Automatic Data Processing, Inc. (ADP) Earnings Call Transcript & Summary

Hi. Welcome back, everybody. And we are very pleased today to have Maria Black, President of ADP , joining us. Maria, thanks so much for being here. Appreciate it.

Thank you. Thanks for having me, Ramsey.

This first question is sort of half intro, half 2-part questions. So bear with me for a second. So you have an extensive history at ADP. You ran sales and marketing, small business services, I think, human resources, outsourcing including the PEO and serving as the GM for ADP in the United Kingdom, if I got all that correct.

You did.

Given the -- that's quite a list. Given that broad experience, how would you compare right now ADP's position kind of current position relative to other periods in its history? The other part to the question is having assumed the role of President in January, sort of what do you consider to be ADP's biggest opportunities for growth moving forward? But maybe we'll tackle the first one first in terms of just how does ADP feel now versus before?

Yes, absolutely. And again, thank you for having me here today. You're right. By the way, that was impressive. Your laundry list is my almost entire CV. I could actually take some notes on that. But the 26 years -- going on 26 years that I've been here, undoubtedly, I've had a wide-ranging set of experience across many of our businesses, inclusive of our international business, our HR outsourcing business, the domestic business around sales, service, implementation and now serve as the President. And I think what I can tell you is in those, as you can imagine, 26 years, it's also been during the duration of many different times, this one being no exception of just changes in the economy, changes in technology, changes over time. And so to answer your question around how I feel sitting here today now as the President of ADP, what I can tell you is that the overall sense of optimism that I have right now for this company is as strong as I can potentially ever remember it. We do feel very, very good about our growth opportunities. When I think about over time, right, these ebbs and flows of economic wins and everything else, what I can tell you is that we -- our industry as a whole, the HCM industry, we've always had strong tailwinds. But right now, we are seeing some of those tailwinds in some of our most high-growth contributors across the business. So that's really our HR outsourcing business, specifically our PEO as well as our downmarket. So our small business solutions offerings, not just the round platform, but the strength we are seeing in retirement services as well is an incredibly, incredibly exciting and definitely yields a sense of optimism. We've also had very, very strong retention. So that's one of the things that we nodded to when we did the Q3 earnings release, and that strong retention is really anchored in what we believe is some of the changes in the economy, but moreover, the client satisfaction scores that we continue to speak to in terms of just the strength that we're seeing and the results of our client clients finding value in what we offer. And then, again, when I reflect on the years that I've been here, what I can tell you is we have the best product set that we've ever had. And so I have the honor actually during our call to speak quite a bit to some of the innovations of late and some of the other offerings we have from a product perspective and definitely feel the strength there. So we do, of course, still have clients -- we're a 70-plus year old company so we do have clients that still have older platforms in some of our upmarket and international businesses, but that consistently is a smaller and smaller portion of our overall business, and it is really about getting all of our clients to this modern platform. So when I think about kind of where we sit today, and hopefully, you can hear the enthusiasm in my voice, it really comes from the environment that we are currently in and all the tailwinds that we believe we have and are leading within our industry. But in addition to that, it's about our improved product position, and it's really about what I see as an incredibly big opportunity for us to seize globally, which is really to get after that $150 billion revenue opportunity that we have.

Okay. And you may have answered this question in that response, which is just what are the -- the second part of my question, which is, what are the biggest opportunities for growth moving forward? It sounds very broad-based and like there's quite a few interesting opportunities. But are there any in particular that you think really will drive growth as we move out here?

Yes. So I think I touched on it a little bit, but we consistently see a very, very strong value proposition in oddly, the strategic pillars that we've embarked upon over the past few years. So the first of that is really anchored in our ability to continue to have best-in-class products and platforms and the global reach of those. The other is the HR outsourcing opportunity, is really remarkable as clients are trying to navigate the environment today, as it relates to the -- in this case, the post-pandemic changes, the tightening labor market, coupled with a very highly complex legislative type of environment. So the HR outsourcing is a place that we continue to see value. And then again, the global breadth and depth of ADP as an organization is really unparalleled. And as a result of that, the continued focus that we have on the global side of our business will yield tremendous opportunity for coming years.

Great. Maybe we can take a step back a bit and just discuss the macro backdrop, what you're seeing out there with respect to the demand environment for the services that you guys offer?

Sure. Yes. So it's been and is a very dynamic environment for our clients to navigate. Many of our clients, right -- I mean this is something we're all talking about, but many of them were hit very, very hard in the early stages of the pandemic. It's interesting now, reflecting on what it is about 2 years ago and the decisions we were making, but also the decisions that were being made outside of this company in terms of the environment, and certainly, that was as an effect of how hard our clients were hit. And so as all of the stimulus money -- by the way, not just here in this country, but really throughout the world, started getting influx into the economy, that continues to become and is even today a very, very dynamic environment for our clients. Part of that is, and a result of that, in terms of what's happened, right, is that the consumer has become incredibly, incredibly strong as the consumers had to navigate all these changes and has had the ability to spend differently. And all of that really has made what we are experiencing firsthand right now, which is a tightening, tightening labor market, and that has made it difficult for everybody to navigate whether you're trying to -- the other day, I was -- my husband, we have some cabinets -- we were trying to get some cabinets filled and or fixed and the contractor said, "I can't find slides, I can't find workers, I can't find anything." So between supply chain and labor, it is incredibly, incredibly difficult for clients to navigate. So for us, here at ADP, it really means 2 things. It does mean what I believe is this continuation we just talked about, which is the secular tailwinds that we've seen in HCM for decades. I think this event, most specifically in the last 2 years, has really reminded companies how much they need help in terms of human capital management. And then the demand has also increased, as clients were forced to challenge themselves to deal with all of these things that were happening in the marketplace. And while they might be -- what we hope is somewhat temporary, they're still definitely continuing in the tight labor market that ensues post-pandemic is very, very difficult. And so some of our solutions, I just mentioned this a bit ago, which is really like our HR outsourcing, is particularly suited to help our clients navigate the times.

And let's talk about bookings a little bit. Employer Services new business bookings accelerated, I think a new record in Q3. So very strong performance with, I think, trends even strengthening through the quarter. I mean can you sort of parse out the degree to which this was a function of some of the end market demand driven by some of the factors that you talked about versus execution?

Yes, absolutely. So we did have a strong quarter. We were incredibly excited to speak to our strong quarter and even more so when you consider that in Employer Services bookings, which is what you asked about, but I'd be remiss if I didn't mention in Employer Services bookings, we had strength but even more so, if you consider that the PEO sales aren't actually included in that metric, right, so we did enjoy a broad-based growth strength in the third quarter. Most of our businesses achieved double-digit growth, and the strengths really continued as the quarter progressed, right? So when we think about the 3 months that constitute a quarter, we did see strength actually heading into the back end of the quarter into March, and that gives us also tremendous excitement and optimism. In terms of the drivers, I think I nodded to some of the excitement earlier in my commentary, what it really was our downmarket business, specifically the RUN platform that serves our small business community continues to just have incredible, incredible strength as well as the retirement services. We have -- I think my -- Carlos actually mentioned, I think he called it gale-force winds, right. So I've said the term tailwinds a few times, but this is a business right now that has gale-force winds, and it's really twofold. One is the attach that our retirement services offering has just the strength we're seeing in the RUN platform, right. So the more RUN clients we sell, the more inherently retirement services clients we sell because the 2 -- one drops off the other, if you will. But in addition to that, retirement services on its own has these gale-force winds, which is really what's happening in the retirement legislative side with the SECURE Act and soon to be the SECURE Act, I guess, 2.0. And so that's an incredibly bright spot for us across the quarter, but also in terms of our outlook. And then the Employer Services HRO, so I say that that way because it doesn't include the strength of the PEO, although the PEO is part of our HR outsourcing offer, but even absent the co-employment model, our HR outsourcing offerings are bringing tremendous strength and value, as clients are looking toward ADP to outsource more of their HCM components in these crazy times. And then last but not least, the other bright spot for us is our international operations. We are definitely seeing incredible strength internationally, as I think the international market specifically was perhaps; one, they actually started the pandemic a bit earlier, if you will, than the rest of the world. But the other is that market in and of itself is used to conducting business in a more remote way. So I think the transition lent itself to specific strengths early, and those strengths have really continued as clients are now more than ever looking to navigate the global ways that they conduct business in a post-pandemic environment.

And Maria, could you comment also on whether that bookings momentum has continued thus far into Q4. I think gale-force winds tend to continue rolling, but I just any commentary on what you're seeing quarter-to-date?

Yes, of course, right. So I would start by saying that I'm not in a position to comment on in quarter or through the end of the year. But I think a nod to how we felt coming out of Q3 in terms of the other strength that we saw in that quarter and the tail end of the quarter, is really what allowed us to narrow our guidance range from 12 to 16 to that 13 to 16. And so we're very pleased with that. We're very excited to guide to the 13 to 16. It is -- and I think the interesting part about it, and when I think back to Investor Day and some of the outlooks we gave back then with respect to our medium-term growth goals, this is materially above that medium-term growth goal. So I think that's, again, just a nod to the excitement we're feeling here at ADP. But in terms of any commentary on Q3 -- or sorry, on Q4 or specifically in fiscal '23, I think it's premature. I think we're excited to get back on the phone with everybody in July to really lay the foundation for a strong fiscal '23.

Fair enough. And you touched on this, too, that the Employer Services booking growth guide is 13% to 16% in 2022. It's really considerably ahead of the medium-term guide. I guess with overall bookings now back above pre-pandemic levels, how quickly should we expect that sort of above normal growth to normalize?

Yes. I think the thing that we are paying the closest attention to is really twofold. It's really what's happening with the tight labor market. and what we're able to do. So just like everybody else, we are ensuring that we're staffed and staffed appropriately. So this is a big piece of the equation for us in Q4 because every Q4, as you can imagine, we ramp to ensure that we're stepping off from a productive headcount perspective into the fiscal year. So that's a piece of the equation. I think the bigger piece that we're also keeping a keen eye on it, and it's interesting and, gosh, it feels almost like a daily event, if not at least a weekly event, which is really what's happening in terms of the strength of the economy, right. So making sure that we are -- so going back to my first point, which is that we are staffed appropriately for what is happening in the economy to take advantage of early this HCM tailwind, if you will. So I think that's a big piece in terms of when the normalization will occur -- will really occur on the backdrop of a continued economic strength and ensuring that we are staffed to take advantage of that strength. And really, it's also, again, the HCM backdrop, right. So I don't see that waning. Like I said, sitting here 26 almost years in, I haven't seen a stronger demand for HCM during my tenure than I do right now. But those things are all kind of interlinked to the strength of the economy.

Okay. I wanted to go back to last year's Investor Day when you were still running sales and marketing -- worldwide sales and marketing. One of the goals was to add capacity through the system through headcount additions. And it's interesting because, of course, on the one hand, it's great for ADP that there's a tight labor market. On the other hand, you're running a business and there's a tight labor market. But can you comment on the hiring environment and your progress sort of adding the sales force?

Absolutely. So our sales headcount was flattish, which, by the way, as somebody who has spent years leading sales and worldwide sales and marketing that were flattish, I don't even know if it's actually a word, but it's something not one I enjoy. But our sales count has been flattish through Q3 and we don't anticipate a dramatic headcount addition in the fourth quarter. And so back to where you started, which was Investor Day and some of the investments that we're making, we are incredibly committed to all things sales in terms of where we continue to invest. Headcount is a piece of that. And in terms of the challenges in this market, right, we're definitely being patient. I think we're navigating this as well as anybody else. I also think about what we do for a living and who we are in the HCM space. We have an incredible value proposition for anybody to come work here. So I'm not concerned that we won't be able to add the headcount that we're committed to. And in the meantime, we've also been making all sorts of other investments into the seller ecosystem. And that's inclusive of modern seller tools. It's inclusive of digital advertising. It's inclusive of our brand and things of that nature. But really, in the end, when I think about how excited I am sitting here reporting Q3 just a few weeks ago, one of the things that's the most impressive about our results is that we have been able to accomplish those results in a flattish headcount environment. So it really speaks to all things in the ecosystem and how important they all are to balance out appropriately so that you can continue to have the results that you have with kind of the hand that your dealt, if you will.

Before moving off of sales and marketing, I want to ask about ADP's recent brand investments. What's the goal here? And what other investments are being made in the sales and marketing area?

Absolutely. So I think I just nodded to a few of them, but I think it's important to point out that it is very much a balanced approach when it comes to brand investment. So whether it's investments into targeted digital advertising, growing the headcount and also kind of this ecosystem of modern seller tools, they just tangibly talk about some of those things. That's everything from ensuring that we have the right type of sales tracking mechanisms. We have virtual tools that facilitate selling in a different capacity and everything from using machine learning and artificial intelligence to ensure that we're serving up the right lead to the right seller at the right time. And so that ecosystem is pretty vast here at ADP in terms of all the things that our sellers are able to leverage. And so all of those things, again, it's really about a balanced approach in terms of where we make those investments. Within that, the brand advertising piece, candidly, as excited as I am. I think I nodded during the Q3 earnings release to #TeamADP, which is our first official athletic sponsorship program with 8 different golfers across the LPGA, PGA and the European Tour. So we're very excited about those programs. But candidly, they're a small piece of our overall go-to-market budget. And it is, again, about this entire ecosystem, the 7,500 sellers that we have out there and enabling them to be as productive as we possibly can with all of these other things that I would like to call air cover, if you will. So candidly, we're pretty proud of the fact that ADP overall these years, our brand is incredibly strong brand equity. ADP has grown a strong brand without having to make these huge investments over time. But that said, we do see a window and an opportunity to spend a bit more, and we're pretty excited about it, and we're confident that it's giving us great payback. But no, I can't imagine that you're going to see a big shift. It's just really about continuing to make smart decisions with each dollar that fuels our great worldwide sales and marketing organization.

That makes a ton of sense. Bookings are obviously very important for any business, for your business, but client retention is obviously important as well. And the good news here is that you guys' retention performance has been exceptional. I guess the question is, can you -- will you try to hold revenue retention at the level at that now? I think it's at about something like 92-ish percent when it was last that you reported. And are you going to hold it there? Or can you walk us through sort of the puts and takes retention might experience sort of moving forward?

Yes, absolutely. So we are very, very pleased with the record Employer Services retention that we experienced, both in the first quarter as well as the third quarter and our near-record retention in the second quarter. So it was a near-record outside of fiscal '21. So really, really proud of where we sit with respect to our retention results in this fiscal year. Part of these gains, they are explained. I nodded to it earlier, a significant Net Promoter Score or NPS improvements. We do have better product. We have more favorable responses to digital onboarding as an example, in our small business space. We're digitally onboarding 30% to 40% of those clients in a given month, and that's significant, right. And the general strength that, that brings and that experience into our overall client satisfaction is huge. We definitely feel like we're in a pretty good spot, as it relates to retention in terms of rest of the year and also as we go forward. As we shared back in November at the Investor Day that beyond '22, our aim is really to stabilize, right, and keep retention stabilized at these levels. But that said, and I think this was stressed several times, I remember we spoke to it in Q2, we spoke it in Q3, we still do expect specifically in the downmarket some normalization as it relates to the strength that we've seen in the downmarket business. And that normalization -- and again, like it's the ups and downs of these economic wins, but it really would stem from higher out-of-business losses. And so in terms of -- for us, our controllable losses, they have been trending significantly below our historical experience. And part of that is kind of going back to where we started, which is its part and parcel. It's kind of all this money that came into the environment, which yielded tremendous results, but it also supported the small business community in a way that -- we haven't seen the eventual story, and I think that chapter is still to be written in terms of when that happens and how it will impact us, but we do expect some normalization.

That makes sense. And a big part of retention is product. And I think on the Q3 call, you also called out a new user experience being rolled out across your product lines. I guess why is this important? And what other tech -- technology initiatives do you see is contributing to ADP's success/performance over the next year or so?

Yes. So I did speak about UX. I said to my partner, Don Weinstein that I felt like UX was like Sally by the seashore because I couldn't stop talking about it on the earnings call. And so it is a mouthful, but our user experience, it's incredible. It truly is a huge investment for us. we're seeing the strength in the downmarket. It's hard to tease out if that's a material contributor, but it has to be in terms of how it's impacting the client experience, how it's impacting our sellers being able to demo this incredible, incredible user experience. So very excited to see that roll across the rest of our portfolio. But this user experience, the reason I'm so excited about it is that the way that we design. It is different than we've designed other things and others are designing other things, which is this research-driven design that we created, which was really about asking our customers as well as those that are not our customers and potentially customers of others in terms of how they want to navigate the payroll process, how they want to engage with us from a practitioner from an end employee perspective, to create an experience. It's incredibly action-oriented in its navigation. And what I mean by that is you don't actually have to be a payroll expert to realize sequentially what comes next. It's very intuitive. It also, as a user leverages the product, it also takes artificial intelligence and machine learning to actually create an environment that's specific to that user. So that next time you return, it will actually navigate the way that they -- the individual preferred. So very excited about that. It's making a meaningful impact when I think about literally the tens of thousands, tens of thousands of demos that our small business sellers are given in a given month and quarter. Undoubtedly, this is making a big impact, both in their confidence but also in the buyer demand. And so very, very excited about the user experience we are rolling it across our ADP mobile app. And again, we're seeing great feedback, great results. How do we know that? We're measuring it in all sorts of different ways, inclusive of types of calls that are coming in, types of checks that are coming in, specifically to the ADP Mobile, why do I care so much about that? Because we have 10 million active users on the ADP Mobile App. It's one of the top 5 most downloaded apps in the Apple App Store. So it's a mouthful to say, but this is all a big part of the story. And it's available in 20 languages. And so we do have an incredible star rating. It's -- already the usability is huge. Undoubtedly, we believe that even with this user experience, the 4.7 star rating we have is only going to get better. So we're really excited about that. We continue to make investments in modernizing all of our existing platforms. And then we're also continuing to invest heavily in our Next Gen platforms, both on the Next Gen HCM as well as the Next Gen Payroll.

Okay. Changing topics here. I think pricing action -- pricing increases, pricing actions came up, I think, on the last earnings call as well. Talk to us about how you guys are thinking about pricing? Where are the opportunities there? How -- what's the sort of pricing philosophy? How does it work at this point?

Absolutely. So we do have -- when I think about price, there are really 2 different ways that you can think about price. On one hand, it's what we do with the existing base of clients that we have, right, so the well over 900,000 clients that we have and what we do with their recurring price. The other is what we do for new business. So I'll start kind of by speaking to a little bit about what we're doing for the base of the clients. In terms of fiscal '22, we're not expecting a material change from about the 50 basis points of price that we tend to recognize. So we expect that to be a normal contribution in terms of the overall target. It might be slightly higher, but not enough to be material to call out. In terms of fiscal '23, we're actually -- this week, it starts in about 2 hours. We are working on our fiscal '23 operating plans. And so we're still finalizing kind of how we're thinking about our operating plans as it relates to price. So I really don't have anything new to share. But certainly, we don't live in a vacuum in that we're trying to be very thoughtful in terms of what to do with price for the existing base, as it relates to inflation, but also what's happening in the ecosystem around us. And that's complicated for ADP and that we do serve so many markets, so many segments across so many various countries and products. And so it is a thoughtful, very diligent process to ensure that we make the right decisions for us and for our clients as it relates to the price. In terms of new clients, we do regularly raise our list prices. That's not something we do generally just once a year. We kind of do it as the market continues to show to us that it's warranted. And so we did put through a higher price increase for new business bookings. However, the contribution of that in terms of how it -- it actually will land is really modest. Certainly, it's not going to have an impact on this fiscal year. If we see it, we will start seeing it as we get into fiscal '23, but it's really modest in terms of a contributor.

Okay. Maria, I think we're about out of time, but I'm pleased to speak with you. Thanks so much for your comments. Very insightful, and it was a great pleasure.

Thank you so much. It was a pleasure as well. Thank you.