Good morning. My name is Crystal and I will be your conference operator. At this time, I would like to welcome everyone to ADP’s Fourth Quarter Fiscal 2020 Earnings Call. I would like to inform you that this conference is being recorded. [Operator Instructions] I will now turn the conference over to Mr. Danyal Hussain, Vice President, Investor Relations. Please go ahead.

Thank you, Crystal. Good morning, everyone and thank you for joining ADP’s fourth quarter fiscal 2020 earnings call and webcast. Participating today are Carlos Rodriguez, our President and Chief Executive Officer and Kathleen Winters, our Chief Financial Officer. Earlier this morning, we released our results for the fourth quarter of fiscal 2020. The 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 as well as our quarterly history of revenue and pre-tax earnings by reportable segment. During our call today, 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 their 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. As always, please do not hesitate to reach out should you have any questions. And with that, let me now turn the call over to Carlos.

Thank you, Dany, and thank you everyone for joining the call. This morning, we reported our fourth quarter and fiscal 2020 results. Although we ended the year against significant headwinds related to COVID-19, we believe we executed well over the course of the last 12 months. And our product offerings remain well positioned to support sustainable long-term revenue growth as we continue to help companies and their workforces through all types of environments. For the quarter, we delivered revenue of $3.4 billion, down 3% reported and 2% organic constant currency, which was better than our expectations. And for the full year, we delivered revenue of $14.6 billion, up 3% reported and 4% organic constant currency. Our adjusted EBIT margin increased 10 basis points in the quarter and increased 60 basis points for the full year, well ahead of our expectations as we managed our expense base prudently to absorb the impact of a decline in revenue in the fourth quarter, while simultaneously providing an elevated level of service to our clients. With this revenue and margin performance, our adjusted EPS growth was flat for the quarter and up 9% for the year. Considering the unprecedented and evolving macroeconomic situation, we are very pleased with our execution in the quarter and our current positioning as employment continues to gradually recover from the steep declines our clients have experienced. The global health crisis from COVID-19 has clearly evolved over these past few months. And I will start today’s discussion by providing a brief update on the trends we have experienced. When we reported our fiscal third quarter results in April, we were just starting to see some preliminary signs of stabilization after weeks of rapid deterioration, more specifically, across our own data sources, including weekly payroll, clock-in volume, job postings, and background screenings. There were multiple indications that we were reaching the trough. Now, three months later, we do believe we saw conditions bottom in late April. Whereas our pays per control was trending down mid-teens in April, it has since improved to be down about 10% as we exited the quarter. And for the full quarter, pays per control was down 10.8%, better than we had anticipated in our outlook. Last quarter, we also discussed our expectation for elevated out-of-business losses in May and June. Those losses ultimately developed in line with our expectations. This yielded a decline in our retention rate of 20 basis points to 90.5% for the full year. Though if not for the elevated out-of-business losses in Q4, we believe our retention rate would have been up for the year. In fact, despite these losses in Q4 for fiscal 2020, we tied an all-time high retention for our mid-market and hit multi-year highs in our up-market. Looking ahead, we have been encouraged by signs that the economic distress brought about by COVID-19 has started to ease in certain countries and several U.S. states. We are seeing continued or even increasing distress in others. And over the past several weeks, we have seen the pace of employment recovery slow. Accordingly, as we set our expectations for the coming year, we believe that the worst is behind us. But the global economic recovery over the coming quarters will be gradual. Kathleen will discuss some of our specific macroeconomic assumptions in more detail. I’d like to turn now to Employer Services' new business bookings. We reported a decline of 21% for the year, which was in line with our revised outlook despite the limited visibility we had in making that forecast. And although this represents a significant decline, the actual execution by our sales force was better than what this reported growth rate suggests. As we mentioned last quarter, there are two components to our bookings figure. Our gross bookings we actually sold in the quarter and adjustments for previously required bookings. Our gross bookings sold in Q4, while down significantly, came in ahead of our forecast, and most importantly, exited the quarter with improving momentum. This gives us confidence that buying behavior is continuing to trend in the right direction, which we believe will drive further bookings recovery in the coming quarters. Furthermore, our sales force has continued to adapt to this virtual sales environment as we have invested in training, stayed agile on sales messaging, and continued to foster our channel relationships. We are also continuing to see week-on-week improvement in leading indicators, such as referrals, appointments per salesperson, and demos scheduled. In addition to these gross bookings, we regularly adjust bookings we have previously recognized if, for example, a client is no longer expected to start within the original estimated timeframe or is starting with fewer employees than originally anticipated. These backlog adjustments are ordinarily immaterial to our bookings growth. But as we said last quarter, COVID-19 is causing some clients to delay implementations or to start with fewer employees than we originally signed. We made a larger backlog adjustment in Q4 than previously planned. And this offset the better underlying sales performance we experienced. Looking ahead, we expect we will likely see negative bookings growth in the first half of fiscal 2021 as we are still selling into an unfavorable macro environment. We expect growth to be flat to positive in Q3 with much more substantial growth in Q4 driving full-year bookings growth of flat to up 10%. Beyond fiscal 2021, a key priority will be getting our sales productivity back to or above its previous level. Within our control are the investments we make. And in fiscal 2021, we are planning to continue investing in product innovation, digital sales capabilities, and leading-edge sales tools to drive sales productivity higher. In addition, at this point, we are planning to add modestly to the size of our sales force. And together, we believe these investments will position us well to return to our previous new business bookings growth trendline as client buying behavior continues to normalize. Factors beyond our control, including overall GDP trends, as well as the timing and scope of workers returning to their job sites, will likely continue to impact our bookings. Moving on, service has remained critical to our clients. Our clients look to us for support and guidance in navigating through the complexities of key HR challenges and regulatory change. And our goal has been to serve as a trusted partner as they face COVID-19. Our clients have responded very positively to the robust service we have provided. And that in turn has led to record NPS scores in June as a direct outcome of our commitment to providing a successful level of service. We expect this favorable NPS trend to have positive implications for us in the years ahead. In response to the initial surge in service volumes related to COVID-19, we redeployed hundreds of sales and implementation associates to help meet the service need. While average resolution time spent per service request remains elevated as our clients work through complex issues, we have now seen our service request volume return to more normal levels. We are happy to report that we have now deployed most of these associates back to their sales and implementation roles. We continue to keep watch on proposed legislation that could drive another surge in client service demand and we remain prepared for such a scenario. We also continue to serve our clients through product innovation. During the quarter, we rolled out a range of solutions to help our clients through the crisis and prepare for the recovery. We implemented over 1,000 feature changes in response to 2,000 legislative updates in 60 countries. We also had over 400,000 clients run over 2 million Paycheck Protection Program reports for a total loan volume of approximately $115 billion. Many of those clients have now run the necessary reports to apply for their loans to be forgiven. Looking ahead, a key product focus is enabling safe return to the workplace. We are offering tools, including touchless and voice-enabled clocking, health attestation, and enhanced scheduling and analytics to help clients manage their workforces as they resume workplace operations. We continually progress on our other major product initiatives, including the rollout of our next-gen HCM platform and payroll engines. Two weeks ago, we won yet another award for our next-gen HCM solution, the Ventana Annual Digital Innovation award. We remain excited about its rollout. Perhaps more importantly, despite shifting our workforce to a remote environment, we remain on track to hit our R&D development roadmap milestones. Just this quarter, we piloted next-gen HCM and payroll in Australia. Our product team also launched our new workforce management solution in the down-market as a new time kiosk in the Apple App Store, and we went general availability with Wisely Direct in our mid-market and down-market. Now, taking a step back, I’d like to say that in every challenge, there is a potential for upside and COVID-19 is no exception. We believe that the nature of this shock in which businesses of all sizes have faced major uncertainties in managing their employees, has made an HCM partnership with ADP much more valuable. As companies emerge from this crisis, we expect them to see even more clearly the benefits of investing in robust, secure HCM offerings that include expertise and service to support their mission-critical activities. Although COVID-19 has created temporary headwinds in our growth, past experience has taught us to stand firm regarding our investments and strategy as part of our commitment to drive long-term sustainable growth. The strength of our business model and balance sheet allows us to do exactly that. We are well-positioned in our product, service, and go-to-market strategy. Last, before turning it over to Kathleen, I would like to quickly touch on our plans for our own associates. Last quarter, we discussed having over 98% of our workforce operating virtually, including our sales force, and we have been pleased with that transition and their overall performance in this environment. While we are well-positioned to continue operating this way, we are in the early stages of bringing back a small portion of our workforce to the office on a volunteer-only basis. I am pleased to join you today from our Roseland headquarters, which we opened just this Monday. Our sales force will continue to primarily engage with prospects and clients virtually, but they are beginning to conduct face-to-face meetings in some geographies, to the extent that they and our clients and prospects are ready to do so. And with all that said, I would like to once again take a moment to recognize our associates for their outstanding effort and the sacrifices they have made. I understand the monumental task of managing work and home life is a complex situation. I also know it’s not easy. A heartfelt thanks to our associates and leaders for their commitment. I will now turn it over to Kathleen.

Thank you, Carlos and good morning everyone. During the quarter, our revenues declined as we felt the full brunt of a double-digit decline in employment among our clients combined with other recession-driven headwinds. But we believe we executed well and are well-positioned to do so for the quarters ahead. For the fourth quarter, our revenue declined 3% reported and 2% organic constant currency was ahead of our expectations as pays per control and PEO performance were better than we had planned. Our adjusted EBIT margin was up 10 basis points in the quarter also well ahead of our expectations. We took specific cost actions in the quarter and continue to benefit from cost savings related to our ongoing transformation initiatives and also benefited from lower selling expenses, which together offset the margin impact from the loss of high-margin revenues related to COVID-19. Our adjusted effective tax rate decreased 210 basis points to 22.9% compared to the fourth quarter of fiscal 2019. Our adjusted diluted earnings per share was flat at $1.14 as lower year-over-year revenues were offset by modest margin expansion, a lower tax rate, and a lower share count compared to a year ago. We ended fiscal 2020 with revenue growth of 3% reported and 4% organic constant currency. Adjusted EBIT margins were up 60 basis points and adjusted EPS growth of 9%, all in a solid year, particularly given the significant decline in economic activity and employment that we faced over the last few months. As I move on to ES segment results, it’s important to emphasize how resilient the business performance was in the context of unprecedented headwinds, including a 10.8% decline in pays per control and a 22% drop in client funds interest revenue. During the quarter, our Employer Services revenue declined 6% on a reported basis and 5% on an organic constant currency basis, in line with our expectations as better underlying growth was offset by incremental FX drag. Our client fund balance declined 8% in the fourth quarter, reflecting lower pays per control, lower state unemployment insurance rates, payroll tax deferrals among some of our clients, and the continued lapping of the closure of our Netherlands money movement operation in October of 2019. Combining that balance decline with a 30 basis point decline in average yields drove our client funds revenue to decline by 22% to $115 million. For the full year, our ES revenue was up 1% reported and 2% organic constant currency, a solid performance. Employer Services margins were flat for the quarter, well ahead of our most recent expectations. We had the impact of lower revenues at relatively high incremental margins as we discussed last quarter offset by prudent cost control measures across all categories. ES margins were up 60 basis points for the full year. Moving on to PEO, also solid performance given the circumstances. Our total PEO segment revenues increased nearly 4% for the quarter to $1.1 billion and average worksite employees declined 3% to 548,000. This revenue and worksite employee growth were both ahead of our expectations driven by better retention performance and pass-through revenue. Same-store employment at our PEO clients performed in line with our expectations of a mid-single-digit decline and as expected was more resilient than the average client in our ES segment. Revenues, excluding zero-margin benefits pass-throughs, declined 5%. In addition to being driven by lower worksite employees, it continued to include pressure from lower workers’ compensation and SUI costs and related pricing. PEO margin declined 450 basis points in the quarter. This included about 530 basis points of unfavorability from the net expense in ADP indemnity of approximately $34 million, which contrasts to the $22 million benefit we had in last year’s fourth quarter. As a reminder, we had experienced favorable worker’s comp claim trends over the past several years which translated to favorable reserve adjustments in ADP indemnity. Those trends remain positive, but not as much as what we factor into our most recent reinsurance agreements. And as a result, we had a slight true-up the other way this year. Let me turn now to our outlook for fiscal 2021. I will start by discussing some of the specific U.S. macro-driven assumptions that underpin our guidance. The data for these assumptions is a combination of our own trend data and third-party macroeconomic forecasts, and we believe we are utilizing a balanced outlook. First, our pays per control outlook. We are assuming a decline in average pays per control of 3% to 4% for the year, driven by decline in the high single-digit range for the first half of the year, improving to a decline of mid-single-digit by Q3, followed by a rebound to positive mid to high single-digit growth in the fourth quarter. This outlook corresponds to a gradual improvement in the employment picture through the fiscal year though it did not contemplate a full employment recovery. To help translate this trend into a single number you can anchor to, our guidance contemplates the U.S. getting to approximately 7% unemployment by June of 2021. Second, out-of-business losses. Our retention was negatively impacted by losses in the most recent quarter, as we had a number of clients turn inactive, but after monitoring and assessing, we decided to write off as losses. While we believe government stimulus programs have helped many small businesses, we continue to see some companies in an inactive state where they are not paying employees. We expect continued elevated losses in the early part of fiscal 2021 as restrictions and lower demand in certain industries continue to drive fallout. As a result, we are setting our expectation for ES retention to decline by another 50 to 100 basis points over this coming fiscal year. Lastly, on client fund interest. As discussed last quarter, our client balance growth is being impacted by the combination of a decline in pays per control, lower new business bookings, and out-of-business losses and we had some modest pressure from companies taking advantage of the payroll tax deferral provision of the CARES Act. We are assuming a client funds balance of 6% to 8% for the year. And like pays per control, we expect it to be negative for the first three quarters and then return to growth in Q4. We expect our average yield to decline as well. As a reminder in Q4, we temporarily suspended our purchases of new securities and reinvestment of maturing securities in our client funds portfolio. Earlier this month, we resumed reinvesting. We have over $5 billion in securities maturing in fiscal 2021, yielding on average over 2% and we expect to reinvest them at prevailing yields that are well below that level. As a result, we expect our average client funds yield to be down 50 basis points to 1.6% for the year. With this combination of lower balance and yields, we expect interest income on client funds to be $390 million to $400 million, down about $150 million versus fiscal 2020 and we expect interest income from our extended investment strategy to be $430 million to $440 million, down about $125 million versus fiscal 2020. With that said, without the benefit of our client investment strategy, which utilizes laddered maturities, we believe the headwind to fiscal 2020 would have been even greater. Having covered the major macro topics for fiscal 2021 let me share with you how we are deploying our downturn playbook to manage expenses. We have concentrated on areas where we have excess capacity and on reducing discretionary costs while maintaining investment in sales, products, and our associates. As we emphasized last quarter, we continue to have the strong cash flow profile and balance sheet strength to withstand impacts to our revenue without taking immediate actions on our investments. We said we would be thoughtful and strategic in assessing the most prudent path forward, a path that balances positioning for recovery against near-term margin performance. We have now had a quarter to assess our business capacity and needs. During the fourth quarter, we identified businesses across ADP, where unfortunately, we didn’t believe a recovery was likely in the near-term and therefore had excess capacity in service and implementation. In addition to taking specific headcount actions, we have further tightened non-essential spending, including T&E and other discretionary spend. We are also continuing to move forward with our transformation initiatives. For the past few years, we have highlighted for you some of the discrete material initiatives that we have worked on and their estimated level of benefits. In fiscal 2019, we executed our voluntary early retirement program, which yielded over $150 million in annual run-rate benefits. In fiscal 2020, we executed on our workforce optimization program and a procurement initiative, which together yielded approximately $150 million in annual run-rate savings against our original expectations of $100 million. For fiscal 2021, we have two important initiatives to call out. First, we are moving forward with a digital transformation initiative that leverages many of the capabilities we highlighted at our February 2020 Innovation Day, primarily to optimize our implementation and service in addition to enhancing efficiency in other parts of the organization. As examples, we are further utilizing automation in the implementation process, deploying additional self-service features throughout our platform, broadening the use of guided assist tools and expanding the use of chat and chatbot. We expect this to be a multi-year effort as we work to optimize large parts of our service delivery model. Our innovation agenda is running full speed ahead and that includes innovation in our client engagement. We also expanded our procurement transformation initiative and expect further benefit for fiscal 2021. We have reassessed our real estate footprint and although we had already closed over 70 subscale locations as part of our service alignment initiative in recent years, we recently closed several additional locations, including a large office in New Jersey. We will continue to evaluate whether there is further opportunity for location consolidation. Between these two initiatives, our digital transformation initiative and the expansion of our procurement initiative we expect to realize a combined $125 million in savings during fiscal 2021, with over $150 million in run-rate savings exiting the year. Let’s now turn to our outlook for fiscal 2021. We will start with the ES segment. We expect a decline of 3% to 5% in revenue for the full year driven by our outlook for a decline in pays per control, balance and yield pressure in our client funds interest portfolio as well as pressure from new business bookings and elevated out-of-business losses. Compared to what we just experienced in the fourth quarter, we expect the first half of fiscal 2021 to experience a slightly greater revenue decline as the incremental impact from lower sales out-of-business losses and lower client funds interest more than offset the gradual recovery in pays per control that we are anticipating. We expect revenue growth to improve modestly in Q3 and then turn positive in Q4. We expect our margin in the Employer Services segment to be down about 300 basis points for the year. And as a reminder, the revenues we lose from pays per control, out-of-business losses, and client funds interest are all high margin. As with revenue, we are expecting a decline in ES margin during the first three quarters and an increase in the fourth quarter. For our PEO, we expect revenue down 2% to up 2% for the full year with average worksite employee count flat to down 3% driven by similar factors as our ES segment, namely headwinds and same-store employment, out-of-business losses and bookings pressure. We expect average worksite employee growth to be negative during the first three quarters and turn positive in Q4. Our revenues, excluding zero-margin pass-throughs, are expected to be down 1% to 4% and we continue to expect lower workers’ compensation and SUI pricing. For PEO margin, we expect to be down about 100 basis points in fiscal 2021 driven in part by drag from higher zero-margin pass-through revenues partially offset by a favorable compare for ADP Indemnity. With these segment outlooks, we now anticipate total ADP revenue to decline 1% to 4% in fiscal 2021 and we anticipate our adjusted EBIT margin to be down about 300 basis points as the benefits from our continued expense management and transformation initiatives are partially offsetting the detrimental impact – margin impact of expected lost revenue due to COVID-19 as well as the investments we continue to make. We anticipate our adjusted effective tax rate to be 23.1%. This rate includes less than 10 basis points of estimated excess tax benefit from stock-based compensation related to restricted stock vesting in Q1 of fiscal ‘21. But it does not include any estimated tax benefit related to potential stock option exercises given the dependency of that benefit on the timing of those exercises. Last quarter, we temporarily suspended our share repurchases as we decided it would be prudent to wait for stabilization of the overall environment. At this point, we anticipate resuming our share repurchase program at some point this fiscal year subject to market conditions and we have a slight net share count reduction contemplated in our guidance. As a result of our outlook for lower revenue and margins and higher tax offset partially by a lower share count, we expect adjusted diluted earnings per share to decline 13% to 18% in fiscal 2021. As most of you are aware, we also have $1 billion in notes due September of this year. At this point, we expect to issue new debt in the coming weeks or months depending on market conditions. I would like to conclude by saying that although COVID-19 is putting pressure on our financial performance, we believe this is transitory and the long-term prospects for ADP are in no way diminished and may even be enhanced by the current environment. For fiscal 2021, we are remaining focused on opportunities for innovation and growth while taking a deliberate balanced approach to managing expenses and we are confident in our long-term growth prospects. I look forward to updating you on our progress. With that, I will turn it over to the operator for Q&A.

Thank you. [Operator Instructions] And our first question comes from Mark Marcon from Baird. Your line is open.

Good morning. Thanks for taking my questions. One key one is just from a bookings perspective. As you look out over the coming year, you gave us a bit of a sense for the cadence that you expect. Which of the new solutions do you expect to see the greatest traction from? Which ones are you the most excited about and which ones could be the most incremental from a really long-term perspective?

Well, I think from an incremental standpoint – to start off with the last part of the question from a long-term standpoint, I think some of the investments we have made in some of our next-gen solutions. I think for me has to be one of the most optimistic in terms of potentially moving the needle from an incrementality standpoint, right, because we already have a very large, as you know, bookings number and anything that we can add on top of that goes into the top of the funnel in terms of revenue growth. That’s really was the reason for these investments, to really move the needle competitively and to improve our position from a differentiation standpoint. The early signs, of course now somewhat temporarily interrupted by COVID-19 were positive in terms of the traction we are getting both with our next-gen HCM platform as well as with our next-gen payroll platform. So that’s kind of where I feel the most optimistic in terms of the long-term. In terms of kind of the cadence and more kind of the short to medium-term in terms of next year – really the fourth quarter is an important part as we have kind of been alluding to here in our prepared comments and some of that is really clearly the pace of the recovery. We have an expectation that unemployment reaches a certain stage by the end of the fiscal year end; those things are all proxies for GDP growth and you guys all have plenty of access to your own firms’ economic forecast and so forth. The second half is really the key for us from a bookings standpoint. And aside from the incrementality question, this issue that we have around for example, adjusting to our – adjustments to our gross bookings is an important one because to the extent that the recovery continues on the pace we expect, it would help us a lot if we can start and continue to implement clients that were previously sold and that. So clearly, one positive would be that, that doesn’t degrade any further, because in full transparency, we mentioned that in our prepared statements that’s a concern under this kind of environment, but there is potential upside as well there. So there is downside and there is upside as well. But when you see the incredible decrease in activity in just a couple of months following the beginning of the crisis, it takes a while for those buckets to get filled up again in terms of leads, then turning into first deployments, then turning into presentations to clients. So, that whole process of how the sales evolution goes is critical for us in the second half. And the places that were hurt the most, which in our case and some of it is perhaps just because of the nature of the crisis, the down-market was hit very, very hard in terms of pays per control and also just declines in activity but also came back, frankly surprisingly – you can’t call it strong because it is still down year-over-year, but I think the bookings performance in the down-market has been gratifying. So if we continue on that trend, that would be good news for the second half of the year. And then we expect based on the current trends that the mid-market and the up market will then kind of follow suit as the kind of pipeline leading indicators that we mentioned translate into actual bookings and actual sales. So I guess, the short story is the things that were the hardest hit are the things that – in the initial stages are the things that should have, in our opinion, the biggest rebound in the second half. And on top of that obviously, our new product investments I think are a source of optimism for us. We’ve also invested in I think you heard us mention Workforce Management in the down market. I mean, we have a lot of things going on. You can see it in our investments in technology over the last four to five years and obviously some of those things are longer-term like the next-gen stuff. Some of it has been, we have been in the investment phase for 6 to 12 months and we expect those things to translate now into new sales. So I don’t know if you heard our tone over the last several years, we pivoted to investing more in product and particularly more around Agile technology and that hopefully gives us some firepower here in terms of our bookings incrementality going into this year, but also into the following years as well.

Mark, yes, just to add a little bit more there in terms of by each segment for sure we are expecting sales growth across each of the segments in fiscal ‘21. And as Carlos said, down market seems to be resilient and has trended up since we were at the low point several weeks ago, but down market has been trending up earlier. During the latter part of the year, we would expect up markets and international for that matter to continue along those lines, but for sure, we are expecting sales growth across all segments. And to Carlos’ point, from a long-term incremental perspective, certainly expecting Next-Gen HCM to be a driver there, but our strategic platforms in the near-term RUN and Workforce Now have been performing really well in the market, and we expect them to continue to perform really well in the market as we recover through this.

Great. Just as a follow-up, could you just give us an update in terms of where we stand in terms of the number of implementations on next-gen HCM or sometimes known as Lifion and also next-gen payroll this percentage of the client base has been converted?

So on next-gen HCM, you could probably appreciate for two, three months, that wasn’t really something that a lot of companies were focused on and for that matter us [indiscernible] unfortunate. The good news is we did actually start a client just a week ago. So that is a ray of sunshine in what was otherwise a lot of dark clouds. We had a number of clients that were set to be implemented in our fourth fiscal quarter, which delayed and one of those actually started here already in the early part of the first quarter. So that is encouraging, but we are not that different from where we were before. So call it still a handful, I think we have like seven or eight clients live somewhere in that neighborhood on next-gen HCM. On next-gen payroll, there the target at the beginning from a piloting standpoint really was – clients are not quite the same size as next-gen HCM. So it’s a slightly different dynamic and we’re making, in terms of numbers of clients, more progress, but it doesn’t mean that the product necessarily is making more progress. It’s just the difference between the markets we’re serving. Next-gen HCM is really in the early stages aimed more at the mid-market, if you will, than really the up-market, even though we expect it to be our next-gen payroll engine across our mid-market and up-market in the initial stages, it’s really mid-market. I think we have somewhere around 100 clients sold, and I think maybe that same number implemented, if I’m not mistaken.

That’s right.

So we’re making some good progress there. And there the pace is a little bit better in the sense that we didn’t come to a complete stop on next-gen payroll and we continue to implement clients there and move forward. But it’s a very challenging situation for our clients and we really need to kind of help them get through this situation and the crisis, not necessarily press them to get started as quickly as possible, although that’s obviously our desire from our standpoint.

Of course. Thank you.

Thank you. Our next question comes from Ramsey El-Assal from Barclays. Your line is open. Please check if your line is on mute.

Can you hear me now?

Yes, we can hear. Yep, go ahead.

Yes, go ahead. We can hear you.

Hello, hello.

Pardon me, sir. Please proceed with your question. And we will move on to our next question. Our next question comes from David Togut from Evercore ISI.

Thank you. Good morning. Could you characterize the gross bookings performance in the June quarter prior to the backlog adjustment?

Yes, I mean I think we – we’re just trying to give a nod to our sales force in terms of – they were – they performed better than we clearly had forecasted and that we gave in terms of color commentary during this same earnings call or during the earnings call of the last quarter, but they were still down significantly. So at the end of the day, we just want to make sure that you guys got the right impression that we weren’t disappointed and that we didn’t do worse than we expected. But from a mechanical number standpoint – think still down somewhere around 50% like if that’s a fair characterization. I don’t know if Kathleen has any more color there?

Yes, no, the gross bookings were slightly positive to what we had expected. The approximately, down 50% is right, which is what we have been anticipating. And then the backlog adjustment, which actually is part of our normal process factored into the overall bookings number being down slightly more than that for the fourth quarter.

Got it. And just as my follow-up, assuming the employment recovery proceeds as you have laid out Kathleen, negative 7% unemployment by the end of FY ‘21, would you expect to be back on your sort of normalized growth path by FY ‘22?

Yes, go ahead Carlos.

No, go ahead, go ahead.

It’s a great question in terms of when do we return to previous levels of growth and profitability. And as you pointed out, a lot really depends on the shape of the recovery. And look, we have taken the best view we can and tried to share with you what we are thinking about that in terms of the shape of that recovery. But it really is going to depend on that. Last recession, it took a couple of years for sales and retention and revenue growth to return to the pre-recession levels. Now, is it going to look exactly like it looked last time? We don’t know. This crisis is different. The make-up of ADP is different. So, I hate to say it, but it’s going to depend on a lot of factors but returning to those previous growth rates certainly will not be in fiscal ‘21 based on what we see right now and we will update you as things change and as we go through the current year.

I think, maybe just add a little bit of – just in terms of my own observations from looking at the kind of the quarterly cadence, if you will and how – what the implications are for FY ‘22, it really depends on – are we thinking about sales? Are we thinking about revenue? Are we thinking about profit growth? And they are all kind of different buckets. But I guess and to Kathleen’s point, it really all depends – if this is unlike the financial crisis, not a two or three, the financial crisis really was – you go back and think about it, the kind of mini crisis that occurred over the course of the following two or three years. Remember, we had the European debt crisis. We had a number of things that elongated that situation, but that could happen here as well, and we are of course not scientists and we don’t know exactly what’s going to happen. But we’re using kind of the same forecast that I think all of you are using and if you make those assumptions around when the healthcare crisis passes, i.e., vaccines and therapeutics and so forth. If you follow that path then FY ‘22, when we exit in the fourth quarter of FY ‘21 – from a mathematical standpoint – I think you used the term growth rates, the growth rates are going to look pretty good in terms of as you exit from a booking standpoint and then starting maybe with profitability in the first quarter of FY ‘22 because in the fourth quarter of FY ‘21 we saw some NDE expense. But some of that – frankly is really the comparisons. So we have three quarters in FY ‘22 that are going to look pretty good. Because if we still think that the first couple of quarters of FY ‘21 are still impacted pretty significantly by COVID and by the first couple of quarters of FY ‘22 you don’t have that impact you are going to have some I hope some really good tailwinds on some of these growth numbers. But the key for me was looking at absolute booking dollars in the fourth quarter of ‘21 compared to the fourth quarter of ‘19 because obviously ‘20 is not a good comparison and looking also at our absolute profitability in the fourth quarter of ‘21 and our revenue in the fourth quarter of ‘21. Again, I feel some sense of optimism about ‘22 based on those exit rate assumptions with a capital assumption because this is – we are a long way away from having certainty and you have seen how fluid the situation has been. But I think the math works favorably once we get through fiscal year ‘21 and particularly when we get through the first three quarters of fiscal year ‘21.

Understood. Greatly appreciated.

Thank you. Our next question comes from Jason Kupferberg from Bank of America. Your line is open.

Thanks, good morning guys. Just wanted to start with kind of a high-level question on the fiscal ‘21 guide. I mean, we have got revenue down modestly, but obviously EPS down quite a bit, and that’s being driven by a little bit of tax, but really the 300 bps of EBIT margin decline. I guess it looks like the transformation savings should largely offset the hit to float income. So, are we really just down to isolating this against decremental margins that maybe people didn’t appreciate the – kind of the severity of or are there other factors there? Because I just think at a high level people were surprised to see how much EPS is going to be down relative to revenue for the current fiscal year?

Let me take a crack at a couple of high-level things. And then Kathleen probably can provide some additional maybe detail to help in terms of quantify some of the stuff. But we – I’m not sure if it was clear from our comments last quarter or this quarter but having been through these types of – not through a healthcare crisis but I personally have been through dot-com downturns, Y2K at ADP, 9/11 and the Global Financial Crisis. Our Board is long-term oriented and it feels like despite how horrible the situation is, it feels like this situation is transitory and so one of the things that we have as a first principle is to maintain our level of investment. That doesn’t mean that we are not prudent around our expenses and I think we have been and I think Kathleen gave you some examples of some of the things that that we are doing. But we are going to add to our sales headcount next year, which might surprise some people and maybe not something that you were expecting. The problem is that when you model only one fiscal year for a company like ADP or recurring revenue model, if you decrease your sales cost or even your investment in product and technology, it actually looks quite favorable. And you can probably offset quite a bit of revenue decline. The question is, is that really the right thing to do long-term? We don’t believe that it is and so that’s one factor, philosophically. The second factor is that even though we clearly have some decline in the number of clients, the nature of the revenues that are going down is very high margin. You mentioned client funds interest, but we also have another decrease from a comparison standpoint ‘20 to ‘21 in pays per control, which is call it 100% margin as well. And there is very little work related to the number of worksite, I am sorry, the number of employees paid by our clients. Our work is – workload is generally driven by number of clients and then as we have all now observed in the last quarter also driven a lot by the regulatory environment. And so the amount of work has not decreased much and in some cases has increased on behalf of our clients. Again, that’s a place where we could cut some of that support. It would lead to lower NPS scores and we would probably have retention go down, but the single most important driver of financial value for ADP is client retention and lifetime value. To lose clients and then have to go sell them again and implement them again makes no sense and all the experience I have and we have and our Board has tell us to kind of stand firm and make sure that – that doesn’t mean that we ignore the realities around us. If we thought that this was a permanent decrease in capacity of the economy or in terms of the global outlook, and then it was going to last two, three, four years, we probably would be behaving differently, but that’s not our expectation, that’s not our – that’s not the way that we are managing the company. There’s also a couple of other items I think that mathematically may be not helping us and maybe Kathleen can help a little bit with some of those sure.

Yes. Look, on the surface the guide to 300 basis point decline on the surface may sound like a lot, but there’s a lot going on in there. When you take it apart, I think it’s really – and you put it into the kind of buckets, I think you will see how we arrived at that guidance and that expectation, right? As we’ve talked about and as you know we’ve got obviously a substantial impact from loss – a very high margin revenue, right? We’ve got that high margin revenue. We’ve got client funds interest, which is a hurt on margin year-over-year. We also have growth in zero-margin pass-throughs, which falls right to the bottom line from a margin perspective. That’s going to be a significant hurt for us where it hasn’t been as much in the past. And the continued investment along the lines of – look, we think it’s prudent and smart to take to continue our long-term view and continue to invest in sales and in product. We are committed to that level of investment so that’s a hurt. And then you do have, as you pointed out, the transformation and other cost actions that we’ve been taking that only partially offset that. So I would think about it in those buckets in terms of, look, you’ve got this high margin revenue. You’ve got top-line stuff that falls right to the bottom line, like the zero-margin pass-throughs and client funds interest. You’ve got our continued commitment to investments. So you have got that from sales expense partially offset by continued transformation work.

But I guess let me – just to provide a little bit of color on kind of our view because I learned the hard way from my two predecessors about some of these things. So if you just look at the sales engine aspect of our business and you look at it over multiple years, you can actually do the math that if our – if we decreased our headcount by 5% or even if we just kept it flat and you assume the productivity continued on kind of its normal trend, which is a big assumption, but if you even assume that, you can see the impact that has on revenue growth from multiple years down the road. So obviously, if you expect that you’re not going to be able to return to the same kind of sales productivity you had before, then you have to do something differently, but that’s not the expectation we have right now. And it’s critical to our growth in ‘22, ‘23, and ‘24 for us to maintain our investment in our sales engine. Not to mention in our product and our technology and a few other places as well.

Okay. Yes, that’s really good color. For my follow-up, I wanted to ask just about retention. I know you are forecasting the 50 bps to 100 bps decline this year. I wanted to see if we can get a sense of how that compares in past recessions and then how much more do we have to go on that? I mean have you written down the majority of it and there’s just a little bit left over because I know in fiscal year ‘21 you are saying there will be some more losses. So just trying to get an impact of magnitude of previous recessions and how much is left? Thanks.

So that really comes through in the retention. So it’s not really, we don’t quote, unquote, write it down, right? So that really comes through in terms of the losses from a retention standpoint. We have like maybe others some clients that have quote, unquote stopped processing and, but they are still there, and so there is a question of which of those clients come back and which of those clients don’t come back. But we have modeled in the down-market, this is really a down-market issue. We hope that it’s a down-market issue. At least in prior economic cycles that’s been the case. I think you see it reflected in our retention rate, but it’s very, very hard for us to say with any level of certainty, how that’s going to exactly play out in the future. We have looked at all the prior downturns, and we know that there’s probably some out of business that’s still there that’s going to occur. A lot of this is going to depend on government stimulus and whether there continues to be some support for small business or not and also just the overall level of GDP and obviously the overall pace of recovery in terms of people going back to spending on products that help small businesses survive.

Okay, alright, well, we appreciate all the disclosure. Thank you, guys.

Thank you. Our next question comes from Tien-tsin Huang from JPMorgan. Your line is open.

Hi, thanks so much for all this detail. Just on the transformation initiatives, I caught all the details there. How about looking beyond those two initiatives? Are there any other potential actions that you could take, anything that could be material over a similar size?

Again, I will maybe give some high-level comments and let, I think Kathleen give some additional detail. We have a very large menu of things that we can do. This company has a very, very long history of navigating through multiple changes in environments and multiple economic circumstances and now I think we will add to our repertoire managing through a major health crisis and a pandemic. We have – I don’t know how else to put it. We have a huge number of things that we could do, if necessary and when necessary. This is an incredibly resilient business model. I recognize that this is unusual for ADP to be down the way we are, but it is what it is in terms of the economic circumstances around us. Believe me; we have a number of levers. So as I said, like some of these things are – and our business model are somewhat self-correcting. If in the unlikely event, there was a belief that there was a permanent impairment of kind of global economic GDP or growth vis-à-vis other industries or other companies, I think that we are in somewhat of a better place because the amount of money that we spend on NDE and on implementation alone would, at least for the short-term, would certainly enhance our bottom line and help us from a margin standpoint. That’s not what we want because the real value to be created here is through growth – like, through profitable growth, not by kind of shrinking our way into profitability. But we have no intentions of allowing ourselves to underperform, if you will, on a long-term basis below what we have delivered for many, many decades. That’s what ‘21 is all about. But if circumstances change, we have a long list and quite a lot of variable expense in our P&L and a very strong balance sheet and a very strong cash position.

So, Tien-tsin, thank you for the question. It’s a logical question because when you think about kind of the past and the history over the last several years, right, in terms of what we’ve been driving from a transformation perspective, you can see that we have had these several kind of big major initiatives over the last several years, right. We had Service Alignment Initiative first. We have a Voluntary Early Retirement program. We told you about the workforce optimization and then the procurement and now the procurement continues and we have shared with you our work that we have been doing around digital transformation. The question, what comes next? Quite frankly, I think there is a lot of runway and we have a lot to do from a digital standpoint and also from a procurement standpoint. It does get harder as you go, I will say, but there is a lot to do there. And a lot of the digital projects, first of all, the digital is certainly focused on our service and implementation because there is an opportunity there, but it is across the entire company. Every single segment and every single department, whether you are front-office or your back-office is tasked with thinking about digital transformation, automation, how do you make the work more efficient, how do you take work out? There is runway there. So I expect that you will hear us talking about that for some time to come. The procurement does get harder as you go. What I would say is, in an environment like this that we are in right now, in a downturn, it does present some procurement opportunities that may not have existed a year ago – when you actually go back and are negotiating with vendors and suppliers, and so forth. So we have got real work to do there. And as you heard us say in the prepared comments, we have expanded procurement to make sure we are capturing all the opportunities. From a real estate perspective in terms of, look, the environment has changed. The way the world is working has changed. Let’s make sure we are thinking about our real estate footprint in a fresh modern, forward-looking way to ensure we are utilizing the assets that we have to the fullest extent possible. We are understanding how we are going to get work done in the future. We are understanding how we can utilize mobility models where it makes sense to do that. So we have got a lot of work and some really good work to do here from a digital procurement real estate perspective.

And just one last comment on that. The other thing that maybe is under-appreciated but it’s worth mentioning here because again, we are typically not talking about these things as they are more longer-term, but if your question was really more about what’s potentially next, longer-term and not just in ‘21, our next-gen investments are the largest potential digital transformation effort we have ever undergone. We always focus on them around what they are going to do in terms of our winning in the marketplace and our sales growth and our revenue growth. But trust me when I tell you that the business cases for those investments and the progress we have been making over all these years, there’s an enormous expectation for call it automation, call it efficiency, whatever you want to call it. We don’t usually talk about our tax engine, we talk about HCM and payroll. But one of those next-gen investments is our tax engine, which again there, the early signs – we already have a couple of hundred thousand clients migrated onto that platform. When you see how quickly we are able to make these legislative changes in that platform and the cost structure and the cost of support again, I would be very optimistic that one of the largest transformation efforts we will be talking about in the future when we look backwards is these next-generation investments. I am hoping they are also going to lead to big growth incrementality and winning more market share in the marketplace, but do not underestimate the value of these investments in terms of our back-office and also our cost structure.

Yes. No, thank you for that. That’s very complete answer. If you don’t mind, just one quick follow-up. You mentioned the legislative changes and a lot of the work and effort that you have put into that. And Carlos, I know I ask you this all the time. So I am going to ask you again, could we see more demand? I know you mentioned improved bookings momentum that you started to see, but could you see more demand for the service model in general here? I don’t know where you are seeing maybe some switching from or more demand for work but again, election year, lot of complexity, probably more changes coming. Could that help you here?

I mean, I don’t see how it can’t. And usually, I am not that optimistic or that definitive because if it were only the election, I would say, we will have to wait and see. But I don’t, again, I am not usually a pontificator, but I just don’t see how companies after all this don’t reassess not just kind of how they do HCM and payroll and so forth, but so many other parts of their business model where continuity and resiliency and so forth are critical and that applies to the smallest client to the very largest clients. I think that for a lot of us, I don’t think we are the only ones or the only industry or space where that’s going to be a tailwind but it’s hard to believe that this is a positive. Now, in what quarter and how do I qualify that because you have GDP going down, I don’t know, 30-something percent in the second quarter. Even if people were thinking about that, that wasn’t really going to be a factor certainly in the fourth quarter. The question is how does that net out in the math, right, because you want to somehow be able to parse that out and understand how much of this is incremental. And I can’t necessarily do that scientifically but intellectually, it’s hard to believe that it is not a tailwind going forward for us. On the election side, we generally like change because – and it doesn’t matter whether one party versus the other. We are apolitical as a company. But usually, when there’s change there is change and for employers. Employers are an instrument of policy of the government, it’s how public policy gets effectuated whether it’s through tax or all the various safety policies – you are seeing all these changes in leave policies now to help manage through the health crisis. So that’s all incredible, I think opportunity for us to help our clients and when there is an opportunity to help clients, that’s an opportunity to sell new business as well.

Yes, agreed. Thank you. Have a safe rest of the summer. Thanks.

Thank you. You too.

Thank you. This concludes our question-and-answer portion for today. I am pleased to hand the program over to Carlos Rodriguez for closing remarks.

Thanks. So just a couple of final thoughts. One is I know I said it before, but we have navigated through a lot of issues over many decades. I have had the experience of being through several myself, whether it’s the dot-com recession, what happened after 9/11, the global financial crisis, because in that case it was really a synchronized global downturn and now this health crisis. The one thing that I would say about ADP’s business model regardless of I know the focus here is on the short term, but if you stay focused on the long term, it’s an incredibly resilient business model, and financial model, but also business model. The value of our products and our services is key and one small anecdote, I think we may have mentioned it in the last call. As kind of this crisis unfolded we had to become, like many other parts of the economy, we had to go and talk to governors and leaders, including the White House to make sure that we were deemed an essential service, because we needed to stay in operation. I don’t know what better sign there is of a resilient long-term model than to be considered an essential service, because we definitely are. We are glad we were there to help our clients will still be there to help our clients. This speaks volumes to the long-term viability and also upside of the business that we are a critical service an essential service to the economy and to our clients. We are proud of that. I am proud of what our associates did to live up to that expectation. As to the next year again, I would encourage everyone to think through kind of first half second half or even by quarter because at least for me assuming that we stay on the trajectory that we are on, which I realize is fluid, but with those assumptions the fourth quarter exit rate of FY ‘21 is really what I am focused on and not necessarily the short-term results of the first few quarters of FY ‘21 although we are going to do our best to perform as well as we can throughout that as well. Lastly, I know Kathleen said in her comments, but we are very proud to have delivered $1.5 billion in cash back to the dividends and $1 billion through buybacks, which I think is also another sign of the incredible resilience. I think cash flow generation capability of this business model in this kind of short-term hit that we are having to revenues and to profitability, I don’t believe will impair our ability to continue that tradition of returning cash to our shareholders. For that, I want to say that I appreciate the patience of our shareholders as well and all of you. Thank you today for listening to us and for all your questions. I wish you all a very safe summer as well. Thank you.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating and you may now disconnect. Everyone, have a wonderful day.