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

Good afternoon, everyone. Welcome to Citi Fintech -- I'm sorry, that's the other conference, Citi Global Tech. Glad to have everybody here. My name is Pete Christiansen. I'm on Citi's Payments Processors and IT Services team. Great to have you. And we're really excited today we have ADP, Don McGuire, CFO. Thanks for joining us. I think second year?

Second year in a row.

Second year in a row.

Thank you, Pete. Thanks for the invitation.

Absolutely. Absolutely. A lot of exciting things going on here with the business, a number of dynamics certainly going on in ATM payroll more generally. And we've had a number of sessions on the HR side today, and it just seems like the complexity is just getting more and more, which we like, which is good.

Which is good thing. Yes.

Yes. For sure. Why don't we start -- let's dig into a little bit more on the demand environment, and then I'd love to go into some of the strategic priorities that Maria laid out on the last call, which are getting a lot of chatter and talk about. But one of the things I certainly want to highlight client retention still so robust, which is really interesting. ES bookings growth still highly resilient. It's pretty interesting. Increasing demand for outsourced HR services continues to decline. And particularly and just in this last quarter where we would expect to see some deceleration, it seems like the bookings growth is still sticking there. Just wondering if you could talk to that, what you're seeing in the demand environment, I would say, just in the last quarter or 2? And perhaps what are some signals that you're seeing on the demand front?

Yes. No. So certainly, we had a very strong year with 10% growth in the ES segment and certainly a very, very strong fourth quarter. So that was very positive. I think the demand environment continues to be pretty strong and pretty resilient, generally. And you touched on some of the reasons for that. Certainly, the complexity of the payroll industry and the complexity of what clients and prospects need to do things efficiently and to the letter of the legislation, et cetera, is not getting any easier. So certainly, we do expect that the demand environment will continue for a long time. It is a $150 billion market. So we think there's lots of room to grow, and we'll continue to grow. But our demand has been strong. And you touched on a few things there as well in terms of just the expertise. So Maria laid out 3 pillars. She laid out strong technology. She laid out expertise in outsourcing, and she laid out global. And I think that -- we think that focusing on all 3 of those attributes or pillars, if you will, are going to be very helpful for us to continue to drive bookings and growth over the mid and long term.

We're going to dig into each one of those pillars in a little bit. But I do want to -- one of the things that caught my attention last quarter, in particular, some of the puts and takes. Clearly, HRO in mid-market continues to be a standout. What do you think that's driving that value proposition at this particular time?

I think it certainly was a standout, continues to be a standout. It's back to -- it's that middle pillar. It's that expertise in outsourcing. It's very difficult to find individuals to work at your company, to do these things and be up to speed and all the complexities and the regulations and the requirements. So companies are more and more willing to look to us to take that burden off of their shoulders and to step up and do those things on their behalf. And I think as back to just complexity increasing across the industry, whether it's here in the U.S. or in North America or globally, it's getting more and more difficult to keep yourself in line. And so companies are looking to outsource as much as they can to make sure they stay compliant and effective in paying their people and paying them accurately, efficiently and to the letter of the regulations.

No, that's -- it's just been a powerhouse just for a number of quarters, not just the last quarter and continues to be a standout. That is impressive. I do want to touch a little bit on down market, and I believe you're not the only provider that's kind of called this out. We're starting to see a bit of a normalization in new business formation. I mean, there was a ton of new business formation during the pandemic. We're kind of coming on the other end of that book out -- the other end of that bookend. Nothing too dramatic on the downside, but at least normalization, maybe some out-of-business losses picking up there. Nothing too dramatic, but just wondering what ADP's take is on what they're seeing in the down market as it relates to that area.

Yes. I'll start with new business formation. New business formation continues to be pretty strong, all things considered. So we're happy to see that. So it's good. Certainly, on the normalization of other businesses, et cetera, we are seeing a little bit of that. But I'll go back to your opening comments about our retention. Our retention has improved across the business, and it's improved significantly in the small business segment. And I would say that if we look back to where we were pre-pandemic in '19, I think the improvements in NPS scores, the deployment of the RUN engine across all of our 800,000-plus clients in that space, I think we have seen a step up. So although we've seen a bit of a normalization in the other business, et cetera, I do think that our improved NPS scores and the way we deliver our services is going to result in a step increase, in our retention rates in the down market in particular.

I have this conversation with clients often. I think about the pandemic, particularly for the HCM providers payroll, seemed like it was a step change and more users going to the big national providers, more tech demand needs, complexity like we highlighted earlier. But the service model also was a standout, building a lot of goodwill with your underlying users. But I mean, given all the rapid changes on what's happening, how do you think investors should think about that era and all the hard work that was kind of put in during that period and how you see that benefiting the brand more generally as we get into a more normalized period?

Yes, there certainly was -- there's no doubt that during the pandemic, there was a lot of trepidation about changing and -- but you had to deliver good service. And I think we did that. And given our global footprint and where we operate, we literally had thousands and thousands of changes to make in multiple countries across the segments to make sure that we could comply and keep abreast of all the regulation changes that all these governments were rolling out to keep people paid, keep people in employment, et cetera. So we're very proud of what we did there. I also think that we have a very strong training organization. We make sure that our associates know how to deal with customers. They know what to expect from our customers. And I think they did a very, very good job. And certainly, we saw our NPS scores improve through the pandemic, and they've continued to improve. So it's more than a pandemic bounce, if you will. I think we've instilled confidence in our client base, and that's going to continue for a long time. So earning the loyalty of those customers and keeping them longer I think is something that we've done and something that's going to continue to help us as we go forward.

I mean, you talk about the balance of trade competitively, and you can break that down in a number of ways across all the different market segments. There's certainly -- then a big national provider, then you also have regional and the self-filers and all those areas. But what I think what struck me is the service model versus that pure software kind of model. It seems like the service model is standing out a little bit, and it's benefiting you competitively. Do you think that's part of the reason? I mean, obviously, the tech has come a long way, and you guys have an outstanding platform. But do you think that service model is making a difference?

Absolutely. I think that's what we say about ourselves. We're a technology company with service. And so it is very difficult to build product that is used seldom. So if you think about a situation, you think about some of these use cases where an employer may for the first time have a paternity leave or have a retirement or a termination, you can build all those things in the software, and they are in the software. But if you only have to use that once a year, once every 6, 7 months then the chances are you're going to struggle with it. So we're very proud of the fact that you have a way to reach us through chat, voice, e-mail, whatever, multiple channels. And we can take your query, and we can answer it quickly for you. So we think layering that service on top of world-class technology is a winning formula. And I think we all know that our employees use our own software to provide these services to clients, specifically in the HR outsourcing that we mentioned earlier. So we have to have good tech, not just for the clients externally, but we also use the same tech internally. So having good products with good service on top is a winning formula.

That makes a lot of sense. Another area of talk is what's going on in the PEO, which is kind of interesting because it juxtaposes what's going on in HRO, less insurance attachment rate, but you're seeing this great pickup in other areas -- the outsourcing business still. What do you think is driving some of that preference change, value proposition perhaps? And do you think there's a point where we start seeing PEO begin to normalize, returning to previous growth rates? How does the company think about that business in particular?

Yes, I think we need to wind it back a little bit and just look at the growth we had coming out of the pandemic. So the PEO growth exploded coming out of the pandemic. It was a very easy way for employers to go find staff, not just to do the work they do in their own businesses, but also to get people to do payroll and HR on their behalf, safety training, et cetera, that they were really struggling to find associates in the marketplace to do. So now we've got some -- we have some grow-over problems, certainly. Keeping up those growth rates coming out of the pandemic has been somewhat difficult. Certainly, things have started to normalize, and things are starting to come back. But we do believe that it's really a strong value proposition. You mentioned the attach rates. The attach rates have bounced around a little bit on some of the medical and some of the benefits. But we believe that a lot of -- most clients come to the PEO because they want to have the opportunity to offer those Fortune 500-type benefits to their employees in a small company. Whether the employees choose to take on those benefits themselves or sign up for those benefits, that's for the employees themselves. But generally, the employers want to offer these benefits to attract employees to their companies. And we think that's a very strong value proposition. We think it's going to continue to grow and get back to the kind of growth rates we had pre-pandemic.

Fantastic. That makes a lot of sense. Let's dig into some of those strategic priorities and the pillars that Maria laid out last quarter. I'd like to start first on the tech side, the tech development side, things like Next Gen Payroll, Next Gen Time. Implementations are now kind of speeding up on the enterprise side. It seems like there's a lot going on here. Well, I mean, obviously, there's a user experience and engagement improvement, hopefully. But how do you think about monetization on top of some of these new changes? Does this help drive attach rates for increased module sales? Does this help on the pricing front? What about cost of delivery, too? Those are, I think, key topics that some of these tech innovations that ADP is driving could have a meaningful impact.

Yes. So the tech innovations, I'll start with our -- with the small business market. So certainly, having those 800,000-plus clients sitting on the single -- a single platform, RUN, certainly helps with the efficiency and the margins, et cetera. Being focused on one engine and being able to make sure that new development and new features, new functions, et cetera, are focused and your spend is focused in a single area. That's certainly helping us. As we go out into the market, we're talking about our Workforce Now and Pi offer, our Next Gen Workforce Now. And that's certainly more and more of our new sales are landing on that new product. Once again, gives the customer the ability to do more things on their own, policy-based engine as opposed to more code-based engine, so certainly more modern. Once again, allows the customer to do more and also takes pressure off of us to provide those services or those changes directly. So lots of opportunity. And then just generally across the business, we continue the journey outside of North America to make sure that we're getting to best-in-class products in most of our countries. So even though we still have some work to do admittedly, we do know that most of our sales in individual countries go to the best-in-class product in that country. And that certainly is also helping as we continue to move to fewer and fewer platforms and better and better margins. I should also mention that in the enterprise space, and we have mentioned this on the earnings call last quarter that we do expect to close down 3 more platforms in our enterprise space, once again, improving the efficiency and getting our focus on fewer products.

Simplification, clearly an opportunity there. I would imagine it's a lot easier and certainly time to market to bring new feature functionality as it comes when you do have more of a unified set of products.

Absolutely. And you also get to make sure you focus more of your spend on single products as opposed to diluting that spend across multiple platforms.

That certainly makes a ton of sense. In addition to this, a little bit on the enterprise end of things, Lifion has been a Next Gen kind of platform that -- that you've talked about for quite some time. It seems, obviously, the pandemic was a hindrance to a lot of the implementation work there. And we all know that enterprise implementations can be lumpy at times. But it seems like that is now beginning to finally accelerate. You feel good about the implementation schedule going forward. Can you just update us where we are in that timeline? And how do you see some of that playing out for the remainder of the fiscal year?

Yes. So first of all, we did have a very good quarter with respect to sales of Lifion at the end of fiscal '23. So we certainly have a healthy list of clients to implement, and we still have strong pipelines. So we are making progress, although I will say that it's not nearly as quick as we would have liked it to be. We always want it to be faster, but it does feel like the momentum has increased, which is very, very good for us. I also think, though, from an investment perspective that given the size of our national account business, which we shared with you on several occasions, it's going to be a while before that product actually starts to move the overall revenue needle to the extent that we would like it to. But we're certainly making good progress, and we're very confident in the success we're going to have.

I mean, I think on the enterprise space, which is always tricky, cycles, what have you, and a lot of enterprises are getting more challenged right now. But I would imagine, over time, it would be a lot easier to drive new product innovation on top of these things. I think, I even remember Carlos discussing there's still a lot of clients on Main Frame. And you need Cobalt engineers to engineer these changes. So it's quite -- it's good to see that things are starting to come around there.

Things are moving. We're very -- we're happy with the progress. Happier as a CFO if they're going faster, but I have to say that.

International is obviously another big topic that Maria laid out. Expansion in Europe, Asia Pac, another key priority. Can you give us some taste of the incremental efforts there are to bring ADP's product portfolio internationally? I mean, I think we -- in an earlier discussion, we were talking about there's the interface level, then there's the gross to net and all that. And then I think you mentioned something about last mile, which I thought was super interesting. Can you lay out some of those complexities versus implementing new users here domestically?

Yes. So certainly, the international is a big opportunity for us, and the enterprise international kind of overlaps somewhat. So I think it's important just to call out that our GlobalView engine that we -- our GlobalView offer that we have, we're now going into -- we'll begin country 44 and 45. So Morocco and Israel will be going live soon. And we now pay literally millions of employees on that platform around the world, including here in the U.S. And then we have the Celergo offer that is the long tail, if you will, of those big companies who may have 4,000 or 5,000 in a single country, they not only have 2 or -- 200 or 15 in smaller Baltic countries or somewhere else in the world. So we were able to put that together into a single experience through a front-end dashboard. So that's allowed us to continue to grow through into multiple countries. And in some cases, the small countries are served by our own payroll engines in many countries in Europe. And in some cases, we have partners in some smaller -- much smaller countries where it may not make sense for us to have our own offer. But we are making progress there, and it's continuing to grow. But if we think about things like Next Gen, Workforce Now and Lifion and Pi as a pay engine, there are 2 things that we're putting into all of our development. One is security first. That's such an important thing in our industry with respect to data privacy, et cetera. And the second is global. So the Pi engine division and more than just division, we actually have the Pi engine working in several countries around the world. We're extending that, and we are looking to have single pay engine becoming the go-to engine in more and more and more of our business. And one of the things we announced in the last earnings call is we're bringing Roll, which is a product we have here in the U.S. to international. It's important to note that the Pi engine is underneath Roll. So we've already started that deployment, and we think that's an exciting place for us to be.

How should investors think about scaling in some of these new markets? The go-to-market, obviously, in some of your international markets, you rely on partnerships, then there's certainly the organic route. Maybe even M&A could play a part of the scale up. And this is going -- I know this is a multi-chapter kind of process. However, from a -- if you could paint a broad brush, how does ADP think is the right way generally that they're going to scale in some of these new markets?

Yes. So I'd break international down into 2 areas in particular. So we do have domestic offers. So if you go to -- we are #1 payroll provider in France. We're the #1 payroll provider in Brazil or #1 or #2 in Australia. So if you look at the domestic market on its own with downmarket and mid-market clients, we're already doing very, very well there. And then back to the conversation that we were having earlier about GlobalView and the enterprise, international-type clients, we already have a different product there for those much larger clients. So as we think about, going forward, in some of these markets, the big ones, in particular, getting our own -- getting the more modern offers, the Workforce Now, Pi type, the Payroll engine into these markets and giving us back to the opportunity to focus on fewer engines so that we -- our spend and our development is more focused, that's where we're going. And I think that's going to help us continue to scale.

So you talk about best-of-breed a lot. And then it seems like this is a bit more of a platform approach. And I guess when you go into these markets, how do you think about your go-to-market in terms of that way? Is it, hey, we lead with a certain level, land and expand kind of strategy, we beef up certain modules along the way for these particular markets or that kind of approach? Or is it, hey, let's sell the whole platform at once all or nothing, or you can eat buffet?

Yes. So I think it's important to know that we're on the ground in 40 countries today. So we have good distribution. We have good presence. And I think that differentiates us from others who are announcing that they're going to international. We've been there for a long time. We're on the ground. We understand from A to Z at the other end, how to get the front end in and how to get those taxes paid and those remittances made. So we understand the whole component, if you will. So I think as we land, I think it's more how do we get more commonality between the countries where we're in so we can continue to scale across the product and the countries. We're not really -- there's not a lot of countries where we're not. So there's not a lot of us -- need for us to land and expand. I think there's an opportunity for us to deploy some of our newer Next Gen offers in more countries and make sure we can grow more efficiently with common products, better scale, more efficiency, et cetera, as we move forward. The other aspect of international, just like in the HRO market here in the U.S., is there's an awful lot of HR outsourcing, if you will. So we do offer similar things to HRO in multiple countries around the world, too. And we're using our own products in the background to do those things. So we are continuing to grow in that way as well. We can offer HRO-type services in France, Brazil, Italy pick a country, in many, many countries. So we're growing through that aspect as well in international.

But also the timing of the Next Gen, that plays a crucial role.

Yes. And it will help certainly. Once again, there's less fragmentation. We also, in the last -- we just bought one of our payroll partners in Sweden on Friday. So we've got a small -- another tuck-in on Friday. We bought our South Africa partner not too long ago. We bought a company called Securax out of Bangalore to provide a time and attendance engine for the Middle East, India and the Philippines. So we are adding some adjacencies to our existing presence. So I think we can continue to grow in that way as well.

Really interesting conversation earlier. And I think I've been asking everybody this question. It's really an AI and how it could help cost of delivery, also engagement, so both system of record, system of engagement at the same time. And had some interesting comments, a lot of it really on the active agent side and tailoring that service model using generative AI to simplify things more and increase automation. Can you take us through that journey? Perhaps also talk about the level of priority. Is this a big bang event for ADP? Or is this something more of a gradual thought process more longer term it will come to fruition?

Yes, I think there are lots of opportunities with gen AI. And I can tell you that once a week, I, with the rest of the Executive Committee, spend an hour with some very expensive consultants, making sure that we're focusing on good projects and making sure we're prioritizing accordingly. So that is something that we do weekly. I do think it's going to be a bit of a build. I don't think there's a silver bullet and we're going to see a step change tomorrow. I think there's a lot of good ideas out there. I think the agent assist is one example. I think in our case because we do have 1 million-plus clients, just the sheer volume of queries we get and the opportunity for us to use gen AI to go through and parse those queries and understand what's coming up most frequently or does that mean we can make changes in the journey to our products? Does it allow us to provide answers and perhaps provide those -- some of those answers directly to our clients without the need for an agent in the middle? There's all kinds of opportunities there. But I do think it's going to be a bit of a build. I don't believe that we're going to see a -- we're going to wake up on a Tuesday morning and find out that things have changed incredibly. It's going to be gradual. It's going to take time to deploy these things.

So no 500 basis point increase to the EBITDA?

Not tomorrow, no.

But it's a big pool. It's a big pool to drive efficiency from. So the opportunity set is impressive.

It is. The opportunity side is impressive just on the sheer number of clients we have and what we can learn from having that many clients. The other place where gen AI can be helpful for us is because we have so many clients, we have a database of clients and client information second to none. So we have the opportunity to use gen AI to mine that database for particular use cases or to understand what's going on in the market better, to provide information to others who may be looking for employment verification or other types of things. We have a very, very large database to work with. It also leads to the opportunity to do natural language queries around -- it's easier now than it was 10 years ago to answer hard questions about who joined the company between the 2nd of December and the 3rd of January. But if you can start asking those questions in natural language as opposed to going through the drop-downs and the screens trying to get to that answer today, that's going to be very, very powerful. And when you've got as many employees, 40 million that we pay underneath what you do, we think that's a big opportunity.

That seems like the differentiator, and we did also talk about that earlier as well. The tool sets could be common or not just you, but for all your peers and for enterprise software and service providers generally, it's really about the data. And having that depth of data is the real differentiator.

It is key for sure.

That's interesting. And I do want to talk a little bit about the fiscal year '24 playbook. This year, outlook calls for 4% to 7% ES bookings growth. Moderate client attrition, which was encouraging, but also 130, 150 basis points of U.S. margin expansion, a multiyear high in part afforded by the higher float income, but can you discuss ADP's balanced approach versus growing the business, driving the top line but also delivering consistent year-over-year margin expansion?

Yes. So we're very focused on margin expansion, and the float has been certainly nice to have. I think though, what we've done at ADP for the last 74 years or so is we're always focused on the long term. So even though there's been lots of pressure from investors to have all of the flow drop to the bottom line, we've made sure that we had a good process, a regulated process to make sure that we invested in an appropriate amount into the business. So last year, we talked about adding salespeople. We talked about adding some service capability and in some ways to cope with the growth we were having beyond float increases. So making sure that we have a balanced approach is something that we always do. And as we shared in our earnings call and as you can see in our release, we do have continued opportunity with float because we do have a number of -- a lot of our investments are maturing that are certainly currently at interest rates below what we're currently earning. So as those mature and we reinvest, we do expect we'll have some tailwinds from float for a few years to come. However, just to temper that a little bit, we're not going to see the growth that we saw in -- that we saw last year. We'll continue to see growth, but not 80% like we did last year.

It takes a while to come on, but it stays for a while.

And that's one of the differences, by the way, to what we see from some competition. We have had this laddered approach to our investment strategy for some time. It's a bit of an opportunity cost to that today because short rates are -- with the inverted yield curve, short rates are higher than long rates, which is only 5x in the last 50 years. So that will normalize as well, we expect. Otherwise, all the capital markets in the world are out of the window. But at some point, that will normalize. And we do think it's the right strategy, and we will benefit from it.

I think it's super interesting that you bring up reinvesting some of that float and this is an area that I've been trying to drive with some clients. It's interesting now, particularly in the down market, right, and when you think about your competitors. As float becomes more of a feature, the view is, hey, okay, now I can invest some of that into pricing -- into retention and market share gains. And you can use that as a tool where a lot of your competitors are disadvantaged in that area. Do you see float income as a tool per se to drive market share in maybe areas on the payroll side specifically?

I would say indirectly. I think having more float income allows us to perhaps spend more on organic development, could allow us to have the opportunity to do more M&A, but indirectly. So -- but I think it's important to use the float effectively, so to make sure that you're not letting it all simply drop to the bottom line, and you are taking the opportunity to invest in. I mean, what we have done at ADP and will continue to do is we grow incrementally. We're not shark teeth-type growth company. We like to grow consistently, persistently and expectedly. And so that's what we're going to continue to do. So we'll make sure that we invest -- reinvest accordingly.

No, that certainly makes a ton of sense. I do want to talk a little bit about -- and that being, in particular, at least my math, and I could be off a little bit here, but back of the envelope, incremental flow drives about 30 to 40 basis points of the firm-wide margin expansion in fiscal '24. So I guess we should assume -- or investors should assume pricing tailwinds, cost inflation, FX, modest positive to the EBIT margin? That makes -- yes, that does make sense. And then one of the areas I do want -- back to the PEO side of the business, and we've seen a lot of health care premium inflation here, ADP is completely insured and hedged there. Do you think this opens up -- will be -- present a challenge for some of your peers who do not have that same level of protection? And do that offer ADP an opportunity?

Yes. I think that -- I don't want to speculate too much on what's going to happen to them. But what I would say is that we think that being fully insured with the medical is a bright thing to do. Back to my comment earlier about shark teeth, we continue to deliver consistent earnings, and they're predictable. And I think if you're uninsured, you risk not being predictable. And I think part of what investors like about the ADP model, be it in PEO or be it in ES, is that we have good predictability. And so not being insured in that segment, I think makes you -- it exposes you to risks and lack of predictability.

No. That certainly makes a lot of sense. I thought it was important to drive that point though. Let's chat a little bit about capital allocation then maybe we can see if there's any questions from the field. You mentioned a small tuck-in last week just recently. And as I look back historically, we have this big mine map of ADP's historical actions. It seems like there's the more chunkier, bigger M&A activities have occurred more towards downturn areas where I assume there's a lot more valuation opportunities. But as we think about M&A going forward, is -- are the opportunity -- at least the focus on your end, is it capabilities? Is it scale? Is it adjacencies? What are some of the areas of interest that grab your attention?

Yes. So as you know, we haven't been the most acquisitive company. And so we are very disciplined about what we buy. I think that if you go back to maybe the '70s and the '80s, in particular, in EMEA and perhaps here in the U.S. as well, but the -- we did a lot of acquisition, and we ended up with a lot of extra product, if I can say it that way. So we've done a really good job of cleaning up our portfolio. So one of the things we're not going to do is just go buy revenue and additional platforms to say we're bigger because if you're going to buy a platform, you have to have a goal for what you're going to do with it. We're going to buy it with the intention of migrating all those clients, fine, but we're not going to go buy platforms. We may do some client book acquisitions, et cetera, which we do in the small end of the business. We'll continue to do those things. But I do think that the most important thing, there's always a good pipeline, good opportunities to go buy things. Now valuations have been a bit high. I think valuations are moderating. I'm not so sure they're totally realistic yet, but they are moderating. But the most important thing in my mind is that if you acquire things, they have to be good adjacencies, they have to be additive to your business and they have to fit your selling model. We sell on a recurring basis. And if you can't buy things that sell on a recurring basis, then that's difficult for us to model internally and direct our sales force towards doing. So we don't sell big one ticket items. We sell X per employee, per month. And if we can buy things that fit that model, whether they're adjacencies and time or HR or PEO or anything else, if we can buy those things, they fit well. Those are the types of things we're going to focus on.

But maybe more sporadic or more cyclical things, maybe not as much of an interest, more retentive enhancing kind of areas are more of a focus?

Yes. I mean, we've done a couple of small technology acquisitions. Those are fine because they're helping with our tech stack and improving some APIs and whatnot that we're doing. But generally, there's lots of opportunities to buy things out there. But it's just do they fit our model, and is it something that our sales force can consume and they'll be comfortable selling the way they sell today because asking our 8,500 sellers to change the way they sell, it's hard.

No, you answered my next question a little bit right there, and then I'm going to see if there's anything from the field. Valuations, that was interesting to hear. But there are a lot of opportunities out there?

There's always a pipeline.

Really? Fantastic. All right. Just wanted to check to see if there's any questions out there from the field? No? All right, good. I get a chance to do some corporate finance questions. Here we go. So one of the things I think people find attractive about this business is such a high level of return on equity. Your return on invested capital by our calculations has gone up 500 basis points just in the last year, nearing 49%. That's after we exclude client fund balances and that kind of thing. But at the same time, you have rising interest rates. So cost of capital was going up. So when you think about target areas for ROE for the company, cost of capital going up, how do you think about capital allocation, also OpEx allocation in the mind frame of those -- that ROE kind of level that you've been maintaining and improving over time?

Yes, I think it comes back to the capital allocation question, right? So number one is organic investment. So what -- are we investing organically in our product and our capability to deliver the product? I think that's the #1 question.

And with scale, I get the operating leverage.

We get good operating leverage of scale and...

The internal returns that just fall through.

Good returns, et cetera. Yes. So -- and then, of course, we -- as you kind of go down the list, should we be using -- given we have such good returns, should we be doing more acquisitions, right?

That makes the decision more difficult, I would assume. So as you look at possible things out there, can you bring that up to the same level or even help to improve your overall level of ROE in the mid-40s, which, there's not many companies at that level.

It's pretty good.

It is pretty good. Fantastic. Well, Don, thank you so much. This is a really interesting conversation. Always great to have you.

Thanks, Pete.

Thank you.