Q2 2023 Automatic Data Processing Inc Earnings Call

January 25, 2023

Speaker 1: You you.

Speaker 2: I'll turn it over now to Maria. Thank you, Danny, and thank you everyone for joining us. ADP delivered strong Q2 results headlined by 10% organic constant currency revenue growth, 120 basis points of adjusted EBIT margin expansion, and more than 1,000

Speaker 3: and 19% adjusted EPS growth. We continue to deliver exceptional value in the HCM market as we invest in ourselves and innovate to continuously meet and exceed the changing needs of our more than 1 million diverse local clients.

Speaker 4: I'll start with some highlights from the quarter. In Q2, we drove very strong ES new business bookings growth, which included an incredible finish in December . We have continued to see robust demand across our downmarket portfolio and our ES HRO offerings and our international sales performance.

Speaker 5: especially our global view platform was much stronger in Q2 after a softer Q1.

Speaker 6: Overall, we are pleased with our sales results for the first half of the year, and although clients are still dealing with a number of uncertainties, our pipelines are healthy and we feel well staffed and well positioned to deliver solid bookings growth for the remainder of the year.

Speaker 7: Our ES retention was once again a source of outperformance with modest year-on-year improvement in Q2 overall, despite continued normalization and downmarket out-of-business rates.

Speaker 8: This strong result was just shy of the record retention set during the pandemic and was led by our mid-market, our up-market, and international businesses. And we're pleased to be taking our full year guidance up slightly.

Speaker 9: Our pace to control metric was 5% for the quarter, decelerating slightly from Q1 as we had anticipated. Job growth in the U.S. labor market has been slowing, but clearly remains solid, which you see reflected in our client base. Despite recent headlines noting job cuts by a number of companies, we have yet to see

Speaker 10: assumed and we're adjusting our outlook accordingly.

Speaker 11: With that said, demands for the PEO solution remains healthy, the secular growth opportunity is unchanged, and we are well positioned to reaccelerate our worksite employee growth.

Speaker 12: Stepping back from the quarter, I want to provide a quick update on our broader strategy. Over the last several years, you've heard us talk a lot about the modernization of our products.

Speaker 13: Our simpler user experience enhances ease of use for our key platforms like Run and Workforce Now, and enables a more seamless integration to complementary solutions like insurance, retirement, and payments.

Speaker 14: Our next-gen payroll engine is a prime example of how we're modernizing the back end of our solutions, and we continue to offer it to a broader set of new mid-market clients.

Speaker 15: And brand new solutions like R.O.L.E. and our NextGen HCM platform position us to address certain HCM opportunities more fully than before.

Speaker 16: These product enhancements are designed to drive win rates and retention even higher, and we have tremendous opportunity in front of us.

Speaker 17: But our strategy has always been about much more than just offering HCM software.

Speaker 18: ADP clients want us to help them find, hire, pay, engage, and provide for the retirement of their workers in a thoughtful and compliant way.

Speaker 19: To truly solve for these needs, we are modernizing all aspects of the client relationship. That starts with product, but also extends to our go-to-market approach, how we onboard our clients, and even how we advise and support them on critical issues.

Speaker 20: We refer to this collective effort as our modernization journey. And as with our product journey, the opportunities here are incredible. We are removing friction and enhancing the client experience in many ways.

Speaker 21: In our US Don Market, we continue to digitally onboard tens of thousands of clients every year, making onboarding easier for our clients and accelerating time to start. We have seen this success in the US and we're beginning to scale the same capability in Canada.

Speaker 22: Our intelligent self-service capability, launched only last quarter, is already helping a portion of our client base answer millions of questions from client employees through a completely automated process. And now, in our international portfolio, we're implementing chatbots to reduce work for those clients as well.

Speaker 23: We continue to invest in our robust partner ecosystem, cultivating deep relationships and integrations with financial advisors, CPAs, and benefits brokers to provide a seamless experience for our mutual clients.

Speaker 24: And we're using the power of our extensive data to deliver insight to bring greater value to clients from better aligning pay to market trends to reducing the frequency and severity of workers' compensation claims to identifying tax credits and other legislative incentives.

Speaker 25: To bring this large-scale modernization journey to life, I'll speak to one of our fastest-growing businesses, ADP Retirement Services, which helps employers establish and administer retirement plans.

Speaker 26: Businesses today face a complex environment with significant legislative change, and our clients look to us to help them navigate these changes, stay compliant, and address talent challenges.

Speaker 27: For example, in the retirement space specifically, the recently passed SECURE Act 2.0 alone has over 90 provisions for businesses and employees to consider.

Speaker 28: And what we've designed makes life easy for our clients and partners, improves the financial wellness of their employees and sets us apart in the market.

Speaker 29: Our robust 401k solution with thousands of different investment options is not only clean and intuitive thanks to our new UX framework, but is also deeply integrated with run and workforce now. Our highly tenured licensed retirement services sales force understands our clients and understands which solutions can make a meaningful...

Speaker 30: better to serve our mutual clients and their employees.

Speaker 31: And our tax credits team, full of experts in their field, is there to help our clients or their CPAs apply for and obtain the appropriate legislative incentives.

Speaker 32: Our goal in our modernization journey is to consistently improve the full end-to-end experience for our clients and their employees, which will in turn contribute to our long-term sustainable growth and profitability. We look forward to keeping you updated. And now, over to Dawn.

Thank you Maria, and good morning everyone. I'll provide some more color on our results for the quarter and update you on our fiscal 23 outlook. If someone Still needs to print 46, I Hope you should Put it Up and

Overall, we had a strong Q2 on both revenue and margins. If I can summarize, we had generally positive developments in our ES segment, despite some incremental headwinds. Meanwhile, trends were a little softer than expected in our PEO.

Let me focus on ES first.

and I'll cover our results in Outlook all at once.

ES segment revenue increased 8% on a reported basis and 10% on an organic constant currency basis which was a good outcome for the quarter.

Maria mentioned the strong new business bookings performance in Q2.

Given the continued macroeconomic uncertainty, we think it's prudent to maintain our current guidance range for now, although we feel well positioned for the back half.

We also had near-record ES retention in Q2.

With first half ES retention results up year on year, we're now revising our outlook and we expect retention to be down only 20 to 30 basis points for the full year.

This continues to assume normalization and out-of-business losses in our downmarket.

Pays per control were in line with our expectation in Q2, but with better line of sight on Q3, we are now assuming less of a deceleration in PAs per control over the back half than we did previously, and are raising our outlook to now assume 3-4% PAs per control growth for the year. We are now assuming less of a deceleration in Q3, but with better line of sight on Q3,

And on FX, we had about 2 percentage points of revenue headwind in Q2, but the outlook for the rest of the year is slightly improved and we now expect full year headwind somewhere between 1 and 2 percent.

Those are the bigger positive developments in ES revenue.

There were few developments in the other direction as well.

Client funds interest revenue was up nicely in Q2, but was actually a bit lighter than we had planned.

This is primarily because yields pulled back slightly from where they were three months ago when we provided our prior outlook.

We're also tweaking down our balance growth assumption now to 45% growth for the year, due primarily to assumptions around average wage related to worker mix, tax rates, as well as the impact of the lapping of the payroll tax deferral.

Together we are lowering the full year by $5 million at the midpoint for revenue and $15 million at the midpoint for net impact to our earnings.

We also saw underperformance in some of our volume-based businesses, like our recruitment outsourcing business and our employment verification business.

Overall, though, we're feeling good about our ES revenue growth trajectory and are taking up our guidance by 1% to now expecting growth of 8-9% for the year.

Our ES margin was up 170 basis points in Q2, which was in line with our expectations.

and there is no change for a flu year outlook.

As a reminder, we've invested in headcount in sales, product, and other areas throughout the organization over the last several quarters as we see continued opportunity to win new clients.

further increase satisfaction with existing clients.

And although we may scale back as appropriate, at a high level we feel comfortable with our staffing levels against the secular growth opportunity in front of us.

Moving on to the PEO.

We delivered 11% PO revenue growth in Q2 with 8% growth in average worksite employees.

As Maria shared, the PO results can be a bit softer than expected.

The PEO business continues to benefit from long-term tailwinds, but there is a lingering effect from the pandemic, which is still adding variability to our PEO results and outlook.

We are, for example, lapping very strong results on retention, bookings, and same-store pays. And while the overall trends are playing out consistent with our expectations, we continue to refine our assumptions about pace and magnitude. With that said, we still see a continued solid demand environment in the PEO and the team remains focused.

on re-accelerating worksite employee growth.

For this fiscal year, we are lowering our PEO revenue outlook to 8-9%, driven by growth in average work-fed employees of about 6-7%.

PO margin in Q2 was up 130 basis points, about in line with our expectations.

And we continue to expect PEO margin to be flat to up 25 basis points for fiscal 2023.

Adding it all up, the favorable revision to our ES Revenue Outlook is largely offset by lighter PEO revenue growth forecast.

And so we continue to expect consolidated revenue growth of 8 to 9% in fiscal 2023. We also maintain our outlook for adjusted EBIT margin expansion of 125 to 150 basis points.

We still expect our fiscal 2023 effective tax rate to be about 23%. And we continue to expect adjusted EPS growth of 15-17% supported by our steady share repurchases.

I'll just make one quick comment on cadence.

We expect consolidated revenue growth to be relatively steady in Q3 from where we were in Q2.

We expect margin expansion to be a bit more modest compared to what we experienced in Q2, closer to 50 to 75 basis points of expansion.

There are a few reasons, including the lapping of a one-time item last year, comparisons from a headcount perspective, and certain investments in sales and marketing that we're assuming for Q3. Again, there's no major change contemplated for the full year, but hopefully this helps you think about Q3.

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

If you'd like to ask a question, please press star 1 1. If your question has been answered or you wish to remove yourself from the queue, please press star 1 1 again. In order to keep within our allotted time, please ask one question with a brief follow-up.

And we'll take our first question from Ramsey Ellis with Barclays. Your line is open. y-

Hi, good morning and thanks for taking my question on pio You mentioned lingering effects from the pandemic is having an impact But I was just curious is the macro environment and I guess labor market trends impacting pio differently than es Is there more is it is it a question of sensitivity to?

small versus large market clients? Is it vertical exposure or is this really something you see as quite transient?

Thank you, Ramsey, appreciate the question. So I'll try to cover all the ground on the PEO that you asked about. So specifically what we saw with respect to the first half, we did see, as mentioned in the prepared remarks, we did see that bookings did come in softer, we saw that retention.

came in a bit softer as well than our expectations. In terms of the lingering effect that we cited, all of our businesses had an impact from the pandemic. I would say the PEO is probably the one that had the most impact. If you think about all the drivers that constitute the PEO, everything from average wages to worker mix to...

state unemployment to certainly the lines of insurance, workers compensation, and health benefits. So I would say it's the business that had the most impact as the pandemic came into the business and as the pandemic is flushing out it is having a lingering effect on the business. I think you touched on what we're seeing

with respect to PACE per control in the PEO and the context of ES, what I would say is PACE per control is the growth rate is decelerating in the PEO, that was expected. If it contributes to the sliders softer performance in the first half and is contributing to.

the second half, but the two main drivers, really behind the performance of me, first half as well as the outlook for the second half, are bookings and retention. One thing I would say though, because I wanna go back to the strength of that business, we have incredible faith in that business as it relates to the...

growth from a long-term outlook perspective. The demand is still there in absolute form from a bookings perspective. The PEO did have growth year on year, albeit it was softer than ES and softer than our expectations.

Thank you. Just a quick follow-up for me. Tech layoffs have been in the headline recently. I know you guys have a very diversified business, but I thought I'd ask anyway. How exposed are you to that particular vertical? Are you feeling any kind of acute impact from all those headline layoffs in the technology sector?

It's a good question. I think it's hard to avoid all the headlines that we're seeing day in and day out. It's fair to say that there's been a number of large names that have announced major layoffs.

We have to say that some of those clients are, or some of those people making those layoffs are our clients, but those layoffs are happening around the world in some cases. They're not necessarily our clients in all of our markets. So I think it's fair to say that we have yet to see significant impact from all those announcements.

I guess I'll just round it out by saying we're still seeing strong demand. We've taken up our base for control assumption for the back half and we're doing that not just on our own internal perspective, we're also looking at the LS reports, the JOLTS reports. The way we look continues to suggest that there's still...

strong demand for employment, unemployment continues to be very low, unemployment applications are still at record lows, they're not increasing, so the macro environment continues to be very, very favorable for us irrespective of some of those headlines that we're seeing.

Perfect. Thank you so much.

Our next question comes from Eugene Samuni with Moffitt Nathanson. Your line is open.

Thank you very much. Hi, Maria. I wanted to ask about booking. So it sounds like a positive commentary. Strong performance there. I think you called out international as coming back strong versus last quarter and also down market. Can you talk a little bit about the mid market?

How are the trends there? And yeah, I think the key question on everybody's mind is, are you seeing any signs of macro pressure on bookings as companies potentially pulling back their tax spending?

We were very pleased with our overall new business booking for the second quarter. Definitely saw an acceleration in pipelines. I'll get back to pipelines in a minute. I did cite the down market, the strength that we're seeing in the down market. That's really our entire down market portfolio. We're thinking

about our obviously our run offerings but all the things that Heather offers the run offer which is the retirement services that I spoke to at length during the prepared remarks insurance services. We did see strengths in employer services HRO and then last but not least one of the other things that I was most pleased.

to see was the bounce back in international in the second quarter, both in pipelines as well as results. And that was, as mentioned really in our global view space. So very happy with the results, very happy with the strengthening of pipelines. That's what gives us confidence. Step again to the back half.

as we think about heading toward our guidance of 6 to 9%. In terms of, I think you also wanted to know about the mid-market because I didn't cite that specifically. We have very solid, yeah, very solid mid-market sales and we continue to see the demand there.

as a byproduct that it's certainly not getting easier for anyone to be an employer, but from a legislative perspective as well as a talent perspective. We have incredible strength in that business as it relates to the product investments we've made. So think about user experience to what we're attaching with the next generation payroll engine.

So we make good product enhancements, we have strong NPS, we have incredible retention results. So the mid-market in general had also a solid sales performance. What I would say is, as you contemplate the mid-market, don't forget that employer services HRO, the offer that we call comprehensive services.

sits squarely in that market. And that's an area that experienced tremendous growth during the pandemic and that growth has sustained and is exceeding the overall employer services growth. So altogether, the net results for the mid-market are very, very solid for us. Got it, got it.

Very helpful and then a quick follow-up for me on pace for control your number was very strong this quarter We thought outperform your expectations, but also keeps outperforming by a point or two Kind of the broad measures of lay of labor labor market growth in the u.s. Like non-farm payrolls

And remind us what's the driver of that and how sustainable is that as the overall labor market slows down? Can you maintain that 1 to 2 point premium?

That's a good question, but just to remind everyone that that number is really a mid-market number, so we focus on the mid-market when we provide that pace per control number. It has been strong, as I mentioned in the earlier answer with respect to the macro environment.

The labor market continues to be strong. We're continuing to see our existing clients add employees. As Maria said, bookings are strong. I think it's the $64,000 question about how long the labor market can continue to grow or unemployment can stay so low as we look at some of the headlines and will those things start to converge at some point in the future.

But for now, I think we're comfortable with what we've done in terms of taking up the pace for control growth for the back half. And Eugene, just to your point about that spread having existed in the past, I think specifically we would have expected 2-3% pace for control growth in a...

normal economic environment and that compares to maybe 1 to 2 percent total employment growth and there's a function of our clients in general being perhaps a bit healthier than the overall economy but also the fact that total labor includes things like bankruptcies and new business formations so it's a slightly different take on employment.

Great, thank you so much. Wanted to quickly just revisit a little bit, and I think you touched on it, but retention, and it's an area where we had at least been expecting to see some normalization, especially from a company perspective, but it seems to continue to improve or tighten.

Obviously, you made technology advancements, et cetera, but what are some other areas, if any, that you'd point to that are helping drive that retention performance?

Sure, thanks, James. With respect to retention, we are very, very pleased by the strength that we've seen year to date. We cited at the end of the first quarter we had record retention. The second quarter was near record. If you look at the first half, it was a record.

So we're very proud of the, not to be a broken record, but the record retention and the strength that we saw. And we believe that it is a byproduct of the investments. I alluded to the investments we've made into the mid-market as an example of the user experience that's broad-based now across the Run platform, our mobile app.

strong service results that's broad-based across the portfolio. I think we generated a tremendous amount of goodwill and value during the pandemic and how we chose to service our clients. And I think that value has continued and we see that in the results on the MPS side. So I think that's another place.

You did touch on normalization. I think it's an important point to make. We do believe at this point, specifically in the down market, I think we even touched on it during the prepared remarks, we do believe that retention has normalized. When we normalize for average or adjust for average size client, we are back to...

the down market really having out of business and bankruptcies back to fiscal 18, fiscal 19 levels. So we do believe that the down market has normalized. So again, back to kind of the broader retention picture, it is a very strong one for us because we believe at this point.

that it's broad-based and it's really a result of the investments and the service levels that we offer.

So Maria, that's an interesting point that you're already kind of at least what you think we're...

where we should be from a

you know

attrition perspective, et cetera, at least compared to where we were pre-COVID. What are you seeing though from the competitive environment, especially as we see companies expressing more concern? Are you seeing flight to quality versus some of the regional players or newer entrants? Is that helping you just?

It continues to evolve. On the other hand, I would tell you if there's nothing really new to report. I think what we're seeing, we look very closely at our balance of trade. We look very closely at our win rate. We're measuring all these investments that we make and whether or not they're impacting things such as our balance of trade and such as our win rate.

And what I would offer is that there is a direct correlation between the places we're investing, whether that's the down market in our go-to-market brands, head counts, or in the mid-market into the products in the next generation suite and the win rates that we have. And so we do believe that we're getting stronger in terms of our offer and I think the record of retention...

is a direct correlation to that.

Great. Thank you. Our next question comes from Mark Markon with Baird. Your line is open.

Hey, good morning. Thanks for taking my questions.

Maria, you mentioned the modernization initiative. I'm wondering if you can expand a little bit on that just in terms of what we should expect over the next 6 to 18 months in terms of new offerings.

or increased offerings. And how would that end up impacting, you know, both from a revenue as well as from a...

expense perspective, how should we think about that?

Sure, I love speaking about the investments we're making into the modernization journey and so perhaps I can offer the story around the next generation and how we're thinking about the impact of that over the next 16-18 months from a revenue perspective and maybe Don if you want to cover the the margin side. So Mark as it relates to our overall modernism.

organization initiatives. There is all the things that I talked about in the prepared remarks, which is around tools, technology, removing friction, taking work out. Last quarter alone we talked about intelligence, self-service, voice of employees. So these are the spoke features functionality that we're layering into our offers and into our...

to see us implement our backlog, continue to build scale, build implementation. Our goal would be to use your time horizon over the next 16 to 18 months that we would open the aperture to have that suite specifically sold across a broader set of the upmarket clients. And with that, I'd like to close the

In terms of the next generation payroll, which is what we are offering attached to Workforce Now in the mid-market, we continue to make progress on next generation payroll. Pretty excited about that progress from a quarter perspective every quarter. There's an increase of the number of clients that we are...

attaching the next gen payroll to us workforce now. So think from Q4 to Q1, we had more from Q1 to Q2 or Q2 to Q1 we had more as we continue again to attach more and more. We're running about 30 to 40% attached. So again, using your time frames over the next 16, 6 to 18 months.

Our goal would be to continue to more broadly offer and scale that offering across specifically our mid-market. We're seeing, again, great signs on wind rates, things like that. I think the other initiative I would speak to is ROLL. Very excited about our project that we – Dub..

or not project, our product that we call ROLL, which is really the downmarket product that we're offering to an incremental buyer, that digital native. And so again, it's exceeding all of its project milestones. We're learning, we're continuing to understand how a digital...

A buyer wants to consume payroll end-to-end in a digital capacity, and we believe over the next 6 to 18 months that we will learn more, and as such, we will scale it across. In terms of the impacts to revenue, I would tell you, you know, revenue over the next 6 to 18 months, I'm not sure that any of those projects will make a meaningful impact.

impact to the revenue. They certainly will make a meaningful impact to bookings, and as we onboard those clients, that will generate new revenue lines for us, whether that's in the upmarket, on NextGen HCM, it's a broader piece to the mid-market on NextGen payroll, and then in the down market, I'm going to micro market that role addresses.

We take a lot of units for it to make a meaningful revenue impact to the broader ADP, but the excitement is really in the offers and the offers being able to drive win rates and retention and changing the competitive narrative. So with that I'll kind of stop and I'll let Don speak to any margin impact.

I'll just follow up on Maria's comments. I think the adoption of these products is exciting and doing well. As we have the adoption increase quarter to quarter, we expect to see improvements in revenue from these new offers. But I think at the same time, the penetration rate within our million existing clients is

going to take some time to achieve. So the margin impacts from those new sales and those clients is going to take some time to make its way through to the bottom line, so to speak. But I would say that you've heard us often speak about transformation of these calls over the last few years. And I would say that businesses have been more Karma as deploying it. You know, as long as I am willing to do what I do. Because we need facebook. We would give the guys the progressive

Internally, I think our biggest transformation exercise, our biggest transformation opportunity is coming from these new products themselves. So we are excited about these new offers and we do think they're going to help us out in the future.

That's terrific. Thank you. And then, you know, obviously, in the headlines, everybody's concerned about, you know, what could potentially occur from a macro perspective in terms of if we go into a recession. ADP's obviously got a stellar long-term track record of navigating.

successfully through recessions. But I'm wondering, you know, what's your philosophy going to be, Maria, if we go into a recession in terms of thinking about, you know, expenses, margins, et cetera.

you know, would you just

focus on the long term or would you do things in a short-term manner to to adjust expenses.

We do have a recession playbook, if you will. I think the first thing that happens is we adjust things such as our go-to-market. When you think about how we address talent needs on the way up in an economy, it's kind of a converse on the way down. So that's not to suggest that the business wouldn't be impacted, the things that would be impacted.

incentive comp. We could also as a byproduct of that if there's lower volume on the sales side coming in, we would have lower volume on the implementation side and potentially lower volume on the service side. And so there would be maybe a pullback in hiring, things of that nature. And these are all playbooks that we've run before a few times in my lifetime. We made

at that juncture choose to prioritize key investments differently depending on what's happening. But we're going and we're very committed to continuing the work we've been doing on modernization and on transformation. And I think one of the big lessons for us, whether it was this most recent pandemic downturn, if you will, an event or it was

the financial crisis or even the, I've been here long enough to be a part of the 2000, call it dot com, et cetera bust. And what I would say is, our investments in growth will be maintained. I think that's the key is.

ensuring that we make smart decisions during a downturn so that when we come out of the downturn, we're positioned to execute quickly. I think we made some very wise decisions specifically on the go-to-market and on the seller side during the pandemic that allowed us, we were lucky because it was short.

and steep and fast and as everything opened back up, we were well positioned to take advantage of that market because of the investments that we continue to make. So to answer your question, I think most of the changes that we would make are somewhat self-adjusting in their nature if bookings were impacted.

Perfect. Thank you.

Perfect, thank you.

Our next question comes from Brian Bergen with Cohen. Your line is open.

Hi, good morning. Thank you. First one I had is on pricing. So just any change in view around ES pricing, any changing client acceptance to the higher levels that I think you were contemplating when you entered the fiscal year, just given the macro.

Yeah Brian , thanks for the question. I think it's a relatively short answer. The fact is our prices are holding well. As a matter of fact, I would say that we are kind of at the high end of the guidance we gave previously and we're comfortable with that. I think if we look at our retention, we look at our MPS scores.

It appears that those price increases have been understood and accepted as well as could be expected.

Okay, good to hear. And then on the international front, so you just talked about what you saw in Europe here that drove the better performance in the quarter and you cited US pays per control here in the earnings material. What does that imply in the Europe space? So I'm curious, not just on the employment level, but also the demand, whether there's really any particular solutions that drove that better.

performance or different underlying behavior in that base versus US. We were very pleased by the improvement that we saw in international bookings. It was driven mainly by our global view offer and a bit of our in-country business. So very excited about what we saw.

specifically as it relates to performance in the second quarter, but also about pipelines, right? So a quarter ago I was on this call citing that we believe that there was some pipeline depletion that happened specifically in international, so pipelines that were pulled into last fiscal year, international was one of the businesses that had an incredibly strong fourth quarter.

as I am. It is an area that we're still continuing to watch for all the obvious things I said last quarter, which is there's still the crisis in the Ukraine, there's still the energy crisis. It is also an area that we see a tiny bit of pipeline aging and so international remains a watch item for us.

For us, I'll be very excited about the pipeline build and the results in the second quarter.

And I think you asked about pace for control in international. Yes, right. Pace for control for our international space tends to be more subdued than what we have in the U.S. in both directions. And so, early pandemic, it didn't fall.

very much at all and in the recovery subsequent we had less growth there. So that's continued. Yeah, so just maybe so the you know the government programs that are in place and the kind of the social aspect if you will of European employment means that things don't go down very quickly and as a result they don't recover very quickly as well because they don't have much to recover from so

That's good for consistency or continuity of earnings. That works in our favor when times are trying.

consistency if you will or continuity of earnings. So that works in our favor when times are trying. Okay, makes sense. Thanks guys.

Our next question comes from Tianjin Wang with JP Morgan. Your line is open. Your line is open.

Thanks so much. Sorry. Hope you can hear me. Maria, I think I heard you say you were looking to reposition PEO.

If that's the case, can you elaborate on that? I'm just trying to think if the implied second half growth in...

NWSC volume within PEO, that's a good number to start from as we look to next year. How does the growth get better or worse from there or how quickly can the repositioning?

benefit of the volume outlook. Thank you. The comment that I made was really about bookings and so we are looking to reaccelerate bookings in the back half for PEO. As mentioned it was a bit softer in the first half. In terms of the question of when we anticipate

the reacceleration, the well-positioned reacceleration in worksite employee growth, we don't anticipate that it will be in the next couple quarters. So not a position to necessarily give guidance for next year, but we are lapping, as mentioned in the remarks, we are lapping record retention, record bookings, and as...

some of that laughing happens, we believe we're well positioned to reaccelerate works on employee growth into next year.

Got it. Perfect. Thank you. And then just on retirement services, since you mentioned it in your prepared remark, any update on penetration?

there across the major lines and if there's any change in that local model there. Thank you. Sure. So it's safe to say that business is outperforming its targets. It has great growth. We do have, and last week we talked about it, we do have 125,000 plans.

across that business. It's primarily an SMB space, a little bit into the mid-market and even up-market. But nonetheless, if you just think of it in the SMB context and with the new SECURE Act, which is the 2.0 version of the 1.0 and all the state mandates, at this juncture we have 125,000 of 800,000-ish.

run clients that take advantage of the offer. So you can kind of think about the opportunity in that way. That's not to suggest that every single one of those run clients could be a retirement plan, but even if we were to capture a bit of that, we do believe, and it's part of the reason I'm so excited about it, is because it does continue to outperform its growth targets and we believe.

There's tremendous runway for growth and retirement services over the coming years. Thanks for that. Our next question comes from Samad Samana with Jeffries. Your line is open. Hi, good morning. Thanks for taking my questions. I just wanted to ask one.

Okay, so let me talk about the two volume businesses that we referenced in the prepared remarks. The first one would be the RPO business, the recruitment outsourcing. That business was down and that business is not a very big business for us and most of it is focused in the upmarket. Most of the clients we have there are...

the enterprise space and I think that is an area of course where we are seeing something internally that correlates more with some of the headlines that we're seeing in the press. But it's not a very big business for us and it did come down. On the employment verification business of course mostly and significantly related to the mortgage market. We don't share the number that EV business is part of our broader billion dollar...

in the mortgage market in the back half of the year and we've reflected those expectations and those forecasts into the numbers that we're sharing with you today.

Great. And then maybe just a housekeeping question on the rate side. So just so we understand it, when the company gives the forward outlook for the float revenue guidance, are you assuming, I'm assuming the tenure that's come in is the short end of the curve, but that's gone up. So,

Should we assume that the tenure at current levels is what you're now forecasting going forward? I'm just trying to make sure that we get it correct, the interquarter moves and how we should think about that on the guidance of that.

Yeah, so since we presented, since we gave guidance last quarter, rates have come down particularly on the mid and the long rates. And even though short-term rates have increased, so have our short-term borrowing costs and our commercial paper program. So the rates that we're giving and the reason we've taken our...

client fund interest forecast down a little bit at the midpoint is to reflect those increased boring rates and the softening if you will of interest rates in the mid and the longer term. Yeah, Samad, thanks for asking that question because I know we take a slightly different approach than some of our peers, but even when you think about the short end of the yield curve, what is currently baked into market expectations?

and that declined from, I think, 4.3% last quarter to 4.1% this quarter. So, in other words, we're getting less in the mid and long end of the yield curve and we're getting more or less what we expected in the short. Great. That's helpful. Thanks for clarifying that. Appreciate it.

And our last question comes from Jason Kupferberg with Bank of America. Your line is open. Hey, thanks, guys. I wanted to come back on PEO for a second and maybe piggybacking on Tingin's question. Just as we think about the second half of the fiscal year, it looks like the revenue growth is going to come in five, six percent. OK, guys.

And then you talked about getting to some easier comps and some reacceleration, but are you thinking any differently about the medium-term guide for PEO? I think that was 10 to 12% when you provided that at the analyst day.

because I said it earlier on the call, but I think it is an important point. The demand is incredibly strong still for the PEO. It is still growing nicely through the second quarter. Technically it was year on year growth. It just wasn't what we had expected and it decelerated a bit earlier than we thought. And so when we think about kind of the back half of the PEO, we do expect bookings to reaccelerate. As mentioned, we expect works on employees.

to not accelerate in the coming quarters, but we're well positioned to do so as we lap the compares into next year. But I think that the big piece, by the way, even retention was healthy. Retention is right in line with really where it's been in the last decade. It's been a lot of years in that business.

I've seen this as nothing abnormal, if you will. It's really just the byproduct of some lingering effects from the pandemic, which is not that different than some of the strangeness that we experienced during ACA in that business. And so what I would say is demand is healthy. Bookings is healthy, just not as high as we wanted it to be on Tough Compares. Retention is healthy, just not as high as we wanted it to be.

an average worksite employee. So I think we're still very much on on that track and pretty much committed to that. Okay, appreciate that. Just wanted to follow up on the pace per control side, obviously you up ticked the guide there, but we have seen in the temp labor market there's been some material declines in recent ones. I'm just wondering how you guys think about the template labor market.

Relative to broader labor market conditions and your business with some kind of potential lag, just any views there would be helpful. Thanks. Yes, Jason, I think... Sorry, let me start. I think some of the leading indicators we looked at... rubber band'd

So we look at the Jolt Report, we look at the job postings, etc. Those still seem to be healthy. It is, I mean, the open positions, the untold positions are certainly declining, but they still remain at healthy levels compared to pre-pandemic levels. So I think that would be an indicator we look at. And I think there's still some room there before they get back to.

what we saw pre-pandemic. So I guess we'll continue to pay attention to it, stay focused on it, but at this point in time things still feel to be pretty healthy. Yeah, exactly to that point. It's one of many leading indicators that we look at and for sure things are slowing given where we are with employment and 3.5% unemployment rates.

So it's not a question of whether we expect the monthly jobs growth to slow over the next several months. I think that's more or less assumed, but the question is at these employment levels, to get that type of growth is still a very healthy outcome. And so I think that's how we would characterize the overall environment today.

Okay, well thanks for the color guys, appreciate it. We have time for one more question and that question comes from Carter Gmeda with North Coast Research. Your line is open.

Good morning. Maybe Maria or Don, as you look at the PEO business, are you seeing any more competition in the business? Could that be a part of what you are seeing or is this just that?

Do you need to reposition the business a little bit? And the business was so strong that the comparisons are difficult. I think the business was so strong. I think the compares were difficult. We plan for deceleration. It happened faster. We do not see a competitive change or landscape.

that exists. Again, in terms of where that business gets its business from, that 50-50 split between kind of new clients coming in as well as upgrades, as well as where we actually return clients that leave. Certainly there is.

PEO to PEO switching, but it's a very small piece to the overall results on the booking size or the impact on retention. We're not seeing, again, we look at balance of trade, we look at win rates, and we do not see a meaningful change in the competitive landscape.

And then maybe Don and Danny, I know you're talking about leading indicators and you talked about the JOLTS report and I'm assuming you have a lot of other statistics, but I'm wondering, are you able to look at the customers you have and the demand they see for employees and if you kind of compared that to what you saw, you know, three, six months ago, are you able to do that? So maybe what you might.

seeing those types of statistics. I think the way we look at that car take is through the pace for control growth. As we went from 7% growth in Q1 down to 5%, we were looking to be a bit flatter in the back half, although we've become a little bit more optimistic on that as time has gone on. That would be the key area where we kind ofkissed the stress rate.

take a look and see what the demand is with our installed client base. Beyond that, CARTC, we do have some recruitment solutions beyond the recruitment outsourcing one that Don spoke about earlier. So we have, for example, data on the total number of job postings that our clients have. And if you were to look back...

that would typically track Jolt so that the trends would be very similar. Now that said, clearly you could be in an environment where people have job postings and then they decide to pull them. So how accurate that is, how great of a leading indicator that is, it's hard to say. But at the same time we have...

live data on Facebook control as Don points out, so we know with precision how many people are being added week to week. That's healthy, the job postings are healthy. Granted there are some signs of deceleration, layoffs, and temp, but the bigger picture is still healthy.

Well, thank you very much. I appreciate it. This concludes our question and answer portion for today. I'm pleased to hand the program over to Maria Black for closing remarks. Thank you, Michelle, and thank you to all of you on the phone today for your thoughtful questions. As you heard from our tone today, very pleased with the first half.

Excited about how we're positioned for the second half against our updated guidance. Again, everything that we do every day is all about solving for clients in the world of work. And with that, I think it would be appropriate for me to thank the 60,000 plus associates.

that are out there every day doing that work for our clients, for their workers, and bringing meaningful value into the world of work and into the world of HCM. So thank you to all the associates, thank you to all the analysts and the investors for your support and your continued support. We certainly appreciate it and we look forward to keeping you updated and speaking with you again soon.

Thanks so much. This concludes the program. You may now disconnect. Everyone, have a great day.

Good morning. My name is Michelle and I'm your conference operator. At this time, I would like to welcome everyone to ADP's second quarter fiscal year.

Go ahead.

Thank you, Michelle, and welcome everyone to ADP's second quarter fiscal 2023 earnings call. Participating today are Maria Black, our President and CEO , 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.adp.com.

where you will also find the investor presentation that accompanies today's call. During our call, we will reference non-GAAP financial measures, which we believe to be useful to investors and that exclude the impact of certain items. A description of these items, along with a reconciliation of non-GAAP measures to the most comparable GAAP measures, can be found in our earnings release. Today's call will also contain forward-looking statements that refer to future events.

results headlined by 10% organic constant currency revenue growth, 120 basis points of adjusted EBIT margin expansion, and 19% adjusted EPS growth. We continue to deliver exceptional value in the HCM market as we invest in ourselves and innovate to continuously meet and exceed.

the changing needs of our more than 1 million diverse local clients. I'll start with some highlights from the quarter. In Q2, we drove very strong ES new business bookings growth, which included an incredible finish in December . We have continued to see robust demand across our downmarket portfolio and our ES HRO offerings.

and our international sales performance, especially our global view platform, was much stronger in Q2 after a softer Q1. Overall, we are pleased with our sales results for the first half of the year, and although clients are still dealing with a number of uncertainties, our pipelines are healthy and we feel well staffed.

and well-positioned to deliver solid bookings growth for the remainder of the year. Our ES retention was once again a source of outperformance with modest year-on-year improvement in Q2 overall despite continued normalization in downmarket out-of-business rates. This strong result was just shy of the record retention set during the pandemic.

and was led by our mid-market, our up-market, and international businesses. And we're pleased to be taking our full year guidance up slightly. Our pace to control metric was 5% for the quarter, decelerating slightly from Q1 as we had anticipated. Jobs growth in the U.S. labor market has been slowing, but clearly remains

While we have been expecting growth to decelerate over the course of this year, the pace was a bit faster than we previously assumed and we're adjusting our outlook accordingly. With that said, demand for the PEO solution remains healthy, the secular growth opportunity is unchanged, and we are well positioned to reaccelerate our worksite employee growth. Stepping back from the quarter, I want to provide a quick update on our broader strategy.

Over the last several years, you've heard us talk a lot about the modernization of our products. Our simpler user experience enhances ease of use for our key platforms like Run and Workforce Now, and enables a more seamless integration to complementary solutions like insurance, retirement, and payments.

Our next-gen payroll engine is a prime example of how we're modernizing the back end of our solutions, and we continue to offer it to a broader set of new mid-market clients.

And brand new solutions like R.O.L.E. and our NextGen HCM platform position us to address certain HCM opportunities more fully than before.

These product enhancements are designed to drive win rates and retention even higher, and we have tremendous opportunity in front of us. But our strategy has always been about much more than just offering HCM software.

ADP clients want us to help them find, hire, pay, engage, and provide for the retirement of their workers in a thoughtful and compliant way.

To truly solve for these needs, we are modernizing all aspects of the client relationship. That starts with product, but also extends to our go-to-market approach, how we onboard our clients, and even how we advise and support them on critical issues.

We refer to this collective effort as our modernization journey. And as with our product journey, the opportunities here are incredible. We are removing friction and enhancing the client experience in many ways. In our US Dawn Market, we continue to digitally onboard tens of thousands of clients every year, making onboarding easier for our clients and accelerating time to start.

We have seen this success in the US and we're beginning to scale the same capability in Canada. Our intelligent self-service capability, launched only last quarter, is already helping a portion of our client base answer millions of questions from client employees through a completely automated process. And now, in our international portfolio, we're implementing Chatbox to reduce work for those clients.

been greater value to clients from better aligning pay to market trends to reducing the frequency and severity of workers compensation claims to identifying tax credits and other legislative incentives. To bring this large-scale modernization journey to life, I'll speak to one of our fastest growing businesses, ADP Retirement Services.

which helps employers establish and administer retirement plans. Businesses today face a complex environment with significant legislative change, and our clients look to us to help them navigate these changes, stay compliant, and address talent challenges. For example, in the retirement space specifically, the recently passed secure access

with thousands of different investment options is not only clean and intuitive thanks to our new UX framework but is also deeply integrated with run and workforce now. Our highly tenured licensed retirement services Salesforce understands our clients and understands which solutions can make a meaningful difference in a client's unique...

of our mutual clients and their employees.

And our tax credits team, full of experts in their field, is there to help our clients or their CPAs apply for and obtain the appropriate legislative incentives. Our goal in our modernization journey is to consistently improve the full end-to-end experience for our clients and their employees.

which will in turn contribute to our long-term sustainable growth and profitability. We look forward to keeping you updated. And now, over to Dawn.

Thank you Maria, and good morning everyone. I'll provide some more color on our results for the quarter and update you on our Fiscal 23 outlook. Overall, we had a strong Q2 on both revenue and margins. If I can summarize, we had generally positive developments in our ES segment, despite some incremental headwinds. 2.

Meanwhile, trends were a little softer than expected in our PEO. Let me focus on ES first, and I'll cover our results in Outlook all at once. ES segment revenue increased 8% on a reported basis and 10% on an organic, constant currency basis which was a good outcome for the quarter.

Maria mentioned the strong new business bookings performance in Q2. Given the continued macroeconomic uncertainty, we think it is prudent to maintain our current guidance range for now, although we feel well positioned for the back half.

We also had near-record ES retention in Q2. With first half ES retention results up year-on-year, we're now revising our outlook, and we expect retention to be down only 20 to 30 basis points for the full year.

This continues to assume normalization and out-of-business losses in our downmarket. Pays-per-control were in line with our expectation in Q2, but with better line of sight on Q3, we are now assuming less of a deceleration in Pays-per-control over the back half than we did previously and are raising our outlook.

to now assume 3-4% PAPG for the year. And on FX, we had about 2% points of revenue headwind in Q2, but the outlook for the rest of the year is slightly improved and we now expect full year headwind somewhere between 1 and 2%.

Those are the bigger positive developments in ES revenue. There were few developments in the other direction as well.

Client funds interest revenue was up nicely in Q2, but was actually a bit lighter than we had planned. This is primarily because yields pulled back slightly from where they were three months ago when we provided our prior outlook. We're also tweaking down our balance growth assumption now to 4-5% growth for the year, due primarily to assumptions around average wage related to worker mix, tax rates, and

as well as the impact of the lapping of the payroll tax deferral. Together we are lowering the full year by $5 million at the midpoint for revenue and $15 million at the midpoint for net impact to our earnings. We also saw underperformance in some of our volume-based businesses like our recruitment outsourcing business and our employment verification business.

Overall, though, we're feeling good about our ES revenue growth trajectory and are taking up our guidance by 1% to now expecting growth of 8-9% for the year.

Our ES margin was up 170 basis points in Q2, which was in line with our expectations.

there is no change for a familiar outlook. As a reminder, we've invested in headcount in sales, product, and other areas throughout the organization over the last several quarters as we see continued opportunity to win new clients and further increase satisfaction with existing clients. And although we may scale back as appropriate, we will continue to work to ensure that our

At a high level, we feel comfortable with our staffing levels against the secular growth opportunity in front of us. Moving on to the PEO. As we keep moving toward a phase of driving change, we will be moving forward on the short term

We delivered 11% PO revenue growth in Q2, with 8% growth in average worksite employees. As Maria shared, the PO results can be a bit softer than expected.

The PEO business continues to benefit from long-term tailwinds, but there is a lingering effect from the pandemic, which is still adding variability to our PEO results and outlook.

on re-accelerating worksite employee growth. For this fiscal year, we are lowering our PEO revenue outlook to 8-9%, driven by growth in average worksite employees of about 6-7%. PEO margin in Q2 was up 130 basis points.

about in line with our expectations, and we continue to expect PEO margin to be flat to up 25 basis points for fiscal 2023. Adding it all up, the favorable revision to our ES revenue outlook is largely offset by our lighter PEO revenue growth forecast, and so we continue to expect consolidated revenue growth.

of 8 to 9 percent in fiscal 23. We also maintain our outlook for adjusted EBIT margin expansion of 125 to 150 basis points

We still expect our fiscal 2023 effective tax rate to be about 23%. And we continue to expect adjusted EPS growth of 15-17% supported by our steady share repurchases. I'll just make one quick comment on cadence.

We expect consolidated revenue growth to be relatively steady in Q3 from where we were in Q2.

We expect margin expansion to be a bit more modest compared to what we experienced in Q2, closer to 50 to 75 basis points of expansion.

including the lapping of a one-time item last year, comparisons from a headcount perspective, and certain investments in sales and marketing that we're assuming for Q3. Again, there's no major change contemplated for the full year, but hopefully this helps you think about Q3. Thank you and I'll now turn it back to the operator for Q&A.

If you'd like to ask a question, please press star 11. If your question has been answered or you wish to remove yourself from the queue, please press star 11 again. In order to keep within our allotted time, please ask one question with a brief follow-up.

But I was just curious, is the macro environment and I guess labor market trends impacting PEO differently than ES? Is it a question of sensitivity to small versus large market clients? Is it vertical exposure or is this really something you see as quite transient?

Thank you, Ramsey. Appreciate the question. So I'll try to cover all the ground on the PEO that you asked about. So specifically what we saw with respect to the first half, we did see, as mentioned in the prepared remarks, we did see that bookings did come in softer. We saw that retention came in a bit softer as well than our expectations.

In terms of the lingering effect that we cited, all of our businesses had an impact from the pandemic. I would say the PEO is probably the one that had the most impact. If you think about all the drivers that constitute the PEO, it's everything from average wages to worker mix to state unemployment to certainly the lines of insurance, workers compensation, and health benefits.

And so I would say it's the business that had the most impact as the pandemic came into the business. And as the pandemic is flushing out, it is having a lingering effect on the business. I think you touched on what we're seeing with respect to a pace per control in the PEO and the context of ES. What I would say is pace per control is the growth rate is decelerating in the PEO. That was expected. It contributes to the...

Slider stopped the performance in the first half and is contributing to the second half. But the two main drivers really behind the performance in the first half as well as the outlook for the second half are bookings and retention. One thing I would say though, because I want to go back to the strength of that business, we have...

Incredible faith in that business as it relates to the growth from a long-term outlook perspective. The demand is still there in absolute form from a bookings perspective. The PEO did have growth year on year, albeit it was softer than ES and softer than our expectations. That was super helpful, thank you. And just a quick follow-up from me.

tech layoffs have been, tech sector layoffs have been in the headline recently. I know you guys have a very diversified business, but I thought I'd ask anyway. How exposed are you to that particular vertical? Are you feeling any kind of acute impact from all those headline kind of layoffs in the technology sector? Yeah, Randy, it's a good question. I think it's hard to avoid all the headlines that we're seeing day in, day out. And it's fair to say that there's been a number of large names that have announced major layoffs. I think it's hard to avoid all the headlines that we're seeing day in, day out.

I'd also have to say that some of those clients are, or some of those people making those layoffs are our clients, but those layoffs are happening around the world in some cases, they're not necessarily our clients in all of our markets. So I think it's fair to say that we have yet to see any significant impact from all those announcements. And I guess I'll just round it out by saying, we're still seeing.

Strong demand. We've taken up our base for control assumption for the back half and we're doing that not just on our own Internal perspective. We're also looking at the VLS reports, the JOLTS reports. Everywhere you look continues to suggest that there's still strong demand for employment. Unemployment continues to be very low.

Unemployment applications are still at record lows, they're not increasing. So the macro environment continues to be very, very favorable for us, irrespective of some of those headlines that we're seeing.

Perfect. Thank you so much. Our next question comes to Eugene Samuni with Mafat Nathanson. Your line is open. Thank you very much. Hi Marie and Dan.

I wanted to ask about ES Booking, so it sounds like a very positive commentary, strong performance there. I think you called out international as coming back strong versus last quarter and also downmarket. Can you talk a little bit about the mid-market? How were the trends there? Let me know in the comments below.

Yeah, I think the key question on everybody's mind is, are you seeing any signs of macro pressure on bookings as companies potentially pulling back their tax spending? We were very pleased with our overall new business booking for the second quarter. Definitely saw an acceleration in pipelines. I'll get back to pipelines in a minute. I did cite the down market.

the strength that we're seeing in the down market. That's really our entire down market portfolio. So thinking about our obviously our run offering but all the things that Heather offers the run offer, which is the retirement services that I spoke to at length during the prepared remarks, insurance services. We did see strength in employer services HRO.

And then last but not least, one of the things that I was most pleased to see was the bounce back in international in the second quarter, both in pipelines as well as results. And that was as mentioned really in our global view space. So very, very happy with the results. Very happy with the strengthening of pipelines. That's what gets us confidence stepping into the back half.

but from a legislative perspective as well as a talent perspective. We have incredible strength in that business as it relates to the product investments we've made. So think about user experience to what we're attaching with the next generation payroll engine. So we make good product enhancements. We have strong NPS. We have incredible retention results for the mid-market in general.

had also a solid sales performance. What I would say is, as you contemplate the mid-market, don't forget that employer services HRO, the offer that we call comprehensive services, sits squarely in that market, and that's an area that experienced...

tremendous growth during the pandemic, and that growth has sustained and is exceeding the overall employer services growth. So, all together, the net results for the mid-market are very, very solid for us. Got it. Got it. Very helpful. And then a quick follow-up for me on pace per control. Your number was very strong this quarter, we thought, out from your expectations, but also keeps outperforming by 0.2%.

kind of the broad measures of labor market growth in the US, like non-farm payrolls. And remind us, what's the driver of that and how sustainable is that as the overall labor market slows down? Can you maintain that one to two point premium? Yeah, that's a good question. Just to remind everyone that...

ad employees, as Maria said, bookings are strong. I think it's the $64,000 question about how long the labor market can continue to grow or unemployment can stay so low as we look at some of the headlines and will those things start to converge at some point in the future. But for now, I think we're comfortable with it.

what we've done in terms of taking up the pace for control growth for the back half. And Eugene, just to your point about that spread having existed in the past, I think typically we would have expected 2 to 3% pace for control growth in a normal economic environment and that compares to maybe 1 to 2%.

total employment growth. And that's a function of our clients, in general, being perhaps a bit healthier than the overall economy, but also the fact that total labor includes things like bankruptcies and new business formation. So it's a slightly different take on employment. Got it, very helpful. Thank you guys.

Our next question comes from James Fawcett with Morgan Stanley . Your line is open. Great. Thank you so much. I wanted to quickly just revisit a little bit, and I think you touched on it, but retention...

It's an area where we had at least been expecting to see some normalization, especially from a company perspective, but it seems to continue to improve or tighten.

Obviously, you made technology advancements, et cetera, but what are some other areas, if any, that you'd point to that are helping drive that retention performance?

Sure, thanks James. With respect to retention, we are very, very pleased by the strength that we've seen year to date. We cited at the end of the first quarter we had record retention, the second quarter was near record. If you look at the first half it was a record. So we're very proud of the, not to be a broken record, but the record retention and the strength that we saw.

And we believe that it is a byproduct of the investments. I alluded to the investments we've made into the mid-market. As an example, the user experience, that's broad-based now across the run platform, our mobile app, our international offer, we're also an international seeing record retention.

So we believe a lot of these things are anchored in just really driving a better user experience, driving the product into a better place. I think the other is NPS. We have strong service results that's broad-based across the portfolio. I think we generated a tremendous amount of goodwill and value during the pandemic and how we

chose to service our clients and I think that value is it has continued and we see that in the results on the MPS side. So that I think that's another place. You did touch on normalization. I think it's an important point to make. We do believe at this point specifically in the down market. I think we even touched on it during the prepared remarks.

We do believe that retention has normalized. When we normalize for average or adjust for average size client, we are back to the down market really having out of business and bankruptcies back to fiscal 18, fiscal 19 levels. So we do believe that the down market has normalized. So again, back to kind of the.

the broader retention picture, it is a very strong one for us because we believe at this point that it's broad-based and it's really a result of the investments and the service levels that we offer.

So Maria, that's an interesting point that you're already kind of at least where you think we're where we should be from a

you know, attrition perspective, etc., at least compared to where we were pre-COVID. What are you seeing though from the competitive environment, especially as we see companies expressing more concern? Are you seeing flight to quality versus some of the regional players or newer entrants? Is that helping you? Just love an update of how the competitive environment factors into what you're seeing overall.

The competitive environment is certainly, you know, one hand I could say it continues to evolve, on the other hand I would tell you there's nothing really new to report. I think what we're seeing, and we look very closely at our balance of trade, we look very closely at our win rate, we're measuring all these investments that we make and whether or not they're impacting

things such as our balance of trade and such as our win rate. And what I would offer is that there is a direct correlation between the places we're investing, whether that's the down market and our go to market brands, head counts, or in the mid market into the product and the next generation suite and the win rates that we have. And so we do believe that we're getting stronger in terms of our offer. And I think the record

Thanks for taking my questions. Maria, you mentioned the modernization initiative. I'm wondering if you can expand a little bit on that, just in terms of what we should expect over the next 6 to 18 months in terms of

you know, new offerings or increased offerings. And how would that end up impacting, you know, both from a revenue as well as from a expense perspective? How should we think about that? Sure. I love speaking about the investments we're making into the modernization journey. And so perhaps I can.

There is all the things that I talked about in the prepared remarks, which is around tools, technology, removing friction, taking work out. Last quarter alone, we talked about intelligence, self-service, voice of employees. So these are the spoke features functionality that we're layering into our offers and into our platforms to make them more accessible.

more competitive and bring more value to the market. With respect to the next generation platforms, you know, touch briefly on next generation ACM. We've given updates of that over time, and I think we continue to see us implement our backlog, continue to build scale, build implementation. Our goal would be to use your time horizon over the next 16 to 18 months.

that we would open the aperture to have that suite specifically sold across a broader set of the upmarket clients. In terms of the next generation payroll, which is what we are offering attached to WorkforceNow in the mid-market, we continue to make progress on next generation.

payroll, pretty excited about that progress from a quarter perspective every quarter. There's an increase of the number of clients that we are attaching the next-gen payroll to us workforce now. So I think from Q4 to Q1 we had more from Q1 to Q2 or Q2 to Q1 we had more.

As we continue again to attach more and more, we're running about 30 to 40 percent attached. So again, using your timeframes over the next 16, 6 to 18 months, our goal would be to continue to more broadly offer and scale that offering across specifically our mid-market. We're seeing again great signs on win rates, things like that.

I think the other initiative I would speak to is ROLL. Very excited about our project that we, or not project, our product that we call ROLL, which is really the down market product that we're offering to an incremental buyer, that digital native. And so again, it's exceeding all of its project milestones.

We're learning, we're continuing to understand how a digital buyer wants to consume payroll end to end in a digital capacity. And we believe over the next 6 to 18 months that we will learn more and as such we will scale it across. In terms of the impacts to revenue, I would tell you, you know, revenue over the next 6 to 18 months.

I'm not sure that any of those projects will make a meaningful impact to the revenue. They certainly will make a meaningful impact to bookings. And as we onboard those clients, that will generate new revenue lines for us, whether that's in the upmarket, on NextGen HCM, it's a broader piece to the mid-market on NextGen Payroll.

And then in the down market and the micro market that Roll addresses, it's – you know, we take a lot of units for it to make a meaningful revenue impact to the broader ADP. But that's the – you know, the excitement is really in the offers and the offers being able to drive win rates and retention and changing the competitive narrative. So with that, I'll kind of stop and I'll let Dom speak to any margin impact.

I'll just follow up on Maria's comment. I think the adoption of these products is exciting and doing well. As we have the adoption increase quarter to quarter, we expect to see improvements in revenue from these new offers. I think at the same time, the penetration rate within our million existing clients is going to take some time to achieve. The margin impacts from those...

new sales and those clients is going to take some time to make its way through to the bottom line so to speak. But I would say that you've heard us often speak about transformation of these calls over the last few years and I would say that internally I think our biggest transformation exercise, our biggest transformation opportunity is coming from these new products themselves. So we are excited about these new offers and we do think...

They're going to help us out in the future. That's terrific. Thank you. And then, obviously, in the headlines, everybody's concerned about what could potentially occur from a macro perspective in terms of if we go into a recession. ADP's obviously got a stellar long-term track record of navigating.

successfully through recessions. But I'm wondering, you know, what's your philosophy going to be, Maria, if we go into a recession in terms of thinking about, you know, expenses, margins, etc.? You know, would you just focus on the long term or would you do things in a short term manner?

on the way up in an economy, it's kind of the converse on the way down. So that's not to suggest that the business wouldn't be impacted, the things that would be impacted are things like bookings. And the reason I bring that up is it is somewhat self-adjusting, right, as it relates to the action. So in the absence of bookings, there's also the absence of expense of some of that.

self-adjusts, thinking, you know, selling commissions, overall incentive comp. We could also, as a byproduct of that, if there's lower volume on the sales side coming in, we would have lower volume on the implementation side and potentially lower volume on the service side. And so there would be maybe a pullback in hiring, things of that nature, and these are all playbooks.

that we've run before a few times in my lifetime. We may at that juncture choose to prioritize key investments differently depending on what's happening. But we're going and we're very committed to continuing the work we've been doing on modernization.

and on transformation. And I think one of the big lessons for us, whether it was this most recent pandemic downturn, if you will, an event, or it was the financial crisis, or even the, I've been here long enough to be a part of the 2000, call it dot com, et cetera, bust. And what I would say is, I think,

you know, our investments in growth will be maintained. I think that's the key is ensuring that we make smart decisions during a downturn so that when we come out of the downturn, we're positioned to execute quickly. I think we made some very wise decisions specifically on the go to market and on the seller side during the pandemic that allowed us, we were lucky because it was short.

Our next question comes from Brian Bergen with Cohen. Your line is open. Hi. Good morning. Thank you. The first one I had is on pricing. So just any change in view around ES pricing, any change in clinics?

high end of the guidance we gave previously and we're comfortable with that. I think if we look at our retention with a better MPS scores it appears that those price increases have been understood and accepted as well as could be expected.

any particular solutions that drove that better performance or different underlying behavior in that base versus U.S.? We were very pleased by the improvement that we saw in international bookings. It was driven mainly by our global view offer and a bit of our in-country business. So very excited about what we saw.

And so we did see a need during the first quarter to rebuild pipelines. The great news is those pipelines were rebuilt and we saw that execution in the second quarter. It's also what gives us optimism as we head into the back half. So we're excited about international and as optimistic as I am, it is an area that we're still continuing to watch for all the obvious things I said last quarter, which is there's still the crisis in the Ukraine, there's still the energy crisis.

It is also an area that we see a tiny bit of pipeline aging. And so international remains a watch item for us, albeit very excited about the pipeline build and the results in the second quarter. And I think you asked about pace for control in international.

Yes, right, paper control for our international space tends to be more subdued than what we have in the US in both directions. And so, early pandemic, it didn't fall very much at all. And in the recovery subsequent, we had less growth there. So, let's continue. Yeah, so just maybe, so the government programs that are in place and the

kind of the social aspect, if you will, of European employment means that things don't go down very quickly, and as a result, they don't recover very quickly as well, because they don't have much to recover from. So that's good for consistency, if you will, or continuity of earnings. So that works in our favor when times are trying. Okay, makes sense. Thanks, guys.

Our next question comes from Tengen Wang.

Our next question comes from Tengen Wang with J.P. Morgan. Your line is open. Your line is open.

Thanks so much. Sorry. Hope you can hear me. Marie, I think I heard you say you were looking to reposition PEO.

If that's the case, can you elaborate on that? I'm just trying to think if the implied second half growth in...

NWSC volume within PEO, that's a good number to start from as we look to next year. How quickly can the repositioning?

the reacceleration, the well-positioned reacceleration in worksite employee growth, we don't anticipate that it will be in the next couple quarters. So not in a position to necessarily give guidance for next year, but we are laughing, as mentioned in the remarks, we are laughing record retention, record bookings, and as some of that laughing happens, we believe we're well positioned.

to reaccelerate works on employee growth into next year. Got it. Perfect. Thank you. And then just on retirement services, since you mentioned it in your prepared remark, any update on penetration?

Thanks for that. Our next question comes from Samad Samana with Jeffrey. Your line is open. Hi. Good morning. Thanks for taking my questions. I just wanted to ask you a question. I just wanted to ask you a question.

limit verification, or do you think it was just seasonally lower? Just how should we think about that since you called it out this quarter?

We are seeing something internally that correlates more with some of the headlines that we're seeing in the press. But it's not a very big business for us and it did come down. On the employment verification business, of course, mostly and significantly related to the mortgage market, we don't share the number that EV business is part of our broader billion-dollar comprehensive services business. It's meaningful for us.

From a revenue perspective, it's more meaningful for us, if you will, from a margin perspective because it's an above average margin business. Hence, we called it out. But our expectations as we look forward is we do expect there to be softness in the mortgage market in the back half of the year and we've reflected those expectations and those forecasts into the numbers that we're sharing.

the tenure that's come in is the short end of the curve that's gone up. So should we assume that the tenure at current levels is what you're now forecasting going forward? I'm just trying to, we're trying to make sure that we get it correct, the interquarter moves and how we should think about that on the guidance of that. Yeah, so since we presented, since we gave guidance last quarter.

rates have come down particularly on the mid and the long rates and even though short-term rates have increased so have our short-term borrowing costs in our commercial paper program. So the rates that we're giving and the reason we've taken our client fund interest forecast down a little bit at the midpoint is to reflect those increased borrowing rates and

the softening, if you will, of interest rates in the mid and the longer term. Yeah, Samad, thanks for asking that question because I know we take a slightly different approach than some of our peers, but

Even when you think about the short end of the yield curve, what is currently baked into market expectations is also what's baked into our Outlook for the year. So even if the Fed raises rates that does not necessarily suggest upside to what we had previously guided and to Don's point at the longer the mid and longer end of the yield curve you actually saw.

a decline and so we share in our earnings release the incremental yield on new purchases and that declined from I think 4.3% last quarter to 4.1% this quarter. So in other words we're getting less in the mid and long end of the yield curve and we're getting more or less what we expected in the short. Great that's helpful. Thanks for clarifying that. Appreciate it.

And our last question comes from Jason Kupferberg with Bank of America. Your line is open. Hey, thanks, guys. I wanted to come back on PEO for a second and maybe piggybacking on Tingin's question.

you provided that at the analyst day.

So, you know, the medium-term guides, all of the medium-term guides were somewhat aspirational in their nature, and we're not sitting here today making changes to any of our medium-term guides. I think, again, when I think about the PEO outlook, just a reminder, because I said it earlier on the call, but I think it is an important point, that the demand is incredibly strong still for the PEO. It is still growing nicely through the second quarter.

technically it was year-on-year growth. It just wasn't what we had expected and it decelerated a bit earlier than we thought. And so when we think about kind of the back half of the PEO, we do expect bookings to reaccelerate. As mentioned, we expect works on employees to not accelerate in the coming quarters, but we're well positioned to do so as we lapse the compares into next year. But I think that the big piece...

By the way, even retention was healthy. Retention is right in line with really where it's been in the last decade. I spent a lot of years in that business and I've seen this as nothing abnormal, if you will. It's really just the byproduct of some lingering effects from the pandemic, which is not that different than some of the strangeness that we experienced during ACA in that business. And so what I would say is demand is healthy.

Bookings is healthy, just not as high as we wanted it to be on tough compares. Retention is healthy, just not as high as we wanted it to be again on tough compares and we feel well positioned in that business to to accelerate and very excited about its long-term growth opportunity for us. Yeah, sorry, and you know at the same time remember at investor day we said that we were expecting high single-digit growth.

wondering how you guys think about the template labor market relative to broader labor market conditions and your business with some kind of potential lag. Just any views there would be helpful. Thanks. Yes, Jason, I think... Sorry. Let me start. You'll be lots of fun.

be an indicator we look at and I think there's still some room there before they get back to what we saw pre-pandemic. So I guess we'll continue to pay attention to it, stay focused on it, but at this point in time things still feel to be pretty healthy. Yeah, just exactly to that point. One of many leading indicators that we look at.

That's more or less assumed, but the question is at these employment levels to get that type of growth is still a very healthy outcome. And so I think that's how we would characterize the overall environment today. Okay, well, thanks for the color guys. Appreciate it. We have time for one more question and that question comes from Carter Metta with North Coast Research. Your line is open.

Good morning, maybe Maria or Don, as you look at the PEO business and are you seeing any more competition in the business? Could that be a part of maybe you're seeing or is this just that you need to reposition the business a little bit and the business was so strong that the comparisons are difficult?

I think the business was so strong. I think the compares were difficult. We plan for deceleration. It happened faster. We do not see a competitive change or landscape that exists. Again, in terms of where that business gets its business from, that 50-50 split between new clients coming in as well as upgrades, as well as where we actually return clients.

And then maybe Don and Danny, I know you're talking about leading indicators and Don, you talked about the JOLTS report and I'm assuming you have a lot of other statistics, but I'm wondering, are you able to look at the customers you have and the demand they see for employees? And if you kind of compared that to what you saw, you know, three, six months ago, are you able to do that? If so, maybe what you might see in that type of those type of statistics.

I mean I think the way we look at that car take is through the pace for control growth. And so as we went from 7% growth in Q1 down to 5% and we were looking to be a bit flatter in the back half although we've become a little bit more optimistic on that as time has gone on. So that would be the key area where we kind of...

take a look and see what the demand is with our installed client base. Beyond that, at Cartek we do have some recruitment solutions beyond the recruitment outsourcing one that Don spoke about earlier. So we have, for example, data on the total number of job postings that our clients have. And if you were to look back, that would typically track Jolt so that the trends would be very similar.

Now, that said, clearly you could be in an environment where people have job postings and then they decide to pull them. So how accurate that is, how great of a leading indicator that is, it's hard to say. But at the same time we have live data on page for control as Don points out. We know with precision how many people are being added week to week. That's healthy, the job postings are healthy. Granted there are some signs of deceleration, layoffs.

and temp, but the bigger picture is still healthy. Well, thank you very much, I appreciate it. This concludes our question and answer portion for today. I am pleased to hand the program over to Maria Black for closing remarks.

Thank You Michelle and thank you to all of you on the phone today for your thoughtful questions. As you heard from our tone today, very pleased with the first half, excited about how we're positioned for the second half against our updated guidance. Again everything that we do every day is all about solving for

clients in the world of work and with that I think it'd be appropriate for me to thank the 60,000 plus associates that are out there every day doing that work for our clients for their workers and bringing meaningful value into the world of work and into the world of HCM. So thank you to all the associates Thank you to all the analysts and the investors for your support and your continued support We certainly appreciate it and we look forward to keeping you updated and speaking with you again soon.

Q2 2023 Automatic Data Processing Inc Earnings Call

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