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

Absolutely. We have been modernizing for 74 years. Is the way I think about it. If you ask me where we are, we're still in the early innings of modernization. I talk a lot about modernization. To me, it's about growth, it's about margin, it's about the things that everybody knows ADP is here to deliver. We spent a lot of the last decade or so speaking to transformation. To me, transformation was really about getting ourselves ready. So all the things I just mentioned in terms of modernizing our products, our current generation, downmarket, our mid-market offering, all of those have been anchored in transformation. The experience that I just spoke to in terms of our clients' ability to engage with us in a frictionless way, again, that's all been part of our transformation. So I think of it as Transformation is kind of what we've been doing internally to get ready. I speak a lot more to modernization. And for me, that's really about the client lens. It's really about, again, having best-in-class products, best-in-class tools, to ensure that our products are as modern as our clients would expect. And at some level, it's interesting. I say we're in early innings. We are. We still have so much opportunity, even new -- and I'm sure we'll get to it, but new technology that's coming that will yield the next level of modernization. So while we've been modernizing all along and we've been transforming for a decade, our work has just begun, and I think it will be continuous. And that for me is really what it is. Because the more we modernize, the more we have the ability to invest. And we invest in distribution and growth and we invest in margin and return shareholder value. So to me, kind of this virtuous cycle that ADP's had for decades to modernize so that we can grow and return margin and do it all over again is pretty winning formula.

Yes. No, it's shown. Whether it was running to the cloud, embracing data, ADP wasn't afraid of it and still delivered on the margin expansion. Despite -- even with all the pressure to invest, it still came through. So of course, at a tech conference here, I know generative AI is going to get a lot of attention as a big tech wave or big part of the hype cycle, whatever you want to call it. And I think I asked you on the earnings call, Maria, around generative AI, maybe because I ran out of questions. But no, it is something I care about, I think a lot of investors here care about. So tell us, sitting in your seat as CEO, how are you embracing generative AI? How disruptive could it be? And as a services company, I would think there is a lot of opportunity.

There's a tremendous opportunity. And by the way, I was very grateful for that question. It came at the tail end of the earnings call, and I'm grateful for it today because it's very exciting for us. It's very exciting for our industry. And maybe I'll start there as somebody, and you have as well, who's been in this industry for 26 years and kind of watched it firsthand. What I would say is generative AI is really the next natural evolution of HCM. So if you think about HCM over time and you dial all the way back to how did HR start, and it really started as an administrative function. It started as a function to keep track of people. That's actually kind of how payroll was initially -- payroll was where you tallied everybody on a roster, if you will. And that's really what HR was in the beginning. Quickly moved into kind of behavioral HCM. And behavioral HCM was when HR realized that, more than just keeping track of employees, you need to ensure that you're developing them and keeping them happy and all of these things. And that also happened kind of in the middle of the last century with kind of what happened with the unions and things of that nature. And so -- that's kind of where HR was spent. Then came really in the early '80s and '90s came strategic HR. And that's when companies started thinking differently about their global footprint and access to talent and how they wanted to run their companies. And for me, what was so exciting about this time, because that's when I stepped into this company, was it was the time where HR got the seat at the table, at the C-suite, at some level, side-by-side with the CEO, to ensure that whatever the company was thinking about from a strategic perspective, HR was able to map to that and HR was able to contribute to that. And so strategic and global HR is where we were until about the last decade. And then came HR technology, and where technology functions. So that's the history lesson of HCM technology for a minute. And that's -- to me, where we've spent the time really trying to sort through HR technology. But while so much HR technology and HCM tech exists, the candid answer is it's not always easy to use. It's not always easy to get that strategic report that shows you where your labor workforce is across the globe. And so to me, what's so exciting about generative AI is that it's a monumental moment in that, for the first time, all of this HR technology and all of this data will become usable in a more meaningful way. And that's a really big deal for the industry, but it's a really big deal for ADP because we have unique data and we have more data than anyone else. And so I'm excited to step into that, I'm excited to watch that evolution in the industry. But how are we thinking about it for us? I think the first is for our clients, right? So I mentioned earlier the commitment we have to being client-centric and how we think about our products and really putting AI inside. We have that already. We have artificial intelligence inside our products that serve up, whether it's payroll inspection, to ensure that payrolls, again, get out on time and accurate, or it's other ways. If you think about HR -- the function of HR, so much of it is administrative, you said services company. We all have been speaking to things like job descriptions, handbooks, writing reports. I actually saw a use case over the weekend, real time, where generative AI was consuming a qualified benefit plan, and in natural language, was able to just return, give me the output of anyone over this group that needs a distribution. And that's incredible. I mean, that is a -- so being able to feed a policy in, and natural language return, that level of reporting. And not to get all geeky about reporting, but these are meaningful experiences for our clients. And then kind of switching gears and talking about us for a minute. Generative AI, we're talking a little bit about this backstage. For us internally, as we think about it for ADP, it's really -- it's both, right? It's both the commitment that I have to this company, which is driving growth as well as returning margin. So on the growth side, today, as you know, we get about 50% of our business from our existing client base. And so this ability, and we have AI tools today, but Generative AI is going to change this game for us, which is being able to serve up the right lead to the right seller at the right time based on attributes and buying signals and times, that's a game-changer for us. And so very excited about what it can do for us on the booking side. And we've been in that space already. And then I think the other is operational efficiency. And so back to transformation, modernization. We've been doing business process improvement for many, many decades, and this will be the next level of that. And so when I think about anything that has to do with the service agent and a service assist, whether it's keying case notes, and we're already playing with these things, and it's incredible, the efficiency that it will yield for us internally. So all the way around, I'm excited for the industry. I'm excited for ADP and the data that we have and making it more meaningful for our clients. I'm excited to continue to put technology and innovation right at the forefront of our clients' experience. And then I'm really excited internally both for growth as well as efficiency.

No, it will be fun to track. Maybe -- because I get this question a lot Maria. Just with all the data you have with across all these employers and employees, I know a lot of other companies are trying to tap into the same data you have and do things like income verification. So what are you doing now? Were you actually monetizing the data? What are the limits on what you can and cannot do?

It's a great question. I think a lot about this. As you can imagine, we're also highly governed both internally. We have the likes of our Board and others making sure that we're doing the right things as it relates to data. And so as a company who's had a lot of data over a lot of years, the good news is we're well-positioned, back to the conversation we just have, to step into it in terms of the governance and really all the brand values that ADP stands for as it relates to making sure we're doing it the right way. And for us, being able to monetize data, the only way to do that is to do it the right way, with the right level of trust from our clients, with the right level of consent from our clients' employees. So I mentioned the 40 million wage earners. If we are ever to use any of their data, they're doing a consent on that. If we're using it in the aggregate, that's a client consent type of situation. And so in all of those things are things we've hashed out over the last few years. But we are, as you mentioned, working with several credit bureaus on the data monetization, specifically for employment verification. That's been a big contributor to ADP over the last couple of years as mortgage rates were actually at one point at all-time lows. But now even today, there are all sorts of new use cases, even for employment verification, even in the absence of the mortgage kind of hype, if you will. We also are looking at all sorts of other use cases where we can monetize data. The way that I think about it and we as a company think about it is, anywhere we can take a normal process and remove friction. So in the case of employment verification, that's a process that forever was littered with complexity and friction for that, in this example, individual that was applying for a mortgage. And what we were able to do through technology and this partnership and our data married with somebody else's data, was take a process that's littered in friction and make it literally seamless. So it's good for the clients' employees. It's good for the world, or the applicant in this case. It's good for our clients. And it's certainly good for us in our bottom line.

Yes. Well, from a position of trust, obviously, ADP is at the top of the list in terms of being the gold standard. So the governance piece is going to be important here, I think, as we track it. And it will be fun to go. So we've got a little less than 8 minutes left. I want to hit a few more topics, if you don't mind, Wisely. Yes. So I think you've heard me say this before. I've always thought of ADP as the sleeping giant in fintech as you touch so many employees, you push funds into their accounts, and so the opportunity to bank be underbanked and provide them this Wisely app and give them the tools to be banked and have a debit card, et cetera, seems quite large. So where does Wisely rank for you in terms of the opportunity to be closer to the employee?

It ranks high on the list. We continue to be, like you are, very excited about our Wisely offering. It is an ability for us to connect and bring value directly to our clients' employees. So the sleeping giant, to use your terms, or this consumerization, if you will, of these 40 million wage earners. To me, it's all about meeting them where they are and where they're engaging. And many of them need -- in the case of Wisely, they need access to their wages in a different way. They need access to pay cards in lieu of checks for various reasons. And so I'm very excited about this in that it will create this ability for us to bring value. And as we grow that value, I have no doubt that the offering will continue to grow. Some of the things that we're doing is bringing financial wellness into that app. So we're actually helping, you mentioned the unbanked, that is a part of the target market. There are also many others. But this concept of financial wellness kind of as an ability for us to help our clients, I talked about it on the last earnings call. We have over $1 billion that has been saved automatically through this wellness app. Again, our commitment to the world is to make the world a better place, certainly, that's one way to do it. And I think all of these ways, whether it's through Wisely or even our ADP mobile app, where we have 10 billion (sic) [ 10 million ] users that engage to either clock in or check their pay statements or look at their retirement, that's another key place that, if we can continue to drive value, we will tap into this sleeping giant, if you will, of the connectivity that we naturally have today with our clients' employees.

Okay. No, it's fun to watch. So with -- valuations have come in quite a bit for some of the fintech names. This isn't a specific for-Wisely question. But just the balance of doing inorganic investments now at this point in the cycle, versus investing organically, where do you stand on that?

Fair. We -- so our capital priorities, we are committed to organic growth. We are also committed to M&A. We're committed to dividends. It wouldn't be an ADP stage presence without shouting about our dividend coming up on 50 years next year. And then share repurchases. So double-clicking really quickly on the M&A side. We are very disciplined as it relates to how we think about M&A. And valuations were incredibly high. They have come down, but we're going to continue to use the discipline we've always used, which is making sure that it has to be incredibly strategic for us to do something that would be outside of the commitments we have. Whether it's growth or on margin, it really has to fit well for us. But we do a lot of tuck-ins. And I don't know if we always get all the credit that, in my opinion, we should as it relates to the amount of tuck-ins we do in a given year, just to kind of give a couple of them. We recently acquired one of our Streamline or Celergo partners, our international partners in South Africa. We acquired a labor management tool in Italy called Infocom. We acquired a business in Ireland to provide payroll there for our clients. Again, that was one of our partners. We recently acquired a company called Integrated Design, IDI, which is really a mid-market ability for us to integrate our offerings. So we do a lot of these tuck-ins. And the goal would be, especially as you mentioned valuations changing a bit, there might be an opportunity for us to accelerate some of those things. And anything bigger than that, again, we're going to be very disciplined as it relates to the value equation.

All right. Good. We got 3 minutes left. I'm debating If I should ask you a PEO question or we should close it out. What do you think?

PEO question. I'll take anything.

Well, let's close it out thinking about valuation. I know I've been a little bit surprised to see ADP stock underperfom year-to-date.

Me too.

And so I'll ask you this. What do you think is underappreciated or maybe misunderstood from an ADP perspective? I know you get a lot of questions on unemployment and what's going on with the macro. But we've seen ADP be very defensive through up and down cycles. So what do you think is misunderstood Maria?

You say defensive, I'd say all-weather. And I think -- and by the way, my job is to ensure that we remain all-weather. That doesn't mean, by the way, we're weather-proof. But we are an all-weather company. And so I think maybe I'll touch on 2 things, and we can end on the PEO. Maybe the 2 things in my mind that might be slightly underappreciated by the market at this time. The first is there are so many questions around where we started, which is the unique backdrop of the labor economy and what's happening with employment and is it going this way or that way. And we guide to these things. But when I think about something such as pays per control over time, it has actually very minimal impact on ADP. And you know this, you've studied us. It all averages out over time. And really, to me, taking us back to kind of where I started. What really matters is the HCM demand. And that demand, the secular demand and our ability to lean into it, right, through things like best-in-class product, through distribution. That to me is more important than what's happening with the employment. The correlation or the impact of pays-per-control to our actual results, both bookings and revenues, is very minimal in the context of the demand environment. And so demand remains strong. I think the other thing, getting to the PEO here at the end. I think the other thing that's underappreciated, if you will, by the market, where I believe maybe even the market is a bit confused because all of the PEOs experienced, I think, a heightened impact, as pays per control came back in terms of the post-pandemic year, we all are challenged by these grow over rates, right? And so I think we all had some element of deceleration and strangeness, if you will, in our results at the same time. And I think the market is very keen to try to figure out what is that one thing that's happening in the PEO? And the truth is we're all very different. We serve different markets at some level, different geographies, different sizes. We have different offerings. Some of us have PEO and various components of administrative services offerings, comprehensive services offerings. We are also structurally very different. So while we are fully insured, and that's what we believe is the right thing for the industry, to really look at the disciplined and stable rates over time, many of our competitors are not. And so we all have had impact in the post-pandemic environment. I think the market is trying to make it one story. And the answer is -- and again, I've spent -- I was in that business since 1999. I've watched these cycles over decades, and they repeat themselves and that's all this is. But our cycle looks the way it does because of who we are and everyone else looks a little different, so there isn't just one thing. But again, back to the demand environment, which is what matters. The demand is strong in the PEO. It's not getting any easier to navigate being a client in that space, and we're right there to step into it. So demand on both ends remains strong.

Great. We think we can end it on that note. I'm really grateful to have you, Maria. I'm really excited to be working with you and hopefully we can do this again.

Okay. Thank you. [ Shift done ]. As well. Thank you.

Appreciate it.