ADP
#Thank you very much, <UNK>, and good morning, everyone
ADP revenues for the quarter grew 5% on a reported basis, 6% organic
Our revenue growth this quarter experienced pressure as we began to lap our fiscal year 2016 ACA-related revenues
Pre-tax earnings from continuing operations before taxes grew 4% on a reported basis to $828 million, despite almost 2 percentage points of combined pressure from our second quarter business disposition and our fiscal year 2017 acquisitions
Adjusted earnings before interest and taxes or adjusted EBIT grew 4%
Adjusted EBIT margin decreased about 20 basis points, compared to 24.8% in last year's third quarter
Our margins this quarter were impacted by slower revenue growth as we maintain our investments and product sales and service, including dual operations cost related to our service alignment initiative
Our net earnings grew 10% on a reported basis to $588 million and benefited from a lower effective tax rate
Our effective tax rate this quarter was aided by an incremental tax benefit related to prior period software development efforts, $0.04 of which was not previously anticipated and $0.02 tax benefit related to the adoption of new stock-based compensation accounting guidance
Diluted earnings per share grew 12% to $1.31 and benefited from fewer shares outstanding compared with a year ago
Our new business bookings performance this quarter was disappointing
However, we have continued to make investments into our sales organization to better position us for growth
We're confident in the competitiveness of our portfolio and the strength of our distribution capabilities, and in turn, our ability to execute on our pipeline of market opportunities
In our Employer Services segment, revenues grew 2% on a reported basis for the quarter and included 1 percentage points of pressure from the sale of our CHSA and COBRA businesses earlier this fiscal year
Our same-store pays per control metric in the U.S
grew 2.5% in the third quarter
Average client fund balances grew 2% on a reported basis, or 3% on a constant dollar basis compared to a year ago
As a result of improving employment, we have continued to see pressure from lower state unemployment insurance collections impact client fund balances
This pressure was offset by a combination of wage inflation and growth in our pays per control metric
Employer Services margin decreased about 40 basis points in the quarter
This decrease was driven by slower revenue growth as we maintain our investments and product sales and service, including dual operations related to our service alignment initiative
PEO revenues grew 12% in the quarter with average worksite employees growing 12% to 471,000. The PEO continued to experience slowing growth in the benefit pass-through costs, resulting from lower health care renewal premiums, which outweighed growth from higher benefit plan participation of our worksite employees during the quarter
The PEO margins continued to expand through operational efficiencies, which helped drive approximately 100 basis points of margin expansion in the quarter
New business bookings this quarter were down 7%
And as a result, we now expect new business bookings for fiscal year 2017 to decline about 5% to 7% compared to the $1.75 billion sold in fiscal year 2016. We have also updated certain other elements of our fiscal 2017 forecast, which I will now take you through
Despite our revised new business bookings guidance and this quarter's revenue retention decline, our revenue outlook remains unchanged at about 6%
This forecast continues to include 1 percentage point of combined pressure from the sale of our CHSA and COBRA businesses and the impacts from foreign currency
While Employer Services segment consistent with our prior forecast, revenue growth is anticipated to be 3% to 4%, which continues to include 1 percentage point of combined pressure from the sale of our CHSA and COBRA businesses and the impacts from foreign currency
For the PEO, ADP continues to anticipate revenue growth of 13%
We continue to expect our consolidated adjusted EBIT margin expansion to be about 50 basis points, which includes about 20 basis points of pressure from dual operations pertaining to our service alignment initiative, which was not part of our non-GAAP charges
On a segment level, we continue to anticipate margin expansion in Employer Services of 25 basis points to 50 basis points
For the PEO, we expect continued operating efficiencies and slower growth in our pass-through revenues as compared to fiscal year 2016 to help drive margin expansion on a full year basis
Accordingly, we continue to expect fiscal year 2017 PEO margin expansion of at least 100 basis points
We are also now expecting growth in client funds interest revenue to increase to about $20 million compared with our prior forecasted increase of about $15 million
The total impact from the client funds extended investment strategy is now expected to be up about $15 million compared to the prior forecast of about $10 million
The details of this forecast can be found in the supplemental slides on our Investor Relations website
As a result of the software development related tax benefit, some of which was not previously contemplated in our prior guidance and the additional benefit related to the stock-based compensation accounting change, we now estimate our adjusted effective tax rate for fiscal year 2017 to be 31.4% as compared to our prior forecasted rate of 32.4%
Based upon our revision of our effective tax rate guidance; adjusted diluted earnings per share is now expected to grow 13% to 14% compared to our prior forecast of 11% to 13%
Our forecast also continues to contemplate a return of excess cash to shareholders via share repurchases of $1.2 billion to $1. 4 billion, subject to market conditions during fiscal year 2017. This forecast includes any repurchases required to offset dilution related to employee benefit plans
So, with that, I will turn the call back to our operator to take your questions
Question-and-Answer Session
I think that's true
But, <UNK>, you're mathematically correct that our new business bookings get implemented and turn into revenue after six months approximately and so some of the impact of our lower retention and lower sales will be seen in the revenue growth next year, as you roll it forward
Just to be clear, when we migrate our clients, the migration itself is not counting as a new business booking because business bookings account only incremental recurring revenue that we report
So the migration is generally cost-neutral to our clients, and they have enhanced feature functionality with a new product that they get
In the process, clients continue to make buying decisions and buy incremental modules as they do, and we have seen that trend continue in particular in the midmarket
But the actual migration is revenue-neutral, as we approach it, and that will be the same for all upmarket clients
So the change – if a client buys more, I don't have the most recent statistics here, but I think the trends continue that a number of clients purchases incremental modules as they see the power of the integrated platform
And so there is some slight revenue uptick that we do see for the clients who choose it and only that incremental revenue would be reflected
But it would be immaterial for the new business bookings number in total
And I think that it is – as I think we've been trying to signal for, I think, probably three years if you go back to my notes, it's very hard because we're obviously in uncharted territories, because we were in something completely new
And it was a very comprehensive regulatory framework that required a lot of information from HR platforms, payroll platforms, benefit platforms, et cetera
And when you look back, we had two years of more than 12% new business bookings growth
And this is why we were cautious all along because that is a little strong
We were happy with it and we take it
It's good for our shareholders
It's good for our revenues
But it definitely felt like a fairly significant tailwind
And I think, in hindsight, it was obviously a big tailwind
Now, what has now added, I think, potentially to that pressure, which again we can't quantify scientifically is that we have, I think, a different environment politically that's creating some uncertainty, that certainly has impacted our new business bookings
We just can't put our finger on exactly to what extent
So as an example, we knew we had a grow-over issue just for ACA itself because we had already sold 50% of our addressable client base
But we did have some planned sales of ACA this year
And even though we've gotten some, it's significantly lower than plan, which is not surprising given the headlines and the frequent votes on repeal and replace of ACA
And so I think that's a second factor that I think was not certainly anticipated as we entered into this fiscal year in terms of our planning process
We knew we had to grow over the mathematical grow-over issue
Now we have what I would call the political issue
And then the third one that you mentioned, which again, is very hard for us to put our finger on, but I think you're onto something because we experienced the same thing back when we had the Y2K phenomenon in year 2000, where you do have some amount of pull forward, if you will, of business because we've seen this particularly on some of our wins last year from ERPs were quite high and elevated
And I think some of that, it appears, with the benefit of hindsight is, people on kind of older legacy technology trying to find a new solution for ACA
And by the way, some of that happened to us
So as we mentioned, before we think some of our retention issues last year may have been related to the same factor of people kind of just out looking for new solutions as a result of what I would call an event, which is a significant event called ACA
So I think all three things are a factor
We really wish we could put our finger on exactly how much each one is accountable
But unfortunately, we can't
I think the only thing, Jim, just keep in mind our new guidance is down 5% to 7%, is our expected new business bookings guidance and I think <UNK> captured it
Our longer-term expectations for organic growth is 7% to 9%, as you correctly quoted
And it's driven by growth of new business bookings in the range of 8% to 10% growth
And it always was meant to cover multiple year type of cycle elongated and it was not a commitment obviously, as you see realistically – not a commitment to perform every single fiscal year
So we are not updating our long-term growth outlook at this point in time
But, clearly, our new business bookings have fallen a little bit behind, but relative to a three- or four-year cycle of new business bookings, we still feel good about our growth opportunities
a little comment to this on the outlook, which <UNK> described correctly kind of roughly in line with fourth quarter and the full-year guidance
But we'll also continue to put our dollars where our statements are and the investments into the sales force, the incentives that we're bringing out to get the sales force ready, and the hiring and preparing for growth in the next year are actually fully underway and have actually to some degree impacted our third quarter and fourth quarter results because we believe we have that opportunity going forward
So we're preparing for growth in the future
And maybe a tiny bit of further detail, <UNK>, is when we look at our competitive position against this multitude of competitors in the quarter, some competitive positions have improved and some have not
And that is a fairly typical thing we see each of these competitors evolving quarter-by-quarter up and down
So when we say the general competitive dynamic we feel has not changed, it's rooted in this analysis, and we see in some cases we have improved and some cases we have not
So it's a mixed bag obviously, but we believe it hasn't changed
Well, next fiscal year, we are clearly half – still a little bit of grow-over but not that material
So next year should be a clean year relative to the ACA-related grow-over
Just a further clarification, we have tried to illustrate this a few times
With the ACA core module that we have sold came off an incremental fuller bundled sales that particularly included benefit administration module
So the impact of the Affordable Care Act have been broader than the direct impact of the ACA-related sales, which makes it a little bit harder to predict
And as a consequence, our clients (54:35) typically provides ADP-wide about 50% of our incremental new business bookings, however, come from selling more to existing clients
And that dynamic has now changed because we have fuller bundles now in particular in the midmarket
And so we started to transition to drive new logo growth in the midmarket and those channels have to readjust a little bit as a consequence of the ACA surge that has driven a more complete bundle in particular in the midmarket
So that transition is still present obviously next year, but we feel that we have great strategies in place to replace basically that up-sell strategy with a more aggressive new logo sales
And as we have clarified, it is a disappointing quarter, but despite our down guidance for new business booking sale, it will still be our second highest sales year ever for ADP
So keep that in mind
Just a quick reminder, as one of the advantages of ADP is that we serve such a broad range of segments and markets in the U.S
and globally and multinational, and so as we had our challenges in the mid and upmarket, we continue to perform tremendously in the down-market, in the PEO, multinational
So there's a broad range of products that are gaining share and really driving success
So obviously, in that balance, our investments into sales signal our confidence for ultimate success in distribution
Yeah
You're never complete on operations, <UNK>, but the majority of our work is actually this fiscal year and next fiscal year
So in next fiscal year I'd still anticipate some dual ops
We haven't determined what that will be specifically, but there is still transitioning happening, but the vast majority relative to those three new locations and the two existing ones should be completed in 2018. But our service strategy is obviously organic and evolving and we're going to continue to drive improvements, but 2018 is a big year still for us
Yeah
The sources of our business and the sources of our losses is something that we track
And both have very similar dynamics
It's a fragmented and there's no clear trend to it, and so they go to a variety of different targets
Some in the ERP space, some to our traditional competitors, some to other solutions, so it is a wide range
Some is driven by their M&A activity, moving to on (1:03:41)
So the loss reasons and their targets is varied as the sources of our businesses are varied and as a consequence we feel the competitive dynamic has not fundamentally changed as we observe it
And on the tax rate, <UNK>, this quarter was onetime unanticipated strong outcome relative to our tax strategies of the R&D credits
So this quarter is not a regular quarter, it was a onetime effect and so we're going to be returning to our – well, that said, we're not giving guidance for next year
But it's certainly not going to be at the level that you saw in the third quarter
The tenets translate into what you have heard
Our belief that our core strategic platforms need to be funded and need to be innovative
So we have a belief in our core capability to develop those products
And we continue as we had in a prior question, our belief that the service alignment initiative is fundamentally positive for our business outlook going forward
So we need to continue to drive the execution of those core strategic initiatives, and we continue to believe that our sales force has opportunity to execute and we will be funding those appropriately
So those may be the core tenets kind of really executing around the strategy that we have laid out for the last few years, also on 2018 is a fair assumption to make
Thank you
