Good morning. My name is Michelle and I will be your conference operator. At this time, I would like to welcome everyone to ADP's First Quarter Fiscal 2022 Earnings call. I would like to inform you that this conference is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I'll now turn the conference over to Mr. Daniel Hussain, Vice President Investor Relations. Please go ahead.

Thank you, Michelle. Good morning, everyone. And welcome to ADP's first quarter Fiscal 2022 Earnings call. Participating today are Carlos Rodriguez, our President and CEO, and Don Maguire, our CFO. Earlier this morning, we released our results for the quarter. Our earnings materials are available on the SEC 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 is useful to investors. And that includes 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 risks. 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. And with that, let me turn it over to Carlos.

Thank you, Danny. And thank you, everyone for joining our call. I'd like to start by welcoming Don Maguire, our new CFO. Don has been with ADP since 1998, when he joined the ADP Canada Team as a VP of Finance. He's held a series of roles with increasing responsibility, most recently serving as President of our international business, where he's done a phenomenal job of driving growth and profitability in a very complex environment. I know he's looking forward to meeting all of you. Now, moving on to the quarter. We're pleased to have delivered a very strong start to the year with 10% revenue growth and 140 basis points of margin expansion, resulting in a 17% increase in adjusted diluted EPS. While we did expect our Q1 revenue growth to be above our prior full-year guidance range, this result was still above our initial forecast and underscores the strong position we are in as we emerge from the pandemic. I'll let Don go through the details after I cover some highlights. Our ES new business bookings results were very strong, representing another record Q1 bookings amount. And we're ahead of our expectations. Our performance is driven by continued strength in our HR portfolio and our international business. With this impressive bookings performance across the enterprise, we're pleased to raise our ES bookings guidance for the year after just one quarter, as we're now feeling even more confident about our sales momentum. Even stronger was our CEO bookings performance, which was also well ahead of our expectations. A key reason that we are raising our guidance for average worksite employee growth for the year as Don will outline for you. As you will recall, we have been sharing our sales productivity trends over the course of the pandemic, and I'm pleased to report that in Q1 we were well above pre-pandemic levels. We reached this result several months sooner than we expected, and we expect this to continue as we look ahead. Our ES retention remained incredibly strong as well. As we shared last quarter, we believed it was reasonable to assume a slight step back in retention from the record 92.2% level we experienced last year. But in Q1, we did not see meaningful deterioration. Instead, we actually saw further improvement in our overall ES retention to a new record Q1 level, despite a decline in our small business division, where out of business losses started to trend back to more normal levels compared to the below normal levels last year. We're continuing to assume a slight decline in our retention outlook for the year. But clearly, we are pleased with our performance so far and the upward revision in our retention outlook reflects the strong Q1 performance. Our ESP pays per control was solid with 7% growth in the quarter, about in line with our expectations. We feel that a number of questions these past several months about what we think might drive workers back into the labor force. While we don't have an answer to that question, what we can tell you is that we continue to see positive trends. Our clients are eager to hire and we are seeing workers return to the labor force, even if it's gradual. As a result, we expect to benefit from above-normal level of pays per control growth over the course of the year. In addition to the very strong ES performance, our PEO delivered another stellar quarter with 15% revenue growth and 15% average worksite employee growth, even better than the high expectations we had coming into the quarter. There were multiple drivers to the outlook performance in the PEO, including the strong level of hiring within the client base, resilient retention, and the improved bookings performance I mentioned earlier. We're very pleased with the momentum we see building in the PEO. And we're raising our full-year guidance accordingly. In addition to the financial highlights, there are a few product highlights I wanted to share with you. First, I'm excited to share that we completed the initial rollout of our new user experience for RUN. As we shared with you last quarter, this represents the most comprehensive refresh we've done since the launch of RUN. And we're very proud that in a matter of a quarter, we were able to seamlessly move hundreds of thousands of clients to a new and better user experience. Early signs indicate client satisfaction scores are trending even higher than the record levels we already have in our small business division. So it’s a really great outcome and represents a very strong execution by the team. I'd like to also share that at the Annual HR Tech Conference a few weeks ago, our innovative diversity, equity, and inclusion tool on the DataCloud platform was named a top HR product. This recognition adds to ADP's longstanding history of award wins at the conference, marking an unprecedented seven consecutive years ADP has been honored for its innovative HCM Technology. You can probably tell from the number of times we've highlighted DataCloud that our velocity of innovation has increased significantly there. With this solution as an example, we've seen over 50% of active users of the solution take action and realize a positive impact on their measures. I'm proud that we provide solutions that drive real positive change for our clients. The seven-year track record demonstrates that innovation is part of ADP's DNA. And we have a strong growing agile R&D team committed to delivering solutions in the market that continue to push the boundary of what HCM solutions can do for employers and employees. As I said before, we're very pleased with this fantastic start to the year. We look forward to sharing even more of the ADP story with you at the upcoming Investor Day in November. And now I will turn the call over to Don for more detail on the quarter and the outlook.

Thank you, Carlos, and everyone on the call, good morning. It's nice to meet you. Our first quarter represented a strong start to the year with 10% revenue growth on both a reported and organic constant currency basis. Our adjusted EBITDA margin was up 140 basis points, much better than expected, and was supported by higher revenue and overall cost containment. Our tax rate was up slightly in the quarter versus last year. But we also benefited from the elevated pace of share repurchases following our debt issuance in May. Combined, those factors contributed to a 17% increase in our adjusted diluted earnings per share. Moving onto the segments, our Employer Services revenue increased 8% on a reported and organic constant currency basis. Our strong Q1, ES bookings guidance performance, and record retention contributed to this performance. Though, as a reminder, we did continue to lap some of the lower revenues we had last year in some of our volume-related businesses, including recruiting and background screening. Our clients' finding interest represented only a slight headwind in the quarter, as our 40 basis point decline in average yield was offset by fantastic balanced growth of 22%, driven by client growth, planner growth, higher wages, and the lapping of the payroll tax deferral last year. ES margin increased 150 basis points on strong revenue performance and overall cost containment. As Carlos mentioned, our PEO had another terrific quarter. Average worksite employees increased 15% year-over-year to 629,000 in revenues, excluding zero margin pass-throughs from 20%, supported once again by favorable mix trends within the PEO employee base, as well as improving SUI rates. Total PEO revenue grew 15%, which included a modest drag from lower zero margin pass-through growth and worksite employee growth as expected. PEO margin was up 70 basis points in the quarter driven by operating leverage. Overall, our Q1 results reflect a very strong start to the year and delivered ahead of our expectations on practically all fronts. Let me now turn to our updated outlook for Fiscal 2022 for ES revenues. We now expect growth for 5% to 6%, which we're raising 50 basis points at the midpoint. This is driven by several underlying factors. We're raising our expected range of ES new bookings growth to 12 to 16%. As we mentioned, we had a better-than-expected performance in Q1 and reached pre-pandemic productivity earlier than we had forecasted. We haven't made significant changes to our rest of year outlook at this point, but if momentum remains as strong as we've seen it, then we may see opportunity to deliver additional upside. We're also raising our ES retention, and we're now assuming a decline of 50 basis points off of FY21 all-time highs versus our prior outlook of a decline of 75 basis points. As with bookings, this is primarily a function of the strong Q1 performance. Our continued assumption is that as clients continue to re-engage in the marketplace, we may experience a slight decline over the course of the year. We expect to have significantly more clarity once we get through the calendar year-end period, where we typically see most of the switching activity. For U.S. pays per control, we're making no change to our outlook of 4% to 5% growth. We continue to expect a gradual recovery in the overall labor market, and the 7% growth in Q1 was about in line with our expectations. Then for our client funds interest revenue, we're raising our outlook by about $15 million to a range of $420 to $430 million, as we're raising our balanced growth assumptions by about 4%, to growth of 12 to 14%. Our outlook for client funds yield meanwhile is unchanged despite the improvement in the yield environment, primarily as our stronger balanced performance actually created a temporary mix shift to overnight investments until new securities are gradually purchased. But that said, the favorable shift in the yield curve is clearly helpful to us and will certainly benefit our multiyear client funds outlook, all else equal. For ES margin, we now expect an increase of about 75 to 100 basis points, up from our prior range of 50 to 75 basis points. While we did outperform meaningfully on margin in Q1, we're also seeing some additional expenses over the rest of the year, including higher headcount in our outsourcing businesses. Meanwhile, we continue to expect transformation initiative benefits, including our digital transformation to offset a year-over-year increase in facilities, T&E expenses, and other return to office expenses. Moving onto the PEO, we now expect PEO revenues to grow 11 to 13%. Average worksite employees to grow 11 to 13% and revenues excluding 0 margin pass-throughs to grow 12 to 14%. This 2 percentage point raise across the board is a function of both our strong Q1 bookings and overall performance, as well as an expectation from stronger hiring within our PEO base to contribute over the remainder of the year. RPO was very well-positioned to capitalize on growing levels of client demand coming out of the pandemic. And if we continue to drive outside booking performance over the rest of the year, that could represent further upside to our outlook. Following our strong start to the year, we now expect a range of flat to down 50 basis points for the year, for an improvement from our prior expectation of down 25 to 75 basis points on our margin. As a reminder, we are growing over very strong margin results in fiscal 2021 and are also expecting elevated selling expenses this year from strong bookings performance. Bringing it all together for our consolidated outlook, we now expect revenue to grow 7% to 8%. Following the strong 10% Q1 performance, we now expect the remaining quarters to grow closer to 7%, which is higher than our prior forecast. For adjusted EBITDA margin, we now expect an increase of 50 to 75 basis points. As we shared last quarter, we expect our margin improvement to be back-half weighted, most specifically in the fourth quarter. Our current expectation is for a slight margin decline in Q2 and Q3. We're making no change to our tax rate assumption. With these changes, we now expect growth in adjusted diluted earnings per share of 11% to 13%. As I think you've heard us say a couple of times now, we are very pleased with our Q1 results and we're happy to be raising our guidance this early in the year. This is still a dynamic environment, and there are a wide range of potential outcomes. We believe our guidance is appropriately balanced given these conditions. However, should our associates continue to drive better-than-expected sales results, client satisfaction, efficiency, and service and implementation, we would see an opportunity to deliver additional upside to our outlook. Before we move into Q&A, I wanted to share two things. First, I look forward to meeting everyone, perhaps virtually for now, but eventually in-person as we get back out on the road to meet our shareholders and the investment community. Second, we are very much looking forward to our upcoming Investor Day in a couple of weeks on November 15th. Having run one of our largest businesses for years, I can tell you there is always much happening here at ADP on the ground. Although it all tends to roll up to a very stable financial picture, I can tell you there's a lot of excitement among our associates for the things they're working on. We hope to share some of that excitement with you in November. And with that, I will now turn it back over to the Operator for Q&A.

We'll take our first question from the line of Samad Samana with Jefferies. Your line is open.

Hi, good morning and thanks for taking my questions. Congrats on the really strong start to the new fiscal year. So Carlos, maybe I want to unpack the drivers to the strength on the new bookings side. I know productivity is clearly one, but how should we think about the product side and within the product portfolio where that strength was in terms of driving new bookings?

So even though we primarily discussed ES bookings, I want to highlight that PEO bookings were exceptionally robust. The growth rate was significantly higher than even the ES bookings growth for the quarter, which was encouraging to see. This indicates that the market is actively seeking solutions post-pandemic that address people and talent challenges. Companies, including ADP, are facing difficulties attracting internal talent, and we’re also seeing shortages of labor in various categories, especially in HR, payroll, and benefits. This situation should provide an edge for clinical outsourcers. Our approach is to offer great technology and software while also managing back-office tasks and ensuring positive outcomes. With many struggling to hire for their HR departments, our outsourcing solutions are gaining traction. Additionally, thanks to easier comparisons, areas such as recruitment process outsourcing and our screening and selection business, which had low booking levels last year, have seen remarkable rebounds. Overall, we experienced strong growth in workforce solutions and continued success even in a down-market. Last year, we mentioned acquiring a large client base, which impacted our bookings. Adjusting for that, SBS was also strong. This reflects our strong connection to the economy and GDP in terms of bookings, aligning with our long-held belief. We are witnessing a robust recovery in a healthy economy, creating a favorable environment for our sales force.

That's very helpful. And then, Don Maguire, maybe one for you on the retention side. So obviously, it's really impactful to raise the outlook one quarter, and I think signals the strength that you're seeing. But just help unpack the slight uptick in the SMB side moving a little bit more towards normal in terms of business failure. Should we think that the offset there is even better-than-expected retention in the mid-market, or on the enterprise side? Can you maybe help us think about it across the customer size spectrum? How to balance those different moving parts?

Yes. Sure. I think it's fair to say, and we commented on it that the retention is at an all-time record for our Q1. So that’s fantastic and better than we had expected. The expectation as we went into the year was to see, particularly in the smaller business segment, to see that slip back a little, and indeed it has, but it hasn't slipped back nearly to the extent that we had anticipated. Of course, then that means that we did have, and continue to have, good retention levels in the mid-market and the up-market. We expect that to continue. However, as you know the cyclicality and seasonality of our business, we will need to get through the calendar year-end, which is when we see most of the switching activity because of the drivers in new starts the year, etc. So we are positive and we did take our retention estimate up for the year and we'll see if it holds and perhaps it's better than we expected.

Great, thanks. And I look forward to seeing you in person in a few weeks.

Thank you.

Our next question comes from Jason Kupferberg with Bank of America. Please proceed.

Good morning and thank you for taking my questions. This is actually my colleague on for Jason. Don, firstly, congratulations on the role. Maybe you can talk a little bit about your priorities in the CFO role and how they could look a little different than the prior one. Should we expect an update on the multiyear targets at next year's Analyst Day? And then I have a follow-up. Thank you.

Yes. So I guess what I would say is I've been with ADP for a long time now. And I guess what I observed in the roughly 23 years I've been with this company is that ADP has always had a very strong financial organization with a strong finance leader. I want to make sure that we continue that. I am sure we will. I think that the priorities that we have are well set out in our strategic plan, previous Investor Days, etc. So we'll probably provide along with an update on those things when we get together on November the 15th. But let's wait until then. I don't think you're going to see any dramatic changes. We pretty much have a well-discussed and well-disclosed trajectory, and plan, and we will update you on that on November the 15th.

Understood, thank you. If I could ask about just sales force spend, we're clearly seeing some very strong momentum in the market. So I was wondering if you have any plans for sales force growth in Fiscal 2022? And which part of the market those ads would be concentrated in? Also, anything notable to call out in terms of just the mix of new logos versus cross-sells in your bookings for the quarter or in the forecast? Thank you.

I think in this kind of environment, given the very first comments we made about the economy, and you have both the economy as a tailwind and you have now in the U.S. I think an administration that is more inclined to regulation into, particularly employer regulation. You have, I think, a very strong backdrop for what I would say is the foreseeable future. In that environment, historically, what ADP would do is add as much sales capacity as possible. That doesn't mean that we indiscriminately hire because we have people to hire and onboard and train and so forth, and we have to make those people effective. But I would say that we have a strong appetite for growing our sales force, but also for growing our investment in marketing, whether it's digital marketing or more traditional advertising. That's exactly what we plan to do. Having said that, I would tell you that we've faced challenges like everyone else in terms of hiring. It's a very difficult labor market. I hope that we can fulfill those expectations of growing our sales force as fast as possible. That's the only thing that I could see getting in the way. We obviously have the capital, we have the desire and we have the experience to be able to execute once we hire those people to get the sales, get the clients implemented, and then hopefully derive the benefits of that revenue for, in many cases, 15-20 years, depending on which business unit you're in. I would say there is a strong appetite for both headcount growth, but also other investments in sales, whether it’s marketing, digital marketing, sales tools, all across the board.

Thank you.

Our next question comes from Tien-jian Huang with JP Morgan. Your line is open.

Thanks so much. Good results here. Just on the PEO side, I'm curious how much of the general improvement there is secular versus cyclical? And I know Carlos, you talked about putting more sales energy there as well. Just curious, what's changed?

We initially felt confident that the PEO business would perform well after the pandemic, as it has historically following previous economic downturns. However, I need to be cautious with specific forecasts. We faced some challenges post-pandemic, particularly with the pricing in the PEO, which was about 10% lower than before. For instance, if average new clients in the PEO had three worksite employees prior to the pandemic, that number dropped to approximately 2.7, reflecting a 10% decline. Therefore, even if we were selling 10% more units, the smaller unit size meant we were not seeing a significant increase in overall results. We attribute this entirely to economic factors and the pandemic's impact. In the recovery phase, we are seeing strong unit growth and a rebound in unit size, which has contributed to robust growth in the first quarter for the PEO. However, we should note that we recently transitioned into a new fiscal year, which ended on June 30th. Historically, our business performs well in the first quarter after a year that was good under the circumstances, but the PEO had been lagging in recovery compared to what we were seeing in ES. Now, as we anticipated, the PEO is taking the lead in growth.

Thank you, Carlos.

Our next question comes from Kevin McVeigh with Credit Suisse. Your line is open.

Great. Thank you and congrats on the results. Don, I wondered could you give us a sense, Carlos, from a sales perspective, despite the tight environment you're still delivering, is there any way to think about the go-to-market strategy this cycle as opposed to last? How maybe technology and more of a mix down-market helps drive that process. I guess what I'm saying is, is there more leverage in the sales force today than you've ever had? Is there any way to maybe put some parameters around that?

I think there is definitely more leverage in the sales force than we've ever had because I mean, I think maybe what you're alluding to is that our sales force like a lot of other competitors had to go to 100% virtual for a number of months, and I'm sure every competitor handled this differently in terms of how long they were virtual versus when they went back in the field. So this process, which we had been learning about for 20-25 years, like we have almost a third of our sales force already selling what we call insights sales. They were able to sell virtually. They had been in a building, but it didn't really matter whether they were in the building or in their homes. They were still able to sell very effectively. That was an easy transition for that portion of our sales force. Then, with the appropriate tools, and some training, and some learning from our inside sales force, we really moved our entire sales force to sell virtually. I think now we're really in a period where we're going to sell based on however the client wants to be sold. If the client wants a combination of an initial video call on Zoom or WebEx, we'll do that. If the client wants an in-person visit, we'll do that. If they want to close the deal with an in-person, but start with a video, we can do that. So I think there's no question that if sales force leverage has increased for us, but admittedly, probably for our competitors as well. Our reach has definitely been extended. There’s no question about that in terms of tools, but also philosophically. I think we are now able to sell in, how should I say, an omnichannel way. We’re also investing heavily in digital marketing. You mentioned the down-market, I would just add that because of some of the comparisons to the down-market had not withdrawn the sales results this quarter. It was actually all the other businesses. So but we do see the underlying strength in small business. But because of the difficult comparison, it's not reflected in the percentages. Not trying to minimize the strength in the momentum in the down-market, I'm trying to emphasize the strength everywhere else in the portfolio. The rest of the portfolio also can benefit from digital tools, digital marketing, but it's not quite as leveraged as it is in the down-market. I think it's a combination of a lot of different things, but the overall comment would be there's no question that there is increased leverage in the sales force, and you're seeing it in terms of the productivity numbers. We are frankly very pleasantly surprised by the rebound in what we call average sales force productivity. So the actual sales representative level, how much are they selling today versus what they were selling in Fiscal year '19. That is back to, and above that level, which is very pleasing to us.

That's helpful. And then just one real quick one on retention. What was the boost for Q1 over-performance because I know Q2 December is big quarter in terms of retention, things like that or is it just more optimism over the balance of the year or a little of both? Is there any way to frame how much of that boost was maybe Q1 over-performance as opposed to how you're feeling over the balance of the year?

Maybe I will take that. I think our retention, certainly we're very happy with the Q1 record we have, but I think it's also heavily linked to the success we've had over the last few years with our improvements in NPS. As our NPS continues to go in the right direction and improve, we're seeing general increases in retention to go along with that. I think that's what we would expect and that's what we want to see happen. With no doubt that the retention is very good and we're benefiting still from a little bit of some of the concerns coming out of the pandemic that clients may have about switching during a time of still virtual for many. We're benefiting from that as well and we acknowledge that. But as I said, we're very happy with the retention and the progress we're making with our products and services that contribute to driving those retention numbers. We will see a little bit of a step back perhaps in the down-market. But as we said so far, it's holding up better than we expected.

Just to clarify, because we did share in our prepared remarks that the raise was primarily a function of the Q1 results. Obviously, we have the stability in October as well.

That makes sense. Thank you.

Next question comes from Ramsey El-Assal with Barclays. Your line is open.

Hi, gentlemen. Thanks for taking my call this morning. I wanted to ask about margins and forgive me if you addressed this in some detail, I missed a bit of the call earlier, but it came in really strong this quarter well above our model. Can you speak to the drivers of the beat and also to their sustainability as we move forward?

Let me start by mentioning that we achieved a record margin in the first quarter, which exceeded last year's results. Last year also saw an improvement over the previous year, which is noteworthy considering it was during the pandemic. What's even more remarkable is that we improved our margins again. We had significantly higher revenue than anticipated, which is very satisfying. This success was seen across both ES and PEO, and in various sectors. We experienced slightly better pay per control and improved retention. There are numerous factors working in our favor. Our expenses have not yet matched our revenues, and we are currently focused on increasing capacity for implementation and service as we approach our year-end period. Like many companies, our top priority is to fulfill our commitments to clients and effectively launch the business we have sold. This dynamic has played a role in our margin performance, but I want to acknowledge the impressive achievements of our organization and the operating leverage we've seen. Had we anticipated our current revenue and volume, we would have hired more staff. We do need to catch up in that regard. To clarify, we are not looking at adding hundreds of millions in expenses; we are just slightly behind. This is relevant for discussions about our EPS guidance, which we are not raising significantly beyond our first-quarter performance. This is because we plan to continue investing in sales, distribution, service, and implementation. The delay in hiring has positively impacted our first-quarter margin. I firmly believe we would have still seen strong margin performance even if our headcount for service, implementation, and volume-related operations had been reached. I thought it was important to share this perspective, as it seems like a relevant question.

That's great and I appreciate your candor there. Quick follow-up from me. I was wondering about the human resources and human capital management products. Can you talk about how the cross-selling process into your basic kit of kind of payroll customers is organized? I'm just trying to figure out sort of how you go about that cross-sell process. And I guess how much of a runway do you see for attach rates to those products?

There really isn't a straightforward answer to that. Regarding the attach rates, there are a few products where we have what I consider good attach rates. As CEO, I acknowledge that these rates could always be improved. Our benefit administration tools and time and attendance systems have high attach rates, as does our workers' compensation tool in a down market. However, most of our products beyond payroll, specifically HCM along with our core payroll solutions, are currently under-penetrated regarding attach rates, which indicates significant potential for improvement. As for how we approach cross-selling, it isn't simple due to the nature of our operations. In some areas, we have distinct sales teams. For instance, in the down market, there is a large sales force that collaborates with accountants and other third-party channels while also selling directly. We also have a separate team focused on our retirement solutions, including 401K products. These teams share leads and have incentives to collaborate. The down-market business contributes to our PEO through incentives, yet there is also a distinct sales force for the PEO. In the up-market and mid-market segments, some of our sales team can sell multiple products or bundled offerings, although we still maintain specialized sales forces depending on product complexity. Regardless, we have primary sales representatives who lead account management, especially in the up-market and mid-market. These key representatives ensure that when the need arises, we involve specialized salespeople with in-depth knowledge of our other HCM solutions. I wish I could present a simpler answer, but this complexity is integral to our success. Our competitiveness stems from our ability to execute this well, a practice that has been refined since the days of Frank Wattenberg and continued with my predecessors. To highlight the importance of cross-selling, about 50% of our bookings come from cross-sell efforts, with the remaining 50% from acquiring new clients each year.

Very helpful. Appreciate it. Thank you.

Our next question comes from Kartik Mehta with Northcoast Research. Your line is open.

Carlos, I just wanted to get your thoughts. I know you talk to obviously a lot about new sales and I'm wondering, outside of this wage inflation that you're seeing, is the cost to acquire clients going down, especially on the SMB side now that there is a new way to sell to them? Or do you think the cost to acquire clients, as we move through this pandemic will go back to what it was?

I wish I could predict where things are headed. From a mathematical or technical viewpoint, the cost of sale is definitely decreasing due to the boost in productivity. This trend is evident across various industries, including ours. As we achieve higher volumes, it naturally leads to increased productivity unless we introduce significant additional expenses. We frequently see media reports highlighting the rise in worker productivity, which is largely due to the recovery in revenues and volumes that have maintained employment levels. We are hiring a few more people now, but it's important to note that worker productivity had decreased during the pandemic when revenues were down. It might seem overly simplistic, but that reflects the current situation. We need to avoid making any medium to long-term assumptions right now because our cost of sale has decreased compared to last year and the year before, primarily due to a substantial increase in bookings alongside a similar rise in expenses. However, we have not yet returned to pre-pandemic levels of cost of sale. We aim to reach that point, but it will require even greater productivity this year. Ultimately, resolving these issues and understanding the implications of base effects and comparisons is vital, but we won't have clarity until we’re past this phase.

Thank you very much. Appreciate it.

Our next question comes from James Faucette with Morgan Stanley. Your line is open.

Thank you very much, and thanks for all the color this morning. I guess maybe I just want to ask the obvious headline question and just wondering how the reported current tightness in the labor market has factored into your guidance? How are you anticipating changes through the coming fiscal year? A product and service-related question tied to that: Are you seeing incremental sales opportunities with some of the tech you can provide to your clients for hiring, etc., and is that having any impact on your outlook and forecasts? Thanks.

Thanks for the question. The second part of your question, I think kind of answers the first part. The answer is yes. Like I think part of again, hard to separate how much is just pure GDP growth, new business formation, etc. But the last part of your question, there's no question that part of our growth is driven by what you are alluding to, which is everyone now is looking for help in terms of hiring, attracting people, and frankly, also trying to hold onto them. This is a great environment for us. The combination of strong GDP, an administration that is more inclined toward regulation, and then a tight labor market for people who do the things that we do—payroll staff and HR staff at prospects and clients—this is all a very good backdrop for us. I'm assuming this is not going to resolve itself overnight in terms of the tightness in the labor market. We should anticipate some tailwinds here and some help for a period until that changes. I hate to use the R-word, but someday, at some point in the future, it doesn't seem anywhere near given what's going on with government stimulus and policy. That might change, but we don't see that on the horizon right now. In terms of the tight labor markets, I would say the overwhelming impact is positive on ADP. I mentioned one of the challenges we have, which is a tight labor market affects our own internal associates in terms of we have to hire service people and implementation people, so it’s harder for us like anyone else. But that pales in comparison to the upside. A tight labor market drives new bookings as we just talked about in the last part of your question. It also could create inflationary pressures, which drives our balanced growth. It should drive interest rates higher, which is one of the most underappreciated stories of ADP is the potential upside in our flow business. The reason it's underestimated is because it’s done nothing for 10 years, as people have been around for 10 years, and it was nothing for pain and headwind. Just when I thought we were coming out of it, we go into a pandemic, and we get more pain, and rates go even lower than they were before. I'm pretty sure that it those changes any lower now, although I think we may have to file an AK after saying that. I'm making a statement on interest rates. Whatever, hover around here, go down a little bit there. But it feels pretty certain that the long-term trend now for interest rates will be for gradual increases. I'm not suggesting there are still underlying demographics that may keep us from getting back to the same kind of 10-year rate that we had 15 years ago or 10 years ago. But when you look at real interest rates, there is upside on interest rates. Tight labor market helps in a number of ways. It creates activity for our sales force. Every time there's activity and there's conversations, we're going to win a fair share. It’s a great backdrop. It creates opportunities for our balances.

That's great color. Thank you.

Our next question comes from Bryan Bergin with Cowen. Your line is open.

Hi, good morning. Thank you. I had a follow-up first on retention. I'm curious, within the record 1Q retention performance, can you dig in a little bit more as far as the drivers there between the still lower out of business closures versus essentially better competitive win rates? And anything broadly, you can comment on around clients switching behavior or client re-engagement to assess HCM solutions?

On the first part, I'm not sure how much more color we can give you. We have a fair amount of detail in terms of losses and retention around what we call non-controlled losses, which are broadly speaking out of business, bankruptcies, etc. Those have started to trend back up again. They’re not back to normal levels, but they have started to trend back. I think that's not surprising because there’s still a lot of liquidity and a lot of stimulus if you will, even if it’s not new stimulus. When you have consumer spending doing what it's doing, and you have activity doing what it's doing, that tends to be supportive of small business rather than the normal turnover that you have that's natural in the small business sector. With hindsight, if we would have put together our plan three or six months ago, we would've probably anticipated the downturn in retention to be slower. We've been positively surprised by how long it's taking for those losses to regress back to normal. Having said that, we don't know that they're going to regress 100% back because there are other parts of our retention that are controllable. We call controllable losses, and we see those going down as well. Don made a comment that shouldn’t be lost on you, which is that our client satisfaction scores as measured by NPS, are at the highest they've ever been. I give credit to the organization for during the pandemic, being able to get through what was an incredibly difficult time for them personally, in terms of they were trying to help our clients. We also had a huge increase in volume due to government stimulus programs, the PPP loans, etc. This happened all over the world, it wasn't just in the U.S. We maintained relative stability in our headcount. We didn't do mass layoffs and let many people go. The combination of maintaining investment and also having people making efforts to help our clients allowed us to maintain those NPS where that actually haven't gone up. They remain at very strong levels, and we believe there’s a correlation between strong NPS and retention. We may see new record highs for retention on a permanent basis, but it's way too early to make that prediction.

Okay. And then just a follow-up on next-gen HCM platform. Can you provide an update on new sales there? Maybe the pipeline and sold clients versus lifelines, any metrics or updates you're willing to share?

Sure. Over the last few quarters, as we entered the pandemic, we encountered challenges with some large clients in heavily affected industries. This led to some delays in our implementations and project starts. We also began to focus on improving our implementation tools. As we started rolling out projects for these clients, we realized there was additional work needed on our implementation tools, especially concerning the involvement of third-party integrators. We've dedicated significant effort to this and feel positive about our progress. We previously mentioned investments made to engage third parties for evaluation and development support. Moving forward, as we hope to enter a phase of accelerated implementations and growth, our priority has shifted towards establishing a solid foundation and the right tools for successful project launches over the next year or two, which we anticipate will generate substantial business. More details will be shared at our Investor Day on November 15th.

Okay. Thank you.

Our next question comes from Eugene Simuni with Moffett Nathanson. Your line is open.

Hi, thank you very much for taking my questions. I have a couple on the PEO, so I'm asking upfront. One is that, if you look broadly at your HRO offerings, so PEO and non-PEO, can you compare and contrast for us a little bit to the PEO solutions and non-PEO hopefully outsourced solutions? How are you seeing them growing relative to each other in demand? And are you seeing any switch in between clients who might be using that HRO solutions without benefits switching into the PEO? That will be the first one. The second, I was just curious about how you position the PEO franchise to really win market share in a post-pandemic environment, given the secular growth seems to be very favorable. But how do you actually make sure that ADP wins share?

On the first question, I think I said in my early comments that all of the HRO Solutions, the Corporate Outsourcing Solutions, are very strong across the board. In the up-market because we have HRO Solutions in the up-market, we have them in the mid-market, and we have them in the down-market. In the down market and in the mid-market, we have PEO, but we also have what you're alluding to, which is a non-core employment. We call it comprehensive services; as the name implies, it provides a broader assortment of services in addition to our traditional software and traditional tax and other services. There is to my knowledge, not a lot of switching from clients that are, what I would call typical clients of ADP that have payroll benefits and maybe TLM, etc., whether it’s in a down-market or in the mid-market into these HRO Solutions. If we do our job well, which I think we do in the sales process and in the upgrade process, those clients tend to stay on whatever solution they have chosen. Both of them are growing at this point at rates that are multiples of our growth in employer services. It’s quite impressive in terms of the tailwind and the growth rates we have in all of the HRO businesses. Regarding the last part of your question, we have about 630,000 roughly reported worksite employees this last quarter. That’s triple what it was 10 years ago in the first quarter of fiscal year 11. That’s a higher market share than it was 10 years ago. I don't know how else to answer that question other than to say that we have a proven track record of execution to continue to drive growth in the PEO that’s faster than the markets. There’s no question about our positioning or our ability to drive market share as evidenced by our ability to execute.

Got it. Thank you.

And our last question comes from Mark Marcon with Baird. Your line is open.

Good morning, Carlos and Don. I'm looking forward to working with you. On next-gen payroll, can you give us an update in terms of the rollout there, please?

We are very enthusiastic about the next-gen PEO, just as we are regarding next-gen HCM and its potential for ADP's future. We recognize the challenges in how we communicate this, and we'll address them on November 15th. With $15 billion in revenue, our focus on next-gen HCM and payroll represents a significant future opportunity for ADP. While you may not be asking about immediate quarterly performance, it's a good moment to mention that the factors driving ADP's performance this quarter, this year, and in the coming two to three years extend beyond just financial metrics. It's crucial for positioning the company for future growth and establishing competitive advantages, as well as creating new bookings. We are pleased with the progress we are making with next-gen HCM and payroll, although we haven't reached general availability yet. We are currently selling next-gen payroll into the core accounts of the mid-market, specifically targeting businesses with 50 to 150 employees. This strategy mirrors our approach during the transition from our old platform to our newer Workforce Now version. The same careful approach is being applied to next-gen payroll and HCM. We have a large existing client base and are ready to begin transitioning some of those clients. We are satisfied with our current business, cash flow, and record-level client satisfaction scores on our existing platform. I want to stress that there is no panic or crisis; we feel a strong urgency to scale these two solutions quickly to stay ahead of our competitors.

I appreciate that, and thanks for the color there. On the PEO growth, can you talk a little bit about two different dimensions? One would be the growth that you're seeing kind of in the established states relative to some of the less mature states and to what extent are you seeing less mature states really catch on? Particularly, given the legislative and regulatory backdrop. And then secondly, how should we think about just health insurance costs now that elective surgeries are starting to come back? What impact would that have on the overall pricing? I know that you're not necessarily impacted directly from a margin perspective, but just thinking about the demand environment.

That's a good question. Regarding the second part, I hope you can overlook the first part for now because we need to follow up with you about which regions or states we perform best in sales. I suspect they're all strong, as the PEO results were outstanding, indicating that there are no states experiencing less than strong double-digit growth. We'll get back to you on that. Concerning healthcare rates, while we aren't directly affected, you're correct that there is an indirect impact since our clients care about their healthcare expenses. It may sound overly simplistic, but large economies tend to revert to the mean, as do healthcare and insurance markets. Losses often return to the average, which is why I urge caution when people perceive sudden declines in either workers' comp or healthcare costs. Typically, there's a reason for it, and it usually goes back to the average. To address what I believe is implied in your question, there was a temporary drop in elective surgeries and healthcare usage in general, including visits to primary care physicians, which led to a short-term decrease in healthcare costs. While I dislike using the term transient, it seems appropriate in this context; it’s evident that this situation was temporary, and healthcare costs will rise again. In our case, since we do not assume risks in healthcare, we wouldn’t see this reflected in our margins or cost structure, but if we experienced below-normal renewals, we anticipate those would return to normal as healthcare costs gradually equalize, which would mean those costs will need to be passed through.

Appreciate the comments. Look forward to seeing you on the 15th.

Same here.

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

There's not much more I can say as we had terrific results. I want to thank Don for joining, and I think you're all going to be very happy to meet him and get the benefit of his experience in ADP more broadly, besides just in the finance organization. I just want to end the way I usually end, which is thanking our organization and particularly our frontline associates because I'm not sure what's going on in other companies, but we would not be able to get our goals accomplished without people going above and beyond. I think we mentioned the tight labor market and that we're a little bit behind in terms of hiring; that means our people are working extra hard. An economist said an increase in productivity, and I’d say that’s just people working hard. We truly appreciate it, our clients appreciate it, I think our shareholders appreciate it too. Many of us, whether we're consumers or buyers of products and businesses, can be frustrated by what’s happening in terms of supply chain and some of these other things. But all I see is a bunch of people working incredibly hard to fulfill the needs of our clients. This is happening across the whole economy. We should show a little patience with each other because this will all normalize as these variants recede. You're already seeing it in some of the mobility data; things will slowly get back to normal. People will come back into the labor force and this great economy that we have will function, the way it's supposed to function. In the meantime, I want to thank our associates for what they've done so far, whether it’s this last quarter and what they're going to have to do to get through this year-end, which is going to be very challenging given the volumes we have and the capacity we have. For that, I thank them, but I also thank all of you for listening and for being supporters of ADP. Thank you.

And this concludes the program. You may now disconnect. Everyone, have a great day.