Q3 2022 Automatic Data Processing Inc Earnings Call
Okay.
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 third quarter fiscal 2022 earnings call.
I'd like to inform you that this conference is being recorded and all lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session if you'd like to ask a question. During this time simply plus the number one put simply press Star then the number one on your telephone keypad.
Draw your question press the pound.
Keith.
Thank you I will now turn the conference over to Mr. Jamie Hussain Vice President Investor Relations. Please go ahead.
Thank you Michelle and welcome everyone to Adp's third quarter fiscal 2022 earnings call participating today are Carlos Rodriguez, our CEO Maria Black, our president and Don Mcguire our CFO .
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 at 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.
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 Danny and thank everyone for joining our call.
We delivered exceptionally strong third quarter results, including revenue that accelerated to 10% growth on a reported basis and 11% growth on an organic constant currency basis.
Coupled with solid adjusted EBIT margin expansion.
The strong outcome on both revenue and margin drove 17% growth in adjusted diluted EPS well ahead of our expectations.
Our clients have had no shortage of challenges of navigating the last 12 months, but through it all not only have they persevered, but they have invested in their workforce to better support their employees and continue to grow their businesses.
To support them in these efforts through our leading HCM technology and unrivaled expertise.
This quarter I'll provide high level commentary on key business drivers and then Maria will take us through some product and other updates.
And as usual dawn will discuss the financials and our updated outlook.
Let me start with employer services new business bookings.
We are very pleased to have delivered another strong quarter of double digit growth.
This was a record level for the third quarter and as we had hoped when we updated you last quarter. The omicron variant was not a meaningful factor in our bookings performance as third quarter growth accelerated from our first half levels towards the high end of our guidance range this quarter.
Our clients continue to find tremendous value across our suite of offerings with our PEO in HR outsourcing international and down market businesses again, leading the way.
We're pleased to narrow our es bookings guidance higher and we look forward to delivering double digit growth for the full year, which should position us well for fiscal 2023.
Our employer services retention was also very strong this quarter as you know our third quarter is especially important for retention since we typically experienced elevated switching with the start of the new calendar year.
Accordingly, we were very pleased that rather than decrease in the quarter towards pre pandemic levels like we anticipated our retention actually increased further into record territory driven by incredible performance from our mid market and international businesses among others.
As we've discussed for several quarters, the strong employee and client growth we've experienced have increase the demands on our implementation and service organization.
We added to our head count to keep up with this demand ahead of our busy year end period and as a result, we were able to maintain strong overall client satisfaction scores. Despite ongoing pressure from this elevated demand.
With retention, having outperformed our expectations. So far this year. We believe we are now on pace to hold onto most of last year's retention gains and expect to remain at 92% retention for the year down very slightly versus last year's record retention level.
Moving on to employer services pays per control our clients continue to steadily higher as workers enter or re enter the labor force in our pays per control growth of 7% for the quarter came in better than expected.
Clearly there are a number of factors that play when considering employment growth trends, but strong overall economic activity continues to keep demand for labor high and we've been pleased to see labor force participation gradually recover over the course of the year.
And one last highlight before I turn it over to Maria our PEO had another strong quarter with 16% average worksite employee growth and 14% revenue growth.
As we've seen all year growth in our PEO bookings was exceptionally strong as small and mid sized businesses increasingly find value in turning over a meaningful portion of their HR function to ADP.
And that strong bookings performance, coupled with robust employment growth within the PEO base has driven this very healthy double digit revenue growth.
And now let me turn it over to Maria.
Thank you Carlos it's great to be joining everyone for the call I'll just some updates on a few key initiatives we have underway.
On key product initiative is the rollout of our new unified user experience and we've made some great progress on this front earlier. This year, we moved the Ron <unk> and next Gen HCM client bases over to the new UX feedback has been strong with clients, especially upbeat about how easy we've made key.
<unk> workflows.
In January we shared we started the pilot of the new <unk> to workforce now and since then we've expanded from a handful of clients to over 1000. Early feedback has also been overwhelmingly positive and this quarter. We began the rollout of the new UX to the ADP mobile App the ADP mobile App is an.
<unk>, an important part of the ADP suite with over 10 million active users and is one of the top five most downloaded business apps in Apple App store and is available in over 20 languages and we're excited to take our four seven star average user experience and make it.
Even more insightful intuitive and proactive for our users as we complete the new UX rollout over the coming months.
Moving on data continues to be one of our key differentiators in this quarter, we expanded our data offerings. Even further as we launched pilot clients on our new global insight dashboard powered by data cloud. This dashboard provides a global view and <unk> clients with advanced analytics.
<unk> for their employee populations around the globe leveraging the same award winning analytics platform, we have scaled across our U S mid and upmarket client bases.
Last quarter, we mentioned you would hear a bit more about our marketing efforts here at ADP at our Investor Day in November I spoke about how for decades ADP has reached prospects through our powerful direct sales force and how in more recent years, we have enhanced this direct channel with modern selling tool.
<unk>, our growing partner network and with increased digital advertising.
This quarter, we continued to advance a great momentum and expanded our overall brand investment with additional initiatives, including our first major athletic sponsorships a group of eight impressive professional golfers featured across the LPGA, the PGA and the European tour.
So together constitute teen ADP.
The ADT brand is a powerful asset and has come to be associated with professionalism insightful and trustworthy data and the Premier technology and service, we pride ourselves on and we believe there is opportunity to continue investing in our brand while also pushing the frontier in digital marketing.
Efforts to support our World Class sales force and that's the final call out this quarter. We were pleased to host one of our marquee client events ADP meeting of the mind in California, which was back in person for the first time since 2019. This was our 37th meeting of the minds conference.
And we took the opportunity to engage deeply with our enterprise clients on the changing world of work.
I Love most about this event is as much as we enjoy sharing our perspective with our clients and showing them. Our latest HCM innovations. We also make the most of this opportunity by listening to and learning from them and having the back in person really makes a big difference the third.
Third quarter was a terrific quarter overall, which you can see in our results and the progress we made on key initiatives. We were recently named one of Fortune's most admired companies for the 16th year in a row and we are proud of this honor because it does highlight our culture of continuous improvement our consistency.
And our focus on par.
Partners into our hands.
Thank you to our associates, who make this all happen now over to Don.
Thank you Maria and good morning, everyone for our third quarter, we delivered 10% revenue growth on a reported basis and 11% on an organic constant currency basis. This revenue growth in turn supported adjusted EBIT margin expansion of 50 basis points, which was much better than the decline we expected we achieve that margin expansion.
And despite incremental investments in head count and compensation, we discussed last quarter towards.
So it was a combination of this strong adjusted EBIT growth, a slightly lower tax rate and a lower share count we were able to deliver a 17% increase in adjusted diluted earnings per share.
Looking more closely at the segment results our employer services revenue increased 8% on a reported basis and 9% on an organic currency basis.
Es revenue has been supported all year long by stronger retention and pays per control trends and our double digit bookings performance has been contributing nicely as well.
In Q3, we also start to get to a more meaningful contribution from client funds interest through the combination of our 15% client funds balanced growth and an average yield that was nearly flat with the prior year. This year over year increase in client funds interest contributed about half a percent to our revenue growth.
Which is a very nice outcome compared to the last several quarters.
Es margin increased 120 basis points, well ahead of our expectations for the quarter and supported primarily by revenue growth.
Moving onto the PEO segment.
PEO revenue remains very strong and grew 14% in the quarter.
Average worksite employee growth is the primary driver to PEO revenue and remained at a very robust, 16%, reaching 688000 average worksite employees for the quarter.
We continue to benefit from the strong bookings growth, we've seen all year long as well as healthy retention and pays per control growth within the PEO client base.
PEO revenue growth was a bit lower than worksite employee growth this quarter, which is fairly atypical impacting revenue.
Worksite employee was a mix shift towards ws ease with a slightly lower average wage and lower benefits participation representing continued normalization back towards pre pandemic mix that said could you see a recovery in all parts of the workforce in ERP.
<unk> margin was flat in the quarter and included higher selling expenses driven by our strong sales momentum.
Moving on to our updated outlook for the year.
For Es revenues, we are raising our guidance and now expect growth of about 7% up from our previous guidance of about 6%. There are a few drivers behind that increase.
We are narrowing our es bookings guidance higher to a range of 13% to 16% up from 12% to 16% prior.
So far this year, we have realized and delivered solid double digit growth.
Clearly there was geopolitical uncertainty in Europe , as well as more general macro uncertainty, but notwithstanding those uncertainties our outlook contemplates a strong Q4 with growth in the teens and we look forward to delivering a strong finish to the year.
We are raising our employer services retention guidance and now expect it to be down only 20 basis points for the year versus our prior expectation of down 40 basis points.
Our retention has held up extremely well so far this year, but out of Prudence, we are assuming a modest decline in Q4 for the same reasons, we've outlined all year long.
For U S pays per control, we're once again, raising our outlook and now expect 6% to 7% growth versus our prior expectation of 5% to 6% growth driven by the ongoing recovered recovery in the labor force participation combined with steady demand for labor from our clients.
We are also raising our client funds interest outlook slightly to a range of $450 million to $455 million up from our prior expectation of $440 million to $450 million.
There is no change to our 18% to 20% balanced growth outlook with just a few months remaining in fiscal 'twenty to the benefit from higher new purchase rates for the recent yield curve shifts is modest and therefore, we still expect yield to round to one 4% for the year.
Moving onto Es margin, we are raising our outlook to now expect margins to be up 100 to 125 basis points versus up 75 to 100 basis points. Prior this.
This increase is mainly driven by the stronger revenue outlook and margin performance in Q3 versus our expectations.
Moving onto the PEO.
We are narrowing our average worksite employee growth to 14% to 15% versus 13% to 15% prior driven by continued momentum in new business bookings.
We are likewise, narrowing total PEO revenue to 14% to 15% growth up from 13% to 15% growth prior.
And we are raising PEO revenues, excluding zero margin pass throughs to 15% to 17% growth from 14% to 16% growth prior.
For PEO margin, we are raising our guidance to now expect margins to be up 25 to 50 basis points, rather than flat to down 50 basis points for the year.
Driven by an improvement in pass through expenses, including more favorability for workers' compensation compared to our prior outlook.
Putting it together for our consolidated outlook.
We now expect revenue to grow 9% to 10% up from 8% to 9% prior.
For adjusted EBIT margin, we now expect an increase of 75 to 100 basis points up from 50 to 75 basis points prior.
We are making no change to our tax rate assumption.
And we now expect growth in adjusted diluted earnings per share of 15% to 17% up from 12% to 14% prior.
Before we move on to Q&A I wanted to quickly touch on fiscal 'twenty three.
We're still going through our planning process and so we won't be providing any specifics at this time.
Clearly they are going to be some unique puts and takes for physical 2003, but overall, we feel very good about the momentum in the business and we will remain focused on our medium term growth objectives.
Laid out at our November Investor Day.
We look forward to providing our outlook next quarter.
Thank you and I will now turn it back to the operator for Q&A.
Thank you wish to ask a question. Please press star one please be aware of the allotted time for question. Please ask one question with a brief follow up we'll take a question first question from Peter Christiansen with Citi. Your line is open.
Thank you and good morning.
Congrats on the solid execution this quarter guys.
Thank you Carlos also have one question about.
For a number of quarters, we've talked about and so HRS, becoming.
A larger contributor.
Just wondering if you had any thoughts on how that's contributing to the stickiness of retention at this point and then as a follow up given all the UI upgrades given across the platform.
Does that how does that translate to growth too.
Add on services I'm thinking even things like pay wisely those sorts of Bob.
Ancillary value added products. Thank you.
Sure I'll take the first part and I'll, let Maureen.
The second part on the <unk>.
Within Es, which as you know is kind of a full outsourcing solution without the co employment.
The growth there has been quite robust on bookings, which obviously then it's driving really robust growth in revenues.
The interesting thing about that business I mean, you have jumps up to call. It out just like we will do a publicly this unbelievable execution because.
In our business when you get that kind of growth that quickly, it's very very hard to manage but somehow they've managed to stay ahead.
In terms of head count hiring for both implementation and service and that the business is just really performing incredibly incredibly well retention rates are are holding up.
Not just holding up I think they are up versus the prior year, which was already a strong year.
And I would say contributing to the overall improvement in retention and stickiness. So I would say that that is probably.
Get in trouble for saying this because then I find all the other businesses, but that's got to be one of the star performers now you're obviously doing incredibly well also and you can see that as a separate segment, it's a little harder to see the <unk> business. It's also getting big I think if I'm not mistaken it's.
Probably never publicly disclosed it but it's getting close to 1 billion $1 billion in revenue so that that's a pretty.
Solid business with again without probably not right to give you too much detail, but revenue growth is strong double digits very strong double digits with a two in front of it let's say <unk>.
And bookings growth is incredibly robust.
As well retention is strong it's just a really performing very well.
With respect to the new user experience I mentioned that about it during my prepared remarks, very excited obviously about the impact of the user experience across the entire portfolio.
In terms of what it's going to do.
With respect to attach I think you mentioned widely in other attached it's hard to tease out specifically the impact of the new user experience at this point in the quarter or even for the year as it relates to any material impact to bookings or to add to attach. However, we definitely believe and what leads to <unk> and the <unk>.
In fact, that's going to make so just to get a tiny bit more color the new user experience is really.
Based on our research driven design that research driven design included our clients as well as our prospects to create a user experience that's very action oriented and its navigation what that means specifically is the ability to move through the process payroll if you will or to your question the ability to buy in.
Attach and a very action oriented navigation, which means you don't really need to know what's next in order to move through it. It also leverages artificial intelligence as well as machine learning to create a very personalized experience for the buyer or the user if you will so that it remembers how the specific.
Individual like to navigate through the system and serves it up that way.
Following subsequent sequences.
Of usage. So the other part that we're very excited I mentioned rolling out the new user experience across the ADP mobile app. The mobile experience one of the things that will really become a competitive advantage for US is the fact that the mobile experience.
Not just for the end user such as that person that would actually purchase wisely, but also.
For the practitioner and so fully web enabled.
User experience using the knee is our user interface, we will certainly lend itself to a better competitive advantage for us in the future. So as you can tell by my commentary very excited what this is going to do for us both as it relates to our sellers being able to add to demo.
And gain volume there as well as our buyers and clients being able to engage in something a lot more user friendly so that we can attach more business.
Thank you thank you Bob.
That's again on the solid results.
Thank you.
Our next question comes from Tien Tsin Huang with Jpmorgan. Your line is open.
Please or telephones muted please on mute.
Forgive me I am sorry about that I hope you can hear me now.
Great results for sure it looks like you're taking some share again.
On the PEO side I, just wanted to make sure I understood.
PEO revenue growth coming in beneath.
WMC grows.
It was unusual some of it was.
Benefits participation.
And salary driven but just trying to understand is that more of a mean reversion change.
Change that you were talking about or is there a quality sort of.
Lucas that maybe we should the hunting and I'm, just trying to better understand that that trend and that that might persist for some time.
Listen I'm glad for the question and I'm also glad for the answer right because mean reversion is my favorite determined.
When you get into large businesses and large economies that as it is.
A powerful force in the universe and Thats exactly what it is if you remember this happened with some of the data that was reported by the fed in by US in terms of employment that in the initial stages of the pandemic. The jobs that went away. The most the most quickly in terms of quantity.
Were kind of lower wage jobs that generally don't have high benefits participation rates and even though our PEO is generally white collar to great great color. We experienced the same thing there in the PEO. So ironically at that time, it looked like our benefits per employee Worksite employee.
We are rising, but it was really because of the averages and because of the mix shift and now we have this mean reversion, where even though the white collar jobs are growing and wages are growing like everything is going exactly as you would want and expect in the PEO you have this unusual thing because of the pandemic with a lot more jobs coming.
Back that are people, who don't have benefits. So it makes the benefits revenue grow slower than the worksite employee number but it has nothing to do with any kind of policy change or or change in and kind of our philosophy or what I was really just a re normally or a normalization back in my opinion to where we were.
Before we're trying to assess kind of how long that takes and it's probably another quarter or two there is a second factor that I think that's contributing to this which is that state unemployment rates are coming in a little bit lower than we had expected because some states because of the strong employment market, even though the.
Initially raised unemployment rates because they thought they were going to have big problems in terms of people filing for unemployment, obviously now with what's happening it's going in the other direction and a few large states have actually lowered unemployment rate that's not.
It's a factor it's not a huge factor I think that the mix shift issue is mathematically and this mean reversion is 95% of the explanation by the way, we don't want necessarily minded one way or the other because as you know we.
We treat benefits revenue as a pass through so theres really no profit and no margin. So it's really it's really not relevant for us in terms of how we manage the business other than we have to explain it to obviously our speed.
Yes.
Thank you for the complete answer it's really helpful. Thanks.
Our next question comes from Bryan Bergin with Cowen Your line is open.
Hi, good morning, Thank you.
On bookings. So you cited an acceleration towards the high end of the range in <unk> and you were tracking below that in the first half of the year. So I'm curious what were the key drivers of that better performance you saw in <unk>.
<unk> deals that were converting some improvements in sales force productivity trends and then just on the outlook for the fiscal year. It sounds like Youre confident that momentum here is carrying through as well as I guess the removal of potential omicron conservatism. So I just wanted to clarify if that was fair.
Fair enough.
We did see strength in the third quarter. As you mentioned, we saw strength that was in line with the higher end of our full year guidance in the third quarter, specifically on accelerated result, we expected that and we deliver that.
Did see strengthen our down market businesses, specifically the run platform sales as well as retirement services.
We also saw strength in our international business, and then last but not least I think Carlos mentioned during his prepared remarks, the strength that we saw on PEO bookings, but the entire HR Io portfolio, which is what's reported in employer services.
It did have specific strengths. So again thats the downmarket, Ron retirement International MBA employer services <unk>, that's where we saw the strength in terms of how we feel stepping into that into the fourth quarter in terms of any quarter. The strength that we saw was actually delivered towards the end of the quarter. If you will in March.
That really gave us the confidence to narrow our guidance heading into the fourth quarter and feel optimistic as we step into the fourth quarter with respect to the overall macro environment and so you mentioned the.
The on the crime that we needed to last quarter, we didn't see that materialize and as we sit here today. The economic tailwind is that we see in the market.
The challenge is that businesses are facing with the increased complexity of new legislation and the tight labor market. There are a lot of things that are out there that are giving us the confidence that we will continue to add to execute in the fourth quarter and as such we felt it right to narrow the guidance range to the 13% to 16%.
For the full year outlook and just as a reminder, when we talk about bookings I think Maria mentioned, it and I'm sure. All of you remember that we really talk about Es bookings. It was several years ago that we changed our approach to disclosures because we thought that disclosures in the PEO were.
We're better in a in a format, where we really talked about growth of Worksite employees, it's very easy to kind of do the math and the appeal. When you talk in those in those terms, but to be crystal clear.
Bookings were included in overall bookings they would have been meaningfully higher for ADP.
Okay. That's helpful.
I know you don't want to quantify fiscal 'twenty three outlook you have I'll give this a shot what are some of the puts and takes we should be thinking about for next year or anything you want to call out as it may relate to comps or dynamics from this fiscal year that may not necessarily carryforward.
Yes, I think that.
First of all no specifics for 'twenty, three we're going to wait until the next.
Next earnings call, we have before we give more color on 'twenty three but as I said earlier, we were very comfortable to fundamentals and we think we're in a good spot.
We overcome some of the challenge that we referenced last quarter in terms of making sure. We're appropriately staffed for the bigger business. We now have.
We did that well going into the into the busiest quarter of the year. So that's all in good shape.
<unk> you.
Probably better with the numbers with me on that.
What's the potential impact on float balances et cetera.
Certainly.
It's pretty clear that we will have higher client fund interest next year. However, how much we're not quite sure yet even though we're seeing rates go up certainly there's lots of volatility in the rates.
There's certainly lots of things going on so.
Ill come back to the way I ended my prepared remarks, and that was that we very much we will be mindful of what we shared with everybody at the Investor Day in November and we will make sure that we have those.
Those targets in mind, as we prepare and get ready to release more information on <unk> three and it is a non-GAAP term, but it's safe to say that client funds interest will be up a lot.
Sure.
Alright, Thank you very much.
Our next question comes from Eugene Simona with Moffat Nathanson Your line is open.
Thank you good morning.
I'll start with the macro level question.
<unk>, obviously has its finger on the pulse, but very large swaths of the economy I'd say, it's always very interesting to hear your guys' perspective on kind of real time read on what's going on across the different pockets of your client base, especially now that we are experiencing volatile macro environment would you add.
Mind, providing us with a little bit of that commentary and what you've seen today across your client base pockets of strength and weakness.
Sure as you know, we obviously our commentary is generally focused on the labor markets.
This morning, I was hearing reports about what's happening with consumer spending which is.
Quite robust that obviously ends up having an impact on labor markets because people who are in the service sector are people who are.
Serving consumers end up hiring people or to fulfill those those that demand, but generally speaking our comments were really around the labor markets and as you can see from our pays per control growth some of which is related to the previous question about comparisons ray like the comparisons are easier and they will get harder next year in terms of percentages.
But the percentages don't matter as much as the absolute numbers right in the absolute numbers are are strong I think our robust and I think as we alluded to the labor market is almost fully recovered.
We obviously keep an eye also on things like GDP GDP growth.
Absolute GDP dollars have already surpassed pre pandemic levels and theyre kind of in line to get back to trend growth or exceed trend growth on a on a real basis rate, which because you have to factor in obviously, the fact that we have some higher inflation.
Now so I mean, our perspective generally is that the economy is very strong like based on the things that we're looking at in our business, but we obviously live in the real world that we have to think about the next quarter or two but also about 12 months from now and 24 months from now and.
Finance 101 would tell you that increase in interest rates that are expected from the fed and that have already been priced in which are helping our client funds interest on the two year five year seven year and 10 years I think we'll all slow.
At some point.
Economy, which is the intention I think of the federal reserve to get inflation under control, having said all of that.
You have to make your own decisions on whether or not that will be navigated appropriately to a quote unquote soft lending, but we had.
10 years from 2011 through call. It 2010 through 2020 before right before the pandemic of what I would call relatively.
Historically speaking reasonable growth and GDP call it to two 5% GDP growth gradually recovering employment so if.
We go from three or 5% GDP growth to two and a half or two we like that and I think we've delivered some pretty outstanding results.
For all stakeholders during that during that kind of period of time, So we would not like a recession.
I was just like no one else would like a recession.
But.
But I think if you believe that.
The best is behind us that doesn't necessarily mean that things are not going to be good going forward because we all of the indicators. We're seeing right now are really strong underlying.
Strong underlying labor markets and we also have in the U S administration that will be in the seat for another call. It three years. Despite what happened in the mid terms that is.
Generally.
More favorable towards employment regulation.
<unk> and <unk>.
That I think is a favorable tailwind for our business as well in terms of just on a macro on a very macro level. So I think we like the environment.
If the best the best scenario for Us frankly, which would be a homerun is that growth gradually slows.
Not to the point, where there is a recession, but where interest rates stay at the rates that they are at particularly like kind of a three to five to seven years and that really is a pretty.
Large tailwind for us from a from a bottom line standpoint.
Got it got it thank you very helpful.
Then quickly on my follow up staying with the macro theme.
And as I believe they are riding high so maybe for Don.
Can you give us a quick overview of how inflation you think impacted your results this quarter.
Puts and takes in the P&L.
Yes so.
A couple of things over the last quarter as we said we were going to.
On our last call.
We did an off cycle salary increase to make sure that.
We kept our associates happy and hope so that was positive we also have some.
Some some bonus programs and some sales commissions accrued accrued programs.
We're certainly anticipated and booked in the quarter.
So we are from a cost side.
We were able to do those things and still deliver the improved margins. So we think that was very positive for us to do.
The other side of this of course is price increases and.
Two aspects of the price increases.
We haven't yet.
Plant, we haven't yet.
Initiated large price increases with our installed base, we will make sure that we do those things accordingly, reflecting inflation.
Most importantly, reflecting to make sure that our clients still get great value from us in a competitive environment and what we did do though and we signaled this in the last call as well we have increased the pricing on some of our our new offers.
<unk> sales, we had in the last in the last quarter, but that is having a very minimal impact on.
Q3, and certainly won't have an enormous impact on the full year either so so we are making sure that we're focused on pricing both in the base and with new new opportunities new prospects and making sure that we're adjusting our wage levels to keep our employees and deliver the good service that we've delivered.
<unk> to the high retention rate, we have and the only other thing that I would add that we may not always directly linked to inflation as some beating a dead horse here, but the client funds interest obviously inflation is what's driving these higher is higher interest rates. It also happens to also drive higher balances.
A lot of our balances are driven by our tax business, but.
Wages some of those taxes cap, but for example, federal withholding taxes are not necessarily capsule. The more people get paid more tax taxes, we collect and have to remit to various agencies and wages are a portion of our float balances and clearly there is a and <unk>.
<unk> from their overall wage inflation forget about our own inflation that Don is referring to but the inflation in our client base in terms of their own the wages of their employees is really driving is helping our balance growth for sure but more importantly, it's obviously driving.
Our belief that interest rates need to rise rather rapidly, which is now being already factored in into.
Even though the fed controls obviously fed funds rate you can all see what's happening with the one year two year three year five year and what the expectation is for it that's all related obviously directly to inflationary expectations.
Got it got it very comprehensive thank you very much guys.
Our next question comes from Kartik Mehta with Northcoast Research Your line is open.
Hey, Good morning, I was just hoping maybe to get a little bit more on the pricing comments you made if you look at pricing.
Compared to what you anticipate getting in compared to historical levels will be a good way to or are you able to kind of quantify that or maybe just a good way to think about the opportunity to ADP has going forward.
I think the safest thing for us to say right now because.
As Don said, we really haven't finalized that yet as we have not finalized our 23 operating plan. So I think Don is giving you kind of directional color, which is a 100% accurate we've been doing a lot of work and Maria and the team we've been doing a lot of work on.
What's the appropriate.
Pricing policy, if you will Dan mentioned, the fact that our new business is relatively easy because that's something that we control timing wise, whereas.
Price changes to the book of business, we have a cycle that we go through and we decided not to do anything unnatural or out of cycle. So that decision is still kind of in front of us, but I think Don used the word competitive.
We do not live in a in a vacuum and so we are going to do what is appropriate based on what's happening with inflation, but also with what's happening with competitors. So we're going to be watching very carefully what everyone.
Is doing.
From the obviously from the sidelines since we obviously don't have any any direct insights into what our competitors are doing but you get you get competitive signaling and you get.
Hearsay here and there. So we're looking at all of those things, but I get the best way to describe it is whatever our price increase had been.
Historically and it was probably consistent for almost 10 years in terms of kind of what we were telling you in terms of what it represented as a percent of revenue.
It's safe to say that that's going to be higher.
And you kind of have to draw your own conclusions if inflation was 2% and now it's 4%, 5% you could infer because our cost.
Not just our wage costs, which Don alluded to we've already had to kind of build in higher cost for our own associates. We have other costs. We have other services and other things that are being provided to us that are like every other company and we got to cover those costs I think our philosophy is we would like to be in line with what's happening in the market.
And then just one last question just on the float portfolio any thoughts about changing how you manage it or.
Going shorter or longer just because of where rates are and the volatility complete in the near term.
We get this question often and at the end of the day, we keep coming back to the same thing and Thats. The safety diversification liquidity will be invested in alright. So.
We're going to make any any major changes to the way we invest funds I think.
We want to certainly do well with our portfolio, but we also want to be prudent and so we'll continue to do that so there's really no.
No.
Competitive imperative for us to make any changes to the way we've been managing those funds.
In the near mid and long term and I think Thats also safe to say that our philosophy is that we run an HCM technology services company.
And this is a really nice side benefit that for however, long we've been in this business. We have this floating come in it and it goes up and down based on interest rates and the economy, and so forth and I think compared to 10 years ago. It's a much smaller portion of our bottom line.
And so that is both good and bad right I would have enjoyed my life in my tenure a lot more at interest rates not been as low as they were for as long as they were.
But having said all that it puts us in a much better position, where it's much more clear now that Adp's core earnings are not driven by fluctuations in interest rates and the reason we lateral portfolio is primarily because of Don said about safety and security and liquidity.
But it's also because philosophically, we're not trying to gain the market. We're not trying to time the market. We are running an HCM technology services business and Thats our focus.
Thank you very much I really appreciate it.
Our next question comes from Ramsey El <unk> with Barclays. Your line is open.
Hi, Thanks for taking my question.
Nice results on margins in the quarter you guys, Peter our number pretty handily. Despite I think a head count increase could you help us think through the puts and takes with that performance in terms of sales productivity or other drivers and also sort of how you're thinking about those those primary levers for margin expansion as we move forward.
Yes, so as I said, a few minutes ago.
We're very happy with the ability to hire quite a number of service implementation people going into this going into the third quarter, because that's obviously the busiest time of our year. So.
We made sure that.
We got as many people as we credit and we did we did quite well.
I think the the retention rates are suggesting that we've continued to do a good job on behalf of our clients because they are they're sticking around so.
Very very positive.
Forward I think as we once again coming back to the plan a little bit, but we're still still putting together, but certainly as we continue to grow we'll continue to make sure that we.
We staffed accordingly and.
Really not too much color to add there other than we've been successful at the hiring as we said we would be and.
It's not going to it's not going to change dramatically.
Yes.
Any.
Different impact on our overall margin than what we anticipated.
I don't know.
The sales continue to go very well.
Doing very well, we've talked last time about productivity and things reverting back means and Marie if you want to make a comment about sales productivity. We've had good results, yes happy too to add there.
The investments that we're making into the overall sales ecosystem.
To be very balanced so it's really all about the seller enablement, though as mentioned many times. We have this world class sales force Thats out there directly distributing our products and we enable them with an entire ecosystem of modern seller tools.
Separately, where we spent the last couple of years and that thing, especially as clients continue to pivot between wanting in person and virtual so seeing great productivity there.
Also seeing investments in brand and marketing and advertising.
A big piece of the balanced approach that we've taken again and I don't see huge shifts.
In terms of the balanced approach that we're taking but it is really an area that we continue to invest I should mention too and that laundry list digital advertising. So that's an area that we continue to see significant performance year on year in our Downmarket in our mid market in terms of the execution. There. So all of these things.
They are really about continuing the approach that we've had to enable the strong sales execution that we've seen this year and going forward. One last thing on margins that I would add because I think it's something that we've been for years talking about us.
Just a reminder, that the overall ADP margin does get impacted by the mix of PEO in the grocery to PEO compared to employer services. So from a GAAP standpoint, we we.
We do include zero margin pass throughs.
Believe that's the right approach and I think the SEC believes that's the right approach, but I think clearly if you took out zero margin pass throughs from the PEO you'd have a very different margin profile of that business and hence you would have a very different margin overall for ADP I only raised that because it is important to look at those two.
Separately, because you do have a mix shift issue that happens that doesn't necessarily tell you what the underlying strength of those businesses are.
That's sometimes it helps us in terms of our story, sometimes it hurts us, but it's the appropriate thing to guide you to look at.
In this case for example, the underlying margin is much higher because of the pressure that we're getting from zero margin pass through as a result of that mix.
Alright, okay.
That's very helpful.
And could you comment on.
Or update us on your sort of M&A <unk> capital allocation strategy and just in the context of the current macro backdrop are you seeing.
Yes.
The opportunity M&A opportunities change or how are you framing that up internally in terms of your priorities prioritization.
Yes so.
I'll just start with opportunity certainly as all.
There is no shortage of things floating around and things to assess and review et cetera. So we continue to do that but.
As Carlos has said and we've said over a long period of time, if we're ever going to do anything other than a tuck in here and there, which we had we did have one in Q2, but it wasn't a tuck.
Tuck in here and there we're very disciplined in making sure that we're just not adding.
Additional products, where we already have products and making sure that we can keep our portfolio is clean as possible. So we continue to look at opportunities and evaluate things and we will.
We will make the right choices.
When the time should the time come.
On the just in terms of our overall philosophy I don't think we've changed our philosophy, we continue to be committed to the share buybacks that we've committed to committed to dividends and the 55% to 60% range. Although we were a little bit higher I think were 61% from last year, but.
We're committed to that 55% to 60% range.
Yes.
Even though the markets are off with respect to opportunities for M&A, a little bit more and even though the markets are off a little bit and.
I think the valuations that are out there are still quite high expectations at a number of.
People, who are looking to do something with their current operations their expectations really haven't adjusted to a reflected what we're seeing in the market. So it's not any easier yet.
But.
We will watch we will evaluate and if we see something or things that makes sense.
We will do what's appropriate.
Got it alright, well thanks, so much.
Our next question comes from Mark Marcon with Baird. Your line is open.
Good morning, and thanks for taking my questions.
I wanted to dig in a little bit.
On the bookings commentary can you talk a little bit about.
Ron you saw strong growth there.
Much of that was new businesses versus competitive takeaways and how would you characterize the competitive takeaways are they.
From your biggest competitor in Rochester or are you seeing more from locals and regionals that haven't been able to keep up with the technology changes.
Just any sort of depth there and then.
Can you also talk a little bit about the written.
<unk>.
Sure.
Service solutions that you have and what Youre seeing there.
Lastly.
Can you discuss a little bit.
What you're seeing with regards to to workforce now in the mid market.
So happy to be the wanted to start here in terms of the strength in bookings so specifically to run Mark I think.
In terms of the commentary around the competitors in Rochester, and others, what I would say there is our continued focus on competitive takeaways has not waned in terms of the strength of the actual run sales.
And bookings performance, it's partially anchored in the amount of new business formations that we've continued to see and so there is definitely strength, there, but certainly not for a lack of interest and the competitive side of the house.
Much on retirement services for a minute as well as the SaaS about that I would say.
They're definitely tailwind there in terms of attach specifics to our run portfolio and so as you are aware significant legislative changes that have happened in the retirement environment state by state and Thats yielded.
A tailwind for us in terms of the offer that we have and certainly that makes an impact in terms of our ability to.
So, it's all new logos as well as competitive takeaways because the combination of Ron in retirement in that in this type of an environment.
Credibly compelling to compete out there in the market. So I don't know Carlos if you had anything else to add to that no. I mean, we try to stay away from obviously any kind of making comments about specific competitors, but I would say that.
Specifically in Sps, we do watch this kind of balance of trade.
Very carefully I think I talked about it every quarter in terms of its important to me like one of the most important things for us in terms of long term sustainability and.
And durability of our business is as market share is really being able to grow units. We also love share of wallet and we look to sell additional business et cetera, but that's.
That's important to us and at least the figures that we're seeing in terms of our large national competitors, our balance of trade remains positive and improved in the third quarter versus the second quarter. So that that can meet tells me that I think we're still I think in a good place competitively in that we're doing all the right things, but having said that it is.
A very competitive market. There is no question about that and.
And everyone I think has.
Including some of our national competitors have good products and good go to market strategies and we are in the trenches every day competing.
Trench warfare with some of those some of those competitors, we feel pretty good based on the data that we keep track of that we are.
Doing well in terms of balance of trade and also in terms of market share.
And Mark you asked about workforce now bookings so.
So we started color on some of this already but in addition to the <unk> business, which is doing really well and uses workforce now and then the PEO business, which also use workforce now so just the mid market HCM solution, we didn't call. It out but that also did very well double digit growth and I think the other last one you asked about was retirement services.
That business as you probably know has some significant tailwind because of regulatory changes that are going to get they're going to become potentially Gale force winds in terms of with the new I think it's called secure two point or because I think the first one was the secure act it looks like it's going to make its way through Congress.
With bipartisan support.
And the first wave in the first version of that has already created some strong demand.
In addition to what was already happening at the state level, where several states, we're requiring small businesses too.
Inventory required to provide a retirement our retirement plans. So all those things are are a tailwind for that business that would be one of those businesses that I would describe as.
No.
Doing incredibly well, but trying to keep its head above water to meet demand. It's a good problem to have trust me like I've been around long enough to know these are this is a good problem to have.
But it's still a problem and so we're busy adding resources and trying to be appropriately staffed in our RF business because it's a it's definitely a growth engine.
Can you size it Carlos in terms of I mean, we are aware of.
Becoming Gale force winds just wondering how meaningful it is going to end up being to you on the whole.
I would say is this a general range. So you have some sense.
Smaller than the HR business. For example, so you shouldnt assume that we have $1 billion business. So you don't start getting too many images of of grandeur.
It's.
A big it's a big business call it maybe somewhere around half ish of that of that business I don't know Danny before I get into trouble, just say hundreds of millions hundreds of millions of dollars, but growing.
I think also at one of the faster rates I think in terms of our our businesses here in both for bookings and for and for revenue.
Great and then the follow up is this.
Carlos you mentioned Youre non-GAAP description in terms of.
In terms of interest income on the float.
For next year, how much of that when we take a look at the analyst day discussion and the margin discussions.
We typically look at.
The margin expansion ex float how much would you let that flow through I know you aren't giving us the <unk>.
Three guidance, but just philosophically how are you thinking about that.
Well first of all philosophically, we don't find anything so as you know there is a nice little schedule that we include that allows everyone to do the math and so next quarter you Im sure Youre going to do the math.
And Youll ask us how come you are or aren't allowing X presented to flow to flow through because the math is actually fairly straightforward. We give we give you. The the balances that are maturing in that year, because since we ladder. The only relevant issue is really what's maturing as well as new money invested in that year, which is what benefits from.
The higher the higher rate since we hold to maturity.
And you'll know what we will give you a forecast of what our balance growth is going to be and we'll also give you a forecast of what yields are going to be in the next year. So you'll have all that math and it would be very easy.
To do and then what you'll have to do is quiz us on.
What was the other side of the ledger in terms of what are the other factors.
In terms of that led to the final.
Our reported or in that case guided.
Net income figures or EBIT EBIT figures and I think one of the things that has changed from Investor day is that.
There is no question that interest rates are way up and client funds interest our forecast for client funds interest would be much higher because you can do the math just like we can.
Other variable that we want to take another quarter to make sure that we think through and then we finalize our plan before we communicate is that inflation is also way up in.
In multiple ways, including on wages as Don alluded to right. So when we had investor day, we had not yet taken this action of an off cycle.
Merit increase or wage increase we had not yet.
We are now fully accrued for some of our incentive bonuses, which are driven primarily by performance, but come in handy. When you are competing for talent and trying to hold on to talent and so those are all things that we have to kind of way now and then the last factor being I think Don talked about.
Price increases where does that finally land will also have an impact. So it is a few more moving parts than I think is typical for us and I think it's just it's important for us to make sure we add it all up and wrap it all up but one thing I can guarantee you is you will have transparency.
Always appreciate that thank you Carlos.
Our next question comes from Jason Kupferberg with Bank of America. Your line is open.
Good morning. This is Matthew on for Jason. Thank you for taking our question I wanted to ask about the <unk>.
Relative intensity and pricing actions, maybe just talk a little bit about the pricing and promotional environment, but you are seeing currently I'll be back to pre pandemic levels in the pre pandemic trends any changes worth calling out in the mix so aggressive misspoke.
Competitors.
Taking the segments, even I know you compete across a lot of different segments and you can help us there.
Yes.
As alluded to the competitive intensity I think you called it trench warfare and Thats certainly the case I think in terms of being back to pre pandemic levels with respect to pricing and promo is we're definitely seeing.
The competitive intensity that would be reflective of prior years, both as it relates to the <unk>.
Trench warfare as well as the the pricing element of it. So I think it's fair to assume that it's still very competitive I think thats part of the reason that as we think about our price increases.
Whether it's on the new business side or on the existing client base, we're being incredibly thoughtful market by market call. It country by country segment by segment product by product to ensure that we continue to remain.
Thoughtful in terms of the overall price value equation that does keep us remaining in a competitive pricing environment. So I would say that the intensity has not waned at <unk>.
<unk> is a very formidable competitors out there and we're confident that we continue to.
To win in the market and that we continue to take a balanced approach on the price value equation.
Great. Thank you and then just maybe turning to the growth in average Worksite employees can you talk about what is driving the strength you've seen in particular.
Particular verticals is it broad based.
Additional color you can provide thank you.
And I think the.
Probably the biggest picture the answer is no. There is no specific verticals or when I were too big and too diversified.
So really its not geographic or verticals, where all of that it's basically very strong bookings with very good retention and also growth of the client base.
This pays per control that we talked about in employer services.
The same phenomenon in the PEO, where the clients themselves are are recovering right and hiring at a faster rate than they would have been because they had.
Either shrunk or hadn't hired during the pandemic and so that is a tailwind also for the PEO, but the big biggest factors are sales minus losses and then.
What's happening with the base, which is obviously strong.
Thank you.
We have time for one last question and it comes from the line of James Faucette with Morgan Stanley . Your line is open.
Great. Thank you so much.
I wanted to follow up on.
Question.
Has to do with.
Competitive intensity, but I guess.
Previously you talked about you had some expectation for slight retention deterioration, but that isn't playing out and in fact, it seems like your outlook is improving.
You mentioned mid market and that and international we're main contributors but.
Are you seeing anything also in terms of business closures in the down market, that's performing better or any other contributors that are helping out there.
I think the best way to describe it that accurate like really happy with international but also in particular, the mid market I think we kind of underestimated as usual there are multiple moving parts. So you had the pandemic at work and so we were looking at kind of our historical.
Trends in thought there'd be some normalization within the mid market, but we also had forgotten that right before the pandemic not break before but 12 months to 18 months before the pandemic, we completed our migration onto one single platform, which is our modern workforce now platform huge process improvement initiatives that will lead.
Hi, John IOL on the team there that they really improved the underlying strength of that business right. So then you get into the pandemic and you get that noise now you've come out of the pandemic and there's no scientific way to.
Paul that apart, but it does feel like our mid market business has a new floor. If you will or a net floor is not the right way to describe it a new level of retention that is higher than it was.
Before that's at least right now the way it looks in the our hope going forward. So that's really good news.
The other item on the auto business that you are mentioning which is really more of a down market.
<unk>.
Again, our big subscribers to the school of common sense and.
It's playing out kind of the way we expect it because if you look at the reported level of bankruptcies from government figures they are pretty flat.
But that really is not the way the small business market works that everyone's declares bankruptcy like some people get in the business and they stop their business and they never declare bankruptcy. So that is a good proxy and it's one indication, but it's not the only one and so we have seen some normalization in that down market business because of what we.
Call non.
Non controllable losses, right, which would include out of business bankruptcies all of the all of the above it is a big enough factor in that segment that it's impossible to believe that it would normalize which is why we plan. The way we did the good news is that it hasnt normalized as fast as we thought and the other part of our business the controllable.
We have performed better than we expected and so net net we are in better shape than we thought but just because you have the second best retention you've ever had doesn't mean that it isn't down from the previous year and so I just wanted to be crystal clear on that because others may have a different perspective on that which would defy.
I think.
I think.
With the finance 101 theories and so forth because.
The number of the percentage of losses related to the.
The economy and so forth are just significant India in the down market and so when you have this unbelievable tailwind you think about the amount of stimulus that was put in with PPP loans and so forth.
And stimulus checks remember some of these small businesses are just like consumers there one person companies or 5% companies and when they get a stimulus check that's like the stimulus check going to their company that stuff is all coming out of the system and interest rates are going up it will it will normalize unfortunately, but you see the outcome.
Net net for us, which is still incredibly gratifying and way above what we would've expected.
Just to clarify.
Best comment James was with respect to the Downmarket only overall it was an all time high sorry, yes.
Okay.
Yes, thanks for that and then so does that so should we interpret that to mean like as far as the that we should still fixed.
Some deterioration, particularly is that down market normalizes, because that hasnt happened, maybe as fast as you thought but the drivers are still there, whereas on the mid market Youre feeling better that your new platform can actually.
Help prevent prevent.
Or improve that retention versus what your thoughts are you kind of have one thing thats permanent one that's still to happen and net net I mean, there may be still some deterioration, but not as much as you thought is that a fair assessment I think that is a fair assessment that you should standby for further details next quarter for next calendar year next fiscal year, because I think we gave you enough.
Color just what you just described is exactly what we expect to happen for the fourth quarter and you see the outcome in terms of our overall guidance for for retention, but I think what's more important for you guys is I hope not just next quarter, but the next year and I think we will have another several months of information by then and we have some other businesses as I talked about.
The comprehensive our HR <unk> business.
Sure Yes.
I mean, there is other businesses that are frankly outperforming outside of kind of the economic factors and the mid market businesses that are outperforming so it's it's really not appropriate yet to jump to any conclusions, but I think your general thesis is exactly correct.
That's great. Thank you very much everybody.
This concludes our question and answer portion for today I am pleased to hand, the program over to Carlos Rodriguez for closing remarks.
Well thanks for all of you for joining us today I hate to end on a down note here, but I think it's important for us to acknowledge.
What's happening in the Ukraine and express our sympathies for the <unk>.
Folks that are in the midst of that of that conflict. We obviously like everyone else would like to see the violent than we have.
Very small exposure from a revenue and business standpoint.
In Russia, and Ukraine, but we do have quite a number of associates and a decent sized business in eastern Europe , and so we would love to see this violence and certainly not to.
Fred we have been doing our part along with some of our colleagues in other companies in the humanitarian efforts to provide relief.
To the people in Ukraine, but what's really been most gratifying to me is not just what we've been able to do through our foundation and through ADP, but.
Our associates have done globally kind of.
Reaching into their own pocketbooks to help their fellow global citizens.
We increased our match our matching contribution amounts for associates, who wanted to provide the various relief agencies. Then we had the largest I think reaction we've ever had any global crisis and it's obvious why because when you see the pictures of what's going on and it's truly truly horrid.
<unk> and I mean.
For me personally to see people, leaving everything behind.
And children and families having.
Having to fleet is personally very very painful so our hearts go out to those folks and we.
We pray that all of the leaders involved can come to some sort of resolution and then the violence, but with that I will thank you once again for participating with US today, and we look forward to giving you all the information you're looking for for fiscal year 'twenty three on the next earnings call. Thank you very much.
This concludes the program you may now disconnect everyone have a great day.
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