Q3 2023 Automatic Data Processing Inc Earnings Call
Yeah.
Good morning, My name is Michelle and I'll be your conference operator at this time I would like to welcome everyone to Adp's third quarter fiscal 2023 earnings call.
To inform you that this conference is being recorded.
The prepared remarks, we will conduct a question answer session and instructions will be given at that time I would now.
Now I'll turn the conference over to Mr. Daniel Hussain Vice President Investor Relations. Please go ahead.
Thank you Michelle and welcome everyone to Adp's third quarter fiscal 2023 earnings call participating today are Maria Black, our president and CEO and Dan Maguire, Our CFO earlier. This morning, we released our results for the quarter. Our earnings materials are available on the SEC website, and our Investor relations website at investors.
About ADP Dot Com, where you will also find the investor presentation that accompanies today's call during our call. We will reference non-GAAP financial measures, which we believe to be useful to investors and that exclude the impact of certain items. A description of these items along with a reconciliation of non-GAAP measures to the most comparable GAAP measures can be found in our earnings release.
Today's call will also contain forward looking statements that refer to future events and involve some risk. We encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ materially from our current expectations I will now turn it over to Maria.
Thank you Danny and thank you everyone for joining us for our third quarter, we delivered strong results, including 10% organic constant currency revenue growth of 110 basis points of adjusted EBIT margin expansion and 14% adjusted EPS growth.
Our continued solid financial performance underscores the power of our innovative and mission critical HCM solutions that serve over 1 million diverse clients around the world as well as our highly recurring revenue business model.
Well I'll start with some highlights from the quarter the demand environment with healthy overall and in Q3, we drove another quarter of solid employer services, new business bookings growth, representing a record Q3 bookings amount bookings.
Bookings performance continues to be particularly strong in our downmarket portfolio in Q3, we sold and started over 60000, new run clients, where our new user experience has helped us reach record level, new client satisfaction rates. These past few quarters.
We also had strong bookings results in our insurance and retirement services offerings supported not only by legislative tailwind, but also by the competitive positioning of our down market HCM ecosystem.
<unk> for our employer services HR outsourcing solutions remained high and we recently reached the 10000 client Mark.
We also saw continued bookings strength and our compliance oriented solutions, including tax remittance and wage payments, which have always been key differentiators for us.
On a year to date basis, we are within our bookings guidance range and are trending in line with our expectations from the outset of the year and we look forward to finishing the year with a strong close.
Our employer services retention rate came in better than expected once again, while we continue to experience normalization in our downmarket out of business rates. This was offset by the strong retention rates in our U S mid market and international businesses, both of which continue to benefit from years of improving client satisfaction.
As such we're pleased to be raising our full year retention guidance.
Our employer services pays per control grew 4% for the quarter and continues to decelerate at a very gradual pace as we have seen for several quarters now layoffs at many larger companies have been offset by the labor demand elsewhere, which in total has resulted in year over year employment growth.
With their continued resilience. We're pleased so expect the higher end of our previous pays per control guidance range.
Lastly, on our PEO, while growth in revenue and average Worksite employees continued to decelerate. This quarter. We were pleased to see PEO bookings growth reaccelerate nicely in Q3, especially in March.
This represented a much better performance than we experienced in Q2 and resulted in our largest quarter for PEO bookings ever.
Despite the current inflationary environment and broad based macroeconomic uncertainty we are focused on our PEO sales execution and on delivering continued strong client satisfaction and we remain confident in the long term secular growth opportunity.
Stepping back while we are pleased to be on track to deliver very strong full year financial results. We are even more excited about how we are leveraging our unmatched scale and decades of innovation experience to drive continued progress on our important modernization journey.
We are making our solutions more powerful and easier to use and we are making are unparalleled insight and expertise more accessible than ever and doing all of this we're delivering an experience that's better for our clients better for their employees and better for ADP.
I mentioned that tens of thousands of new clients, we on boarded in our downmarket over a third of those clients utilized our digital onboarding experience, yielding a faster time to start happier clients and greater productivity for our implementation team.
We just completed our busy year end period during which we helped our clients with over $75 million U S tax forms and to further enhance the client experience, we proactively surface critical year end data to our clients before they had to search for it.
Not only reduce friction for them, but also reduce the number of calls and interactions with our service teams.
For years, we have directly engaged and served our clients employees through channels like wisely as we focus on the overall employee experience. We can offer we continue to add valuable functionality like a savings envelope that employees have used to move more than $1 billion into savings over the last 12 months and then.
New financial wellness hub with test tools and education to drive better financial outcomes.
With our new intelligent self service solution, we are already interacting with over 3 million client employees per month through our action card feature.
And our voice of employee solution is helping thousands of clients obtained better insight from their employee populations, which can drive higher engagement and satisfaction for those employees.
The opportunity to continue creating value and efficiency in the world of work is meaningful and we believe these modern approaches that reduce friction and exceed client expectations will help us deliver on that in the coming years.
With that in mind I want to provide some perspective on how we are strategically positioning ourselves to invest over the near term given the economic backdrop.
As we shared earlier this year in fiscal 2023, we were impacted by higher wage inflation. We also added to our service and implementation capacity to meet the expectations of our growing client base and we invested throughout the year in sales and product.
As we position for a potential economic slowdown beyond this fiscal year, we are being thoughtful about how we prioritize our investments at.
At the same time, we are very much committed to our ongoing modernization journey, which is critical to our sustainable growth and that will require continued steady reinvestment into the business.
In the coming quarters, I look forward to updating you on near term growth priorities for ADP.
Before turning it over to Don I want to take a moment to recognize our associates for their continued focus on helping our clients through the many challenges they face each day, especially amid these uncertain times.
Resiliency and partnerships represent core components of the ADP brand promise and are among the many reasons businesses around the world choose to partner with a leader in the industry. Our unrelenting support through years of growth years of challenge in the years in between is something they've growth account on and we are honored to <unk>.
Support them with that I'll turn it over to Don.
Thank you Maria and good morning, everyone I will provide some more details on our Q3 results and update you on our fiscal 'twenty three outlook before briefly touching on fiscal 'twenty four.
Let me jump straight into the segments, starting with employer services.
Es segment revenue increased 11% on a reported basis and 12% on an organic constant currency basis, which is the strongest es revenue growth we've experienced in quite some time.
As Maria shared Es, new business bookings were solid and kept us on track with our full year outlook. We believe the full range of bookings outcomes is still on the table given the relative importance of Q4 bookings to our full year results. So we're not making any change to our guidance, but we do believe the middle of our guidance range fuels.
Most likely at this point.
On Es retention following another quarter of better than expected results were again revising our outlook and we now expect retention to be down only 10 to 20 basis points for the full year compared to our prior outlook of down 20 to 30 basis points. This again will be driven by retention decline and are down mark.
From normalized out of business losses, and was mostly offset by improved overall retention elsewhere.
Patient control remained strong in Q3, and we are raising our outlook to now assume about 4% pays per control growth for the year compared to our prior outlook for 3% to 4% growth.
Client funds interest revenue increase in Q3 in line with our expectations and we are updating our full year outlook utilizing the latest forward yield curve, which in this case resulted in no major change.
And on FX, we had about one percentage point of Es revenue headwinds in Q3, and there was no change to our outlook for a full year headwind of between one and 2%.
Following our strong Q3, es revenue growth, we're pleased to be raising our outlook. Once again to now expect both 9% growth up from 8% to 9% for our.
Our Es margin increased 80 basis points in Q3, which was in line with our expectations.
We are narrowing our full year outlook to now expect about 200 basis points of margin expansion and we still see significant opportunity to invest in sales product and elsewhere throughout the organization to capitalize on the growth opportunity in front of us, which we're choosing to do at this juncture.
Moving onto the PEO.
We had 5% revenue growth driven by 3% growth in average Worksite employees.
As a reminder, this deceleration was driven by a few factors, including slow pays per control growth.
<unk> comparisons versus record retention levels and softer recent bookings growth that we experienced the last two years.
For this fiscal year, we now expect PEO revenue growth of about 8%.
With growth in average Worksite employees of about 6% both at the lower end of our prior ranges.
<unk> mentioned the bookings Reacceleration in Q3, and we're feeling upbeat about re accelerating the revenue growth in the coming several quarters.
This guidance update is mainly due to a tweak to our pays per control assumption within the PEO as it decelerated a bit more than we previously assumed somewhat different from what we experienced in the Es segment we.
We are separately lowering our outlook for revenue, excluding zero margin pass throughs to a range of 7% to 8% due mainly to lower sui rates in Q3 than we previously anticipated.
PEO margin increased 140 basis points in Q3, which was better than expected due primarily to continued favorable workers compensation reserve adjustments, which we had not assumed as well as the lower Sui costs I, just mentioned and we are raising our outlook for PEO margin to now expected to be up.
50 to 75 basis points for fiscal 'twenty three.
Putting it altogether.
We still expect consolidated revenue growth of 8% to 9% in fiscal 'twenty three but now believe it will be towards the higher end of that range. We are maintaining our outlook for adjusted EBIT margin expansion of 125 to 150 basis points.
Fiscal 'twenty three effective tax rate of about 23%.
And we now expect adjusted EPS growth of 16, 17% compared to our prior outlook of 15% to 17%.
I also wanted to provide some early high level color on what to expect for next year we.
We are still going through our annual planning process, but there are a few things to consider at this point.
First assuming a slowing economic backdrop pays per control could be at a below normal growth rate next year among other potential macro considerations.
I would also point out that while client funds interest appears positioned to give us some contribution to growth based on the latest forward yield curve it will likely be very modest at.
At the same time, we have good momentum in our Es bookings performance and Es retention and we're feeling upbeat about the continued opportunity to build on our decades of success.
Thank you.
I'll now turn it back to Michelle for Q&A.
Thank you if you'd like to ask a question. Please press star one one if your question has been answered and you'd like to remove yourself from the queue. Please press star one again in order to keep within our allotted time. Please ask one question with a brief follow up we will take our first question from Bryan Bergin with Cowen Your line is open.
Hi, all good morning, Thank you.
So Don maybe just building on those last comments you had there I'm curious just any indications or call outs worth mentioning as it relates to fiscal 'twenty four really in the context of our medium term outlook that you've given in the past without said this reconsider the magnitude of potential impact across some of these kpis from a potentially slower macro environment.
Yes, Brian Good morning, and thank you for the question.
It's still early we're still in the middle of our planning process. I think we have a lot of things going in our favor sales, where we still have relatively high client fund interest pays per control have been good strong bookings continue to be strong as we as we said earlier so as we get into 'twenty four I think we're going to be pretty.
Pretty healthy spot with what we know today I guess the challenge we all have is trying to guess.
I guess, what's coming in terms of the broader macro situation.
We continue to see strong demand our retention continues to be pretty good. Although it is normalizing a little bit in the down market as we did expect but.
I think things feel pretty good at this juncture, so I'm going to have to ask you to bear with us a little bit as we make our way through our plan and we stay tuned to what's going on in the macro in the macro environment, even closer as we get forward or closer to our July one beginning of the year.
Okay, that's fair.
And just on the PEO Worksite employee view down, Texas, I think you were down sequentially in average Worksite employees can you just talk about what youre seeing and kind of the pays per control versus the retention aspect in the PEO and with bookings re accelerating how long does the reconnection to improve growth take.
So the we did have as you as you mentioned, we had a particularly strong PEO bookings month in March which were optimistic is going to continue and help us as we go forward certainly we're going to have to see how those bookings continue through the balance of the year trying to anticipate how those are going to actually <unk>.
<unk> and revenue.
When you do start relatively quickly on the PEO business, but it's going to take some time once again to see how that stuff rolls from bookings into into revenue.
But we're pretty optimistic about how things went in was in the third quarter, especially with the finish and we do expect to see that re acceleration.
As quickly as we wanted to and by the way. He is back to your earlier question a little bit we talked about high single digit growth in our mid term midterm view and we won't be happy if we don't get something like that.
Yes, I think Brian if I can just comment on the quarter over quarter real quick is I think you mentioned the sequential growth Q2 to Q3 in Worksite employees that is something that obviously, we noticed as well and as Don mentioned.
From a medium term perspective, we are definitely still committed from the medium term to the worksite employee growth.
That we have guided to for that however, as it relates to kind of the quarter over quarter. We noticed the same thing that you noticed and obviously thats not the ideal situation and we're hopeful that won't be the case as you look sequentially on the <unk>.
Our quarter to quarter Q3 to Q4, but also year on year and I think that's really a byproduct of the timing and that timing is really about retention rates. So it's really about call. It third quarter retention results, which we've cited.
Before were a bit softer than we expected.
And as a result of that you see the sequential piece to the quarter on quarter.
Okay is that just a function of the type of client within PEO.
In terms of the type being quite more white collar.
I don't know that it's a function of more white collar I think it is really a function of some of the.
The feeling is that we have a post pandemic as the renewals have really been kind of.
Color rippling through the business of the PEO. So it's really a byproduct of some of the post pandemic impact that we saw in the PEO. So it's really a byproduct of the retention softness that we saw in the first quarter in the second quarter, and then quarter on quarter. This past quarter. So I don't think it's necessarily a byproduct of because the retention.
<unk>, albeit it's normalizing a bit in the down market. We do have very strong retention in the mid market. We also have strong retention, albeit tiny bit less than last year in the down market. So I don't really think it is a byproduct of the client base or white collar I think it is really a byproduct as kind of a post pandemic environment.
<unk>.
Okay. Thank you.
Thank you. Our next question comes from Bryan Keane with Deutsche Bank. Your line is open.
Hi, good morning, Thanks for taking my questions.
Just trying to look at employer services really strong growth in the quarter, 12% organic if you back into the guidance for fourth quarter it looks like.
A little bit of a deceleration I think you'd get to something around 8% growth. So just trying to understand the puts and takes there for the fourth quarter guide versus the strong results in the third quarter.
Yes, thanks for the question.
<unk>.
The biggest impact I guess in terms of growth would be we are going to continue to see strong growth from clients on interest in the fourth quarter, but certainly Q3 is by far the strongest quarter, just given the seasonality of tax receipts et cetera for us. So I think that would be one of the one of the key drivers.
And of course, we did mentioned as well that we expect to see pays per control growth coming down and softening a little bit even though a bit higher than we expected to see last quarter.
It is coming down it's certainly starting to moderate.
Got it.
Got it and then on the bookings side, although bookings were strong I think you commented maybe towards the lower end.
The range of six to nine and just can you help us maybe think about how bookings will translate into future revenue growth for the employer services and if you can just remind us just as we get our models set or thinking about fiscal year 'twenty four.
Yes, so I'll, let John comment on the how the bookings kind of relates to the models on the revenue side, but from an overall bookings perspective, what we cited in the prepared remarks is that we do anticipate the middle of the range. So we did keep the range.
Constant so its constant with the outset of the year. It's also constant with last quarter's guidance. So we are keeping that six to nine range. We do anticipate at this point the middle of that range and we feel pretty confident heading into the end of the fourth quarter. When we take a look at how we exited March but also taking a look at the number of sellers we.
The investments we've made into the ecosystem and as those sellers to ultimately gain tenure because were actually lapping a lot of new hires that we had if you will a year ago. So pretty excited as we step and the other part of that confidence is really about what we're seeing as it relates to the.
The overall pipeline so pipelines are strong.
More of a call it enterprise and international our large deal type of comment we're seeing tremendous activity.
And the top of the funnel still upmarket. So the dawn market continues to shine for us and that's really supported by what we're seeing in continued increases in new business formations. We're also seeing.
Those new business formations generate inbound leads so we're seeing good activity on the digital side, so feel confident as we step into the fourth quarter and then I'll, let Don comment on how the.
Ultimately, where we land in the fourth quarter and how that translates into revenue for US next year, yes.
Yes, so on the modeling side, roughly a 1% change in es bookings growth impacts us in the $17 million to $20 million annually on revenue growth. So that's kind of how we.
Thank you for your models.
I think thats been pretty consistent yes, and Brian the timing is.
Hands on the business, obviously strong performance in the down market will impact revenue much more quickly and if you have strong global view sales at the other end of the extreme that can take several months to even more than a year and in some cases to rule and so typical rule of thumb for US is a couple of quarters to see the full impact but of course the <unk>.
Bookings throughout the year have been.
Pretty consistent for us and so I wouldn't expect any real callouts from the revenue.
Timing standpoint.
Great Alright, thanks for the color.
Thank you. Our next question comes from Jean <unk> with Moffett Nathan Your line is open.
Hi, guys good morning.
Maria I wanted to pick back up on your comments about the <unk>.
Down market, maybe elaborate on that a little bit what are the macro factors your competitive positioning, but still supporting that and if you could contrast that for us a little bit with what's going on in the mid market I know.
It's still doing well, but.
The question is is there a path when mid market to get to as strong of a pointed that market. What are the levers that maybe youre able to pull to get you there.
Absolutely so I'll start with the down market just to kind of reiterate the strength, we're seeing there top of funnel.
So we are very pleased with what we saw in the performance of the down market. That's also inclusive of the Downmarket ecosystems. I think this is our run platform I talked about the third quarter Onboarding 60000 clients, that's pretty pretty incredible those clients also many of them have attach rates of our retirement services offering our insurance services offerings. So the.
Entire dawn market portfolio.
Definitely performing well for us and has <unk>.
Some time it is driven by what we're seeing macro and so you just kind of reiterate what we've seen as new business formations are up year on year, 8% by the way they are still up year on pandemic as I call. It. So they are actually if you look at current new business formations versus.
The year of 2019, right the pre pandemic, it's actually 8000 or so a week and this is all from the U S Census Bureau.
From the standpoint of what we're seeing.
That kind of emanate into the pipelines and then to the top of funnel, we do have double digit growth in our digital inbound leads rights I think these are.
The OCM ads, where ultimately clients are coming to us and we're meeting those clients with our inside sellers.
The demand is there the demand is strong in terms of the mid market. The mid market was a bit softer this quarter than it was last quarter that said. We also are very excited about the other pipelines that we're seeing in the mid market.
Specifically call out the tech only we do have strength in our employer services HR outsourcing offering which also touches the mid market. So combined.
Your question around is there a path to see tremendous growth there between those businesses. We are seeing growth and we are excited about our overall.
Mid market position from a competitive landscape.
Do have our next generation payroll engine that's attached to.
About 30% to 40% of our mid market new business sales and what I will tell you is it's resonating incredibly well in the market. It's resonating with our sellers that's always a good sign when they like to talk about it and they like the demo Ed. It's also resonating in terms of the competitive landscape and and more wins and so we feel that theres definitely path, that's what we're investing in.
Both in product and the ecosystem.
To have the mid market is an exciting of the story is the dawn market is for us.
Got it very helpful color. Thank you and then for my follow up wanted to quickly come back to the <unk>.
Can you talk a little bit about the kind of the macro headwinds for the beyond that I think we discussed last time, specifically the insurance attach rate the insurance premiums kind of blocking <unk> growth is that still a factor or not any longer.
Yeah, what I would say is that the PEO demand remains strong and so we're bullish about the secular tailwind of the PEO, we're bullish about the value proposition as it relates to benefits and benefits attach I know theres a lot of discussions are a lot of surveys out there from the likes of Kaiser et cetera, as it relates to our clients making different.
<unk> I think what we see within our basis, perhaps some asks of that and on the peripheral kind of on the margin. Perhaps there is price sensitivity as it relates to benefit but that really allows for us where our solid just needs to be call. It more surgical as they go to market, but in terms of the value proposition of the PEO and benefits still being a.
Big component of that that is the case, we skew definitely a bit more white color in our PEO. In addition to that our model with a fully insured model is a little bit different and so.
The companies that we attract our PEO are still companies that want to be employers of choice and employers of choice, especially in a macro environment such as this one where talent is still the name of the game they want to offer benefits and benefits our piece of that so what I would say is we're not seeing huge signs I think even if you take a look at the revenue.
<unk>, you would be able to see kind of what's happening with benefit revenue. So theres not huge signs that there is a shift in benefits attractiveness I think the shift that we see is just the sharpness that our sellers need to have as they position the value proposition and call. It the right the right plans and the right rates to the right the <unk>.
<unk>.
Got it thank you very much.
Thank you. Our next question comes from Kevin Mcveigh with Credit Suisse. Your line is open.
Great. Thanks, so much memory I think you've talked about 60000, new run clients in the quarter.
Can you help us dimensionalize that.
Where would that typically be.
How should we kind of expect that to evolve going forward.
So the 60000 clients that I mentioned are specific to our down market specifically the run platform. So thats actually 60000 clients that we started so where would they be they would be all over the United States. If you will from a.
And I'm not trying to be funny about it but it's really pretty amazing effort. If you think about the volume of clients. The throughput. If you will that comes to us through some of the things that we talked about today, new business formation and sales will come to us through our channel ecosystem. So we've made a lot of investments.
So the relationships, we have with our CPA ads with our banks in terms of what does it look like quarter on quarter, stating the obvious.
Third quarter for US is obviously, the highest volume quarter. So thats why its kind of fun to give that shout out there.
This quarter, because arguably I would say that's not a typical quarter for ADP as it relates to a number of units on the throughput because many of the starts do happen in January in that business.
But there are they're kind of all over the place and they come to us through the strength of our distribution model and the strength of our overall ecosystem.
So that answered the question Kevin.
It did I guess I was just.
I know Q3 is the high watermark.
How should we think about 60000, maybe relative to Q3 of last year was at 40%.
And I understand like how the momentum is accelerating there and then just.
What's the profitability because it sounds like a third word digital onboarding like the ones that are digitally onboard it how much more profitable or those than a traditional client. That's onboarding just trying to get a sense of if we're at an inflection point in terms of the growth there.
Yeah listen I fair enough I don't know that I meant to trip myself into giving a quarter on quarter number but I would tell you is it's higher than last quarter.
Both on revenue obviously in the performance. It's also higher end share unit volume so.
I suppose I'll kind of leave it at that in terms of the third that come through the digital Onboarding.
That yields is a few things Kevin one of which is a better experience for the client right. So our digital onboarding clients have very high what we call new business client NPS results right, so and when a client starts with us happier at yields to a happier client long term, which yields to a happier.
And more retentive clients. So I think in terms of what the call it margin profile or lifetime value of those clients looked like over time, we're still learning a bit about that but it's very optimistic for us as we're seeing the results I think the other is it also yields efficiency for our implementation organization right. So if you think about having the ability.
To have these clients digitally on boarded allows the more complex onboarding. If you will perhaps clients that are coming to us with more complications around their taxes or maybe from a competitor or something that actually demands.
And implementation person to be involved at a much higher level. It allows their focus to remain there, which also should yield a better experience for those clients and we're also seeing that so overall, we are seeing and I cited it in the prepared remarks, we're seeing new clients come onboard happier.
The digital ones are happier than the non digital but theyre all happier than they were last year, which is a which is a good thing for us as it relates to the <unk>.
Retentive nature of those clients over time, and what they will bring to us in terms of lifetime value.
Helpful. Thank you.
Thank you and our next question comes from James Fawcett with Morgan Stanley . Your line is open.
Great. Thank you very much I wanted to quickly Murray a clarifying question on the mid market.
You talked about some of the things that youre doing there, but just to be clear it sounds like.
From your perspective.
More issues or things that ADP can do to address versus macro I just want to make sure I'm understanding kind of your list of objectives and things to do in that segment.
Absolutely.
The mid market for us still has and we are still experiencing solid mid market sales rate and so from my vantage point I don't think its necessarily the softness that we saw in Q3 versus Q2 was a byproduct of a macro type of environment, we're paying close attention to demand cycles.
We're paying close attention to pipelines.
In terms of are there some cycles that are perhaps a tiny bit elongated maybe there might be some more approvals.
Approval layers involved and there may be.
Little bit of cycle elongation I would tell you we're not seeing that much of that in the mid market and it really looks more like 19, it looks more like pre pandemic and it does nestle.
<unk> necessarily something that would give us a belief that there is a macro concern in the in the mid market, but I would say is on the macro side, it's not getting any easier on the mid market to be a client right and so if you think about the complex environment for the mid market customers and clients. It does continue to increase and so they are solving for hybrid work theyre solving.
For talent they are solving for compliance regulation and theyre, turning to HCM providers, such as us to us to help with all of that so I think the macro supports a very strong environment for the mid market.
We do continue to.
<unk> expects to have mid market growth, including our <unk>.
Got it got it and then I guess, maybe dovetailing with that can you speak a little bit about the.
Competitive environment.
Any changes youre seeing there or what are you seeing from customers is there a flight to quality versus maybe some of the regional players.
What is the impact of newer entrants.
Give us kind of a state of the.
The competitive landscape.
Sure I would say the competitive landscape one way to think about it is it actually hasnt changed that much. So is there a flight to quality, we've seen some of that.
But it's not material at this time as it relates to clients, calling us and.
Asking about the macro and what's happening in the world We've had a few.
Of those calls just recently based on some things that have happened in EMEA in the environment, but what I would say when I think about the competitive environment. We look at this very closely we just completed our strategic plan process and we've been looking at our competitive position against all the major players in that market and others over the last handful of years in our surgical way.
I would offer a few a few items one of which is we have strong retention specifically in the mid market. We also have very strong retention in international we have near record highs and NPS and so I would say that R. R.
Our value proposition and our competitive positioning.
It's proof if you will if you look at the retention from our balance of trade. We are also winning more away from our competitors than we have in years past and so again I think our position is it's about the same when I look at it year on year, but it is getting perhaps a little bit better on the wind side and I think that a lot a lot of that does have to do with.
The quality that we're providing so I cited kind of NPS results.
Certainly the investments we've made the investments into our organization to serve our clients better some of the things I talked about new products that we're leveraging the <unk>.
Likes of AI to actually drive self service to drive better and better experience for our clients their employees and drive friction out so I would say investments into product and then lastly, again investments into new products that is creating better ones for us.
That's great. Thank you so much for the color.
You bet.
Thank you. Our next question comes from Kartik Mehta with Northcoast Research. Your line is open.
John I know you gave preliminary FY 'twenty for guidance and one things you've talked about is obviously pays per control moderating, but do you think could there be an offset because inflation is still running high and there's a pricing opportunity for the company, especially on the payroll card.
Yes, Kartik Thats a good question. So certainly talk about pays per control growth decelerating called that out.
We are also as I mentioned earlier 24, and I think there's a risk that it decelerates further.
So we'll have to watch and see what happens there on the inflation side and pricing. We are still in the early days of our FY 'twenty four plan. So we're watching it carefully I think we can say that we are happy with the impact of the results of the price pricing decisions. We took in 'twenty three.
We have those readily accepted I guess.
Reflected by our higher NPS scores by our continued strong retention. So we have an ability to take price, but as we always come back to you.
We're in this for the long haul with our clients. They are long term retention is the most important thing to watch so we need to make sure that we continue to have that good value proposition between what's the absolute pricing how much price, we can take et cetera.
Once again Kartik, it's definitely something we're looking at and trying to evaluate as we get closer to.
Putting the plan.
Too bad.
And then Maria just on the PEO side.
Is there any attrition related to maybe customers deciding that they had a PEO and it just got too expensive for them. So they decided to move out of the PEO for a while until they can get a better understanding what's happening in the economy.
Changes like that.
I would say that's always the case I think every year as we go through renewals as we go through the year and cycle you have clients that are choosing to buy into the PEO and you have clients that are choosing to exit the PEO when I look at where where we get our clients from obviously I think we cited multiple times that about 50% of the new business that comes.
And to the PEO comes from our existing ADP base that would suggest that at least 50% come from a non PEO environment and we somewhat tend to return them. The same way. So that's not to say that clients don't at times, we don't trade.
Customers between us and the other PEO, but generally speaking I think that's always the case I don't believe there is a.
Larger trend towards that this this time than there has been in the past I think really in the end.
It's really a byproduct again kind of what we saw with the renewal post pandemic and.
The impact of that as we headed into this selling cycle. If you will.
Thank you very much appreciate it.
Thank you. Our next question comes from Ramsey El <unk> with Barclays. Your line is open.
Alright, Thanks for taking my question.
Also wanted to follow up on the PEO and particularly on the bookings Reacceleration I'm just curious how much of that Reacceleration is sort of from a better.
Kind of external demand environment versus changes in your sales strategy I'm, just trying to figure out how much of sort of push versus pull when it comes to that recovery and I guess the underlying question is your confidence level that this reacceleration is a sustainable trend.
Fair. Thank you Ramzi, we are excited about the PEO reacceleration, specifically, what we saw in March.
And obviously, how we feel is stepping into the final stretch I think it'd be too early to comment on on the furnished by the pipelines are strong what I would tell you is that I'm bullish about the demand in the market for the PEO and the overall value proposition of all things being equal I think we're positioned well.
As well as anybody else as it relates to the overall PEO I.
I guess the demand if you will right. So I don't think it's the Reacceleration was really in my mind more byproduct of top of funnel.
Filling the pipelines, we've made a lot of investments into our seller ecosystem and the PEO. We have incentives that we can pull in addition to that we've invested into and I think I've talked about it a couple of times on these calls we've invested into.
Artificial intelligence that actually looks across our base.
Two our project, where we're actually looking at ADP base to try to serve up the <unk>.
Call It PEO seller at the right time to the right ADP clients. So we're getting smarter.
Very good job, saying it outside of we're getting smarter in terms of who we are actually targeting on the PEO using technology today that didn't exist. So I think all of that is going to yield to what I would say is a strong execution by the PEO sales teams.
To drive the Reacceleration that we would expect and that we are excited to see and optimistic that it will <unk>.
Okay great.
Quick follow up.
When you look across the business.
Are you seeing any vertical specific areas of softness.
Maybe tech or a commercial real estate or financial services or are there any worrisome kind of verticals that you are keeping an eye on.
Are you referring to the PEO, specifically or the overall macro I know I should have been more clear just more broadly across the business are there any.
You guys have a pretty broad macro view and I'm. Just curious if there is any specific areas that are causing any concern in terms of.
Recent trends.
Maybe I'll jump in I think in terms of verticals certainly seeing all the reports and reading all the things.
Real estate than everyone else's.
If we look at the breadth of the distribution of our client base.
Pretty broad so I'm not so sure that we're seeing any particular verticals that are causing us any undue concern at this time I would say as has been reported we mentioned it in the prepared remarks, certainly the enterprise space the upmarket spaces, where there's been a lot more layoffs announced et cetera.
Particularly in tech. So we are looking at that.
The pass through that's not the biggest part of our business. So even though there is some more softness in that end of the market.
Let's be willing asset by the success, we're having in the down in the mid market. So.
From a particular vertical nothing in particular.
Okay. Thanks I appreciate it.
Thank you. Our next question comes from some odd Tomorrow with Jefferies. Your line is open.
Great. Good morning, Thanks for taking my questions. Maybe first one just I wanted to maybe get a better understanding when you were talking about.
Change in maybe the investment investing philosophy of the company just as Youre adjusting.
The macro environment is evolving as well is that more maybe pulling back on hiring is that more about maybe redirecting where resources are can you maybe just help us better understand.
What that translates into maybe how we should think about that impacting both the top and bottom line.
Yeah, Thanks, Martin and good morning.
Happy to talk about modernization, it's one of my favorite topics as all of you are probably learning from my prepared remarks, and I think.
It's important to think about the modernization journey we've been on.
And how it really can set us up for kind of future growth and future.
Margin, if you will as a company and Thats really what its all about for US I think.
We've been undergoing transformation, we've been undergoing modernization for years I would actually suggest that ADP has been modernizing for the last 73 years as we've invested in technology to make things better for.
Also the business to become more efficient and we've been investing in our clients and in product to make it easier for them and so I think that's not a new cycle of the way I think about modernization is really a client first lines right. So it's really about all the things that I cited it's about taking out friction the way I think about the investment which is your question some odd assets and impair.
But it for us to continue to invest in modernization because it's the modernization that over time has really allowed us to reinvest in growth and reinvest in the business.
And we are committed to our continued journey of growth and margin and as a result of really the way we've been able to do that so for us it's really about both its really about the ads right. So it's about growth and margin expansion and I think this virtuous cycle that we've been on really as a company for a very long time, which is we make things easier we make.
Them better we become more efficient, we make things better for our clients and that allows us to invest in growth and it allows us to invest in back into our shareholders. If you will in margin. So it's really in an story and it's key to who ADP is and it will be a key for us as we go forward in terms of the commentary that I have.
Made around how we're thinking about it in the macroeconomic backdrop. It is important time to make sure we're making the right choices and the right trade offs I mentioned earlier, we've been in the middle of our strategic planning process the last.
Order and as we've gone through the business. If you will end to end rest assure that we are trying as a company to make the very best.
<unk> is to have the very best outcomes as it relates to growth and margin.
Great I appreciate that and then just one quick follow up for Don I was just.
Looking at the guidance by segment.
The margin for it yes, it looks like you've settled without it.
Within the range at the lower end I'm, just curious maybe what drove that.
Is that the ladies apparel contribution driven or is that more the result of just bookings being better so expenses being pulled forward.
Help me understand why that was narrowed to that to the lower end of the range. Please.
Yes, I think there's a couple of things going on one certainly we're continuing to benefit from from bookings growth retention price pays per control are all a little bit stronger and we certainly are getting lots of tailwind. So we have lots of tailwind in Q3 in particular from client fund interest so thats been very helpful for us.
The.
Things slow a little bit from the client fund interest perspective in Q4, so that certainly is not as helpful. As it was.
And we are of course as Maria just mentioned, we are taking advantage of some of those extra flow funds that we have to invest reinvest in the business or continue to invest in the business on modernization. So it's all about I think trying to find the right balance and still delivering as we.
And the <unk>.
Higher end of the earnings for earnings per share prediction or guidance. So.
It's all about finding the right balance and we will continue to invest in modernization and deliver improvements as we as we go forward.
Great I appreciate taking my questions. Thank you.
Thank you and our next question comes from David <unk> with Evercore ISI. Your line is open.
Thank you good morning could you walk through the 140 basis points of PEO margin expansion in Q3, it seems pretty notable given the deceleration in PEO revenue growth in particular could you unpack the size of the workers' compensation reserve beliefs in Q3.
Hey, Julien.
$17 million Youll see it in the Q compared to seven last year. So it wasn't a huge amount.
Yeah.
But those are the two impacts so the biggest impact was the.
The reserves reserve adjustment on workers comp and the other big item there is the lower sui costs. So.
Which we know margins on Sui. So so it comes down let's talk it certainly improves the margins so.
Those would be the two major impacts on the margin improvement in the PEO.
Got it and then just as a follow up Don could you walk through your strategy.
Managing the tax filing float going forward, we've got a pretty steeply inverted yield curve right now, which means it's actually more expensive for you to borrow in the.
Commercial paper market and invest float medium term duration bonds are you thinking of shifting the investment portfolio at all in the year ahead.
We've had that strategy in place for some 20 years or so and we've realized about $2 $8 billion of incremental benefit from that strategy.
So we have a strategy in place we are always revisit these strategies and look at them.
It's true that the yield curve is inverted for the seventh time in 50 years.
How long that continues not sure but.
We will continue to look at that strategy and to see what we need to do if anything to change it as we go forward.
It is something we've been committed to and we follow closely.
Near term certainly we benefited this quarter because of the inflow of funds in.
Calendar Q1, Theres, a big balance or big benefit there to us.
So as we go forward, we will continue to look at the look at the opportunities.
And decide if we need to make any material changes to the.
So the investment strategy, David one point worth clarifying because this has come up before if you look at the last slide of our earnings presentation, you will see a disaggregation of client sure extended and long and one thing I think is worth.
Emphasizing is that we are net long exposure to the client short in other words, if short term interest rates went up and up and up that would actually be beneficial to our earnings and our margins. It just shows up in two different places, which can often cause confusion, but it's actually not hurtful to us to have.
Higher borrowing costs, because we have more dollars invested long and the client short portfolio.
Understood. Thank you.
Thank you. Our next question comes from Mark Marcon with Baird. Your line is open.
Hey, good morning, everybody.
Maria you talked about modernization can.
Can you talk about the areas.
And.
One area that I'm.
Particularly interested in.
International.
What youre seeing there in terms of opportunities. Thank you.
Sure.
Raul I think modernization is really about end to end so think of it as product.
And continuing to make investments in.
Ensuring our products are.
Next generation, if you will and Thats certainly the case across.
Many pieces of our portfolio and you are well aware of the investments we're making in next generation technology.
I think product is a big piece of it I think other is the internal modernization so that would be everything from go to market too.
Call. It the seller ecosystem modernization I think I've spoken to that quite a bit in the past as well as how we actually serve our clients and again, we've referenced that today, so kind of going back to modernization, specifically and our opportunity in international.
We're very excited about our position in international very excited about the opportunity that we have and this is definitely an area that we have been modernizing. So if you think about each and every country that we serve over 140 countries. Today that we have offers over time, we have the modernizing the platforms and we've been consolidating platforms, but to your point Mark that work.
It is not done and so we still have that journey that we've been on is the journey that we're going to continue but as we do that we're also focused on ensuring that we continue to make the investments to the platforms and we continue to make the investments into the overall ecosystem of how we serve our clients international to really draw.
<unk> further call it opportunity and so there are still places in international and I'll, probably leave it with we will be back next quarter to talk more about things such as our growth strategy, but I think as it relates to international all of that modernization should also yield a growth opportunity for us because it's still a big world and there are places that.
We even though we're in more countries than anybody else. There are countries that we don't exist or segments within certain countries, where our offer still has opportunity and so we are very good.
Incredibly excited about the the overall international space, where we are the work that we're doing and where we're going.
That's great.
Can you talk a little bit about just what the appetite is.
And obviously.
Diverse across the globe.
Broadly speaking are you seeing a greater level of interest in terms of modernization.
HR HCM systems across the Globe certainly has been an ongoing trend in the U S for quite some time.
Just hearing from others that there is a pickup in terms of our.
Rfps that are occurring things of that nature.
But we could be a few early stages.
Higher levels of growth international.
So notwithstanding.
What I would suggest.
Is that over the last few years the conversation in the international space has definitely shifted a bit and I could suggest the same thing which is that it's picked up and so that conversation today tends to lead with more of a global offer global system of record.
Kind of conversation. So we work in today and we have a conversation with with our clients more often than not about how many countries are you in and where can we help serve you and how can we tie it altogether.
Making a a an ability for that client so really see across multiple countries and have more of a unified experience.
Versus I would say, perhaps 510 years ago with more of a country by country conversation today, it's more it starts with a multi country conversation and so I think all of that suggests what it appears you've heard from others, which is the narrative in the international is shifting I think there is greater demand for HCM offering and <unk>.
National as it relates to companies now that are more global than they've ever been and certainly the hybrid environment has accelerated that a bit and the ability for companies to be able to see their workforces and make talent decisions head count decisions across multiple countries. That's a very different conversation today than it was.
A few years ago, when we see that when we have we just recently actually this quarter, we had all of our international clients together at a.
At an event and the topic is about their transformation, it's about their HCM transformation and the partner shipped.
That we have with them to solve for that and I think the beauty of ADP is that we have the ability to solve the MMC the multi country piece and we also have the ability to solve the in country and a lot of times for clients. It's a mix of both and so it's really about the flexibility we have in our partnership options to serve these clients in a very unique way.
Okay.
Perfect. Thank you.
Yeah.
Thank you we have time for one more question and that question comes from Tien Tsin Huang with Jpmorgan. Your line is open.
Okay. Thank you so much any covered a lot already I just wanted to on the down market given the success and the bookings here just curious if that's.
Changing your thinking and investing more or less maybe an ASO versus DSO and the digital sales versus the seller ecosystem.
I'm curious as you're going into fiscal 'twenty four here, if there's any maybe changes began prioritization there.
So we have leaned into the down market in terms of the investments. We've made so when I think I referenced earlier the seller head count as we head into the final stretch here and how pleased we are with the investments we've made in head count and the ecosystem around them so investments into the channels things of that nature.
And as all of that turns into more productivity because the head count is actually gaining tenure is primarily setting those investments have been in the down market. So again, thank our.
Sps platform that retirement services insurance services most of that also comes into our digital.
Sales organization also known as the inside sales. So we are making investments into inside sales to really serve the down market and what I would suggest is that.
From our viewpoint at this point, but demand is there we have leaned into that demand and we will continue to lean into the demand to drive the growth that we're driving out of the market.
As long as it exists if you will.
Glad to hear it if you don't mind one more question just.
I have to ask you since you mentioned that Mario with AI, we didn't give a lot of questions on generative AI and Jeff GBT, you mentioned being smarter around serving up.
When necessary at the right time, but just broadly speaking how are you thinking about generative AI and how that might help you run your business better both from a sales perspective, but also from a from a delivery perspective support standpoint.
Yeah. Thank you Tien tsin I'm actually I'm thrilled you asked the question.
Because I was I was counting on it during this call because it definitely seems like it's the other topic to your but the real answer is just like everybody else. We're incredibly excited about generative AI. We have been very excited about AI for quite some time.
You mentioned.
We've been doing for our sellers and the PEO. That's broad based work that we've been doing for a long time and continue to invest in AI into making us more efficient that example is about our sellers, we are making similar investments even with the new technologies that are out there to really look at how we can make our served.
It's associates as well as our sellers more productive. So you think about all the things that an agent. If you will does today to support our client and some of the generative AI tools that can drive.
Our level of efficiency and we're very excited we have I think it's something around like 44 different work streams that are underway currently to take a look at different ways that we can leverage these.
These tools internally that's also notwithstanding the opportunity that it creates for our industry right. So if you think about the HCM industry. There are still very many things inside of HCM that our administrative in nature in terms of whether its job descriptions performance reviews things that are maybe a handbook things are very tactical.
That really at times hold back the the practitioner from doing what they wanted to do which is be a strategic partner and so we're really excited to put these tools also into our products for our clients and our practitioners to be able to lean into it. So all of that said, we're very excited about the opportunity one thing I would point out.
Because it's important and it's also very topical right now which is that the good news is we've been doing a lot of this work and as such we have standards we have.
A way to think about the ethical nature and that kind of comes at parity with who we are given that we have the big data. If you will behind ADP in the 40 million wage earners that we pay and so when we think about all of this with also with the lens of doing it the right way and making sure that it's ethical it's secure it's compliance all the things that you.
Would expect from ADP, but no doubt Tien tsin that we are excited about the opportunity it creates for us internally and the opportunity that it creates for us in our product.
So really serve the industry right and make this entire industry that much more strategic and that much more exciting so great.
Great question.
Are there more soon talk soon thank you.
Thank you. This concludes our question and answer portion for today I am pleased to hand, the program over to Maria Black for closing remarks.
Yes. Thank you so first and foremost thank you everybody for joining today.
Appreciate the questions and the interest as you can imagine I sit here one quarter into my new role as CEO and I get a lot of questions. Just last night I got another tax I said, how we are the first hundred days, how is the first quarter or what have you been up to and here's what I would offer the third quarter for ADP and you heard it in my tone today, you heard it in my excitement about.
There is some of the volumes and the throughput that the third quarter is really where you see ADP shine and it is our final quarter you have year end, yet busy season, yet selling season that all kind of come together in this quarter, what I would say is add in some economic strangeness questions about whats happening in the world and I would say that sitting here.
One quarter and I couldnt be more excited I couldnt be more pleased I couldnt be more grateful for this year execution our of our associates. So I felt the breadth and depth of ADP. This quarter at its fine us and with that I just want to take another minute too so.
Thank our associates for everything that they do to the power of this great company I'd also like to thank all of our partners and stakeholders in all everyone on the call listening today I couldnt be more proud and more excited about this company and with that we will wrap up the call.
This concludes the program you may now disconnect everyone have a great day.
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