Earnings Call Transcript - ADP Q2 2023

Operator, Operator

Good morning. My name is Michelle and I'll be your conference operator. At this time, I would like to welcome everyone to ADP's Second Quarter Fiscal 2023 Earnings Call. I would like to inform you that this conference is being recorded. After the prepared remarks, we will conduct a question-and-answer session and instructions will be given at that time. I would now like to turn the call over to Mr. Danyal Hussain, Vice President, Investor Relations. Please go ahead.

Danyal Hussain, Vice President, Investor Relations

Thank you, Michelle, and welcome everyone to ADP's Second Quarter Fiscal 2023 Earnings Call. Participating today are Maria Black, our President and CEO; and Don McGuire, our CFO. Earlier this morning, we released our results for the quarter. Our earnings materials are available on the SEC's website and our Investor Relations website at investors.adp.com, where you will also find the investor presentation that accompanies today's call. 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 the 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'll turn it over now to Maria.

Maria Black, President and CEO

Thank you, Danny, and thank you, everyone for joining us. ADP delivered strong Q2 results headlined by 10% organic constant currency revenue growth; 120 basis points of adjusted EBIT margin expansion; and 19% adjusted EPS growth. We continue to deliver exceptional value in the HCM market as we invest in ourselves and innovate to continuously meet and exceed the changing needs of our more than 1 million diverse global clients. I'll start with some highlights from the quarter. In Q2, we drove very strong ES new business bookings growth, which included an incredible finish in December. We have continued to see robust demand across our downmarket portfolio and our ES HRO offerings and our international sales performance, especially our GlobalView platform was much stronger in Q2 after a softer Q1. Overall, we are pleased with our sales results for the first half of the year, and although clients are still dealing with a number of uncertainties, our pipelines are healthy, and we feel well staffed, and well positioned to deliver solid bookings growth for the remainder of the year. Our ES retention was once again a source of outperformance with modest year-on-year improvement in Q2 overall despite continued normalization in down market out of business rates. This strong result was just shy of the record retention set during the pandemic and was led by our mid-market, our upmarket, and international businesses. And we're pleased to be taking our full year guidance up slightly. Our pays per control metric was 5% for the quarter, decelerating slightly from Q1 as we had anticipated. Job growth in the U.S. labor market has been slowing, but clearly remains solid, which you see reflected in our client base. Despite recent headlines noting job cuts by a number of companies, we have yet to see broad-based softening in the labor market. Last, on our PEO, our growth in average worksite employees was solid at 8%. While we have been expecting growth to decelerate over the course of this year, the pace was a bit faster than we previously assumed and we're adjusting our outlook accordingly. With that said, demand for the PEO solution remains healthy. The secular growth opportunity is unchanged, and we are well positioned to reaccelerate our worksite employee growth. Stepping back from the quarter, I want to provide a quick update on our broader strategy. Over the last several years, you've heard us talk a lot about the modernization of our products. Our simpler user experience enhances ease of use for our key platforms like RUN and Workforce Now, and enables a more seamless integration to complementary solutions like insurance, retirement, and payments. Our Next Gen Payroll engine is a prime example of how we're modernizing the back-end of our solutions, and we continue to offer it to a broader set of new mid-market clients. And brand new solutions like Roll in our Next Gen HCM platform position us to address certain HCM opportunities more fully than before. These product enhancements are designed to drive win rates and retention even higher, and we have tremendous opportunity in front of us. But our strategy has always been about much more than just offering HCM software. ADP clients want us to help them find, hire, pay, engage, and provide for the retirement of their workers in a thoughtful and compliant way. To truly solve for these needs, we are modernizing all aspects of the client relationship. That starts with product, but also extends to our go-to-market approach, how we onboard our clients, and even how we advise and support them on critical issues. We refer to this collective effort as our Modernization Journey. And as with our product journey, the opportunities here are incredible. We are removing friction and enhancing the client experience in many ways. In our U.S. down market, we continue to digitally onboard tens of thousands of clients every year, making onboarding easier for our clients and accelerating time to start. We have seen this success in the U.S. and we're beginning to scale the same capability in Canada. Our Intelligent Self-Service capability launched only last quarter is already helping a portion of our client base answer millions of questions from client employees through a completely automated process. And now in our international portfolio, we're implementing chatbots to reduce work for those clients as well. We continue to invest in our robust partner ecosystem, cultivating deep relationships and integrations with financial advisers, CPAs, and benefits brokers to provide a seamless experience for our mutual clients. And we're using the power of our extensive data to deliver insights to bring greater value to clients from better aligning pays to market trends, to reducing the frequency and severity of workers' compensation claims, to identifying tax credits and other legislative incentives. To bring this large-scale Modernization Journey to life, I'll speak to one of our fastest-growing businesses: ADP retirement services, which helps employers establish and administer retirement plans. Businesses today face a complex environment with significant legislative change, and our clients look to us to help them navigate these changes, stay compliant, and address talent challenges. For example, in the retirement space specifically, the recently passed SECURE Act 2.0 alone has over 90 provisions for businesses and employees to consider. And what we've designed makes life easy for our clients and partners, improves the financial wellness of their employees, and sets us apart in the market. Our robust 401(k) solution with thousands of different investment options is not only clean and intuitive, thanks to our new UX framework, but is also deeply integrated with RUN and Workforce Now. Our highly tenured, licensed retirement services sales force understands our clients and understands which solutions to make a meaningful difference in a client's unique talent strategy. To expand on our partnerships with financial advisers, we recently developed a platform called Advisor Access, much like the Accountant Connect platform we developed for the CPA community years ago. This positions us better to serve our mutual clients and their employees. And our tax credit team, full of experts in their field, is there to help our clients or their CPAs apply for and obtain the appropriate legislative incentives. Our goal in our Modernization Journey is to consistently improve the full end-to-end experience for our clients and their employees, which will in turn contribute to our long-term sustainable growth and profitability. We look forward to keeping you updated. And now over to Don.

Don McGuire, CFO

Thank you, Maria, and good morning, everyone. I'll provide some more color on our results for the quarter and update you on our fiscal '23 outlook. Overall, we had a strong Q2 on both revenue and margins. If I can summarize, we had generally positive developments in our ES segment despite some incremental headwinds. Meanwhile, trends were a little softer than expected in our PEO. Let me focus on ES first, and I'll cover our results and outlook all at once. ES segment revenue increased 8% on a reported basis and 10% on an organic constant currency basis which was a good outcome for the quarter. Maria mentioned the strong new business bookings performance in Q2. Given the continued macroeconomic uncertainty, we think it's prudent to maintain our current guidance range for now, although we feel well positioned for the back half. We also had near-record ES retention in Q2, with first half ES retention results up year-on-year; we're now revising our outlook, and we expect retention to be down only 20 basis points to 30 basis points for the full year. This continues to assume normalization in out-of-business losses in our downmarket. Pays per control were in line with our expectations in Q2, but with better line of sight on Q3, we are now assuming less of a deceleration in pays per control over the back half than we did previously and are raising our outlook to now assumed 3% to 4% pays per control growth for the year. And on FX, we had about two percentage points of revenue headwind in Q2, but the outlook for the rest of the year is slightly improved, and we now expect full year headwind somewhere between 1% and 2%. Those are the bigger positive developments in ES revenue. There were few developments in the other direction as well. Client funds interest revenue was up nicely in Q2, but was actually a bit lighter than we had planned. This is primarily because yields pulled back slightly from where they were three months ago when we provided our prior outlook. We're also tweaking down our balance growth assumption now to 4% to 5% growth for the year due primarily to assumptions around average wage related to worker mix, tax rates as well as the impact of the lapping of the payroll tax deferral. Together, we are lowering the full year by $5 million at the midpoint for revenue and $15 million at the midpoint for net impact to our earnings. We also saw underperformance in some of our volume-based businesses like our recruitment outsourcing business and our employment verification business. Overall, though, we're feeling good about our ES revenue growth trajectory and are taking up our guidance by 1% to now expecting growth of 8% to 9% for the year. Our ES margin was up 170 basis points in Q2, which was in line with our expectations and there was no change for our full year outlook. As a reminder, we've invested in headcount in sales, product, and other areas throughout the organization over the last several quarters as we see continued opportunity to win new clients and further increase satisfaction with existing clients. And although we may scale back as appropriate, at a high level, we feel comfortable with our staffing levels against the secular growth opportunity in front of us. Moving on to the PEO. We delivered 11% PEO revenue growth in Q2 with 8% growth in average worksite employees. As Maria shared, the PEO results came in a bit softer than expected. The PEO business continues to benefit from long-term tailwinds, but there was a lingering effect from the pandemic, which is still adding variability to our PEO results and outlook. We are, for example, lapping very strong results on retention, bookings, and same-store pays. And while the overall trends are playing out consistent with our expectations, we continue to refine our assumptions about pays and magnitude. With that said, we still see a continued solid demand environment in the PEO and the team remains focused on reaccelerating worksite employee growth. For this fiscal year, we are lowering our PEO revenue outlook to 8% to 9%, driven by growth in average worksite employees of about 6% to 7%. PEO margin in Q2 was up 130 basis points about in line with our expectations, and we continue to expect PEO margin to be flat to up 25 basis points for fiscal 2023. Adding it all up, the favorable revision to our ES revenue outlook is largely offset by our lighter PEO revenue growth forecast. And so we continue to expect consolidated revenue growth of 8% to 9% in fiscal '23. We also maintain our outlook for adjusted EBIT margin expansion of 125 basis points to 150 basis points. We still expect our fiscal 2023 effective tax rate to be about 23%. And we continue to expect adjusted EPS growth of 15% to 17%, supported by our steady share repurchases. I'll just make one quick comment on cadence. We expect consolidated revenue growth to be relatively steady in Q3 from where we were in Q2. We expect margin expansion to be a bit more modest compared to what we experienced in Q2, closer to 50 basis points to 75 basis points of expansion. There were a few reasons, including the lapping of a one-time item last year, comparisons from a headcount perspective, and certain investments in sales and marketing that we're assuming for Q3. Again, there's no major change contemplated for the full year, but hopefully, this helps you think about Q3.

Operator, Operator

Thank you. And we'll take our first question from Ramsey El-Assal with Barclays. Your line is open.

Ramsey El-Assal, Analyst

Hi. Good morning and thank you for taking my question. Regarding PEO, you mentioned the ongoing effects from the pandemic are influencing its performance. I'm curious whether the macro environment and labor market trends are affecting PEO differently than ES. Is it a matter of sensitivity between small and large market clients? Is it related to vertical exposure? Or do you view this situation as largely temporary?

Maria Black, President and CEO

Thank you, Ramsey. I appreciate your question. I'll address everything related to the PEO that you inquired about. Specifically, regarding the first half, as mentioned in the prepared remarks, we observed that bookings came in softer than expected, and retention was also somewhat below our projections. All of our businesses were affected by the pandemic, but the PEO experienced the most significant impact. The factors affecting the PEO include average wages, worker mix, paid unemployment, and various insurance lines such as workers' compensation and health benefits. This business felt the pandemic's effects the most, and as we move past the pandemic, those lingering effects remain. You mentioned our observations about pays per control in the PEO in relation to ES. I can confirm that the growth rate for pays per control is decelerating in the PEO, which was anticipated. This has contributed to the somewhat softer performance in the first half and is likely affecting the second half as well. The primary factors driving our performance in the first half and influencing our outlook for the second half are bookings and retention. However, I want to emphasize our confidence in this business's strength and its long-term growth potential. The demand is still there, and in absolute terms, bookings for the PEO showed year-on-year growth, although it was softer compared to ES and our expectations.

Ramsey El-Assal, Analyst

Got it. That was very helpful. Thank you. I have a quick follow-up. Tech sector layoffs have been making headlines recently. I know your business is well-diversified, but I wanted to ask how exposed you are to that specific area. Are you experiencing any significant impact from the recent layoffs in the technology sector?

Don McGuire, CFO

Yes, Ramsey, that's a good question. It's difficult to ignore the headlines we see daily. Many large companies have announced significant layoffs, and while it's tough to claim that some of those companies are our clients, these layoffs are occurring globally. In some instances, they don't involve our clients in all markets. However, I believe we have yet to experience any notable effects from these announcements. We're still observing strong demand. We've adjusted our pay-per-control expectations for the latter half of the year, based on both our internal assessments and the BLS and JOLTS reports. Evidence indicates that employment demand remains robust. Unemployment rates are very low, and unemployment applications are still at record lows, showing no signs of increase. Thus, the overall macro environment continues to be very favorable for us, despite the concerning headlines.

Ramsey El-Assal, Analyst

Perfect. Thank you so much.

Operator, Operator

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

Eugene Simuni, Analyst

Thank you very much. Hi, Maria and Don. I wanted to ask about ES bookings. So it sounds like a positive commentary, strong performance there. I think you called out international as coming back strong versus last quarter and also downmarket. Can you talk a little bit about the mid-market? How are the trends there? And yes, I think the key question in everybody's mind is, are you seeing any signs of macro pressure on bookings as companies potentially pulling back their tech spending?

Maria Black, President and CEO

We are very pleased with our overall new business bookings for the second quarter and have definitely observed an acceleration in our pipelines. I will discuss the pipelines in a moment. I mentioned the strong performance in downmarket, which encompasses our entire downmarket portfolio. This includes our RUN offering and the associated services, such as retirement services and Insurance Services. We also experienced strength in Employer Services HRO. Additionally, I was particularly pleased to see the rebound in international performance for the second quarter, both in terms of pipelines and results, especially in our GlobalView area. We are very satisfied with these results and the strengthening of our pipelines, which gives us confidence as we move into the second half of the year while aiming for our guidance of 6% to 9%. Regarding mid-market trends, we had strong sales performance in this area and continue to see robust demand, as it is not getting easier for employers due to various legislative and talent challenges. We have made significant product investments that have bolstered our strength in this sector, particularly through improvements in user experience and enhancements to our Next Generation Payroll engine. Our net promoter score and retention results have also been strong. In the mid-market, it's important to highlight that our Employer Services HRO offering, known as Comprehensive Services, has seen tremendous growth during the pandemic, and this growth continues to outpace overall Employer Services growth. Therefore, the overall results for the mid-market are very strong for us.

Eugene Simuni, Analyst

Got it. Got it. Very helpful. And then a quick follow-up for me on pays per control. Your number was very strong this quarter we thought, out from your expectations. But also keeps outperforming by 1 point or 2, kind of the broad measures of labor market growth in the U.S. like nonfarm payrolls. Remind us what's the driver of that? And how sustainable is that as the overall labor market slows down? Can you maintain that one to two point premium?

Don McGuire, CFO

Yes, it's a good question. But just to remind everyone that, that number is really a mid-market number. So we focus on the mid-market when we provide that pays per control number. And it has been strong. As I mentioned in the earlier answer with respect to the macro environment, the labor market continues to be strong. We're continuing to see our existing clients add employees. As Maria said, bookings are strong. And I think it's the kind of the $64,000 question about how long the labor market can continue to grow. Unemployment can stay so low as we look at some of the headlines and will those things start to converge at some point in the future. But for now, I think we're comfortable with what we've done in terms of taking up the pays per control growth for the back half.

Danyal Hussain, Vice President, Investor Relations

And Eugene, just to your point about that spread, having existed in the past, I think typically, we would have expected 2% to 3% pays per control growth in a normal economic environment, and that compares to maybe 1% to 2% total employment growth. And that's a function of our clients in general being perhaps a bit healthier than the overall economy, but also the fact that total labor includes things like bankruptcies and new business formation. So it's a slightly different take on employment.

Eugene Simuni, Analyst

Got it. Very helpful. Thank you, guys.

Operator, Operator

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

James Faucette, Analyst

Thank you for that. I wanted to go back to something you mentioned regarding retention. We had anticipated some normalization in this area from a company perspective, but it seems to be continually improving. Clearly, you have made technological advancements, but what other factors, if any, are contributing to the strong retention performance?

Maria Black, President and CEO

Sure. Thanks, James. Regarding retention, we are very pleased with the strong performance we've seen this year. We reported record retention at the end of the first quarter, and the second quarter was almost a record as well. The first half of the year has also set a new record. We're proud of this achievement, which we believe is a result of our investments. I've mentioned our efforts in enhancing user experience in the mid-market, which is now reflected across our RUN platform, mobile app, and international offerings where we’re also experiencing record retention. A lot of our success is tied to improving user experience and enhancing our product. Additionally, our Net Promoter Score demonstrates strong service outcomes across our portfolio. During the pandemic, we created substantial goodwill by how we served our clients, and we see that reflected in our NPS results. You mentioned normalization, which is an important point. We believe that retention has now normalized, especially in the down market. When we adjust for average client size, we find that the down market has returned to levels seen in fiscal years '18 and '19, indicating a normalization. Overall, the retention picture is very strong for us, driven by our investments and the quality of service we provide.

James Faucette, Analyst

So Maria, that's an interesting point regarding where we currently stand in terms of attrition compared to pre-COVID. What are you observing now in the competitive landscape, especially as companies show increasing concern? Are you noticing a shift toward quality versus some regional players or new entrants? Is that benefiting you? I would appreciate an update on how the competitive environment influences what you are experiencing overall.

Maria Black, President and CEO

The competitive environment is certainly evolving. There isn't anything really new to report. We are closely monitoring our balance of trade and win rate, assessing the impact of our investments on these metrics. I believe there is a direct correlation between our investments—whether in downmarket and go-to-market brands, headcount, or in mid-market products and our next-generation suite—and our win rates. We do feel that our offerings are strengthening, and the record retention aligns directly with this improvement.

James Faucette, Analyst

Great. Thank you.

Operator, Operator

Our next question comes from Mark Marcon with Baird. Your line is open.

Mark Marcon, Analyst

Hey, good morning. Thanks for taking the questions. Maria, you mentioned there was a modernization initiative. I'm wondering if you can expand a little bit on that, just in terms of what we should expect over the next six to 18 months in terms of new offerings or increased offerings. And how would that end up impacting both from a revenue as well as from expense perspective? How should we think about that?

Maria Black, President and CEO

Sure. I'm happy to discuss the investments we're making in the Modernization Journey. To provide some insight on the next generation and its expected revenue impact over the next 16 to 18 months, I'll share details about our overall modernization initiatives. This includes the tools, technology, and processes we've implemented to streamline operations. Last quarter, we highlighted advancements like Intelligent Self-Service and Voice of the Employee, which are unique features enhancing our offerings and making them more competitive in the market. Regarding our next generation platforms, I've briefly mentioned Next Generation HCM, for which we've provided updates over time. We continue to work through our backlog and are focused on scaling our implementation efforts. Our goal within the upcoming 16 to 18 months is to expand sales of this suite to a larger segment of our upmarket clients. As for Next Generation Payroll, which we provide alongside Workforce Now in the mid-market, we're making significant progress and are enthusiastic about the quarterly increases in the number of clients we connect with this offering. We've experienced consistent growth from one quarter to the next, and we currently have about 30% to 40% of clients opting in. Our aim over the next 16 to 18 months is to broaden the distribution and scale of this offering in the mid-market, where we are seeing promising win rates and positive indicators. Additionally, I'm excited about our product called Roll, designed for the downmarket segment, targeting digital-native buyers. It has surpassed all project milestones so far, and we are gaining valuable insights into how digital buyers prefer to handle payroll in a fully digital manner. We expect to learn more in the next six to 18 months, which will help us scale this offering. In terms of revenue, it's hard to say that these projects will have a significant revenue impact in the near term. However, they will contribute meaningfully to bookings as we onboard clients, creating new revenue streams through Next Gen HCM in the upmarket, Next Gen Payroll in the mid-market, and Roll in the downmarket. While it takes a large volume to generate a significant revenue impact for ADP, the real excitement lies in the offerings themselves, which drive win rates, retention, and influence our competitive stance. With that, I'll hand it over to Don to discuss any margin impacts.

Don McGuire, CFO

Yes, Mark, I want to build on Maria's comments. I'm really enthusiastic about the adoption of these products and their performance. As we see adoption increase each quarter, we anticipate higher revenue from these new offerings. However, achieving a stronger penetration rate within our existing one million clients will take some time. Consequently, the margin impacts from these new sales and clients will take a while to reflect positively on our bottom line. We've frequently discussed the transformation of these calls over the years, and I believe that our largest transformation opportunity comes from these new products. We are excited about these new offerings and are confident they will benefit us in the future.

Mark Marcon, Analyst

That's terrific. Thank you. And then obviously, in the headlines, everybody is concerned about what could potentially occur from a macro perspective in terms of, if we go into a recession, ADP has obviously got a stellar long-term track record of navigating successfully through recessions. But I'm wondering, what's your philosophy going to be Maria, if we go into a recession in terms of thinking about expenses, margins, et cetera. Would you just focus on the long-term or would you do things in a short-term manner to adjust expenses?

Maria Black, President and CEO

We have strategies in place for managing during a recession. Initially, we would adjust our go-to-market approach. In a thriving economy, we focus on talent needs, but that changes during a downturn. This doesn't mean the business won't be affected; bookings would likely decrease. It's somewhat self-regulating since if bookings decline, expenses typically do too. This includes things like sales commissions and overall compensation. A reduction in sales volume could lead to lower implementation and service volumes, potentially resulting in a slowdown in hiring. We've navigated similar situations several times before. At such junctures, we may reassess our investment priorities based on current circumstances. However, we are committed to continuing our work on modernization and transformation. A significant lesson we've learned from recent downturns is to maintain our growth investments. It's essential to make informed decisions during a recession to ensure we are ready to act quickly when conditions improve. During the pandemic, we made strategic adjustments that positioned us well for market recovery, thanks to the ongoing investments we made. In summary, any adjustments we consider would likely be self-regulating if bookings are affected.

Mark Marcon, Analyst

Perfect. Thank you.

Operator, Operator

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

Bryan Bergin, Analyst

Hi. Good morning. Thank you. First one I had is on pricing. So just any change in view around ES pricing, any change in claim acceptance to the higher levels that I think you were contemplating when you entered the fiscal year, just given the macro?

Don McGuire, CFO

Yes, Bryan, thanks for the question. I think it's a relatively short answer. The fact is our prices are holding well. As a matter of fact, I would say that we are kind of at the high end of the guidance we gave previously, and we're comfortable with that. I think if we look at our retention, we look at our NPS scores, it appears that those price increases have been understood and accepted as well, as could be expected.

Bryan Bergin, Analyst

Okay. Good to hear. And then on the international front. So can you just talk about what you saw in Europe here that drove the better performance in the quarter? And you cited U.S. pays per control here in the earnings material, what does that imply in the European base? So I'm curious not just on the employment level but also the demand, whether there's really any particular solutions that drove that better performance or different underlying behavior in that base versus U.S?

Maria Black, President and CEO

We were very pleased by the improvement that we saw in international bookings. It was driven mainly by our GlobalView offer and a bit of our in-country business. So very excited about what we saw specifically, as it relates to performance in the second quarter. But also about pipelines, right? So a quarter ago, I was on this call citing that we believe that there was some pipeline depletion that happened specifically in international. So pipelines that were pulled into last fiscal year. International was one of the businesses that had an incredibly strong fourth quarter finish. And so we did see a need during the first quarter to rebuild pipelines. The great news is those pipelines were rebuilt and we saw that execution in the second quarter. It's also what gives us optimism as we head into the back half. So very excited about international. And as optimistic as I am, it is an area that we're still continuing to watch for all the obvious things, I said. Last quarter, which is, there's still the crisis in Ukraine. There's still the energy crisis. It is also an area that we see a tiny bit of pipeline aging. And so international remains a watch item for us, albeit very excited about the pipeline build and the results in the second quarter. And I think you asked about pays per control in international?

Danyal Hussain, Vice President, Investor Relations

Yes. Bryan, pays per control for our international pays tends to be more subdued than what we have in the U.S. in both directions. And so early pandemic, it didn't fall very much at all. And in the recovery, subsequent, we had less growth there. So that's continued.

Don McGuire, CFO

Yes. The government programs in place and the social aspect of European employment mean that downturns don’t happen quickly. Consequently, recoveries are also slow since there’s not much to bounce back from. This stability supports consistent earnings, which is beneficial for us during challenging times.

Bryan Bergin, Analyst

Okay. Makes sense. Thanks, guys.

Operator, Operator

Our next question comes from Tien-Tsin Huang with JPMorgan. Your line is open.

Tien-Tsin Huang, Analyst

Hey, thanks. Thanks so much. Sorry, hope you can hear me. Maria, I think I heard you say you were looking to reposition PEO growth. If that's the case, can you elaborate on that? I'm just trying to think if the implied second half growth in WSE volume within PEO, that's a good number to start from. As we look to next year, could growth get better or worse from there? Or how quickly can the repositioning benefit the volume outlook? Thank you.

Maria Black, President and CEO

The comment I made was about bookings. We are aiming to reaccelerate bookings in the second half. For PEO, as mentioned, it was somewhat softer in the first half. Regarding when we expect to see reacceleration and worksite employee growth, we do not expect this to happen in the next couple of quarters. Therefore, we can't provide guidance for next year at this time. However, as noted in the remarks, we are coming off record retention and record bookings. As we move past those records, we believe we are well positioned to reaccelerate worksite employee growth next year.

Tien-Tsin Huang, Analyst

Got it. Perfect. Thank you. And then just on Retirement Services, since you mentioned it in your prepared remarks. Any update on penetration there across the major lines? And if there's any change in the outlook or the model there. Thank you.

Maria Black, President and CEO

Sure. It's safe to say that the business is exceeding its targets and experiencing significant growth. Currently, we have 125,000 plans within this business, primarily focused on the small and medium-sized business sector, with some presence in the mid-market and larger markets. With the new SECURE Act 2.0 and various state mandates, 125,000 out of approximately 800,000 RUN clients are taking advantage of this offer. While not all RUN clients will transition to retirement plans, even capturing a small portion presents a substantial opportunity. I am particularly enthusiastic about this because it continues to exceed growth expectations, and we see vast potential for expansion in Retirement Services in the upcoming years.

Tien-Tsin Huang, Analyst

Thanks for that.

Operator, Operator

Our next question comes from Samad Samana with Jefferies. Your line is open.

Samad Samana, Analyst

Hi. Good morning. Thanks for taking my questions. I just wanted to ask one on the volume-based parts of the businesses that you mentioned, particularly on the employment verification. I was just wondering if you could help us understand how much did that contribute? And what are the assumptions going forward? Are you assuming that there will just be less activity around employment verification? Or do you think it was just seasonally lower? Just how should we think about that since you called it out this quarter.

Don McGuire, CFO

Okay. So let me talk about the two volume businesses that we referenced in the prepared remarks. The first one would be the RPO business, the recruitment outsourcing. That business was down and that business is not a very big business for us. And most of it is focused in the upmarket. Most of the clients we have there are in the enterprise space. And I think that is an area, of course, where we are seeing something internally that correlates more with some of the headlines that we're seeing in the press. But it's not a very big business for us, and it did come down. On the employment verification business, of course, mostly and significantly related to the mortgage market. We don't share the number that EV business is part of our broader $1 billion comprehensive services business. It's meaningful for us. From a revenue perspective, it's more meaningful for us, if you will, from a margin perspective because it's above-average margin business. Hence, we called it out. But our expectations as we look forward is, we do expect there to be softness in the mortgage market in the back half of the year. And we've reflected those expectations and those forecasts into the numbers that we're sharing with you today.

Samad Samana, Analyst

Great. I have a housekeeping question regarding the rate side. Could you clarify the company's forward outlook for the float revenue guidance? Is it correct to assume that the tenure at the short end of the curve has increased? Should we expect the tenure to remain at the current levels in your forecast going forward? I'm trying to understand the inter-quarter moves and how they influence the guidance.

Don McGuire, CFO

Yes. Since we provided guidance last quarter, rates have decreased, particularly in the mid and long ranges. Although short-term rates have risen, impacting our short-term borrowing costs in the commercial paper program. The rates we are providing and the slight reduction in our client fund interest forecast at the midpoint reflect those increased borrowing costs and the overall softening of interest rates in the mid and longer term.

Danyal Hussain, Vice President, Investor Relations

Yes. Thank you for asking that question because we approach things a bit differently than some of our competitors. Even when considering the short end of the yield curve, what is currently reflected in market expectations aligns with our outlook for the year. So even if the Fed raises rates, it doesn't necessarily indicate an increase compared to our previous guidance. Additionally, at the mid and long end of the yield curve, there has been a decline. In our earnings release, we shared that the yield on new purchases decreased from approximately 4.3% last quarter to 4.1% this quarter. This means we're receiving less yield at the mid and long end of the yield curve, while our expectations for the short end remain in line.

Samad Samana, Analyst

Great. That's helpful. Thanks for clarifying that. Appreciate it.

Operator, Operator

And our last question comes from Jason Kupferberg with Bank of America. Your line is open.

Jason Kupferberg, Analyst

Hey, thanks, guys. I wanted to come back on PEO for a second and maybe piggybacking on Tien-Tsin's question. Just as we think about the second half of the fiscal year. It looks like the revenue growth is going to come in 5%, 6%. And then you talked about getting to some easier comps and some reacceleration. But are you thinking any differently about the medium-term guide for PEO? I think that was 10% to 12% when you provided that at the Analyst Day.

Maria Black, President and CEO

The medium-term guidance remains aspirational, and we are not making changes to it at this time. Regarding the PEO outlook, demand has been very strong and continues to grow through the second quarter. Although we experienced year-on-year growth, it was not as high as we anticipated, and the deceleration occurred earlier than expected. For the latter half of the PEO, we do anticipate bookings to pick up again. While we don't expect a significant increase in the number of employees in the coming quarters, we are well positioned for growth as we move into next year. Retention rates remain strong, aligning with historical levels over the past decade. I have spent years in this business, and this situation is not unusual; it reflects some ongoing effects from the pandemic, similar to past experiences during the ACA period. Ultimately, demand and bookings are healthy, though not as high as we would like due to challenging comparisons. Retention is also healthy but lower than our targets for the same reasons. We are optimistic about accelerating growth in this area and are excited about its long-term prospects for us.

Don McGuire, CFO

Yes. Sorry. And at the same time, remember, at Investor Day, we said that we were expecting high single-digit growth in average worksite employees. So I think we're still very much on that track and pretty much committed to that.

Jason Kupferberg, Analyst

I appreciate that. I just wanted to follow up regarding the increases in your guidance for pays per control. However, we’ve noticed significant declines in the temp labor market recently. I'm curious how you view the temp labor market in relation to the overall labor market conditions, and whether there might be a lag in your business as a result. Any insights on this would be appreciated. Thank you.

Danyal Hussain, Vice President, Investor Relations

Yes, Jason, I think.

Don McGuire, CFO

Sorry, let me start. Maybe Danny can add some insights. Some of the leading indicators we track, like the JOLTS report and job postings, still appear to be strong. Although the number of open positions is decreasing, they remain at healthy levels compared to before the pandemic. This suggests there is still some capacity before returning to pre-pandemic figures. We'll keep monitoring this, as we're focused on it. Overall, things still seem to be in good shape at this point.

Danyal Hussain, Vice President, Investor Relations

Yes. Jason, exactly to that point. It's one of many leading indicators that we look at. And for sure, things are slowing, given where we are with employment and a 3.5% unemployment rate. So it's not a question of whether we expect the monthly job growth to slow over the next several months, I think that's more or less assumed. But the question is, at these employment levels to get that type of growth is still a very healthy outcome. And so I think that's how we would characterize the overall environment today.

Jason Kupferberg, Analyst

Okay. Thanks for the color guys. Appreciate it.

Operator, Operator

We have time for one more question, and that question comes from Kartik Mehta with Northcoast Research. Your line is open.

Kartik Mehta, Analyst

Good morning. Maria or Don, as you evaluate the PEO business, are you noticing any increased competition? Could that be a contributing factor to what you're observing, or is it more about needing to reposition the business? The business was quite strong, making comparisons challenging.

Maria Black, President and CEO

I believe the business performed exceptionally well despite facing tough comparisons. We anticipated a slowdown, but it occurred more quickly than expected. There hasn't been a noticeable change in the competitive landscape. The business gains are evenly split between new clients and upgrades, along with returning clients. While there is some switching between PEOs, it represents a minor aspect of our overall bookings and retention impact. Additionally, we are monitoring trade balance and win rates, and we do not observe any significant shifts in competition.

Kartik Mehta, Analyst

I know you have been discussing leading indicators, and Don mentioned the JOLTS report, but I am curious if you can analyze your customers and the demand they have for employees. Can you compare this to what you observed three or six months ago? If you can do that, what insights might you gain from those statistics?

Don McGuire, CFO

Yes. I mean, I think the way we look at that, Kartik, is through the pays per control growth. And so as we went from 7% growth in Q1 down to 5% and we were looking to be a bit flatter in the back half, although we've become a little bit more optimistic on that as time has gone on. So I think that would be the key area where we kind of take a look and see what the demand is with our installed client base.

Danyal Hussain, Vice President, Investor Relations

Yes. Beyond that, Kartik, we do have some recruitment solutions beyond the recruitment outsourcing one that Don spoke about earlier. And so we have, for example, data on the total number of job postings that our clients have. And if you were to look back, that would typically track JOLTS, the trends would be very similar. Now that said, clearly, you could be in an environment where people have job postings and then they decide to pull them. So how accurate that is, how great of a leading indicator that is, it's hard to say. But at the same time, we have live data on pays per control as Don points out. So we know with precision how many people are being added week-to-week. That's healthy. The job postings are healthy. Granted there are some signs of deceleration, layoffs, and temp, but the bigger picture is still healthy.

Kartik Mehta, Analyst

Well thank you very much. I appreciate it.

Operator, Operator

This concludes our question-and-answer portion for today. I am pleased to hand the program over to Maria Black for closing remarks.

Maria Black, President and CEO

Thank you, Michelle, and thank you to all of you on the phone today for your thoughtful questions. As you heard from our tone today, very pleased with the first half, excited about how we're positioned for the second half against our updated guidance. Again, everything that we do every day is all about solving for clients in the world of work. And with that, I think it'd be appropriate for me to thank the 60,000 plus associates that are out there every day doing that work for our clients, for their workers, bringing meaningful value into the world of work and into the world of HCM. So thank you to all the associates. Thanks to all the analysts and the investors for your support and your continued support. We certainly appreciate it and we look forward to keeping you updated and speaking with you again soon. Thanks so much.

Operator, Operator

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