ADP
#Thank you, <UNK>, and thank you for joining our call this morning
We appreciate your interest in ADP
This morning, we reported our first quarter fiscal 2018 results, with reported and organic revenue up 6% to $3.1 billion
We're pleased with this revenue growth which was above our expectations
Revenue growth in the quarter includes approximately 1 percentage point of pressure from the fiscal 2017 disposition of our CHSA and COBRA businesses, which were substantially offset by the benefits from foreign currency
Our adjusted diluted earnings per share grew 6% to $0.91 per share and benefited from a lower effective tax rate and fewer shares outstanding
Overall, this earnings growth in the quarter exceeded our expectations, and we're very pleased with our solid results, which <UNK> will walk through in more detail shortly
New business bookings during the first quarter were down 3% compared to the first quarter of 2017. This performance was in line with our expectations as we begin to realize the benefits of our fiscal 2017 head count investments while we continue to manage through the effects of the regulatory uncertainty that has prevailed since last year's U.S
elections
Despite the short-term bookings pressure, we continue to be very pleased with the performance of our down-market businesses and the solid results in our multinational business
As we communicated previously, we continue to expect our bookings growth to gradually expand back to pre-ACA growth levels as we progress through the year
As a result, we continue to anticipate full year fiscal 2018 new business bookings growth of 5% to 7%
On the client retention front, we experienced a 160 basis point improvement during the quarter, which was ahead of our expectations and saw positive growth across all of Employer Services <UNK>ets
This performance is due in part to our continued efforts to upgrade clients to strategic cloud platforms as well as the investments we've made to improve the client service experience while also aided by the easier compare from our fiscal 2017 first quarter federal government OPM contract loss
Our client upgrade initiatives continue to progress nicely and now we have more than 83% of our clients on our strategic solutions
We also continue to make good progress on our Service Alignment Initiative where we now have 2,000 associates across our three new scalable service centers and 5,400 associates in total across all five of our strategic service locations, delivering service to clients across the HCM spectrum
I'm proud of these efforts and of our speed to execute, which have enabled us to rationalize our footprint by exiting nine subscale facilities this quarter
This represents a closure of 63% of our total planned exits under this initiative in just over one year
The progress we are making with respect to new platforms and improved service is leading to happier clients and improvement in our NPS scores
It isn't just our own internal metrics that are helping tell the story
Last month, G2 Crowd, a leading business software review platform ranked our Workforce Now solution number one in satisfaction for payroll and HR management suites in their fall mid-market grid report
In analyzing the reviews of actual users of the products, ADP was also named the leader in all five HR software categories: payroll, HR management suites, core HR, performance management and applicant tracking systems
We're excited about the innovations we continue to introduce to the market that are helping clients meet the dynamic needs of an evolving workforce
And it's gratifying to see these investments in HCM innovation continue to be recognized with prominence in the industry
A few weeks ago, I had the opportunity to attend the HR Technology Conference in Las Vegas where few of these innovations took center stage
For the third consecutive year at HR Tech, ADP was recognized with an HR Product of the Year Award from Human Resources Executive magazine, this time for our Compass Solution which is designed to boost the leadership and collaboration behaviors of our clients' employees
In addition to this recognition, we scored a second three-peat at the show after our Pay Equity Explore Solution was named one of HR Executive's Awesome New Technologies
Pay Equity Explorer is a powerful tool that combines data science and benchmarking and is built on the biggest data sect in HCM, the ADP Data Cloud
It was developed to help clients uncover insights and identify potential opportunities when it comes to gender or race pay gaps, so they can stay competitive in the war for talent
Innovation is a job that's never done
While we are incredibly excited about the solutions we are delivering in the market today, we are even more excited about the future
In September, we had the opportunity to brief HCM industry analysts on the new products and services coming out of our global product and technology organization
At the event, we previewed our next generation of client-centered innovation including a low code application development platform that enables internal and external development teams to build agile country, segment and client-specific applications, leveraging the latest technology and delivered by the public cloud
We also shared progress on our efforts to deliver next-gen payroll and tax filing engines which will further increase our differentiation in payroll and payments
These engines are designed for multi country localization and will enable us to deliver paid and other services with greater flexibility based not only on the needs of our clients today, but also their evolving future needs as organizations are increasingly comprised of both full-time and contract workers
ADP's unique ability to meet the needs of our clients today while anticipating their needs in the future have been hallmarks of our success over the past 68 years, and will drive our sustained growth in the years ahead
Also before I turn the call over to <UNK>, I'd like to say a few words on our acquisition of Global Cash Card, which we announced in October
At the core of HCM is ensuring employees are paid accurately, securely and in a timely fashion
This is the DNA of ADP
And with the acquisition of Global Cash Card, we are strengthening and expanding this core capability
For those not familiar, Global Cash Card is a leader in digital payments, including pay cards and other electronic accounts
The digital payment space is an exciting one for the future of payroll
The increasing use of contract workers in the gig economy has driven the demand for these accounts, which can let independent contractors bring their various wages and expenses into a single account, providing the best picture of their financial well being
From the employer's perspective, digital payments can be less expensive, more immediate and a more secure option than other means of payment such as paper checks
With this acquisition, ADP becomes the only HCM provider with a proprietary digital payments processing platform which will be integrated with our aligned pay card solution for a seamless client experience
We are excited about this acquisition and we're pleased to welcome the Global Cash Card team to the ADP family
I'm proud of the efforts of our associates
Our results in the quarter continue to reflect the enduring qualities of ADP, including a culture that is relentlessly focused on delivering a great client experience through best-in-class technology and unparalleled service
Fiscal 2018 is off to a good start, and we look forward to turning over full attention to advancing our strategy and delivering on our commitments to all stakeholders, clients, shareholders and associates alike
And with that, I'll turn the call over to <UNK> for a further review of our first quarter results
Well, I think as I mentioned in my comments, I think this quarter, the improvements were really across all of our ES segments
And as we've said in the past many times, retention can be a very volatile metric especially as you get into the up market
But this quarter, we happened to have good news and we're very happy about it
We think that is not just because of volatility but I think because some of the things we've been doing around investments in our service organization
We see our NPS scores coming up and so, we're very pleased with that
I would say that, to your question about the mid-market, we are not finished yet with the migrations of our clients in the mid-market
We have about 2,000 left
We still think that we'll be close to done, if not done, by the end of the calendar year
We may have a couple of stragglers
But we do expect to be substantially done by the end of the year and that does put pressure on our retention because as we've mentioned multiple times, and the same still holds true, there's quite a substantial difference in retention between our strategic platform in mid-market and our legacy platform
So, what you're alluding to, we hope and we expect will happen a couple quarters from now as we get all these migrations and the mid-market behind us
But that would not be one of the reasons why there was improvement in the mid-market as well as in the rest of ES this quarter
I think the impact of that large loss was around 100 basis points last year
So, the right way to look at this is about 60 basis point improvement in retention for the quarter
Other than that it's getting really big
And we're still pretty happy with 10% unit growth
I don't think anything further to report there, but that's becoming a very large, we're close the 0.5 million worksite employees
That's one of the largest employers in the U.S
, if you look at it as, which we do, as an employer even though there are sub-clients
Obviously there's more than 10,000 clients in the PEO, but it's a very large – the way we treat it for, the way we have our retirement program and the way we have our workers' compensation and benefits, et cetera
We are a co-employer and consider ourselves a co-employer for the purposes of some of the responsibilities around employment
And so technically, I think we're probably in the top five now in terms of size of employers in the U.S
which is becoming a very large base
But we feel pretty happy and pretty satisfied with that kind of growth rate
So just to make sure we get our language clear here, because we have introduced some new terminologies
So, when we refer to next-gen platforms, so we have our strategic platforms, which are Workforce Now, RUN, Vantage and our Global View multinationals platform
We did start talking and we mentioned it in our introductory comments that we talked to industry analysts in mid-September about our next-generation platforms which we have only a handful of clients on today
So, I just want to make sure I clarified the language there
As we go forward, we'll be more careful about making sure that we pick the right language
So, and I'm sorry, what was the rest of the question?
So since we still have a lot of work to do in the up-market where we've really only begun the migrations, I think that's consistent with what we've said before in our publicly released information around the proxy contest
I think we included there about 51% of our revenues being on our strategic platforms that I just mentioned the names of
It's very important to note that when we talk about our strategic platforms, we have a number of areas of our business where there's really no immediate plan to migrate or move clients
So for example, our insurance services, our retirement services, we have some international platforms that we're happy with that we're not planning any movement there
So, we could probably in the future be able to provide some more color around the quote-unquote addressable market
In other words, what part of our client base is really up for migration, if you will, but the right answer, the straight answer is 51%
But we're not aiming to get to 100%, I guess is the
We disclose a lot of information, again as we've been trying to communicate with shareholders about some of the things we've been doing here over the last five or six years
We've disclosed, I think, some additional information about that
And I think starting off with the fact that we've increased our innovation spend from around $150 million to around $450 million, I think or somewhere thereabouts in that neighborhood, so it's a significant amount of increase in our R&D investment
A large part of that was in the next generation platforms that we just announced recently that we've been working on here in some cases for three to four years
But we've also made big investments in things like our data cloud and things like our mobile solutions and some of the other products and innovations that we actually already have out in the market and are helping us, I think, with our efforts in terms of helping our clients and also helping drive new business bookings and retention and so forth
So, that's a sense of what's happened with the innovation spend
On the maintenance spend, for the sake of I guess government work, it's about flat
So it's increased slightly
But again, in the world of some inflation, the fact that we've held that constant, we see that as a good news story
It was a conscious effort to really shift the mix, if you will, in the balance of our spending to more innovation and less maintenance
A lot of our maintenance spend is focused on platforms that serve tens of millions of employees that get paid, both on our tax engine and our payroll engine
And so as we develop these next generation technologies, when we retire those legacy platforms, which is a ways down the road, then obviously, we would expect actual decreases in maintenance spend
But for the last several years, this has really been a story of increasing the spend and making sure that that spend is focused on innovation while we build out the necessary platforms to move clients to and then reduce the spending on those legacy platforms
We have retired I think it's around 13 legacy platforms
So, it's the first time in a long time at ADP that we've actually retired things
So, it's not like we haven't made any progress, but those were relatively small dollar items in terms of the overall maintenance spend
The really big chunks of spend are on some of our large scaled legacy platforms that service, by the way, very well and are very efficient, very secure and very reliable
And we have no plans to get off of them in the next three to six months or any kind of timeframe like that
So this is a, as we always say, this is an evolutionary process, not an overnight change
So, I'm going to let <UNK> maybe go through a few of the numbers here
But just quickly on the hurricanes and <UNK> will give you a sense of impact
Clearly, it had an impact on the business
But I just want to take a moment to also point out that these were massive storms, especially in Houston and in Puerto Rico
We have a decent sized business in Puerto Rico
We obviously have a very large presence in Texas and in Houston specifically
And what our associates and our infrastructure people did to be able to continue our business, not necessarily as usual, but to make sure the business went forward and that we served our clients was nothing short of heroic, including flying airplanes from Tampa when no other planes were flying into Puerto Rico to deliver supplies to our associates but also to deliver payrolls to the businesses that were actually still functioning and still wanting to pay their people so that they would be able to actually have money for, in obviously what was an incredible crisis
So, the fact that you're asking the question, I think shows the strength of ADP that we continued to perform and to deliver business as usual in the face of what was obviously a very, very challenging situation
I think <UNK> maybe has a little bit of color on the numbers
And just to point out, there have been times in our history in the PEO where it's been even higher than this
So as <UNK> said, it really depends on the general health care inflation environment
It's clearly not sustainable from a – it's not just about our PEO or our own company, but this is why there was healthcare reform to begin with, that you can't have this kind of healthcare inflation for a long period of time, because it just doesn't work from an economy standpoint
It becomes the entire GDP eventually
So, it's safe to say that this is a number that has to, by definition, maybe not over a quarter or two or over one year, but that number has to at some point converge or regress back to the mean
But we have had times where we've had even bigger differential between worksite employee growth and our pass-through revenue growth
And this is probably from a three or four year standpoint, this is probably the highest it's been and it's probably in line with what you're hearing out in the world, right
Which is healthcare inflation's picking up a little bit
We'll try to help with that, but again, what we encourage people to do is to look at Employer Services margins and profit growth and the PEO's margins and profit growth
Because what we're focused on is growing EPS and creating value for our shareholders
We're not fixated on a specific margin number even though we realize that the margin number is important to the overall economic model and to actually building a model that works
Right
Exactly, I mean that's ultimately the – growth in Employer Services and profitability Employer Services and growth in PEO ultimately would drive return on invested capital and that's really the right way to focus on the business
As you know, our PEO business is our most profitable, most successful, best business
So, for us to get overly concerned about mix and what impact that has on the overall margin, I realize it's something we have to address and we have to talk about and help people with their models, but it's really not the right way to focus on the business
One last thing, because you did mention about the distraction on the – I just wanted to answer that question because others may have the same question
I think the way I have been, had a lot of investors asking is the same thing, because there's a lot of concern about the distraction of the proxy contest and I would say that it's an extremely high distraction for an extremely small group of people
As you can see from the results of this quarter, it did not distract our associates or our sales force
I think it's probably, it's both
I think we had, we obviously feel better about what's going on with retention and I think the trends in the business
We got a little bit of help from, even from float income as you mentioned because that actually flows into our top line as well as into our bottom line
But I think you're correct that that just happens to be the way the numbers have fall out as well
So I think it's both things
I think that one of the things we've been as we've been kind of going out talking to folks, making sure that this is an opportunity now to make sure everyone understands that the starting point for margins in terms of the amount of room there is for improvement was larger in the small business market than it is in the mid-market
So we have a successful good business in the mid-market including healthy margins
We do think that based on what we see around retention potential because the real, one of the really important improvement to the small business division was the rise in retention which has a fairly big impact in that business on margins because the amount of business you have to sell, which brings with it sales cost, implementation cost, is less to achieve the same growth objective if you will
And so that was an important part of that picture, if you will, in small business, the improvement in retention
I am hopeful, based on what we're seeing so far, that we are going to experience good improvements in retention in our mid-market as well once we're through migrations all of our clients on one platform
Better retention should have the same impact that it had on SBS in the sense that you have sell that much less business in order to achieve the same growth rate or you can grow faster, like it's either you get the best of both worlds that you can choose which way depending on market conditions you want to move
But the absolute starting point is important as it is always in any situation
And again, we don't give specifics sub segment data if you will
Neither do any of our competitors, I would just point out
But the fact is the margins are higher
They were higher to begin with in mid-market and the replatforming is really about strengthening our competitive position, driving faster growth and hopefully some modest improvement in margins as well because we do expect to get higher retention rates in the mid to long term as we get all of our clients onto one platform
Yeah, and think I also want to point out again, I want to say it one more time that clearly some of the pressure we're experiencing is from investments, because we have been investing in our sales force for example
But it's just important to note that some of what's happening in terms of these numbers is still these mathematical grow-overs and comparisons
Because last year, in the first half of the fiscal year, so the last two quarters of the calendar year, we had almost 20% operating income growth, and then in the last two quarters of the fiscal year, first two quarters of the calendar year, because of the ACA grow-over in the comparisons of having lapped the revenues, the revenue comparison, we ended up having the numbers go in the opposite direction
And the two quarters that we're in right now, the quarter that we're just reporting plus the next quarter, are really mirror images of the first two quarters of the calendar year
And then as we've said multiple times in our guidance, our second half of this fiscal year gets back from a margin standpoint, from a growth standpoint, from a bookings standpoint to a more reasonable normalized place, if you will
So unfortunately the way – you guys know this better than anyone else – like whenever, whether it's an acquisition or ACA or some other factor, you have to really look beyond that to understand what's really happening beneath the covers
And so we had 12 months of easy comparisons, and then we had 12 months of hard comparisons
And we have, I guess right now, a couple more months before we get through those difficult comparisons
Well we hope, we do for example invite clients on a regular basis to visit our Innovation Center in New York City in Chelsea to kind of get first hand knowledge of some of the things that we're working on
And it's not just about the platform
We have other things that we are working on as well that we share with our clients
So obviously, part of that is an effort to make sure the clients understand our roadmap and so that they stick with us as we get through product development and then eventually a transition to our New York platforms
I think that would be true in each of our business segments, but it's obviously very important in the up-market enterprise space where the client lifecycles are very, very long
So we have very high retention rates in our up-market business
Client stay 15 to 20 years on average
And obviously if they are staying with ADP for that long, that means they've already been through multiple changes in technology with ADP over the years
So this is just another evolution if you will, which makes the products better for them, easier to use, easier to service, easier to upgrade
So these are all, I think, part of leveraging technology, which is one of the central themes that we've had here for the last five or six years
So we're really trying to do what ADP's been doing for many years with a slight change in emphasis, with greater emphasis on product and technology than maybe historically we had had 5, 10, 15 years ago
So the second part is a tricky question, because the way it gets shared, if you will, is it makes our company stronger
It allows us to, for example, theoretically, to be more careful with price increases
None of which – so I guess the answer is, we haven't changed anything
Like it hasn't – if rates were as you know because of the way our portfolio is laddered, even though we felt multiple years of pressure on the downside, we are getting a little bit of help here on the upside
But there's really, this isn't like an overnight, and I don't mean overnight in the sense of rates
But because of the laddering, there's not that kind of dramatic of a change that we are all of sudden that it's raining money out of the helicopters and we have to figure out what to do with it
But we definitely appreciate it
It's better than it was when it was going in the other direction
So it's all positive
So I think historically, I think it probably make us stronger, more competitive
But we really don't – there's no pricing mechanism
We didn't raise prices, when interest float income went down and rates went down
And we don't plan on lowering prices when it goes up
I guess to be completely direct
And, <UNK>, just to add, just to be even more clear, we lost $300 million in float income and that's assuming that the balances have stayed flat, but the balances actually grew from about $15 billion to over $20 billion during that period of time
And I am thinking back to like 2007 and 2008 when we peaked in terms of our float income
And so there's a long way to go to get back to that $300 million and that would not be even adjusting for inflation and for growth
And as <UNK> just said, we don't have those kinds of arrangements
We didn't increase our prices when that was going on
So we managed to improve our margins and grow our business in the face of that kind of headwind
And so I think it feels fair to us to now enjoy the fruits of a better environment on a go-forward basis would be the way we would look at it
We never said there's a new version to an up-market product
And so you shouldn't say it either
So what we built was, we built a platform on which we can build apps that could serve a number of different clients
It could be used globally
It could be used in the up-market and frankly someday, can be used in the mid-market
So we're not ready
We shared a lot of information with industry analysts and we're trying to share as much information with all of you without sharing so much information that it creates a competitive problem for us
And so we're not ready to say exactly what we're doing and where we're going
But I can tell you that the benefits are obviously usability, speed to change and speed to development, cost of maintenance, not to mention cost of development
So there are a number of benefits that we will get from our product development efforts
And that's really only talking about the low code development platform
We also have two very large investments in back-office systems
So this is our gross-to-net payroll engine and our tax engine as well
There we expect and the plan is to have that be completely transparent
These engines are back-office engines that are really not visible to the clients
They just, they create outcomes
The front ends are Workforce Now, Vantage, and some of our other front-end products
And so there's really no expected impact assuming that we execute well in the kind of transition, if you will, to a new gross-to-net payroll and also tax engine
The expectation for improvements, though, are fairly significant in the sense that we'll have a lot more flexibility around the things we can do around payments
So we may choose to, we may not necessarily do it, but we'll have the ability to do same-day payments, real-time payments
We'll have a lot more flexibility around speed to make changes, whether they're statutory or competitive changes in our systems
And then the cost of maintenance and the cost of support will go down significantly based on our business cases that we have for these back-office engines
So these are really modernization efforts because those platforms serve us incredibly well today at high scale, high reliability and high security
But we believe based on our business cases that obviously, whether it's two, five, seven years down the road, that new technology can help us leverage those services that we provide in a much more efficient manner
Well the impact of the acquisition would be zero because it's zero
It's a great business and it's a good-sized revenue business fortunately it's around breakeven is the way we would describe it
So it's not a huge drag on our earnings and it's not a huge help
It has a small drag on margins obviously because at breakeven, and with some reasonable revenues, it doesn't help our margins
But I would say no impact in terms of EPS guidance from acquisitions
And the other, I'm sorry the second part of your question was?
I think for bookings growth, what we try to look at is the noise in the system has been pretty significant in the last 24 months because first, we had ACA and then we didn't have ACA
So I have to preface my comments by saying, it hasn't been exactly business as usual
But in typical business as usual for ADP, we would have a head count increase, accompanied by a productivity increase of our sales force, which would lead to our sales result
And so the mechanisms that we would, the buttons that we would push to try to increase or improve our new business bookings would generally be around increasing our head count, or our capacity if you will of sales, because we could also spend money on digital marketing and other tools that make our sales force more efficient
And then what can we do around products to drive the productivity, because some of the productivity is just like in any business, we expect our sales force to do a little bit better each year
But we also try to give them better products and more things to sell so that they can also grow their productivity that way
So one of the things we did last year is, in the face of the challenges we were having, we decided to actually invest in head count
We'd had two or three years where we were able, because of the tailwind of the ACA, to put less into head count because we were getting more from productivity
And we opted last year really to, in order to make sure that we had a good couple of years of new business bookings, we invested in our head count
And we're now I think at about 7% head count growth year-over-year
That's pretty healthy for us when you look at the last five or six years
It doesn't have an immediate impact because those people have to become productive
They have to get ramped up
They have to get into the field
But as those people mature, that's an investment that should pay off for us for several years to come as those new sales reps become more mature and become more productive over time
So I guess the answer your question is, the reason we feel good about our forecast, which again is subject to interference by, as we just saw the government had a fairly large change in direction nine months ago
So we can't ever say we're 100% sure, but we look at certain metrics that give us confidence in terms of what we have in terms of guidance and it's mainly around head count and modest productivity improvement
I don't think so because as <UNK> said, I mean I think it's first of all, it's early
We're through the first quarter and I think you could tell that we feel good about our results
We feel good about the future
But I think it's premature
We did get help from tax
We did get a little bit of help from on the growth rate from the floating come
So I think it's just too early
But directionally, we feel good
But I think it's way too early to think about how the first quarter impacts 2020 for us
Yeah, and I think part of the reason for that is we've obviously invested a lot already
But now we're in the process of quote-unquote hardening and also getting clients
We do have clients, by the way, on each of the three next-generation platforms
These are real platforms that we've invested hundreds of millions of dollars in over multiple years
So we feel good about it
They're real and they're going to drive long-term efficiency, lower costs, stronger sales, better client experience
But from a timing standpoint, I think it's clearly way too early I think for us to be factoring those types of improvements into our forecast
But for, there is no question that whether it's in 2020 or the last half of 2020 or in 2021 or 2022, these investments are expected to have meaningful impacts on ADP's competitiveness and its profitability as well
Thank you
As you could see, we're off to a really good start, and we're happy that the initiatives that we have around enhancing our service, the innovation of our products and expanding our distribution model are working
And we have obviously a lot of confidence that I think the investments will continue to deliver the results we expected from those investments, especially in the latter half of fiscal 2018 and beyond
Over the last several months, obviously we've been involved in this proxy contest and I just want to acknowledge for a minute our associates, because obviously, some of them may feel like their efforts have been put into question during this process
And as I mentioned, I think the distraction has been largely to a small group, but inevitably our associates also hear some of the noise out in the market
And I just want to thank our associates for the resolve that they've had in delivering to our clients what the clients expect from ADP
And I also want to thank them for the encouragement they've given to us to continue to move beyond the distraction and continue to deliver valuable services to our clients
The dedication, I think, and the attentiveness and the integrity, more importantly, of our associates is what makes this company great and it's what our founder I think insisted on
And I'm confident that with their help and their support, we're going to continue to make ADP successful
I also want by extension to thank our shareholders and the confidence they've put in our management and our board
As we've gone around visiting and talking to investors, the encouragement that we've gotten from them, I think just strengthened our resolve to continue to do the right thing for them, and also on their behalf
And so with that, I want to thank you again for joining us, and thank you for your interest in ADP
