Automatic Data Processing Inc (ADP) — Q4 2015 Earnings Call Transcript

Thank you. Good morning, everyone. This is Sara Grilliot, ADP's Vice President, Investor Relations, and I am 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 fiscal 2015 earnings call and webcast. Carlos will begin today's call with some opening remarks and then Jan will take you through the fiscal 2015 financial results and our outlook for fiscal 2016. We will then take your questions. I'd like to remind everyone that today's call will contain forward-looking statements that refer to future events and as such involve some risks. 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. Good morning everyone. This morning, we reported fourth quarter and full fiscal 2015 results with revenue up 5% and 7%, respectively, despite continued pressure from foreign currency translation. Even more gratifying is our exceptionally strong performance on new business bookings, which grew considerably better than our expectations to 18% for the quarter and 13% for the year. Our strategy to drive sustainable growth at ADP is working, the result of which is strength across all three of our strategic pillars. In particular, ADP's Health Compliance product line has been particularly well received in the market, significantly outpacing our internal expectations. We have brought our technology and expertise together in a way that meets an acute client need at a time when businesses are racing to ensure compliance with the Affordable Care Act. Our success here has resulted in higher than anticipated selling expenses ahead of related revenue and that has put significant but short-term pressure on our fourth quarter and full fiscal year 2015 margins and earnings. In order to transition this strong performance in new business bookings to recurring revenue, we are making additional investments in operational resources that will begin in the first half of fiscal 2016 and remain throughout the year. These investments are not expected to contribute meaningfully to recurring revenue until the second half of the fiscal year. Jan will further explain our expectations for fiscal 2016 later in the call. But before he does, let me give you other examples of how execution against our three strategic pillars is driving ADP's recent growth and future opportunities. As we have told you, we are all-in on HCM. Overall, it was a successful quarter and year for ADP, as we continued to grow our complete suite of cloud-based HCM solutions, delivering customer solutions that work together seamlessly. This past quarter, we introduced a number of enhancements across our major platforms. With RUN, we updated the entire user experience to simplify interaction with the platform for small business owners. We expanded the capabilities of Workforce Now, our HCM solution for midsized businesses, to include career and job portals as well as a consumer-grade experience for employee benefit enrollment. And we delivered a new user experience for Vantage clients as well, which promise to be even more intuitive, engaging, and contextual. And for certain clients on our strategic platforms, we were especially excited to introduce ADP DataCloud, which leverages ADP's unparalleled data and insight to deliver workforce analytics that can help boost productivity, help develop talent, increase retention and identify potential flight risks. About 1,000 ADP clients are already taking advantage of these analytical capabilities. Not only have we been busy on the technology front, but we have also been busy building partners through the ADP Marketplace. We're excited to have about 60 partners providing solutions through our secure application programming interfaces, or APIs, and there are another 200 that have expressed interest in partnering with us. This is an exciting development for us. We are attracting established leaders like Concur and Cornerstone OnDemand, as well as exciting emerging technologies, such as OnePage, which provides clients an innovative platform for engaging passive job seekers. The ADP Marketplace is a great example of ADP taking a client-centric, outside-in view of enhancing our HCM capabilities and creating best-in-class solutions for our clients. In fiscal 2015, we also continued to make progress in growing and scaling our market-leading HR BPO solutions by innovating our product offering and improving the experience for our clients and their employees. Helping our clients achieve success is at the core of what we do, so it's critical that we understand the business issues they're facing in the markets they serve. We recently hosted an Insights 2 Innovation forum for a number of our clients to help us look around the corner. These client insights provide a framework to enhance our innovation efforts to ensure we are consistently advancing our solutions to address their needs and help their businesses thrive. To this point, in May we introduced a new program for ADP TotalSource focused on health, wealth, life, and work, aiming to provide worksite employees with a suite of benefits and tools designed to support employee growth and development. Increasingly, employees are interested in tools and services to optimize productivity and wellness across the entirety of their lives, both at work and at home. We are continuously looking at ways to improve the health of worksite employees by offering new benefit solutions and partnering with clients to implement wellness programs. We also continue to expand into new markets and grow globally with our clients. In the 104 countries that we now serve, we remain focused on broadening our service capabilities to ensure we are delivering consistent, scalable, and valuable services. In fact, the Everest Group recently recognized ADP for the geographic scope, scalability, and global expertise of our payroll offerings. The success we've achieved requires that ADP continues to attract and keep great talent. We take great pride in creating an environment that attracts great people and I'm honored by some of the recent awards we've received recognizing ADP as an innovative company and a great place to work. Specifically, InformationWeek recently named ADP to their list of top business technology innovators and Computerworld listed ADP as a Top Place to Work in IT. And we are also pleased to have ranked number 20 on the 2015 DiversityInc Top 50 Companies for Diversity. ADP is the only HCM company that serves clients across the globe, across the full HCM spectrum and across the full range of client sizes. We focus on our clients' biggest investment, challenges, and opportunities: their people. And we have the resources, scale, and expertise to meet the market needs. Our clients are responding. We now have 500,000 clients in the cloud, more than 5 million people are using our mobile app, and client revenue retention remains at record levels. In closing, fiscal 2015 was a successful year for ADP. We sharpened our focus on the HCM market through the spin-off of CDK Global. We expanded our suite of HCM solutions and our global presence and delivered solid revenue growth in spite of pressure from foreign currency translation. Consistent with our commitment to shareholder-friendly actions, we returned $2.5 billion in cash through dividends and share repurchases and during fiscal 2015 reached a milestone of 40 years of consecutive dividend increases. As I look forward into fiscal 2016 and the opportunity we have to assist our clients with growing regulatory compliance associated with the Affordable Care Act, I'm excited about the challenge ahead. The success of our HCM solutions highlights the strength of our direct sales force and our history of assisting clients with navigating the challenges of ever-increasing regulatory complexity. Combine this with ADP's historical strength of expanding client relationships, and this is a challenge I would love to have every year. The higher selling expense we incurred in the fourth quarter is behind us. To deliver on these commitments to clients, we will invest further in the first half of the fiscal year to convert these new sales to recurring revenues. We believe these investments will reward us with profitable revenue growth and even deeper client relationships over the longer term. I am confident that as we successfully execute against our strategy, we will continue to drive results for our clients, our associates, and our shareholders. And with that, I'll now turn the call over to Jan to further review our fiscal 2015 financials and a discussion of our fiscal 2016 outlook.

Thank you very much, Carlos. And good morning, everyone. As Carlos mentioned, fiscal year 2015 was a successful year for ADP. Revenues grew 7% to $10.9 billion for the year. This growth includes a negative impact of approximately 2 percentage points from the effects of foreign currency translation. Pre-tax earnings grew 10%, which includes a negative impact of approximately 1 percentage point from the effects of foreign currency translation. ADP's consolidated pre-tax margin improved by 60 points for the year. This included a drag of about 20 basis 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. Diluted earnings per share grew 12% to $2.89 on a lower effective tax rate and fewer shares outstanding compared with a year ago. This growth included a negative impact of about $0.04 from the effects of foreign currency translation. And as Carlos mentioned, our new business bookings for the year exceeded our expectations, finishing at 18% growth for the quarter and 13% for the year compared with our April 30 forecast of about 10%. This outperformance resulted in higher selling expenses than ADP anticipated and caused pre-tax margins and earnings results to come lower than our own prior expectations. Overall, I'm pleased with ADP's solid performance, which yielded good growth despite the impacts from foreign currency translation and the continued low-interest-rate environment, which puts pressure on the growth of ADP's high-margin client fund interest revenues. I'm also pleased that we continued our shareholder-friendly actions, returning approximately $2.5 billion to shareholders during fiscal year 2015 through dividends and share repurchases. So now for a discussion of our segments results. In our Employer Services segment, revenues grew 5% for the year and were negatively impacted by 2 percentage points from foreign currency translation. This revenue growth was driven primarily by additions of new recurring revenues across all of our HCM markets we serve. For the fiscal year, client revenue retention remains at a record high level of 91.4%. You may have noticed in this morning's press release that in the fourth quarter our revenue retention rate declined by approximately 30 basis points. And as we told you last quarter, we do experience variability in this metric from quarter to quarter and we continue to pay close attention to retention across all our areas of our business. We are also pleased that same-store pays per control in the U.S. remain strong with an increase of 3% for the year. Average client fund balances grew 5% compared with a year ago, including a negative impact of about 1% from foreign currency translation on balances held outside the U.S. The primary drivers of the client fund balance growth were additions from net new business and pays per control, moderated by decreased balances from lower state unemployment tax rates compared with the prior year as employment levels in the U.S. continue to improve. We remain pleased with the overall performance of our international business, which continues to see healthy growth from sales of our multinational solutions. In Europe, the economic situation remains challenging, and while we have seen growth in sales from our in-country solutions that are above Europe's overall GDP rate, the growth has been slower than our overall growth. Pre-tax margins in Employer Services – pre-tax margin in Employer Services was 70 basis points for the year, primarily from scale and productivity and reflects pressure from additional selling expense related to the fourth quarter outperformance in our new business bookings. I'm very pleased with the performance of the PEO in fiscal year 2015. The business posted 17% revenue growth with average worksite employee growth of 14% for this year. And along with this growth, the PEO delivered exceptionally strong margin expansion through sales productivity and operating efficiencies, expanding margins by approximately 110 basis points for the year. Before I take you through our fiscal 2016 outlook, I would like to point out that our client funds investment strategy had a positive year-over-year impact to our fiscal year 2015 revenue and pre-tax earnings for the first time since 2008. The benefit was slight, contributing about $7 million, driven by a balance growth that was offset by slightly lower average yield on the portfolio. However, we are pleased to have turned the corner in fiscal year 2015 after years of earnings pressure resulting from the continued low-interest-rate environment. So now, I will take you through our updated fiscal 2016 outlook, which excludes the results of discontinued operations from a small non-HCM related business we sold at the end of the fiscal year. For fiscal year 2016, we are anticipating new business bookings growth of 8% to 10%. We expect this growth to be balanced across our three strategic pillars, with continued favorable performance from the sale of our ADP Health Compliance products. We anticipate total revenue growth of 7% to 9% for the year, including an anticipated negative impact of 1 percentage point to 2 percentage points from unfavorable foreign currency translation. This forecast assumes 5% to 6% revenue growth in the Employer Services segment, including an anticipated drag of approximately 2 percentage points from foreign currency translation and growth in pays per control of 2% to 3%. Revenue growth for the PEO is expected to be 15% to 17%. ADP's pre-tax margin is expected to expand about 50 basis points from 18.9% in fiscal year 2015. This forecast of pre-tax margin expansion is at the low-end of our goal of 50 basis points to 75 basis points of pre-tax margin expansion over the longer term. We're still committed to this goal but we believe the opportunity to assist our clients with ACA compliance will contribute to ADP's strategy of driving higher penetration of our HCM product suite as well as continue revenue growth and profitability. So while we do not expect to achieve more than 50 basis points of pre-tax margin expansion in fiscal year 2016, we believe that the fiscal year 2016 investments we are making will contribute to ADP's growth and achievement of our longer-term goals. On a segment level, we anticipate pre-tax margin expansion of about 100 basis points for Employer Services and about 50 basis points of margin expansion in the PEO. Diluted earnings per share is expected to grow 12% to 14% compared with $2.89 in fiscal year 2015, and includes an anticipated negative impact of about 1 percentage point from unfavorable foreign currency translation. This forecast does not contemplate further share buybacks beyond anticipated dilution related to employee benefit plans. Although as communicated at our March 3 Investor Conference, it is clearly our intent to continue to return excess cash to our shareholders, depending on market conditions. Our earnings per share forecast assumes an effective tax rate of 33.7%, compared with the 33.5% in fiscal year 2015. Before I move to the forecast for the client funds extended investment strategy, I want to make a few comments about our expected quarterly growth rates for fiscal year 2016. As mentioned in this morning's press release, we expect that revenue growth in the first and second quarters of the fiscal year will be below our forecasted range of 7% to 9% for the year and above the forecasted range of 7% to 9% for the third and fourth quarters in that fiscal year. This is due to two factors. First, we anticipate that the first and second quarters of the year will experience continued negative pressure from foreign currency translation until we anniversary the strengthening of the U.S. dollar that occurred during fiscal year 2015, assuming no material changes to current foreign exchange rate. Second, as Carlos mentioned, new business bookings sold during the fourth quarter of fiscal year 2015 will take time to implement and, therefore, we anticipate that most of the incremental revenue from these solutions will not impact recurring revenue until the third fiscal quarter. Because of the investment in operational resources to support these implementations and the anticipated lower revenue growth in the first half of the year, our quarterly earnings forecast assumes flat to slightly positive pre-tax earnings growth in the first and second quarters of fiscal year 2016. As we have mentioned, we believe this investment will yield growth and longer-term benefits to ADP, as well as deeper client relationships. So, with that, I will take you through our forecast of the client funds extended investment strategy. First, a reminder that the objectives of our investment strategies remain safety, liquidity, and diversification of our assets. As of June 30, approximately 80% of our fixed income portfolio was invested in AAA and AA rated securities. In a typical year, our strategy results in about 15% to 20% of our fixed income investments maturing, and this year, we expect the percentage of maturities will be closer to the higher end of this range. We continue to base the interest rate assumptions in our forecast on the Fed Funds future contracts and the forward yield curve of the three-and-a-half and five-year U.S. Government agencies, as we do not believe it is possible to accurately predict future interest rates, the shape of these yield curves, or the new bond issuance behavior of corporate and other issuers. For fiscal year 2016, we anticipate average client fund balances in the range of $22.5 billion to $22.9 billion, which represents 3% to 5% growth, and includes an anticipated impact of about 1% from foreign currency translation, as almost 12% of our client fund balances are anticipated to be outside the U.S. in fiscal year 2016. We anticipate that the yield on the client funds portfolio will remain about flat at 1.7% compared with fiscal year 2015. These factors are expected to result in an increase of $5 million to $15 million to our client funds interest revenue and an increase of up to $10 million to pre-tax earnings from the client funds extended investment strategy, when compared to fiscal year 2015. The detail of this forecast is available in the supplemental slides on our website. And, finally, before I take – before we take your questions, we're anticipating capital expenditures of $225 million to $250 million in fiscal year 2016.

Thank you. Good morning, Carlos and Jan.

Good morning.

Good morning, David.

Good morning. How do you think about balancing this well above trend growth in global new business bookings with the expense associated with implementations? And what I'm trying to understand is, if you have the opportunity, let's say, to meaningfully accelerate bookings growth above the historic target levels of 8% to 10%, would you do it in this environment?

Yeah, absolutely. I mean, when you think about the way our business model works, and I think we've been saying this probably for multiple decades, it's an incredibly attractive business model because of the retention rates. So, if you're keeping clients 10 years to 12 years on average, and in some cases, with large clients, 20 years, and to spend the sales expense and the implementation expense in the first year to then have that cash flow stream for that long adds tremendous value in what we call lifetime client value. So, we've been saying this, I think, for decades. All of my predecessors have said that this is really a great problem to have, which is to have new business bookings accelerating the way they did this year, and in the last quarter. And, frankly, from a shareholder value creation standpoint, we would love for it to continue.

Understood. So as a follow up, that said, I'm trying to understand the 8% to 10% growth target for new business bookings given the 13% growth you put out for FY 2015, is that just a conservative outlook or is that realistic?

Well, we were taking bets on how long it would take someone to ask this question and so you get the prize. And the reality is, I think as we've said over the last three years or four years, whenever we have the kind of strong finish that we just experienced, we have historically wanted to be cautious because – and we've had experiences in the past where, due to the way our incentive systems work and other factors in terms of how our sales force behaves, a very strong finish in a fiscal year can sometimes lead to a slower start in the next fiscal year. So, when we looked at that 8% to 10%, if you look at the five years on a compounded basis, we have had actually right around 10% growth. And so we've been in double-digits now for five years and we're definitely coming off of some very strong momentum. And I think the ACA boost that we're getting is certainly welcome. But I think when you look at it over a long period of time, I think we feel like 10% is a very, very strong number and that's at the top end of our range. So somewhere in that middle range of 8% to 10% feels like the right place for us to be planning our year.

Understood. Thank you very much.

Hi. Thanks. Good morning. I wanted to start by asking about the strength in the fourth quarter new bookings. Are these coming from larger clients? I'm wondering if that's why it's taking about six months for them to start to contribute. Is any coming from Vantage or much coming from Vantage? And are you expecting margins to be in the typical range?

So, to be clear, I'll let maybe Jan add a little bit of color in terms of specific numbers, but the strength was really across the board in all of our segments. And to be clear, it was not only Affordable Care Act related business; it was also in some of our other HCM solutions, including our core strategic platforms. And we just want to remind you also that ACA compliance is a requirement not just for large national account clients, but really effective next year for clients over 50 employees and currently at clients over 100 employees. And so we obviously experience some interest in our HCM products and ACA compliance products in our major accounts and mid-market business as well. So it wasn't contained to national accounts. And we also frankly experienced strong growth in our multinational products as well, which have nothing to do with ACA. So we really just had good across-the-board sales results. I don't know if, Jan, you want to add?

Yeah, I think one way to think is that ACA is triggering basically a broader HCM demand because the integrated bundle is very compelling to our clients. That's particularly relevant for the mid and up-market. But in addition to your final question is the margin expectations for this ACA business and we have no reason to assume it would be any different from our average that we have in ADP. So this will be a good business for us in the long run.

Okay. Great. And then turning to the fourth quarter. Employer Services revenue growth of 2% was below what we've seen in a while. And I know that FX was an issue and the comparison was particularly tough. But I am wondering if this was a surprise for you. And if so, what led to it? Particularly because you have had strong new bookings for the last couple of quarters. Thank you.

I think excluding the FX, it was not a surprise. I think that if you look at again over four quarters to six quarters, there's some variability sometimes in calendar and a few other odds and ends here. But, no, the answer is it is not out of line with what we would have expected based on our bookings and based on our retention rates and all of the kind of other things that go into that mix.

Great. Thanks.

Hi. Great. Thanks. Great bookings. I guess just a build-on question. I mean, can you just force-rank for us which markets were stronger than expected on the bookings front? And any change in duration of deals, thinking about how they cycle in?

Having looked at these numbers last night, I'm not sure that I can force-rank it because we really had strength across the entire portfolio, including global. Probably where we have the most variability is in the highest end of the business just because of the lumpiness and the size of those deals. And we did have particularly strong results in our multinational products. But when you look at the broader big business units where we have much bigger numbers and you don't have as much variability, they were all very, very strong and we were very pleased with the results.

Okay. Fair enough.

The second question was around duration. You mean in terms of how long it's taking to close deals? Or...

Well, yeah, I was actually more thinking about the revenue realization or the bookings conversion and terms of the deals.

There are two elements obviously as we deal now with a big backlog of implementations that just have to be naturally worked down. And secondly, the reporting requirements kick in really in earnest around the calendar end of the year. So I think the ACA product itself contributes a little bit to the back-endedness of our product. And then just regular work. So I wouldn't just put anything special into this revenue conversion of a half a year, I think it's just like how we're operationally going to implement the business. And then the ACA timing plays a little bit of a role of it, too.

There are some important milestones that happen on January 1 with regards to reporting around the Affordable Care Act. And so that's six months from now, that happens to be the average guidance that we give in terms of converting new business bookings into revenues. But we just want to make sure that we maybe gave a little bit of color there that if people are wondering why now and not three years ago, because the Affordable Care Act was passed quite a long time ago. Some of the requirements for ACA have been phased in over time and there happen to be some important reporting requirements that are kicking in January 1.

Got it. That is very, very clear. Makes sense. So, just one quick follow up just on the buyback front, as we expected, it's not in guidance. But has your philosophy changed at all with respect to buybacks, including how you leverage your balance sheet and approach to debt, etc.? Thanks.

No, there is absolutely no change in our philosophy. I think it's actually typical that we would not guide to future share buybacks, so this is right in line with how we've ever done. You should not see any change in our attitude towards returning cash to shareholders.

Great. Thanks, Jan. Thanks, Carlos.

Thank you. So just another question on bookings. Generally speaking, the acceleration in new bookings that you're seeing, are you just generally seeing the markets that you are competing in growing faster than you were expecting, or do you think you're also taking share from some of your competitors?

I think it's probably a little bit of both and it depends on which market. And probably not going to get into those specifics in terms of market by market. But I think it's a combination of both because we have heard anecdotal stories, we obviously don't meet with our competitors to talk about these things, but we have heard anecdotally that the Affordable Care Act compliance requirements, especially the reporting requirements that are kicking in on January 1, are creating a higher-than-normal level of activity in the marketplace in general. But I think when we look at our growth rates across overall ADP and compare them to the growth rate of industry, we believe we are, I think, winning some market share as well.

Got it. And then just a follow up on ADP Marketplace. It sounds like there's a lot of developer interest. Can you remind us whether this is more about giving customer choice for existing modules or whether it's about generating more revenues?

That's a good debate that we've had I think a fair amount of here internally and I think we are leaning right now in the direction of being more open than not, which means, in some cases, there will be potentially some either perceived or real gaps that clients will be able to fill in through the ADP Marketplace, but we do fully expect this to be monetizable and I think a revenue generator for ADP. But I think as we've said for the last two quarters or three quarters as excited as we are because of the traction we're getting at $12 billion, this is really not going to have a meaningful impact anytime in the near future from a revenue standpoint.

Hey, guys. Good morning. I guess I'd ask another question about the ACA product. Obviously, that sounds like that's doing really well. How do you – two-part question. How do you think about how that trend in bookings trend, once we get into calendar 2016, and, theoretically, most companies are using this service, and can this continue to grow or is this more of like a one-time mad dash to get into compliance and then it's hard to keep growing that product? And the second part, as companies come to you looking for this product, are you seeing them take any other products? Or is that driving broader demand as they're thinking through these issues into the other parts of your portfolio? Thanks.

They are, in fact, taking broader sets of our product. And part of that is, just to refresh your memory, I think we've been talking about this for a few years that the Affordable Care Act really requires a core system of record for payroll, requires a good benefits administration system, and a good time and attendance system. I know you've probably heard the stories about the 30 hours requirement for eligibility and some of the other factors that go into complying with ACA. So really, having a complete HCM bundle and suite is almost a necessity for ACA compliance. Now, some, I think, competitors and, in some cases, we may choose to provide ACA solutions on a standalone basis, just like we do with standalone tax. But clearly, with the very effective, direct sales force that we have, I think we are using this as an opportunity to really, as much as possible, encourage prospects and existing clients to really broaden their – what they're taking from us in terms of HCM solutions because it just makes it easier to report and comply with ACA. But it also, frankly, provides a lot of other benefits that we've been talking about for years, in terms of managing their workforce and optimizing their business. So the answer is yes, when you look at our sales results, our new business bookings results, the ACA products dragged along with them additional modules and bundles, particularly around benefits administration. We anticipate that time and attendance systems will also be something that will be of increasing interest here over the next couple of years, not just because of ACA but because of some of the recent proposals around new requirements for the measurement of overtime. So I think that this all bodes well for additional penetration of our products and we did see that in the fourth quarter.

Great, and then the follow-up is, is there anything particular about these ACA solutions that's different and would require a significant level of resources – investment and resources to handle the onboarding? Or is it just that it's a fairly new product and so you didn't have those assets in place?

Yeah, it's a fairly complex compliance solution. And we developed it really with ADP's value proposition in mind, so it goes even further than recording and measuring eligibility. And in particular at the back end, which has a lot of the filing requirements that are due to the IRS and exchange of information with the public exchanges on penalties and rebates and so forth is fairly complex. And so that requires some time. I think the delay in implementation is not specifically caused by the complexity of the ACA product implementation, but more by the volume that we have to work through, and to some degree, if clients buy a full suite of HCM services, obviously, that is a complex implementation on its own. So, that combination of it. So, don't think of the ACA product as particularly difficult to implement. It does require implementation resources, but it is more really that working through the backlog and implementing a large number of broader modules in parallel with the ACA that will cause that time delay that we give you. Also, the revenue disbursements, I'd just like to remind everybody, is also due to that strong FX pressure in the first two quarters and less FX pressure in the second half of the year, so it's a combination of that that helps with the guidance. And even though you didn't ask the question, I just want to make sure I get the information out. In the first quarter, we anticipate FX pressure of approximately 3% and in the second quarter, revenue pressure of FX by approximately 2%. So you can – then it abides in the second half of the fiscal year. And on NOI, it's a little bit less pressure but kind of in that neighborhood and so you have really a strong component of this revenue guidance is aided also by the FX impact. So I don't want to have this ACA impact to be too overstated in your thinking.

Thank you.

Thanks for taking my question. A couple, if I may. Probably first one just on the operational costs. Can you elaborate on the operational costs associated with this new bookings? Is it just primarily going to be on services or are you expecting some investments in product offerings, especially for the up-market segment?

I think just in terms of on the fourth quarter, I think we may have said in our comments, and if not, we should clarify that. We fully – even as of a few months ago, expected to – our own forecasts were to come in line with the guidance that we had provided. And so the entire miss in the fourth quarter, if you want to call it a miss, I kind of call it good news, but if you want to call it a miss, was really due to selling expense. So we had approximately $40 million in incremental selling expense, which again as I said, we'll take all day long because that's now behind us. And again, given these lifetime client values, we're going to have these clients for a long time. We're going to be collecting revenue and margin for them for a long time to come. So that's all good news. In terms of what we are planning, in terms of additional resources for implementation, as Jan said, this is all due to volume. It's not related to complexity or other issues, which again, just to reiterate, is a good news story. So we were not anticipating 13% bookings growth, otherwise we would have – and 18% for the quarter, otherwise we would've told you that last quarter. And so that requires us to ramp up some of these implementation resources purely driven by volume. But again, it's a good news story because once we get through that expenses well, then we will have the benefit of those revenues for many, many years to come. And so in terms of quantifying those numbers, as Jan said, the first half of the year, it's mainly an FX story, but we do have probably 30 – around $30 million to $40 million of incremental operating expenses in order to implement all of these incrementals. It's incremental on top of what we had already planned for in terms of implementation expense and that adds a little bit of additional pressure in the first half, but the FX is really the main story.

That's great. On the competitive landscape, can you provide any color on the changing dynamics in various segments, up-market, mid-market, the SME market and also the PEO segment? A lot of noise in the market, but want to hear your perspective on your latest offerings and how the competition is in the market?

I mean, that's a lot of ground to cover. I think the general answer is again as we prepare for these calls and we look at our win/loss ratios and we look at growth rates of new business bookings, not just for ACA but also in our strategic platforms, we feel pretty good about our competitive position. We don't see any major changes in terms of pricing behavior out in the marketplace. We're steadily growing our sales force at the rates that we had planned and I think our productivity gains have exceeded our expectations, which I think are a sign of I think getting reasonably good traction in terms of our products in the marketplace. So we're – I think we're pleased with our competitive position, but we acknowledge also that there is a lot of competition out there. And a number of new entrants and I'm sure there's plenty that have exited. But this is a vibrant, competitive market but we believe that we are doing a pretty effective job when you look at our new bookings results, which is the ultimate measure of whether or not we're winning against the competition or not.

That's very helpful. Thanks, Carlos.

Hi. Good morning, guys. Hey, in the, I guess, 7% nominal and then 9% constant currency revenue growth from this year, it looked like pays per control came in around 3%. Can you kind of disaggregate the other 6 points of constant currency growth in there?

Yes.

Client growth versus PEO-related revenue growth versus add-on modules into the base?

Sure. I mean, Jan can maybe add a little bit more detail, but I think as we went through in March Investor Conference, pays per control really adds less than 1% to our revenue growth. And we have a couple of other small items that, plus and minus, very, very small impact. The main impact of our revenue growth is the difference between our new business bookings, which then turn into starts, and then our losses. So, we refer to as starts, which is the leading indicator of our starts is our new business bookings. And so that really is the bulk of the 6% that you're referring to. And, by the way, that 6% was probably closer to 2% to 3% three years ago, because as the difference between our starts related to new business bookings and our losses has grown at a faster rate than our revenue growth, we've been able to kind of accelerate our revenue growth here. And that is with kind of a very similar pays per control number overall for three or four of those years. And we've had around 2.5% to 3% pays per control growth here for a while. I want to add, also, that for two years or three years, we had about a 1% drag from client funds interest, because that was a revenue number that was under pressure. We had one year where we had $90 million decrease in interest income and in another one, I think we had $50 million. So there are some moving parts where it's very, very hard in a call like this to get through every year, every detail. But, in general, our net new business – difference between starts and losses has been expanding and growing, and it will continue to, given these strong new business bookings we just reported, and that tends to accelerate our revenue growth. Now, versus other business models that are not recurring revenue models, our revenue growth tends to accelerate at a slower rate because of just the dynamics of the existing base, which we also love. So, we love retaining 91% of our clients. But what that means is that to accelerate that revenue growth requires multiple years of new business bookings growth in 10% or more, which is exactly what we've accomplished in the last five years. And so that's why you've seen this, I think it was probably around 2% coming from that net new business number four years or five years ago, and today more like 6% to 7%. And obviously, we think that by the second half of this fiscal year 2016, that revenue growth rate will be based on – to be fully – we were transparent in terms of providing the comments and the guidance that Jan gave, that we expect to be above our range in the second half of the year. I think that you can extrapolate from that that we will have robust revenue growth in the second half, exiting the second half of 2016 and hopefully entering into 2017.

Terrific. And the just – sorry, go ahead.

I was going to – I think your other question was about decomposing PEO impact versus impact in the marketplace. And I believe that from a growth rate decomposition standpoint, I believe it's about half and half.

Thank you all for joining us today. I think that the 2015 results as you see I think are an example of the enduring quality of the ADP business model as we continue to combine best-in-class sales operation with breakthrough products and services to try to meet the needs of our clients. I also want to take this opportunity to say that as excited as we are about the opportunities in front of us, we need to thank our associates and, in particular, our sales implementation associates for the hard work in 2015. There was a lot of extra hard work to make these new bookings results happen and there's still a lot of work in front of us here in 2016 and it would appear beyond in order to get all of this business implemented, started, and provide the clients the service they expect from us. So I appreciate their hard work as well, and I look forward to talking to you again next quarter. Thank you very much.