05/08/2022 - ADP - Automatic Data Processing Inc.: Earnings Document

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EDITED TRANSCRIPT

ADP.OQ - Q4 2022 Automatic Data Processing Inc Earnings Call

EVENT DATE/TIME: JULY 27, 2022 / 12:30PM GMT

OVERVIEW:

Co. reported FY22 revenue growth of 10% and adjusted EPS of $7.01. 4Q22 YoverY revenue growth was 10%. Expects FY23 consolidated revenue growth to be 7-9%.

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JULY 27, 2022 / 12:30PM, ADP.OQ - Q4 2022 Automatic Data Processing Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Carlos A. Rodriguez Automatic Data Processing, Inc. - CEO & Director

Danyal Hussain Automatic Data Processing, Inc. - VP of IR

Don Edward McGuire Automatic Data Processing, Inc. - Chief Financial Officer

Maria Black Automatic Data Processing, Inc. - President

C O N F E R E N C E C A L L P A R T I C I P A N T S

Bryan C. Bergin Cowen and Company, LLC, Research Division - MD & Analyst

Bryan Connell Keane Deutsche Bank AG, Research Division - Research Analyst

Dan Dolev Mizuho Securities USA LLC, Research Division - MD & Senior Equity Research Analyst

David Mark Togut Evercore ISI Institutional Equities, Research Division - Senior MD

Kevin Damien McVeigh Crédit Suisse AG, Research Division - MD

Mark Steven Marcon Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

Ramsey Clark El-Assal Barclays Bank PLC, Research Division - Research Analyst

Samad Saleem Samana Jefferies LLC, Research Division - Equity Analyst

Tien-TsinHuang JPMorgan Chase & Co, Research Division - Senior Analyst

P R E S E N T A T I O N

Operator

Good morning. My name is Michelle, and I'll be your conference operator. At this time, I would like to welcome everyone to ADP's Fourth Quarter Fiscal 2022 Earnings Call. I would like to inform you that this conference is being recorded. After the speaker's presentation, we will conduct a question-and-answer session. I will now turn the conference over to Mr. Danyal Hussain, Vice President, Investor Relations. Please go ahead.

Danyal Hussain - Automatic Data Processing, Inc. - VP of IR

Thank you, Michelle, and apologies to everyone for the brief delay, and welcome everyone to ADP's Fourth Quarter Fiscal 2022 Earnings Call and Webcast. Participating today are Carlos Rodriguez, our CEO; Maria Black, our President; and Don McGuire, our CFO.

Earlier this morning, we released our results for the quarter. Our earnings materials are available on the SEC's website and our Investor Relations website at investors.adp.com, where you will also find the investor presentation that accompanies today's call.

During our call, we will reference non-GAAP financial measures, which we believe to be useful to investors and that exclude the impact of certain items. A description of these items along with a reconciliation of non-GAAP measures to the most comparable GAAP measures can be found in our earnings release.

Today's call will also contain forward-looking statements that refer to future events and involve some risk. We encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ materially from our current expectations. With that, let me turn it over to Carlos.

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JULY 27, 2022 / 12:30PM, ADP.OQ - Q4 2022 Automatic Data Processing Inc Earnings Call

Carlos A. Rodriguez - Automatic Data Processing, Inc. - CEO & Director

Thank you, Danny, and thank you, everyone, for joining our call. We finished our fiscal 2022 with a strong fourth quarter that featured 10% revenue growth and 12% organic constant currency revenue growth. We also delivered 170 basis points of adjusted EBIT margin expansion, which helped drive 25% adjusted EPS growth. And for the full fiscal year 2022, we ended up with 10% revenue growth, 90 basis points of margin expansion, 16% adjusted EPS growth. And importantly, we achieved record bookings and near record-level retention, reflecting our strong position in the HCM market.

Let me cover some highlights from the quarter and year before turning it over to Maria and Don for their perspectives. Starting with Employer Services new business bookings. We had a fantastic Q4 with growth accelerating from the prior quarter resulting in our largest new business bookings quarter ever. And with this strong finish, we were very pleased to have delivered 15% ES bookings growth for the year. Despite several sources of global uncertainty, including the ongoing effects of the pandemic, the conflict in Ukraine, inflation and concerns about global recession, our compelling suite of HCM offerings have continued to resonate throughout the market.

In total, we sold over $1.7 billion in ES new business bookings in fiscal 2022 and well over $2 billion when including the PEO, marking the first time we've exceeded $2 billion in bookings. Maria will talk more about the growth opportunities ahead, but clearly, we are incredibly pleased with what is the best performance by our sales force that I've seen in my 20 years with ADP.

Moving on. Our full year ES retention of 92.1% was nearly flat versus last year's record level of 92.2% as we once again exceeded our expectations in the fourth quarter. Client retention is driven by several factors, including product and service quality, business mix and macroeconomic factors. And our expectation at the start of fiscal 2022 called for macroeconomic factors like SMB out-of-business rates to drive some normalization and retention towards pre-pandemic levels. We did see some of that play out but clearly less than anticipated.

More importantly, our product and service teams have continued to deliver a best-in-class experience for our clients and particularly so on our modern and scaled platforms. We achieved record client satisfaction levels for the year, and we once again set new record levels for retention in several of our businesses, including our mid-market. So although you will hear from Don that we are once again making an assumption for a modest amount of macroeconomic-related normalization in retention in fiscal 2023, we are excited to have delivered such a strong performance in fiscal 2022 and look forward to maintaining our retention rates at these historically high levels.

Moving on to the employment picture. Our pays per control growth metric was 7% for the quarter and 7% for the year, reflecting a persistently strong demand environment for labor among our clients that has continued to exceed our expectations. This growth has served as a testament to the resilience of our clients. And although we expect pays per control growth will naturally slow in the coming quarters, employment conditions today remain strong with our client data suggesting that near-term demand for labor remains healthy.

And finally, our PEO business delivered another great quarter as it wrapped up a strong year. We had average worksite employee growth of 14% in Q4 and 15% for the year, and we were thrilled to have crossed the 700,000 worksite employee mark this quarter.

As you know, I joined ADP 2 decades ago when ADP entered the PEO market through an acquisition. And as bullish as I was about the PEO industry back then, I'm not sure I could have anticipated we would be here 20 years later still growing at this combination of pace and scale. But the ADP TotalSource team continues to deliver a great platform, great service and a great benefit experience for our PEO clients, and there is plenty of opportunity for us in the years ahead to serve even more businesses.

Taking a step back, fiscal 2022 was unique in a number of ways. We experienced strong demand with over $2 billion in worldwide new business bookings and near record-level retention, which together drove us to surpass 990,000 clients at year-end, putting us on track to exceed 1 million clients any day now. At the same time, we've had to manage this growth in volume with prudent head count growth given tight labor conditions. The way we've been able to do that is through efficiencies, of course, but also some plain hard work by our associates. And for that, I thank them for their efforts and for coming through for our clients once again. I'll now turn it over to Maria.

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JULY 27, 2022 / 12:30PM, ADP.OQ - Q4 2022 Automatic Data Processing Inc Earnings Call

Maria Black - Automatic Data Processing, Inc. - President

Thank you, Carlos. With fiscal '22 behind us, I want to take this opportunity to review where we stand on some key initiatives and provide an update on where we are heading in fiscal '23. At the core of our client experience is their interaction with our platform, and one product initiative we have talked about throughout fiscal '22 is our new unified user experience, which was designed to be more action-oriented and contextual and to move us from transaction-oriented applications to experience-oriented applications. In other words, more intuitive, better looking, faster and more consistent across our solutions.

To achieve this, we have applied a research-driven approach informed by the data and insights we have gained in working with our nearly 1 million clients. Our focus has been to listen to our clients, learn from them and utilize their input to design the best experience. In fiscal '22, we moved hundreds of thousands of clients over to this new user experience, including our clients on RUN, iHCM and Next Gen HCM as well as over 20,000 Workforce Now clients. We also moved the ADP Mobile App over to the new UX.

Feedback so far has been extremely positive. And in fiscal '23, we plan to expand this rollout further to remaining Workforce Now clients as well as to additional modules and experiences within our key platforms. Workforce Now, in particular, has been exciting for us for a few reasons beyond user experience.

First is its growing traction in the U.S. enterprise market. Just this quarter, ADP was rated for the first time an overall Customer's Choice provider in Gartner's annual Voice of the Customer study. This was the highest tier possible and was based on prospective from end users with 1,000 or more employees and is a reflection of our continued momentum in selling Workforce Now to the lower end of the U.S. upmarket these past few years. This momentum builds on the already strong presence and traction Workforce Now has had in the U.S. mid-market, in the HRO space and in Canada, all places where it is highly differentiated.

Second is the continued rollout of our Next Gen Payroll engine to a growing portion of our new Workforce Now clients. Our Next Gen Payroll engine not only benefits from having a global native and public cloud architecture, but also empowers our platforms like Workforce Now to offer a better product experience and enables us to offer better service. We are incredibly excited for our payroll engine to continue to scale up to larger and more complex Workforce Now clients over the coming quarters.

And finally, with talent and engagement an increasingly important aspect of the HCM suite, we continue to focus on our ability to help employers better connect with their employees. This quarter, we will launch a new offering that we're calling Voice of the Employee, a robust employee survey and listening tool, which leverages survey instruments from the ADP Research Institute to offer clients a way to seamlessly capture employee sentiment across the employee life cycle.

And one of the things I love about this solution is that it was born out of an elevated client employee engagement, our return to work -- workplace solutions have been able to drive and it reflects the ability of our global product team to quickly identify an opportunity and develop a solution to meet a need in the market.

Moving on, we made some exciting enhancements to the Wisely program this quarter. Most notably, we now offer Wisely self-enrollment with full digital wallet capabilities for Apple and Google Pay thereby allowing employees to instantly receive and start using their Wisely account without support from their employer and without having to wait for a physical card. We also expanded our work -- earned wage access solution by offering a seamless 1 app solution for Wisely members through a deeper integration with one of our key partners.

The offering enables employees to receive a portion of their earned wages prior to payday and, most importantly, is free for employees who use Wisely. With these enhancements and more on the horizon, we're incredibly excited about the growth prospects for Wisely and look forward to taking it from over 1.5 million active members today to an even larger portion of our U.S. payroll base over the coming years.

During fiscal '22, we also highlighted the strength of our retirement services business, a key component of our HCM suite. We offer recordkeeping services, provide unbiased independent advisory services and give our clients, their employees and financial advisers, access to over 10,000 investment options from over 300 investment managers seamlessly integrated with our key platform and with the ADP Mobile App.

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JULY 27, 2022 / 12:30PM, ADP.OQ - Q4 2022 Automatic Data Processing Inc Earnings Call

With over 125,000 retirement plan clients leveraging solutions, including 401(k), SIMPLE and SEP plans, we are proud of our scale today, but even more excited about the significant opportunity in the market as we look to expand our market share within and beyond our payroll base of client. Fiscal '22 was an incredibly strong year for our retirement services business, and we are looking forward to another strong year.

And finally, our Next Gen HCM solution is getting closer to a broader rollout as we continue building on the implementation capacity for our pipeline of sold clients as we shared at last year's Investor Day. While we are excited about all of these product enhancements and others too, product only drives growth when our sales and marketing organization can match it to a buyer and translate it into new business booking. And to that end, we are excited about our sales and marketing momentum and the continued investments we have planned to drive growth this year.

First, the product improvements I just mentioned as well as many others are all intended to drive higher win rates and expanded breadth of offerings for higher price realization, and we fully expect our sales force to continue capitalizing on these opportunities. Second, we are making continued investments in both digital and traditional marketing into our brands and into our broad and growing partnership network. Third, we are excited to have invested at year-end in sales head count and are stepping into the new year with hundreds of additional quota carriers. And we expect to be able to grow our average sales head count in the mid-single-digit range over fiscal '23.

Continued execution on our product and our sales and marketing strategy is ultimately designed to drive sustainable growth. And for fiscal '23, we expect to drive ES bookings growth of 6% to 9%, bracketing around our medium-term target of 7% to 8% from Investor Day. Growth is a priority for us, and we look forward to continuing to update you on our progress. Now over to Don.

Don Edward McGuire - Automatic Data Processing, Inc. - Chief Financial Officer

Thank you, Maria, and good morning, everyone. Our Q4 represented a strong close to the year with 10% revenue growth on a reported basis and 12% growth on an organic constant currency basis, ahead of our expectations despite higher-than-expected FX headwind from the strength in the dollar. Our adjusted EBIT margin was up 170 basis points, about in line with our expectations as leverage from strong revenue growth overcame higher selling expenses, PEO pass-throughs and growth investments like the sales head count growth Maria just mentioned. And our robust revenue and margin performance drove 25% adjusted EPS growth for the quarter, supported by our ongoing return of cash to our investors via share repurchases.

For the full year, revenue landed at 10% growth. We delivered 90 basis points of margin expansion, offsetting a few different sources of incremental expense over the course of the year, and adjusted EPS grew to $7.01, up about 16%.

For our Employer Services segment, revenues in the quarter increased 8% on a reported basis and 9% on an organic constant currency basis. The stronger-than-expected revenue growth was a function of continued outperformance on key metrics like retention and pays per control. And our ES margin increase of 140 basis points was a bit lower than previously planned as a result of growing head count faster than previously anticipated. For the full year, our ES revenues grew 8% on a reported basis and our ES margin increased 110 basis points.

For our PEO, revenue in the quarter grew 16%, accelerating slightly from Q3. Average worksite employees increased 14% on a year-over-year basis, to 704,000 as bookings, retention and same-store pays all continued to perform well. PEO margin was up 260 basis points in the quarter, due in large part to favorable workers' compensation reserve adjustments. For the full year, our PEO revenues and average worksite employees grew -- both grew 15% at the high end of our guidance ranges, and our margin expanded 80 basis points.

I'll now turn to our outlook for fiscal '23, beginning with some overall remarks. We have, on the one hand, an inflationary environment that is creating upward pressure on our expense base. And at the same time, we recognize there is clearly concern about a potential upcoming global recession or that we perhaps are already in one. On the other hand, our momentum entering fiscal '23 is strong, and there are no obvious signs of near-term strain. And if the market's forecast of higher interest rate holds, we are positioned to benefit from a continued rebound in interest income.

So our focus for now will be to continue executing on our strategy. And to that end, we have been and will continue to be making investments in head count where we perhaps didn't get a chance to last year in a tight labor market, but we also expect to deliver growth that's at or above our medium-term annual objectives shared at our November 21 Investor Day.

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