Q4 2022 Automatic Data Processing Inc Earnings Call
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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 fourth quarter fiscal 2022 earnings call.
I would like to inform you that this conference is being recorded.
After the Speakers' presentation, we will conduct a question and answer session I'll now turn the conference over to Mr. Daniel Hussain Vice President Investor Relations. Please go ahead.
Thank you Michelle and apologies to everyone for the brief delay and welcome everyone to Adp's fourth quarter fiscal 2022 earnings call and webcast.
Participating today are Carlos Rodriguez, our CEO Maria Black, our president and Don Maguire our CFO .
Earlier. This morning, we released our results for the quarter our earnings materials are available on the SEC website, and our Investor Relations website at investors ADP Dot Com, where you will also find the investor presentation that accompanies today's call.
During our call, we will reference non-GAAP financial measures, which we believe to be useful to investors.
To exclude the impact of certain items.
<unk> 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 at Ballston risks. 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.
With that let me turn it over to Carlos.
Thank you Danielle and thank everyone for joining our call.
We finished our fiscal 2022 with a strong fourth quarter that featured 10% revenue growth and 12% organic constant currency revenue growth.
We also delivered 170 basis points of adjusted EBIT margin expansion.
Which helped drive 25% adjusted EPS growth.
For the full fiscal year 2022, we ended up with 10% revenue growth 90 basis points of margin expansion.
16% adjusted EPS growth and importantly, we achieved record bookings and near record level of retention, reflecting our strong position in the HCM market.
Let me cover some highlights from the quarter and year before turning it over to Maria and Don for their perspectives.
Starting with employer services new business bookings.
We had a fantastic Q4 with growth accelerating from the prior quarter, resulting in our largest new business bookings quarter ever.
And with the strong finish we were very pleased to have delivered 15% es bookings growth for the year.
Despite several sources of global uncertainty, including the ongoing effects of the pandemic.
Conflict in Ukraine inflation and concerns about global recession are compelling suite of HCM offerings has continued to resonate throughout the market.
In total we sold over $1 $7 billion in Es, new business bookings in fiscal 2022.
And well over $2 billion, when including the PEO.
Marking the first time, we've exceeded 2 billion in bookings.
Maria will talk more about the growth opportunities ahead, but clearly we are incredibly pleased with what is the best performance by our sales force that I've seen in my 20 years with ADP.
Moving on our full year Es retention of 92, 1% was nearly flat versus last year's record level of 92, 2%.
As we once again exceeded our expectations in the fourth quarter.
Client retention is driven by several factors, including product and service quality.
Business mix and macroeconomic factors.
And our expectation at the start of fiscal 2022 culled from macroeconomic factors like F&B out of business rates to drive some normalization in retention towards pre pandemic levels.
We did see some of that play out, but clearly less than anticipated.
More importantly, our product and service teams have continued to deliver a best in class experience for our clients and particularly so on our modern and scaled platforms.
We achieved record client satisfaction levels for the year and we once again set new record levels for retention in several of our businesses, including our mid market.
So although you will hear from Don that were once again, making an assumption for a modest amount of macroeconomic related normalization retention in fiscal 2023.
We are excited to have delivered such a strong performance in fiscal 2022 and look forward to maintaining our retention rates at these historically high levels.
Moving on to the employment picture, our pays per control growth metric was 7% for the quarter and 7% for the year, reflecting a persistently strong demand environment for labor among our clients that has continued to exceed our expectations.
This growth has served as a testament to the resilience of our clients.
And although we expect pays per control growth will naturally slow in coming quarters.
<unk> conditions today remains strong with our client data, suggesting that near term demand for labor remains healthy.
And finally, our PEO business delivered another great quarter as it wrapped up a strong year.
We had average worksite employee growth of 14% in Q4, and 15% for the year and we were thrilled to have crossed the 700000 Worksite employee Mark this quarter.
As you know I joined ADP, two decades ago, when ADP entered the PEO market through an acquisition.
And as bullish as I was about the PEO industry back then I'm not sure I could have anticipated we would be here 20 years later still growing at this combination of pace and scale.
But the ADP total source team continues to deliver a great platform, great service and a great benefit experience for our PEO clients and there is plenty of opportunity for us in the years ahead to serve even more businesses.
Taking a step back fiscal 2022 was unique in a number of ways.
We experienced strong demand with over $2 billion in worldwide, new business bookings and near record level of retention.
Which together drove us to surpass 990000 clients at year end, putting us on track to exceed 1 million clients any day now.
At the same time, we've had to manage this growth in volume with prudent head count growth given tight labor conditions.
The way we've been able to do that is through efficiencies of course, but also playing hard work by our associates.
And for that I, thank them for their efforts and for coming through for our clients once again.
I'll now turn it over to Maria.
Thank you Carlos with fiscal 'twenty, two behind US I want to take this opportunity to review, where we stand on some key initiatives and provide an update on where we are heading in fiscal 'twenty three.
At the core of our client experience as their interaction with our platform and one product initiatives. We have talked about throughout fiscal 'twenty. Two is our new unified user experience, which was designed to be more action oriented and contextual and to move us from transaction oriented application.
Berrien oriented applications in other words, more intuitive better looking faster and more consistent across our solution.
To achieve this we have applied a research driven approach.
Informed by the data and insights we have gained and working with our nearly 1 million clients.
Our focus has been to listen to our clients learn from them and utilize their input to design the best experience.
In fiscal 'twenty, two we moved hundreds of thousands of clients over to this new user experience, including our clients on run ICM and Nextgen HCM as well as over 20000 workforce now clients.
We also moved the ADP mobile app over to the New U S.
Feedback so far has been extremely positive and in fiscal 'twenty three we plan to expand this rollout further to remaining workforce now clients as well as two additional modules and experiences within our key platforms.
Workforce now in particular has been exciting for us for a few reasons beyond user experience.
First is its growing traction in the U S enterprise market. Just this quarter ADP was rated for the first time and overall customers choice provider and Gardener's annual voice of the customer study. This was the highest tier possible. It was based on a perspective from end users with 1000.
Or more employees and is a reflection of our continued momentum in selling workforce now to the lower end of the U S. Upmarket. These past few years.
This momentum builds on the already strong presence in traction workforce now has had in the U S mid market and HR, Okay and in Canada, All places where it is highly differentiated.
Second is the continued rollout of our next Gen payroll engine to a growing portion of our new workforce now clients.
Our next Gen payroll engine not only benefit from having a global native public cloud architecture, but also empowers our platform like workforce now to offer a better product experience and enables us to offer better service.
We are incredibly excited for our payroll Amgen to continue to scale up to larger and more complex workforce now clients over the coming quarters.
And finally with talent and engagement and increasingly important aspect of the HCM suite, we continue to focus on our ability to help employers better connect with their employees.
This quarter, we will launch a new offering that we're calling voice of the employee a robust employee survey and listening tool, which Leverages survey.
Instruments from the ADP Research Institute to offer clients, a way to seamlessly capture employee sentiment across the employee lifecycle and one of the things I Love about this solution is that it was born out of the elevated client employee engagement are returned to work workplace solutions have been able.
To drive and it reflects the ability of our global product teams to quickly identify an opportunity and develop a solution to meet a need in the market move.
Moving on we made some exciting enhancements to the widely program. This quarter, most notably we now offer wisely self enrollment with full digital wallet capabilities for Apple and Google pay, thereby allowing employees instantly receive and start using their wisely account without support.
From their employer and without having to wait for a physical card.
We also expanded our war earned wage access solution by offering a seamless one off solution for wisely members through a deeper integration with one of our key partners.
The offering enables employees to receive a portion of their earned wages prior to payday and most importantly is free for employees who use wisely.
With these enhancements and more on the horizon, we're incredibly excited about the growth prospects for wisely and look forward to taking it from over $1 5 million active members today to an even larger portion of our U S payroll base over the coming years.
During fiscal 'twenty two we also highlighted the strength of our retirement services business, a key component of our HCM suite we.
We offer recordkeeping services provide unbiased independent advisory services and give our clients their employees and financial advisors access to over 10000 investment options from over 300 investment managers seamlessly integrated with our key platform and.
With the ADP mobile App.
With over 125000 retirement plan clients leveraging solutions, including four one K simple and stop plans. We are proud of our scale today, but even more excited about the significant opportunity in the market as we look to expand our market share within and beyond.
Our payroll base of clients.
Fiscal 'twenty, two with an incredibly strong year for our retirement services business and we are looking forward to another strong year.
And finally, our next Gen HCM solution is getting closer to a broader rollout as we continue building on the implementation capacity for our pipeline of salt clients as we shared at last year's Investor Day.
While we are excited about all of these product enhancements and others to product only drives growth when our sales and marketing organization can match it to a buyer and translated into new business bookings and to that end. We are excited about our sales and marketing momentum and the continued investments we have.
Land to drive growth this year.
First the product improvement I, just mentioned as well as many others are all intended to drive higher win rates and expanded breadth of offerings or higher price realization and we fully expect our salesforce to continue capitalizing on these opportunities.
We are making continued investments in both digital and traditional marketing into our brands and into our broad and growing partnership network.
Third we are excited to have invested at year end in sales head count and are stepping into the new year with hundreds of additional quota carriers and we expect to be able to grow our average sales head down in the mid single digit range over fiscal 'twenty three.
Continued execution on our product and our sales and marketing strategy is ultimately designed to drive sustainable growth and for fiscal 'twenty. Three we expect to drive bookings growth of 6% to 9% bracketing around our medium term target of seven.
<unk> to 8% from Investor day.
Growth is a priority for us and we look forward to continuing to update you on our progress now over to Don.
Thank you Maria and good morning, everyone. Our Q4 represented a strong close to the year with 10% revenue growth on a reported basis and 12% growth on an organic constant currency basis ahead of our expectations, despite higher than expected FX headwinds from a strengthening dollar.
Our adjusted EBIT margin was up 170 basis points about in line with our expectations as leverage from strong revenue growth overcame higher selling expenses PEO pass throughs and growth investments like the sales headcount growth Maria just mentioned and our robust revenue and margin performance drove 25% adjusted EPS.
<unk> for the quarter supported by our ongoing return of cash to our investors via share repurchases.
For the full year revenue landed a 10% growth.
Delivered 90 basis points of margin expansion offsetting a few different sources of incremental expense over the course of the year and adjusted EPS grew to $7 and one up.
About 16%.
For our employer services segment revenues in the quarter increased 8% on a reported basis and 9% on an organic constant currency basis, the stronger than expected revenue growth was a function of continued outperformance on key metrics like retention and pays per control and our es margin increase of 140 base.
This points was a bit lower than previously planned as a result of growing head count faster than previously anticipated for.
For the full year, our revenues grew 8% on a reported basis and our Es margin increased 110 basis points.
For our PEO revenue in the quarter grew 16% accelerating slightly from Q3 average worksite employees increased 14% on a year over year basis to 704000 as bookings retention and same store pays all continue to perform well.
Margin was up 260 basis points in the quarter due in large part to favorable workers compensation reserve adjustment for.
For the full year, our PEO revenues in average Worksite employees grew.
Both grew 15% at the high end of our guidance ranges and our margin expanded 80 basis points.
I'll now turn to our outlook for fiscal 'twenty three.
Beginning with some overall remarks, we have on the one hand and inflationary environment that is creating upward pressure on our expense base and at the same time, we recognize there is clearly concerned about a potential upcoming global recession or that we perhaps are already in one.
On the other hand, our momentum entering fiscal 'twenty three is strong and there are no obvious signs of near term strength and if the market's forecast a higher interest rate tools, we are positioned to benefit from a continued rebound in the interest income.
So our focus for now will be to continue executing on our strategy and to that end, we have been and will continue to be making investments in head count would you perhaps didn't get a chance to last year and a tight labor market and we also expect to deliver growth.
At or above our medium term annual objectives shared at our November 21 Investor day.
Under the numbers.
Beginning with Es segment revenues, we expect growth of 6% to 8% driven by the following key assumptions.
We expect our es, new business bookings growth to be 6% to 9%, which Murray to cover.
Yes retention, we finished the year at 92, 1% a touch below last year's record level and we believe it's prudent to anticipate some further normalization of SMB business levels in fiscal 'twenty three even while we maintain record retention levels in some of our other business units.
Our initial assumption is for a decline of 25 to 50 basis points in Es retention for the year.
For pays per control with employment back near pre pandemic levels, we anticipate a return to a more normal a more typical 2% to 3% growth range.
We normally talk about prices contributing 50 basis points to our EPS growth rate, we expect that benefit to be around 100 to 150 basis points. This year.
And for client funds interest revenue, we expect higher overnight interest rates and higher repurchase rates on maturing securities should combined with our continued balanced growth to drive interest income up nicely.
Our short portfolio, which is invested in overnight securities will benefit assuming the federal open market Committee increases the fed funds rate over the course of this fiscal year and.
And our client extended and loan portfolios will benefit as we reinvest maturing securities at an expected rate of about three 3%.
Between those two drivers we expect average yields to increase from one 4% in fiscal 'twenty two to two 2% in fiscal 'twenty three.
We expect our client funds balances to grow 4% to 6% supported by growth in clients pays per control and wages and this is on top of a very robust 19% growth we experienced last year.
Putting those together, we expect our client funds interest revenue to increase from $452 million in fiscal 'twenty, two to a range of $720 million to $714 million in fiscal 'twenty three.
Meanwhile, the net impact from our client fund strategy will increase by a bit less from $475 million in fiscal 'twenty two to a range of $675 million to $695 million in fiscal 'twenty three.
And as a reminder, this is the number that impacts our adjusted EBIT.
A slightly lower growth year is due to the expected increase in short term borrowing costs, which track the fed funds rate.
<unk> enables us to a lot of our portfolio and divest further out on the yield curve that we otherwise would as we gradually reinvest on maturing securities. This gap between client funds revenue and the net impact from our client fund strategy should reverse and again become positive.
Back to the Es revenue outlook.
One more factor to consider is FX headwind clearly with the year over year period into the dollar with a weaker pound and with about 20% of our EES segment revenue being generated outside the U S.
Factoring in a fair amount of FX headwind for fiscal 'twenty three of well over 1%.
For Es margin, we expect an increase of 175 to 200 basis points.
This coming year, our expense base will be increasing more than it does in a typical year in part due to inflationary pressure on our overall wages and in part due to head count growth some of which we did late in fiscal 'twenty, two and some of which we're planning for fiscal 'twenty three.
Because our margins are benefiting from strong revenue growth outlook, including growth in client funds interest revenue, we're pleased to be able to guide to the strong es margin outlook.
Moving onto the PEO segment.
We expect PEO revenues.
<unk> revenues, excluding zero margin pass through to grow 10% to 12%. The primary driver for our PEO revenue growth because our outlook for average worksite employee growth of 8% to 10% that would represent a bit of a T cell duration from last year, but of course, we are contemplating much less contribution from same store.
<unk> pays per control in fiscal 'twenty, three compared to fiscal 'twenty two.
This 8% to 10% growth compares to a high single digit target.
That we outlined at the Investor day in November .
We expect our PEO margins to be down 25 to up 25 basis points in fiscal 'twenty three compared to a strong margin results in fiscal 'twenty two.
Adding it all up our consolidated revenue outlook is for 7% to 9% growth in fiscal 'twenty three.
Our adjusted EBIT margin outlook is for expansion of 100 to 125 basis points, we expect our effective tax rate for fiscal 'twenty three to increase slightly to about 23% and we expect adjusted EPS growth of 13% to 16% supported by buybacks.
And I'll make one comment on cadence because we expected year over year head count growth to be more significant early in the year because of the benefit from client funds interest will build as the year progresses, we expect adjusted EBIT margin to be down about 60 basis points from Q1, but then build steadily over the rest of the year.
<unk>.
And I'll now turn it back to Michelle for Q&A.
As a reminder to ask a question. Please press star one one.
In order to keep within our allotted time. Please ask one question with a brief follow up.
We will take our first question.
Our first question comes from Bryan Bergin with Cowen Your line is open.
Hi, good morning, Thank you.
Wanted to start with the demand question. So can you just talk about what you've seen.
Seeing across client size as it relates to the demand environment I heard the continued optimism in the mid market can you talk a bit more about upmarket Downmarket International and then just give us a sense of booking cadence it sounds like the accelerated through <unk> have you seen any change in pace as you've gone through the first couple of weeks here in July .
Yeah, absolutely Brian .
Happy to comment on on both pizza, so with respect to the overall strength that we saw in new business bookings.
For the full year fiscal very very proud of the remarkable results.
For full year as well as the fourth quarter and the strength was really broad based there was.
Solid performance across each one of our markets I think a few callouts that I would give you highlight at the mid market. The mid market does continue to perform we saw strength in our HR <unk> offerings, even beyond that the PEO and HR or was a strength for us I know what I mentioned it in the prepared remarks, but I'd be remiss if I didn't mention.
Retirement services again, we also saw strong results in Canada, which was fantastic to see.
Canada definitely.
Its impact has been more with the the longer Lockdowns from a pandemic perspective, and then I continue to highlight quarter after quarter. The strength that we're seeing in our downmarket and our run the offer. So we felt very pleased with the go to Ron and then last but not least on the international front, our international business had a try.
This year, so very confident in the results very proud of the work of the sales organization as we can.
Think about the demand environment right now you asked about how did it progress throughout the quarter and how do we feel sitting here.
Since July I, suppose I can't necessarily comment on any quarter, but what I can comment on is we did see the results accelerate throughout the quarter. So while there was some macroeconomic things happening in the world our demand actually accelerated as we close out the quarter. So we saw significant strength.
Specifically in the month of June in fact June was a record month for us ever.
The quarter and as was the here as mentioned so I feel good about the demand environment and the acceleration we saw throughout the quarter.
Thank you for the question.
Okay, and then just a follow up on margin. So if things do slow down can you just talk about the levers you have to insulate EBIT margins. It sounds like you have baked in a healthy amount of resource additions can you talk about where you're making those across the organization and then where you might have some discretion to throttle inverse.
<unk> should things slow down.
Yes, no. Its very good question. So thank you for your question I think as I mentioned in the remarks in the materials that were distributed.
We're able to get our sales organization, a little bit more than fully staffed going into the fourth quarter and that makes us feel really good about the opportunity to just step off into into 'twenty three with a fully staffed team, which is something that as we mentioned in prior quarters. There was a little bit more difficult to do during 'twenty. Two so I think we feel really good about where we are.
With staff and particularly the sales side I would also say that just following the business model that we have if we look at the record sales we had particularly the late in the fourth quarter, we need to make sure that we have fully staffed implementation resources to get those bookings generated revenue as quickly as we can so we will be focused on that.
And then of course, just following through to year end process speed to make sure. We can service all of those additional clients at that time comes upon us.
Late December January February so if we can do all those things on the other hand as I referenced and that's we're seeing in the media and elsewhere everywhere.
Talk about recession potentially coming are we didn't want et cetera, we still do have flexibility of course, and we can certainly temper tempur.
Addition of head counts and temporary cost generally.
Should we think that that's necessary if it's something that.
As a result of changes in the macro environment. So I think we saw lots of levers and I think we've shown historically that.
We are able to navigate those waters pretty definitely.
Should should that kind of a situation of lives.
Alright, thank you.
Okay.
Our next question comes from Kevin Mcveigh with Credit Suisse. Your line is open.
Great. Thanks, so much.
Congratulations on the results.
This would be for Carlos or whomever, but.
It feels like the retention step up is clearly a little bit more structural just given the recent trends in 'twenty two into 'twenty three.
Is that a function of kind of the next gen payroll engine or just where are you seeing that success because its clearly been a super Super outcome post Covid I think positive.
Focus with whether or not that starts to normalize or not but it feels like it's at a structurally higher level.
Yes, there probably are some structural factors just because we can see obviously, where the retention is a stronger and I think as we mentioned some of the macroeconomic kind of readjustment that we expected in a down market. We saw some of it just not as much as we expected but it's.
Talk of recession is correct, then kind of business and bankruptcies and so forth probably will kind of come back with some kind of normal level, which is why as Don mentioned in his remarks, we once again.
Planned for a slight decrease in retention in 'twenty three that's really mainly in the down market in terms of the mix. It represents the total it represents the mix because everywhere else, we really see some reasonable what appear to be structural improvements.
I wouldn't say that it's really nextgen payroll.
You're really going to see that impact of that on sales and market share and so forth in the next.
A couple of years, because the majority of our clients are still.
Not enjoying I think the benefits, even though over time they will of next gen. Payroll. So that's really not just wanted to make sure I was clear on that but that is not what's causing the retention improvements, but one thing I would point out is.
I know this is a broken record, but we made this big transition from multiple platforms onto one in the dental market 10 years ago or a little bit more than that and then more recently, we went through a multi year effort, which was painful to do that in the mid market. We have other things going on like new UX and NEC.
Gen payroll, but those migrations and those consolidations in and of themselves have created some real structural tailwind as I think in terms of service NPS and ultimately on the retention stat, but it's just a much more an easier environment for our own folks to operate and it's easier for us to invest.
Tim.
Less platform versus more platforms. Its just a much better environment. As you know we still have work to do in the upmarket. So there's still opportunity there there is still some opportunity.
In employer services international as well, but we think these structural tailwind that first helped us in the down market. Despite the macro right because of macro or is it really a cyclical issue, but overall excluding cycles.
Our retention in the Downmarket is up I said, it before hundreds of basis points higher than it was 10 to 15 years ago and now the mid market is at record levels and the NPS scores continue to be at record levels and I don't think we anticipate that going back down if anything we see more opportunity.
They're in the mid market and our plan would be to continue to do that throughout other parts of of ADP to add more structural tailwind to our to our retention.
Super Helpful. And then maybe this is for Don.
It looks like the margin guidance like 100, 125 basis points up from 90.
Given the leverage and flowed and pricing it seems like really nice outcome on the pricing side.
Z offset kind of the cost inflation and where is the.
Cost inflation in the model in 'twenty, three relative to where it's been historically.
Yes, I think it's a good observation I think theres a few things driving of course, we talked about more price than we historically have been able to take them.
And of course, we do have the we have.
The tailwind if you will from the client fund interest.
So there is certainly we need to remember that the reason, we're getting our interest rates that were at a higher inflationary environment. So that's driving the overall cost base and wages. The other aspect is that we.
We have called out and we typically haven't called out FX in the past, but we certainly see I think what we would refer to as pretty dramatic changes in FX headwinds in the fourth quarter compared to what we've seen in typical years and so we thought that was important to call out and with 20% of our es revenue being outside of.
Outside of the U S and denominated in Canadian dollars euros.
Sterling in Australian dollars for that matter I think all the currencies that are essentially down so when you put all that stuff together it certainly.
Okay results in a little bit less of the topline dropping through to margin so, especially in our focus the other thing I'd say is that we do have a little bit of.
A little bit of conservatism as we looked at the back half.
After taking into account all the things, we're reading about and see.
And making sure that we're thinking hard about how prepared should something happen in the back half of the year. So I think those are the primary drivers too.
To answer your question and if I can add one thing because you mentioned also price and it's a big topic I know for a lot of companies and a lot of questions about it and I think it's important for you to understand strategically right at a very high level, regardless of how it flows into the numbers and so forth.
<unk> on price, we set up a couple of quarters now is to kind of keep up with inflation. So I want to make sure. It's very clear that we're not achieving our margin improvements or doing anything that would be.
Unusual because I think there.
There might be some companies that are trying to make up revenue gaps for margin gaps with with price because there is quote unquote cover out there to do that but I think when you do that and I think Tom has mentioned this before that we were.
We operate in a competitive environment and we look at what competitors are doing we look at what's happening in the world and we're long term thinkers here. So you should you should assume that our price increases were in line with what's happening with inflationary cost and not anything more than that and not materially less than that.
Been very consistent on that thank you.
Okay.
Our next question comes from Bryan Keane with Deutsche Bank. Your line is open.
Hi, guys good morning, and congrats on the numbers.
I guess my question is looking at the midterm outlook for employer services back in November I think we talked about the 6% growth rate.
And you guys are going to be trending above that.
Six to eight.
And with the strength in bookings growing over 15% I just wonder if maybe the mid term outlook was a little low compared to what structurally is going on in the business model that that potentially the growth rates faster than the 6% outlook that you gave over our mid term.
Well I hope so ill, let Dan comment in a moment, but again, just because I've been doing this for a long time.
Can't get it out in my mind the way the recurring revenue model.
It kind of works as you know.
We love the 15% and what you just described really comes through in the numbers that the difference between our bookings and our losses are strong retention and our strong bookings at the net of that.
Contributed more.
<unk> services revenue than I've ever seen.
Seen in my tenure as CEO and that is what led to that acceleration that you just described.
Es revenue so that net new business growth is really the way to grow the top line here. There's other factors in there like pays per control client funds interest, but that's the core of the business and we're really happy with that.
The challenge of course is that we're not.
Forecasting 15% bookings growth again next year. So I would just caution you to now the good news is that that increase and then your business is in our run rate now and so we don't have to.
Grow by as much next year in terms of that net new business to further accelerate our revenue growth, but I would just caution.
Are you in terms of if you do that kind of math, it's hard it's hard to accelerate the revenue growth rate of this company. We just did it and it takes a combination of better retention and higher starts higher sales and new business starting in the in the upcoming year in that 15% really makes a huge difference.
You can see from our guidance.
That is not our expectation next year in terms of bookings and so youll experience hopefully additional acceleration of revenue growth in es, but not by as much as you had from 'twenty two to 'twenty three notwithstanding the fact that remember there is other things in there moving parts like piece for control client transition.
And so forth some of which will give us tailwind.
Some of which may be may be headwinds.
So Carlos covered off all the main drivers there of course I think just once again go back I mentioned, the FX headwinds, we're experiencing so I think when you add that into the mix I think.
Probably get to a place where we're where.
Where we're landing and what we're anticipating for guidance for FY 'twenty three.
Got it got it and then let me ask you another popular question.
That everybody is getting is just how the model might be different now.
Versus previous recession. This just thinking about the resilient to potential in the ADP model.
I mean, Don again has I think a couple of points you could probably make but I would say as usual it's probably.
Some put some puts and takes.
I mean, obviously I'd be I.
That wouldn't be a CEO if I didn't say I think our model is better now than it was before even though.
I've been through a couple of cycles here myself, so it's not that I'm criticizing anything other than myself, if I'm, saying that it's better than it was before but we just talked about the structural retention.
Level, so even if we have a little bit of a drag in the down market and by the way the downmarket as a larger percent of our overall business than it was.
10 to 20 years ago, but still it's structurally higher by several hundred basis points in and of itself. So even if it goes down a little bit and it's a little bit bigger part of our mix I think our retention is just going to hold up better I would predict in terms of.
Depending obviously on the severity of the recession. So that's a huge help because.
The bigger obviously the portion of the revenue that you're retaining each year.
Less dependency you have on bookings in a recession, which tends to be the most sensitive like historically when you look at GDP growth.
All of our metrics besides pays per control bookings.
Something that.
Can be challenging in a severe recession in which to reiterate we don't see so we we read the same thing as everyone else reads and we know that fed tightening will lead to slower economic growth.
But we really can't see it in our numbers like our pays per control <unk>.
Number in the fourth quarter was as strong as it was the whole year you look at the monthly initial unemployment claims you look at the room that still is there in labor force participation you look at their job openings in comparison.
To where it was historically and I just don't see.
So there clearly are pockets that are happening I think is part of readjustments because of Covid that are kind of confusing landscape and there is clearly some kind of slowdown underway because it just happens when you have fed tightening, but it's not happening in the labor markets at least not yet.
Great. Thanks for the color.
Our next question comes from Tien Tsin Huang with Jpmorgan. Your line is open.
Yes.
Thank you so much really strong sales I was just trying to think about attribution.
And how you would rank.
And factors there between kind of product set that's more relevant and I was just kind.
Pivoting expanded sales force.
The cycle or is it can move things around sourcing.
Our software.
Any interesting observations on your side Carlos of Morgan.
Yes. Thank you so definitely tremendous strength that we saw I think I called out a few areas definitely the strength that we're seeing in our upmarket continues to excite us.
For the future I think you asked about the attribution of strength and I think it really was broad based across the business, but I think from an execution standpoint, it really comes down to the execution of our sales organization and how they've been able to have to go to market candidly really over the last two year as it relates to navigating this evolving.
Xyrem and more specifically provide a value to our clients in a more meaningful way and we really have seen that evolve over this past year as we've been really across each one of the segments, helping our clients navigate.
As I mentioned, the evolving environment inclusive of all of the legislative changes. So I think there is the value of our bromine.
The strong execution in general across the sales organization and leveraging the entire ecosystem.
To frame that strategy, right, which is everything from our marketing investments or brand investments I feel.
Earlier to the head count investment and so all of this together I think is lends itself to tremendous execution on this strategy.
As it relates to the overall performance.
And the only thing I would add to that is.
<unk> been talking for the last 18 months about how one of the most important things for our sales organization was really to get productivity at the quota carrier level back to and then exceed from a trend line standpoint, where it was right. When you think about where the GDP trend or price trends or anything.
That you got to get back to where you were and then you got to get back on that same timeline, otherwise you leave a lot of money on the table right, whether it's the economy.
Or adp's revenue and bookings growth and.
From an attribution standpoint.
Again, I think it's important to understand this color like we had unbelievable productivity growth and Thats why I said that this is the best performance I've ever seen by our sales force and.
Clearly some of it is because we were in recovery mode, but sales forces naturally generally have not that I know because I was never a salesperson, but I guess I've been around long.
Long enough to be hopefully an honorary member but.
When you total salesforce. So can you got to grow we're going to grow our head count by a few percentage points and then we got to grow our productivity two to three percentage points. That's a typical year.
And that part in a typical year.
When you tell a sales force you have to grow your productivity close to 20%, even if even though it's because it went down 20% that's breaking the hard to do.
Very hard to do psychological anybody who's in sales I think.
Understand that and so these percentage growth number that we have.
And the productivity growth numbers that we have.
Honestly are incredibly.
Just gratifying because I really thought this was going to be hard I was of course, keeping my poker face on and just telling everybody because we have to do it we have to do it and we did it and so most of this growth came from productivity and not from head count because as we've talked about we actually had some challenges up until the fourth quarter.
In terms of our achieving our head count objectives, not probably a lack of trying by the way not because we were trying to save money because we were doing everything we could.
And it was just a difficult labor market. Good news is in the fourth quarter as Maria mentioned we.
<unk>.
Really did quite well and we're in a great position head count wise now, but the 'twenty. Two story is all about productivity and that is an unbelievable accomplishment for our sales force and it's across the board. It is and just to provide some actual numbers to that though we reported a $1 7 billion in employer services bookings that does that.
It is a record of as much as it does exceed the other record which was pre pandemic in fiscal 19, and $1 6 billion and so that really.
Speaks to some of this additional productivity.
Replace if you will but Carlos.
Is spot on we did initially tell the sales force, we will add head count and you have to grow faster, but in the end, we didn't add head count and they grew that much faster, which is why I am very bullish and excited as we step into the fiscal year with more sellers more asset quota carriers to really coupled with the strength that we've had.
In productivity with now finally more sellers to go get after it.
Okay.
That's great must be gratifying for sure.
I'll stop there my question. Thank you.
Our next question comes from Dan <unk> with Mizuho. Your line is open.
Hey, guys really nice results very happy to see the same in BC.
And besides that you called out.
Thanks.
Can you tell us like I know you.
We don't parse out the growth between.
Yes.
If you did.
Period.
The different verticals on the bigger picture can you tell us like.
What types of firms.
We gained share.
So it's like.
Lower amp up the market.
Price and clinical sites.
Are these public safety ecosystem analysis of safety.
Thank you.
Yes, I think you mentioned, we were having a little trouble catching the entire questions. So maybe I'll, maybe try to give a little bit of color. Maybe you can repeat again or ask us.
Ask the question again, but I think you said something about the lower end of the enterprise space and kind of where the strength in sales is coming from acceptance. So I think just to repeat what Maria said I think it is it is across the across the board, but that is one reason I'm picking up on it like this is it's a really good new story.
For us so our workforce now platform. We made this strategic decision two three years ago. It makes sense because it fits well in the lower end of the enterprise space.
It's really been a homerun for us there so against certain competitors.
It's really very very effective and we're selling a lot of units in that kind of lower end of the upmarket space for us as we continue with the rollout of next Gen HCM, which is really intended further upmarket and eventually for global.
In the meantime, we're really having a lot of success in the lower end of the upmarket with our workforce now platform.
If you want to maybe repeat your question one more time, we'll give it another try yes, no I think that's sort of answered. The question I wanted to know and I apologize you can hear me before I wanted to know like how the conversations are like how the conversations are different today. When you are at with those clients versus say three years ago, because I'm sure there's been a tremendous change keeping their results.
There have been a tremendous it's a good observation there has been tremendous change I think Carlos hit the nail on the head in the lower end of the upmarket with one of the reasons we cited the well.
More than recognition, we recently received from Gartner because the conversation around our offering of workforce now in that lower end is definitely resonating for several reasons. One is it's a best in class product as Gartner, even acknowledges and the users that were survey for that for that award, but Moreover, it's also the <unk>.
Speed by which we can execute and really pick these enterprise customers.
And turn them into active clients, so meaning a lot of different needs from a product perspective from a timeline perspective I think in the upper end of the market certainly the conversation over the last three years has evolved a big piece of that conversation is the global discussion and our ability to.
To talk too much larger U S enterprise customers and other enterprise customers across the globe around a multi country offerings and how we're thinking about.
How they are thinking about their strategic direction on HCM on the global front and so I think the conversation continues to evolve on both ends of the spectrum of the up market and we're certainly in a position to be able to have very formidable conversations and.
Transformation that Scott.
Thinking about.
How they are thinking about their strategic direction on HCM on the global front and so I think the conversation continues to evolve on both ends of the spectrum of the upmarket and we're certainly in a position to us to have very formidable conversations and.
Transformation discussions with our clients in that space.
Great. Thank you and the excellent results with Dolby.
Thank you.
Our next question comes from Mark Marcon with Baird. Your line is open.
Hey, good morning, Carlos Maria Don Great to see all of the years of hard work really pay off here. This year. So congratulations on the results wondering with regards to the new bookings I mean $2 billion in total $1 7 million yes.
How much of that is split between new.
New logos relative to.
Upsells and how would you characterize your your expectations on that front.
For the coming year.
Thanks, Mark and thank you for acknowledging the strong performance in bookings there.
There's really no news to report here I think we've cited it per year, it's really the split between new logos and.
Client business. It really remains at that 50% kind of 50 50 going forward and that's really what we expect heading into fiscal 'twenty three.
Great and then with regards to with.
With regards to the forecast John you gave us a bit of a cadence.
No.
For margins, how would you characterize it for revenue and specifically what I'm interested in is you did mention.
The interest on client funds is going to be backend loaded.
But at the same time, we've got pays per control being modeled up 2% to 3%.
Even though people are starting to call for.
A potential recession and potentially a decline in employment. So I'm wondering how you're thinking about that part of the model.
And are there any things that you would call out with regards to this revenue trends as we.
Build out the models for the coming year.
Yes, So Margaret is just going back to the first part of your question you mentioned the deceleration of margin that I mentioned and of course, we talked about the increase in sales headcount and specifically because it is meaningful quarter with one of this year to quarter. One of 22. So we do think that's going to have a bit of a drag there are of course, some other factors general inflation general et cetera.
But and we've taken price Carlos described it took you through there are price banking, which is pretty consistent to what we've discussed over the last couple of quarters. So we do expect to see a little bit of deterioration in margin percentage through the through the first quarter I think that's understood and then as interest rates continue to.
As interest rates go higher and as we get the opportunity we're going to see higher interest toward the last three quarters of the year, but overall.
Looking at pretty even.
<unk> revenue quarter by quarter through the balance of the year.
No no big changes at all in terms of growth rates.
By corporate $3 23, compared to what compared to 'twenty two so.
You're modeling <unk>.
<unk> growth has to be pretty comfortable to model.
<unk> growth across the top line quarter by quarter and that doesn't mean that you should model or that we modeled every.
Everything consistently throughout the quarters, so because I do have to make a comment on your point that it.
It sounded like you thought we were being aggressive which would not be typical of us to model, 2% to 3% pays per control what everyone's thinking there's going to be a recession I would tell you that the fourth quarter you saw what our pays per control growth was and.
And I can tell you that we have visibility into July .
It's hard to believe that for the whole year, it would be less than 2% to 3%. But then you can assume that if for example, the first couple of months at least since we have some visibility of that already are in the 6% to 7% range, because that's where we're kind of exiting and you can do the math right.
You probably this is just to give you a color in terms of what some of our assumptions are in our operating plan because I think Don mentioned, maybe a bit of conservatism on the back on the back half, we probably have reasonable.
Continuation of trend because thats the way <unk> go on patient control in the first half and then you would probably expect.
The second half of the year to have.
To note pays per control growth or somewhere in that in that neighborhood. It's also hard for us to.
Model, a big negative growth in pays per control just because of all the factors. We mentioned in the labor market that doesn't mean that won't happen in 'twenty four or late 'twenty three year at some point in history, but it doesn't it doesn't seem.
Likely over the course of our of our fiscal year, but we're clearly expecting some slowdown in the second half.
Carlos you read my mind in terms of just the way it was.
Thinking about the characterization and then and I'm thinking like Okay. This is probably what you're thinking.
In terms of the way, it's going to fall. So that's directly in line Hey can I just ask one more question just on workforce now would you expect next gen payroll, what's the expectation in terms of the number of clients that would have nextgen payroll within the workforce now.
By the end of the year.
In terms of the new book, New business bookings because obviously.
I'm just wondering should we answered the question correctly it would only affect.
Obviously, we're not even talking about migrations, yet even though at some point that will happen exactly.
Exactly.
Do any migrations over the course of this year no.
Okay.
Thank you and congrats again.
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 if you are seeing or expect to see any divergence in that kind of hiring our macro hiring environment macro impact between the U S and Europe I guess I guess the broader question is does your guidance assume a tougher environment in Europe relative to the U S or something similar.
Dan probably has the details, but I can give you some high level color.
Color that pays per control growth and I know youre.
Not asking about historical but as we gather the data I just wanted to tell you that.
Pay per control growth was very strong in employer services international as well and part of that of course is because of what we're coming off of rate which were.
These these lockdowns and with high unemployment rates kind of across the across the globe. So I'd say international has.
Reformed Similarly, but it is it is safe to assume that we see probably challenges given what's happening in the macro environment with energy costs and the war and so forth in.
In our international business and I don't know Don if he has got Charles I think those points are valid certainly.
What happens with energy.
And in particular is going to have some.
It has some impact on the results, but beyond that this was a little bit of a conundrum that we've talked about earlier, but where we are versus what people are talking about it. So it was much as everyone's predicting recession et cetera.
Unemployment rates in the eurozone or six 1%, which is an all time low.
Can't wait to Canada are as low as they were even before I started working with 1974 unemployment rates, Australia, a 50 year low so we've got a situation where there seems to be a lot of employment yet all this risk and worry about.
Sessions so.
Although it's come back to your question a little bit more concerned about what could happen.
In EMEA in particular as a result of.
What's going on with the current crisis et cetera, a little bit more concern yes.
They both that we put our plans together to some extent, yes, you should point out that you're sort of working in 1974. When you were 12 years old well I would say that before.
Okay.
[laughter].
Thats very helpful.
A follow up question just update us on M&A capital allocation are you shifting your approach at all or are you seeing incremental opportunity out there given the turmoil with valuations in the marketplace potential acquisition targets or is it just sort of steady as she goes in terms of no change.
Yes, I think for now it's pretty much steady as she goes I mean, certainly you can see the valuations have dropped across the board things.
Really expensive in January .
Phil just expenses.
Things are still expense come down off of historic highs. So there.
Not exactly what I would call a bunch of bargains out there. There is also not a lot of people who are coming forward looking to sell the properties because prices are down.
So I would say it's steady as she goes and we will continue to do what we've done and look for things that work for us strategically look for adjacencies that make sense should they arise, but really steady as she goes really no change to our overall policy.
Great. Thanks, so much.
Our next question comes from David <unk> with Evercore ISI. Your line is open.
Thank you good morning, John you called out 260 basis point.
An increase in PEO year over year in part driven by a favorable workers compensation reserve adjustment, how much was that adjustment and how should we think about this item for fiscal 'twenty three.
Yes, So I guess the short answer is we we get adjustments.
On a regular basis.
Been favorable for US we look at it the workers' compensation experience over a number of years that we get external third parties to do an assessment as to whether or not it's appropriate to book any of those adjustments.
<unk>.
This year, we've been fortunate.
Typically forecast those numbers in any greater detail simply because we do have to rely on the experience rating that insurance companies bring to us and so without trying to disclose exactly what the numbers were I would say they were favorable and we will have to wait as the months go by to see.
What's going to happen.
2003.
And in our in our 10-K, so we can yes. It was $40 billion for the quarter. David indicated that compares to last year about $5 million and most of that was as we headed into the quarter in the <unk>.
And the forecast and guidance. So it wasn't a big departure from what we had expected, but I think what Don was trying to say, though about 23 is that it is clearly a headwind right. So as we as you kind of be your modeling and you think about margins.
It's a headwind not because there is an operating performance issue or what not just because we had a big.
Benefit in 'twenty, two and we're not.
Planning for a big benefit in 'twenty three although we're always hopeful that we will get some benefit.
Historically Ben.
Our experience is that we do get some some critical reserve release is probably not as big in 'twenty three as in.
As in 'twenty, two but it might not be as big a headwind as it appears now just because of the numbers.
I appreciate that just as a quick follow up Don in the and the guidance you've given for extended investment strategy clients.
Client fund interest to be up about $200 million to $220 million year over year in fiscal 'twenty three how should we think about the incremental margin on that additional revenue are you applying additional expenses against that or should we think about it flowing through.
At some set margin.
Yes, so I think there's other things going on and of course, we mentioned the <unk>.
Inflationary environment, which is why we have to higher interest rates, we mentioned the FX headwinds we have so all things and we're still expecting we're still very very happy and very proud of the operating margin improvements were getting we think we still have a good opportunity for for margin improvement ex client fund interest going forward. So I would say that right now.
Our expectations are for a pretty balanced.
Incremental margin from both of those factors.
So we are of course as we mentioned we are spending some more money. We're investing in sales headcount, we have higher costs as a result of inflation. Some of it is offset by price but.
We are letting a substantial amount of fall to the bottom line.
We are obviously in this for the long term. So we will take the opportunity to invest in the business and make sure that we have the right balance between margin growth and preparing ourselves for continued success.
In the future years, but I think that stream of revenue, we would generally see it as a 100% margin.
Just to be completely clear.
Clear.
Thank you Eric question can we apply expenses against those revenues and the answer is I think we've it felt like a trick question because.
You've known us for a long time, and we've been clear for a long like on the way down we always say.
It's 100%.
Hurts us right because theres really no expenses that go away when that interest income goes away. So.
Likewise, we would want to be transparent and acknowledge that on the way up to 100% margin, but I wasn't sure. If it was a trick question or sounds like it was.
No I was just trying to understand how much of that incremental revenue would flow through to the bottom line since Dan had talked a lot about investment initiatives.
You had underscored growth in sales force head count, but thank you so much very responsive I appreciate it.
Hey, David I'll, just add one clarification, you said incremental revenue we did make the point in the prepared remarks that the net impact of the portfolio that would be 100% incremental margin. So that there is a cost offset in the short term borrowing costs associated with the portfolio strategy.
Much appreciate it thank you.
We have time for one more question and that question comes from Samad Samana with Jefferies. Your line is open.
Hi, great. Thanks for squeezing me in I, just wanted to maybe circle back on the price increases.
No that inflation is a big driver of that.
More than normal amount can you just maybe help us understand would that put the company back on track if I think about deposit increases and maybe fiscal 'twenty wondering COVID-19 would it be kind of linear from pre COVID-19 levels. If we just thought about the price increases compounding or what put you ahead of that because of inflation.
And Carlos can you just remind us do those price increases tend to stick.
Inflation starts to rollover.
Yes, I think again strategically maybe Danny and Don can give more specifics on the numbers, but I wouldn't characterize what we did is being out of step with the market or there was a pause for a few months, but our price increases our intention was that our price increases during the COVID-19 were reflective of the inflation environment at that time as well.
Well, we did pause for a few months because timing wise, we just thought in particularly in 2020 that it was inappropriate to be giving clients price increases one or two months into a global pandemic, but we we eventually did some price increases, but we did very modest price increases because inflation was.
Near zero for some period of time, so I would I don't know if that answers as I'm trying to be responsive, but I think in general we are always trying to remain kind of in step with the market and still be competitive because our number one goal is to gain market share and what.
The trap that it's easy to fall into when you're a large company like ours is you can take price and take it higher than may be.
You should be you can usually do that multiple times and you can do that for a while but it just doesn't work forever because of just the law of economics and large numbers in it because of competition and so our intention is important for you to understand that strategically is we want to grow and we want to gain market share.
To do that we have to be competitive in terms of our products our service and also our price and that's so it's important when we do price pricing actions either on new business or in our existing book of business that we remain in line with with what's happening in the general market and with our competitors.
Great I appreciate that and good to see the strong results.
Thank you.
This concludes our question and answer portion for today I'm pleased to hand, the program over to Carlos Rodriguez for closing remarks.
Thank you.
I think we've.
We're very happy with the quarter as we said.
I'm not sure what else I can say other than.
What I said about our sales performance, which I think is definitely the best I've seen.
In a long time, and we've talked a lot about our retention in some of the structural issues that are happening. There. So it's hard to be more pleased about about that now, but I do want to reiterate again, how happy we are with <unk>.
Our organization and our team.
First we start with Covid and all the uncertainty that that created everybody having to work from home. Then we have all of these regulatory changes some of them very positive like the PPP loans. The ERP see it happened across the world and while were then in the middle of that pandemic propelling our associates as they got to work weekends and nights because we've got it.
Keep up with all of these regulatory changes and we got to help our clients.
And then as soon as that starts to abate a little bit we get this great reshuffling and we start having challenges.
Which we overcame in terms of being able to add the staffing and silver. So we ask ourselves is to once again.
Work harder.
Putting the extra effort and every time we've asked.
They've come through for us, so and they've come through more importantly for our clients, we really do provide critical services.
Across the world to our to our clients and it was very very important for our organization to come through for our clients and I just want to again, thank our associates for making it through so many ups and downs, where we just keep asking for a little bit more and they keep they keep delivering so I want to thank them.
Once again.
Once again.
Your attention and your interest and the great questions and we look forward to.
Talking again in the next quarter. Thank you.
This concludes the program you may now disconnect everyone have a great day.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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