Q2 2022 Automatic Data Processing Inc Earnings Call

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 2022 earnings call I would like to inform you that this conference is being recorded and all lines have been placed on mute split in the background noise.

After the Speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad to try 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 welcome everyone to Adp's second quarter fiscal 2022 earnings call.

Participating today are Carlos Rodriguez, our CEO and Don Maguire our CFO .

Joining us for Q&A is Maria Black President of ADP.

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 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.

That let me turn it over to Carlos.

Thank you Tony and thank you everyone for joining our call.

Pleased to have delivered strong second quarter results, including 9% revenue growth 20 basis points of adjusted EBIT margin expansion and a 9% increase in adjusted diluted EPS all ahead of our expectations.

This remains a very dynamic and challenging business environment for our clients and prospects. We believe the value of working with a trusted HCM partner with more than 70 years of expertise is more compelling than ever.

And we see evidence of this reflected in our continued sales momentum as long as our very high levels of client satisfaction and retention, which continues to drive upside to our results.

As usual, let me start with some highlights from the quarter.

Our employer services, new business bookings results were strong despite the onset of omicron variant at the end of the quarter.

We experienced a record Q2 bookings level and like Q1, we were pleased to be ahead of pre pandemic sales productivity levels.

We experienced robust double digit growth in nearly every one of our businesses.

And as we saw earlier in the year, we experienced even stronger performance in our PEO segment, where demand is especially robust.

As we outlined at our November Investor day, the pandemic and the dynamic macroeconomic environment have made running HR more challenging for our clients today are clients must navigate a tight labor market across their organizations.

Higher than usual worker turnover, new legislative requirements and in many cases staffing challenges specifically within their payroll and HR departments.

The strong broad based demand across our Es and PEO segments reflects the fact that clients of all sizes are increasingly looking for greater levels of assistance and expertise to help address their needs in some cases seeking our intuitive comprehensive software offerings, while in other cases seeking a more fully outsourced solution.

We believe we provide extraordinary value through all business environments and today's environment supports the continuation of a positive decades long secular trend in global HCM.

Moving on to employer services retention, we are pleased to have experienced continued strength.

Although our retention in the quarter did declined very slightly versus last year's elevated level declined by less than we had anticipated and would have represented a record Q2. If you were to exclude last year's pandemic impacted retention levels.

With overall client satisfaction once again, reaching a record level. This quarter. This strong retention is not surprising to us.

Moreover, early January results look strong, giving us greater confidence for the rest of the year and we are pleased to be raising our retention guidance once again.

Our ESP for control metrics came in slightly better than expected at 6% growth in the quarter.

We are very pleased very pleased to see the U S unemployment rate back below 4%, which reflects the U S economy's ongoing improvement and resulting strong demand for workers.

Meanwhile, Labor force participation is gradually recovering and as it does we should continue to benefit from higher than usual pays per control growth.

Over the first half of the fiscal year. We've tracked ahead of our expectations and are now raising our pays per control outlook for the full year.

In the second quarter, our PEO had stellar performance once again and was well ahead of our expectations with 15% revenue growth and 16% average worksite employee growth representing acceleration from last quarter, Despite a slightly harder growth comparisons.

The across the board strength in our PEO continues to be driven by several factors, including better than expected retention in bookings contributing to client growth.

Better than expected hiring within the PEO client base further adding to worksite employee growth.

And better than expected wage levels further adding to revenue growth.

While some of these <unk> will normalize over time, we remain very confident in the outlook of our PEO business over the coming years.

During our November Investor Day, we also outlined key aspects of our growth strategy by product and by business unit and we are confident about sustaining healthy growth and our fast growing businesses and optimistic about accelerating our growth and our businesses that continue to transition to our most modern offerings.

One aspect of our growth strategy that we discussed is an overall greater focus on marketing, which we believe will allow us to better activate our existing scale distribution.

We believe at ADP, we can deliver a lot of incremental value from tactical investments and we look forward to sharing more in the very near future.

One key product initiative, we talked about during investor day that cuts across our businesses is the development of a new unified user experience and in the second quarter. We were pleased to have made further progress on this effort.

As a reminder, we shared last quarter that we moved our run client base over to the new ADT UX and now only a quarter in early indicators suggest that clients are in fact, finding it more intuitive, resulting in fewer client service contacts.

In Europe , we have been gradually transitioning our client base over to our award winning <unk> platform and in Q2, we seamlessly move those clients over to the new ADT UX.

And we're now very excited just this month, we began our pilot of the new ADP user experience for workforce now, which when coupled with our next gen payroll engine makes for an even more differentiated offering for what is already a market leading HCM solution in its target markets.

And in terms of a few other highlights I am pleased to share that we reached a new milestone by running $1 million face lips for a single client on a single day for the first time.

And at the other end of the spectrum, a room or rural mobile App, which serves the micro segment continues to outperform our initial expectations.

And another milestone in calendar 2021, the ADP mobile App had over 1 billion logins highlighted highlighting the growing amount of direct engagement, we have with employees and managers around the world.

To that point this month, our return to workplace mobile solution part of the ADP Mobile App was awarded the business Intelligence group's 2022 Big Innovation Award.

And as a final highlight just this week, we launched our bill pay feature in the widely App.

Bill pay is free to widely users and fully integrated into the App and has been a top requested feature from our user base. We believe. This addition will further drive engagement and retention and we look forward to continuing to expand the wisely ecosystem.

Overall Q2 represented a solid outcome on both the financial front as well as with respect to key strategic initiatives I'd like to thank our associates, who continue to deliver these exceptional products and outstanding service to our clients and I will now turn the call over to Don.

Thank you Carlos and good morning, everyone.

In the second quarter, we delivered 9% revenue growth on both a reported and organic constant currency basis. Our adjusted EBIT margin was up 20 basis points better than planned and supported by our better than expected revenue growth.

Set partially by increased PEO pass throughs and head count growth in our implementation and service organizations I'll share more on this last point when I discuss our outlook our.

Our tax rate was up slightly in the quarter versus last year, driven by the lapping of a onetime international tax benefit we experienced last year.

When including the benefit from share repurchases, we had a 9% increase in our adjusted diluted earnings per share.

Moving on to the segments, our employer services revenues increased 6% on a reported basis and 7% on an organic constant currency basis.

In addition to the strong bookings retention trends in pays per control performance Carlos outlined our client funds interest grew for the first time since the pandemic started as lower average yield was offset by a tremendous 28% balanced growth.

This growth included some benefit from the lapping of last year's deferred employer, social security taxes and incremental benefit from the repayment of a portion of those employers social security taxes.

Which together contributed several points of growth. In addition to the already robust growth from higher client count employment growth and higher wages.

Our Es margin increased 40 basis points ahead of our expectations for the quarter and supported by better than expected revenue performance.

Moving on our PEO continued to deliver exceptional performance with 15% revenue growth in the quarter.

Average worksite employees accelerated to 16% year over year growth and reached $660000 for the quarter key contributors were strong bookings and retention as well as very healthy pays per control growth within the PEO client base.

Revenues, excluding zero margin pass throughs grew 18%, which was driven by worksite employee growth as well as higher average wages and higher Sui revenues per worksite employee.

PEO margin was down 10 basis points in the quarter.

Included in that figure was pressure from workers' comp and Sui expenses, due primarily to worker mix and wages.

Moving on to our updated outlook for the year.

For Es revenues, we are narrowing our guidance and now expect growth of about 6%. The upper end of our previous guidance range of 5% to 6%.

The primary drivers for our outlook are the stronger Q2 performance, our higher client funds interest outlook for the year and higher pays per control growth.

Partially offset by an expectation from incremental FX headwind in the back half of this year on the recent strengthening of the U S dollar.

For our client funds interest revenue, we're raising our outlook by $20 million.

To a range of $440 million to $450 million.

Like last quarter, we're raising our bounds gross assumption meaningfully to now expect growth of 18% to 20%.

Whereas our client funds yield expectation is unchanged despite the improvement in interest rates.

This is primarily because of our stronger than previously expected balanced performance creates a temporary lag with greater short term investments before we purchased higher yielding fixed rate securities.

For U S pays per control, we're raising our outlook by 1% to now expect 5% to 6% growth.

We continue to expect that a gradual ongoing recovery in labor force participation will support job growth in the first half of the year was a bit ahead of expectations.

In addition to client funds in pays per control, we are raising our retention guidance slightly and now expect it to be down 40 basis points for the year.

Although we still anticipate some normalization in client switching activity trends. So far this year have been very positive and January is looking like a continuation of that same strength.

One thing we're not changing at this time is our es bookings guidance as Carlos outlined our Q2 performance was strong with bookings is one place where the evolving pandemic conditions and the omicron Varian has potential to create noise as we saw at the outset of the pandemic.

Though we haven't seen a material impact at this time, we still think it is prudent to maintain a wide range of outcomes in our guidance.

For Es margin, we're making no change to our outlook of up 75 to 100 basis points.

Although we are raising our revenue guidance and although some of that is coming from high margin revenues like client fund interest in pays per control at the same time, we are now more fully caught up on implementation and service head count after running a bit behind earlier this year and late last year.

This investment in implementation and service teams is critical both because the current year end period is important to our clients and their employees and also as we look to get ahead of the needs of our growing client base.

With the continued out performance and retention, we're now planning to grow our implementation and service teams slightly more than we had previously planned as we exit this fiscal year.

In addition to this growth in personnel. We also took onetime compensation actions across our organization in recognition of broader inflation trends in the market.

The incremental expenses associated with those actions are now included in our outlook.

Although this tight labor market has created its own set of challenges for most companies. We are very pleased to have been able to grow our organization as much as we did these past few months and the wage increases we layered in give us confidence regarding our staffing levels at a busy time of year. We're also pleased to have been able to support those changes without <unk>.

Instrument to our existing guidance ranges.

Moving onto the PEO.

Following the strong first half trends in both client growth in Worksite employee growth. We are now expecting average worksite employees to grow 13% to 15% and we are likewise, raising our guidance for <unk> revenues and revenues, excluding zero margin pass throughs by two percentage points each.

Our outlook will continue to be sensitive to employment trends within our client base as well as bookings and retention performance. So although we are currently contemplating growth to be a bit lower in the back half of the year, we could continue to see upside if the current robust trends persist.

For PEO margin, we are making no change to our guidance of flat to down 50 basis points for the year.

Although we are raising our revenue guidance. We are at the same time expecting higher Sui and workers comp expenses to create offsetting margin pressure.

Putting it all together for our consolidated outlook, we now expect revenue to grow 8% to 9% for.

For adjusted EBIT margin, we continue to expect an increase of 50 to 75 basis points as we shared earlier. This year, we expect our margin improvement to be concentrated in the fourth quarter and expect our margin to be down in Q3, particularly following the recent personnel growth and wage increases.

We're making no change to our tax rate assumption.

And with these changes we now expect growth in adjusted diluted earnings per share of 12% to 14%.

Thank you and I'll now turn it back to Michele for Q&A.

As a reminder to ask a question. Please press Star then one.

If your question has been answered and we'd like to win this DUC Mchugh.

Thank you.

Our first question comes from Bryan Keane with DB. Your line is open.

Hi, guys congrats on the results.

Wanted to ask on the impact of.

Omicron, especially in December and January is there is there any noticeable impact in sales or retention or anything that you'd call out, particularly from the rise.

That we've seen from the virus and other crops.

And I think you've heard from our prepared comments that the answer was no but when you think about the way the quarter works.

<unk> really started to pick up and I would say middle to late December in terms of my recollection, it's really incredible how fast things have changed rate with this because now we are back on the down slope in the northeast. It appears at least in the U S. So it's pretty pretty fast moving but.

I would say that our our answer is no we didn't see anything in the in the quarter that we just reported.

Obviously, we're now in the next quarter and it's kind of difficult to start talking about the next quarter. Given we're only I think three weeks into it but you have seen probably multiple reports I saw one this morning in the journal about.

It was the IMF for someone kind of lowering kind of global growth.

And so forth and some of it.

Is obviously a result of omicron, there's probably other other factors as well.

We do believe that we're not we're not immune from these kind of things that ripple through the economy, including omicron, but the truth is we havent really seen a big impact yet.

Yet, but if GDP growth.

Thank the GDP growth for the full year calendar year, most people have kind of kept it in the same range. So I'm guessing that people have lowered their first quarter I'm talking about calendar quarters, now GDP growth forecast slightly and probably increase because I think it's just a matter of pushing activity forward because it does look like in a few weeks things will.

We'll start to quote unquote normalize and at least a portion of the country and then I think shortly thereafter economic economic activity should be robust again as was I think predicted by by a bunch of economists. So anyway, so long long winded way of saying that really not yet but.

We are always careful to not assume that.

That we are somehow insulated completely from what happens in the overall economy. If people are traveling a little bit less I mean, our.

For example, our own associate population, we proactively asked we were already back in the process of getting people back into our offices and we kind of went back in the other direction for the for about a month or two.

That just lowers economic activity people aren't driving as much they're not going to lunch and the local area et cetera, and those things have a ripple effect through the economy, but no no signs of any kind of major decrease in demand or economic activity from our numbers yet.

Got it that's helpful and just as a follow up I wanted to ask about the strengthen and the balanced growth I think it was up 22% last quarter up 28% this quarter.

Don't know if you guys look at how much inflation is could be driving that number as well and any other callouts I know you raised the guide there, but just surprised at the strength there.

Yes, we have had some growth so certainly wages are a little bit of that but.

Also as we said in the prepared remarks, the big driver was the grow over from the lapping from last year with the deferrals. So certainly the deferrals represented a few points in the growth of that.

Of those balances in the quarter, although even the deferrals were only for a number of few number of days towards the end of the month of December . So certainly we look at those but as we said we do expect.

The balanced growth to continue and we expect it to be firm based on the pays per control in the increase in the number of people working for our clients I think that's the biggest driver and just in terms of a refresher by deferrals I think Don said in his remarks is social security tax deferrals not everyone lives. This day to day like us, but it was a significant stim.

<unk>.

Part of the stimulus package, if you will and those sort of security deferrals need to be repaid have.

We just went through that which is what helped us in terms of tailwind on balances and the other half is next December 31, So that's something maybe to pencil in.

Which would provide some support to our balances next year as well.

Okay. Thanks for taking the questions.

Our next question comes from David <unk> with Evercore ISI. Your line is open.

Thank you good morning could you unpack.

Demand trends.

Looking at run workforce, now and vantage HCM in the quarter and whats embedded in your 12% to 16%, yes bookings growth outlook.

As a follow up if you could comment on your recent announcement that you're expanding workforce now with international functionality, what sort of traction do you expect to see there.

Yes, hi, good morning. This is maria thank.

Thank you for the question David Happy to comment on both.

With respect to the overall performance in the quarter.

With.

David in the prepared remarks, we had strong double digit growth.

I'd really go across our scaled operators specifically in the down market. We saw the strength in our run platform. We saw the strength in our retirement solutions definitely experienced strength in the workforce now platform in general.

I'll cover off on your second question as well if we get to.

The press release that we just initiated additionally in the second quarter. We also saw strength in global view, so very happy with our international contribution to the quarter. So that was really the strength across.

The double digit growth it sounded player services.

It relates to the workforce now press release that I think we estimated in the last couple of days.

Gardening.

The offer that now is on the on a global basis, the ability for our U S States and Canadian based companies to process payroll across on the workforce now platform across multiple countries and partnership with our celerity offering very excited to have this offer as you can imagine over the core.

The last decade, but certainly in the last couple of years the ability for mid market customers.

They'd be able to support international employees on their end.

<unk> demand and we're pretty excited to be able to satisfy that demand with this new offer.

Thank you very much.

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

Great. Thanks, so much.

You talked about improvement in retention again.

It's still challenging environment.

Overall could you maybe reconcile those comments a little bit because all things equal I would think.

Environment, maybe you have a little bit more pressure from a client perspective, but just can you unpack that a little bit.

Yes, I think what we've been saying for probably a few quarters now it's really not maybe the tougher environment isn't the right term it's.

Tougher comparisons right because I think we our thesis was that we had gotten some tailwind from the pandemic.

<unk> and a lot of areas, but one of them was in retention there is less clients switching.

And on top of that there was also lower bankruptcy rates in down market and where its a significant portion of the turnover of our clients is quote unquote out of business all the government stimulus and all of the low switching I think really elevated our retention at the same time, our NPS scores and client satisfaction and all the feedback we're getting from <unk>.

It was very very strong so frankly, it's difficult to separate the two so we planned for some moderation in our retention.

As a result of those tailwind because those tail winds are going to go away I think they're economically driven and we've seen a little bit of that in our down market. I think we've also kind of alluded to that that despite our continuing strong retention is kind of generally playing out the way, we expected, which is our down market SBS is a little is down a little bit over the previous.

Year, but other parts, obviously are holding up well, if not improving and the net of that is better than we expected and better than we had planned and the question is are we going to able to hold on to all of it. Our plan of course is to hold on to all of it and that is why you saw in dons comments that we're making sure we have the right levels.

The service the right levels of implementation because if we can if we can achieve the forecast we have for retention for the year, which will be ahead of what our plan and our expectations were that has a meaningful impact on our long term growth and value creation for the for the company.

That's very helpful and then.

I don't know if this would be Carlos you are down but can you remind us.

The rate sensitivity 25 basis points, what that means and then.

I guess with the <unk>.

Nice to see the boost in the extended investment strategy, just given I thought there was a little bit more of a lagged effect on that so maybe just because obviously it's been so long we've been in front of a rate cycle, but just the dynamics of client funds related to extended investment.

Thanks.

Yes, why don't I start with the second question first on the on the rate environment and what that means for us. So so generally speaking.

As you know.

The fund balances increase rapidly we have to invest in short term items are short term instruments until we have the opportunity to invest in and longer term instruments and as a result.

We don't see as much pickup as we would like to see but I can certainly give you some sensitivity with respect to if we had a 25 basis points improvement in the rates in our short term investments only that would translate into about $9 million of EBIT.

EBIT.

On a 12 month basis, so not.

Usually significant on the other hand, if we saw that both in the short in the intermediate term that 25 basis points over a 12 months period would translate into about $23 million of.

Impact before taxes, so certainly that becomes meaningful so as we look to invest those funds longer term as rates continue to go in what we would say I guess, we would say is a better direction I think we have some opportunity in the future, but at this point in time.

We think that.

We're not going to see a huge amount of improvement in client fund interest over the balance of the second half and what we have talked about is in the forecast today, Kevin could you could you clarify the question on the extended.

Portion, where specifically you were your focus there.

Just David just the dynamics of the client funds interest revenue versus the extended <unk>.

<unk> strategy.

The timing differences on those two in terms of when you would see it because obviously you saw a little bit of benefit from extended investment in terms of the outlook.

Not as much on the client funds side, but just is there a timing element to the extended versus the client funds.

Yeah.

Well, if youre talking about balanced growth extended strategy balanced growth is actually tied more to the volatility of cash flows on a year to year basis. So it has to do with our forecast of what our low balance is going to be in the year versus our average balance which is a little bit different from the client funds forecast.

Long term, yes extended balanced would grow kind of in line with the client fund balance growth, but on a short term year to year basis, Theres, a whole lot more noise.

So that is actually driving the difference more so than the lag effect the lag effect that Dan was referring to has more to do with the growth in the client fund balances.

When they are particularly when the growth is particularly high it's often hard for us to reinvest quickly.

Just given the number of opportunities there are in the market and so forth for the type of credit quality that we're seeking.

But within a couple of quarters can catch up so it's just a question of.

How quickly we can deploy those additional funds, but I think I think the short answer is the net impact from our strategy because theres also re classing issue in terms of how we do it in terms of accounting and so forth. So I think the right. The right way to look at it is really what's happening with yields what's happening with overall, what's happening with balanced growth and then what's the net impact.

<unk> of our strategy for client fund strategy and I think on that front. The short answer is it's looking pretty good like just as an example, our Q1 reinvestments we're at about a 1% yield some new purchases and in Q2. They were one 5%. So that's been you see the same thing we've seen the moves in the two years and the.

Five years or even more significant than the 10 years and so forth so for us it's the.

<unk>.

When we talked long like our version of long is 357 not.

Beyond beyond that just because of the way, we invest our portfolio and on that front you could not have a better environment in terms of wage inflation balanced growth and increases in interest rates. So I would say, we're not ready to say anything yet about 23% and 24, but all of this.

A lot of a lot of talk about mechanics in the short term or whatnot, because I know a lot of people are focused on the short term, we're more long term oriented and we could be in here for a multi year.

<unk> from finally from client funds interest in AR.

Meaningful meaningful way.

You're going to have a high class margin problem Carlos.

Yes, listen I've been waiting 10 years ahead here when I started as CEO and I remember, telling the treasurer at the time rates have to go up next year and then next year I said rates have to go up next year.

And here we are here.

Here, we are at this time dammit.

Right.

Okay.

Yes.

Thank you.

Our next question comes from Tien Tsin Huang with Jpmorgan. Your line is open.

Thanks, So much guys. Good morning, just.

Really good results better based control looking at better retention in line bookings raising.

Balanced growth and all that good stuff.

I think of all of these as positive forces for margin expansion right. So you are keeping the margin. The same so is that just a function of the cost you discussed or is that some conservatism as.

As well I'm, just trying to better understand that.

The question is about conservatism I'll, let Don handle it. Thank you. Thank you Carlos.

Yes.

Yes, so I think I.

I think the answer is that we have got a pretty reasonable forecast in front of us.

I think we're we're not.

Being terribly conservative, but I think what you should consider though is that we raised our revenue by $150 million.

The prior from the prior forecast and we've also raised our expenses by $115 million.

Start to break down those expenses at $115 million of expense increase come pretty quickly. The PEO pass throughs grew $48 million of that so those.

$8 million of that expense increase is really having a bit of a drag on our our margins otherwise I think our margins clearly would be would be better but.

Thats really whats.

Preventing.

Reason, we haven't been able to.

To do more on the margins, but I do think that we will.

All in we've done a really good job of breaking things into our guidance.

Firming up are firming up the expectations we set.

Yes for sure.

No. That's very go ahead, just one other thing I think we should also add I think to your point to in terms of tone, we want to make sure. We're clear here that back, but we're not insulated from the world. There is no question that there is pressure on cost, particularly around wages and we are a.

It's a technology services company. So we have.

Costs around R&D and so forth. We also have cost around the service side of our business and you heard in the prepared comments that Don mentioned that we've taken some actions.

That are what I would call mid cycle. So not the typical annual wage increases because we felt we needed to do something to make sure that we held onto our talk to our people and that we were attracting the right kinds of people. So we are we are doing some things that now the good news on the other side of that coin.

I'm, assuming will come up later in the question of Amaze will address it now.

Like some other industries, but not every other industry, we do have a fair amount of.

And the industry has shown demonstrated historically and I think there are some recent signs from competitors.

Pricing is more elastic than.

And then in many industries. So this is not a commodity business.

And Theres, a fair amount of room. The problems you have to exercise that very carefully because you want to remain competitive and on and on and on and you've heard that story from us for many years to write that we really want to win in the market. We want high retention rates. So we can't just go around Willy nilly passing through price increases.

But the fact is we can.

And we will if it's driven by market forces and cost increases that are experienced across the board and we're confident that our competitors will do the same thing and some of them already are.

You answered my follow up on pricing. Thank you Carlos Thank you Dan.

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

Hi, good morning, Thanks for taking my questions.

I wanted to maybe circle back to the PEO business and the strength. There. It continues to perform really well I was curious can you remind us when we think about the source of new bookings for PEO, how much of it is new to ADP for the first time versus.

Convergence of potentially existing customers in the F&B side of the base that you are up selling over <unk>, just how should we think about the source of new bookings.

I think it's been pretty consistent for a long time at around 50%.

Yes, it's about half.

We kind of mine our own it's a combination of mining our own clients, but we also mine our own sales force. Our sales force is able to kind of bring in obviously new clients straight onto the PEO, but we also have a very large installed base that we as you alluded to we might I think it's 50 50, if I'm not mistaken hasn't really changed that much over the years.

Great. That's helpful. And then maybe just as I think about the Reconsolidation debased onto one UI.

There's clear user benefits to that but how should we think about maybe is there a tailwind to that on the gross margin side more in market based on a single UI from AA from I guess, a service or a maintenance standpoint in terms of spend going forward and how should we think about that unfolding on the on the gross margin line.

I think Thats, a fair point, there's a lot of things that we do.

That are intended to really quote unquote standardize right and to be able to get leverage and this is clearly one of those where.

ADP historically as it was a little bit more fragmented in terms of our R&D and we've been starting with my predecessor, I think trying to become more kind of unified et cetera, and the user experience is one of those places where there was an obvious opportunity that I think will make us better competitively and allow us to invest our money more.

<unk> and there clearly is some backend benefits of that from a margin standpoint, but I would say I'd be I'd be.

I don't think it would be true to say that that was the primary driver. There is got to be some residual help from a margin standpoint and from an efficiency standpoint, but this is really about winning and by having the best products and having the best face to the market in terms of our the best skin. If you will on each of our products that makes a difference as you know like we.

We get it we're a technology company now and.

Matters, a lot like the experience that our and it's not just our clients. He used to be 2030 years ago was only the clients now the employees of our clients are obviously.

Touching and interacting with our products, especially with the mobile App and this user experience stuff matters a lot in terms of engagement.

Great helpful. Congrats on the solid results.

Thank you.

Our next question comes from Bryan Bergin with Cowen Your line is open.

Hi, good morning, Thank you.

I have a first one follow up on retention can you dig in a little bit more about the underlying drivers so out of business closures versus competitive switching behaviors and when you think about a 40 basis points year over year decline in forecast and how much is due to a pickup in that.

Great versus competitive losses.

Almost all of it.

As in the down market and related to normalization of economic factors like closure rates I don't know that closure rate is the right word, but that's one of the that's in that category, what we call we track uncontrollable losses, and controllable losses controlled losses would be around service and product et cetera uncontrollable.

Is the obvious like bankruptcies out of business et cetera, and what happened during the pandemic. It wasn't just that bankruptcies went down like just all the categories of uncontrollable losses.

Went down and there has been some normalization of that not all the way back to pre pandemic, but I would say that there's really nothing that you can read into the numbers to tell you anything other than we have fantastic service solid NPS scores, but there is some normalization in categories.

Typically more down market everywhere else I think our retention rates are good to improving.

And solid and in many cases better than prior years, and we have less tolerance in those other businesses because theyre not economically sensitive.

So we have less tolerance for the excuse that theres going to be normalization. There because we now have a taste of what's possible in retention in the mid market and in international and in all the international has been strong all along and in the upmarket and we just want to maintain those retention levels, but it would be foolish in the down market to assume that there won't be some X.

<unk> factors normalization Thats, what you see reflected.

In our forecast.

Okay makes sense and then just on the PEO strength. So the sequential increase in Worksite employees is really notable here could you just dig in a little bit more I heard the better units, so better retention better bookings, but it does seem like there's been a release or tipping point here around clients converting to this model can you just talk about that.

Yes, I mean I think that.

We're thrilled just to be clear, but let me just give you a few back to like these comparisons in the pandemic and noise part of our headwind in the PEO sales, which by the way were positive and were good but not as good as yes last year. We I think we shared a little bit of color there that the average client size sofa.

<unk> had come down a little bit.

Wages werent growing that much so all of those things have an impact more on the PEO than they do in yes, particularly in some some of the Es units those things have all turned in the other direction now so the average <unk>.

<unk> client is.

Bigger in terms of clients sold and that is meaningful and then you have wage growth, which flows through the PEO. It doesn't flow through <unk> because of the billing is not as a percent of wages, whereas in the PEO. It is and so we do have a number of tailwind that are also are also helping but the most important thing.

Which is maybe what you're alluding to is the average worksite employee growth, which kind of cuts through the inflation.

<unk> growth and all of that and Thats also robust, but thats getting assistance like I, just mentioned from average sized client being a little bit a little bit bigger in terms of new business bookings, but again thats, great news, but it's a little bit of a normalization because it's actually back now so went down from where it was pre pandemic announced backed up about where it is.

Was pre pandemic and hopefully you get 1% to 2% growth going forward, but right now it's more than just 1% to 2% growth.

Okay. Thank you.

Our next question comes from Ramsey El <unk> with Barclays. Your line is open.

Hi, there thanks for taking my question today.

I wanted to ask you about your HCM products and the cross sell opportunity to into your base of payroll customers sort of an update in terms of where you are there and whether you could potentially accelerate that.

That process.

Yes, I'm happy to add to comment on our HCM products and how are our sellers go to market to drive the combination of new business bookings between new logos as well as add on business for a stem products from an attach perspective.

So as you can imagine a lot of the investments that we've spoken about for several years and existing products a lot of the investments that we're making into our existing platforms. We just talk about the <unk> and the impact that sneaking in our down market and we will continue to make coupled with the investments that we're making into our next gen products.

Are all investments that are anchored in the belief that we can continue to expand.

Operating to our existing clients as well.

As new clients, so excited about that.

Execution on each one of these initiatives and the impact that it will make to our bookings and mix of bookings between new logos and ATM product attached.

I mean, our attach rates in general are pretty good on some particularly in some categories like we said this before like our.

Workforce management, we used to call. It tightened labor those those products tend to have high attach rates and others have high attach rates others have low attach rates I think part of our opportunity for whatever the years to come is to not only sell new logos, which were now obsessed about because we want to grow market share, but share of wallet is a huge opportunity for us.

The fact is like we have very low.

H penetration still in many of our categories and many of our products.

Interesting okay. Thank you for that and a follow up from me is on M&A and balance sheet deployment here, obviously, a lot of the valuation.

Multiples in the sector are holding quite a bit I don't know if if the environment has created a situation where maybe you had a shopping list dream shopping list, but maybe now you can go after that you couldnt before but maybe an update on on weather.

Your capital allocation and specifically as it relates to M&A, our plans would be helpful.

Yes, so I think that Theres always things floating across everybody's desk and evaluation is being done of opportunities et cetera.

That's true.

Last few weeks have not been kind to some to some companies.

I don't think we've really changed our objectives and our objective is to make sure that anything that we seriously consider and we pursue has to fit the portfolio. So whether it's some.

It has to be either.

Geography extension that we currently have or it has to be something thats filling our product niche.

So we're going to continue to work by those are those guidelines, if you will and if things become more affordable and something falls into those categories, but certainly we will take the opportunity to to look more seriously or to look a bit harder than we might have say three or four months ago.

Carlos I don't know.

Well I was thinking was that in some cases, if people pay us will buy their companies.

Yeah.

Alright fantastic I appreciate it thanks, so much.

We can clean them up.

Yeah.

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

Hey, good morning, everybody and congratulations on the quarter I was wondering could you give us a couple of updates with regards to.

Some of the products.

In terms of next generation power.

To what extent has that been further rolled out.

What's the update there.

I mean, I would say we had a really good I think first I would call at year end, because when you get to the mid market, which is next gen pay as you know right now.

Is really being sold in a portion of what we call. The core part of the mid market. So call. It 50 to 150.

And I think we're at we're selling somewhere between 2025% of our clients of our new business is coming in on the new platform. We expect to be <unk> I think it's end of this.

Calendar year end of calendar year. So that's kind of what we talked about in Investor day, and I would say that I call. It December January sales season, because a lot of those clients. They want to start clean right on January one so it's a fairly important point of the year in terms of judging kind of where youre doing where you where you are.

In terms of sales results and so forth and we had a fair fairly good.

A number of starts we were happy I would say with the early January late December .

Cost starts results in other words those are clients that we sold previously that when we then that now got starting we have up and up and running so we're not trying to avoid getting this business. How many clients within every quarter you guys are going to ask this but I'd say that thats going really well and we're on track for this <unk> by the end of the calendar quarter and then we had a good a good start season for ended.

Remember beginning of January .

That's great and then.

It sounds like one of the early comments that Carlos was highlighting the graph.

Talking about how role is doing on the <unk>.

Low end and then also mentioning that with one client you had 1 million transactions in a single day, which does obviously.

Impressive can you just give us a sense for what in terms of.

Roll how much is that now that you've had some experience with it how.

How much more excited are you about that possibility.

Penetrating that micro part of the market.

Then on the flip side with the capabilities of being able to service companies globally.

Then huge scale.

How does that expand.

The top end of the market.

Yes, I mean, as you know, we do a little bit different than most in the sense of we're 100%.

<unk> all in on HCM, and we cut across multiple segments and also geographies. So that makes us a little bit unique. So you have to get excited within segment because like rule is really exciting and we're excited about that opportunity, but that is in that micro segment. Because if you take the other extreme example of that other clients like when we process one.

It's like a client obviously has a million employees and we process their payroll and we processed 1 billion paychex on one day.

Hi.

That's a lot of small rule clients to make up for that so we're excited about that but we're also excited about its role in the growth of ADP and in it.

In the marketplace in terms of our ability to compete and to create opportunities for us. So it's a little hard to compare I guess, it's like when you have multiple children and you have to love the mall and they are all good looking and smart and so forth and I think thats the way I feel about.

Roll in the down market versus <unk>.

Market versus global view I mean, they really are all I think performing quite quite well now and I think we're excited about the opportunity in each of those markets separately I'm trying not to give you a non answer answer but I think that's what I'm trying my hardest to give you something concrete.

But it's exciting because these are all I mean, the growth rate that you won't allow me to say it because we were preparing for the call.

We were a startup we would be quoting.

Growth rates for roll that would make your eyes roll, but Daniel let me say it because it's really frankly insignificant to a $15 billion company today, but it won't be insignificant in five or 10 years.

I guess, that's part of it is getting that was.

On the.

For example in terms of role.

You know when you first introduced it.

You talked about it.

And in a more modest manner, but it sounds like it's getting really good traction. So I was just wondering.

I'm wondering if there was some some way to.

Capture.

How youre thinking about how big that could eventually be.

It's definitely getting good traction we're definitely excited about it but again you shouldnt over I'm not trying to overplay. It because we have a very large organization and you guys need to think about like all the pieces fit together so that it fits into our forecast and just from a dollar impact I mean, I hate to go back to that.

That product in that segment competes against certain competitors, we feel pretty good about what we're going to be able to do there in terms of market share and growth et cetera, but you should not be thinking about this as something thats going to move adp's growth rate by 1% to two percentage points on the top line in the next year or two is just not that's not the way the math.

Works I wish it did.

All of these things have to work together next gen payroll Nextgen HCM.

Global view solar ago, there are.

A lot of things PEO that have to come together for us to to get to the numbers and we like that where I think a portfolio that as you've seen we manage pretty effectively.

And the combination of all of those businesses, having good success some more than others at times I think leads to the results that we are reporting and forecasting.

I appreciate that thank you.

Our next question comes from Eugene ceremony with Moffett Nathan Thanks Nelson Your line is open.

Thank you good morning, congrats on another strong quarter guys.

Wanted to ask about wisely and Youll kind of general price not finance product strategies that you highlighted the bill pay offering in your prepared remarks can you just remind us what are the next big milestones for the overall strategy and.

I know, it's a small part of your portfolio, but would.

At some point, maybe start providing some metrics that can help us track the growth of this area like some businesses like that provides such a number of cardholders.

Once you have transactions.

The amount spend control.

Yes.

Yes, I'm happy to comment on the overall lightly product strategy, and where we're heading with VM opportunity.

Opportunity, it's incredibly exciting for us.

And then we can talk through what those metrics could be again.

Solid basis of growth over time as it relates to that overall might likely after the strategy. We have within the likely portfolio. It is really a strategy that is anchored in financial management.

Mansell financial management, and App happens through education Budge.

Budgeting savings tools reward what you heard today, which you just mentioned as well which is the launch of our Bill pay feature we believe is significant.

Exactly what we all probably is with respect to any type of an online bill pay rate to scan the check and actually facilitate end and still processing through a mobile device and so that is all part of the my likely App and the overall financial management strategy and financial wellness et cetera that we've employed in addition to that.

The other thing that's forthcoming is.

The launch of our early wage access.

<unk> as we refer to it which is really that ability for.

Our clients employees or employees to gain access to wages that they've earned as they earn them.

And this is also a big piece to the overall equation.

As respect to the overall likely things that we're monitoring actively right now back to kind of the question around how many cardholders et cetera.

We're looking at that we're looking at.

Other types of typhoon cardholders like using what feature functionality. There is some data that you could look at as it relates to <unk>.

He reviews, we have onto the app the quality of the App certainly supersede some of them.

The competition in this space I'm pretty proud of the impact that our financial wellness tool my likely app.

Is creating in the market, but I'll, let Danny and Carlos can comment on.

Cardholder tracking in London, It will slip that yes, I think we will I mean thats a.

Its a takeaway for us we will see if there is something else that we I mean, we're always open.

Suggestions and trying to be open minded about disclosure, but again. This is not the same as the conversation about role, but as excited as we are about wisely. We're equally excited about things like roll and widely is much bigger than role, but again relative I hate to be a broken record, but relative to the size of ADP.

Wouldn't be at the top of the list of the things that are going to drive.

The overall results because again, we're a portfolio of so many different things that have to go right and that we have to get right in order to get growth on 15.

<unk>.

I mean, I think that business is probably I'm trying to do the math in my head, it's like 2% to 3% or smaller in terms of total actually smaller than that even in terms of revenue. So.

The way, we want that and it is growing faster than the line average all things youre asking about our are relevant and those things will all help the overall growth rate of ADP, but it would be misleading.

Because I think others might have done that where they make a bigger deal out of it than it really is and maybe relative to their companies. It is a big deal relative to us we.

We have lots of other things that we have to do and that has to go right and I was trying to pretend that if we tell you. This is how much we get for card and then we start giving your math that if a 100% of our clients got on the card. There is how much money we would have.

We don't need to do that because that's just distracting and silly because first of all I'm not going to happen, we're not going to get 100 overnight and it could take some some time anyway, but we will take that away and think about what if anything we can do to give you a little more substance around the progress around around why is it because it's exciting and we're <unk>.

Happy about it but it's not.

There are other parts.

Our disclosure that would give you more indication like the things we've been talking about pace per control new business bookings overall all of those things overall are bigger drivers of our results.

Got it thank you very much guys.

Our next question comes from James Walton with Morgan Stanley . Your line is open.

Thank you very much and good morning.

Most of my questions has been answered but.

I wanted to talk just a little bit about or ask about strategy.

And in the past you've mentioned customer service capabilities being a differentiator related.

<unk> players.

Should we think about the <unk>.

Differentiated surface level as your own AI capability grows in importance and when we look at the future of self service initiatives and closure your own services and service levels to look more like a traditional SaaS players.

I guess I'm, just wondering like how we should be thinking about that strategically and what the implications are of the business I recognize it probably fits well within.

Few of your most recent comments just like it takes a while to move the needle, but would love to get a sense of where you think youre going in those areas.

Great. It's a great question, because that's a topic that comes up not just among the management team, but also from the board because we clearly see the opportunity there and again, we have a couple of advantages coming out of the gate.

We obviously have a lot of data. So we have a lot of information that can be used to provide I think.

More automated if you will whether it's AI machine learning you can whatever term you want to use for it you have to have.

Information right to be able to then.

Monetize that or turn it into a value add for the clients, which then can be monetize. So we spent a fair amount of time on that we've actually recently appointed someone to be kind of our chief data officer, who is kind of what we're seeing in owning kind of all of our our data and then how we can marshal those resources to create the <unk>.

These are advantages that youre talking about which really advantages for our clients. So that we can be able to hold onto them longer sell them more things et cetera et cetera. So.

Everything from like the simplest things like chat bots to real true AI I think are things that we have already deployed and I think are in the process of kind of.

Growing and scaling if you will to take to take advantage of and I think we have some of those that <unk> seen around press releases and we've talked about some of them on investor day, but clearly there is a lot more opportunity in front of us than what we've already already done in that in that area. So I would say that that's a great question and a substantial opportunity for us.

Like the previous point about disclosure, we have to find a better way.

Of giving more guidance or more disclosure around how thats going and how it is being leveraged because it's going to be meaningful I think over the next five.

Five to 10 years for for ADP.

That's great I appreciate it Carlos.

We have time for one more question and that question comes from Jason Kupferberg with Bank of America. Your line is open.

Thanks, guys I just wanted to start with the EPS guidance for fiscal 'twenty, two I guess were going up 1% at the midpoint so call it <unk> and.

And so just breaking that down it looks like the raise in the float income expectations is about <unk> of that and presumably the rest.

The revenue outlook I, just wanted to see if that math is correct.

That sounds.

That sounds pretty good.

I think that the theme I think whether that's exactly right or not the theme you should hear is.

I mean, it's maybe a bad thing to end the call with but you should understand that the second we are investing and this is not the first time you've heard this from from ADP the opportunity in front of US is big like our bookings are growing.

Economy is growing robustly, despite the noise in terms of the stock market and so forth. This is a really good environment.

For us and so we are we are preparing ourselves and.

You should expect that that is going to lead to kind of long term improvement and hopefully our growth rates and in our margins and so forth. So just don't get distracted by the short term noise because I think the implication is doesn't seem like we.

<unk>.

The rest of our whatever profit by much the answer is probably probably right, but its all the things we've been talking about during the call, which is we're making sure that we keep up with the market in terms of wage growth, but we have price levers that we haven't necessarily hit yet because we're not a panicky company like we're not going to like tomorrow.

An unplanned price increase to our two are basically we have times that are natural and normal where we will do that but we're not going to wait.

Take action on wages and in hiring and so forth until we get there because it doesn't make sense, we're not without some schlocky little company that needs to the panics. So we're going to do the right things and if theres, a timing of mis timing by a quarter or two so be it we think it's still pretty damn good like when you think about the inflationary pressures.

We have.

And.

The fact that we're still able to kind of deliver the results that we are delivering enabled to grow the way, we're delivering we're pretty damn proud of it but admittedly.

We're feeling more pressure on the expenses.

Now then we definitely felt call it 18 months ago right. The opposite and this is what happens in political comparisons and when your clinical lab things and all that stuff that you guys like to look at like the pandemic hit and our expenses went down because we were very careful and very frugal and very.

<unk> in terms of hiring and so forth and our revenues never came down as much as everyone thought and as we thought and then we now have to go back up and make sure that we're staffed and at the same time wages started to increase and we have to now factor that into the into the picture, but we're feeling pretty damn good about our execution and how we are and how we're doing.

But that is the way the numbers add up is the way you described it.

Okay, great those points just last one for me I wanted to see if you could elaborate a little bit on the competitive landscape, just what youre seeing downmarket mid market enterprise wide.

Interested in just any changes in the mix or the aggressiveness of any competitors across the across the spectrum.

Thank you.

Again because.

Competing so many different segments. There is not I don't think its a broad sweep some of our competitors only compete with us in one segment. So it's hard to make a sweeping statement other than I think it's business as usual that may not be very exciting, but I don't see I don't know Maria if you see any there's been no I mean, I think we look at our balance of trade, we're pretty happy about a couple.

<unk>.

People that we've been more focused on recently than maybe before which we're now doing better than before.

But as usual then there's others that are now gaining ground on us.

I would say that the general environment is stable and that group.

What is it the rising tide is lifting all boats. It feels like the industry. Overall has a lot of I don't know growth opportunity and we're all getting our fair share and trying to feel each other share, but it's a good it's a good environment I don't know if you have any I would give her I would echo the sentiment on the overall <unk> space and <unk>.

Environment, and I don't think anything's materially change that we certainly intend to continue to win our fair share and more.

Okay I appreciate that thanks, guys.

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

Thank you I would just just back to like the general economic conditions, and what's happening in the market and so forth, which nothing that we focus on on a day to day basis.

But.

Some of the things we did have a little bit of a discussion and some questions on <unk>.

Capital allocation and structure and so forth, but I would just I can't help but I'm obsessed with the dividend and I love how no one asked about the dividend nobody cares about the dividend, but we may be entering an environment where might matter again so.

Maybe maybe someday I'll get a question about.

The dividend because I think we are in our 47th year of consecutive increases in the dividend and I think if you go back 10 years and you look at what are the cost basis of the stock was and what the dividend yield given today's dividend is on that cost basis 510 years ago 15 years ago 20 years ago.

This company.

Machine and so.

And clearly capital gains are important too, but the focus.

Changes, obviously as the market environment changes and listen I'm not wishing a downdraft in the market it hurts us as much as it hurts anyone else, but I like where ADP is positioned competitively and I like where we're positioned in terms of our balance sheet, our dividend and our and the way we allocate.

Capital, but most important thing I am proud of is our associates because every quarter now as we get further away from despite arm upfront and so forth clearly we're in a much better place than we were before we would not be where we are today without our associates and I mentioned, how we were understaffed for sure.

Early times of pandemic, because we felt like we had to be careful on the expense side and as we were being careful the workloads, we're increasing because of all the government.

Regulation issues that were intended to help and they did all of the stimulus and this was across the whole world.

That created a ton of work for our people of which we had fewer people and I'm incredibly grateful and will forever be indebted for people stepping up and doing whatever it took to get our clients and get us through that difficult difficult period.

So glad that we were able to deliver on all of our commitments because we were I think one important factor besides the Amazon trucks still running in other parts of the economy still functioning I think we played a role in helping the world economy, I think get through the pandemic and our associates deserve credit for the Rowley.

So with that I appreciate you listening to us and we look forward to catching up with you again next quarter. Thank you.

This concludes today's conference you may now disconnect everyone have a great day.

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