Earnings Call Transcript
AUTOMATIC DATA PROCESSING INC (ADP)
Earnings Call Transcript - ADP Q4 2024
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 Fourth Quarter 2024 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. Instructions will be given at that time. I will now turn the conference over to Matt Keating, Vice President of Investor Relations. Please go ahead.
Matt Keating, Vice President of Investor Relations
Thank you, Michelle, and welcome, everyone to ADP's Fourth Quarter Fiscal 2024 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. The 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 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 current expectations. I'll now turn it over to Maria.
Maria Black, President and CEO
Thank you, Matt, and good morning. Before we get started, I'd like to take a minute to thank Danyal Hussain for leading Investor Relations for these past several years. He helped guide us through the pandemic and assisted with our CFO and CEO transitions during his time. With Danny moving on to a broader role, it is my pleasure to officially welcome Matt Keating to his first call. Congratulations to you both. We closed out the year with a strong fourth quarter that included 6% revenue growth, 80 basis points of adjusted EBIT margin expansion, and 11% adjusted EPS growth. For fiscal 2024, we delivered 7% revenue growth, 70 basis points of adjusted EBIT margin expansion, and 12% adjusted EPS growth, representing another great year for ADP. I'm excited to share the progress we've made across our three strategic priorities, but first, I'll start off with some additional highlights from our results. Our sales and marketing team delivered exceptional employer services and new business bookings in Q4, on top of a strong Q4 last year. This performance was broad-based, showing continued strength in our small business portfolio, as well as our mid-market enterprise and international businesses. In fact, we sold and started more than 50,000 new small business clients during the quarter, which reflects the strength of our run solution and our reputation for commitment to strong service. Similarly, in the enterprise space, client interest in our next-gen HCM solution has exceeded expectations and resulted in strong Q4 sales, and we are excited to continue this great momentum. As a result of this exceptional performance, our fiscal 2024 employer services bookings growth came in at 7%, the high end of our 4% to 7% guidance range. This growth speaks to the power of ADP's unmatched distribution model, which remains a clear competitive advantage for us. With our new business pipeline even stronger than this time last year, we look forward to building on that momentum. Overall, our employer services retention came in better than expected for the year at 92%. We drove record level retention in our mid-market business for the second consecutive year in fiscal 2024. I'm also extremely proud to share that our client satisfaction scores for our total business reached new all-time highs for both the fourth quarter and full year. These results are a testament to the strength of our entire product portfolio and our commitment to supporting our clients. We are confident that these client satisfaction gains will support our retention results moving forward. Our employer services pays per control increased 2% both for the quarter and the full year. We were pleased to see the resilience of the US labor market as our clients continued to hire employees at a moderate pace. Finally, our fourth quarter PEO revenue growth of 6% exceeded our expectations despite continued pressure from slowing client hiring activity. Our fiscal 2024 accomplishments extend far beyond our strong financial results. One year ago, I laid the foundation for our three strategic priorities that will guide our future growth. Now, I'd like to recap some of the great progress we made in each of these areas. Our first priority is to lead with best-in-class HCM technology. We had a very busy year on this front as we launched ADP Assist, our cross-platform solution powered by generative AI that transforms client data into actionable insights. This isn't just another technical solution; it's an experience that combines ADP's deep data set and expertise to empower HR professionals, leaders, and employees. We deployed ADP Assist across several of our platforms with enhanced capabilities ranging from report creation to natural language search to initiating HR actions. These tools streamline daily tasks and are powered by an easy-to-use search interface that is already receiving meaningful recognition in the field of generative AI. We are very proud to share that ADP Assist earned the Generative AI Innovation Award in the 2024 AI Breakthrough Awards, and we look forward to rolling out even more features in fiscal 2025. In addition to embedding generative AI in our products, we continued to advance our next-gen initiatives. Our active next-gen payroll client count increased by nearly 50% in fiscal 2024, and we grew our number of live next-gen HCM clients by more than 30% as we continued to improve implementation times. Our second priority is to provide unmatched expertise and outsourcing. Our approach to supporting our clients has been key to our winning formula for decades. In fiscal 2024, we focused our efforts on implementing new technology that will help make an even greater impact for our clients. To further unlock the value of our expertise, we deployed generative AI tools like call summarization and real-time guidance to support our service associates. We also invested in generative AI and other automation capabilities for our implementation teams to reduce manual data entry and minimize the risk of error during implementation. For example, out of the 50,000 new RUN clients we sold and started during the fourth quarter, about half were digitally onboarded compared to a third of our new client onboarding in RUN this time last year. And as generative AI capabilities advance, we are excited to further accelerate this progress. Finally, we plan to provide additional tools to help our associates deliver better, faster service, allowing our client satisfaction scores to continue reaching new record levels. Our third strategic priority is to benefit our clients with our global scale. Globally, we bring together an unmatched footprint, best-in-class integrated solutions, and industry-leading service and expertise to help our clients and their employees navigate the changing world of work. In fiscal 2024, we continued to leverage this global scale to strengthen our business. We extended our global footprint, acquiring the payroll business of our partner in Sweden, expanding the scope of our Celergo payroll offering to include Iceland, and further growing our on-the-ground presence in the APAC region. Our iHCM platform also continued to scale in several European countries and now serves more than 5,000 clients and pays more than 1 million client employees. Finally, we deepened our existing partnerships with several other leading technology providers to simplify HCM processes and broaden the spectrum of support we can provide our clients. Next, I'd like to share some new client wins from Q4 to highlight how we're leading in workforce innovation and delivering value for our clients. In US small business, we continue to successfully onboard new retirement services clients across multiple industry verticals. During the quarter, we added the plan for a Texas-based insurance agency that was challenged by manual processes and the management of multiple providers. ADP's advanced technology and planned fiduciary solutions simplified the client's plan administration, reduced its manual oversight, and lowered its plan fees. The ADP team made the transition easy and stress-free by providing the client with critical management of the transfer process, as well as regular briefings on the plan setup. This is just one of the thousands of new clients who turn to our retirement services solution every year. In fact, we recently took the top spot as the nation's largest 401(k) record keeper by Total Plans and Total 401(k) Plans in the Plan Sponsor Magazine 2024 defined contribution Record Keeping Survey. We serve over 170,000 retirement services clients, and it brings me great joy to see how ADP is helping employers address the retirement savings needs of so many Americans. We look forward to continuing the momentum in our retirement services business in fiscal 2025. In our HR outsourcing business, an orthopedic device company that had grown extensively through acquisition recognized it needed a deeper HR and technology infrastructure to support its future growth. So it turned to our comprehensive services support model to integrate its acquired companies onto a common platform. We look forward to supporting this client's current needs and helping it expand in the future. Additionally, comprehensive services crossed a major milestone in fiscal 2024, generating more than $1 billion in revenue for the year. This business has come a long way since its launch in 2008, and we look forward to leaning into our outsourcing business as a differentiator. In US enterprise, we welcomed one of the largest automotive dealers in the Midwest to our next-gen HCM platform. Following several years of rapid growth, this client wanted to reimagine their HCM strategy. To help, our team went onsite and conducted a deep review of its current practices and pain points. We developed a plan that would leverage our next-gen HCM platform, flexible position management structure, and other advanced HCM tools to address the organization's current and future HR strategy. Our initial solution included HR, payroll, time, and benefits, and the client later added recruiting and talent management. Overall, we were extremely pleased with our strong financial and strategic outcomes this past year. In fiscal 2024, ADP was recognized as the world's most admired company by Fortune magazine for the 18th consecutive year, and we also celebrated our 30th straight year on the Fortune 500. As some of you may know, 2024 is also our 75th anniversary. As I reflect on ADP's enduring impact on the world of work, the one constant on our journey is our talented associates, whether it's the recent accolades we received or the 75 years of support for our clients; we owe our recognition and strong financial performance to our 64,000 dedicated associates who deliver the great products and exceptional experiences and continue to drive our client satisfaction scores to new highs. I want to take a moment to recognize them for their incredible contributions. Thank you for all you do for ADP and for our clients. And now I'll turn the call over to Don.
Don McGuire, CFO
Thank you, Maria, and good morning, everyone. I'll start by expanding on Maria's comments around our Q4 results and then cover our fiscal 2025 financial outlook. Q4 performance was very strong overall, helping drive fiscal 2024 revenue and earnings growth towards the high end of our expectations. As previously mentioned, we benefited from broad-based strengths in employer services with exceptional new business bookings, better than anticipated retention, and stable pays per control growth. PEO revenue growth in the quarter also came in better than expected. Our strong Q4 results contributed to our full year revenue growth of 7%, bringing our fiscal 2024 revenue to $19.2 billion. For our employer services segment, revenue in the quarter increased 7% on both a reported and organic constant currency basis. These results were bolstered by a slightly better than expected contribution from client funds interest. Our ES margin expanded 220 basis points in the fourth quarter, which exceeded our expectation. For the full year, our ES revenue grew 8% on a reported basis and 7% on an organic constant currency basis, and our ES margin expanded 210 basis points. For the PEO segment, revenue increased 6% for the quarter as growth accelerated from Q3. Average worksite employees increased 3% on a year-over-year basis in the fourth quarter to 742,000. PEO margin contracted 240 basis points, slightly more than we anticipated due to higher operating expenses and unfavorable actuarial loss development in workers' compensation reserves. For the full year, PEO revenue grew 4%. Average worksite employees increased 2%, and our margin contracted 150 basis points, with the margin contraction mostly due to less favorable actuarial loss development in workers' compensation reserves versus the prior year. Our fiscal 2024 PEO new business bookings growth rate also moderated from the prior year. I'll now share our outlook for fiscal 2025. While the macro backdrop remains uncertain, we believe we are well positioned to deliver solid overall financial results while continuing to invest in our future growth consistent with our strategic priorities. Our fiscal 2025 outlook assumes some moderation in economic activity over the course of the year. Beginning with the ES segment, we expect revenue growth of 5% to 6%, driven by the following key assumptions. We expect ES new business bookings growth of 4% to 7%, representing solid growth after coming in at the high end of the same guidance in fiscal 2024. For ES retention, we forecast a 10 basis point to 30 basis point decline from the 92% result for fiscal 2024. We are encouraged by our recent record client satisfaction scores, but we think it's prudent to continue to expect some retention pressure from higher small business out-of-business levels and slightly slower economic growth overall. As we mentioned at our prior earnings call, we see the potential for below-normal US pays per control growth in fiscal 2025. Our outlook assumes 1% to 2% growth for the year. This view is consistent with most economists' forecasts for continued moderation in US private sector payroll growth. After price contributed around 150 basis points to ES revenue growth in both fiscal 2023 and fiscal 2024, we anticipate a benefit closer to 100 basis points in fiscal 2025, which is in line with the moderation in overall inflation. We also expect FX to transition from a modest tailwind to ES revenue growth in fiscal 2024 to a slight headwind in fiscal 2025. For client funds interest revenue, the interest rate backdrop remains dynamic. It's important to remember our client funds interest revenue forecast reflects the current forward yield curve, which is likely to continue to evolve as we move through fiscal 2025. At this point, we expect our average yield to increase from 2.9% in fiscal 2024 to 3.1% in fiscal 2025, which contemplates the market's expectations for short-term interest rates to decrease during the year. We expect our average client funds balances to grow 3% to 4% in fiscal 2025. Putting those together, we expect our client funds interest revenue to increase from $1.02 billion in fiscal 2024 to a range of $1.13 billion to $1.15 billion in fiscal 2025. Meanwhile, we expect net impact from our client fund strategy to increase to a range of $1 billion to $1.02 billion in fiscal 2025. We expect ES margin to increase 100 to 120 basis points in fiscal 2025, driven by operating leverage as well as continued contribution from client funds interest revenue, partially offset by ongoing investments to advance our key strategic priorities. Moving on to the PEO segment, we expect PEO revenue to grow 4% to 6% and PEO revenue excluding zero-margin pass-throughs to grow 3% to 4% in fiscal 2025. Our PEO revenue growth outlook assumes average worksite employee growth of 1% to 3%. This reflects our expectation for continued new business bookings growth and modestly better retention to be offset by declining PEO pays per control growth that remains below our historical experience. We expect PEO margin to decrease 90 to 110 basis points in fiscal 2025. This anticipated margin decline reflects our forecast for zero-margin pass-throughs to grow faster than PEO revenue and increases in our workers' compensation costs and higher PEO selling expenses from accelerating new business bookings growth. Adding it all up, our consolidated revenue outlook is for 5% to 6% growth in fiscal 2025. Our adjusted EBIT margin outlook is for expansion of 60 to 80 basis points. We expect our effective tax rate to be around 23%. And we expect fiscal 2025 adjusted EPS growth of 8% to 10% supported by buybacks. One quick note on our margin cadence: we anticipate adjusted EBIT margin expansion on a year-over-year basis to be more modest in the first half of the year before trends ramp in the second half of fiscal 2025. Thank you, and I'll now turn it back to Michelle for Q&A.
Operator, Operator
Thank you. Our first question comes from Bryan Bergin with TD Cowen. Your line is open.
Bryan Bergin, Analyst
Hi. Good morning. Thank you. I want to start with bookings here. So, sounds like a pretty solid close to the year. Can you provide more color on the attribution of that bookings performance across the business? And in general, I guess when you're looking at demand into July, just any changes based on employer size or geography?
Maria Black, President and CEO
Sure, good morning, Bryan. Great to hear from you. I love talking about bookings, especially on the heels of what was truly an exceptional performance by the overall team in the fourth quarter. To answer the first part of the question, it was broad-based. So we did see strength across our growth in small business, mid-market, enterprise, and international. So we are really pleased with the momentum that we see as it relates to the overall receptivity to the offerings, to the product, to the execution, and really proud of how the team moved through the quarter, which led to the exceptional results at 7% for the year. In terms of the demand environment overall and what we see, what I would offer is that the HCM demand environment remains strong. One of the things that's unique about HCM is that what we do isn't a 'nice to have'; it is actually an imperative for a company to run their business. They need to have their associates paid; they need HR tools, and certainly it's not getting any easier, whether you're in the down-market, mid-market, or up-market to navigate being an employer. And as such, we fit squarely into that. So we feel good about the momentum stepping out of the quarter. We feel good about the demand environment stepping into the quarter. Pipelines from a year-on-year perspective look strong. So we're very optimistic and proud of the performance.
Bryan Bergin, Analyst
Okay, I appreciate that. And then my follow-up, just on kind of pays per control performance here, can you compare and contrast the pays per control performance in ES versus what you're kind of seeing on the same store sale, PPC and PEO? And any cadence assumptions here as you go through 2025?
Don McGuire, CFO
Yeah, Bryan, I'll take that one. So as we look at pays per control, we do think that the labor market is still pretty resilient. I mean, there are a number of factors that we look to. If you look at the BLS, you look at the unemployment rate, the JOLTS Report came in the other day; it was down, but better than expected. Labor force participation still has some room to go, etc. So jobless claims are kind of neither here nor there. They're benign. So we think there's still continued good strength in the market. Having said that, we do think that pays per control is going to moderate. And we have said we're thinking 1% to 2% as we go forward into 2025. I would say that we do expect that the pays per control growth in the PEO will be lower than it is in ES, but we are still optimistic that there's growth to be had; certainly, we expect ES to be somewhat stronger than we expect PEO.
Bryan Bergin, Analyst
Thank you.
Operator, Operator
Thank you. Our next question comes from Dan Dolev with Mizuho. Your line is open.
Dan Dolev, Analyst
Thank you for taking my question. I would like to understand how much of the strength in ES is due to unique factors related to your internal efforts versus broader macroeconomic conditions. Additionally, I would appreciate your guidance on what factors could positively or negatively impact the macroeconomic environment related to your outlook. Thank you.
Don McGuire, CFO
Yeah, Dan. So you know just to follow up on that, I would say that you could will unemployment remain as low as it has been? I think there's no indication that it's going to worsen. It's still at, you know, decade lows or comparable to decade lows. There is good strength, there seems to be good strength across the broader spectrum of new jobs. So the NER report came out earlier today and we're continuing to see new jobs. So I think that we put out there a PPC growth number that's realistic. What could change that? We could imagine all kinds of macro issues, but I prefer not to do any imagining. I think we're trying to do what we can based on what we know today. So I think that what we have today is pretty good. But as I mentioned earlier to Bryan's question, we certainly recognize that ES is likely to be stronger than PEO.
Maria Black, President and CEO
And Dan, to add to the sales discussion regarding whether our results are driven by macro factors, I would say both aspects are contributing. We are experiencing strong demand, which I highlighted in response to Bryan's question about our offerings and their fit within the demand landscape. This is a result of broad execution across our entire business. Our investments in products and our top-tier service are evident in our NPS results and retention metrics. We are seeing continuous improvement. The value we provide is essential for businesses. Additionally, our execution across all areas of sales differentiation is impressive. As mentioned in my prepared remarks, this is one of ADP's greatest competitive advantages. Our ability to engage the entire market is crucial; whether a buyer opts for a digital purchase, channel purchase, or traditional purchase, we are present at every opportunity, providing the best product and service available. Consequently, I believe we are performing exceptionally well.
Dan Dolev, Analyst
Great results, Thank you.
Operator, Operator
Thank you. Our next question comes from James Faucette with Morgan Stanley. Your line is open.
James Faucette, Analyst
Great. Thank you so much. I wanted to ask on competition. Some of our recent conversations with those in the industry have indicated that there's been some meaningful price compression from some of your competitors, particularly in the mid and down market segments. Have you observed others getting more competitive on price, or from your perspective, is it fairly status quo right now?
Maria Black, President and CEO
Good morning, James. What I would offer is it is pretty status quo. We haven't really observed any of those meaningful price compression, things of that nature. Given how much we do compete, I think we would see – I’d say that there is always some of that in terms of whether it is promotions and things that all of us run at various times throughout the year. But it doesn't seem atypical for me. And obviously, I've spent a lot of years watching the competitive landscape and the sales environment. So I haven't seen anything anomalous. I think the one thing that's changed, specifically in the competitive landscape is us. And so when I think about our ability to execute and everything I just mentioned, best product, record retention, record NPS, incredible execution by sales. I think we are stronger than we've ever been. So I'd say that's the shift. But from our purposes, it is still a competitive environment, and we lean into it every single day.
James Faucette, Analyst
Great. Glad to hear that. And then wondering if you can give a little bit more color on the composition of bookings, especially between enterprise, mid-market, and down market. And also, what are you seeing in the international business? And how should we think about the potential uplift there over time as price points in lower-cost regions continue to improve?
Maria Black, President and CEO
The down market showed remarkable strength, following an equally strong year prior. During the prepared remarks, I noted that we acquired and began working with 50,000 new small business clients in the fourth quarter alone, bringing our total to 890,000 of our 1.1 million clients in that segment. We are seeing widespread demand and executing well. Our mid-market sales results were exceptional, thanks to great execution by the team. Our product is continuously improving, and I feel optimistic about that. I also mentioned in the prepared remarks our advancements in the enterprise sector, particularly with our next-gen HCM offering. I'm excited because we are witnessing record results, far exceeding our expectations, and we haven't even reached general availability yet. This indicates that the market is prepared and eager for this offering. Clients are looking to ADP for enterprise solutions, and we are seizing that opportunity. As for the international business, it had an outstanding year overall, characterized by strong performance across all four quarters. The first quarter of last year showed significant growth compared to the same period in 2023, followed by even stronger results in the second and third quarters, with the fourth quarter showing continued strength. Overall, our international business has also had a fantastic year.
Operator, Operator
Thank you. Our next question comes from Ramsey El-Assal with Barclays. Your line is open.
Ramsey El-Assal, Analyst
Hi, thank you for taking my question. Could you share your thoughts on how you are managing the balance between pricing and retention? Additionally, what is your confidence level in implementing a 100 basis point pricing increase? I believe this is more than what you adjusted prior to the pandemic, although it is less than the adjustments made in the current inflationary environment. How confident are you that you can proceed with this increase without negatively impacting retention?
Don McGuire, CFO
Thanks for the question, Ramsey. Yes, it is a great question because we always think really, really hard about pricing decisions and making sure that we don't get greedy. As we've shared on many occasions, what we are interested in is long-term clients and the lifetime value of those clients. So we are always very, very careful not to over-rotate on price. And you're right, we have been able to take about 150 basis points in '23 and '24. As we look to '25 and we looked at the moderating inflation environment, we thought that 100 basis points is realistic. If we go back pre-'23 and back into the teens we were more on the 50 basis points range, but the inflation environment was very, very different then; it was virtually non-existent. So we are confident that we can get 100 basis points. We're confident that we can target it in the right places. So it is something that we think is a reasonable expectation for us to target.
Ramsey El-Assal, Analyst
Okay. And a follow-up for me is about generative AI. And just if you could talk about how we should think about the long-term kind of opportunity there in terms of monetization. Is this ever something that could contribute to revenue directly? Or is generative AI sort of more something that will drive soft dollars to retention, new bookings? Obviously, there is an expense benefit internally, but I'm just curious about how you're framing it up over the long term.
Maria Black, President and CEO
It's a great question. My answer to you would be both. And so from a generative AI perspective, I know you know that I love to speak about it. I talked about it again at length just this morning during the prepared remarks. What I’d offer is that all across, whether it is the focus we have of putting generative AI, ADP Assist across and into each one of our products, or it is the work that we're doing with putting ADP Assist into the market to help practitioners or help our own service associates and our sales associates, the way I think about it, first and foremost, is exactly what you suggested, which is it should feed the ADP model. In its most simplistic form when I think about this company and driving the recurring revenue model that we have, it is about sales, it is about retention, it is about product efficiency, and it's about NPS. And those four metrics, generative AI and everything that we are offering as it relates to ADP Assist should feed, call it the machine of our model, right? So we should have more sales, we should be able to keep clients. Why? Because they are happier and they have a better experience as it relates to NPS. And then in turn, we also drive efficiency. So I think that's the output and the outcome of a lot of the investments we are making. That said, as we look at all the use cases and both the short-term stuff that we're working on, as well as the long-term vision of what ultimately generative AI could look like in the coming years, we do see monetization opportunities. Each one of our business cases, as you can imagine, has clear goals of what it is that we are trying to accomplish, inclusive of revenue growth. I think it's too early to start sharing some of those broadly across the market. But certainly, that's a big piece of our strategy, as is making sure that we continue to drive the transformation type of opportunities that we've been driving for years as a company.
Ramsey El-Assal, Analyst
Fantastic, thank you.
Operator, Operator
Thank you. Our next question comes from Samad Samana with Jefferies. Your line is open.
Samad Samana, Analyst
Hi, good morning. Thanks for taking my question. Don, maybe one for you. Just on the PEO guidance, and I apologize if this question is kind of a dumb question, but I just want to make sure I understood it. If I look back to last year, you had actually a slightly better WSE assumption, and you guided to 3% to 5%. And this year, you are assuming lower WSE growth but actually slightly better revenue growth. And I was just trying to reconcile those two things. Is retention assumptions the big difference there? Or is there some other mechanical thing, is it easier comps? I'm just trying to understand the PEO guidance this year versus last year.
Don McGuire, CFO
No, Samad, it is a great question. So there are a few things happening if you look forward to 2025; revenue is growing, but the biggest contributor to the revenue growth is zero-margin pass-throughs. So that's the largest component, and that's what's happening there. And then, of course, we have mentioned earlier that pays per control are under pressure. So as I said in an earlier answer, 1% to 2% for ES, and we think more towards the low end of that for the PEO area. And then we have a little bit of pressure from workers' compensation on the margin. And I guess the third thing is we do continue to focus on the area to get sales reaccelerating. So we certainly have more selling expense baked into that business to help drive the top-line and make sure we get to continue to grow our worksite employees.
Samad Samana, Analyst
Understood. And Maria, if I take just one huge step back, the business is very strong right now, and it seems like that's happening in what is a backdrop that is slowing. And so I just was wondering, you've been at ADP for a long time; you've seen multiple cycles. Can you just remind us that when you see a broader slowdown in the backdrop, just how you still are able to drive value and what the performance of the business has historically been in these slowdown periods? Because I think we are all impressed by the durability of the strength even as things may be slow in the backdrop?
Maria Black, President and CEO
Thank you, Samad. You're correct. The durability of our offerings, which I mentioned earlier regarding the importance of HCM, allows us to adapt to changing macro conditions. Our sales force at ADP excels during growth periods, remains strong during steady times, and serves as a valuable resource when the employer environment is under pressure. We have a solid value proposition and a flexible playbook that enables us to quickly adjust our offerings based on shifts in demand. However, we acknowledge that a significant decline in the macro environment would impact us, particularly in terms of bookings. Nevertheless, the ability to adapt our value proposition remains strong, largely due to the essential nature of HCM. We are confident in our capacity to adapt, and I have observed this flexibility over my long tenure at ADP. I trust that the team will perform similarly. I believe Don can also elaborate on how our financial model can adjust in response to market changes.
Don McGuire, CFO
Yes, certainly. We've discussed this before. Looking back a year or so, or perhaps 18 months, the term recession was mentioned much more frequently than it is today. The most recent survey I encountered indicates there is about a 28% chance of a recession occurring in the next 12 months. I'm sure many of you have seen that survey as well. The positive news is that a recession in the next year seems very unlikely. However, as a stable company, our services are not optional; they are essential. If sales or implementations slow down, we can adjust our workforce accordingly. Based on our experience in 2008, it took a significant amount of time for ADP to reach a point of considerable adjustment. We believe we can utilize those tools again if necessary. I just hope that the survey is accurate and that there is no widespread concern about a recession in the next 12 months.
Samad Samana, Analyst
Great. Appreciate. Have a good day. Thank you.
Operator, Operator
Our next question comes from Mark Marcon with Baird. Your line is open.
Mark Marcon, Analyst
Hi, good morning. And thanks for taking my questions. Congrats on the strong bookings in the fourth quarter as well as the really strong retention. I wanted to dive a little bit deeper into both. With regards to the strong bookings, Maria you cited on the small business side, RUN doing extremely well, getting 50,000 new clients. Can you talk a little bit about what the source of those clients are? Were those clients that were using competitive solutions? Were they brand-new business formations? How would you characterize that? Where are you seeing the strength and the takeaways from?
Maria Black, President and CEO
Sure. So on the down market specifically as it relates to bookings, the bookings again are broad-based, right? So where are we getting them? We are getting them from digital inbound, we're getting them from new businesses, we are getting them through the ecosystem of our channels, so clients that are engaging with banks, CPAs. Again, we canvass the entire market. That said, some of the things that we have seen, Mark, year-on-year new business formations, it is still at an elevated rate, but it is pressurized. So sorry, year-on-year, it is minus 3%, but it's still elevated compared to norm. And so as a result of that, we did see less coming this time from new business formations. Now we had a lot come from new business formation, but we also saw an increase in balance of trade, some more coming from the competition. So what I would say is mix shifted a little bit in terms of how we broadly canvass the down market. All that rolled up to this incredible result of 50,000 units in the fourth quarter. So it is broad-based, but there are tiny bit of shifts within that to answer your question specifically.
Mark Marcon, Analyst
Great. You mentioned a 50% increase in new sales for next-gen HCM even before fully going live. Can you elaborate on the sources of these wins? Are the clients transitioning from older ADP platforms, or are they coming from competitors? If they're from competitors, which ones?
Maria Black, President and CEO
Sure. The answer is both and also head-to-head against competition. So some of them are ADP upgrades. We did see more new logos than we've seen before. So we are really excited about the net new wins to ADP. Some of those were wins and takeaways from enterprise competitors. Some of them were wins head-to-head against the same said enterprise competitors, which again is probably why I'm so optimistic about it, because it appears that the offer that we have is competing incredibly well in the market, and clients are choosing ADP.
Mark Marcon, Analyst
That's great. And then with regards to client retention, I know you are guiding prudently for a normalization. But it seems like your client satisfaction scores continue to trend up. How would you characterize the primary drivers of the improved client satisfaction? Is it the solution set? Or is it the service underlying, or a combination of both?
Maria Black, President and CEO
It is a combination of both. NPS is fantastic. So NPS for the quarter as well as the full year was a record. Almost every single business is at a record NPS. So what drives NPS? It is that both, right? So it is the investments we've made into our best-in-class products. And this is years that we've been making these investments and making our products newer and more modern, taking friction out, and making them more self-service. All of these things that go into having best-in-class HCM technology; those investments coupled with best-in-class service, is driving the broad NPS record that we have across the business. So as such, that is a direct correlator to a record retention. And so we are really proud of the 92%. You are right. We're prudently guiding into the year again. And the reason behind that is, as you know, we've had this conversation many times, is that there is still perhaps some normalization that could happen, and also because we are executing at all-time highs almost across every single business. We just want to be thoughtful as we step into the year to make sure that the retention guide is prudent.
Mark Marcon, Analyst
Got it. Thank you.
Operator, Operator
Thank you. Our next question comes from Tien-Tsin Huang with JPMorgan. Your line is open.
Tien-Tsin Huang, Analyst
Hi, perfect. Just want to extend on the retention, but more on the outlook side, if that's okay. Just any callouts expectation-wise across the segments, small, mid and large? I know you've commented on balance of trade already, but I didn't know if you're seeing anything different in terms of expectations on retention.
Maria Black, President and CEO
Yes, that's reasonable. I wanted to point out that our guidance for this year reflects potential normalization in the downturn we've experienced. I've mentioned this perspective for the past couple of years. While the downturn hasn't fully returned to pre-pandemic levels, I understand that it has been five years and we may need to accept it as the new normal. However, we haven't observed a rise in bankruptcies or business closures to the extent we used to. Therefore, we believe it's wise to consider that some normalization could still occur. Essentially, we're suggesting the same thing; it simply hasn't materialized yet. Our aim is, of course, to prevent such situations from occurring again.
Tien-Tsin Huang, Analyst
Yes, you did exceed the guidance set last year. I just wanted to follow up regarding margins. While typical margin expansion was mentioned, I understand there might be more investment in G&A. Is there anything different about the incremental margin outlook for fiscal 2025? It seems like you're also undergoing workforce rebalancing in the fourth quarter, so I want to ensure we address all factors affecting the margins. Thank you.
Don McGuire, CFO
Thank you for the question. We are consistently assessing our workforce to ensure we have the right people and the appropriate number in the right positions. There are no specific issues concerning the margin at this time. We have made some modest investments in Gen AI, which may affect margins by 10 to 20 basis points occasionally. Overall, these impacts are modest. Looking ahead, we anticipate some pressure on the margin next year due to lower pricing increases and reduced client fund interest, particularly in the second half of the year. However, these points have been previously mentioned, and there’s nothing out of the ordinary.
Tien-Tsin Huang, Analyst
Yes. No, glad to see it's typical. And congrats to Danny and Matt as well. Thanks, guys.
Operator, Operator
Thank you. Our next question comes from Bryan Keane with Deutsche Bank. Your line is open.
Bryan Keane, Analyst
Hi guys. Congrats on the quarter, really strong in ES. On PEO, the bookings were accelerating and recovering in fiscal year '24 but moderated towards the end of the fiscal year. So just want to understand what changed in the marketplace there.
Maria Black, President and CEO
Sure. Thank you, by the way. I appreciate the congrats. PEO bookings did moderate a bit in the back half. And from a year-on-year perspective, it did moderate as well. That said there was still strong growth in PEO bookings. From my vantage point, the demand equation is still incredibly strong for the PEO. It was a slight moderation year-on-year. We feel really solid about the demand for the offer and the value proposition of the offer, and we feel solid about pipelines in the PEO. As you know, with pipelines in the PEO, it is more about activity in the market, new appointments, requests for proposals, things of that nature. So all the bellwether signals show that the PEO strength is still there, but it did moderate a bit in the back half.
Bryan Keane, Analyst
Yes. And just a follow-up just with thinking what would it take to get PEO back to high single-digit or double-digit revenue growth that was targeted previously?
Don McGuire, CFO
Yes. Hi, Bryan. I think it's going to take a little bit of time. We were working, and as I mentioned earlier, we are seeing some more margin pressure in PEO. Some of that is because of the investments we are making in the sales force to make sure we can get those bookings going. But realistically, to get to kind of Investor Day guidance that we provided three years ago, it is going to take some time to build that back. So we are definitely focused on that, and we are definitely focused on getting there. Of course, if we were to see some reacceleration in the pays per control, that would put lots of wind in the sails, but it's going to take a little bit of time to get back to where we want to be.
Bryan Keane, Analyst
No, that makes sense. And congrats again.
Operator, Operator
Thank you. Our next question comes from Scott Wurtzel with Wolfe Research. Your line is open.
Scott Wurtzel, Analyst
Good morning guys. Thank you for taking my questions. I wanted to go back to the margin guidance and just the context of seems like slower expansion in the first half versus second half. Wondering if you could maybe walk us through the drivers there. Is that more on the shape of revenue, or does it have anything to do on the cost side? Thank you.
Don McGuire, CFO
No. Good question, Scott. More on the shape of expenses. Revenue expectations throughout the year are pretty consistent quarter-to-quarter. It is really some spending patterns we have in the first half of the year, but really nothing specific to call out. Just want to give folks a heads up that we think we are going to be stronger in the back half than the first.
Scott Wurtzel, Analyst
Got it. That makes sense. And just as a follow-up on the international side. I mean, it seems like you're making some good traction on incremental countries and geographies. And we'd love to just kind of hear about your sort of expectations for international heading into this year, how much of it is a priority for you relative to maybe other investments in the business, and where you're maybe seeing opportunities internationally.
Maria Black, President and CEO
Yes, Scott, this is a significant priority for us. As you may recall, our third strategic priority focuses on leveraging our global scale to benefit our clients. International operations are central to that priority. We have been developing this business for over fifty years, and we are currently leading the competition in terms of the number of countries we serve. Additionally, we have built a strong infrastructure in these countries. We often emphasize the importance of the final mile and our efforts to enable our clients to pay in complex scenarios, whether they involve large clients or operate in smaller countries. This remains a crucial aspect of our offering. Companies increasingly consider their systems of record from a global viewpoint, especially as they maintain distributed workforces and adapt their supply chains in a globalized environment, with remote employees in various regions. We have an extensive network to support clients in 141 countries and are continually expanding as opportunities arise, focusing on growth economies that align with our clients' needs. This international capability is a vital component of our growth narrative and differentiates us in the market. Our multi-country MNC business provides a distinct competitive advantage in the international arena.
Operator, Operator
Great. Thank you. Our next question comes from Jason Kupferberg with Bank of America. Your line is open.
Caroline Latta, Analyst
Hi. This is Caroline on for Jason. Thanks for taking our question. Can you talk about the duration of the portfolio? We were a little surprised to see that the F'25 average yield is expected to be up year-over-year based on the number of rate cuts being forecast. And maybe how you might be adjusting your investment strategy for the portfolio based on the interest rate outlook for the next 12 months.
Don McGuire, CFO
Thank you for the question. We have a laddered investment strategy, and if you look at the last page of the earnings release, you’ll find the maturity schedule for our investments. For instance, in 2025, we have $6 billion maturing at approximately 2.2%, while our current reinvestment rate is 4.2%. There are still many opportunities here, highlighting the effectiveness of ADP's laddering strategy. It's true that in recent years, due to the inverted yield curve, we've experienced some opportunity cost with this approach. However, as yield curves begin to normalize, we continue to see significant potential for growth in client funds interest. I should add that our portfolio is projected to grow by 3% to 4% next year, though perhaps not as much as in the last couple of years due to a slight moderation in wages and pay per control. Nevertheless, we are still witnessing strong growth in that area. The crucial point I want to emphasize regarding our fund strategy is that we base all commitments and expectations on the current yield curve. We do not attempt to predict the market but instead rely on what the market indicates. Our forecasts and guidance on interest rates are constructed using these yield curves.
Caroline Latta, Analyst
Okay, that’s helpful. Thank you so much.
Operator, Operator
Thank you. Our next question comes from Ashish Sabadra with RBC Capital Markets. Your line is open.
David Paige, Analyst
Hi. This is David Paige on for Ashish. Thanks for taking our question. I just wanted to circle back to the workforce optimization charge that we had in the quarter of $42 million. Should we expect further workforce optimization in 2025? If yes, how much of that there, what's the benefit to the EPS guidance for '25 as well? Thank you.
Don McGuire, CFO
David, as Maria has shared earlier, I mean, we're always looking to make sure that we've got the workforce at the size it needs to be and in the places it needs to be. We made those difficult decisions that we had to make on behalf of some of those employees. But we always look at this. If you look at ADP over the years, we've always done what needed to be done to go forward. I would just leave it at that and say that we're very happy with the guidance we put out here and the margin guidance as well. We will make sure that we do what we need to do to execute, and we'll see what the future brings. But as we sit here today, we've done what we need to do, and we are looking forward to the future.
Operator, Operator
Thank you. Our next question comes from Kartik Mehta with Northcoast Research. Your line is open.
Kartik Mehta, Analyst
Good morning. I know you've talked about the strength in bookings quite a bit. And I'm just wondering from an enterprise sales standpoint if there has been any change. Is the sales cycle lengthening at all? Are enterprises maybe asking to buy less modules than they have in the past? Any kind of change, or has it been pretty much status quo and really no change from a demand or a sales cycle standpoint?
Maria Black, President and CEO
Fair. It is a great question. I think we talked about it a bit last quarter and perhaps throughout the year, which is that we're really at a new normal as it relates to the overall sales cycles. It is reminiscent of what it used to look like pre-pandemic. But arguably, there are more decision-makers involved. The process has elongated a bit from where it was during the height of the pandemic. But the deals are moving through the motions. I would say that they are moving through the motions pretty typically. But certainly, it's not as fast as it was at one point in time. But we're not seeing less modules. We are seeing a big conversation around global, a big conversation around global system of record, things of that nature, which again is where this next-gen HCM fits squarely into that demand. So the conversation shifted a bit, but that is not necessarily new news, Kartik. It's really what we've seen over the last couple of years, as a byproduct of how clients in that enterprise global space operate. So certainly, that's how we are leading what that best offer kind of across the enterprise and international space. But from a deal cycle standpoint, it is pretty similar to what we've seen throughout this year, which is more decision-makers involved and prudency, as it relates to the decisions that are being made, but not necessarily less modules or anything of that nature.
Kartik Mehta, Analyst
And then just on the small business side, I mean as you look at the health of the small business, anything that is changing or anything that would give you concern just as people get worried about the economy, or change in behavior?
Maria Black, President and CEO
Yes. Great question. So we monitor so many of these things, right? I spoke to one of them earlier, which is the pace of new business formation. That tends to be a bit bellwether. Again, it is still elevated from norms, but it is down year-on-year. We are also monitoring our own out of business. We are looking at clients that, call it, suspend payroll and how many are sitting in that type of capacity. These are all things and metrics that we've monitored for years to ensure that we are kind of seeing what is happening in real time, if you will. What I would say is there are little pockets, very similar to the new business formation of kind of watch items that we have our eye on. None of it at this juncture gives us great pause. Quite the opposite. But at the same time, we are monitoring these things to make sure that we don't get surprised as it relates to the shift should there be one. But there hasn't been one yet.
Kartik Mehta, Analyst
Perfect. Thank you so much. I really appreciate it.
Operator, Operator
Thank you. There are no further questions. I'd like to turn the call back over to Maria Black for any closing remarks.
Maria Black, President and CEO
Great. Thank you. So I will end where I started, which is I'd like to take this opportunity to thank our 64,000 associates. All of the results that Don and I have the pleasure of getting on this call to represent; they are a byproduct of 64,000 associates that are all incredibly committed to having the best-in-class technology, the best service, and the biggest, broadest global scale. Everything we do, whether it is from product innovation to our contracting process, to our sellers, to our service associates, it really takes the entire company being aligned on what I would suggest is a commitment to client and client centricity. In that spirit, I'd also like just to take a minute to thank our 1.1 million clients. I will tell you, as we celebrated the 75th anniversary of ADP, it was quite a remarkable moment to think about all the clients we've impacted over 75 years and had the honor of contributing to their journeys of success and navigation. So definitely want to take a minute to honor all of our clients. And then last but not least, all of you who dialed in today. I appreciate you joining us. I appreciate your interest and your investment in ADP, and I look forward to speaking with you soon.
Operator, Operator
Thank you for your participation. You may now disconnect. Everyone have a great day.