Automatic Data Processing, Inc. (NASDAQ:ADP) Q1 2024 Earnings Call Transcript

Automatic Data Processing, Inc. (NASDAQ:ADP) Q1 2024 Earnings Call Transcript October 25, 2023

Automatic Data Processing, Inc. beats earnings expectations. Reported EPS is $2.08, expectations were $2.03.

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 First Quarter Fiscal 2024 Earnings Call. I would like to inform you that this conference is being recorded. After the prepared remarks, we will conduct a question-and-answer session, instructions will be given at that time. I will now turn the conference over to Mr. Danny Hussain, Vice President, Investor Relations. Please go ahead.

Danyal Hussain: Thank you, Michelle, and welcome everyone to ADP's first quarter fiscal 2024 earnings call. Participating today are Maria Black, our President and CEO; 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.

A well-dressed executive discussing financial strategy with a client in a busy office. Editorial photo for a financial news article. 8k. --ar 16:9

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. I'll now turn it over to Maria.

Maria Black: Thank you, Danny, and thank you, everyone for joining us. This morning, we reported strong first quarter results, including 7% revenue growth and 12% adjusted EPS growth, and we made significant progress on the three strategic priorities we shared with you last quarter. Let me begin by quickly reviewing some of our financial highlights from the first quarter. We had a solid start to the year in Employer Services new business bookings with record-level volume for first quarter which was supported by a particularly strong September. Among our best performers were our small business portfolio and our compliance-oriented solutions. Overall demand in HCM has remained steady and we maintained a healthy new business pipeline at the end of the quarter across our business.

Our Employer Services retention rate once again exceeded our expectations. Although, retention declined slightly versus the prior year, including in our small business portfolio, we continued to see resilience among our clients. More importantly, our overall NPS scores reached a new all-time high, positioning us to stay near these historically high retention levels. Our Employer Services pays per control growth was 2% for the first quarter as our clients continued to add employees at a pace that is gradually slowing. And our PEO revenue growth of 3% in the quarter was relatively stable versus last quarter, reflecting solid PEO bookings performance offset by deceleration in PEO pays per control growth. Don will speak to our updated guidance in a moment, but the demand environment for PEO as well as our other outsourcing services remains healthy.

Moving on, we made meaningful progress across all three of our strategic priorities that we outlined last quarter. Let me start with an update on some actions we took in Q1 to lead with best-in-class HCM technology. First, we began embedding Gen AI features into our products. In Q1, we integrated Gen AI into Roll to further enhance its conversational UI and make it even easier for small business owners to quickly obtain customized Payroll and HR guidance. We also began rolling out ADP Assist, which delivers insights and recommendations to make complex HR work simple. We've enabled ADP Assist for select Workforce Now clients, beginning with a Report Assist feature that allows practitioners to easily extract the insights they're looking for. We look forward to continuing to build on the live feature set of ADP Assist to further enhance the experiences of both HR practitioners and employees.

We also had some exciting product developments beyond AI. Our clients tell us they need personalized experiences and deep integrations to help them manage the complexity of running a business today. To help address this, we recently launched a new product called API Central, which enables businesses to easily and securely connect their ADP workforce data across systems using pre-populated APIs and tools. This is a feature our clients have increasingly asked for and we have already seen a strong uptake. In Q1, we complemented the launch of API Central with the acquisition of Sora, an intelligent workflow automation and data integration tool. Sora's unique capabilities will allow our clients to automate people processes by unifying various applications such as HR, IT, CRM, and more, creating a smarter and easier-to-use experience for our clients.

In Q1, we also launched ADP Workforce Now for construction, a comprehensive offering designed to help clients with the unique payroll and HCM needs of the construction industry. This verticalized offering combines tailored Workforce Now capabilities and reporting with a team of dedicated specialists for the construction industry. While ADP has always served clients across the full spectrum of industries, construction stood out to us as a vertical with enough complexity to warrant a more tailored solution, and we're excited to further strengthen our offering in the mid-market. We also announced the launch of our corporate venture capital fund earlier this month, leading with best-in-class HCM technology requires that we stay attuned to the frontier of HCM innovation.

And now, in addition to the organic efforts we are developing in ADP Ventures, we will invest in and partner with early-stage startups to strengthen our core business our core business and to extend into natural adjacencies. Two of our early investments focus on improving lifestyle benefits to drive associate engagement in simplifying the incredibly complex leave management process that businesses and their workers have to address. We're excited to build on these partnerships and develop new ones. Overall, Q1 was a very busy quarter on the product front with much of the work we're doing representing seeds of innovation that will position us to continue shaping the future of work. Our second strategic priority is to provide unmatched expertise and outsourcing solutions.

In addition to launching the pilot of ADP Assist for our clients, we also launched the pilot of our new Agent Assist embedding Gen AI in the flow of work for ADP Associates. So far, we have enabled our call summarization capability to select associates. Thanks to this Agent Assist feature, those service associates no longer need to spend time writing up case notes after client calls, which should make our associates more effective and also allow us to quickly aggregate real-time client feedback to continuously improve our products. We are also piloting Agent Assist real-time guidance for our associates to help them with support content and guided workflows and to more easily share their accumulated knowledge in a way that's customized to individual client cases.

We are excited to continue working toward additional Agent Assist features to help our implementation and service associates deliver better, faster service and to help our client satisfaction scores continue to reach new record levels. Our third strategic priority is to benefit our clients through our global scale, and in Q1, we expanded on this advantage. In August, we extended our leading global footprint by acquiring the payroll business of BTR, our longtime partner in Sweden. Acquisitions like this strengthen our multi-country payroll ecosystem while also positioning us to grow a local HCM business in countries with attractive growth prospects. In Q1, we launched Roll in Ireland, representing the beginning of an expansion into the European market, where we believe an AI-based payroll app coupled with our existing on the ground ecosystem will allow us to expand our SMB business outside the U.S. And during Q1, we also announced plans to deepen our existing partnership with Workday to deliver enhanced global payroll compliance and HR for the many clients we jointly serve around the world.

Partnerships like this reflect our long-standing commitment to provide the personalization and overall experience our clients desire. Before turning it over to Don, I wanted to highlight a couple milestones in two of our businesses. Our suite of workforce management solutions, sometimes referred to as time and labor management, reached more than 125,000 clients in the first quarter, benefiting from a double-digit growth rate these last few years. Scheduling and precisely tracking time has become more important for employers over recent years in order to meet evolving legislative requirements, and we look forward to continuing to invest in our workforce management solutions to drive higher client attach rates. We also now serve more than 150,000 retirement services clients, which is up more than 20% from the 125,000 clients we served at the end of fiscal 2022.

We anticipate growth for our retirement services business will remain strong in the years ahead as the provisions of the SECURE Act 2.0 and additional state mandates continue to phase in and as companies of all sizes continue to recognize the importance of positioning their workers well for their eventual retirement. I'm proud of our start to fiscal 2024 with both strong financial results and meaningful strategic progress. Our roadmap for the months ahead is keeping us incredibly busy. And with this in mind, I'd like to take a moment to recognize our associates across sales, service, implementation and technology whose efforts and outstanding performance are positioning us to consistently deliver for our clients and our shareholders. Thank you, all.

With that, I'll turn it over to Don.

Don McGuire: Thank you, Maria, and good morning, everyone. I'll provide some more color on our results for the quarter and update you on our fiscal '24 outlook. Overall, we had a solid Q1 and are not making changes to our consolidated outlook, but there are some moving pieces I'll cover. Let me start with Employer Services. ES segment revenue increased 9% on a reported basis and 8% on an organic constant currency basis, ahead of our expectations. As Maria shared, ES new business bookings had a solid start with especially strong growth in September. The demand environment is stable, our pipelines are healthy, and we are on track for our 4% to 7% growth guidance. Our ES retention did decline slightly in Q1 versus the prior year, but that was slightly better than we expected.

At this point, we are maintaining our outlook for a 50 basis point to 70 basis point decline in full year retention, which continues to embed an expectation for small business losses to increase due to higher out of business rates. But if recent trends continue, then we would hope to outperform that range. ES pays per control growth was in line with our expectation in Q1. It decelerated modestly to 2%, and we expect this very gradual deceleration to continue in the coming quarters and are maintaining our outlook for 1% to 2% growth for the full year. Client funds interest revenue increased in line with our expectation in Q1, but we're raising our full year outlook based on the latest forward yield curve, which result in a modest increase in average yield to 2.9% from our prior expectation of 2.8%.

We now expect client funds interest revenue as well as the net impact from our client funds extended strategy to be up $35 million from our prior outlook. Meanwhile, the U.S. dollar strengthened, representing a drag relative to our prior fiscal '24 revenue outlook. In total, our strong Q1 ES revenue growth combined with higher than expected client's funds revenue for the rest of the year effectively offset the adverse FX movement and we're maintaining our fiscal '24 ES revenue growth range of 7% to 8%. Our ES margin increased 220 basis points in Q1, driven by both operating leverage and contribution from client's funds interest revenue. For the full year, we are raising our fiscal '24 outlook to now anticipate an increase of 150 basis points to 170 basis points, which reflects the benefit of higher yields, partially offset by higher spend on Gen AI projects and usage, as well as a small amount of dilution from our recent acquisitions.

Moving on to the PEO. We had 3% revenue growth driven by 2% growth in average worksite employees in Q1. As Maria mentioned earlier, our PEO bookings growth was solid, but pays for control growth continued to slow and was lower than expected, particularly for clients in the professional services and tech industries. This resulted in a slightly softer Q1 worksite employee count than we were anticipating. As a result, we now expect fiscal 2024 PEO revenue growth of 3% to 4% with growth in average worksite employees of 2% to 3%. Our PEO sales pipelines are healthy and we continue to forecast their worksite employee growth gradually ramping in the back half of fiscal '24. PEO margin decreased 90 basis points in Q1 which is more than we had planned.

The decline was primarily driven by a lower workers' compensation reserve release benefit as well as higher selling expenses. We now expect PEO margin to be down between 50 basis points and 100 basis points in fiscal '24 with the continued assumption for higher selling expenses as well as year-over-year headwind from a lower workers' compensation reserve release benefit than we experienced in fiscal '23. Putting it all together, there is no change to our consolidated outlook, but I would like to share some color on cadence. In Q2, our client funds balanced growth will lightly impact the payroll tax deferral that we had in our average balance for the past two years, which creates some grow over pressure on our client's funds balance and will result in more modest ES margin expansion in Q2 than other quarters this year as well as a modest revenue impact.

As a result, we expect consolidated revenue growth to moderate before accelerating slightly in the back half. And we expect adjusted EBIT margin to be down slightly before ramping in the back half of the year. This was already contemplated in our guidance at the outset of the year. So again, no change to our consolidated guidance. We continue to forecast fiscal '24 consolidated revenue growth of 6% to 7% with our adjusted EBIT margin expanding by 60 basis points to 80 basis points. We still expect our effective tax rate for fiscal '24 to be around 23% and we anticipate adjusted EPS growth of 10% to 12%. Thank you. And I'll now turn it back to Michelle for Q&A.

See also 30 Dying Professions to Avoid Like a Plague and 20 Highest CPM YouTube Niches in 2023.

To continue reading the Q&A session, please click here.