow 11% to 13% and revenues, excluding zero margin pass throughs to grow 12% to 14%.
This two percentage point ratings across the board is a function of both our strong Q1 bookings and overall performance as well as an expectation from stronger hiring within our PEO base to contribute over the remainder of the year.
Our PEO is very well positioned to capitalize on growing levels of client demand coming out of the pandemic and if we continue to drive outsized booking performance over the rest of the year.
Could represent further upside to our outlook.
Following our strong start to the year, we now expect a range of flat to down 50 basis points for the year for an improvement from our prior expectation of down $7 25 to 75 basis points on our margin.
As a reminder, we are growing over a very strong margin results in fiscal 2021 and are also expecting elevated selling expenses. This year from strong bookings performance.
Putting it all together for a consolidated outlook.
We now expect revenue to grow 7% to 8% following the strong 10% Q1 performance. We now expect the remaining quarters to grow closer to 7%, which is higher than our prior forecast.
For adjusted EBIT margin.
We now expect an increase of 50 to 75 basis points as.
As we shared last quarter, we expect our margin improvement to be back half weighted most specifically in the fourth quarter.
Our current expectation is for a slight margin decline in Q2 and Q3.
We're making no change to our tax rate assumption.
With these changes we now expect growth in adjusted diluted earnings per share of 11% to 13%.
As I think you've heard US say a couple of times now we are very pleased with our Q1 results and we're happy to be raising our guidance. This early in the year.
This is still a dynamic environment and there are a wide range of potential outcomes and we believe our guidance is appropriately balanced given these conditions. However.
Our associates continue to drive better than expected sales results client satisfaction.
Efficiency and service and implementation, we would see opportunity to deliver additional upside to our outlook.
Before we move to Q&A I wanted to share two things first I look forward to meeting everyone, perhaps virtually for now but eventually in person as we get back out on the road to meet our shareholders and the investment community.
And second is that we are very much looking forward to our upcoming Investor day in a couple of weeks on November 15th.
Having run one of our largest businesses for years I can tell you. There is always much happening here at ADP underground and although it all tends to roll up to a very stable financial picture I can tell you. There's a lot of excitement among our associates for the things that we're working on.
We hope to share some of that I hope to share some of that excitement with you in November.
And with that I'll now turn it back over to the operator for Q&A.
If you wish to ask a question. Please press star one please be aware the allotted time for questions. Please ask one question with a brief follow up.
I'll take that question first question on the line.
So mark <unk> with Jefferies. Your.
Your line is open.
Hi, good morning, and thanks for taking my questions. Congrats on the really strong start to the new fiscal year. So Carlos maybe I wanted to unpack the drivers of the strengthening U on the new bookings that productivity is clearly one but how should we think about.
How should we think about the product side and within the product portfolio, where that strength was in terms of driving your bookings.
So we even though what we really talk about is es bookings just want to start off by saying that the CEO bookings were.
Incredibly strong I don't know how else to put it so kind of call. It orders of magnitude in terms of growth rate higher than even the es bookings growth for the quarter. So that was really good to see so that's kind of assign to your question about products that.
Think the market is really searching for solutions coming out of this pandemic that help them with obviously people issues and so but there is also a talent crunch. So people are looking to to obviously attract and retain people in this environment, where every company, including ADP is going through some of these challenges in terms of attracting our own.
Internal internal talent and then you have another dynamic which is if there are shortages of labor in various categories. There. We're hearing that theres also shortages of talent in kind of the HCM category in general that should create a little bit of an advantage for the clinical outsourcers right. So as you know our model is.
We provide great technology and software, but we also do the back office work and we take accountability for outcomes and I think when people are struggling to hire people to.
Do the work in their HR department or their payroll department of their benefits Department.
We're here to help and so I think those outsourcing solutions are getting a lot of tailwind. We also saw because of the easy comps and I think you've heard in Dan's comments.
Some of the things like our recruitment process outsourcing business and our screening and selection business, which were really at very low bookings levels last year at the same time have rebounded.
For obvious reasons incredibly incredibly well, but having said that it was really across the board that we had very strong growth in workforce now we had very strong growth in the upmarket we had strong growth even in the down market. Although last year at the same time I think we mentioned that we had what we call client base acquisition, which is not <unk>.
<unk>, an M&A deal, but we were able to buy a large book of business that we converted.
That really some of that flowed through our through our bookings. So it made that comparison, a little harder on the on the SBS side, but if you back that out.
It was equally strong on the SBS side as well so I would say that that could give you a little bit of color, but it really was across the board. It just shows how.
Connected we are to the economy. The GDP when it comes to bookings, which is something that we've had as a theory here for <unk>.
For some for some years now and we just have a very strong recovery in a very strong economy, and it's a great environment for our sales force.
That's very helpful and then Don maybe one for you on the retention side. So.
Obviously, it's really impactful and to raise the outlook one quarter and I think signals the strength that youre seeing but just help me unpack the slight uptick in the SMB side, moving a little bit more toward normal in terms of business failure should we think that that the offset there is even better than expected returns.
In the mid market or.
Or on the enterprise side can you maybe help us think about it across the customer size spectrum, how to balance those different moving parts.
Yes, sure I think it's fair to say and we commented on it that the retention is at an all time record for a Q1, so that's fantastic and better than we had expected.
<unk>.
The expectation as we went into the year was to see particularly in the smaller business segment to see that slipped back a little and indeed, it has but it hasn't slipped back nearly to the extent that we had anticipated. So we're even better there against what we had previously thought of course, then that means that we did have and continue to have.
Have good retention levels in the mid market in the upmarket. So we expect that to we expect that to continue however.
As you know the cyclicality of our business and the seasonality of our business, we will need to get through.
Through the calendar year end, which is when we see most of the switching activity because of the drivers and the new starts to the year et cetera. So we are positive and we did take our retention estimate up for the year and we'll see if we will see if it holds and perhaps is better than we expected.
Great. Thanks, gentlemen, and look forward to seeing you at the analyst day in person and then a few weeks. Thank.
Thank you.
Please proceed.
Good morning, and thank you for taking my questions. This is actually Mihir bhatia on for Jason.
Firstly, congratulations on the role maybe.
Maybe you can talk a little bit about your priorities in the CFO role and how they could maybe look a little different than under Kathleen and then just relatedly should we expect that update to multiyear targets at next year's Analyst Day, and then I have a follow up thank you.
Yes, so I guess, what I would say is I think with ADP for a long time now and I guess, what I've observed in the roughly 23 years old and what this company is that ADP has always had a very strong financial organization with a strong finance leader and I want to make sure that we continue that and.
So I'm sure we will.
I think that the priorities that we have are well set out in our strat plan previous investor days et cetera. So we will probably be provided the WOMAC on update on those things when we get together on November the 15th.
But.
Let's wait till then and I don't think youre going to see any dramatic changes, we pretty much have a well discussed and well disclosed trajectory and plan and we will update you on that on November the 15th.
Understood. Thank you and then just if I could ask about just your sales force plan just purely seeing some very strong momentum in the market. So I was wondering if you have any plans for sales force growth.
2022, and which part of the market those ads would be constant greeted and also anything notable to call out in terms of just the mix of new logos versus cross sells in your bookings for the quarter OIBDA forecast. Thank you.
I think in this.
In this kind of environment given the very first comments, we made about the economy.
You have both the economy as a tailwind and you have now in the U S. I think an administration that is kind of more inclined to regulation and to particularly employer regulation and so you have I think a very strong backdrop.
I would say is that foreseeable future in that environment. Historically, what ADP would do is we would add as much sales capacity as possible that doesn't mean that we indiscriminately higher because we're able to hire and onboard and train and so forth and we have to make those people effective but I would say that we have a strong appetite for <unk>.
Knowing our salesforce, but also for growing our investment in marketing, whether it's digital marketing or more traditional advertising and thats exactly what we what we plan to do having said that I would tell you that we've had challenges I think like everyone else in terms of in terms of hiring it's a very difficult labor market.
So I hope that we can fulfill those those expectations of those dreams. If you will of growing our sales force as fast as possible.
But that's the only thing that I can see getting in the way, we obviously have the capital.
Have the I think the desire and we have I think the experience to be able to execute once we hire those people to get the sales get the clients implemented and then hopefully derive the benefits of that revenue for in many cases, 15 20 years, depending on which.
Which business unit were in so I guess I would say strong appetite for both head count growth, but also other investments in sales, whether it's marketing digital marketing sales tools all across the board.
Thank you.
Our next question comes from Tien Tsin Huang with Jpmorgan. Your line is open.
Okay. Thanks, so much good results here just on the PEO side.
I'm curious how much of the year.
General improvement there is secular versus versus cyclical and I know Carlos you talked about putting more.
Sales energy there as well so just curious what changed.
So at the risk of.
Because I think it's.
We had a strong feeling that the PEO business was going to.
B strong coming out of this pandemic as it has been strong coming out of prior clinical recession, though this is a different recession. So so you have to be careful about.
Any any specific predictions.
But we had some challenges I think coming out of the pandemic with.
We were selling in the PEO was slightly smaller and just ballpark it around 10% smaller so let's say that the average I'm just going to make up the numbers, let's say the average new clients hold in the PEO was 30, worksite employees and all of a sudden prior to the pandemic and that has been.
Political growing slightly over the years all of a sudden it came down to like 27%. So 10% decline. So even if you saw 10% more units.
Units are 10% smaller you basically ended up in the same in the same place. So that's a little bit of what we were expecting we believe that's a 100% related to the economy and to what was happening with the pandemic.
Now what we've seen in the recovery is both the unit growth is still strong as it was prior year and now our unit Si has recovered and so the combination of those two things has created really really strong.
Growth in the first quarter in the in the PEO. The only caveat that I would add also is that we.
We did have a kind of a transition into a new year as you know our fiscal year ended on June 30.
And in some cases, our businesses tend to perform really extremely well in the first quarter when they come out of a year, where I wouldn't call. It underperformance because it was still a good year last year, given the circumstances, but but clearly the PEO. We were very I think clear that the PEO has been true.
<unk> in terms of recovery when it comes to bookings, but we were seeing in yes, and now as we expected.
The horse race now the horse in the lead has changed so now the PEO is the one leading the race.
Good color. Thank you Carlos.
Our next question comes from Kevin Mcveigh with Credit Suisse. Your line is open.
Great. Thank you and congrats on the results and Dan welcome.
Hey, I Wonder could you give us a sense Carlos.
From a sales perspective, despite the tight environment you are still delivering.
Is there any way to think about the go to market strategy. This cycle as opposed to last and how maybe technology, maybe more of a mix down market helps drive that process I guess, what im saying is there more leverage in the sales force today than you've ever had and is there any way to maybe put some parameters around that.
I think there is definitely more leverage in the sales force than we've ever had because I think maybe what you're alluding to.
Our salesforce like a lot of other.
Of our competitors had to go to 100% virtual for a number of months and I'm sure every competitor handle it differently in terms of how long they were virtual versus when they went back India in the field, but.
That process, which we had been learning about for 2025 years like we had almost a third of our sales force already selling what we call inside sales. So they were able to sell virtually they had been in the building, but it didn't really matter, where they were in a building or in their in their homes. They were still able to sell very effectively so that was an easy transition for that portion of our sales force.
And then we really with the appropriate tools and.
Some some training and some some learning from our inside sales force, we really moved our entire sales force to sell virtually so I'd say now we're really in a period, where we're going to sell based on however, the client wants to be sold and so if the client wants a combination of an initial video call on zoom or Webex will do that.
If the client wants an in person visit we will do that if they want to close the deal with an in person, but start with a video we can do that so I think theres no question that the Salesforce leverage has increased for us, but admittedly probably four or our competitors as well our reach has definitely been extended theirs.
No question about that.
And about that in terms of tools, but also philosophically I think we are now I think able to sell in a I mean to use a cliche in Omnichannel way. We're also investing heavily in digital marketing. So you mentioned the down market and I would just add that because of some of the comparisons of the down Mark.
It had.
That was not what drove the sales results. This quarter. It was actually all the other businesses, so, but we do see the underlying strength in small business, but because of the difficult comparison.
Not reflected in the percentages, so not trying to minimize the strength and the momentum in the down market I'm trying to emphasize the strength everywhere else in the in our portfolio.
And the rest of the portfolio also can benefit from digital tools digital marketing, but it's not quite as leveraged as it is in the down in the down market. So I think it's a combination of a lot of different different things, but the overall I think comment would be there's no question that there is.
Increased leverage in the sales force and Youre seeing it in terms of the productivity numbers.
We are frankly very positively surprised by the rebound in kind of what we call average sales force productivity. So the actual sales rep level, how much are they selling today versus what were they selling in fiscal year 19.
And.
That is back to and above that level, which is very very pleasing to us.
That's helpful and then just one.
Quick one on retention.
The boost.
All of Q1 over performance because I know the Q2 December is a big quarter in terms of retention things like that or is it just more optimism over the balance of the year or a little of both the currently way to frame how much of that boost was maybe Q1 over performance as opposed to how you are feeling over the balance of the year.
Yes, maybe I'll take that I think our retention certainly we're very happy with the Q1 record we have but I think it's also heavily linked to the success. We've had over the last few years with our improvements in NPS.
And as our NPS continues to go on the right direction and improve.
We're seeing general increases in retention to go along with that and I think thats, what we would expect and that's what we want to see happen. So I think there is some relationship there.
But no doubt the.
Retention is very good and we're benefiting benefiting still I think from a little bit of some of the concerns coming out of the pandemic that clients may have about switching during a time of still virtual for many.
So we're benefiting from that as well and we acknowledge that but as I said, we're very happy with the retention and the progress, we're making with our products and our our service that go along to driving those retention numbers.
We will see a little bit of a step back perhaps.
Sit down down market.
As we said so far it's holding up better than we expected hey, Kevin its debt and just to clarify because we did share in our prepared remarks that the raise was primarily a function of the Q1 result, obviously, we have visibility into October as well.
That makes sense. Thank you.
Okay.
Our next question comes from Ramsey El <unk> with Barclays. Your line is open.
Hi, gentlemen, thanks for taking my call. This morning.
I wanted to ask about margins and forgive me. If you addressed this in some detail I missed a bit of a call earlier, but it came in really strong this quarter well above our model can you speak to the drivers of the beat and also to their sustainability as we move forward.
Sure let me let.
Let me start off by saying that the margin in the first quarter was a record for us.
And it was above last year as we just reported but if you go back to last year last year was above the prior year and so.
It's.
It's quite quite impressive.
That we had margin improvement last year, given that we were one quarter into a pandemic, but is even more impressive is that we had margin improvement again, having said that thats. The victory lap. So then the other part of the comment is we had way higher revenue than we had anticipated which is.
Gratifying, we're very happy about about that and it was really in both Es and PEO and it was in a bunch of different places.
Slightly better pace per control retention was better you heard all the all the comments we have just a lot of things working in our in our favor here.
<unk> expenses have not caught up to the revenues and so right now we are.
We are trying to add capacity both for implementation and service, particularly ahead of our year end period and so like other companies is the most important thing for us is to be able to execute on our commitments to our clients and to be able to start all of the business that we've sold and so I would say that that's a dynamic that fee.
Factored into the margin performance, but I don't want to take anything away from the organization or anything away from the operating leverage because it's pretty impressive what the organization was able to accomplish but.
Had we known where we were going to be in terms of topline and volumes. We would have more head count today than we have and there is some catching up to do now to put a fine point on that don't think of we have to add hundreds of millions of dollars of expense were just a little bit behind and Thats why you see.
Keeps consumables asked it yet and as well address it head on.
For the rest of the year.
When you look at the EPS and the guidance, we really not raising by much more than what we had in terms of outperformance in Q1 and Thats because we are going to continue to invest in both sales and distribution, but also in service and implementation and that delay in hiring or deferred hiring helped us in terms of the margin in the first.
Quarter I strongly believe we still would have had a very strong margin performance in the first quarter, even had we hit our head count numbers.
For service implementation and volume related businesses, but I thought I should kind of put that out there because it seems like an obvious question as well.
That's great and I appreciate your candor there a quick follow up for me I was wondering about the human resources human capital management products.
Can you talk about how the cross selling process into your base.
Payroll customers is organized I'm, just trying to figure out sort of how you go about that cross sell process and I guess, how much of a runway do you see for for attach rates with those products.
There really isn't a simple answer to that so the first part I think we will come back to the to the I think the second question about the attach rates. Let me answer that one first the attach rates are there is a couple of products, where we have what I would call. Good attach rates acceptable, let's just say the CEO speak for they could always be higher like our benefits.
Admin tools, our time and attendance systems, but most of our products and our workers' compensation tool in a down market also has a high attach rate, but almost everything else that is quote unquote beyond payroll. So HCM. In addition to kind of our core payroll solutions.
Way Underpenetrated in terms of attach rate. So there is a lot of potential I think for that to improve as well so.
So on the first part of your question in terms of how we cross sell as I started saying there isn't a simple answer because there isn't a simple answer.
In some of our businesses, we have very distinct organizations like in the down market. We have a large downmarket salesforce that works with accountants.
And other third party channels and also sell directly and then we have a sales force that sells our retirement solutions, our 401, K product and our insurance services solution. Those are distinct sales forces that basically share leads with each other and they have incentives to do so.
Our Downmarket business also feeds business to our PEO through also incentives, but there is a separate and distinct salesforce in the PEO as well when you get into the upmarket and into the mid market you start to get some portion of our sales force, which is able to sell multiple products or what I would call bundles.
But even then you still have specialized sales forces in certain circumstances, depending on I think the specialization or the complexity of the product, but in all cases, we have primary sales what I would call primary salespeople. So the quarterback if you will on an account now I'm talking about upmarket.
And in mid market and those quarterbacks are really in charge of making sure that when it's appropriate and when a client has a need that we bring in our specialized salespeople that have.
Specific knowledge about some of our other HCM HCM solution. So I wish I wish I could give you a simple answer.
But that's actually part of the secret sauce right in terms of our ability to grow and outperform some of our competitors is to be able to do that well and I'd like to say that I invented this but this is something that goes all the way back to the Frank Lautenberg days into my predecessors, Gary Art and Josh and this is a well oiled machine in terms of our sales and dish.
Dubuque and specifically on what you just described about the about the cross sell and again to put a fine point on it roughly 50% of our bookings come from cross sell and roughly 50% of our bookings come from new logos each year.
Very helpful. I appreciate it thank you.
Our next question comes from Kartik Mehta with Northcoast Research Your line is open.
Carlos I just wanted to get your thoughts you talk obviously, but new sales and I'm wondering outside of this wage inflation that you're seeing is the cost to acquire clients going down, especially on the SMB side now that there is a new way to sell to them or do you think the cost to acquire clients as we move through this pandemic will go back to what it was.
Wise.
I wish I had a crystal ball in terms of answering where it's going to go but I think just from a mathematical or technical standpoint, the cost of sale is definitely going down because of this productivity increase right. So this is the same leverage that youre seeing in so many industries in so many businesses, including ours on the revenue happens on the bookings.
As well right when you get higher volumes.
It basically indicates higher.
Unless you add a lot of expense by definition, you get higher productivity. So you see this being reported in the press all the time about how worker productivity is up well part of the reason why worker productivity is up is because revenues have recovered volumes have recovered and it's the same people right or you are adding a few more people know.
But maybe people are focusing on is it worker productivity went down right as the pandemic kind of set in and People's revenues went down so I mean, I hate to make it so simplistic mathematically, but some of that is what's happening now. So you do have to be careful about jumping to any medium to long term conclusions because right now our cost of sale compared to last year.
A year before is definitely coming down as a result of a very large increase in bookings without a similar increase in expenses.
Still though are not back to where our cost of sale was pre pandemic and we hope to get there but.
But that will require even a little bit more productivity during during this year, but that would be our expectation is that for the rest of the GDP or interest rates or employment.
Regression to the mean here this is a very large economy.
Adp's, a large company, but the economy is massive and it tends to regress to the mean on a lot of things and we also tend to regress to the mean, so I think some of these things will work themselves out.
And then you have to just get past the base effect from the comparisons and so forth to really understand where you are and we won't know that until we're on the other side. Unfortunately, I hate to I hate to say it.
Well. Thank you very much appreciate it.
Our next question comes from James Faucette with Morgan Stanley. Your line is open.
Yes, Thank you very much and thanks for all the color. This morning, I guess, maybe I wanted to ask the obvious headline question and just wondering how the <unk>.
Ported current tightness in the labor market is factored into your guidance and how are you anticipating.
That changes through the coming fiscal year, and I guess, maybe a product and service related question tied to that.
Are you seeing incremental sales opportunities with some of the tech that you can provide to your clients for hiring et cetera, and is that having any impact on how youre thinking about your outlook and forecast.
Thanks for the question. The second part of your question I think kind of answers. The first part the answer is yes like I think part again part of separate how much is just pure GDP growth new business formation et cetera, but the last part of your question. There is no question that part of our growth is driven by what you are alluding to which is.
Everyone now is looking for help in terms of hiring.
<unk> people and frankly also trying to hold on to them. This is a great environment for us the combination of strong GDP.
An administration that is more inclined towards regulation and then a tight labor market for people, who do the things that we do by that I mean.
Payroll staff and HR staff at prospects and our clients. That's all a very good backdrop for for us. So.
Yeah.
I'm assuming that this is not going to resolve itself overnight in terms of the tightness in the labor market. So we should anticipate some tailwind here on some help for some period of time.
Until that changes and I hate to use the word but some day at some point in the future it doesn't seem anywhere near future given what's going on with government stimulus and.
And government policy.
But someday that might change, but we don't see that in the on the horizon right now on the on the very first part of your question. There in terms of the tight labor markets I would say the overwhelming impact of tight labor markets is positive on AEP I mentioned one of the challenges we have which is tight labor market affects our own internal associates in terms of we have to we have to hire service piece.
Implementation people so it's harder for us like it is harder for anyone else, but that pales in comparison to the upsides like a tight labor market drive new bookings as we just talked about the last part of your question, but it also could create inflationary pressures, which drives our balanced growth. It should drive interest rates higher which is one of the most under.
Appreciated stories I think of ADP is the potential upside.
Our in our flow business and the reason, it's underestimated because there's been nothing for 10 years, because they've been here for 10 years, and it's been nothing but pain and headwind and just when I thought we were coming out of it we go into a pandemic and we get more pain and rates go even lower than they were before but I'm pretty sure they're not going any lower now although I think we may have to follow.
After saying that right I'm, making a statement on on interest rates, but yes.
Hover around here go down a little bit there, but.
Feel pretty certain that the long term medium and long term trend now for interest rates will be at least for gradual increases and I'm not suggesting that there is still underlying demographics that may keep us from getting back to the same kind of 10 year rate that we had 15 years ago or 10 years ago, but I.
I think everyone knows when you look at real interest rates, if there is upside.
On interest rates, so the tight labor market helps in.
A number of ways.
It creates.
Activity for our Salesforce every time, there is activity and there is conversations we're going to win our fair share so thats a great backdrop.
<unk>.
It creates opportunities for our balances I think it creates opportunities for the PEO because some of our billings are actually driven by as a percentage of wages and whenever you have wage inflation. If you are billing on percent of wages.
To some extent that will help that's not like an infinite thing because we won't just allow our revenue to go up indefinitely, we would have to adjust those rates, but in the medium term, we will see I think some tailwind from in the PEO from higher higher wages and wage growth, which is an inevitable outcome of a tight labor market.
That's great color. Thank you.
Our next question comes from Bryan Bergin with Cowen Your line is open.
Hi, good morning, Thank you.
A follow up first on retention I'm curious within the record <unk> retention performance can you just digging a little bit more as far as the drivers there between the still lower out of business closures versus essentially better competitive win rates and anything broadly you can comment on around around clients switching behavior or client reengagement to assess HCM.
Solution.
On the first on the first part I'm not sure how much more color. We can give you. We have we have a fair amount of detail in terms of losses in retention around what we call non controllable losses, which are broadly speaking out of business bankruptcies et cetera, and those have started to trend back up again.
Got back to normal levels, but they started to trend back I think that's not surprising because theres still a lot of liquidity and a lot of.
Stimulus if you will even if it's not new stimulus.
When you have consumer spending doing what it's doing and you have activity doing what it's doing.
It tends to be supportive of small businesses rather than the normal turnover that you have that's natural in the small business sector.
I guess with hindsight like ish, three or six months ago. When we were putting together our plan we had a crystal ball.
We would've probably and we had experienced with the pandemic, we probably would have planned.
Planned the downturn and retention to be slower.
So we've been positively surprised by how long, it's taking for those losses to regress back to normal having said that we don't know that they're going to regress, a 100% back to normal because there is other parts of our retention that are controllable, we call controllable and on our controllable losses, we see those going down as well and I think Don made a comment.
They should not be lost on you, which is that our client satisfaction scores as measured by NPS are the highest they've ever been.
And I give credit to the organization for during the pandemic being able to get through what was an incredibly difficult time for them personally in terms of as they were trying to help our clients, but we also had a huge increase in volume because of all the government stimulus programs and the PPP loans et cetera, and this happened all over the world. It wasn't just in the in the U S.
Fortunately, we maintained relative stability in our head count, we didnt do mass layoffs, and let a bunch of people go so the combination of maintaining investment and also being able to.
To have people I don't know how to describe it to make heroic efforts to help our clients. We were able to maintain those NPS score and actually having them go up and they are sustained at very strong levels and we believe that there is a correlation between strong NPS and retention. So we may be able to see.
Kind of a new record highs for retention on a permanent basis, but it's way too early to make that prediction.
Okay.
And then just follow up on next Gen. HCM platform can you provide an update on new sales there the pipeline installed clients versus live clients any metrics or updates are willing to share.
Sure.
We've talked about over the last couple of quarters as we kind of entered into the pandemic. We obviously had a couple of particularly large clients that were in industries that were particularly hard hit so we got thrown a little bit off course, if you will in terms of our implementations in our starts. We also I think started to focus on.
Patient tools I think we had I don't know how many how many we said we had sold.
As we started we started implementing in starting these clients we recognize that we still have some work to do in terms of implementation tools and making sure that if and when we want to use third party integrators to help us with that that we need to build out those those tools. So there's been quite a lot of focus on.
That effort and we feel good about it we actually I think we also talked about investments in the last quarter that we made to bring in some third parties to help us with the evaluation and in some cases, the build of that to make sure that as we now kind of enter a hopefully a period of time, where we can really accelerate the implementation.
And the growth in the starts of those clients, but it's fair to say and I think we said in the last couple of quarters that our focus turned more to making sure that we have a strong foundation that we had the right implementation tools to be able to get the business started that we intend to have in the next year or two which is <unk>.
Hopefully cui.
Quite a lot of business and Youll hear more details about this when we get to our Investor day on November 15th.
Okay. Thank you.
Our next question comes from Eugene Mooney with Moffett Nathan Your line is open.
Alright, Thank you very much for taking my questions.
I have just a couple on the PR ask them upfront. One is if you look broadly at H, our offerings to appeal and non PR can you.
In contrast for us a little bit the kind of the <unk> solutions and <unk>.
Non P all fully outsource solutions.
How how you see them growing relative to each other the demand and are you seeing any switching between clients who might be using that.
Hey, Chiara solution without benefits switching into the PEO. So that'll be the first one the second I was just curious.
How are you positioned your franchise with market share in a post pandemic environment, given the secular growth seems to be very favorable, but but actually make sure that the ADP win share.
So on the first on the first question I think I said it in my early comments that all of the HR solutions, the clinical outsourcing solutions.
Our very very strong across the board rate upmarket, because we have <unk> solutions in the upmarket we haven't in the mid market and we haven't been a down market in a down market and in the Midmarket. We have PEO. We also have what youre alluding to which is a non co employment.
What I would call a comprehensive services as the name implies it provides a kind of a broader assortment of services. In addition to our traditional software and our traditional tax and other other services there is to my knowledge.
Lot of switching from.
Clients that are what I would call typical clients of ADP that have payroll benefits admin <unk> et cetera, whether it's in a down market in the mid market into these <unk> solutions. There is not a lot to my knowledge of switching across because it typically again if were doing our job from a sales standpoint, you really try.
To find the right fit for the client in some cases the client wants you to do their benefits admin and provide their benefits provide their workers' comp and therefore, one case and other cases the client wants you to only do the administrative back office of the payroll Department and HR Department, which would be the non PEO.
Solutions. So I think if we do our job well, which I think we do in the sales process and in the upgrade process those clients tend to stay on those on.
On whatever solution. They they have they have chosen but to be clear both of them are growing at this point at rates that are multiples of our growth in employer services and so it's.
It's quite quite impressive in terms of the the tailwind in the <unk> and the growth rates that we have in all of the <unk> businesses on the last part of your question, which I think it was about positioning CEO in terms of market share and so forth.
We have 600 and I think it's 630000, roughly we reported Worksite employees average Worksite employees. This last quarter Thats Triple what it was 10 years ago in the first quarter of fiscal year 11.
And so and Thats a higher market share.
And then it was.
10 years ago. So I don't know how else to answer that question other than to say that we have a proven track record of execution to continue to drive <unk>.
Growth in the PEO, it's faster than the market. So I don't think Theres any question about our positioning or our ability to drive market share as evidenced by our ability to execute.
Got it thank you.
And our last question comes from Mark Marcon with Baird. Your line is open.
Good morning Carlos.
John look forward to working with you.
On our next Gen payroll can you give us an update.
In terms of the rollout there please.
So next gen payroll, we're equally excited as we are about next Gen HCM.
In terms of what.
<unk> holds for the future for our for ADP.
The challenge for Us in terms of as we communicated on November 15th we will try to figure out a way to address this issue like we have $15 billion in revenue so as as well as next gen HCM or going in next Gen payroll is going.
It just doesn't.
This is a future impact for ADP. So it's not in the next quarter and I know youre not asking a question necessarily about the next quarter, Mark, but I think it was a good opportunity to kind of throw that out there.
What's driving the performance of ADP this quarter this year and for the next two to three years.
<unk> is not going to be that from a financial standpoint, but in terms of positioning the company for the future in terms of growth and creating competitive differentiation and ability to drive new bookings. They are absolutely critical so I would say that on those measurements were still happy and excited by the progress we're seeing.
With both next Gen HCM as well as next Gen payroll.
We have not gone to general availability, so we're selling.
A lot of Nextgen payroll, but it we're only selling into what we call. The core of major accounts right now of the mid market, which is kind of 50 to 150 and this is no different in terms of the playbook that we use with our transition from our old platform to run in a down market.
Some of our more legacy platform in mid market to than our Nextgen workforce now version, which we're on now so we're doing the same thing with next Gen payroll and the same thing with next Gen. HCM, which is we're doing it very carefully because we have we have a very large installed base and we are not we're going to eventually.
Some of those clients and begin to move some of those clients.
But we're happy with the business and the cash flow that we have in our client satisfaction scores that are record levels on our existing platform. So we do not have any this is not we're not panicking, there's no sense of crisis and there is no we have urgency, but no crisis I want to make sure people hear that.
I don't want you to think that we don't have a sense of urgency because the faster we get these two solutions to scale faster we beat the competition.
Appreciate that and thanks for the color there on the PEO growth can you talk a little bit about two different dimensions, one would be the growth that youre seeing kind of in the established states relative to some of the less mature states and to what extent are you seeing less mature states really catch on.
Clearly given the.
The legislative and regulatory backdrop and then.
Secondly, how should we think about health insurance costs now.
Elective surgeries are starting to come back elective procedures are starting to come back.
Sort of impact would that end up having to start the overall pricing I know that youre not necessarily impacted directly from a margin perspective, but just thinking about the demand environment.
Yes, it's a great question I will take the second part of the question. So hopefully you'll forget about the first part because we don't have.
To prepare for everything in that one we'll have to follow up with you on in terms of.
What regions or what states were strongest in terms of our so I'm going to suspect that they were all strong because honestly like the PEO results were off the off the charts.
<unk> be any state that wasn't.
And strong double digit growth, but we'll follow up on that on that question on the healthcare rates question Youre right that were not directly impacted but youre also right to imply that we're indirectly impacted because it does it does matter right. It matters to our clients what they are paying for healthcare and I hate to be so simplistic.
But I think what Dr regression to the mean in large economies.
The health care World and insurance companies are also similar in terms of they regress rates of losses have an uncanny way a regression to the mean, that's why I always caution people when all of a sudden someone thinks that they have this big decline in either workers' comp costs, our healthcare costs. It usually doesn't work that way, there's usually something that <unk>.
Planes and it usually regressive as back to the mean, so I think if I can try to answer what I think is the implication of your question. There was a temporary decline in things like elective surgery, and frankly health care in general people, even start stop going to their primary care physicians and so forth that decreased health care costs.
Temporarily and I hate to use that word transitory that is now the favorite favorite word it seems to talk about inflation, but it's very clear that that was transitory and that health care costs will come back and so I think to the extent you had below normal renewals, which would be our situation right because we don't take risk on health care.
So we.
We wouldn't see it in our margins and in our in our cost structure, but to the extent that we had below normal renewals. We would expect those rules to go back to normal because we would expect as health care costs go back to normal slowly that those costs would have to be pass through when you look at the healthcare insurance companies.
As much as much criticism as they get they are largely pass through entities theyre paying hospitals and providers.
And other health care cost prescription drugs et cetera, and it's really not a business where you can say Oh, we can't pass this 10% increase in healthcare cost because their margins aren't even 10% and so that business is very very straightforward, which is they try to earn a markup.
Our margin for doing what they do in terms of managing networks et cetera, but in the end they have to pass those costs through we have to also because we are a pass through entity as well and I think those who take risk on healthcare, we will probably see those costs go up over some period of time.
I appreciate the comments look forward to seeing you on the 15th.
Same here.
This concludes our question and answer portion for today I'm pleased to hand, the program over to Carlos Rodriguez for closing remarks.
So there's not much more I can say is we really had terrific results I want to.
<unk> done for for joining and I think youre, all going to be very happy to meet him in and get the benefit of his experience and ADP more broadly. Besides just in the finance organization because he has kind of real world business experienced within ADP as well.
I just want to and the way I, usually end, which is thinking our organization and particularly our frontline associates.
Because.
I'm not sure what's going on in other companies, but we would not be able to get.
Our goals accomplished without people going above and beyond I think we mentioned the tight labor market and that we're a little bit behind in terms of our hiring that means our people are working extra hard.
And economists said, that's an increase in productivity I would say that's just people working heart.
And we really appreciate it our clients appreciate it I think our shareholders appreciate it.
I think a lot of them listen to this call, but you should be aware of that whether it's here in other companies. There's a lot of people out there that are pushing really hard to deliver and many of us whether we're as consumers or buyers of products and businesses and so we're frustrated by what's happening in terms of supply chain and some of these other things but all.
The IC is a bunch of people working really really hard to try to like fulfill the needs of our clients and I think that's happening across the whole economy, and I think we need to show a little bit of patients with with each other because this will all I think normalized.
As these variant this variant now receives I mean, youre seeing already in some of the mobility data things will slowly get back to normal people will come back into the Labor force and this great economy that we have with function the way, it's supposed to function, but in the meantime, I want to thank our associates for what they have done so far.
Whether it's this last quarter and what theyre going to have to do to get through this year, and which is going to be very challenging given the volumes, we have and the capacity. We have so for that I. Thank them, but I also thank all of you for listening and for being supporters of ADP. Thank you.
This concludes the program you may now disconnect everyone have a great day.
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