Michelle, the conference operator, welcomed everyone to ADP's Fourth Quarter Fiscal 2023 Earnings Call and informed them that the call was being recorded. Danny Hussain, the Vice President of Investor Relations, then provided an overview of the company's results for the quarter and full year, which were available on the SEC's website and the Investor Relations website. He also mentioned that during the call they would reference non-GAAP financial measures and forward-looking statements. Finally, Maria Black, the President and CEO, thanked everyone for joining the call.

In the fourth quarter of fiscal 2023, ADP experienced 9% organic constant currency revenue growth, 270 basis points of adjusted EBIT margin expansion, and 26% adjusted EPS growth. Worldwide sales and marketing team delivered strong double-digit Employer Services new business bookings growth, and the HCM demand environment has been healthy. The Employer Services retention rate was also higher than expected, with a 10 basis points increase for the full year and a record level of 92.2%. Overall client satisfaction was also at a record level in the fourth quarter.

ADP's Employer Services has experienced a 3% growth in pay per control for the quarter and a 5% growth for the full year. The company has seen a double-digit growth in PEO bookings in Q4, setting a record level sales quarter. ADP's strategic priorities for the future include leading with best-in-class HCM technology, accelerating the pace of innovation, and offering industry-leading HCM products. The company expects to have a busy fiscal 2024.

Paychex is rolling out several product enhancements to serve their 850,000 RUN clients, including a tax ID registration service, learning management, an AI-powered insurance and sector tool, and a Next Gen Payroll and time engine. They are also expanding their iHCM midmarket platform and launching role outside the U.S., while deploying GenAI-powered features to help clients more quickly and easily tackle HR transactions. They are also providing unmatched expertise and outsourcing services to their one million clients.

ADP is focused on improving client experience in fiscal 2024 through the use of GenAI tools to aid service and implementation associates, as well as continuing to offer strong bookings and client satisfaction for their HR outsourcing and PEO businesses. Additionally, ADP is leveraging its global scale to provide robust platforms, industry-leading service, and a unique on-the-ground presence in over 30 countries.

ADP is combining its data, partners, and integrated solutions with one of the largest business-to-business sales forces in the world to help clients navigate the changing world of work. In fiscal 2024, ADP plans to expand its GlobalView platform to more countries and make tuck-in acquisitions to increase its native in-country presence. ADP also plans to invest in headcount and marketing and enhance its sales tech stack with GenAI functionality. As more people are served, the power of ADP's insights will continue to grow and benefit clients.

Maria recognizes the associates at ADP for their effort and performance over the course of the year, which has enabled the company to be recognized as the World's Most Admired Company by Fortune Magazine for the 17th consecutive year and one of the Best Companies for Innovators by Fast Company. Don follows up by discussing their Q4 results, which were strong overall, driving fiscal 2023 results at or above expectations and yielding a 10% organic constant currency revenue growth for the year.

The ES segment revenue is expected to grow 7-8% in fiscal '24, driven by 4-7% new business bookings growth and a record-level 92.2% ES retention rate. The PEO segment revenue grew 8% for the full year, with average worksite employees increasing 6%, and a 60 basis point margin expansion. The outlook for fiscal '24 assumes a moderation in economic activity, but nothing dramatic.

In fiscal '24, the company is expecting a 50 to 70 basis points ES retention decline due to an increase in small business losses and a slowing economic backdrop. Additionally, price contribution is expected to be lower than the 150 basis points seen in fiscal '23, but higher than the historical average of 50 basis points. The average yield for client funds interest revenue is expected to increase from 2.4% in fiscal '23 to 2.8% in fiscal '24, while average client funds balances are expected to grow 2% to 3%. This will result in an increase in client funds interest revenue from $813 million in fiscal '23 to a range of $955 million to $975 million, and an increase in the net impact from the client fund strategy from $730 million in fiscal '23 to a range of $815 million to $835 million in fiscal '24.

The company expects revenue growth of 6-7% in fiscal '24, with an adjusted EBIT margin expansion of 60-80 basis points. They anticipate a 23% effective tax rate and adjusted EPS growth of 10-12%, supported by buybacks. The total revenue growth is expected to be consistent quarter-to-quarter, though the adjusted EBIT margin is expected to be down slightly in Q1 on a year-over-year basis.

Maria Black answers a question about the complexity of payroll processing in international markets and the potential of Roll in those markets. She states that the rollout of Roll has been exciting, and that the product has been successful in the U.S. down-market.

Roll is excited to expand their business into two international countries, focusing on the SMB market. There is a lot of complexity involved in expanding into different countries, such as government entities, legal and tax attorneys, and understanding tax authorities. Roll has been building their international business for the past couple of decades, and it is more than just dropping off software.

Don McGuire and Maria Black discussed the broad-based strength of Roll's bookings in the fourth quarter of fiscal year '23, citing the tax business and international business as particularly strong. They attributed the success to healthy pipelines, a strong staffing position, and an all-hands-on-deck execution from the entire organization.

Maria Black discussed the mid-market strength that ADP has seen, attributing it to their HRO offerings, investments into the mid-market, and their next-generation payroll engine. She also mentioned the product investments and innovation in the mid-market, such as the Workforce Now platform with its new user experience.

Don McGuire reports that the company has seen record mid-market retention and near-record MPS results. He is confident that the Next Gen HCM platform will be a larger contributor to bookings in the upcoming year. He is pleased with the 150 basis points of price increase that was achieved without a decline in retention or NPS scores.

Maria Black commented on the general demand environment in terms of decisions getting delayed and the appetite to buy HCM in the current macro environment. Demand remains strong across the business, even in the down market, with small business formations still being strong. Price increases have landed well in FY '23 and are expected to continue in FY '24, but not to the same extent as in FY '23.

The company is monitoring the enterprise space and MNC space to see if the demand cycle has changed due to the pandemic, but so far it has not. They have also been investing in sales and go-to-market strategies, and their R&D growth for the upcoming year versus the fiscal year will likely be different.

Maria Black discusses the three key strategic initiatives that she outlined in her prepared remarks and their subsections. She is particularly excited about the mid-market and deploying next-gen payroll, as well as the time engine. She emphasizes the importance of taking these developments and making sure they are global in nature.

ADP is making investments in products such as roll and their next-generation payroll engine with the goal of achieving competitive advantages and differentiation. Additionally, they are utilizing generative AI to provide opportunities for clients to become more efficient and to make it easier for clients and associates to engage with each other. Short-term results are expected from these investments, as well as long-term impact.

Don McGuire explains that the first quarter of the year will likely have a lower margin than the rest of the year due to the increased cost and headcount, as well as the large borrowing of funds to support the laddered client fund interest strategy. He states that these two factors will put pressure on the margin for the first quarter, but that the margin should improve over the course of the year.

Maria Black discussed the reacceleration of PEO bookings in the fourth quarter and going into the New Year, and attributed it to the focus of the management team. She also expressed her optimism about the overall value proposition of the PEO and the demand that it warrants. However, the demand trends are difficult to pin down due to the various variables in the PEO business.

Don McGuire states that the company will continue to invest in key areas of the business to ensure it runs effectively, such as service, implementation, and sales. However, the growth in expenses in those areas will not be as substantial as last year due to the end of the pandemic.

Don McGuire states that revenue growth will be consistent throughout the year due to the strong fourth quarter bookings result. The PEO business will have a slightly slower growth rate but overall growth for the company will not be substantially different between the business units.

Scott Wurtzel asked Danyal Hussain and Maria Black about the differences between PEO and ES revenue growth, and the investment needed for Gen AI. Hussain explained that PEO revenue growth is expected to accelerate over the year, while ES revenue growth is expected to decelerate. Black added that they have a clear lens on where investments may be enhanced or replaced to focus on Gen AI, and that there will be both incremental investment and repurposing of existing investments.

Maria Black discussed the company's approach to international scaling, which includes both organic and inorganic investments. The decision criteria for investments is based on speed, often as a result of clients needing to pay employees in certain markets. Don, who previously ran the company's international business, will leverage both organic and inorganic ways to get there.

Don McGuire has made a number of acquisitions over the last year, including a payroll budgeting software in Italy, a partner in South Africa, and a time-and-attendance product in India. He expects the average return on investments to increase over the year, with the overnight investments reinvesting at 5% and the extended and loan portfolios reinvesting at 4%. The average duration of investments has shortened in the last couple of years, but the yields and maturity schedule provided can help estimate the expected returns.

Maria Black explains that the company's initial outlook for retention degradation was around 50-25 basis points last year, but they are now starting with a more conservative outlook of -70 to -50 basis points. She acknowledges that this is more conservative than what they started with last year, but she does not specify the exact amount of conservatism that is embedded in the outlook.

Maria discussed the company's guidance for fiscal '24 and their success in the fourth quarter. She also discussed the macroeconomic outlook and the impact it could have on retention rates. Finally, she commented on M&A and the overall valuation levels.

Don McGuire explains that when considering acquisitions, they want to make sure that it either gives them additional capabilities or exceeds what they already have, and that it is a natural fit and can be sold and operated in a recurring model. They are hearing about valuations coming down, but they are focused on making sure they are paying the right price for any acquisitions.

ADP's PEO has a strong value proposition and is a durable business that can flex in a downturn. The sales force is able to pivot the narrative and value proposition as needed. Despite the macroeconomic challenges, clients have not been hesitant to purchase the PEO and this is evidenced by the record results in bookings in the quarter. The value proposition is holding firm and should the economic wins ever come to life, the demand for the offer will remain.

Don McGuire and Danny Hussain answered a question from Kartik Mehta regarding pay per control and how it will change over the course of the year. They stated that they do not anticipate it going negative, but rather decelerating from a 3% range to something flatter by the end of the year. Maria Black closed the program by expressing her gratitude to the associates for their performance and thanking all of the stakeholders for their support.

The program has come to an end and everyone is thanked for their participation. A toast is made to the successful completion of the program, and everyone is wished a great day.

This summary was generated with AI and may contain some inaccuracies.