ADP
#Thank you, <UNK>, and thank you all for joining our call this morning
We appreciate your interest in ADP
This morning, we reported our second quarter fiscal 2017 results, with revenue up 6% to $3 billion or 7% on a constant dollar basis
This quarter, we saw the continued benefits of strong prior period new business bookings and a strengthening in our retention metric which helped to drive organic revenue growth across all market segments
Our earnings growth exceeded our expectations this quarter with adjusted diluted earnings per share growing 20% to $0.87 per share
<UNK> will take you through the key contributing factors to our strong earnings performance in more detail shortly
During the quarter we experienced a decline of 5% in new business bookings compared to a strong second quarter in fiscal 2016. These results reflect a continued difficult grow-over related to the tailwinds from our fiscal 2016 sales of additional modules related to the Affordable Care Act, which was expected
Additionally, within the midmarket and upmarkets in particular we also experienced the effects of political uncertainty leading up to and following on from the November U.S
elections which slowed decision making among some clients and prospects during the quarter
Our value proposition remained wrong and we have a successful track record of managing change for our clients
As you have seen with ADP many times in the past, change can provide us with significant opportunities to grow and expand our solutions to help deepen our client relationships
We expect that the environment in 2017 and beyond will be no exception and at this current uncertainty and related hesitancy, will be a short-term phenomenon
Accordingly, we continue to expect new business bookings growth in the second half of fiscal 2017, but in light of the second quarter decline, we have now revised our outlook and now expect to be about flat for fiscal 2017 as compared to the $1.75 billion sold in fiscal 2016. The client experience remains a priority for us whether it's through investments in our service model, in innovation and the user experience or in our efforts to upgrade clients with the most appropriate strategic based platforms, we believe that we have the right strategy to address these continuously evolving needs and opportunities and we remain pleased with the progress we are making
We continue to see the benefits of higher retention rates for clients on our strategic platforms and from our continued investments in service
Accordingly, this quarter retention increased in line with our expectations by about 10 basis points as we saw the benefits of these ongoing efforts help drive further improvements in client service metrics
But at the same time, we remain cautious as we enter the time of the year when clients in our industry are most likely to change providers
In <UNK>uary, we completed the acquisition of The Marcus Buckingham Company or TMBC, to expand our core talent portfolio
This relatively small, but strategic acquisition brings together ADP's robust dataset with TMBC's innovative talent solutions so as to help clients build a better and more engaged workforce
TMBC and its founder Marcus Buckingham are cutting-edge innovators in using data and research to drive talent management practices
Their cloud-based performance and talent management solution now known as ADP StandOut coupled applications with coaching and education to give leaders the tools, insights and data needed to improve employee and team performance
Feedback on this acquisition from many of our mutual Fortune 100 customers has been extremely positive
We look forward to delivering new data-driven solutions to the market that bring together the unique capabilities of ADP and TMBC
As we think about the future growth of ADP, we anticipate that investments such as these coupled with our ongoing organic investments in innovation, service and sales will enable us to continue to stay at the forefront of the HCM industry
Other examples of our innovative successes can be seen in the traction of our ADP DataCloud and ADP Mobile Solutions app
As you know, we introduced our ADP DataCloud to allow business leaders and HR professionals to generate actionable insights from the workforce data embedded in their ADP HCM solutions
Today, several thousand clients are using our DataCloud analytics platform and we continue to advance the solution with new capabilities
During the quarter, we added depth to the geographic benchmark data and added time and labor benchmarks such as market-based absence and overtime
These new benchmarks are unique within HCM and leverage our close to 30 million anatomized U.S
employee records to assist HR professionals in developing and fine-tuning their strategies
With respect to the ADP Mobile Solutions app, we recently announced the number of users has surpassed the 10 million mark
Our Mobile Solutions app is the most downloaded app in the HCM market with users spanning 200 countries
We've continued to add new features and functionality to embrace the modern users' needs from workers accessing stock profiles, editing team schedules or approving time-off requests to users changing their 401(k) contribution or viewing their account performance
Organizations know that employees expect technology to be easy to use and accessible from anywhere while simultaneously being powerful and secure
Our Mobile Solutions app is the first app of its kind and continues to be consistently among the top three business apps in Apple App Store
For the last couple of quarters, we've been sharing our plans regarding our Service Alignment Initiative and I'm excited to highlight for you that we've been making great progress
During the last quarter, I took part in the opening of our new service and implementation facility in Norfolk, Virginia
We welcomed more than 400 associates to a new signature building and anticipate our presence in Norfolk will ultimately reach 1,800 associates
We are similarly on track in hiring in Orlando where we expect to eventually have about 1,600 associates
Also during the quarter, we announced our third new strategic service center in Tempe, Arizona
We anticipate opening that facility in the spring of 2017 with a capacity of 1,500 associates in that location
These new centers are a critical component of our overall service strategy and will enable us to significantly enhance ADP's service capabilities across the HCM spectrum
Lastly, before I turn the call over to <UNK>, I would like to add how gratified we are for the recognition we continue to receive from the HCM industry and the customers we serve
During the quarter, ADP received the Everest Group's highest recognition for our GlobalView HCM solution
Their report recognized us for the scalability of our solution while noting ADP's reporting, analytics and mobile app are key differentiators for us
In addition, ADP DataCloud earned a Cloud Computing Innovation Award from Ventana Research, recognizing our ability to deliver positive business impact
In bestowing the award, Ventana noted ADP's ability to provide organizations with data that can reveal the workforce trends and provide the deep insights needed to make better business decisions
In closing, despite the recent uncertainty in the U.S
business environment, we continue to believe that change will be beneficial to us as we are well-positioned to help our clients navigate the complexities of HCM
I remain confident in ADP's future and in the success of our strategic initiatives
In fact, I believe that we're in a firm position for sustained growth and success as we continue to make the technology and service investments to further increase the strategic value of the HR function
With that, I'll turn the call over to <UNK> for further review of our second quarter results and an update to our fiscal 2017 outlook
It's a great question
Obviously, there are two factors that are affecting the growth in our new business bookings
One was the known factor which is the difficult grow-over and obviously, we had some sense of that and factored it in in terms of our guidance for the year because we were obviously below our long-term 8% to 10% as a result of what we knew was going to be a more limited base to sell into since we had already sold half of our clients on ACA
So that was a known factor, but the reality is we didn't know exactly how much difficulty we would have in selling additional modules of ACA over what we sold last year
So that is a factor that obviously has become more difficult to measure given the talk of the administration of repeal and replace of ACA
So I guess, in a nutshell, whatever we assumed about the difficult grow-over, I think, it became a much more difficult grow-over as we think many companies in the midmarket and upmarket are probably – have a wait-and-see attitude in terms of what's going to happen around the Affordable Care Act
I think that there's also this kind of second factor which obviously we have no scientific way of measuring which feels like people are in general just delaying and waiting to see what happens not just with ACA, but with a variety of other things that the administration is talking about
Having said all that, there are also a lot of positive things and we see that reflected in some of the public markets or the equity markets in terms of anticipation of lower tax rates and fiscal stimulus and so forth
And in particular, one of the things that I noted, I've seen a chart that shows – I believe it's the NFIB confidence index, but small business confidence indexes are kind of off the charts positive and in a strange way, it's a little bit reflective of kind of what we're experiencing which is continued success which we don't give guidance by segment, but we have very good and strong new business bookings results in our down market and not so much in our mid and upmarket
And of course, the PEO, we generally consider to be a down market business but that business does have obviously a relationship to ACA and what's going on around regulation and the variety of regulations that had been talked about previously that now may be subject to change on a go-forward basis
So there's a lot of moving parts and hopefully that provides you a little bit of color, but we don't have really great precise scientific tool to be able to ascertain how much of the weakness is coming from each factor
I mean, the most obvious one is this the discussion around the Affordable Care Act, so we – as I mentioned in my prepared comments, ADP generally does well when there's change, but not when there's uncertainty about change
And so I think a protracted debate about what replacement means or what will be happening is probably not helpful to us in terms of our new business bookings results
There are a number of other items out there around, for example, overtime rules, EEOC [Equal Employment Opportunity Commission] reporting around pay equity and even DOL rules around the fiduciary responsibility that affects our retirement services business
So there's a number of things that are in play by the administration, generally speaking over 67 years we have benefited from whether it's one particular party or another particular party or one philosophy versus another philosophy because generally there's change, there's constant change and I think, employers use services like ours to help them manage through that change
So we, on a medium to long-term basis, are, I think, optimistic that whatever form comes of healthcare reform whether it's more state based or just a different way of providing because I think the administration appears to be committed to maintaining the number of people that have insurance so that will require some form of tracking and some form of enforcement or tax credits and it maybe more state based, but that's something that we hope to be able to help our clients navigate through when the administration and Congress, I think, get further along in terms of figuring out what exactly they want to do
And there's a number of other regulations that are probably less public and less significant on an individual new business bookings basis, but they all add up to quite a lot of bit of potential change which I think would be very good for ADP
As you can see from our retention notes, we haven't add – I think, <UNK> makes a great point which is what's fascinating is obviously the challenge for us right now is the new business bookings, but we haven't had cancellations or in fact we have clients that are still being implemented on ACA, but it's natural that once you've made a decision and you're committed and you're on the path and it is the law, by the way, it still is the law, it makes sense to go forward, but I can see how some people, if they're doing it in-house or doing it themselves might be hesitant to make a decision given the uncertainty around what's actually going to happen regarding the law
Well, I didn't say the new business bookings growth was weak in the PEO, we don't give segment reporting with details of our bookings
I was just trying to give you a general flavor because, as you saw, we also had some weakness on the revenue growth, but that wasn't necessarily related to ACA, but just in general, I was trying to convey that there is some logical, I guess, explanation to some of what's happening in the sense that there appears to be a lot of optimism on the part of small businesses and we're seeing that reflected in parts of our business
In other parts of the business the results are mixed because we do, I think, see as a result of the fact that 50% of the PEO's business comes from referrals of our existing payroll sales force, to the extent that that sales force is encountering some slower decision-making, particularly in the midmarket, and also encountering some slow decision-making as a result of uncertainty about ACA that is expected to have and is having some impact on the PEO
But to be clear, the weakness in the revenue growth of the PEO was almost exclusively the pass-through revenues and lower inflation in health benefits and a slight slowing in benefits participation which is probably also related to a, quote unquote, peaking of ACA implementations
And by that I mean that we have seen several year decline in benefits participation rate, in other words how many eligible employees of the PEO actually take benefits and that sort of the trend upward as we got closer to the deadline
So the last, call it, two years right before ACA, given the fact that the law was intended to increase participation and companies were coming to the PEO in order to comply with the law, we saw those participation rates trend up
And now we saw the increase in the second quarter be a smaller increase than in the prior second quarter and in the quarters before that
So that slowing trend of benefits participation coupled with lower inflation of benefits per worksite employee is what led to slower growth, if you will, in the PEO, but the 12% worksite employee growth is still very, very strong, so we're still very happy with what we consider to be net revenue growth in the PEO which is now growing almost in line with worksite employees whereas historically had grown a little bit faster because of this pass-through cost pressure
So I hope that helps a little bit
And it's certainly isn't for lack of head count, so we're in a strong position from a sales force capability standpoint
And I think if your question was really around did our retention – I think, you started off by asking about retention, did retention benefit from slower decision, that's possible
So it is possible that on the other side of the coin, if you will, people didn't make as many decisions than we were able to hold on to clients, it'd have very difficult for us to measure that, but it's possible
I think we also have – I think our expectation is a little bit of a return of the growth of the PEO pass-through cost, which I think that just mathematically also adds to – I think the last part of your question was a broad PEO margin pressure question about ADP, but in this first half, second half it is a factor
Based on our current forecast, just the expectation for our pass-through cost for the second half alone causes some pressure in the second half
And I think your broader question about overall pressure is a very, very good question which we spend a lot of time looking at and talking about
But this year in particular, because of lower benefits inflation costs, we actually, as you could tell from the first half of the year, it actually helped us
It took some of the pressure that we had historically had off
So even though the PEO has an absolute lower margin, the fact that its margin has been improving as much as it has combined with the slower growth of pass-through costs made this a moot point for the first two quarters of this year
And I think what you have from us is a commitment to really make sure that we have a lot of transparency around because we do a lot of what-if scenarios around the next two to three years what the PEO margin expectation is versus the ES margin expectation and the overall ADP
And we feel comfortable at least right now that we are in a place where we're able to still achieve the guidance that we've provided on a long-term basis, but over time that could change
If we have a lot of inflation and pass-through costs, we might have to revisit that topic just because of the pure mathematics, not because of the quality of the business or the strength of the business, just because of the math that I think you're implying
But I think for now, I think we're in an okay position
No, I think that – <UNK> may have something to add, but we had a great quarter earnings-wise, so that helps because we obviously provide guidance based on what we really think is going to happen
And as I think we were clear in our comments, the second quarter exceeded our expectation
So in fairness, we got a little bit of tailwind from the second quarter going into "maintaining" our guidance for the year on earnings
So I think we feel good about where we are in terms of our expenses, even though <UNK> described very well this issue of we've lapped our ACA revenues, and we had already lapped our ACA expenses for the last two quarters
So those kind of factors are what helped boost the margins in the first two quarters of the fiscal year which we don't get in the second two quarters of the fiscal year
But in general when we look at the quality and the trajectory of the business, we feel pretty good other than this issue in new business bookings, which ironically helps our margin in the first half of the fiscal year
Other than that factor, we feel pretty good about where we are
<UNK>, I think to add to that, I think we have some historical data to support <UNK>'s points like, obviously, we don't have any historical data to really be able to ascertain what's happening, what month and with what regulation
But the first point about the economy is indisputable that when ADP is obviously a very – from a recurring revenue model standpoint on our revenues and our profitability and so forth a relatively defensive steady company, but new business bookings is a little bit different
And when you look at 20 years of data, our new business bookings growth over the course of rolling four quarters because obviously any one quarter can have issues like we just experienced
We can have a new regulation that requires a new product
We had for example Y2K 20 years ago but, in general, follows very, very closely almost a smooth line what's happening with the economy, as does our pays per control growth
So our pays per control growth when unemployment is going up, tends to go down and vice versa
So we are in new business bookings, I think, somewhat tied to the strength of the economy and so, as <UNK> said – and we are, obviously, we try to be as transparent as possible
We were sitting here talking about potentially entering a recession
We would have to, I think, temper our optimism based on that 20 years of history
But since that doesn't appear to be the environment that we're entering at least for now, we feel that we're going to rely on this historical data and I think plan on returning to historical growth rates in our new business, and our new business bookings
In terms of this issue of the specific regulations and change and so forth, there's also a lot of history in ADP
There's more than 20 years of history where even though there are bumps along the road in terms of the amount of regulation and the type of regulation, in general the trajectory has been in one direction
And that's a global statement, not just a U.S
statement because governments try to effect public policy through employment and through employers, whether it's around safety, or taxes, or a variety of healthcare in this case
And so we like where we are, we like the space we operate in, and we're optimistic about, I think, the future, although obviously, we're not exactly happy about what's happening in the short term here
And I think – I'll just add that I think we are working on these types of products and others in order to drive not just incremental revenue from the products themselves, but to gain market share and to win more new business
Because the reality is that when we wake up every morning we're thinking about how you grow over $1.75 billion in new business bookings
And to give you a specific answer like in the next year or two we don't plan on sharing on this call that it had the same impact as ACA
Because again, the numbers are just so large that unless we simultaneously generate incremental revenues from new products, while driving – using those new products to drive better differentiation and more net new wins in the marketplace to gain market share, then we're not going to be able to grow the business
I think <UNK> described it well which is it's a very broad strategy around differentiation and strengthening our products, as well as we don't mind earning a little bit of extra revenue and income from selling those types of products
Yes, we're still on track
And very excited about it
So we like it so much because there's a service component in addition to a technology component which actually fits well with our business model, so you're right
There is a – they have deep, deep data analytics and insights in their own business, and so there's a lot of research-based, data-driven decision-making in how they deliver their products
I think the belief by them and by us is that we have obviously a very big data set to be able to enhance the work that they do to really help people create a better workforce
And so I think the combination of the coaching, the data and the analytics along with combining that with ADP, I think, we think that we could really do something special here
So again, caution that given the $12 billion of revenue, if it wasn't obvious from our comments, this is not an immediate game changer from a revenue growth standpoint, but it's an immediate game changer from a strategic standpoint and from a brand standpoint
No
I think that that's as good a math as – for example, when we had some challenges with retention in the last year, that's kind of the way to look at things is to use simple math to put things in perspective
And so we obviously fully expect to return to stronger new business bookings growth as these compares get a little bit easier and hopefully as some of this uncertainty wears off, but I think that your math is dead on, which is why you hear us still remaining optimistic
We would obviously prefer to have $100 million then to not have the $100 million, but I think in the context of what we're trying to accomplish for the company from a value generation standpoint, EPS, share buybacks, et cetera, it really doesn't – for now, it doesn't have a major impact
You're referring to new business bookings? Or
I'm not sure I understand, sorry, the question
The
<UNK>, I think that – sorry
Maybe I didn't at first understand the question, but I did look last night at sales force productivity over the last few years
And as you can imagine, now our average productivity per sales rep is down, but largely driven by ACA
If you exclude ACA, our sales productivity is still in line with our expectations
So I think what we've had is we had – and I think we've been every quarter I think very, very clear
We haven't been pretending that it was either sustainable or that we had done something magical to all of a sudden create such a huge increase in productivity in our sales force
Clearly, we got help from and lift from ACA sales
We had two years of 13% and 12% new business bookings growth, fiscal years, and I don't know the last time that we had ever done that
So clearly, maybe we didn't emphasize enough how much help we were getting
And certainly now it's difficult to go back to the sales force and remind them that we had help and now the help isn't there anymore
We've got to now focus on fundamentals
We've got to go back to selling new clients and the old-fashioned approach of ADP of having a reasonable mix of head count growth and productivity growth
And I think when I look through the numbers and try to normalize for ACA, we feel pretty good about where we are in terms of head count and also sales force productivity
It's actually a fantastic question because this afternoon I'm actually going to speak to our midmarket sales force about some of the things that we can and need to do in terms of getting ourselves reset here for a different environment
I think, as we said multiple times today, we're not going to a zero regulation environment
So 99% of the laws and regulations that affect employers are still in place today that were in place two months ago, and they're probably going to be in place a year and five years from now, and there may be new ones
And so we have always been there to help our clients with compliance and with regulation
Having said that, we're clearly entering a period of time with tightening labor markets where I think many employers' attention is going to turn to how to attract and retain a workforce
And this is something that we've been building to over the last four to five, six, seven years by investing in our talent management suites
by investing in tools to help our clients use data and analytics to run their business better and manage a better workforce
So we've been preparing fortunately for this strategic opportunity here for many years, and it's coming and it's coming fast because I believe we reported the ADP Employment Report this morning, and that's only going to add to I think the tighter labor markets
Because as we've seen multiple times in the last 20 to 30 years, as unemployment gets to the level that it's at now and we understand that there might still be a little bit of slack as a result of labor force participation, but that slack will also inevitably come out of the system, whether it's in 6 months or in 12 months
It may have already come out, we don't know
But besides higher interest rates, which are going to be beneficial to ADP, we think this is going to be beneficial to ADP's new business bookings and to our approach to the market, which is to help our clients and products exactly with this topic
How do you attract and retain the best workforce when everyone else is trying to do the same thing? So we're not ready to say there's a war for talent yet, but clearly there are pockets of that
And I think when that happens, I think some of the products and solutions that we've developed, this acquisition that we've just done with TMBC, I think, position us well to help our clients with that
So as we mentioned, obviously some of the uncertainties that have been created as a result of this change in administration and the talk about repeal and replace of ACA are certainly not helping us in terms of our new business bookings here in the second quarter, but we still are pretty positive about our business model
I think you've heard that from us today that we're well positioned for helping our clients with what are becoming very, very tight labor markets, and we're also optimistic that there will be some change
We know there's going to be change, so repeal is clearly in the eye of the beholder, but given that there's a commitment to maintaining 20 million Americans on insurance we believe there will be some new form of tracking of regulation and that we will have something that we can help our clients with if not the current ACA products that we have today
In the meantime, we're going to rely on our historical track record of being able to navigate through obviously these uncertain times and wait for the inevitable pickup in the economic activity as well as government activity around some of these changes
We continue to invest in simplifying our portfolio, as <UNK> said, including using that as one of the criteria for acquisitions
You've heard us talk about how we're aligning our service model
We're very excited about what that's going to do for the quality and long term cost of our service, and as you heard from us today, we're certainly not backing down on our distribution channel
So we continue to invest in our sales force and grow our sales force because we plan on continuing to grow
So we appreciate your time today
Thank you for joining us, and we appreciate your interest in ADP
