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 fourth quarter fiscal 2022 earnings call. I would like to inform you that this conference is being recorded. After the speakers' presentation, we will conduct a question and answer session. I will now turn the conference over to Mr. Danyal Hussain, Vice President, Investor Relations. Please go ahead.

Thank you Michelle, and apologies to everyone for the brief delay. Welcome everyone to ADP's fourth quarter fiscal 2022 earnings call and webcast. Participating today are Carlos Rodriguez, our CEO, Maria Black, our President, and Don McGuire, our CFO. Earlier this morning, we released our results for the quarter. Our earnings materials are available on the SEC website and our Investor Relations website at investors.adp.com, where you will also find the investor presentation that accompanies today's call. During our call, we will reference non-GAAP financial measures which we believe to be useful to investors and that exclude the impact of certain items. A description of these items along with a reconciliation of non-GAAP measures to the most comparable GAAP measures can be found in our earnings release. Today's call will also contain forward-looking statements that refer to future events and involve some risk. We encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ materially from our current expectations. With that, let me turn it over to Carlos.

Thank you Dany, and thank you everyone for joining our call. We finished our fiscal 2022 with a strong fourth quarter that featured 10% revenue growth and 12% organic constant currency revenue growth. We also delivered 170 basis points of adjusted EBIT margin expansion which helped drive 25% adjusted EPS growth, and for the full fiscal year 2022 we ended up with 10% revenue growth, 90 basis points of margin expansion, 16% adjusted EPS growth, and importantly we achieved record bookings and near record level retention, reflecting our strong position in the HCM market. Let me cover some highlights from the quarter and year before turning it over to Maria and Don for their perspectives. Starting with employer services new business bookings, we had a fantastic Q4 with growth accelerating from the prior quarter, resulting in our largest new business bookings quarter ever. With this strong finish, we were very pleased to have delivered 15 ES bookings growth for the year. Despite several sources of global uncertainty, including the ongoing effect of the pandemic, the conflict in Ukraine, inflation and concerns about global recession, our compelling suite of HCM offerings has continued to resonate throughout the market. In total, we sold over $1.7 billion in ES new business bookings in fiscal 2022 and well over $2 billion when including the PEO, marking the first time we’ve exceeded $2 billion in bookings. Maria will talk more about the growth opportunities ahead, but clearly we are incredibly pleased with what is the best performance by our sales force that I’ve seen in my 20 years with ADP. Moving on, our full year ES retention of 92.1% was nearly flat versus last year's record level of 92.2% as we once again exceeded our expectations in the fourth quarter. Client retention is driven by several factors, including product and service quality, business mix, and macroeconomic factors, and our expectation at the start of fiscal 2022 called for macroeconomic factors like SMB out-of-business rates to drive some normalization in retention towards pre-pandemic levels. We did see some of that play out, but clearly less than anticipated. More importantly, our product and service teams have continued to deliver a best-in-class experience for our clients and particularly so on our modern and scaled platforms. We achieved record client satisfaction levels for the year and we once again set new record levels for retention in several of our businesses, including our midmarket, so although you will hear from Don that we are once again making an assumption for a modest amount of macroeconomic-related normalization and retention in fiscal 2023, we are excited to have delivered such a strong performance in fiscal 2022 and look forward to maintaining our retention rates at these historically high levels. Moving onto the employment picture, our pays per control growth metric was 7% for the quarter and 7% for the year, reflecting a persistently strong demand environment for labor among our clients that has continued to exceed our expectations. This growth has served as a testament to the resilience of our clients, and although we expect pays per control growth will naturally slow in coming quarters, employment conditions today remain strong with our client data suggesting that near term demand for labor remains healthy. Finally, our PEO business delivered another great quarter as it wrapped up a strong year. We had average worksite employee growth of 14% in Q4 and 15% for the year, and we were thrilled to have crossed the 700,000 worksite employee mark this quarter. As you know, I joined ADP two decades ago when ADP entered the PEO market through an acquisition, and as bullish as I was about the PEO industry back then, I’m not sure I could have anticipated we would be here 20 years later still growing at this combination of pace and scale, but the ADP TotalSource team continues to deliver a great platform, great service and a great benefit experience for our PEO clients and there is plenty of opportunity for us in the years ahead to serve even more businesses. Taking a step back, fiscal 2022 was unique in a number of ways. We experienced strong demand with over $2 billion in worldwide new business bookings and near record level retention which together drove us to surpass 990,000 clients at year end, putting us on track to exceed a million clients any day now. At the same time, we’ve had to manage this growth and volume with prudent headcount growth, given tight labor conditions. The way we’ve been able to do is through efficiencies, of course, but also through the plain hard work by our associates, and for that, I thank them for their efforts and for coming through for our clients once again. I’ll now turn it over to Maria.

Thank you Carlos. With fiscal '22 behind us, I want to take this opportunity to review where we stand on some key initiatives and provide an update on where we are heading in fiscal '23. At the core of our client experience is their interaction with our platform, and one product initiative we had talked about throughout fiscal '22 is our new unified user experience, which was designed to be more action-oriented and contextual and to move us from transaction-oriented applications to experience-oriented applications; in other words, more intuitive, better looking, faster, and more consistent across our solution. To achieve this, we have applied a research-driven approach informed by the data and insights we have gained in working with our nearly 1 million clients. Our focus has been to listen to our clients, learn from them, and utilize their input to design the best experience. In fiscal '22, we moved hundreds of thousands of clients over to this new user experience, including our clients on RUN, IHCM and next-gen HCM, as well as over 20,000 Workforce Now clients. We also moved the ADP mobile app over to the new UX. Feedback so far has been extremely positive and in fiscal '23, we plan to expand this rollout further to remaining Workforce Now clients as well as to additional modules and experiences within our key platforms. Workforce Now in particular has been exciting for us for a few reasons beyond user experience. First is its growing traction in the U.S. enterprise market. Just this quarter, ADP was rated for the first time an overall customers' choice provider in Gardner's annual Voice of the Customer Study. This was the highest tier possible and was based on perspectives from end users with 1,000 or more employees and is a reflection of our continued momentum in selling Workforce Now to the lower end of the U.S. up market these past few years. This momentum builds on the already strong presence and traction Workforce Now has had in the U.S. midmarket in the HRO space and in Canada, all places where it is highly differentiated. Second is the continued roll-out of our next-gen payroll engine to a growing portion of our new Workforce Now clients. Our next-gen payroll engine not only benefits from having a global native and public cloud architecture but also empowers our platforms, like Workforce Now, to offer a better product experience and enables us to offer better service. We are incredibly excited for our payroll engine to continue to scale up to larger and more complex Workforce Now clients over the coming quarters. Finally, with talent and engagement as an increasingly important aspect of the HCM suite, we continue to focus on our ability to help employers better connect with their employees. This quarter, we will launch a new offering that we’re calling Voice of the Employee, a robust employee survey and listening tool which leverages survey instruments from the ADP Research Institute to offer clients a way to seamlessly capture employee sentiment across the employee lifecycle. One of the things I love about this solution is that it was born out of elevated client employee engagement our return to work workplace solutions have been able to drive, and it reflects the ability of our global product team to quickly identify an opportunity and develop a solution to meet a need in the market. Moving on, we made some exciting enhancements to the Wisely program this quarter. Most notably, we now offer Wisely self enrollment with full digital wallet capabilities for Apple and Google Pay, thereby allowing employees to instantly receive and start using their Wisely account without support from their employer and without having to wait for a physical card. We also expanded our earned wage access solution by offering a seamless one app solution for Wisely members through a deeper integration with one of our key partners. The offering enables employees to receive a portion of their earned wages prior to payday, and most importantly is free for employees who use Wisely. With these enhancements and more on the horizon, we’re incredibly excited about the growth prospects for Wisely and look forward to taking it from over 1.5 million active members today to an even larger portion of our U.S. payroll base over the coming years. During fiscal '22, we also highlighted the strength of our retirement services business, a key component of our HCM suite. We offer record keeping services, provide unbiased independent advisory services, and give our clients, their employees and financial advisors access to over 10,000 investment options from over 300 investment managers seamlessly integrated with our key platform and with the ADP mobile app. With over 125,000 retirement plan clients leveraging solutions, including 401-K, SIMPLE and SEP plans, we are proud of our scale today but even more excited about the significant opportunity in the market as we look to expand our market share within and beyond our payroll base of clients. Fiscal '22 was an incredibly strong year for our retirement services business and we are looking forward to another strong year. Finally, our next-gen HCM solution is getting closer to a broader rollout as we continue building on the implementation capacity for our pipeline of sold clients, as we shared at last year’s investor day. While we are excited about all of these product enhancements and others too, products only drive growth when our sales and marketing organization can match it to a buyer and translate it into new business bookings, and to that end, we are excited about our sales and marketing momentum and the continued investments we have planned to drive growth this year. First, the product improvements I just mentioned, as well as many others, are all intended to drive higher win rates, an expanded breadth of offerings or higher price realization, and we fully expect our sales force to continue capitalizing on these opportunities. Second, we are making continued investment in both digital and traditional marketing into our brands and into our broad and growing partnership network. Third, we are excited to have invested at year end in sales headcount and are stepping into the new year with hundreds of additional quota carriers, and we expect to be able to grow our average sales headcount in the mid-single digit range over fiscal '23. Continued execution on our product and our sales and marketing strategy is ultimately designed to drive sustainable growth, and for fiscal '23 we expect to drive ES bookings growth of 6% to 9% bracketing around our medium term target of 7% to 8% from investor day. Growth is a priority for us, and we look forward to continuing to update you on our progress. Now over to Don.

Thank you Maria, and good morning everyone. Our Q4 represented a strong close to the year with 10% revenue growth on a reported basis and 12% growth on an organic constant currency basis, ahead of our expectations despite higher than expected FX headwinds from a strengthening dollar. Our adjusted EBIT margin was up 170 basis points, about in line with our expectations as leverage from strong revenue growth overcame higher selling expenses, PEO pass throughs, and growth investments like the sales headcount growth Maria just mentioned, and our robust revenue and margin performance drove 25% adjusted EPS growth for the quarter, supported by our ongoing return of cash to our investors via share repurchases. For the full year, revenue landed at 10% growth. We delivered 90 basis points of margin expansion, offsetting a few different sources of incremental expense over the course of the year, and adjusted EPS grew to $7.01, up about 16%. For our employer services segment, revenues in the quarter increased 8% on a reported basis and 9% on an organic constant currency basis. The stronger than expected revenue growth was a function of continued outperformance on key metrics like retention and pays per control, and our ES margin increase of 140 basis points was a bit lower than previously planned as a result of growing headcount faster than previously anticipated. For the full year, our ES revenues grew 8% on a reported basis and our ES margin increased 110 basis points. For our PEO, revenue in the quarter grew 16%, accelerating slightly from Q3. Average worksite employees increased 14% on a year-over-year basis to 704,000 as bookings, retention, and same-store pays all continued to perform well. PEO margin was up 260 basis points in the quarter due in large part to favorable workers' compensation reserve adjustments. For the full year, our PEO revenues and average worksite employees both grew 15%, at the high end of our guidance ranges, and our margin expanded 80 basis points. I’ll now turn to our outlook for fiscal 2023, beginning with some overall remarks. We have on the one hand an inflationary environment that is creating upward pressure on our expense base, and at the same time we recognize there is clearly concern about a potential upcoming global recession, or that we perhaps are already in one. On the other hand, our momentum entering fiscal '23 is strong and there are no obvious signs of near-term weakness, and if the market’s forecast of higher interest rates holds, we are positioned to benefit from a continued rebound in interest income. Our focus for now will be to continue executing on our strategy, and to that end, we have been and will continue to be making investments in headcount where we perhaps didn’t get a chance to last year in a tight labor market, and we also expect to deliver growth that’s at or above our medium-term annual objectives shared at the November '21 investor day. Onto the numbers, beginning with ES segment revenues, we expect growth of 6% to 8% driven by the following key assumptions. First, we expect our ES new business bookings growth to be 6% to 9%, which Maria covered. For ES retention, we finished the year at 92.1%, a touch below last year’s record level, and we believe it’s prudent to anticipate some further normalization of business levels in fiscal '23 even while we maintain record retention levels in some of our other business units. Our initial assumption is for a decline of 25 to 50 basis points in ES retention for the year. For pays per control, with employment back near pre-pandemic levels, we anticipate a return to a more typical 2% to 3% growth range. We normally talk about price as contributing 50 basis points to our ES growth rate, but we expect that benefit to be around 100 to 150 basis points this year. For client funds interest revenue, we expect higher overnight interest rates and higher repurchase rates on maturing securities should combine with our continued balance growth to drive interest income up nicely. Our short funds portfolio, which is invested in overnight securities, will benefit assuming the Federal Open Market Committee increases the Fed funds rate over the course of this fiscal year, and our client extended and long portfolios will benefit as we reinvest maturing securities at an expected rate of about 3.3%. Between those two drivers, we expect average yield to increase from 1.4% in fiscal '22 to 2.2% in fiscal '23. We expect our client funds balances to grow 4% to 6%, supported by growth in clients, pays per control, and wages, and this is on top of a very robust 19% growth we experienced last year. Putting those together, we expect our client funds interest revenue to increase from $452 million in fiscal '22 to a range of $720 million to $740 million in fiscal '23. Meanwhile, the net impact from our client fund strategy will increase by a bit less, from $475 million in fiscal '22 to a range of $675 million to $695 million in fiscal '23, and as a reminder, this is the number that impacts our adjusted EBIT. The slightly lower growth here is due to the expected increase in short-term borrowing costs which track the Fed's fund rate. This borrowing enables us to ladder our portfolio and invest further out on the yield curve than we otherwise would. As we gradually reinvest our maturing securities, this gap between client funds revenue and the net impact from our client fund strategy should reverse and again become positive. Back to the ES revenue outlook, one more factor to consider is FX headwinds. Clearly with the year-over-year parity the dollar with a weaker pound and with about 20% of our ES segment revenue being generated outside the U.S., we’re factoring in a fair amount of FX headwind for fiscal '23 of well over 1%. For our ES margin, we expect an increase of 175 to 200 basis points. This coming year, our expense base will be increasing more than it does in a typical year, in part due to inflationary pressure on our overall wages and in part due to headcount growth, some of which we did late in fiscal '22 and some of which we’re planning for fiscal '23, but because our margins are benefiting from strong revenue growth outlook, including growth in client funds interest revenue, we’re pleased to be able to guide to this strong ES margin outlook. Moving onto the PEO segment, we expect PEO revenues and PEO revenues excluding zero margin pass-through to grow 10% to 12%. The primary driver for our PEO revenue growth is our outlook for average worksite employee growth of 8% to 10%. That would represent a bit of a deceleration from last year, but of course we are contemplating much less contribution from same-store pays per control in fiscal '23 compared to fiscal '22. This 8% to 10% growth compares to the high single-digit target that we outlined at the investor day in November. We expect our PEO margin to be down 25 to up 25 basis points in fiscal '23 compared to a strong margin result in fiscal '22. Adding it all up, our consolidated revenue outlook is for 7% to 9% growth in fiscal '23 and our adjusted EBIT margin outlook is for expansion of 100 to 125 basis points. We expect our effective tax rate for fiscal '23 to increase slightly to about 23%, and we expect adjusted EPS growth of 13% to 16% supported by buybacks. I’ll make one comment on cadence - because we expect year-over-year headcount growth to be more significant early in the year and because the benefit from client funds interest will build as the year progresses, we expect adjusted EBIT margins to be down about 50 basis points in Q1 but then build steadily over the rest of the year. I’ll now turn it back to Michelle for Q&A.

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

Hi, good morning. Thank you. I wanted to start with a demand question. Can you just talk about what you’ve seen across client size as it relates to demand environment? I heard the continued optimism in the mid market. Can you talk a bit more about up market, down market, international, and then just give us a sense of booking cadence. It sounds like it accelerated through 4Q. Have you seen any change in pace as you’ve gone through the first couple weeks here in July?

Yes, absolutely Bryan. I’m happy to comment on both pieces. With respect to the overall strength that we saw in new business bookings both for the full year fiscal - very, very proud of the remarkable results, but for full year as well as the fourth quarter, and the strength was really broad-based. There was solid performance across each one of our markets. I think a few callouts that I would give, you highlighted the mid market. The mid market does continue to perform. We saw strength in our HRO offerings even beyond the PEO. The HRO was a strength for us. I know I mentioned it in the prepared remarks, but I’d be remiss if I didn’t mention retirement services again. We also saw results in Canada, which was fantastic to see as Canada definitely was impacted a bit more with the longer lockdowns from a pandemic perspective, and then I continue to highlight quarter after quarter the strength that we’re seeing in our down market and our RUN offer, so felt very pleased with the RUN. Then last but not least, on the international front, our international business had a tremendous year, so very confident in the results, very proud of the work of the sales organization. As we think about the demand environment right now, you asked about how did it progress throughout the quarter and how do we feel sitting here a few weeks into July. I suppose I can’t necessarily comment on in quarter, but what I can comment on is we did see the results accelerate throughout the quarter, so while there was some macroeconomic things happening in the world, our demand actually accelerated as we closed out the quarter, so we saw significant strength specifically in the month of June - in fact, June was a record month for us ever, as was the quarter and as was the year, as mentioned. We feel good about the demand environment and the acceleration we saw throughout the quarter, and thank you for the questions.

Okay, and then just a follow-up on margins. If things do slow down, can you just talk about the levers you have to insulate EBIT margins? It sounds like they have taken a healthy amount of resource additions. Can you talk about where you’re making those across the organization and then where you might have some discretion to throttle investment, should things slow down?

Yes, it’s a very good question, so thank you for the question. I think as I mentioned in the remarks and the materials that we distributed, we were able to get our sales organization a little bit more than fully staffed going into the fourth quarter, and that makes us feel really good about the opportunity to step off into ’23 with a fully staffed team, which is something that, as we mentioned in prior quarters, was a little bit more difficult to do during ’22. So I think we feel really good about where we are with staffing particularly on the sales side. I would also say that, just following the business model that we have, if you look at the record sales we had particularly late in the fourth quarter, we need to make sure that we have fully staffed implementation resources to get those bookings generating revenue as quickly as they can, so we will be focused on that. And then of course just following through to the year-end process, we need to make sure we can service all those additional clients as that time comes upon us in late December-January-February. We can do all those things. On the other hand, as I referenced and as we’re seeing in the media and elsewhere, everywhere is talk about a recession potentially coming, are we in one, etc. We still do have flexibility of course, and we can certainly temper the addition of headcount and temper our costs more generally should we think that that’s necessary, if it’s something that’s as a result of changes in the macro environment, so I think we still have lots of levers and I think we’ve shown historically that we are able to navigate those waters pretty adeptly should that kind of situation arise.

Okay, thank you.

Great, thanks so much, and congratulations on the results. I don’t know if this will be for Carlos or whomever, but it feels like the retention step-up is clearly a little more structural, just given the recent trends in ’22 into ’23. Is that a function of the next-gen payroll engine or just where are you seeing that success, because it’s clearly been a super, super outcome post COVID. I think part of our focus is whether or not that starts to normalize or not, but it feels like it’s at a structurally higher level.

There are likely some structural factors present, as we can observe stronger retention levels. Although we anticipated some macroeconomic adjustments in the down market, we did not see as much change as we expected. If discussions about a recession hold true, businesses and bankruptcies might return to normal levels, which is why, as Don noted, we are once again planning for a slight decrease in retention in 2023. This mainly reflects conditions in the down market, but we still see reasonable structural improvements elsewhere. It’s important to clarify that this isn't primarily driven by next-gen payroll, as most of our clients have yet to fully realize the benefits, although they will over time. I want to emphasize that this is not the cause of the retention improvements. Additionally, we notably transitioned from multiple platforms to a singular one during a downturn over a decade ago, and just recently undertook a challenging multi-year effort to consolidate in the mid-market. Our ongoing initiatives, such as new user experiences and next-gen payroll, have created real structural advantages in service, Net Promoter Score, and retention. It’s much easier for our staff to operate, allowing us to invest in fewer platforms. While we still have work ahead in the up market and opportunities in international employer services, these structural advantages have aided our performance in the downturn. Despite macroeconomic cyclical challenges, our retention during downturns has improved significantly compared to 10 to 15 years ago. Currently, mid-market retention is at record levels, and our NPS scores are also at their highest. We do not foresee a decline, and we identify more opportunities in the mid-market, with plans to enhance these structural advantages across other areas of ADP to bolster retention further.

Super helpful. Then maybe this is for Don, it looks like the margin guidance, like 100, 125 basis points up from 90, given the leverage and float in pricing, it seems like really nice outcome on the pricing side. Is the offset kind of the cost inflation, and where is the cost inflation in the model in ’23 relative to where it’s been historically?

Yes, I think it’s a good observation. I think there’s a few things driving it. Of course, we talked about more price than we historically have been able to take, and of course we do have the tailwinds, if you will, from the client fund interest, so. Certainly we need to remember that the reason we’re getting our interest rates is that we’re in a higher inflationary environment, so that’s driving more cost base in wages. The other aspect is that we have called out, and we typically haven’t called out FX in the past, but we’ve certainly seen, I think what we would refer to as pretty dramatic changes in FX headwinds in the fourth quarter compared to what we’ve seen in typical years, and so we thought that was important to call out. With 20% of our ES revenue being outside of the U.S. and denominated in Canadian dollars, euros, sterling, Australian dollars for that matter, I think all the currencies are essentially down. When you put all that stuff together, it certainly results in a little bit less at the top line dropping through to margins, so that’s been our focus. The other thing I’d say is that we do have a little bit of conservatism as we look to the back half. We have to take into account all the things we’re reading about and seeing and making sure that we’re thinking hard about how to prepare should something happen in the back half of the year, so I think those are the primary drivers, to answer your question.

And if I could add one thing, because you mentioned also price, and it’s a big topic. I know for a lot of companies, there’s a lot of questions about it, and I think it’s important for you to understand strategically at a very high level, regardless of how it flows into the numbers and so forth, our view on price, we’ve said it for a couple of quarters now, is to kind of keep up with inflation, so I want to make sure it’s very clear that we’re not achieving our margin improvements for doing anything that would be unusual, because I think there might be some companies that are trying to make up revenue gaps or margin gaps with price because there is, quote-unquote, cover out there to do that. But I think when you do that, and I think Don has mentioned this before, that we operate in a competitive environment and we look at what competitors are doing and we look at what’s happening in the world, and we’re long-term thinkers here, so you should assume that our price increases were in line with what’s happening with inflationary costs and not anything more than that, and not materially less than that.

You’ve been very consistent on that. Thank you.

Hi guys, good morning, and congrats on the numbers. I guess my question is looking at the midterm outlook for employer services back in November, I think we talked about a 6% growth rate, and you guys are going to be trending above that, 6% to 8%. With the strength in bookings growing over 15%, I just wonder if maybe the midterm outlook was a little low compared to what structurally is going on in the business model, that potentially the growth rate is faster than the 6% outlook that you gave over midterm.

I hope so. I'll let Don comment shortly, but having been in this industry for a long time, I can't help but think about how the recurring revenue model works. We appreciate the 15%, and what you described is reflected in the numbers. Our strong bookings and retention have resulted in employer services revenue that's higher than anything I've seen during my time as CEO, which is partly why you've noted the slowdown in ES revenue. The key to increasing our top line is net new business growth. There are other factors at play, such as pays per control and client funds interest, but that's the heart of the business, and we're pleased with that. The challenge is that we don't expect 15% bookings growth next year, so I want to make you aware of that. The good news is that the increase in net new business is part of our current run rate, which means we don't need to grow as significantly next year to further boost our revenue growth. However, I want to caution you that increasing the revenue growth rate for this company is difficult. We just accomplished it, and it requires a mix of better retention and increased sales, along with new business starting in the coming year, where the 15% makes a significant difference. Our guidance indicates that we aren't expecting that level of bookings next year, so while we hope to see some additional acceleration in revenue growth for ES, it won't be as substantial as what we experienced from 2022 to 2023. Keep in mind that there are other variables at play, like pays per control and client funds interest, which may provide some benefits or challenges.

Yes, so Carlos covered off all the main drivers there. Of course, I think just once again I’d go back and mention the FX headwinds we’re experiencing. I think when you add that into the mix, I think you’d probably get to a place where we’re landing and what we’re anticipating guiding to for ’23.

Got it, got it. Then let me ask you another popular question that everybody’s getting, is just how the model might be different now versus previous recessions, just thinking about the resilience potential in the ADP model.

Don has a few points to make, but as usual, there are some pros and cons to consider. Naturally, I believe our model is better now than it was in the past, and any criticism I have is directed at myself, not at the model itself. We recently discussed our structural retention level, and even if we experience some challenges in a downturn, our retention is still significantly higher than it was years ago. Even if the down market affects a larger proportion of our business now, I expect our retention to perform better, depending on the severity of the recession. This is beneficial because retaining a larger share of our annual revenues reduces our reliance on bookings during a recession, which is usually the most susceptible area. Historically, looking at GDP growth and other metrics, bookings tend to struggle during a significant recession, but we currently don’t see that challenge. We understand that Fed tightening may lead to slower economic growth, but our numbers don’t reflect that. Our pays per control in the fourth quarter were strong for the entire year. When analyzing initial unemployment claims, labor force participation, and job openings compared to historical data, the expected downturn isn’t apparent. There are certainly pockets of adjustments due to COVID that complicate the situation, and while some slowdown is evident due to Fed tightening, it’s not yet apparent in the labor market.

Great, thanks for the color.

Thank you so much. Really strong sales. I was just trying to think about attribution, the strength and how you would rank the factors there between better product set that’s more relevant or better just productivity, expanded sales force, the cycle, or particular things around outsourcing taking over versus software. Any interesting observations on your side, Carlos or Maria?

Yes, thank you. Definitely tremendous strength that we saw. I think I called out a few areas. Definitely the strength that we’re seeing in our up market continues to excite us for the future. I think you asked about the attribution of strength, and I think it really was broad-based across the business, but I think from an execution standpoint, it really comes down to the execution of our sales organization and how they’ve been able to go to market, candidly, really over the last two years as it relates to navigating this evolving environment, but more specifically providing value to our clients in a more meaningful way, and we really have seen that evolve over this past year as we’ve been really across each one of the segments, helping our clients navigate, as I mentioned, the evolving environment inclusive all the legislative changes. I think there is value we’re bringing. I think the strong execution in general across the sales organization and leveraging the entire ecosystem to bring that strength, right, which is everything from our marketing investments, our brand investments, I spoke earlier to the headcount investments, and so all of this together, I think has lent itself to tremendous execution and strength as it relates to the overall performance.

The only thing I would add is that Maria and I have been discussing for the past 18 months how crucial it is for our sales organization to restore productivity at the quota carrier level and ideally surpass the previous trend line. Whether considering GDP trends, price trends, or anything else, it's essential to return to where we were and get back on that same trend line; otherwise, we risk leaving significant revenue on the table, whether related to the economy or ADP's revenue and bookings growth. From an attribution perspective, it’s important for you to understand this context. We experienced remarkable productivity growth, and that’s why I remarked that this is the best performance I've seen from our sales force. While part of this can be attributed to being in recovery mode, sales forces typically face challenges. I’m not a sales person myself, but I've been around long enough to feel like an honorary member. When you inform a sales team that they need to increase productivity by a few percentage points while also growing headcount, that’s already challenging in a typical year. Now, when you ask them to boost productivity close to 20% because it declined by 20%, that’s incredibly tough to accomplish psychologically. Anyone in sales understands this. Therefore, the strong percentage growth in productivity that we’ve achieved is truly gratifying, particularly because I anticipated this would be difficult. I maintained a positive outlook, urging everyone to strive for success, and we did it. Most of the growth we experienced stemmed from productivity rather than headcount, as we faced challenges in meeting our headcount objectives until the fourth quarter. This was not due to a lack of effort or an intention to save costs; it was simply a difficult labor market. The good news is that in the fourth quarter, as Maria mentioned, we performed well and are now in a solid position regarding headcount. However, the story of 2022 is fundamentally about productivity, which is an outstanding achievement across our sales force.

It is, and just to provide some actual numbers to that, so we reported $1.7 billion in employer services bookings - that is a record, as mentioned, and it does exceed the other record which was pre-pandemic in fiscal '19 at $1.6 billion, and so that really in the end speaks to some of this additional productivity , if you will. But Carlos is spot on - we did initially tell the sales force people, we will add headcount and you have to grow faster, but in the end we didn’t add the headcount and they grew that much faster, which is why I am very bullish and excited as we step into the fiscal year with more sellers, more active quota carriers to really couple this strength that we’ve had in productivity with now finally more sellers to go get after it.

Hey everyone. The results are impressive, and I'm pleased to see the strength in the enterprise that you mentioned. Can you share details about the growth within ES, particularly regarding the different sub-verticals? On a broader scale, can you tell us if you're regaining market share in the lower end of the large enterprise segment, and what size firms this growth is coming from, along with all the discussions surrounding it?

Yes, I think we were struggling to fully understand your question, so let me offer some additional context, and you can ask it again if needed. You mentioned the lower end of the enterprise space and where our sales strength is being generated. To reiterate what Maria said, our success is widespread, but I want to highlight that this is particularly positive news for us. Our Workforce Now platform, which we strategically developed a couple of years ago, is well-suited for the lower end of the enterprise market, and it has been exceptionally successful there. It stands out against certain competitors, and we are selling numerous units in that segment. As we advance the next-generation HCM aimed at higher-market and global clients, we're currently experiencing significant success at the lower end of the up-market with our Workforce Now platform. If you'd like to repeat your question, we can address it again.

I think that addressed the question. I wanted to know how the conversations with those clients are different today compared to three years ago, as I’m sure there has been a significant change considering the results.

There has been significant change, and it's a good observation. Carlos highlighted an important point regarding the lower end of the up market. One reason we mentioned the award and recognition we recently received from Gardner is that our Workforce Now offering is resonating for several reasons. Firstly, it is recognized as a best-in-class product, as acknowledged by Gardner and the users who were surveyed for that award. Additionally, our ability to execute quickly and convert enterprise customers into active clients is noteworthy, as we meet various needs from both a product and timeline perspective. In the upper end of the market, the conversation has definitely evolved over the last three years. A key part of that discussion is the global dialogue and our capability to engage with larger U.S. enterprise customers as well as other global enterprise clients about our multi-country offerings and their strategic direction on HCM globally. The conversation is continually evolving on both ends of the spectrum in the up market, and we are well-positioned for impactful conversations and transformation discussions with our clients in that segment.

Hey, good morning Carlos, Maria and Don. Great to see all of the years of hard work really pay off here this year, so congratulations on the results. Wondering with regards to the new bookings - I mean, $2 billion in total, $1.7 billion in ES, how much of that is split between new logos relative to up-sells, and how would you characterize your expectations on that front for the coming year?

Thanks Mark, and thank you for acknowledging the strong performance in bookings. There is really no news to report here. I think we’ve cited it for years - really, the split between new logos and client business really remains at that 50%, kind of 50/50 going forward, and that’s really what we expect heading into fiscal '23.

Great, and then with regards to the forecast, Don, you gave us a bit of a cadence sense for margin. How would you characterize it for revenue, and specifically what I’m interested in is you did mention the interest on client funds is going to be back-end loaded, but at the same time, we’ve got pays per control being modeled up 2% to 3%, even though people are starting to call for a potential recession and potentially a decline in employment, so I’m wondering how are you thinking about that part of the model and are there any things that you would call out with regards to just revenue trends as we build out the models for the coming year?

Yes, Mark, regarding the first part of your question about the slowdown in margins, we discussed the increase in sales headcount, which is significant in the first quarter of this year and in the first quarter of 2022. We believe this will have some impact. Additionally, we are facing general inflation and other factors. Carlos explained our pricing strategy, which remains consistent with what we've shared in previous quarters. We anticipate some decline in margin percentage in the first quarter, which is expected. As interest rates rise, we expect to see higher interest on client funds for the last three quarters of the year. Overall, we are looking at relatively stable top line revenue quarter by quarter for the rest of the year, with no significant changes in growth rates from quarter to quarter in 2023 compared to 2022. You can confidently model consistent growth across the top lines each quarter.

And that doesn’t mean that everything should be modeled consistently throughout the quarter. I need to address your point that it sounded like you thought we were being aggressive, which is not typical for us. We typically model 2% to 3% growth per control when others are anticipating a recession. In the fourth quarter, you saw our growth in pays per control, and we have visibility into July. It’s hard to believe that for the entire year it would be less than 2% to 3%. In the first couple of months, we have some visibility, and we’re seeing numbers in the 6% to 7% range, which reflects our exit trend. This is just to provide insight into our assumptions within our operating plan, as Don mentioned some conservatism for the latter half of the year. We expect a reasonable continuation of trends for pays per control in the first half, followed by little to no growth in the second half of the year. It’s challenging for us to forecast significant negative growth given the factors affecting the labor market. While a downturn could occur in 2024 or late 2023 at some point, it doesn’t seem likely throughout our fiscal year. Nonetheless, we are anticipating some slowdown in the second half.

Carlos, you read my mind in terms of just the way I was thinking about the characterization and then thinking, okay, this is probably what you’re thinking in terms of the way it’s going to unfold, so that’s directly in line. Can I just ask one more question? On Workforce Now, would you expect next-gen payroll, what’s the expectation in terms of the number of clients that would have next-gen payroll within the Workforce Now contingent by the end of the year?

In terms of new business bookings, we just want to ensure we answer the question correctly. It will only impact our discussions later, and we are not even addressing migrations at this stage, although that will happen eventually.

That’s what I was asking. Are we going to do any migrations over the course of this year?

No.

Okay, great. Thank you and congrats again.

Hi there. Thank you for taking my question today. I wanted to ask if you are noticing or expect to notice any differences in the hiring environment or macro impact between the U.S. and Europe. The broader question is whether your guidance takes into account a more challenging environment in Europe compared to the U.S. or something similar.

Don likely has the specifics, but I can provide some general insights. The growth in pays per control is very robust in employer services international as well. This is partly due to the previous lockdowns and high unemployment rates worldwide. International performance has been similar, but it's reasonable to expect challenges considering the current macroeconomic environment, including rising energy costs and the ongoing war affecting our international operations. I’m not sure if you have any additional thoughts, Don.

No Carlos, I think those points are valid. Certainly, what happens with energy on the continent, in particular, is going to have some impacts on the results, but beyond that, this is a little bit of the conundrum that we talked about earlier regarding where we are versus what people are discussing. As much as everyone is predicting a recession, unemployment rates in the euro zone are at 6.1%, which is an all-time low. Unemployment rates in Canada are as low as they were even before I started working in 1974. Unemployment rates in Australia are at a 50-year low, so we have this situation where there seems to be a lot of employment yet all this risk and worry about recession. To come back to your question, are we a little bit more concerned about what could happen in EMEA in particular due to current prices? A little bit more concerned, yes. Did we consider that when we put our plans together? To some extent, yes.

Don, you should point out that you started working in 1974 when you were 12 years old.

That’s very helpful. A follow-up question, just update us on M&A, capital allocation. Are you shifting your approach at all? Are you seeing incremental opportunity out there given the turmoil with valuations in the marketplace, potential acquisition targets, or is it just sort of steady as she goes in terms of no change?

Yes, I think for now, it’s pretty much steady as she goes. I mean, certainly you can see the valuations have dropped across the board. Things that were really expensive in January are still just expensive. Things are still expensive, but they’ve come down off of historic highs, so there’s not exactly what I would call a bunch of bargains out there. There’s also not a lot of people who are coming forward looking to sell their properties because prices are down, so I would say it’s steady as she goes and we will continue to do what we’ve done and look for things that work for us strategically, look for adjacencies that make sense should they arise. But really, steady as she goes, really no change to our overall policy.

Thank you, good morning. Don, you called out a 260 basis point margin increase in PEO year-over-year, in part driven by a favorable workers' compensation reserve adjustment. How much was that adjustment, and how should we think about this item for fiscal '23?

I guess the short answer is we get adjustments on a regular basis, and they’ve been favorable for us. We look at the workers’ compensation experience over a number of years and we get external third parties to do an assessment as to whether or not it’s appropriate to book any of those adjustments, and this year we’ve been fortunate. We don’t typically forecast those numbers in any great detail simply because we do have to rely on the experience rating that the insurance companies bring to us, and so without trying to disclose exactly what the numbers were, I would say they were favorable and we’ll have to wait as the months go by to see what’s going to happen in ’23.

We’re disclosing it in our 10-K.

Yes, it was $40 million for the quarter, David, in the K, and that compares to last year's about $5 million. Most of that was as we headed into the quarter in the forecast and guidance, so it wasn’t a big departure from what we had expected.

I believe Don was trying to express that 2023 presents a challenge for us. As you plan and consider margins, this challenge arises not from any operational issues, but simply because we experienced a significant benefit in 2022 and do not anticipate a similar benefit in 2023. However, we remain optimistic about the possibility of receiving some benefit. Historically, we have experienced critical reserve releases, and while they may not be as substantial in 2023 as they were in 2022, the situation may not be as severe as it currently seems based on the numbers.

Appreciate that. Just as a quick follow-up, Don, in the guidance you’ve given for extended investment strategy, client fund interest to be up about $200 million to $220 million year-over-year in fiscal '23, how should we think about the incremental margin on that additional revenue? Are you applying additional expenses against it or should we think about it flowing through at some set margin?

Yes, there are various factors at play. We have talked about the inflationary environment, which is contributing to higher interest rates, as well as the foreign exchange headwinds we are facing. Overall, we are pleased with the improvements in our operating margins and see opportunities for further margin enhancements excluding client fund interest in the future. Currently, we anticipate a balanced incremental margin driven by both of these factors. We are investing more in sales personnel and facing higher costs due to inflation. While some of these costs are mitigated by price increases, a significant portion is contributing positively to our bottom line. We are focused on the long term, so we are seizing opportunities to invest in our business, ensuring we strike the right balance between margin growth and laying the groundwork for continued success in upcoming years.

But I think that stream of revenue is generally seen as 100% margin, just to be completely clear. If your question is whether we apply expenses against those revenues, the answer is that it felt like a trick question because you know us well and we’ve been clear for a long time. On the way down, we always say it 100% hurts us, right, because there are really no expenses that disappear when that interest income decreases. Similarly, we want to be transparent and acknowledge that on the way up, it’s 100% margin. But I wasn’t sure if it was a trick question, and it sounds like it might have been.

No, it was just trying to understand how much of that incremental revenue would flow through to the bottom line since Don had talked a lot about investment initiatives, and you had underscored growth in sales force headcount. But thank you so much, very responsive. I appreciate it.

David, I would just add one clarification. You said incremental revenue. We did make the point in the prepared remarks that it’s the net impact of the portfolio that would be 100% incremental margin, so there is a cost offset and it’s the short term borrowing cost associated with the portfolio strategy.

Much appreciated, thank you.

Hi, great. Thanks for squeezing me in. I just wanted to maybe circle back on the price increases. I know that inflation is a big driver of the maybe more than normal amount. Can you just maybe help us understand, would that put the company back on track if I think about deposit increases in maybe fiscal '21 during COVID, would it be linear from pre-COVID levels if we just thought about the price increases compounding or would it put you ahead of that because of inflation? Carlos, can you just remind us, do those price increases tend to stick if inflation starts to roll over?

Yes, strategically speaking, I believe Dany and Don can provide more specific numbers. However, I wouldn’t say our actions were misaligned with the market. There was a temporary pause for a few months, but our price increases during COVID were intended to reflect the inflation environment at that time as well. We decided to pause for a few months because we felt it was not appropriate to implement price increases just a month or two into a global pandemic in 2020. Eventually, we did implement some modest price increases, as inflation was nearly zero for a period. I hope this addresses your question. Generally, we strive to remain aligned with the market and competitive, as our primary goal is to gain market share. A common mistake for large companies is to raise prices higher than might be justified. While it may be possible to do this multiple times for a while, it’s not sustainable in the long term due to economic principles and competition. It’s crucial to understand that our strategic intention is to grow and increase market share, which requires us to be competitive in terms of our products, service, and pricing. Therefore, when we take pricing actions, whether for new business or our existing portfolio, we focus on staying in line with what’s occurring in the overall market and among our competitors.

Great, I appreciate that, and good to see the strong results.

Thank you. We are very pleased with the quarter, as we've mentioned. There's not much more to add beyond what I've said regarding our sales performance, which I believe is the strongest I've seen in quite some time. We've discussed our retention and the structural issues we're facing, so I can't express enough how satisfied I am with that. I also want to emphasize again how proud we are of our organization and our team. We initially navigated COVID and the uncertainty it brought, with everyone working from home, followed by various regulatory changes, many of which were beneficial like the PPP loans and the ERP changes globally. During the pandemic, we had to ask our associates to work weekends and nights to keep pace with the regulatory shifts and assist our clients. As that situation improved slightly, we faced the great reshuffle and staffing challenges, but we managed to overcome them. Once more, we requested our associates to exert extra effort, and they consistently delivered for us and, more crucially, for our clients. Our organization plays a vital role in providing essential services worldwide, and it was crucial for us to meet our clients' needs. I want to sincerely thank our associates for their resilience through all the challenges, as we continue to ask for more and they keep rising to the occasion. Thank you once again for your attention, interest, and insightful questions. We look forward to speaking again next quarter. Thank you.

This concludes our program. You may now disconnect. Everyone have a great day.