Automatic Data Processing Inc (ADP) — Q2 2016 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 second quarter fiscal 2016 earnings call and webcast. Carlos will begin today’s call with some opening remarks, and then Jan will take you through the quarter’s results and provide an update on what you expect for fiscal 2016. During our call today, we will reference certain non-GAAP financial measures, which we believe to be useful to investors. A reconciliation of these non-GAAP financial measures to their comparable GAAP measures is included in our earnings release and in the supplemental slides on our Investor Relations website. I would like to remind everyone that today’s call will contain forward-looking statements that refer to future events and as such involve 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 results for our second quarter of fiscal 2016, which included revenue growth of 6% or 8% on a constant dollar basis. This solid revenue growth was impacted by about 1 percentage point from the sale of our AdvancedMD business at the end of the first fiscal quarter. In the second quarter, we continued to see very strong demand for our solutions, which is evidenced by our new business bookings growth of 15%. Sales of additional human capital management modules that assist with Affordable Care Act or ACA compliance continued to contribute meaningfully to this performance, which has exceeded our expectations on a year-to-date basis. As a result, we are now forecasting new business bookings growth of at least 12% for fiscal 2016. In addition to delivering this solid performance, we have returned to shareholders an additional $780 million through share repurchases in the first half of the fiscal year. And in November of 2015, our Board approved an increase of our cash dividend of 8%, marking our 41st consecutive year of dividend increases. These actions demonstrate our commitment to shareholder-friendly actions and are intended to contribute to ADP’s goal of achieving top-quartile total shareholder return. It has been an exciting and challenging quarter for ADP and our associates as we help our clients prepare to comply with the ACA. Our teams have worked very hard to implement human capital management modules that were sold during calendar 2015, and I am pleased with the number of units started on our ACA platforms during the quarter. This is performance that we should be proud of. And I want to thank our associates for all of their hard work and dedication to our clients. We now have more than 14,000 US clients with over 50 full-time employees live on our ACA solutions. Let me put that achievement into perspective. By the end of March, employers with 50 or more employees will be required to send Form 1095-C to each of their employees describing the health insurance available to them. This is the most significant employee tax filing form that the US government has introduced since the W2, and ADP is on track to deliver about 10 million of them in the first year. Success of our ACA solution is just one example of ADP’s proficiency in dealing with complex compliance issues. From helping clients determine eligibility for Work Opportunity Tax Credits signed into law just weeks ago to preparing for anticipated changes in overtime rules, ADP’s expertise is unique in the dynamic world of HR compliance. As this complexity grows, many clients are choosing to outsource HR entirely to ADP. Our PEO business, ADP TotalSource, experienced another strong quarter, growing revenue 18% and average worksite employees by 14% in the second quarter. With this growth, we eclipsed an exciting milestone. ADP TotalSource, already the largest PEO in the US, now supports more than 400,000 client employees. In fact, if ADP TotalSource were an independent employer, it would rank among the top size private employers in the US. On the new product front, while in its early days, we are excited about the progress we are making with our analytics platform called ADP DataCloud. During the quarter, we fully released the benchmarking capability with more than 1,000 job titles, which allows our clients to generate actionable insights from workforce data embedded in their ADP HCM solutions. The benchmarking platform available for US companies draws aggregated and anonymized information from ADP’s large US client base. And of course, ADP’s data advantage is a global one. During the quarter, we introduced the ADP France National Employment Report as part of our commitment to adding deeper insights into the labor markets globally and providing businesses, governments, and others with a source of credible and valuable information. Similar to the US report, each month ADP will publish aggregated employment statistics from an anonymized sample drawing from 1.3 million workers included among ADP’s client base in France. Here are just a few examples of ADP’s leadership in the HCM category, which continues to receive positive external recognition. Most recently, Ventana Research recognized our ADP Vantage platform with its Technology Innovation Award in the Business Innovation Category. In bestowing this honor, Ventana recognized us for our ability to help employees not just work efficiently through a modern user experience but also enjoy working with the application. It’s always gratifying to see the HCM community recognize the progress we have made with our platforms. And now, I would like to give you an update on client retention. In the second quarter, ADP experienced a decline in retention of 120 basis points, which marks a sequential improvement over the first quarter. While we are disappointed to see this metric slip from its recent historical high, we are pleased that retention on our strategic platforms remains high. Consistent with the first quarter, the majority of the retention decline stems from clients on mature technology, and we still believe that market activity from employers choosing their ACA providers has introduced a change event for our clients. Although disappointing, our management team remains focused on this metric, and we have taken actions to address opportunities we have for improvement. Our progress on client migrations remains a key area of focus for us. Based on the success we have seen in our small business services unit with all clients now on ADP RUN, we believe these migrations are the right thing for our clients and for the long-term success of our business. As evidence of this, in December, we reached a milestone as we were able to sunset the PCPW platform in the mid-market, a legacy payroll product. Many clients have chosen ADP for our strength and expertise in compliance. We are in a time when the level of uncertainty in the regulatory environment is higher than it has been in decades. As a result, our clients are even more reliant on our service teams. As a management team, we remain focused on the client experience, which includes staffing our service teams to the level appropriate for assisting our clients with these HCM needs. Since last quarter, we have hired over 1,000 associates to assist our clients and expect to receive the benefit of adding these talented people in the coming months. Once again, I want to thank and congratulate these new, as well as our tenured associates for their continued contributions to our success. I’ll wrap up with one reflection from our ReThink Global HCM Conference, which I attended last week in Rome. We had Executive HR, Finance, IT, and Security leaders together to explore global perspectives around managing and cultivating the foundation of organizational success. It’s clear that winning the war for talent as well as handling compliance on a global scale are critical issues facing businesses around the world. What’s even clearer to me is that no organization is better positioned to help these clients than we are. With that, I’ll now turn the call over to Jan for a further review of our second quarter results and an update on our fiscal 2016 outlook.

Thank you very much, Carlos, and good morning, everyone. During the quarter, we realized a gain of $14 million from the sale of the building. My comments on the quarter refer to adjusted results, which exclude the impact of this gain. ADP revenues grew 6% or 8% on a constant dollar basis. This growth includes approximately 1 percentage point of pressure due to the divestiture of the AdvancedMD business, which occurred at the end of the first quarter. As Carlos mentioned, our new business bookings remained strong, posting 15% growth for the second quarter. Adjusted earnings before interest and taxes, or adjusted EBIT, grew 2% or 4% on a constant dollar basis. Adjusted EBIT margin decreased about 70 basis points compared to 18.7% in last year's second quarter. Adjusted diluted earnings per share grew 4% to $0.72 or 6% on a constant dollar basis and benefited from a lower effective tax rate and fewer shares outstanding compared with the year ago. The slower earnings growth we realized in the second quarter as well as the decline in margins were anticipated as we made planned investments to increase operational resources in support of our service teams and new product implementations. Additionally, increased selling expenses resulting from higher than anticipated new business bookings also contributed to the slower growth. In our Employer Services segment, revenues grew 3% for the quarter or 6% on a constant dollar basis. This growth was primarily driven by net new business additions in the quarter. As a reminder, new recurring revenue from ACA-related modules is not expected to impact revenue growth until the third fiscal quarter. As Carlos discussed, client revenue retention decreased 120 basis points for the quarter as we continued to experience elevated losses from clients on legacy platforms. Our same-store pays per control metric in the US grew 2.5% in the second quarter. Average client fund balances grew 4% compared to a year ago or 6% on a constant dollar basis. This growth was driven by additions from new business as well as increased pays per control. Outside the US, growth in our multinational solutions remained strong. Employer Services margin declined about 30 basis points in the quarter due to planned investments that we have made in operational resources to install new business sold and provide services to our clients, as well as higher selling expenses from continued strong new business bookings. ADP's PEO continues to perform very well with revenue growth of 18% in the second quarter. As Carlos mentioned, the PEO reached a milestone in the quarter, surpassing 400,000 average client employees to reach 403,000, which represents growth of 14%. We continue to see an increase in benefit plan participation rates from our worksite employees, a trend we expect to continue for the remainder of the fiscal year. The PEO also continues to drive margin expansion through operating efficiencies, expanding margins by approximately 20 basis points in the quarter. We are pleased with the progress we've made in the first half of fiscal year 2016, particularly with the success we have seen in new business bookings. As Carlos mentioned, we are now forecasting new business bookings growth of at least 12% compared to our prior forecast of at least 10%. As a result of this change to our expectations and the strengthening of the US dollar, which occurred towards the end of calendar year 2015, we have updated certain elements of our fiscal year 2016 forecast. ADP now expects fiscal year 2016 revenue growth of about 7% compared with our prior forecast of 7% to 8%. This change is due to higher than anticipated pressure from unfavorable foreign currency translation, which is now expected to impact our revenue growth by about 2 percentage points for the fiscal year. On a constant dollar basis, ADP now expects revenue growth of 9%, which is the higher end of our previously forecasted range of 8% to 9%. This updated forecast reflects our increased expectations for new business bookings growth as well as our confidence in the recurring revenue, which will start from new solutions sold over the past three quarters. And as a reminder, this forecast also includes almost 1 percentage point of expected pressure from the sale of the AdvancedMD business, which occurred toward the end of the first quarter. For the Employer Services segment, revenue growth is anticipated to be 4% to 5% compared with our prior forecast of 5% to 6% due to higher than anticipated pressure from unfavorable foreign currency translation. On the constant dollar basis, revenue growth is now expected to be about 7% compared with our prior forecast of 6% to 7%. Due to the strong first half performance of the PEO, ADP is now anticipating 16% to 18% growth for this segment compared to our prior forecast of 15% to 17%. Our forecast for adjusted EBIT margin expansion of 50 basis points is unchanged. On a segment level, we are now expecting margin expansion of about 75 basis points in Employer Services compared with our prior forecast of about 100 basis points. Margin expansion expectations for the PEO remain unchanged. ADP has made some minor changes to our forecast for the client funds extended investment strategy to adjust for the December 2015 increase in the Fed funds rate, as well as additional pressure anticipated from foreign currency translation that is expected to reduce our balance growth. These changes are not material to our overall forecast, and the details can be found in the supplemental slides on our Investor Relations website. Adjusted diluted earnings per share is now expected to grow 11% to 13% from the $2.89 in fiscal year 2015, compared with our prior forecast growth of 12% to 14%. This forecast reflects additional selling expenses anticipated from increased new business bookings and higher than anticipated pressure from unfavorable foreign currency translation, which is assumed to have a negative impact of 1 to 2 percentage points on earnings per share growth. On a constant dollar basis, adjusted diluted earnings per share growth is expected to be 12% to 14% compared with our prior forecast of 13% to 15% growth. These changes to our full year outlook reflect the results of our first half and our expectations for the balance of the fiscal year 2016. However, we continue to acknowledge that changing factors in the marketplace due to uncertainty around ACA compliance could put a short-term strain on our earnings growth. We remain committed to our strategy and to our clients, which we believe will yield the best results for ADP over the long run. So with that, I will turn it over to the operator to take your questions.

Thank you. You mentioned that the Sunset PCPW platform in the mid-market during the quarter, given that a lot of the churn has happened in the legacy platform, should that favorably impact retention just arithmetically as we go into the back half of the year?

So we have been keeping track of retention by platform, which is obviously where we have the information about our legacy platforms versus our strategic platforms, and there is no question that the PCPW platform as it got into its final stages of migrations had very low retention rate, but over the last 12 months that was relative to the total size of ADP and even to the size of our mid-market business, I would say that it would not be a material change. We have other legacy products that have the largest number of clients on them that are also underperforming from a retention standpoint, which are the greater focus for us than just a mathematical improvement from PCPW retirement because it's just not mathematically significant because it has been waning over the last 12 months, even as we got close to the final retirement of the final clients.

I see. So, I mean, if you step back and you just look at some of the changes, Carlos, in the enterprise IP staff impact that’s having on customer buying patterns, with that as a backdrop, are you seeing any change in the way the market is segmenting between those that choose a platform like ADP with services wrapped around it and the software-only platform? And if you are, what are the key differentiators that are changing between the different buyers?

I think if you take our new business bookings as an indication, it would seem that there is still quite a lot of strength and interest in buying a solution that has services wrapped around it. And I think the fact that we’ve had these robust sales around ACA compliance, which does include a service component in terms of assistance with compliance, not just providing the software, reinforces our belief that we think our technology and services-enabled model is the right model. It doesn’t mean that other models are not good and that other people won’t choose other models, but we like our approach, and it seems to be frankly right now gaining traction in the marketplace.

Very good. Thank you.

Hi, this is Jay Hanna covering for Gary today. I just had a question regarding the buyback. Are you anticipating using any additional operating cash flow in addition to the $2 billion you already planned on the buyback, or are you happy with the offering covering most of the buyback for the remainder over the next two years? Thanks.

Jay, you will see our cash balances are slightly below $3 billion at the end of the quarter, and we stopped really thinking in ADP about separating our initial debt offering from the cash at hand that is generated out of the operating cash flow. So we continue on our steady path of returning the cash to shareholders via an ongoing share buyback program and will proceed to work those cash balances down over time.

Okay, thank you.

Thank you. Good morning. Could you remind us where you are in the migration of midmarket clients to Workforce Now, so what percentage are still on legacy platforms? And are the retention issues largely concentrated with those mid-market customers?

Sara, we have around 75,000 clients in the mid-market and we have about 45,000 clients, so around 60% or so on the latest version of Workforce Now. This gives answers also to David’s first question around the impact that the settlement of PCPW had. It was a small client base, and we still have a large number of clients to be migrated in the remainder of this fiscal year and the next fiscal year. Those are big milestones, and we have communicated prior that we are anticipating to make significant progress towards the end of fiscal year '17. That's still our plan.

Okay. And just from a retention perspective, is that really where the primary issue is?

I think that’s fair. I think that’s what we said in the first quarter. There has really been no material change, and again, I think that consistent with what we said in the first quarter, I think the piece of migrations was quite accelerated in the first quarter versus the prior year first quarter. And in the second quarter, it was the same, in part because we had a lot of migrations already in the pipeline and we had momentum. I think it’s safe to say that we were on kind of in the same place, if you will, in terms of the pressure that migrations had the benefit of hindsight, and I take some accountability or I take all the accountability as the boss for this, that migration is a very big priority for us, but not at any cost. We have put a lot of focus and pressure on the organization as per usual, and the organization responded to the boss. I think we may have overdone it and created an inordinate amount of pressure on the organization as a result of the piece of migrations. I think we also have mentioned that I think the ACA decisions that some of our mid-market clients were making because in the up-market, these are not decisions that you can make over the course of two or three months, and in the low end of the market, it doesn’t apply, because companies under 50 employees don’t have to comply. So it really is a mid-market issue, and we think it had an impact. We just don't know how to measure that. Lastly, I also acknowledge that we exited the last fiscal year with not enough resources to handle everything I just mentioned, the extra activity around migrations and the activity and noise around ACA. We have added resources, and we've taken actions. This is not the first time - ACA is definitely a new factor and the pace of migrations is something that, with the benefit of hindsight, we probably stepped on the accelerator a little too fast, but we've been through this type of event before. It seems similar to prior times where there's really no concentration of any one particular competitor, or any pattern that we can see, other than self-inflicted wounds that are reparable, and we are in the process of repairing them, and we see some signs of improvement. So despite the fact that we still have 40% of the clients in the mid-market, it doesn't necessarily mean that we will have to continue to see it, and we don't plan on continuing. We obviously have no forecast and we don't provide guidance around retention, but I can assure you that we don’t believe that we have to accept the retention levels that we have on our legacy platforms today. So we are not just standing idly by and continuing on the same pace of migrations with the same actions, and we don't expect the same results going forward.

Great. Thank you.

Hi, good morning, guys. Can you give any qualitative feedback that you get back from the sales teams out there around how clients are thinking about the ACA implementation and whether this is sort of it as we go through this season or whether you expect or they are anticipating making some additional changes over the next year?

Maybe two comments. Number one, the number of clients that we now have and are eligible which is part of our client base, represents approximately half of our client base. We still have about half of our client base that we expect to offer some future opportunities, although probably at a slower rate than we expect in the first year to sell the product. Secondly, the product is for ongoing use, so it is not really just implementation and printing of the tax form. It is an advisory tool that helps clients manage their liabilities and ensure compliance on an ongoing basis, so it's really just a component of an HCM module that clients use, and we expect the clients to benefit from it throughout the year as they keep employees in compliance.

Hi, good morning. Thank you for taking my question. I guess I was wondering if you could touch more on the new business bookings and discuss the trends that you are seeing in terms of winning new clients versus expanding and up-selling with existing clients? So what’s been the biggest driver of bookings beyond the ACA stuff that you are seeing? Thanks.

Again, given that we historically don't get into a lot of detail for competitive reasons on our new business bookings in terms of breaking by segment or by product, but it's important for you to understand directionally. The wording we've used in my comments or in Jan’s opening comments is that ACA added to our new business bookings growth and exceeded our expectations in terms of bookings. I guess an indirect way of answering your question is that the long-term 8% to 10% new bookings growth that we strive for absent changes would be safe to say that this year we’re on track to achieve that, and that performance above and beyond that would be attributable to ACA. Of course that's only with six months done that could change in the third quarter and fourth quarter. But we believe, based on the information we have and what we see in terms of market activity, that that view is fair. It's also important for all of you to understand that, as Jan said, even though we still have an opportunity in front of us, the opportunity is obviously smaller now than it was in the prior year and so we don't expect to get as much lift, we hope we do, but we won’t expect to get as much lift from ACA in fiscal 2017. Having said all that, the most exciting thing for me around ACA and this event in general is that it should and we hope will drive companies to look at the full HCM bundle. ACA compliance requires having information not just about how many employees and what they're paid but also about their time, how many hours they work per week, whether they have benefits or not. So, having for example a Workforce Now platform like we have in the mid-market really helps a lot with ACA compliance. Not to mention that, as we rollout analytics tools and other things to help manage people better, those are also attractive features. The combination of the improvements in our user experience, the information that we provide through analytics, plus the advantages you get through compliance, we believe will generate new business bookings growth in terms of clients and also sales dollars into the future, even if the tailwind we get from ACA diminishes a little bit in fiscal 2017.

Thank you, that's helpful. Just as a follow-up, I was wondering if you could talk a little bit more on the mix shift you’re seeing in terms of the strong new business bookings and still some challenges with the retention. Any margin implications we should be thinking about here longer term from that mix shift? Thank you.

As you saw our adjustment for the forecasts on margins is driven primarily by two factors: higher selling expense which is above our long-term expectation of new business bookings growth, and FX. You saw that we upped our revenue guidance for the year on a constant dollar basis, which kind of takes into account the cost for higher selling more clients and slightly elevated retention, if you will. The recent adjustment of the margin has mostly to do with FX and selling expense.

Mathematically, with the information that we have today and baked into our forecast is an assumption that, despite the pressure we're getting from retention, our revenue growth is accelerating as a result of our strong new business bookings growth. Net-net, Jan and I are happy, and I think the organization is very happy because obviously that growth rate, our plan is to get retention stabilized and make improvements in that area as you've heard. Assuming that we do that, an acceleration in our long-term revenue growth rate is very positive for ADP because of the recurring revenue nature and the lifetime value of these clients that we're bringing in.

Thank you, I appreciate the detail you gave on the remaining conversion schedule, the Workforce Now. Just taking a step back, should we expect client retention to begin to improve again once you complete the conversion to Workforce Now, or are you just in general seeing much greater competition in the mid-market? So retention should be something we should keep an eye on, even post the conversion to Workforce Now?

Again, consistent with what we mentioned in the first quarter and I think mentioned a few minutes ago, we have information around both our sales successes against competitors and we also have information around our losses against competitors. Unless all of a sudden, all competitors got together and did something different, there would be nothing in our information that shows that this is a competitive issue in terms of what's driving our retention. I think that’s one part of the answer to the question. So again, note we don't see any changes in the pricing environment or in the competitive environment. In terms of the conversions and migrations, it's clear, as we're pointing out, that we're getting pressure on legacy platforms. It doesn't mean that we can have a better retention rate even on the legacy platform. So take our down market SBS business as an example. In that business, we went through a migration similar to the one we're describing in majors over the course of multiple years, and as in this case, you have to balance speed with the desire to get done; and in that case, I think we've felt some level of pressure around retention at various points, and when we were done with that migration, our retention rates improved. They just didn't stabilize but they improved. But in the case of that client migration, we did not encounter what we term as self-inflicted wounds that we're having here that we believe we can address and correct as we’re going through the migration. The problem is that there is a lot of uncertainty and it would be irresponsible for us to make definitive statements because we just don't know for sure. However, I want to make sure that everyone is clear that we believe we can impact the retention rates in the mid-market even as we're doing these migrations. And also everyone should understand that we're not going to stop doing the migrations, but we will moderate; we are still on track to be finished by the end of fiscal '17, which was our original plan, but the pace at which we do these and the timing of when we do them is something that we will do on our terms in order to maximize the balance between client retention and the long-term health of our business and what's right for our clients.

Thank you, that's very helpful. Just a quick follow-up. Recognizing you don't give guidance beyond the current year, I'm just trying to understand clearly the bookings growth has been terrific and well above expectations. Client retention possibly could be an issue going into '17 as you continue to convert from legacy mid-market onto Workforce Now. Should we think of the retention issue offsetting the stronger bookings trajectory, or should we think that the retention issue potentially could be an issue for FY17 and beyond?

I’ll let Jan make a comment, but you should back to the discussion we had about PCPW—just if you think about this mathematically: as we continue to migrate clients, the number of clients on legacy platforms becomes smaller and smaller and mathematically has a smaller impact on our retention rate. I would just caution against a linear assumption around retention into 2017, even though that's clearly a possibility. I would caution against making that assumption because that base of clients is becoming smaller and will have a smaller impact on our overall retention rate. I also want to just reiterate what we just said earlier: our new business bookings is more than offsetting the pressure we're having from retention. Our revenue growth rate has moved up in terms of our guidance for this year, and we're very, very happy with where we are versus our long-term range. We have said in the first quarter and we'll say again today that in the second half of this fiscal year, on a constant dollar basis, if you adjust for the AdvancedMD disposition which typically would have been included in discontinued ops but, because of accounting changes, is not in discontinued ops, if you adjust for that, we will be at the high end of our long-term revenue growth guidance.

While we don't give guidance for fiscal year '17, I have one more comment to emphasize: retention of our strategic platforms remains very good. So, out of that, you can deduct that as that base is growing, there should be a mathematical re-weighing of the retention rate that will help and plus what we hope to achieve an improvement of retention in the legacy base. Those things together, plus our revenue update guidance, I think sends you the signal about how we think about the impact of retention.

Thanks for taking my question. Carlos, just on the client migration levels, can you remind us what was the client migration level in mid-market beginning of calendar 2015? And also a small clarification—is the FY17 objective only for mid-market or does that apply to upmarket as well?

We migrated almost 7,000 clients in the first quarter of fiscal year '16 in the mid-market and close to 4,000 clients in the second quarter. Year-end slowed migrations down a little bit for the reasons that Carlos described, obviously tempered a little bit in the second half of the last quarter. That migration pace compared to the prior year was accelerated as we increased the resources available to them. You should expect basically continued focus on migrations, maybe at a similar level as last year, maybe slightly accelerated. We will determine that as operations allow to maintain our goal of finishing migrations, the vast majority of migrations in the mid-market by the end of fiscal year '17. The upmarket migrations will be a multi-year effort, and we're going to proceed together in partnership with our clients, and I don't think we're going to provide specific migration numbers for the upmarket.

Jan, this question is definitely for you. Just on the margins, obviously the ACA business is the mix of products, services, and various offerings from your end. Can you clarify if the margin profile of the ACA business is going to be post all these implementation costs and higher selling costs? Will the margin profile be closer to the products business or closer to the PEO business?

That is a loaded question because the PEO has pass-throughs in its P&L, and if you exclude the pass-throughs from the P&L, PEO margins you'll see are actually ahead of our ES margins. The characteristic of ADP is actually very similar between our product sets, and even our HR BPO products, excluding the pass-throughs have margin characteristics that are roughly in line for most of the cases with our overall margin profiles. So if you think about ADP as a kind of growth margin for an ongoing contribution of the recurring revenue model, the ACA product is expected to have a margin profile very similar to the rest of our product set.

Hello, this is Ashish Sabadra calling on behalf of Bryan Keane. A quick question on the PEO; the gap between revenues and the worksite that was 4% this quarter. On the last call, you had mentioned that it may normalize to 2 to 3 points, but it looks like it's trending north of it. I was just wondering if you continue to see good traction there on the benefit adoption, what's driving it, and how do you think about that gap going forward for the rest of the year?

I think you hit the nail on the head, which has been the benefits. The number of clients selecting and the number of worksite employees selecting benefits does have an impact on the growth of our top-line revenue versus worksite employee growth because of the pass-through nature of the benefits revenues. We do have a chart that shows—and I think we may have even mentioned it in our comments in the script—that benefits participation rates are trending upwards. It had been trending downwards several years ago pre-ACA, and now it's trending upwards. It’s not a dramatic increase, but it's enough to help drive additional differences between our worksite employee growth and our top-line revenue growth, which is why it’s so important until we get the margin dynamics of that business, excluding those pass-through revenues.

That's great color. And then quickly on pricing—you're in the peak selling season. Are you seeing any shift in the pricing environment?

No. We observe pricing very closely. Two factors are important: our discounting levels, as we distribute new business in our new business bookings, and those discounting levels have been very consistent with prior quarters, so no change in the marketplace. Secondly, we indicated that our long-term goal is to have price increases to our client base closer to 50 basis points than the historic 100 basis points, and we're trending right along that—in between this year, a little bit less than 1% of price increases to our client base, unchanged and 100% in line with our expectations.

Okay, thanks.

Hi, Carlos and Jan. Thanks for taking the question. I just wanted to ask a couple of clarifying questions about new business bookings. First on your back half guidance, it seems to bake in 10% growth; is that just conservatism given you’re not really sure what demand for ACA would look like in the next couple of quarters, or are you actually already seeing some slowdown there? Secondly, I know new business bookings is at the run rate revenue number, so wouldn't there be FX impact in there as well? Therefore, with newer bookings a couple of points higher, or would it be very similar given a lot of that came from the ACA product, which is mostly US? Thanks.

I think, at the risk of getting into trouble, I think the answer is yes to both questions, but it is what our forecast is. You’re mathematically correct about second-half bookings growth, so I don't want to say much more other than it’s accurate that we have no real definite sense of what's going to happen in terms of the tailwind around ACA in the second half, and hence it is what it is in terms of our forecast. The second part of your question is also accurate; I would remind you that our bookings outside of the US are not a large part of the overall sales result, but there would be some impact from FX in it. That would be a fair statement. But I would not quantify a couple of percentage points extra growth in new business bookings.

That's fair. Maybe one point to mention: we finished our last fiscal year 2015 in the fourth quarter with a very, very strong quarter, so there is a big growth over in the fourth quarter that you would also have to consider. So that probably factored into our overall expectations.

Got it. Thanks. And then maybe a high-level question on PEO. It has been growing at a healthy pace for the past 15 years or so since you've been in the business, and I imagine a lot of your customer base has now been educated about it or has heard of it, but at the same time, the value prop seems to be increasing over time. So just in that context, is there a way that you can help us think about maybe what inning we’re in in terms of double-digit growth, or is it just really hard to tell, and it depends too much on regulation and insurance and so forth?

I am not going to attempt to answer that question, because if you had asked me that question six or seven years ago, I would have probably said that it was going to get really, really hard because of how big the business had gone. We're selling now just each month, the number of worksite employees we have to sell in order to maintain this growth rate is close to what the size of the business was when I first entered that business and started my career in a PEO before I got acquired by ADP. So I’m the wrong person to answer that question because it is large numbers, and it's becoming—as we said—it’s now one of the largest private employers in the US, but it is very strong with strong momentum and a very talented management team. So we definitely don't have any plans to slow it down, as there is no slowdown because on a per client, per worksite employee basis, that business is a winner for ADP. We convert about half of the business that starts in PEO, and comes from existing ADP clients that we upsell, and that's an incredibly powerful formula for us because I think we are one of the few that have that advantage of having the Salesforce and the installed client base that we have to have the ability to upgrade. We’re very, very happy with that business, and we hope that it continues to grow at these robust rates.

Understood. Thank you very much.

Thanks. Just two questions—on the upper end of the market or the enterprise side of the market, what's going on there in terms of sales and retention? Any change in trend there given the macro?

Again, I will say that we try to avoid for a variety of reasons getting into specifics by segment or by business unit. But I think it's safe to say that we don't see any—within that business, you do have to look at it, I think multiple quarters. One month or a couple of months does not make a trend, just because of the lumpiness of that business. However, I think if you look at our upmarket business overall, I don't think we see any material change. I think our vantage platform is still selling well. Our multinational international platform is selling well. I think, on the retention front, there is really nothing to report, either in terms of any trends. So I think that we’re satisfied with that business in terms of well, obviously we'd love to have more, but I don't think there is anything material to report in the upmarket.

Thank you for that. And then just on the PEO, just one question there—with I guess Paychex, they’ve introduced a minimum premium plan, and I guess TriNet is also looking to make some changes in how they handle the risk side of insurance. Given all these changes, does that create share opportunities for ADP, and are you considering making some changes as well? I'm assuming not, but I figured that out, given some of the changes happening in the marketplace.

We’re always looking at all of our options, but there are no current plans to make any changes, and we have really no way of knowing what competitive impact it's going to have in terms of what other people are doing.

Good morning, and thanks for taking my questions as well. Just on the PEO side, you mentioned that half of the clients are basically existing payroll clients. Can you describe a little bit how much more profitable or what the revenue uptick is when we typically go through a conversion from a payroll-centric to a more comprehensive PEO solution?

Excluding pass-throughs, it obviously depends on what the client had when they were a payroll client and depends on what the pricing is when they become a PEO client, but you can think of the range being between 8 and 10 times the multiple of revenue on a net basis, excluding pass-throughs.

That's great. And then—when we talk about the new bookings, how much of the new bookings is from upsells of either modules or versus brand-new clients?

Historically, our mix has been 50-50, about 50% of bookings roughly toward new client counts or logos and 50% of upsell. However, with the elevated levels of ACA selling, the mix has shifted a little bit because most of the ACA has been really selling to our existing client base. In the current year, that mix is a little shifted, but as we indicated, without ACA, we would have grown with our long-term expectation of new business bookings going up 8% to 10% for that component. That roughly holds in line.

Great. And then you mentioned 14,000 clients using you for the ACA. Can you give us a percentage of the core target there in terms of the companies, above 50 employees but not overly huge, that are using you for the ACA? How far penetrated are you?

I think we have captured about half of the opportunity in total. At the large market, this is a smaller number, so at these ranges it doesn't really make that big of a difference to include them or not include them. So I think we have captured about half the opportunity.

We have time for one more question.

Yeah. Thanks for squeezing me in. With the fall selling season over, could you talk about if there are any qualitative differences, like more active than normal or people frozen because of the ACA?

I think based on our results, excitement would be the qualitative description.

Okay. So you are at success. And then you mentioned that the ACA revenue would be more felt in the third quarter, and that was maybe for the modules. I know you’ve been charging monthly to some people; could you just talk about how the revenue from ACA will dovetail in?

Yes, it is a monthly per employee charge that the clients start to incur with really January or February, depending on when they launch their product. You will see the full swing of our implementations that we finished in December into January by building up, and that's basically reflected in our revenue guidance. As Carlos indicated, we will reach by the end of the year the double-digit revenue growth, 10% revenue growth if you adjust for FX impact from the AdvancedMD business, so you will see it kind of from our current organic growth rate accelerating to those levels in order for us to make the full-year guidance.

So thank you all for joining the call today. We’re obviously halfway through this fiscal year, and I think we’ve described some of the challenges we still have ahead of us, but obviously we’re very happy with the progress we've made. I don't usually use the word exciting, but I just used it in the last question to describe how we feel about our new business bookings growth. We're clearly getting some help from ACA compliance, but it’s really an incredible achievement to have the kind of bookings growth that we have this year on top of last year. I also just want to remind you that we still remain committed to the shareholder-friendly options that we've always been committed to around share repurchases and increasing our dividend. I want to end this by, besides thanking all of you for joining us and thanking you for your interest in ADP, saying that there has always been a strong work ethic here at ADP. Over the last 12 months, it has been a challenging environment for our associates with the ACA rollout and some of the challenges we've had around resource constraints. I once again would like to thank all of our associates for their dedication to ADP and more importantly to our clients. Thank you.