Automatic Data Processing Inc (ADP) — Q4 2016 Earnings Call Transcript

Thank you. Good morning, everyone. This is Sara Grilliot, ADP's Vice President of 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 fourth quarter FY '16 earnings call and webcast. Before we begin, you may have noticed in the slide presentation posted on our website that we included the details of our client funds available for sale portfolios as of June 30th, 2016, which shows the embedded book yields of the portfolio by year of maturity. This chart is in the appendix of the presentation and is provided for your information. 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. Before Carlos begins, 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. Now let me turn the call over to Carlos.

Thank you, Sara, and good morning everyone. Thanks for joining our call and for your continued interest in ADP. This morning we reported solid results for the fourth quarter and full FY '16, with revenue up 8% for the quarter and 7% for the year. Excluding the impacts of foreign currency translation, FY '16 revenue grew 8%. Please keep in mind that our 8% growth in FY '16 was negatively impacted by about 1% from the sale of our AdvancedMD business which occurred at the end of the first fiscal quarter. In addition to the solid FY '16 revenue growth, I'm very pleased with the robust new business bookings results we experienced during FY '16, posting 12% growth for the year. This represents $1.75 billion in new recurring revenue generated by our sales force during the fiscal year. Strong sales of human capital management modules that assist clients in complying with the Affordable Care Act contributed meaningfully to the outperformance we've seen in new business bookings for the past two fiscal years. This important regulatory change impacted the ATM industry in material ways. ADP responded well and sold our ACA compliance solutions to about half of our addressable base in a relatively short period of time. Because of this very strong recent performance and the resulting difficult compare, we expect FY '17 new business bookings to grow 4% to 6% from the $1.75 billion sold in FY '16. If achieved, this will result in a three-year compounded annual growth rate of 9%, which is within our long-term expected range of 8% to 10%. FY '16 was an exciting year that showcased ADP's agility as we continued to adapt to the dynamic needs of our clients. When we look back at our progress, it's clear that the long-term trends we see with respect to the changing nature of how work is done, the increasing complexity of regulatory compliance, the trend toward harnessing the power of big data in HR, and the need to work seamlessly across geographic borders are all having positive impacts on our success. We've responded to these trends in many ways during the year. For example, across the portfolio, we've dramatically improved the user experience of our clients' employees. In doing so, we've made our products easier to use and more consistent with how employees engage with consumer technology and social media. If your company is an ADP client, I invite you to join the more than eight million users of ADP's mobile app to experience this for yourself. We've leveraged our unique data set of 26 billion payroll records to introduce significant new data analytics capabilities. Since introducing ADP DataCloud just over one year ago, we now have more than 2,500 clients using this solution to generate actionable insights that help address workforce productivity, contribute to talent development, and assist with employee retention. We've expanded our capabilities geographically and can now meet the payroll processing and compliance needs of companies with operations in more than 110 countries and territories, which is a key differentiator in our industry. And we've met the challenges presented by the implementation of the Affordable Care Act in the U.S. With strong demand for our ACA solutions, we made investments in operational resources and successfully helped more than 25,000 clients process more than 10 million Form 1095-Cs, the most significant new employee tax form introduced by the IRS since the W-2. As we've discussed, we believe our investments to innovate and simplify our portfolio are essential for our long-term success. We believe our strategic platforms now deliver best-in-class HCM capabilities in each of the markets they serve, and we've seen solid retention rates from clients on our strategic platforms. Therefore, continuing to upgrade clients to our modern cloud solutions remains a critical area of focus for us and is the right thing to do for our clients. Today, all of our small business clients are on the RUN platform and during the fourth quarter we increased the pace of our client migrations in the mid-market and now have about 49,000 clients on the latest versions of Workforce Now. With two-thirds of this base now upgraded, we expect the balance of our Workforce Now clients to be transitioned to the current platform by the end of FY '17. As we continue to move clients onto our strategic platforms and have more clients engaging ADP for multiple services across the HCM spectrum, we're embarking on a path to simplify our service model for our associates and our clients. Over the past several years, our technology platforms have evolved to meet the dynamic needs of our clients, who are choosing to engage in a more comprehensive way with their HCM providers. As a result of this shift, a new approach to service is essential to support the HCM Company that we've become and extend our leadership in this growing market and I'm therefore excited to tell you about a service initiative we're kicking off in FY '17. This new initiative is designed to better align our service organization to work across traditional lines, leverage best-in-class service tools and processes, and establish teams with expertise across the HCM spectrum. We believe this will enhance the client experience and at the same time allow us to better transfer knowledge among these service teams and offers robust career opportunities within the service organization, all of which benefits our clients and our associates. As we begin to build out this new service model, we believe there's a benefit to be gained by collocating certain U.S. service capabilities at existing and new ADP locations in the U.S. that have the scale to support the strategy. We have had positive experiences creating centers like these at sites such as El Paso, Texas; Augusta, Georgia; among other places. We've recently selected Norfolk, Virginia, and Maitland, Florida, near Orlando, as our next two locations and have started building cross-functional service teams at both sites. We will announce a third new site in the western part of the U.S. later this year. As part of this initiative, we will focus on building service capabilities within these and our existing other locations while streamlining our geographic footprint. In connection with these efforts, ADP will be making certain investments in FY '17 which are expected to put some pressure on our margin expansion goals for the year. Jan will provide more detail when he reviews our FY '17 outlook. However, we do expect our margin expansion in FY '17 to be lower than our long-term goal of 50 to 75 basis points as we make these important investments. Now let's spend a few moments on retention. During the fourth quarter, we experienced a retention decline of 80 basis points and for the full fiscal year, retention declined about 1 point to 90.5%. Similar to previous quarters, we continue to see a concentration of losses from clients who are still on legacy technology, and while we have seen some benefits from investments we've made in service during the early part of FY '16, we continue to experience variability in our retention metric. In closing, FY '16 was an exciting and challenging year for ADP. We achieved strong revenue growth driven by sales of additional HCM modules to support clients with the new ACA requirements. We invested in implementation and operational resources to support this revenue growth while still delivering solid margin expansion, and we did this while remaining consistent with our commitment to shareholder-friendly actions. During FY '16, we returned about $2.1 billion in cash through dividends and share repurchases and increased our dividend for the 41st consecutive year. 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 turn the call over to Jan who will review our FY '16 financials and share our FY '17 outlook.

Thank you very much, Carlos, and good morning everyone. During the fourth quarter, we took a severance charge of $48 million that was related to a broad-based workforce optimization effort. Certain non-GAAP measures and my commentary to follow exclude the impact of this charge, as well as certain other one-time items recognized earlier in the fiscal year. A reconciliation of these non-GAAP measures can be found in this morning's press release and in the supplemental charts of our Investor Relations website. As Carlos mentioned, FY '16 was a successful year for ADP. New business bookings grew 12% to $1.75 billion sold. Revenues grew 7% to $11.7 billion. Excluding the impacts of foreign currency translation, revenues grew 8% for the year. On a reported basis, net earnings grew 8% and diluted earnings per share grew 12%. Adjusted earnings before interest and taxes, or adjusted EBIT, grew 10%, or 11% on a constant dollar basis. For the year, adjusted EBIT margin expanded 60 basis points from the 18.8% in FY '15. I'm pleased with this solid margin expansion, which includes the impact of investments and operational resources that were made during the fiscal year as we supported our clients through the first year of the ACA-related reporting requirements. Adjusted diluted earnings per share grew 13% to $3.26, reflecting a lower effective tax rate and fewer shares outstanding compared with a year ago. In addition to delivering this solid operating performance, we have paid more than $900 million in dividends and returned about $1.2 billion through share repurchases for FY '16. During the fourth quarter, ADP returned $100 million to shareholders through share repurchases, which was at a reduced pace compared with prior quarters. Market conditions were not a factor and our longstanding commitment to return cash to our shareholders remains unchanged. So now, for a discussion of our segment results. In our employee services segment, revenues grew 5% for the year or 6% on a constant dollar basis. This growth was driven by additions to new recurring revenues during the fiscal year from strong new business bookings sold. As Carlos discussed, client revenue retention decreased 80 basis points in the fourth quarter, and for the year, revenue retention declined about 1 point to 90.5%. Our same-store pace for control in the U.S. grew 2.5% for the fiscal year. Average client fund balances grew 3% for the year or 4% on a constant dollar basis. This growth was slower than in prior years, primarily related to the declines of state unemployment insurance collections as the result of an improving labor market in the U.S. This, in combination with the impact from client losses experienced at the end of the year, has put added pressure on the client funds balance growth. Our business outside of North America continues to perform well despite an uncertain global environment. This performance is driven by continued strong demand for our multinational solutions, which serve businesses of all sizes and are now the largest contributor to our sales outside of North America. Employee services segment margin increased about 60 basis points for the fiscal year. This increase was driven by reduced selling expenses in the fourth quarter compared to last year's fourth quarter, partially offset by the negative impact of planned investments made throughout the year to support our clients with the first year of ACA compliance. The PEO had a successful year, posting revenue growth of 16% and average worksite employee growth of 13%. Let me make a few comments about fourth quarter revenue growth in the PEO, which trended lower at 13% growth compared with the previous three quarters in FY '16. This revenue growth deceleration was based on two factors. First, regarding our gross revenues, which include pass-throughs, our clients experienced a favorable impact from lower healthcare renewal premiums during our fourth quarter, which contributed to a lower relative gross in our pass-through revenues. Second, in the fourth quarter, we noticed some variability in the timing of payrolls run by our clients. This type of timing variability has occurred in the past and should not be viewed as an indicator of any underlying change in the fundamentals of the business. We remain pleased with the performance of our PEO, which had strong worksite employee growth of 13%, and we're happy to see that the PEO also delivered strong margin expansion of approximately 70 basis points for FY '16, which was primarily driven by operating and selling efficiencies from increased productivity. This is solid overall performance for FY '16, with strong new business bookings yielding healthy revenue growth and solid margin expansion despite the initial investments we made during the year. I'm pleased with our results and will now take you through our expectations for FY '17. As Carlos mentioned, for FY '17, we're expecting new business bookings growth of 4% to 6% from $1.75 billion sold in FY '16. We anticipate total revenue growth of 7% to 9% for the year, which is not expected to be significantly impacted by foreign currency translation based on current rates. This forecast assumes 4% to 5% revenue growth in the employer services segment and growth in pays-per-control of 2.5%. Revenue growth for the PEO is expected to be 14% to 16%. ADP's adjusted EBIT margin is expected to expand 25 to 50 basis points from the 19.5% in FY '16, which is below our goal of 50 to 75 basis points of margin expansion over the longer run. We're still committed to this margin improvement goal over the longer term, but as Carlos mentioned, we're making investments in FY '17 to align our service model in support of our technology strategy. We expect these operational investments will put about 20 basis points of pressure on our FY '17 margins, and as a result of these build-out of the new facilities, total expenditures/capital expenditures for FY '17, I expect it to be about $250 million. In addition to these investments, we also anticipate certain one-time charges of $100 million to $125 million throughout FY '18. Of this, $45 million is expected to be incurred during the first quarter of FY '17 and $45 million in the latter part of the year, with the remainder expected in FY '18. These charges are excluded from our FY '17 forecast for adjusted EBIT margin expansion and from our adjusted diluted earnings per share forecast. A reconciliation of these metrics can be found in this morning's press release and in the supplemental slides on our Investor Relations website. On a segment level, we anticipate pre-tax margin expansion of about 50 basis points for employer services and 50 to 75 basis points of margin expansion in the PEO. On a reported basis, diluted earnings per share is expected to grow 6% to 8% compared with the $3.25 FY '15. Adjusted diluted earnings per share is expected to grow 10% to 12% from the adjusted $3.26 in FY '16 and contemplates an adjusted effective tax rate of 33.3%, consistent with the 33.3% in FY '16. In accordance with our continued shareholder-friendly actions and our intention to return excess cash to shareholders, our earnings per share forecast assumes that excess cash of $1 billion to $1.4 billion will be returned via share repurchases during FY '17. This forecasted range includes anticipated share repurchases required to offset employee benefit plan issuance, and the timing of these share repurchases is dependent upon market conditions. So with that, I will take you through our forecast for the client fund extended investment strategy. First, a reminder that the objectives of our investment strategy remain the safety, liquidity, and diversification of our assets. As of the end of the fiscal year, 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 lower end of this range. We continue to base the interest rate assumptions in our forecast on the Fed funds future contracts for the clients' short and corporate cash portfolios and the forward year curves of the three-and-a-half and five-year U.S. government agency forward year curves for the client and corporate extended and the client long portfolios, respectively. And as we do not believe it is possible to accurately predict future interest rates, the shape of the year curve, and the new bond issuance behavior are corporate and other issuers. For FY '17, we anticipate growth in the average client funds balances of 2% to 4% from the $22.4 billion in FY '16. We anticipate that the yield of the client fund portfolio will remain about flat at 1.7%, compared with FY '16. These factors are expected to result in an increase of up to $5 million to client fund interest revenue. The total contribution from the client funds extended investment strategy is expected to be about flat to FY '17. The detail of this forecast is available in the supplemental slides on our website. And before we take your questions, I wanted to let you know that Sara will be taking a new role within ADP finance as a CFO of one of our business units. I want to thank Sara for her contributions leading our investor relations program and welcome our new Head of Investor Relations, Christian Greyenbuhl, who has recently led ADP's global accounting team. So with that, I will turn it over to the operator to take your questions.

I was wondering if you could maybe give us an update on the migrations in the mid-market segment. I think you said 45,000 had already migrated. It sounds like maybe that's under 40,000 clients to go. Can you maybe talk about any changes you're seeing in terms of, as you make those migrations, whether you're seeing any kind of additional client losses and maybe you can just talk about the pace of migrations over the course of FY '17, whether that's going to be back or front-half loaded or just ratable over the course of the year?

Sure. I think the number was really 49,000 that have been migrated, and I think we have about 25,000 to go. In terms of the other questions, you know, we did have some time to kind of reset how we were doing migrations and the pace also based on, you know, I mentioned that there were three factors that I think impacted our retention back over the last three quarters, and we think one of them was the pace of migrations and also the execution around migrations. So a lot of work was done during what we call our year-end blackout because we really prefer not to do migrations anyway in the call it November to January, February time frame, because there are so many things going on at the calendar year-end in a typical HCM payroll company. And so that gave us a little bit of time for those folks to focus on kind of stabilizing that organization and rethinking what the proper pace is, and to put it in perspective, we migrated approximately 4,000 clients during the quarter. And when we experienced challenges with some of the migrations, we were up as high as 7,000 in a quarter. This is back in the beginning of this fiscal year. So hopefully that gives you a little bit of color, and I think the overall comment is clearly I think our competitors are fishing in those waters, because we see it in the numbers in terms of our losses being concentrated in our legacy platforms. And we're trying to reduce the size of the fishing pond, so there's still some variability there in the retention. But I think we've gotten better at how we're doing the migrations, and I think our pace is more manageable and I think easier for us to control at this point.

This is Christin Chen for Jason. Thank you for taking my question. We were under the impression in FY '16, your bookings growth in excess of the traditional 8% to 10% range was mostly due to ACA. Just looking at the 4% to 6% for FY '17, it would imply a slowdown of, you know, kind of more than just what the tough comps from ACA would imply. Can you just talk about the things you're seeing or the underlying drivers behind that deceleration for this metric? Thanks.

Sure, I will let maybe Jan talk a little about the math, but I think the math does kind of work in within maybe 0.5 point to 1 point, one way or the other depending on your perspective. Because we don't provide exact numbers. But we want to reiterate that we had strong growth in new business bookings this year excluding ACA. And then mathematically, what that creates is a grow-over for next year. I think I've previously said and we will say today that we don't expect the same level of new business bookings from ACA, since we've already sold half of our addressable market. Even if we assume that we sell half of the remaining half next year, that creates a mathematical grow-over issue for us. I'll let maybe Jan comment on the math. But I think the message you should hear from us is that we believe over the course of three years, as you can imagine, we look very carefully about, is the sales strength coming from core operations, is it coming from additional business, is it coming from ACA, and we feel pretty good on a three-year compounded basis about where our new business bookings growth is right now.

Yes, thank you, Carlos. And there are two different methods you can look at this, you could exclude the ACA impact on all three years and look at the underlying growth of the rest of our new business bookings. We would be delivering exactly what we have said are in line with our long-term goals expectations of 8% to 10% over those three years. And you can also look at is the decline driven by a slowing of ACA sales in FY '17 and that is yes, because we have at rest already half of our business opportunity in the first year, and we don't expect to close, cover 100% of the sales opportunity in FY '17. So we had to make assumptions about that, and so both are in line within a percentage point plus, minus. So this is for government work, an estimate that keeps it intact.

Yes, I think more government work, again, these are not the right numbers, but mathematically if you take 4% out of the 12% it gives you 8%. And if you add 4% to the 4% to 6%, you get back to 8% to 9%, and you're still within the 8% to 10% range. So I hate to be so simplistic, but I think that's really the way the math works.

The EF guidance for 4% to 5% revenue growth just slower growth in constant currency than what we've been seeing recently, in spite of the ACA bookings that you got this past year. Is that because of retention, and could you give us any color on what kind of revenue you did get from ACA last year and what you're expecting for this coming year?

I think that the ES revenue growth has been accelerating for the last five years. And I think some of that obviously is driven by the economy, in terms of as the economy rebounded, I think we had some help in pace per control and a number of other factors and just the strong new business bookings growth has created a bigger gap between our starts, what we call our starts and our losses, and I think that has contributed to this accelerating growth in employer services. I think you're right that the losses that we experienced this year obviously have an effect this year and they have an effect on the following year as well. But again, back to kind of simplistic math for government work, I think we're probably plus or minus 0.5 point in terms of ES revenue growth. So maybe some of that is rounding, but we don't feel any weakness, I guess, to be clear. And the ACA revenues, Jan probably has the exact number, that clearly provided lift in our new business bookings and does provide lift to revenues that then also presents somewhat of a grow-over. It's not as pronounced a grow-over, because it's a revenue number versus a new business bookings number, but it does have the same impact. But we feel where we're right now, employer services feel like a pretty good place in terms of trend and, in terms of trajectory as well.

And we don't provide, really, the precise revenue numbers, but it's kind of a little bit above, in the $100 million plus range of ACA impact to ADP.

This is Ashish Sabadra calling on behalf of Bryan Keane. I would like to follow up on the topic of retention. Last quarter, you mentioned that you were taking steps to improve service capability, which increased your confidence in retention. However, we still observed a decline in retention. My question pertains to the mid-market customer base, which still has 25,000 customers that will be migrated over the next four quarters. Typically, migrations do not occur in November or December, suggesting that over 6,000 customers will be migrated each quarter, compared to the 4,000 from last quarter. Given this higher level of migration, how should we anticipate retention trends moving forward? Is there a possibility that retention may worsen before it improves? Any insights you could share regarding retention would be greatly appreciated. Thank you.

That's a good question. Your calculations are quite accurate. The only thing I would add is that you need to consider a retention or loss factor to the 25,000 clients over the year. Typically, we lose about 10% of those clients, possibly a bit more since they are legacy clients. This means the actual number to account for over the four quarters is slightly smaller. You're looking at around 5,000 clients that need to be migrated each quarter, which we believe is manageable given our established infrastructure and new migration processes. Additionally, the results haven't aligned with our expectations, largely due to retention being influenced by the overall Company's performance, which varies across different businesses. It's important to note that while we still see retention challenges, particularly in the mid-market segment, there's also a significant portion of ADP’s revenue, estimated at $8 billion to $9 billion, that faces similar retention variability. To elaborate on why I believe improvements are on the horizon, we recognize specific retention challenges in the mid-market. We track several metrics that indicate performance, such as telephone response times and unresolved case backlogs. Much of the service experience metrics in the mid-market have either returned to or surpassed previous levels prior to our retention struggles. Therefore, despite potential delays due to clients exploring options after a subpar service experience, my confidence in the enhancements in service quality and client experience in the mid-market remains quite strong.

If I may add a more technical observation regarding our losses over the fiscal year, we experience cyclicality in our loss volumes. Typically, the end of the calendar year, which coincides with our third quarter, sees higher loss months, while the fourth quarter generally records lower losses. This results in variability in the quarterly shifts of our retention numbers, affecting the lower loss volume we normally see in the fourth quarter. Therefore, I advise monitoring the retention changes we report without becoming overly analytical about the quarter-by-quarter fluctuations. A more meaningful indicator is to consider our retention number reflecting a decline of 100 basis points. In summary, we aim for improvement in the fiscal year. While we do not specifically guide to retention, it's clear that as a company, we have strong aspirations for enhancement.

I wonder if I could ask a question about the margin guidance. I think you gave us some good color on what the headwinds were going to be into FY '17, but if I understood you right, there's about 20 basis points of incremental headwinds over and above what you're isolating as nonrecurring. Perhaps you could give us more insight into, you know, what those incremental charges are, and when you bundle everything together, you know, as you come out of FY '17, how should we look at how the model has changed and how the leverage in the model changes beyond FY '17?

So as we described, our initiative is really to create more concentrated centers of excellence and strategic locations, and we indicate basically five big cities that we're doing. So as a consequence, approximately 5% of our employee population is going to be transferring or moving or the work will be moving and impacting about 5% of our associate population in this fiscal year. And there are costs that are related to this which are non-GAAPing which are related in essence to employee costs to facilitate the transfer of the work that is basically included in the 20 basis points of our guidance. We clearly hope that the outcome of this service alignment initiative is multi-folded. I believe strongly it will enhance our service value proposition, because we're going to have larger centers with bigger capabilities, leveraging ADP's strength and compliance in service and offering a better value proposition to our clients which is the most exciting part for this service alignment initiative. Hopefully resulting in better competitiveness and higher retention rates and also as you can see, these centers are located in geographies of the U.S. that offer certain advantages, relative to the cost where they operate, so that we should be in the longer run also contribute to our margins. We're a little bit hesitant to specify this for 2018 because the initiative will actually bleed over into FY '18, we mentioned in particular the center and investments in the West is going to come later in 2017 and will bleed over to 2018. So 2018 will still have some impact, but we're clearly hoping that it will guarantee basically that we can fulfill our commitment to the 50 to 75 basis points of margin expansion in the long run, so this is an important supporting initiative for that.

And David, I think you're right, the 20 basis points is above what we've put in quote, unquote the non-GAAP numbers. And I think, you know, that's just a frictional cost. They are identified. We know what those costs are, and they are costed. It's not appropriate to bucket it into the non-GAAP charges, I guess is the best way to put it. I'm not, obviously, the accountant, but I think your math is, or your comment was spot on. So that's the, when we provided that color to give you more information to be able to come up with what you might think might be the longer-term potential performance of the Company which, as Jan said, we're optimistic about. And I think we're doing these things, you know, really there's two things that we're always focused on, service experience, the client experience from our service organization and implementation and just the operations of the organizational role and our competitiveness and our efficiency. I would call this a large initiative and a complex initiative that hopefully is coming across with the significance that it should and it's multi-year.

And can I ask just one follow-up on just the CapEx comment as well. So it sounds like CapEx is over $2 million related to this, so is there anything we should think differently about the year-over-year growth and pre-cash flow in FY '17?

I'll let, maybe Jan can comment a little more on the CapEx. We weren't implying that the entire CapEx was because of this initiative. We have normal, ongoing normal CapEx. It's just trending higher than it has historically. So wanted to make sure that we put that out there. But I do want to comment, besides Jan giving you the specifics on the numbers, that we're investing in this Company. So this Company has an industry that has positive global dynamics in terms of growth. We just saw it with ACA in the U.S. We're going to see it with FLSA and the EEOC equity pay rules, and we're seeing the same thing in other countries. And so this Company has opportunity. And we intend to invest in order to seize those opportunities. And so I think what you're seeing is our investment in CapEx and frankly also our investment in capitalized software which we disclosed but is not something that we necessarily always focus on, are all trending higher. And we take the deployment of capital very, very seriously as you know. But people should not mistake what our actions are for anything other than optimism about the future and the potential for these investments to have incremental returns for our shareholders over the long-term.

I have really only two comments to add is, so there's a temporarily higher capital expenditure rate and the increase is to the very largest amount driven by investments into our real estate project to get these facilities up and going. And related investments for this initiative. And secondly, I'd like also to remind you that ADP has pursued over the last couple of years a growth strategy that is more focused on our organic growth capabilities, focusing on investments into our own product set, and focusing in this initiative on enhancing and developing additional market-leading service capabilities. So I think it's right in line with how the strategy has worked for ADP and it's really quite an exciting moment for ADP.

I wonder if we could go back on the new service initiative. Just kind of see if you could tie it in to the investments that you've made earlier in the delivery side, what informed this and how related or not was it to the service delivery issues and investments that you had earlier and just tie those two together. Thank you.

So I'll make a comment, and then Jan I think can add. I really appreciate the question, because they are actually quite separate topics. As though the service delivery issues that we experienced were concentrated in a particular part of our business in the mid-market and they were execution related. And I think what we're talking about in terms of our new service alignment initiative is a broad strategic objective across the entire Company. It's partly driven by the fact that the industry has evolved and I think the clients' needs have evolved and the products have evolved. So as an example, 10 years ago, having three or four different products that were serviced differently and different databases was not an issue. Our platforms now are single-database integrated solutions that provide an HCM solution if a client wants to buy it that way, in a comprehensive and seamless way. The service model had not moved in the same direction. And I think that this initiative is really intended to have our service and implementation really align with the way the market is going, the way buyers are buying, and the way clients want to be serviced. So we've done similar things in our sales organization where that also requires that our sales force be trained and equipped to be able to sell in the new environment. So our belief is that now we will have our products, our service, and our distribution all aligned.

And I think it is probably the best way to connect our focus on creating competitive technology platforms that are cloud-based and integrated as a prerequisite to create the integrated service model, so we have made really A, great progress with these strategic platforms, but B, also migrated now large numbers of clients onto these platforms. So it really does make good sense at this point in time to launch the service alignment initiative. And as you might imagine, we did have, we have tested these service models and components of our organization at smaller scale. And we have seen great results out of those pilots.

And then if I could just quickly follow up, Jan, on the comment you made earlier about how you've been making more organic investments. Has anything changed just in general in terms of your portfolio shaping, any sort of divestitures, small ones to come, and how are you approaching M&A currently? Thank you.

No, I think our principal stand on M&A has not changed. We have a very solid balance sheet, we have the capital to investment in the industry, and we continue to evaluate opportunities, but we evaluate M&A opportunities in light of our strategic priorities, which are focused at this point in time on reduction of complexity and aligning and focusing on our client needs. So any acquisitions that support that drive, what we will actively and aggressively pursue. But it has played out over the last three years to a more organic growth pattern that has seen great results. And so I think that stand stays the same. I would not expect any dramatic shift in our attitude towards M&A, from what you have seen in the last three years. And relative to divestitures and adjusting the portfolio, I think the large portfolio alignment initiatives have happened with the spinoff of CDK, and I think our larger, last larger divestiture was AdvancedMD. There will be here and there smaller type of things as we continually evaluate the performance of our product portfolio, and if we see opportunities to enhance shareholder value, we will pursue it as we have done so in the past. But it's really, in essence, I would anticipate FY '17 to run under the same guide poles as in the last three years.

I believe Jan is completely right on all those points. I would just like to add that regarding capital and how seriously we approach capital deployment, we have a strong balance sheet and capital available for deployment. However, as Jan mentioned, if something aligns well with our technology roadmap and enhances our progress, we would utilize our capital. We are not going to invest in something that simply adds to our existing portfolio without clear integration. It needs to be able to fit smoothly into what we are already focusing on in our product strategy. This marks a shift from six or seven years ago when our approach was more about leveraging our distribution and expanding capabilities with less regard for alignment with our technology roadmap. This isn't so much a change in strategy, but rather a response to market demand and how customers prefer to buy products, making it vital for us to maintain close alignment and coherence in our offerings. Additionally, regarding Jan's point, since we have capital, if an opportunity arises that would enhance our progress, we would pursue it just as we are with our internal investments aimed at accelerating growth. However, in recent years, when assessing capital deployment, Jan and I often discuss how we haven't purposely avoided acquisitions; instead, it has become more challenging to find suitable ones that align with our strategy. Ultimately, we are investing about $300 million to $400 million less in acquisitions while increasing our spending on internally developed products, capital expenditures, and the investments outlined for FY '17. This wasn't necessarily a planned approach; rather, it's just how our capital deployment has evolved. Nevertheless, we still reserve the right to invest in acquisitions when appropriate.

Could you provide more details about the service realignment and how clients might be serviced? Will there be a transition to dedicated service representatives for the mid-market? What insights did you gather from the pilot studies, and what has been the internal response from service providers regarding potential geographical relocations?

It's a great question. We have specific people who handle certain clients in the up-market and national accounts, but in the small business sector, we focus on execution and delivery over individual representatives. Our retention rates and growth in that market support our approach, suggesting that a dedicated rep may not be the best service model for small or even larger companies today. We prioritize delivering the best service in a way that meets client needs, which can vary widely. We are shifting towards a team-based service model rather than relying solely on dedicated individuals. For instance, clients often purchase multiple HCM modules, indicating that a team can provide more comprehensive service across various areas. This approach requires cross-training and ensures that skilled individuals are available to assist clients with diverse issues. Our experiments with intact or collocated teams have shown positive results in retention and client satisfaction, which in turn boosts margins. This strategy enhances both client experience and opportunities for our associates. In smaller locations with limited career mobility, we are creating more opportunities for associates to learn and advance in various areas of our HCM offerings. Overall, we believe that this service alignment strategy is effective for both our clients and our internal talent management.

Carlos mentioned most of the factors. I would add, too, we have seen a rise in our associate engagement scores as a consequence for those who work in those intact teams. And it reflects probably better of how in a modern team environment our associates want to work. So that's really exciting for our associates as well. And one additional component that a strategic move on locations allows you to plan for is also a coordinated effort between our market segments, small, medium, and large. So I think we mentioned it in the call. So now we have collocation between those market segments and there can be natural growth and exchange of best practices between the different platforms. And for some of the platforms, the back end is fairly similar. If you think about sender-self excellence for our tax filing operation and so forth, so it allows us also to create buckets of scale that are very hard to create in smaller locations. So it really, I believe, will transform how associates be perceiving A, the value of the job they're in and the job opportunities then that can reach in the future and allows us to deliver additional service capabilities to our clients which is the strategic benefit that we're reaping out of it. Carlos mentioned most of the factors. I would add, too, we have seen a rise in our associate engagement scores as a consequence for those who work in those intact teams. And it reflects probably better of how in a modern team environment our associates want to work. So that's really exciting for our associates as well. And one additional component that a strategic move on locations allows you to plan for is also a coordinated effort between our market segments, small, medium, and large. So I think we mentioned it in the call. So now we have collocation between those market segments, and there can be natural growth and exchange of best practices between the different platforms. And for some of the platforms, the back end is fairly similar. If you think about sender-self excellence for our tax filing operation and so forth, so it allows us also to create buckets of scale that are very hard to create in smaller locations. So it really, I believe, will transform how associates perceive A, the value of the job they're in and the job opportunities then that can reach in the future and allows us to deliver additional service capabilities to our clients which is the strategic benefit that we're reaping out of it.

I wanted to revisit an earlier question about revenue acceleration. You’ve experienced two years of above-trend bookings, and the control process is progressing at a similar pace. You faced a setback this year from selling a business, which won't be an issue in 2017. Retention has also been a challenge, and while you’re not specifying, it might still be a concern, though potentially less so in 2017. Given your indication that current-year bookings don't significantly impact revenue, why shouldn’t we expect to see some acceleration? Is it simply due to PEO, as you're anticipating slower growth there? It seems like there should be better revenue growth when considering all these factors. Thank you.

Yes, the calculations will show how our sold starts relate to retention, and there hasn’t been any significant change in our business models over time. We did experience some unusual revenue fluctuations that led to greater revenue acceleration this year compared to next year, which plays a part in this. However, considering that factor, there’s nothing particularly unusual about next year's revenue growth.

Yes and I think that all the things you mentioned, it's important to acknowledge what you said. We do, again, even though we don't give specific guidance, we do expect less of a drag for example from retentions because we expect things to get better. We have some metrics and some underlying data that give us hope at least, right? Because we don't know for sure that will improve your math, the comments you made about new the business bookings, all those things are correct. I think I would just encourage you to maybe spend some time offline with us in terms of kind of the math and how the revenue works. One of the interesting things about this business, this is an incredibly stable and predictable business model. It's also very, very hard to move the numbers dramatically one way or the other over the course of one year. So over the course of four or five years, we've had double-digit new business bookings, and this year we had a blip with retention. But retention's also been fairly stable. That's allowed us to accelerate our revenue growth about half to one percentage point from, call it five years ago, in employer services. The PEO, as you said, also happens to be a factor because it's growing faster and it's becoming a larger portion of the overall results. So if it slows slightly, that has an impact too. So we'll spend the time to make sure we do the math, but what I can tell you is that you're right that this year, if you exclude the impact of the divestiture or if you don't factor the divestiture in, we were close to 9% revenue growth. We're really proud of that. And next year we're slightly below that because there's one day less, because this year was a leap year or whatever the issues are, and we have a drag still from, even though retention's getting better, it's still not as good as it used to be. We're still going to be pretty damn happy and pretty damn proud because we're going to be in I think still in the high end of our guidance from a revenue standpoint. And in this business, when you get into that range, given who we are, in terms of because we understand, we have very keen insight into who we are like as a company in terms of where we want to be, in terms of our growth rates and our margin improvement and the balance of those things, I think we're, I think satisfied with that outcome. It obviously makes it easier as you pick up additional revenue growth because of the nice leverageability of our operating model. But, you know, that's part of why we're also doing some of the things we're doing around service alignment, because we know that we're really not, I think satisfied with just the results that we have today. On the other hand, we're not going to sit here and tell you that we're trying to aim for 10%, 12%, 15% revenue growth because that's really not who we are. So 7% to 9% is our long-term guidance for revenue growth, with some margin improvement, with a healthy dividend, with share buybacks, that's our model, that's what we're executing against. And I'm proud of the Organization and the results they delivered this year. And I think if we deliver the results that we've put out there for the next year, we're going to be just as proud of that as well.

Okay, great. I have a quick follow-up. For the ACA product, how much revenue will come from sending out the 1095 forms compared to the ongoing revenue from the analytics and compliance tool?

Yes, this gives me the opportunity to highlight our exceptional and unique ACA product. It is much more than merely submitting 1095 and 1094 forms. We provide a comprehensive compliance service that includes continuous monitoring and assessment for eligibility and affordability. Additionally, we offer what we refer to as notice management services to address agency and exchange notices, ensuring that companies remain compliant, which is critical since a significant portion of fines can arise from non-compliance. Our pricing model is based on a per-employee per-month basis, meaning our revenue is not tied to the delivery of specific forms but is instead generated as an annualized recurring revenue. Consequently, you should consider the revenues similarly to how you view the rest of ADP.

Thank you. This is our 67th year, and we have combined world-class operations with innovative products and services that address the evolving needs of our clients. This was especially evident in 2016, and I take pride in our business's success in delivering solutions to meet those client needs. If I may take a moment to highlight something important, I previously mentioned that this marks ADP's 41st consecutive year of paying and increasing our dividend. As a dividend aristocrat, ADP is among just over 50 companies in the S&P 500 that have paid and raised dividends for more than 25 years. Looking ahead to FY '17, ADP's leaders and associates are making investments to establish the groundwork for ADP to join the ranks of the dividend royals in nine years, which includes just 17 companies that have maintained dividend payments and increases for over 50 years. Anyone familiar with business understands that only the most resilient and iconic companies make either list. This success is a direct result of the hard work and commitment of our associates, who dedicate themselves every day to ensuring our clients' success. So to them and to all those who came before them, I extend my gratitude. I also appreciate all of you for joining the call today and for your interest in ADP.