Earnings Call Transcript
AUTOMATIC DATA PROCESSING INC (ADP)
Earnings Call Transcript - ADP Q4 2021
Operator, Operator
Good morning. My name is Sarah, and I will be your conference operator. At this time, I would like to welcome everyone to ADP’s Fourth Quarter Fiscal 2021 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. Thank you. I would now like to turn the conference over to Mr. Danyal Hussain, Vice President, Investor Relations. Please go ahead.
Danyal Hussain, Vice President, Investor Relations
Thank you, Sarah. And welcome everyone to ADP’s fourth quarter fiscal 2021 earnings call. Participating today are Carlos Rodriguez, our President and Chief Executive Officer; and Kathleen Winters, our Chief Financial Officer. Earlier this morning, we released our results for the fourth quarter and full year. 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. I’d also like to share that we intend to host our Investor Day on November 15th. At this time, we’re planning to keep it virtual for most of our attendees. But given positive reopening trends, we do have capacity here in our Roseland, New Jersey headquarters to host our sell-side analysts live and we look forward to seeing our analyst community in person soon. With that, let me turn it over to Carlos.
Carlos Rodriguez, CEO
Thank you, Danny, and thank you everyone for joining our call. We reported very strong fourth quarter results, including 11% revenue growth and 5% adjusted diluted EPS growth, capping a year-end which revenue and margin outperformed our expectations in every quarter. For the full year, we delivered 3% revenue growth, the high end of our guidance range, and I’m happy to say, we reached $15 billion in revenue, a big milestone for the company. As we’ve discussed all year, we took a consistent approach to investing this year, while also prudently managing expenses. As a result, our adjusted EBIT margin was down only slightly and we were able to deliver 2% adjusted diluted EPS growth for the year, ahead of our guidance and well ahead of our expectations at the start of the year. I’ll first cover some highlights from the quarter. Our new business bookings results were very strong and our momentum in the market continues to build. Compared to last year’s fourth quarter, we grew our Employer Services New Business Bookings by 174%, which was slightly ahead of our expectations. And for the full year, we delivered 23% growth in ES bookings, towards the higher end of our guidance. We are very pleased with this outcome from our sales team, which booked $1.5 billion in new business in a year with a high degree of economic uncertainty.
Kathleen Winters, CFO
Thank you, Carlos, and good morning, everyone. Our fourth quarter represented a strong close to the year, with 11% revenue growth on a reported basis and 9% growth on an organic constant currency basis, solidly ahead of our expectations. Our adjusted EBIT margin was down 120 basis points better than expected. And as a reminder, we did have some comparison pressure versus last year’s lower selling and incentive compensation expenses that drove the comparative decline. Our 5% adjusted diluted EPS growth was strong, and in addition to the revenue and margin performance benefited from share repurchases. For our Employer Services segment, revenues increased 10% on a reported basis and 8% on an organic constant currency basis, as we lapped last year’s pandemic-affected Q4. We continued to see contributions from excellent retention, strong new business booking and growth in pays per control offset by lower client funds interest. ES margin was down 90 basis points due primarily to higher selling and incentive compensation expenses versus the prior year. Our PEO also had another very strong quarter. Average worksite employees increased to 616,000, up 12% on a year-over-year basis on both continued retention outperformance and contribution from solid employment growth. Our PEO revenue grew 12%, an impressive performance, as we once again benefited from higher payroll for WSE, as well as stronger workers comp and SUI revenue for WSE compared to the prior year, partially offset by lower growth and zero margin pass-throughs. PEO margin was up 340 basis points in the quarter, due to an elevated worker's compensation reserve true-up last year. We were very pleased with our strong finish to the year. For fiscal 2021, a year heavily impacted by a pandemic, we drove strong bookings growth, solid 3% revenue growth, delivered positive EPS growth and continue to invest for sustainable growth and digital transformation.
Operator, Operator
Thank you. We will take our first question on the line of Eugene Simuni with MoffettNathanson. Your line is now open.
Eugene Simuni, Analyst
Good morning. Thank you for taking my question. Maybe to start with a little bit of a high-level macro question, Kathleen, you just highlighted that there is significant amount of secular growth that’s coming out in the HR services industry from the pandemic? Can you speak a little bit more about where you guys are seeing the indications that the secular growth is actually helping, financial performance of ADP and how much of that is incorporated in your fiscal year 2022 guidance and where can we see that effect in the numbers?
Carlos Rodriguez, CEO
I think there are probably a couple of highlights. I think Kathleen probably has a couple of others she would mention. But, like, I think, we mentioned in our prepared remarks, what we’re seeing around Workforce Management in terms of time tracking and scheduling and so forth. We also mentioned some of the products we’ve developed for Return to Workplace. So there are a number of things that are likely related to what’s likely to be a more hybrid work environment for white-collar employees at least on a go-forward basis, which requires people to think about their investments in HCM in terms of what they can do to maximize the recruiting and retention and the engagement of that hybrid workforce. So I think that is one. The other one is, there’s always been a secular uptrend in terms of regulatory-related demand for HCM products. In other words, the more complexity there is around being an employer, the greater the demand for the wide array of services that we provide. That secular trend has probably gotten a bit of a boost based on the change in administrations in the U.S., which we’ve experienced for seven years since ADP has existed. But there are times when it’s stronger in terms of a tailwind and sometimes where it’s weaker. And I would say that we’re heading into a strong secular tailwind here, as a result of some increased attention on regulatory actions. You probably all saw, I think it was yesterday or the day before, that the President signed a number of executive orders, most of which are aimed at employer-employee related relationships that increase the amount of tracking and reporting and compliance necessary on the part of the employer. So those are a couple that I would mention. I think our retention rate also shows in an indirect way secular demand improving in the sense that people have rethought dropping or switching from their HCM vendors. But that one is a little difficult to be 100% sure about, because we do expect some normalization in that retention rate.
Kathleen Winters, CFO
Yeah. I think that really covers a lot of that. I mean to summarize and categorize what Carlos said, when you think about the complexity, number one, of being an employer, the ongoing and significant changes that we see from a regulatory standpoint. So complexity, regulatory change, and the dynamic environment as the way people work and employer-employee relationship changes, it’s a very dynamic environment. All of that is, you can just see in the bookings number that we have. Our bookings, I’m sure we’ll get into the discussion on this, but the growth is pretty broad-based. I mean, certainly, we saw some channels stronger than others, but it’s pretty broad-based. And I think that’s because of all of this dynamic change and complexity that we see, and in particular, our comprehensive solutions that our outsourcing solutions have seen quite significant growth. So we’re really encouraged about the macro trends that we see in the space.
Carlos Rodriguez, CEO
And again, I think that, I’ve always never known what is defined the secular versus not secular. But the huge demand now for talent, what’s happening in the labor markets. Obviously, that’s a huge tailwind for all of us in the HCM space in terms of recruiting tools and engagement tools to try to hold on to people. But that could also be something that wanes in six months. That’s a little harder to tell. But generally speaking, the war for talent has always been a secular tailwind to our industry as well.
Eugene Simuni, Analyst
Got it. Got it. Thank you. Great. And then for a follow-up related to the bookings growth and looking at your guidance for 10% to 16% growth next year. Can you just quickly speak to kind of two or three key swing factors that you see that will define whether we’re going to end up on the lower end or higher end of that range, as we kind of turn the corner on the recovery and go through the spirit?
Carlos Rodriguez, CEO
Sure. I can highlight three factors that shape our perspective on this. First, we need to consider the ongoing secular and cyclical trends. If the economy maintains its current momentum, we feel optimistic. However, if we encounter more challenges related to the pandemic or other issues, the existing government stimulus, even without additional support, remains strong, coupled with pent-up demand from recent reopenings. This sets a favorable environment for our bookings growth. The next two factors revolve around our sales force productivity at the Sales Quota Carrier level and the number of Sales Quota Carriers. While it may seem simple, our size means that new product launches typically do not dramatically alter our growth. For smaller companies, a new product introduction can lead to significant growth spurts or challenges if they lack new offerings. For us, growth is more about methodically enhancing and adding new products and making acquisitions. A critical element for our success is ensuring we have the right headcount and continuously improve our sales force productivity, which aligns with our plan. Over the last four quarters, our sales force productivity at the Average Quota Carrier level has consistently improved, reaching 90% for the full year. By the end of the fourth quarter, we were in the mid-90% range compared to pre-pandemic levels. This suggests we are returning to a positive trend in average sales productivity. If we maintain this trajectory and achieve our headcount goals, we should be positioned to meet our new business bookings targets.
Eugene Simuni, Analyst
Got it. Thank you very much.
Operator, Operator
Thank you. Our next question comes from a line of Pete Christiansen with Citi. Your line is now open.
Pete Christiansen, Analyst
Good morning. Thanks for the question. Carlos, you talked about a lot of new logo wins this year, which is pretty impressive. But I was curious to hear how you think about how this may have changed your or ADP’s cross-sell, upsell opportunity set? I’d imagine the runway there is expanded quite a bit, and perhaps, how you are thinking about strategy, that land and expand strategy to really take advantage of this opportunity? Thank you.
Carlos Rodriguez, CEO
Yeah. So one of the questions we sometimes get is related to what you’re asking is the mix of how much is new logo sales versus how much is add-on sales. And it’s really been very steady over many years. It was only during the ACA period where we had a little bit of a tilt more towards incremental add-on sales. But it’s for a long time been around 50-50 and it’s still kind of in that neighborhood. So I think that bodes well because the more clients we add, the more opportunities we have to pursue that land and expand approach that you just described. So I would say that we’re bullish on the opportunity to continue to go back to the new logos that we sold, which in many cases, we sell with multiple modules, but there’s always additional room for new products as well to go back to that existing client base. So I think that underlying logo growth is another kind of supportive factor for new business bookings because we do get about 50% of our bookings from our existing client base.
Pete Christiansen, Analyst
That’s helpful. And as a follow-up, I was just hoping if you could juxtapose the GlobalView business versus the rest of ES. I know they haven’t been totally in sync during this recovery. What are you seeing there of late trend-wise? And as you look towards the outlook, is that part of the business considered or laggard behind the remainder of the ES or is there some variability there that investors should be aware of? Thank you.
Carlos Rodriguez, CEO
It’s actually a little bit of the opposite. We may have confused some people, I think, in prior calls. But I think GlobalView is probably could be at the top of our list in terms of performance this year. Large multinational companies have been looking for ways. I think this pandemic raised some issues and concerns around control. I think for the HR leaders that probably raised some issues around engagement and making sure that you’re connected to your global workforce and that you had global reporting, et cetera. So there’s a lot of factors that probably went into what was incredibly strong demand and very positive sales growth. So I would say that, again, we don’t disclose individual product lines, but I would say the GlobalView sales were one of the stronger line items for us. And I’ll add that to your question about differences between the businesses. I think all of our businesses really performed well. It’s hard to point out which ones were spectacular versus just good. And I would say that GlobalView and even our International business really were standouts and it’s very impressive because some of the situations in Europe, for example, were very challenging in terms of dealing with the pandemic, but I didn’t really stop people from looking for solutions and it didn’t stop our sales force from finding them, even though they had to do that from, obviously, from a remote workplace. So, I guess, the summary is GlobalView is a shining star for us.
Kathleen Winters, CFO
Yeah. They saw good momentum as we closed out the year. In fact, it was a particularly strong close with a good number of multinational deals on GlobalView coming through at the end of the year, and we’re looking at fiscal 2022 for them to be a big contributor again.
Carlos Rodriguez, CEO
The strong bookings will translate into revenue over the next six to 18 months. This is because these are typically large multinationals that require some time to implement. Looking ahead, this should positively impact us within that six-month to 18-month timeframe.
Pete Christiansen, Analyst
Thank you. Great color and really nice execution. Good job. Thank you.
Carlos Rodriguez, CEO
Thank you.
Operator, Operator
Thank you. Our next question comes from a line of James Faucette with Morgan Stanley. Your line is now open.
James Faucette, Analyst
Great. Thank you very much and good morning. I wanted to ask quickly and I think it’s tied into some of the comments you’ve made around your guidance. But specifically, how are you thinking about the well-publicized difficulties employers are having attracting employees and that kind of thing? How is that factoring into your guidance and your formulation and are expecting resolution of that as we go through the fiscal year? Just trying to get a little bit of color how you’re putting the macro environment into forecasts?
Carlos Rodriguez, CEO
I would categorize this as either secular or cyclical tailwinds, depending on whether we view it as a short-term or long-term issue. If this situation resolves itself, there are a few scenarios. If it's a temporary issue related to placing people in the right jobs, then in about six months, we might see unemployment drop to the 4% to 5% range. This would create additional demand for employers looking to find talent and compete for the right skills. It appears we're in a prolonged cycle where employers will be actively searching for workers. This dynamic should generate more conversation opportunities. While we don't have a perfect solution and aren't a staffing company, we do offer tools and technology, along with personnel who can help our clients enhance their competitiveness in securing the right hires at the appropriate compensation levels. This is our area of expertise. I believe we are amidst a significant cycle of demand for labor that is primarily influenced by temporary challenges, such as people not being in the right roles and ongoing issues like childcare and eldercare. Many economists share the view that these issues will be transitory, yet the overall need for workers will remain constant, especially given the low unemployment rate we expect to see by the end of calendar year 2022.
James Faucette, Analyst
That's really helpful, Carlos. Then regarding sales productivity, you noted that you're expecting and observing improvements in that area. Additionally, you mentioned that you're able to connect your salespeople with more accounts and potential accounts. How closely tied do you anticipate these two factors will be as we progress through the rest of the fiscal year?
Carlos Rodriguez, CEO
We are navigating unfamiliar territory, making it challenging to provide a definitive answer. Over the past year, we were unable to engage with most of our processes until recently. We achieved strong bookings results, which reflects our ability to adapt to market demands and client needs. Approximately half of our workforce, which likely includes half of our clients, continued working in physical locations, producing and delivering goods. In contrast, many white-collar workers did not. This segment of clients expects us to be available for in-person meetings, though we will not pressure anyone to meet face-to-face. We are open to virtual or in-person meetings based on their preferences. Our goal is to be prepared for market demands. However, identifying the most influential factor driving our success is difficult. We believe that being willing and available to meet in person has played a significant role in our sales success for fiscal 2022, but I cannot quantify its impact, as we were also successful in 2021 without this engagement.
Kathleen Winters, CFO
Yeah. I think the key is that we’re going to have to make sure we can continue to be nimble just as we were in fiscal 2021, right? If there are certain regions or points in time where we might have to scale back a little bit in the face-to-face, I think we’re nimble enough to do that. We’ve proven we could do that. But we’re certainly ready and have been out there doing face-to-face and hope that that continues.
James Faucette, Analyst
Thanks, Kathleen. Thanks, Carlos.
Carlos Rodriguez, CEO
Thank you.
Operator, Operator
Thank you. Our next question comes from a line of Dan Dolev with Mizuho. Your line is now open.
Dan Dolev, Analyst
Hey, guys. Great results. Thanks for taking my questions. So, can you discuss how the retention has varied by sort of the three ES by the three sub-segments, SMB, mid-market and up-market? And what happens to the SMBs once the PPP rolls off, so how should we think about kind of your guidance for retention versus like those three vectors? And then I have a very short follow-up? Thanks.
Carlos Rodriguez, CEO
That's a good question. Kathleen might have some additional insights. I would say your suggestion that the PPP loans could be linked to these increased retention rates is something we've heard mentioned. It's difficult to quantify that impact. However, our down market business has shown one of the strongest retention rates, which is why we've cautiously planned for some adjustments next year. This fiscal year and the two months prior were likely the best examples of ADP’s business model in its ability to deliver results. Whether you call it service or compliance, when people needed assistance with their PPP loans, they weren't reaching out to their bankers, and many banks were overwhelmed and not providing help. We found a way to support our clients during that time. I recognize that memories fade quickly, and we need to consistently impress and deliver for our clients. We demonstrated to hundreds of thousands of clients, and hopefully potential clients, that if you want a true partner, ADP is the right choice. You can purchase software anywhere, but if you want excellent technology and service, you should choose ADP. I believe this will help us maintain retention rates more permanently because when people faced challenges, they recognized the value of having someone they could reach out to for advice and problem-solving. That said, we remain cautious and aware that some normalizing could lead to lower retention rates, particularly in the down market, as you've suggested.
Kathleen Winters, CFO
Yeah. I mean, that’s covered a lot of. In fiscal 2021, look, we saw strong retention across almost all of our channels, our businesses, particularly in small business and mid-market as well, though, and even actually on the international side where the retention is very high. We thought it’s a little bit higher there as well, too. So, pretty much strong across the board. But look, we want to be prudent from a planning perspective and while we haven’t seen any change yet in terms of switching or along those lines. I do think it’s prudent to plan that there’s going to be, I’ll call it, a little bit of give back in fiscal 2022. I think we are going to hold on to some of the games. We’re certainly attempting to do that. We want to do that. But I do think it’s prudent to plan for a little bit of give back, which we’ve done and that would be primarily with regard to small business segment normalizing back to pre-pandemic levels.
Carlos Rodriguez, CEO
To clarify, I’m not aware of any specific connection between our clients and us or anyone else due to the PPP loans. I've heard theories suggesting that there might be a psychological barrier making it more challenging to switch providers, but I’m not a small business owner. Our conversations with small business owners haven't indicated that this is a concern. While it seems reasonable that it could play a role, there is no definitive sign that leads me to believe we will suddenly lose 100,000 clients on November 15th due to the repayment or expiration of their PPP loans. That’s simply not how the program functions.
Dan Dolev, Analyst
Understood. For my quick follow-up, which I believe is related to this, I want to ask about the margin guidance. What I'm hearing from investors this morning is that it might be slightly under expectations. Is this related to the mix shift expected next year, or is there something else you can share regarding the margin guidance? Thank you.
Carlos Rodriguez, CEO
Well, listen, after 10 years of doing this, I’ve never heard anyone say that your margin guidance was too aggressive and too high. So let me just start off with that comment. And part of that is that we’re always trying to balance short-term and long-term investors. I’m not sure which one you were hearing from. But our intent here is to continue the machine, right, and the momentum that has led to multiple decades here of compounded growth and creation of value over a very long period of time and that requires delivering short-term results, as well as long-term results. And those long-term results, I think, require some investment including on the R&D side. But in particular this year, really the biggest factor is selling expense and sales investment, which has happened to us in the past, we’ve had other times and call it 2000, 2001 or 2002 and then, 2008, 2009, 2010, because I was around for those, where we reaccelerate and take advantage of demand back to the secular growth opportunity. The way our business model works is we incur a lot of upfront selling and implementation expense. Now there are some accounting rules that allow you to defer some of that. But generally speaking, you get elevated selling expenses and implementation expenses, and it’s pretty significant. So I would say that that is a significant part of what would have maybe otherwise been higher margins for 2022. But when that business then is on the books, that’s a high incremental margin business that then in 2023, 2024 and then for the next 12 years to 13 years, that’s how long we keep our clients on average creates an annuity. So as you can imagine, we never turn down the incremental opportunity to add business, never, because it is just the way the value creation model works. And we’re going to make hay while the sun is shining here. And with 6%, 7% GDP growth last quarter and what’s likely to be incredibly strong GDP in the next year or two, we’re going to take every possible opportunity. And unfortunately, that requires some selling expense and some implementation expense in addition to the ongoing investments in technology and some of the other things that we do.
Kathleen Winters, CFO
Yeah. So just big picture when you think about margin for next year, and we’re very happy that we’re able to kind of guide to the 25 basis points to 50 basis points of margin expansion, I mean, look, we always look to do better than the plan, but that’s what we’re comfortable with. Right now, the way to think about it is, look, we’re going to have operating leverage to a greater extent in fiscal 2022, obviously, but we’ve also got the investments that we want to continue to make, as Carlos just articulated, in product, in sales and in digital transformation importantly. And we do have some offsets, Carlos mentioned, the sales expense. But we also have things like, Return to Office and ramping up T&E versus where we were in fiscal 2021. So kind of all that goes into the mix, net-net, we’ve got this 25 basis points to 50 basis points margin expansion. We’re going to do our best to deliver on that and continue to work our digital transformation and if possible do even more.
Carlos Rodriguez, CEO
And one more thing, if you have any doubts about ADP’s ability to drive margin, there was a small issue this year with interest rates that created a $110 million headwind to net contribution and almost $125 million impact on both top line and bottom line in terms of client funds interest revenue. Our revenue growth would have been nearly a point higher, and our margin this year during the pandemic would have increased by 70 basis points instead of decreasing by 40 basis points, if we hadn't faced that headwind. While we did encounter this challenge, it's difficult to speculate on what might have been without it. However, it's a straightforward issue that has nothing to do with operations, and which we have no control over. We just have to ride that cyclical wave, and hopefully, that wave is moving in a very positive direction for us over the next two to three years. I wanted to emphasize this point because it highlights how much control we have over our expenses, our business model, and our long-term value creation goals.
Kathleen Winters, CFO
And that perhaps our interest does continue to be headwind for us in fiscal 2022, very modest headwinds, compared to what we experienced in fiscal 2021, but it doesn’t help us, whereas in the past, it was a significant help to us.
Dan Dolev, Analyst
Got it. Thank you for the detail. Appreciate it.
Operator, Operator
Thank you. Our last question comes from a line of Ramsey El-Assal with Barclays. Your line is now open.
Ramsey El-Assal, Analyst
Hi. Thanks for taking my question. I wanted to follow up on your comments on retention and you’re prudently planning for retention to increase if the market normalizes whether it does or not we’ll see. But can you describe your toolkit on the sales or technology side that you can use to prevent attrition and I’m sure a lot depends on the underlying sort of reasons for the attrition. But can you be more proactive on that front and sort of stem the tide of it if push comes to shove?
Carlos Rodriguez, CEO
Absolutely. We can provide a couple of examples of what we've accomplished over the past year. It's typically a careful, long-term strategy aimed at enhancing our products. When we discuss innovation, it encompasses new business bookings, but it also involves making our solutions user-friendly and intuitive. We’ve made significant investments in user experience, particularly in RUN and some of our other platforms, which are crucial for client retention in today's environment. We recognized the need to evolve into a technology company, in addition to being a service provider. Therefore, having excellent products that are easy to use and frictionless is essential for retention. Additionally, our business model focuses not just on technology and software but also on compliance assistance and expert advice. This requires well-trained associates available to address client inquiries, whether by chat or phone. The complexity of our services and the challenges of being an employer necessitate support; most clients don’t navigate these issues alone. We combine exceptional technology with outstanding service, and I believe that if we maintain both, we'll likely sustain the improvements we've seen in retention, even if there is some pullback in a downturn.
Ramsey El-Assal, Analyst
I see. Just not a question of running analytics at the right time, it’s really more of a longer-term kind of blocking and tackling and product innovation approach.
Carlos Rodriguez, CEO
We conduct extensive analytics as well. For instance, we collect a significant amount of data on individual clients, including how often they call us. We have voice recognition technology that identifies certain keywords during recorded phone calls. This provides us with valuable insights into clients who may be at risk. Additionally, we have specialized teams that can follow up with these clients to ensure any issues they experienced are addressed. I would describe that as trench warfare; I'm willing to get into the details if you’d like. Our analytical tools offer profound insights. For example, during downturns, our clients don't often reach out, presumably because we effectively prevent issues. However, if one of our small business clients makes multiple calls in a month, that prompts us to reach out for a closer look and triage to ensure we retain that client, since it's usually indicative of underlying problems. We also employ various techniques and tools to identify what we call hotspots. Furthermore, we carefully monitor pricing during our rate adjustments, which can mean price increases. We approach these changes with a lot of analytical support to ensure we implement them in the smartest way possible to maximize retention.
Ramsey El-Assal, Analyst
Okay. Thanks for that. And a quick follow-up for me. How would you characterize the demand environment for off-cycle or on-demand payrolls, is it something that you see getting quite a bit more popular or will it sort of remain kind of a niche service over time?
Carlos Rodriguez, CEO
It's clearly becoming popular, as many people are discussing it, which tends to lead to popularity. Once it's mentioned, it gains traction. We've been aware of this trend for several years now, recognizing that many developments are inevitable and we are preparing for them. Real-time payroll is one that we've been considering for a long time. For instance, in California, if someone is terminated, they must receive their final paycheck immediately, which complicates the usual processes. We have long had solutions for this. The growing interest likely correlates with heightened discussions and technological advancements that enable more options for instant or faster payments. So, yes, this is significant. For industries with high employee turnover, the ability to offer this solution is essential. We can provide that solution, and it's crucial in states like California to ensure clients can deliver instant pay upon termination.
Ramsey El-Assal, Analyst
Got it. All right. Thanks so much.
Operator, Operator
Thank you. Our next question comes from a line of Bryan Bergin with Cowen. Your line is now open.
Bryan Bergin, Analyst
Hi. Good morning. Thank you. Can you talk about how you’re thinking about the cadence of the pays per control projecting, you’ve assumed during fiscal 2022? And what does the 45% build imply in the base relative to pre-pandemic levels?
Danyal Hussain, Vice President, Investor Relations
Yeah. Bryan, it’s just a mirror image of what we saw effectively last year. And so there’s a stronger Q1 performance PPC that’s baked into our assumptions and it gradually tails off. But we don’t have an explicit guidance for you on what this means for reported unemployment rate, the same way that we gave you that guidance last year at the outset.
Carlos Rodriguez, CEO
The average for the year for pays control is 4% to 5%. Therefore, I would expect that for the fourth quarter, it will likely revert to the lower range.
Danyal Hussain, Vice President, Investor Relations
Absolutely.
Carlos Rodriguez, CEO
Because we’re growing over the 8% and in the first three quarters, particularly the first quarter it’ll be higher.
Bryan Bergin, Analyst
Okay. And follow up then on M&A. How are you thinking about areas of potential acquisitions for capabilities? And then also, can you comment on how the market has been for book of business acquisitions, curious how COVID has changed that dynamic during fiscal 2021 and then to fiscal 2022?
Carlos Rodriguez, CEO
We’ve had quite a bit of success in acquiring clients. I was surprised by the opportunity we found and how we managed to act on it. We mentioned a significant acquisition last year, primarily in the fourth quarter, which continued into the first quarter a bit. The previous year also saw a major acquisition in the fourth quarter. This year, we've made several smaller acquisitions, which collectively have a positive impact. Overall, the news is encouraging and we have developed a solid capability for making these transitions that drive growth for us. Regarding cross-selling, we typically offer a more comprehensive range of solutions compared to those we acquire from, which creates additional value opportunities for us. In terms of mergers and acquisitions, we've focused on some international markets where we still have minimal market share and are seeking add-on products. In the U.S., we aren't looking to add more platforms for benefits or payroll. Our focus needs to be on adjacent areas within the HCM space that aren't duplicative, as we have been prioritizing simplification and organic growth for many years. This doesn't mean we won't pursue acquisitions; it's been a couple of years since our last one. However, we are open to adding supportive benefits if they align with our technology strategy and aren't disruptive or solely aimed at boosting revenue. On the international front, we don’t face those same concerns as much, and that area still presents a lot of opportunity for expansion through mergers and acquisitions.
Bryan Bergin, Analyst
Okay. Thank you.
Operator, Operator
Thank you. Our next question comes from a line of Kartik Mehta with Northcoast Research. Your line is now open.
Kartik Mehta, Analyst
Good morning, Carlos. You talked about the PEO business, obviously, it performed well in the fourth quarter and seems like trends are coming back. I’m wondering if you’ve seen any secular changes, I know that word maybe you don’t like, but any secular changes in demand for the product, or if you anticipate any changes, because what we’ve gone through with COVID?
Carlos Rodriguez, CEO
Based on my experience from running a business at ADP and observing the industry for 25 years, economic environments like the current one typically provide a positive long-term trend for PEOs. Over the last 20 to 30 years, we have noticed consistent positive trends for the PEO sector, which can be further strengthened by cyclical factors, such as a robust economy. While some believe that PEOs or outsourcing perform well during recessions because companies seek to cut costs, the data does not support this. Normally, PEOs and outsourcing thrive during periods of strong economic growth, high GDP, and talent competition where offering attractive benefits is key. However, it's important to consider that we recently experienced a pandemic, which may influence our past experiences. So, it's wise to set aside some of those insights. Generally, the current economic conditions are favorable for PEOs. In the past 18 months, we observed that while our sales cycle is long and decisions involve considerable thought, our booking results have exceeded expectations, although they haven't been as strong as we would like in the early recovery stages. We anticipate a significant rebound in bookings for PEOs in 2022, and we are already noticing positive signs in the fourth quarter. During recent challenging times, we maintained high retention among existing PEO clients, though acquiring new clients was more difficult. We delivered tremendous value to our existing clients during the pandemic, assisting them with various challenges beyond just PPP loans, like workforce downsizing and understanding state-specific benefits rules. While other firms may have experienced less activity, our team was incredibly busy, especially within the PEO segment. This strong engagement and reputation, coupled with positive cyclical influences, suggest a promising outlook for PEOs over the next couple of years.
Kartik Mehta, Analyst
And just as a follow-up on the ES business, have you had to do anything out of the ordinary in terms of price competition or just providing promotions?
Carlos Rodriguez, CEO
No.
Kartik Mehta, Analyst
Perfect. Thank you.
Operator, Operator
Thank you. Our last question comes from the line of Mark Marcon with Baird. Your line is now open.
Mark Marcon, Analyst
Good morning, everyone, and thank you for having me. I’d like to hear more about the strong bookings performance. Specifically, regarding new logos, where did you find the most success? Was it primarily in the lower market with new business formations or was it more widespread? Additionally, who do you feel you were competing against the most?
Carlos Rodriguez, CEO
We will always make room for you, Mark. To highlight a few points, we discussed our non-PEO HRO solutions in our prepared remarks. These are essentially mid-market and upmarket outsourcing solutions that are more comprehensive. A significant aspect of this is that many businesses realized, not long after the pandemic began, how difficult it is to manage these operations, especially when quick adaptations are necessary. Companies must ensure their systems are functional and cannot rely on outdated setups for payroll processing, especially with employees working remotely. Many realized they required more than just basic software and services; they needed robust support for business continuity. This is where our HRO solutions truly shined. Additionally, our upmarket and ESI bookings were notably strong. While new business formation was beneficial in the down market, we were pleased with our overall booking results, which were robust across the board. However, there were segments that performed even better. For instance, in our GlobalView Tax Filing and Compliance business, companies recognized the risks of having small teams handling critical tasks without knowing their ability to work on-site or remotely, prompting them to outsource to us. We also experienced growth in volume-based services like employment verification and screening, as well as a slight recovery in RPO. Overall, our performance was commendable across different areas.
Kathleen Winters, CFO
Yeah. Like a strong across the board, Carlos said all those right points, in particular SBS really led the way, down market really led the way in recovery during the course of the years. And in fact, and you can correct me if I’m wrong on this, but I believe SBS had their biggest Q4 ever, including the Retirement and Insurance Solutions.
Carlos Rodriguez, CEO
Yeah. I wrote it down somewhere, but I can’t find it. I think we had records Q4 bookings in a number of different categories. But that’s also probably happens over the years to, where we have so many things were so broad, that there’s always a few bright spots. But honestly, compared to what we would have expected the beginning of this year, really, to be saying we had record bookings in any business line is really good news.
Mark Marcon, Analyst
Okay. That’s fantastic. And just with regards to the new logos, in terms of if there wasn’t moving to an outsourcing solution that was previously done in-house, was there any sort of commonality with regards to competitive takeaways and wins that you ended up seeing as a source?
Carlos Rodriguez, CEO
When I look at the balance of trade data, I believe we are making some progress. We don’t share much detail on this as I don’t think it’s beneficial, and I'm not trying to criticize any specific competitor. However, we are satisfied with our improvement. Stronger retention means we are losing fewer customers to the competitors you mentioned, and our strong bookings performance indicates that we are winning more against them. It's likely that there are a few competitors where our balance of trade has improved, which is true, although for some competitors it has remained the same. I don’t think there are any instances where we have gone backward that I can recall. We are very focused on this aspect; we need to concentrate more on gaining new customers and units and on monitoring our competitors, as they are keenly observing us, and we are quite tired of it.
Mark Marcon, Analyst
Understood. And then, along those lines, you’ve made a number of product enhancements. Can you highlight it, a number of them, including in terms of Workforce Solutions, Workforce Planning, time and attendance? And then, obviously, highlighting Next Gen Payroll, just wondering, which ones do you think are going to have the greatest incremental contribution? I know it’s all leads to sales force productivity, but just, which ones should we look for the greatest benefit from?
Carlos Rodriguez, CEO
Well, that’s a tough one, because it’s like picking your favorite child.
Kathleen Winters, CFO
Yeah. I mean, I have a view. I think what we do from an investment perspective in ongoing kind of refresh and modernization, and you act on all of our strategic platforms is critical. And we’re doing that all the time and that’s just critical to our ongoing satisfaction with our products, as we talked about earlier and our NPS score. So that constant refresh from a UX perspective is really, really important. But, Carlos, you may have other things you want to just highlight…
Carlos Rodriguez, CEO
I agree completely. I'm really enthusiastic about all of our initiatives. I believe that Next Gen Payroll has the potential to be a significant advancement for ADP in recent decades. However, it's crucial to prioritize Workforce Now, Roll, and other current initiatives because they are critical and highly visible. Next Gen Payroll serves as a tool for our overall performance, but the enhanced flexibility and process improvements it offers in our back office could be transformative for ADP's competitiveness and efficiency. Ultimately, we must focus on the client experience, and I think Kathleen is correct. What matters most to clients is their interaction with our services, which largely revolves around user experience and our front-end solutions. So, I believe that should be our main area of focus.
Mark Marcon, Analyst
Great. This Next Gen Payroll, what’s the plan for this year in terms of percentage of Workforce Now that ends up getting converted or that should be on it?
Carlos Rodriguez, CEO
We are currently experimenting with a few conversions, but it is not our top priority at this moment. We initially focused on the lower end of our mid-market, specifically core major accounts ranging from 50 to 150. We're pleased with our progress in this area, as we've indicated in previous quarters. We have a well-structured plan that we prefer not to disclose fully due to competitive concerns. Our goal is to transition to 100% of our core sales being Next Gen Payroll, while gradually expanding to major accounts between 150 and 1000 and converting all those clients to Next Gen Payroll. Conversions will begin gradually but are not a major focus for us right now. It's important to note that Workforce Now is integrated into both types of accounts. This transition will be transparent; it won't disrupt clients significantly, similar to past migrations that caused disruption. Clients will notice minor enhancements, particularly in self-service capabilities, but their overall experience will remain largely unchanged.
Mark Marcon, Analyst
Terrific. Congratulations.
Carlos Rodriguez, CEO
Thank you.
Operator, Operator
Thank you. This concludes our question-and-answer portion for today. I am pleased to hand the program over to Carlos Rodriguez for closing remarks.
Carlos Rodriguez, CEO
Thank you all for joining the call today. It's been quite a year filled with challenges, which I'm sure many companies can relate to. I am truly thankful to our associates for their outstanding commitment, especially to our clients. When faced with difficulties, we stepped up to deliver. This began in the fourth quarter of last year with the numerous government regulation changes and the high volume of inquiries about PPP loans. That momentum carried into this fiscal year, and we faced an incredibly tough environment, including personal health challenges among our team. I reflect on our mission-driven approach and am grateful for the culture built over decades by my predecessors, which enabled us to navigate these times, albeit not without difficulties. We provided for our clients and contributed to the economy as a vital service. I am immensely proud of our associates, including our back office staff who support our frontline team, as well as our sales force that continues to drive growth, despite the unprecedented challenges we face. I remain optimistic about the future, even with the short-term hurdles posed by the new Delta variant. We are moving in a positive direction and look forward to better times in the coming quarters, knowing we'll encounter some ups and downs along the way. It's reassuring to see that things are on the right track in the United States, and we hope other regions like Europe, Asia, and Latin America will follow suit. Thank you for your interest in ADP and for being here today.
Operator, Operator
Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.