Automatic Data Processing Inc (ADP) — Q3 2015 Earnings Call Transcript

Thank you. Good morning, everyone. This is Sara Grilliot, ADP's Vice President, Investor Relations, and I'm here today with Carlos Rodriguez, ADP's President and Chief Executive Officer; and Jan Siegmund, ADP's Chief Financial Officer. Thank you for joining us for our Third Quarter Fiscal 2015 Earnings Call and Webcast. Before Carlos begins with a discussion of our achievements in the quarter, I'd like to remind everyone that today's call will contain forward-looking statements that refer to future events and as such involves some risk. We encourage you to review our filings with the SEC for additional information on risk factors that could cause actual results to differ materially from our current expectations. With that, I will turn the call over to Carlos.

Thank you, Sara, and good morning, everyone. This morning, we reported solid results for our third quarter of fiscal 2015, which included revenue growth of 7% despite increased pressure from foreign currency translation. Worldwide new business bookings grew 6% in the quarter compared with a third strong quarter last year. I'm pleased that, fiscal year-to-date, our new business bookings growth is a solid 11%, putting us squarely on track to meet our full year forecast of about 10% growth. Our results are directly attributable to the continued focus and dedication of ADP teams across the world that are driving our HCM strategy. Recently, we had the opportunity to detail this strategy during our Investor Day, which was held on March 3. If you did not have a chance to attend or listen live to the webcast, a recording of the event continues to be available on our website. During our Investor Day, we outlined our strategy, which consists of three pillars: first, to continue to innovate from our core platforms to grow a full suite of cloud-based HCM solutions that work together seamlessly; second, to continue to scale our industry-leading outsourcing solutions; and third, to expand into global markets that can benefit from our HCM offering and grow globally with our clients. We see evidence of success in executing on all three pillars, which contributed to our performance in the quarter. Our SaaS platforms continue to meet expectations, and fiscal year-to-date, our client revenue retention remains at record levels. We continue to expand the capabilities of these platforms to meet the demands of clients and to respond to their need to comply with an increasingly complex regulatory environment. One example of this is ADP Health Compliance, which helps clients manage the complexities of compliance with the Affordable Care Act. This product continues to receive significant interest from our upmarket clients and has recently been introduced to our mid-market clients. Another opportunity for our clients and ADP is big data. Big data represents an opportunity for clients to make better HR decisions. We pay one in six private sector workers in the U.S. That's the biggest data set of its kind in HCM and affords us a unique opportunity to deliver insights that enable better HR decisions. For years, we've been bringing data-driven insights to the market through the ADP Research Institute, and we will soon be announcing new products which leverage our unique data to deliver insight across HR, wages, time, benefits, and talent depending on the client's HCM platform. We continue to be excited with the performance of RUN, our strategic platform targeted to small businesses, which continues to perform well. We now have all our small-market clients using RUN, an important milestone for our business as we were able to sunset the legacy platform, EasyPay, during the quarter. This is a big achievement, not only because we completed the migrations and can sunset the platform, but also because the execution exceeded our expectations on several other fronts. Notably, we exceeded expectations in client retention during the transition. I believe the high level of retention we experienced is a testament to our product and our clients' confidence in ADP. In addition, throughout the migration, we benefited from greater adoption of HCM modules than anticipated. While this has not driven a significant amount of revenue for ADP, it is certainly a positive outcome. And while we do not anticipate some level of cost savings associated with this platform shutdown, we plan to reinvest the savings to support further migration efforts of legacy systems to our cloud-based platforms. Again, I could not be more proud of our associates for successfully completing these small-market migrations, and this success reinforces our confidence as we push forward on this multiyear migration journey. On the global front, we've continued to grow our capabilities outside North America and have now expanded our offerings of HCM solutions to 104 countries. For clients in these countries, we continue to expand our service capabilities to ensure we are delivering consistent, scalable, and valuable services. In February, we announced the opening of a new Center of Excellence in Bucharest, Romania. This is a terrific team that will use standardized and automated systems to help our clients optimize HR and payroll operations to build great workforces. The services they are delivering start with implementation and migration and include fully managed outsourced services. Together with our operations in Prague and Barcelona, the Bucharest center enhances our capabilities in Europe. And while we're excited about our progress, it's even more satisfying when our clients recognize it. Last month, I had the pleasure of participating in ADP's annual Meeting of the Minds event in Nashville. The buzz and positive feedback we received from customers and industry analysts validated for me that we are, indeed, on the right path. It was great to share the stage with clients willing to talk about their experiences in driving specific, tangible value from our solutions. We're also proud of the recognition we continue to receive from third parties recognizing the value our solutions are delivering to the market. Most recently, NelsonHall, a global BPO analyst firm, named ADP a leader in recruitment process outsourcing. Their analysis recognizes our comprehensive recruitment service, which helps clients recruit high-quality talent at scale. This is a fantastic recognition as we continue to grow our BPO services. So we are pleased with the progress we are making on our strategy and believe it's contributing meaningfully to our performance. In the end, ADP is the only company that serves clients across the globe, across the full spectrum of HCM and across the full range of client sizes, and we have the resources, scale, and expertise to meet the market needs. With this in mind, we are improving how we communicate the ADP brand to our clients and prospects. To better articulate what makes the ADP experience unique, we have developed a new tagline: ADP, a more human resource. We believe this tagline succinctly captures what sets us apart. We believe that software alone is not enough. To win in HCM requires deep expertise and outstanding service to help clients not just manage their employees, but build better workforces. We love this new tagline, which you'll start seeing in the market shortly. Overall, we have great confidence in our team, our strategy, our ability to execute, and our message to the market. And with that, I'll turn the call over to Jan to walk you through the third quarter results.

Thank you very much, Carlos, and good morning, everyone. For the quarter, ADP's revenue grew 7% and pretax earnings grew 12%. This revenue and pretax earnings growth includes a negative impact of approximately 2 percentage points from the effects of foreign currency translation. Earnings per share grew 16% in the quarter on a lower effective tax rate and fewer shares outstanding compared with the year ago and included a negative impact of about $0.02 from the effects of foreign currency translation. I'm pleased with this solid performance despite the headwinds experienced from foreign currency. Our tax rate was lower than anticipated in the quarter as we were able to realize benefits from certain tax items that were not previously forecasted. ADP remains committed to shareholder-friendly actions and has repurchased more than 13 million shares throughout the end of the third quarter at a cost of $1.1 billion. These share repurchases were partially funded by the dividend proceeds of $825 million ADP received from CDK as a result of the spin-off, which occurred on September 30. Employer Services revenues grew 5% and were negatively impacted by 3 percentage points from foreign currency translation. This revenue growth was driven primarily by additions of our new recurring revenues from our HCM solutions as well as the benefit of revenues from certain tax credits filed on behalf of our clients that we received in the third quarter of this fiscal year. While our client revenue retention was down in the quarter compared with last year, and we are paying attention to this change, on a fiscal year-to-date basis, our retention remains at record levels. Same-store pays per control in the U.S. remained strong with an increase of 3.1%. Average client fund balances grew 4%. This growth was driven by net new business and growth in pays per control, but was moderated by decreased balances from lower state unemployment tax rates compared with the prior year in the U.S. as U.S. employment continues to improve as well as the negative effects of foreign currency translation. Our international business continues to perform well with growth coming from each major geographic region that we serve. Multinational solutions continue to perform very well with solid revenue and earnings growth. And while the economic situation in Europe is showing some signs of improvement, we are seeing some slowdown in our Latin American business. Our pretax margin expansion in Employer Services was 190 basis points in the quarter, primarily from scale and productivity. The PEO posted 15% revenue growth compared to last year's third quarter with growth in average worksite employees of 13%. And although this growth has slowed from the first half of the fiscal year because of a difficult comparison, the business continues to perform well as more businesses seek to fully outsource their HCM needs. The PEO continues to deliver solid margin expansion through sales productivity and operating efficiencies, expanding margins by approximately 150 basis points in the quarter. ADP's consolidated pretax margin improved by 110 basis points in the third quarter, which included a drag of about 20 points from the slower growth of our high-margin client funds interest revenues as these highly profitable revenues grew at a slower rate than overall revenues. So now I will take you through our updated fiscal 2015 outlook. As Carlos mentioned earlier in the call, we are still anticipating worldwide new business bookings growth of about 10%. Because of the negative FX anticipated from foreign currency translation, we are now anticipating revenue growth for total ADP of about 7% compared with our prior forecast of 7% to 8%. Our revenue forecast for Employer Services still anticipates growth of about 5%. This forecast includes a negative drag of about 2 percentage points for the fiscal year due to foreign currency translation. However, the impact on the full year growth is expected to be more pronounced in the fourth fiscal quarter. This forecast assumes pays per control growth of about 3% compared with our prior forecast of 2% to 3% growth. For the PEO, we are now anticipating revenue growth of about 16% compared with our prior forecast of 15% to 17%. Our forecast anticipates pretax margin expansion for total ADP of at least 75 basis points from 18.4% at fiscal year 2014 compared with our prior forecasted range of 75 to 100 basis points of pretax margin expansion. On a segment level, we are revising our fiscal year 2015 forecast for Employer Services pretax margin expansion to contemplate our year-to-date results and are now anticipating margin expansion of about 125 basis points compared with our prior forecast of about 100 basis points. We are now anticipating about 100 basis points of margin expansion in the PEO. We have narrowed our forecast for the client funds extended investment strategy. And primarily due to the impact of foreign currency translation on interest earned outside of the U.S., we are now anticipating an increase of about $5 million over the last year. This compares with the prior forecast of an increase of $5 million to $15 million over last year. This forecast anticipates average client fund balances growth of about 5%, which is at the low end of our prior range of 5% to 7%. The detail of this forecast is available both in the press release and in the supplemental slides on our website. The improvement in our effective tax rate is expected to continue for the balance of the fiscal year and we are updating our forecasted effective tax rate to reflect this improvement. We are now anticipating a tax rate of 33.7% compared with our prior forecasted tax rate of 34.2%. This tax rate improvement, combined with the impact of share repurchases on our earnings per share growth, is expected to offset earnings pressure we anticipate from foreign currency translation. And due to the solid performance of our business year-to-date, we are now anticipating growth in diluted earnings per share of approximately 14% compared with our prior forecast of 12% to 14%. This forecast does not contemplate any further share buybacks beyond the anticipated dilution related to equity comp plans. However, it remains our intent to continue to return excess cash to shareholders subject to market conditions. With that, I will turn it over to the operator to take your questions.

First question on competition. I'm wondering if you could give us an update on the competitive environment around midsized clients for payroll services.

Our sales performance in the mid-market aligned with our overall results and may have even been a bit stronger. However, we prefer not to delve into specifics. We don’t have much additional data on competitors besides what Jan and I review for these quarterly calls, which includes the sales results and our win-loss metrics against competitors in the mid-market, upmarket, or the lower segment. I would say we are experiencing slight improvements in our performance sequentially, particularly in what we define as the core of the lower mid-market, which includes companies with 50 to 150 employees. This is an area where it appears we have improved, but we only have one quarter's worth of limited information. There isn't much to report in terms of changes. Jan, do you have anything to add?

I would say that we remain competitive in the marketplace, but there has been no significant change compared to prior quarters. No major change.

Great. And just as a quick follow-up, at your Investor Day you spoke about the potential for leverage capacity given the move to the AA credit rating. I know that there's no particular rush as you think through that, but I'm wondering if you could give us an update on how you and the board are thinking about over the longer term.

Sounds like a question for the CFO, but since you're asking me, I'll give it a try and then let Jan answer as well. As we mentioned at our Investor Day, we recognize that our capital structure could be optimized further while maintaining our strong credit rating, which is important for our money movement strategies and client investment funds. Over the last quarter, we returned the entire amount we received from CDK, $825 million, and more, through share repurchases to our shareholders. This leaves us with a comfortable amount of cash on our balance sheet. We are not market timers and prefer steady returns to shareholders over time through dividends and repurchases without trying to time the market. Currently, we are comfortable with our position but remain aware of the capacity on our balance sheet. This is a topic we are actively discussing with the board, and as we progress and have more to share, we will. We want to make it clear that we are seriously considering optimizing our capital structure and potentially adding some debt to the balance sheet. So, Jan?

I think that captures it. I think relative to the timeline, Sara, it's kind of this year, we have been focused on returning the dividend to our shareholders. And as we evaluate that, we would update, of course, the investment community about the progress. But right now, there is no update, really.

This Danyal Hussain calling for Smitti. Just wanted to touch on R&D in light of sunsetting EasyPay. Perhaps could you just give us an update on where you are in terms of R&D spend and how that's, right now, broken down between maintenance and new product development?

We set a goal three or four years ago to adjust our spending between maintenance and new products. Initially, our R&D spending was about 40% on new initiatives and 60% on maintenance. A couple of quarters ago, we reversed that allocation, now spending 60% on new projects and 40% on older ones. This shift has been supported by an overall increase in total spending, with most of the additional funds aimed at new developments. While we haven't significantly cut our expenses on legacy platforms, our financials over the past few years show a consistent increase in R&D investment. Although the increase may not be immediately noticeable, it's meaningful for us as we've aligned our growth in R&D spending with our revenue growth. We've been focused on enhancing margins through other areas like services and operations while maintaining our R&D investment. The increased spending levels do not fully capture our total expenditure, which includes capitalized software as reflected in our balance sheet and reports. However, the key takeaway is that we have been making substantial investments in R&D for sound reasons, which we believe will lead to an improved competitive product lineup, as demonstrated in recent years with our strategic platforms. Overall, we're pleased with shifting our expenditure toward new products and services while slightly reducing our spending on legacy systems, achieving our goal from several years ago that was also part of my management objectives because we believe it's essential to continue investing in product and technology.

Got it. And just looking at Employer Services growth, I guess, FX adjusted, it looks like it was about 8%. So you mentioned the tax credits, can you just talk a little bit about what else is driving the strength there and how much of that tax credit benefit is sort of onetime in nature?

The Tax Credit Services business that we have as part of our Employer Services business is a long-running business. It suffered from the lack of renewal by Congress of certain return-to-work credits in the past years. So those tax credits have been reinstated and the business is in catch-up mode to collect those tax credits for our clients and receive the fees for it. So while the revenue is bumpy, I wouldn't describe it as onetime revenues because these are long-term processing contracts that we have with our clients. They are just dependent on the U.S. government and Congress to renew at certain time points for it. So they were suspended and we lacked the revenue throughout the last four quarters; and this quarter, the revenues started to kick in and they contribute a little bit more than a percentage point to the growth about. So it's just part of our business that now regains momentum as part of it.

The PEO has experienced significant margin expansion for several consecutive quarters, following a period of more stable fluctuations over the past few years. What factors have contributed to this growth this year? Is it due to changes in pass-throughs or are you gaining leverage from the faster growth you are achieving? Additionally, how should we view this trend as we move forward?

I believe it's important to recognize the efforts of the team running the business on the ground. Their execution has been commendable. However, you are correct that in this sector, the math is significant. As the growth of pass-throughs accelerates, achieving margin expansion as a percentage becomes more challenging. Our focus tends to be on the profit in dollars per worksite employee or total profit from that segment rather than just the margin percentage due to the nature of pass-throughs. That said, a deceleration in the growth rate of pass-throughs can actually aid in achieving better percentage margin improvement. We are experiencing a slight slowdown in pass-through growth that may create favorable conditions for potential margin enhancement alongside their exceptional execution. They have gained good operating leverage, particularly in distribution, which has shown remarkable sales productivity, evident in the sales results from the past few quarters. This is beneficial because sales costs are generally fixed; thus, significant improvements in sales can lead to increased productivity. Additionally, this business typically ramps up more quickly than some of our other operations in the upmarket, allowing for faster margin relief from distribution costs. However, I want to add a note of caution: this is currently a 10% to 11% margin business mainly due to pass-throughs. So, it’s reasonable to anticipate only modest margin improvements moving forward. The margin results we are seeing now are impressive but not likely sustainable in the long run. Part of this uncertainty comes from the unpredictable nature of pass-throughs, although we will provide guidance in August regarding that. Overall, if you analyze the figures, this business has a naturally lower margin compared to our other operations, but we value it because, like our other businesses, it isn't capital-intensive. Every dollar of profit generated in this sector contributes to our shareholders and our earnings per share. We appreciate this business despite needing to clarify some aspects regarding the margin percentages.

The point on profit per average worksite employee is a good one. I think I've got 10 years of data I'm looking at here, and it looks like you're trending towards, by far, the highest level that that's ever been, up solid double digits this year. And so is it the sales leverage you mentioned and I guess just leverage of fixed cost with the business growing faster? But is there any reason that level of profits wouldn't be sustainable or be able to continue to trend somewhat higher?

As in all businesses, that level of profitability is dependent on your differentiation and your competitive position in the market. In other words, how strong your value proposition is. We feel very, very bullish and very good about not only the execution of that business today, but also the value proposition in part because of how complex the environment has gotten because of ACA for all employers, not just for large employers. So this is just really creating, I think, a natural trend towards people looking for help. And you could get help in a variety of ways, and the good news is ADP has all types of ways we can help you, all the way from basic payroll to the PEO, which is the ultimate BPO bundle. And I think this kind of environment where you have increased regulatory compliance and complexity around health care is really a very, very favorable environment for the PEO. But on top of that, I think the PEO has not been, to their credit, over the last five years, has not just been sitting there kind of waiting for things to happen on the regulatory front. They've also made great strides in terms of the products and services that they deliver and the value that they add to the clients that they serve. And again, this is not the appropriate call to get into those details, but we feel very, very bullish about the value proposition that has emerged there over the last three to five years.

Great. Just to follow up, Carlos, you mentioned that while it’s positive that you're selling more HCM to RUN customers, it doesn’t have an impact on revenue. Is this due to a scale issue, or is there another reason it’s not providing more benefit?

It's somewhat of a scale issue. While it's beneficial that we serve all markets globally across various segments, this means that changes in any single segment or country typically do not have a significant impact. We need multiple parts of ADP working together to create noticeable results. The SBS business, which is our downmarket segment, is substantial, but the increase in HCM penetration as we transition clients doesn't significantly affect the overall size of that business or ADP itself. We recognize its importance and it contributes positively, but we included that detail to clarify that we are not seeing a $40 million or $50 million increase in just one year from it. However, over time, if we increase our penetration of products like HR, time and attendance, insurance services, and 401(k), particularly because the RUN product is easier and more integrated, this could benefit us in the long run. It's essential to understand that our business model does not yield large one-time increases, and we want to ensure this is clear. We are optimistic about it, and it indirectly highlights that if we see similar increases in the mid-market and upmarket, where we anticipate higher penetration of our HCM products, it suggests positive outcomes as we continue our migrations and complete transitions in other segments. We believe this could lead to a more significant increase than what we've seen so far in our lower segment.

Probably just to start off, as you continue to increase your focus on expanding your HR suite, what are the metrics you are using internally to judge your success, both from an R&D and sales perspective? Is it the number of products you're offering? Is it attach rates? And if you could provide any update on attach rates post migration.

I know Jan has those attach rates at the tip of his tongue, and I think that's probably, besides our sales results and the attach rates in our upfront sales, I think the attach rates on our migrations, those two metrics are important metrics for us to judge our success of kind of our overall HCM strategy. So for example, in the upmarket, Jan has the exact numbers, but when you compare to kind of prior platforms that we had, the attach rates are much higher of the traditional HCM products around time and attendance, benefits, HR, talent, etc., and we're experiencing the same thing in mid-market where the concept of a seamless product that provides the entire solution in one-stop shopping I think is resonating in the marketplace. But what we needed to have is the products to actually reflect that, and I think we have that now in our strategic products, and we're seeing it in the sales results. And now what you've been hearing us talk about over the last two or three years that we want to do that also with our client base by moving them on to our strategic products, which is what we just finished doing in Small Business, and we're now trying to do in mid-market and also in national accounts. So I don't know, Jan, if you have the attach rates.

Yes, we have. In the upmarket, there has been no change from our prior reports, remaining in the mid-70s to low 70s for some modules, but Vantage remains high. In the mid-market for Workforce Now, we have actually seen an increase in the attach rate of our benefits bundle, which we believe is related to strong interest in our ACA offerings. There's definitely activity in the mid-market driving demand for a more comprehensive bundle that includes benefits, influenced by insurance changes. We are monitoring these attach rates, which are crucial for both new and migrated clients and their purchasing decisions. The trend has continued in line with the numbers we previously disclosed, with no significant changes.

I want to emphasize that our sales team reacts positively to strong products, and the market also responds favorably to quality offerings. For instance, following the launch of our recent talent solutions, we observed a noticeable increase in attach rates for new sales, although we won’t disclose specific percentages. This uptick is significant, reinforcing our belief that while we will keep focusing on compliance and service, the quality of our products is crucial in driving these attach rates.

That's great. Just following up on one of the earlier questions on the PEO business, taking into consideration the pass-through costs and the mechanics related to that, but are there any other levers for margin expansion? You alluded to expansion of your products and services in this business. So can those products and services provide some upside, more from a mid- to long-term perspective, but are we going to be just range stuck? Or do you think these newer products and services should just allow you to expand margins?

We will not be limited in our growth potential. What I was trying to convey is that the improvements to expect will not be drastic, like moving from 10% to 20% over three years. Instead, it's more likely to be a gradual increase, such as 10.5% to 10.8% or 10.9%, and then from 10.9% to 11.2%. This situation is quite different. Since more than half of our revenues are categorized as pass-through revenues, we effectively take no risk on the healthcare side and simply pass on the costs of these healthcare plans to our clients and their employees, depending on how much each party contributes. This setup limits our opportunities for margin expansion compared to a business where 90% to 100% of costs can be leveraged. Nevertheless, the value proposition can still strengthen. Regarding the other half of our revenue, which comes from various products and services charged with administrative fees, we can achieve operating scale from these offerings. It is crucial for everyone to understand that there is a limit in this business due to the large pass-through amounts. However, we do not think we are constrained in terms of growth potential, and we aim to capitalize on the significant leverage opportunity that arises from slower growth. In all of ADP's businesses, including the PEO, distribution costs are important. Even though we are achieving operating leverage from distribution costs in the PEO, the fact remains that accelerated growth leads us to account for all distribution expenses upfront. This rapid growth creates significant pressure, making it impressive to see how well the business is performing amid high sales and revenue growth. We hope not to face challenges in the near future, but it is likely that the biggest source of operating leverage and margin enhancement in the future will come from experiencing slower growth.

This is Ashish Sabadra calling on behalf of Bryan Keane. I was just wondering if you could provide some more insight on the recent decline of 50 basis points this quarter. Was this linked to any large client, or was it primarily related to small and medium businesses?

So as you know, we typically don't get into specifics around where our retention is going up or down. And so the good news is that for several quarters as retention went up, we didn't get into the details and didn't brag. And so we're going to take the same approach today, which is this has happened before. I think it was probably four or five quarters ago where we do have variability and it does tend to happen more in the upmarket where, when transactions or deals are large enough, they can move the needle in any one quarter. But today, we have really nothing to report other than, on a year-to-date basis, we're still about 10 basis points above last year and still at record levels. And so I think Jan put it well, which is we're going to obviously watch this very, very carefully and we are obviously watching it and digging in and looking at to see if there's anything underneath the covers. But we spend a lot of time on this topic. And today, we really don't have anything to report other than the usual fluctuations in the business. I don't know if, Jan, you have...

I think it's important to note that there can be timing of losses between the second and third quarters. Therefore, the more reliable figure is the year-to-date number, as timing differences and prior year timing variations can complicate the quarterly figures, making them harder to interpret. So, aside from focusing on retention, we shouldn't read too much into the quarterly results one way or the other.

We have previously indicated that moving forward, especially during Investor Day, we are not assuming a 1 to 2 percentage point improvement in retention over the next 2 to 3 years. Our long experience in this industry provides us with a clear understanding of what is realistic. As we navigate through these migrations, it's possible we may achieve higher potential retention rates than we have historically, thanks to a stronger competitive position. However, getting from where we are now to that future state will take several years and will involve some turbulence. While we remain optimistic and recognize the potential for higher absolute retention rates, we know from experience that reaching record client retention levels is not the right moment to anticipate significant increases in retention moving forward.

Just quickly, on Europe, I was wondering if you could provide some more color on the European business and how do the people control trending in Europe?

I was in Europe last week, and it's clear that the employment situation there is challenging, with slow GDP growth and high unemployment. The labor market shows enough friction that we don’t see significant fluctuations. The positive aspect is that as the European economy weakens, the decline in employment and layoffs is not as pronounced, which takes longer to manifest. However, the current levels of unemployment and GDP in those markets are not favorable for us. Europe is the largest segment of our international business, and we are quite exposed to it, particularly given the recent foreign exchange pressures we've faced. Despite this, compared to other companies, our exposure is manageable, with less than 20% of our revenues coming from international operations, and only a portion of that from Europe. Overall, considering the macroeconomic backdrop, we have been performing well in terms of new business sales, client retention, and revenue growth in Europe. While Europe hasn't significantly added to our revenue growth rate, it remains a positive contributor. In my recent visit to the U.K., I noted it as a good example of what we could achieve in the next 10 to 20 years. We have strong technology products, Money Movement operations generating income, and we've integrated time and attendance systems with HR into our payroll offerings to create a comprehensive HCM solution. This is indicative of the growth opportunities we can replicate worldwide, reflecting some of our successes in the U.S. Each market will have its unique challenges regarding product needs and regulations, but overall, this supports the idea that our model can be successfully implemented in other regions where we currently have low market share.

With regards to international, just a little more color, if you could, with regards to what you're seeing in terms of the play or the strategy in terms of expanding globally. Can you give us some sense in terms of what sort of deals you're seeing? What the pipeline looks like? How quickly you think you may be able to expand and ramp that?

We appreciate the interest in our international efforts, as we often focus heavily on our U.S. operations, which are our most established. However, our greatest growth opportunities clearly lie outside the U.S., looking five, ten, or even twenty years ahead. Currently, our multinational solutions are performing exceptionally well. Recently, during my visit to Prague, I met with our multinational solutions team, and their performance is impressive. A few years ago, we frequently received inquiries about GlobalView’s profitability and when it would break even. While I won’t go into specific profitability details, the enthusiasm surrounding our multinational services in Prague is strong. Our clients view our offerings—both GlobalView and our Streamline solutions—as one cohesive multinational package, and the customer satisfaction scores for GlobalView have significantly improved compared to three or four years ago. It's no longer just a break-even operation; it's very profitable, witnessing robust double-digit growth. This segment is nearing a $0.5 billion business, growing steadily, and consistently attracting new clients among the Global 100. The multinational aspect represents an incredible opportunity for us. Additionally, we are enhancing some of our North American platforms to support global capabilities, such as integrating global features into Vantage or Workforce Now, which we believe will create further opportunities. The global market is going to be crucial for ADP in the coming decades, and despite our habitual focus on U.S. metrics and domestic sales growth, we remain committed to our international strategy. The economic conditions in Europe, a key region for our international results, may have made us less vocal about our global business, but our enthusiasm remains strong. Latin America and Asia are also experiencing rapid growth, though they currently represent a small fraction relative to our overall $11 billion business. It will take time to see their significant impact on our results. Jan, do you have anything to add regarding international developments?

No, I think that the multinational is the key driver for us, and ADP is the clear market leader in that space. And that drives that multinational business that is now close to $0.5 billion, so that's really what makes it successful.

That's great to hear. And then just a follow-up, you mentioned Vantage and the potential to take that international. Can you just give us a progress report on Vantage? You've done such a great job on RUN and Workforce Now. Where do we stand with Vantage?

Yes, let me clarify that providing global capabilities to Vantage is different from taking it internationally, though I understand it might seem like semantics. I want to make sure that distinction is clear. Vantage continues to perform well. Based on our sales trajectory year-to-date, we anticipate good growth for Vantage compared to last year in new business sales. We have a couple of hundred clients sold, with over 100 already implemented. We are very excited about this. Vantage is our strategic platform in the upmarket, and we believe it is performing effectively. Regarding attach rates, it’s exciting to see them around 70 percent for time and attendance. Benefits, talent, and HR also show strong performance, with HR being automatically attached at 100 percent. For talent and benefits, the attach rates are in the 60 percent range, which is much higher than when we previously sold separate payroll, benefits, and time and attendance systems. This seamless integration is driving higher attach rates and strengthening our value proposition in the marketplace.

This is Ryan Cary for Jason. I was just hoping you could just speak to some of the trends in new business bookings. I know growth in the first half of the year came against a weaker comparison, at least compared to the 14% in third quarter of '14. Is the third quarter 6% due primarily to the tougher comp? Or is there something else? And just rough ask, it looks like the guidance suggests about 8% in the fourth quarter. How should we be thinking about this number trending as we, say, get beyond '15?

That's a great question. The 6% growth we achieved was actually exactly what we had planned for sales in the third quarter. This suggests that our performance was in line with our expectations. While we always hope to exceed our targets, we were aware of last year’s 14% growth rate for the same quarter. Given our scale, with annual sales of $1.6 billion, this quarter represents about a fourth of that. These figures are significant. Therefore, a planned growth of 6% aligns with our historical performance, and we did our best to communicate this during our March Analyst Day and through other channels. We are right on track and pleased to report an 11% growth year-to-date compared to 8% at this time last year. We remain optimistic and confident in our sales team and distribution trends. I can't emphasize enough how thrilled I am about achieving double-digit sales growth at our current size, as it is crucial in delivering the financial outcomes we aim for our shareholders.

Great. And just as a follow-up. At the recent Analyst Day, you spoke a lot about the new technology and offerings, particularly speaking about big data and analytics. When do you believe these could be needle-moving to results? Or do you see these offerings more along the lines of helping to win new clients?

Winning new clients would be significant for us. It forms part of our ongoing effort to enhance our value proposition and set ourselves apart in the market. If you notice a slight change in our messaging regarding HCM and our commitment to assisting clients in developing better workforces while focusing on their business outcomes, that’s where big data comes into play. We believe that, in addition to our traditional strengths in operational efficiencies and compliance, we can elevate our clients' performance by providing them with better insights to make informed decisions about their personnel. This, we feel, strengthens our value offering, leading to more client acquisitions and potentially increasing our market share. Ultimately, as we mentioned during Analyst Day, people are the most critical asset in any company. Even in manufacturing, despite heavy equipment usage, technology has made people the key differentiator. Thus, attracting and retaining top talent, ensuring they receive proper training, and effectively tracking their performance and compensation through appropriate systems are all vital components of our HCM strategy. We believe these factors will contribute to increased sales through new client acquisition and possibly improved market share over time.

Jan, in your remarks, when you were talking about the funds-held balances, you mentioned something about lower balances because of SUI tax rates going down. I just want to confirm that, if you can give a little bit more color. And is this an issue that we need to think about in the upcoming quarters as well?

Yes, I think we adjusted our forecast for the client-fund balances to the lower end. So the SUI impact is traditionally the biggest impact in the third quarter. These are the withholding rates for unemployment taxes, and if the economy improves, traditionally, SUI rate should go down because the high employment and unemployment funds are better funded as a consequence. So that was a large driver for the decline this quarter. And we have also actually measurable impact on the growth due to the currency translation that we have for our Canadian client fund balances that actually impacted the overall growth. So I think that's going to be to-be-continued for sure in the fourth quarter, and then we'll give guidance for '15 in August.

And I think one thing that I need just to add because I think a number of people here hate it when I do this, but I just can't resist. Reminding you that in fiscal year '08, we generated $691 million from the net client funds strategy on approximately $15 billion of balances. In fiscal year '15, we'll generate around $420 million on $22 billion of balances, and I think that just shows the magnitude of what's happened in terms of our yield going from 4.4% in fiscal year '08 to 1.89% today in fiscal year '15. And we have no expectations that we're going to achieve 4.4% any time in the near future, so we get that. But I just want to make sure that everyone understands the magnitude of the pressure that we've been able to get ourselves through here and the potential opportunity down the road because our balances obviously have grown despite this little hiccup with unemployment in the quarter, which, frankly, tends to happen every time there's an employment cycle that's improving, and it's just very hard to predict exactly where that state unemployment level is going to come down. But overall, our balances are still up from $15.7 billion to $22.1 billion, and unfortunately, interest rates have not cooperated with us during that period of time. But I think history tells us that we will have our day.

Okay, appreciate you pointing that out again. And actually, just shifting gears back to the discussion about your international business. If I remember correctly, you get about 11% or 12% of your total revenues from Europe. Is there a major difference between your Employer Services and your PEO Services in terms of the exposure there?

The PEO operates solely within the U.S. I’m not sure if that addresses your question, but the PEO is exclusively a U.S. business, not even extending to North America. Therefore, there is no international exposure. While Employer Services is reported as a single segment, you are generally correct that Europe represents a percentage of our overall results.

Okay. I just wanted to make sure there weren't any other HCM businesses in the PEO segment. It doesn't sound like there is.

No, it is an HCM business. There's no possible way because it does everything. It's already like a bundle from recruitment to retirement.

I like your new tagline. Can you give an idea of what type of revenue uplift you are aiming for as you drive these substantially increased attach rates, particularly in an ideal scenario where a client purchases the complete suite as you have defined it today?

It obviously depends on whether clients decide to buy one, two, or three additional modules alongside our core payroll service. To provide some context, our business model operates gradually, meaning these developments take time. For instance, when clients using older platforms migrate to a new platform and choose to purchase additional modules, we can see revenue multiples of 2x or even 3x in some cases. Not every client who migrates makes the same choices; some opt for one module, while others may go for two. However, the potential revenue impact is considerable. In addition to traditional HCM modules available for purchase, we are also introducing new products, such as our Health Compliance solutions, which represent an extra sales opportunity that contributes to overall revenue. I believe Jan can assist me here, but I recall that a notable percentage of our new sales come from these additional attach rates, which is a healthy figure.

It's a healthy number. I think we can roughly say it's 50% new clients and 50% incremental business, although it's important to note that at the lower end, we see a higher rate of acquiring new clients. On the upper end, we serve 90% of the Fortune 100 companies, so most of that is likely incremental and upsell. The distribution shifts smoothly from small to large, but a key aspect is selling incremental modules to our existing clients.

I believe my understanding is that it's around 50-50. To clarify, our strategic objective is to ensure that this ratio does not shift to 40-60 or 30-70. We aim to grow in both areas, and our efforts in technology solutions and product investments are focused on gaining market share and attracting additional clients. We are also looking to take advantage of higher attach rates, which we are currently experiencing. However, a crucial internal goal is to pay more attention to unit growth and market share. The positive news is that this has been a strong trend over the past few years, and we will continue to focus on this as we are not solely relying on increased attach rates for our growth. Thank you for joining us today for the call. I want to emphasize a couple of points. First, we remain very committed to treating our shareholders well. We pledged to return the $825 million dividend from CDK, and we achieved this through a share repurchase that surpassed $1.1 billion. You can expect us to continue prioritizing returning capital to our shareholders. Additionally, I want to note that we are experiencing the same pressures from foreign currency translation as others. While we may not have highlighted this as much, we are pleased that, despite the significant impact on both our top and bottom lines, our performance for the quarter and year-to-date remains strong. I believe this demonstrates our continued success in executing our HCM strategy. We appreciate your time today and look forward to having you with us again next quarter. Thank you.