Automatic Data Processing Inc (ADP) — Q2 2019 Earnings Call Transcript

Thank you, Daniel, and good morning, everyone. And thank you for joining ADP's Second Quarter Fiscal 2019 earnings call and webcast. With me today are Carlos Rodriguez, our President and Chief Executive Officer; and Jan Siegmund, our Chief Financial Officer. Earlier this morning, we released our results for the second quarter of fiscal 2019. These materials are available on the SEC's website and our Investor Relations website at investors.adp.com, where you will also find the quarterly investor presentation that accompanies today's call, as well as our quarterly history of revenue in pretax earnings by reportable segment. During our call today, we will reference non-GAAP financial measures, which we believe to be useful to investors and that exclude the impact of certain items in the second quarter and full year of fiscal 2019 as well as the second quarter and full year of fiscal 2018. A description of these items and a reconciliation of these non-GAAP measures can be found in our earnings release. Today's call will also 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 factors that could cause actual results to differ materially from our current expectations. As always, please do not hesitate to reach out should you have any questions. And with that, let me turn the call over to Carlos.

Thank you, Christian, and thank you, everyone, for joining our call. This morning we reported our second quarter fiscal 2019 results with revenue of $3.5 billion, up 8% on both reported and organic constant currency basis. We are pleased with this revenue growth which was slightly above our expectations and which was aided in part by the continued strength of our employer services down market and multinational solutions and our PEO. Our adjusted diluted earnings per share grew 30% to $1.34 and benefited from our strong revenue growth, as well as adjusted EBIT margin expansion, lower adjusted effective tax rate, and fewer shares outstanding. Our results this quarter continue to highlight the underlying strength of our business model, as we continue to experience the benefits of operating efficiencies enabled by our ongoing transformation efforts. We also continue to see improvements in our cost base across our businesses and back office functions. We remain excited about the progress of our investments in technology, including our next-gen solutions, and we are also pleased with the performance of our recent acquisitions. As we continue our efforts to accelerate our investments to enhance the efficiency and effectiveness of our products and services, we also continue to see improvements in our overall client satisfaction scores. With these positive trends across our businesses, we are reaffirming our expectation of 25 to 50 basis points of improvement in ES revenue retention for fiscal 2019. Moving on to employer services new business bookings, this quarter we saw bookings growth below our expectations with 1% growth for the quarter. That can happen some years; the timing of the December holidays and our own selling calendar played a larger than anticipated role which resulted in a number of deals particularly within the mid and upmarket pushing into the third fiscal quarter. While we see a similar pattern from time to time, the impact this year was a bit more pronounced than typical. And it's also important to remember that new business bookings has inherent variability quarter-to-quarter. With that said, we continue to see strong bookings performance in our downmarket, multinational, and HRO businesses. And we are largely pleased with our product positioning, win rates, and overall sales strategy. For these reasons, despite the lower than expected growth this quarter, we are maintaining our forecast of 6% to 8% ES New Business Bookings growth for fiscal 2019. Now, I would like to expand on my earlier comments regarding the progress of our transformation initiatives and then touch on some strategic and operational business highlights. First, looking internally, as we discussed at our June 2018 Investor Day, we have launched a number of initiatives across the organization with the objective of enhancing both our operating efficiency and our go-to-market strategy. As you can see from this quarter's results, our efforts to streamline our operations, while also enhancing the client experience, are paying off. We are clearly seeing the benefits of these transformation efforts help our overall margin performance. In addition, we feel good about the progress we are making as we transform our service and we continue to see broad-based positive trends in our client satisfaction scores, which for some of our businesses are now at record high levels. I am pleased with what we have achieved to date and with our ability to remain on track as we tackle various competing demands. I'm especially proud of our associates who are helping us manage through these change initiatives in a thoughtful and careful way. Now, moving on to an area of key strategic differentiation, our leading data analytics and benchmarking solution, ADP DataCloud. As the world of work evolves and companies and their employees increasingly demand greater access to timely and insightful data, we believe that ADP is well-positioned to leverage our broad-based HCM dataset to further empower our clients' front-line managers and key decision makers. With these capabilities in mind, we recently expanded the use of ADP DataCloud to deepen our relationship with key distribution channel partners. One example of this is through our current CPA-centric data product, Accountant Connect, which gives CPAs the ability to see their clients' payroll reports, tax forms, and notifications, while also providing them with a central practice management tool, all in one place. We are always looking for new ways to leverage the strength of our data and the breadth of our HCM services to generate additional opportunities for growth. And at the beginning of November, we announced an exciting new partnership with Intuit, which now further strengthens the services we offer to accounts. Through this initiative, we have expanded our integration with QuickBooks, adding an enhanced general ledger interface that maps directly through Accountant Connect. This new cloud-based interface combines the financial and transactional capabilities of QuickBooks with a deep data pool available through ADP's DataCloud and will help accountants save time while also providing access to award-winning compensation insights to help improve their clients' business as we head into tax season. We are proud to be able to provide products and insights like these to our clients to further empower them. Last week, we were equally proud to be selected as one of Fortune magazine's world's most admired companies for the 13th consecutive year. I am pleased that our efforts have been consistently recognized, especially as we make steady progress on our transformation amid a dynamic business environment. It is an honor to once again be among the most admired companies in the world and this is a testament to the commitment of our associates, clients, and partners to drive innovation as we work together to change the world of work. Overall, we are pleased with our progress and remain confident in our long-term strategy as we continue our efforts to deliver on our transformation initiatives. And with that, I'll turn the call over to Jan for his commentary on the second quarter results and fiscal 2019 outlook.

Thank you, Carlos and good morning everyone. Our consolidated revenue this quarter was $3.5 billion, up 8% on a reported and organic constant currency basis. And as Carlos said, this was slightly ahead of our own expectations. This quarter, we continue to experience the incremental benefit from the sales momentum we generated last year, as well as the steady improvement in the performance of our PEO. The PEO results were particularly strong in part due to better contribution from benefits, workers' compensation, and SUI revenue than we had anticipated, but there was also an unrelated pull forward in SUI revenue from the third quarter which I will discuss in more detail in a few moments. Our earnings before income taxes and adjusted EBIT both increased 26%; adjusted EBIT margin was up about 320 basis points compared to last year's second quarter and included 30 basis points of pressure from acquisitions. This margin improvement was ahead of our expectation and benefited from a few key drivers. In addition to the solid performance from our revenue growth and operating leverage, this quarter we also benefited slightly from lower growth in our distribution expenses, as a result of lower than expected second quarter new business bookings performance. With that said, we also continue to benefit from the execution on efficiencies efforts within our IT infrastructure and to our broader transformation initiatives including our voluntary early retirement program. As we mentioned last quarter, we have continued to benefit from a slower ramp in our backfill hiring related to the voluntary early retirement program. And we expect some of the benefit to moderate over the back half of the year. As a result, while we continue to estimate a run rate of about $150 million in savings from this program, we now anticipate achieving slightly more than our original estimate of $100 million of benefit in fiscal year 2019. As Carlos mentioned, we're executing on a number of different initiatives and the timing of costs or benefit can move around from quarter-to-quarter, and as a reminder, as we proceed and refine our plans, the impact of some of these initiatives may overlap but ultimately our focus remains to deliver against the multi-year commitments we laid out at our June 2018 Investor Day. Our adjusted effective tax rate was 24.6% and included a small benefit from the unplanned stock compensation tax benefits. This tax rate compared to over 25.6% adjusted effective tax rate for the second quarter of last year. Adjusted diluted earnings per share grew 30% to $1.34 and in addition to benefiting from our strong revenue and margin performance, and our lower tax rate was also supported by fewer shares outstanding compared with a year ago. Now for our segment results. For Employer Services, revenues grew 7% for the quarter, 7% organic constant currency, and we were ahead of expectations. Retention is improving in line with expectations and we continue to see the benefits from last year's stronger than expected new business bookings. Each contributing to our stronger than expected revenue performance this quarter. Our revenue growth in our international businesses, which we now disclose quarterly in our Form 10-Q, was also strong this quarter and was aided by a solid double-digit growth in our multinational offerings which continued to do very well. Interest income on client funds grew 21% and benefited from a 30 basis point improvement in the average yield earned on our client fund investments and the growth in average client funds balances of 5% compared to a year ago. This growth in balances was driven by a combination of client growth, wage inflation, and growth in our pays per control, offset by pressure from corporate tax reform and lower state unemployment insurance collections. As a reminder, we had some pressure on our client fund balance growth related to the corporate tax reform that we now fully lapped, but other sources of pressure like SUI rate changes and FX will put added pressure on our balance growth for the remainder of the year. Our same-store pays per control metric in the U.S. grew 2.3% for the quarter. Moving onto Employer Services margin, we saw an increase of about 460 basis points in the quarter which included approximately 50 basis points of pressure from the impact of the acquisitions. This very strong performance is a result of the same factors I mentioned earlier regarding our consolidated results, including operating leverage across all of our businesses, efficiencies in our IT infrastructure, slower growth in our selling expenses, and the impact of our transformation initiatives which continue to help in improving our underlying efficiency. Our PEO revenues grew 12% in the quarter and PEO revenues excluding zero-margin benefits pass-throughs grew 15%, both above our expectations. Average worksite employees increased 9% to 545,000. We were pleased to see continued solid performance of our worksite employee growth, in particular with some signs of normalization and retention compared to the pressure that we had seen last year among our larger PEO clients. For revenue, the outperformance was attributable to two factors. First, we saw favorability in benefits, workers' compensation, and SUI revenue relative to our expectations which is not unusual and is part of our normal variability. Second, as I mentioned earlier, there was a pull forward in a portion of our SUI revenue this quarter which benefited our total PEO revenue growth rate by about 200 basis points. And this will therefore come out of next quarter's PEO growth, yielding no net impact for the full year. The PEO segment's margin increased 70 basis points for the quarter and benefited from operating leverage and selling efficiencies, partially offset by the grow-over pressure from adjustments to our loss reserve estimates related to ADP Indemnity. Now onto our fiscal year 2019 outlook. For Employer Services, we are increasing our revenue guidance to 5% to 6% from our previous guidance of 4% to 6%. With two quarters now coming in ahead of expectations, we feel better about our position for the year, but we continue to anticipate a deceleration in the back half driven in part by a combination of the impacts of this quarter's new business bookings performance, incremental pressure from FX, and the lapping of certain acquisitions. We continue to anticipate growth of 2.5% in our pays per control metric. Finally, due to our margin outperformance this quarter, we are raising our ES margin outlook and now anticipate full year ES margins to expand 175 basis points to 200 basis points from our prior forecast of 150 basis points to 175 basis points. Our look also continues to contemplate 50 basis points from acquisition drag for the year. Moving on to the PEO, we now expect 9% to 10% PEO revenue growth in fiscal year 2019 compared to our prior forecast of an 8% to 9%. And we continue to expect 8% to 9% growth in average worksite employees. We now anticipate 8% to 9% growth in PEO revenues excluding zero-margin benefits pass-throughs, as we have been realizing better workers' compensation and SUI revenues relative to our prior expectations. For our PEO margins with better than expected performance in our PEO margin this quarter, we now expect margins to be at least flat compared to our prior forecast of a decrease of down 50 basis points to 25 basis points. And meanwhile, we continue to anticipate grow-over pressure from adjustments to our loss reserve estimates related to ADP Indemnity to result in 50 basis points of grow-over pressure on a full year basis unchanged from our prior forecast. Moving on to the consolidated outlook, we continue to anticipate total revenue growth of 6% to 7% for fiscal year 2019. We now expect the growth in average client fund balances to be about 4% compared to our prior forecast of up 3% to 4%. And we continue to expect growth in our client fund interest revenue of $90 million to $100 million and for the total impact from the client funds extended investment strategy to be an increase of $70 million to $80 million. The details of this forecast can be found in the supplemental slides on our Investor Relations website. We now anticipate our adjusted EBIT margin to expand 125 basis points to 150 basis points compared to our prior forecast of 100 basis points to 125 basis points driven by the strong execution that we have seen so far this year. This outlook continues to include approximately 30 basis points of pressure from acquisitions. With that said, as you can see, our guidance implies a slower pace of margin expansion in the latter half of fiscal year 2019 as we continue to expect lower top line revenue growth while we at the same time, maintaining our investments into the business and continue to catch up on our backfill hiring plans related to our voluntary early retirement program. With the impact of the first half stock compensation related tax benefit, we are tweaking our adjusted effective tax rate expectation to 24.4% in fiscal year 2019 compared to our prior estimate of 24.5%. And with these adjustments to our outlook, we now expect adjusted diluted earnings per share to grow 17% to 19% from our prior forecast of 15% to 17%. We continue to be pleased with our overall execution. And with that, I will turn it back to the operator to take your questions.

Good morning. Congratulations on the strong results. I am wondering if you can talk a little bit about what you think is the sustainability of the margin improvement that you've seen particularly in light of the catch up not for the remainder of this year, but just as we think a little bit beyond this year? That's the first question. And then the second question would just be you're seeing an improvement with regards to your retention rate. Can you talk about how much of that do you think is due to the service center consolidation versus maybe leveraging some of the enhanced assets that you have such as the data cloud? Thank you.

Thank you for the question. I think on the sustainability front, I would refer you back to Jan's comment about remaining committed to the commitments we made at our 2018 Investor Day, where I think we laid out multi-year commitments around margin expansion. So I would refer you back to that because it's again we want to kind of stick to the that we normally do things here, which is we provide guidance one year at a time, but I think that will give you some sense of what our expectations of what the business is capable of doing over multiple years.

You did Carlos. So just, you're outperforming this year, and so I didn't know if that outperformance this year would thereby potentially impact kind of the cadence on a go-forward basis? If that makes sense.

I appreciate that. I'll refer back to some important points Jan made that are worth discussing on this call. We remain committed to the outcomes we outlined in June 2018, and we are focused on achieving them in a careful and thoughtful way, which relates to the transformation efforts we are currently undertaking. For instance, our service alignment initiative and voluntary retirement are substantial projects that impact many people and areas of the business, and this is the first time we're implementing them. We have developed plans and contingency plans, and we adapt as circumstances change. As Jan mentioned, our initial strategy to backfill a certain percentage of voluntary retirements worked well on paper, but while it benefited associates and the company, we did lose significant knowledge and experience through this process. It was crucial to plan adequately around this to ensure we maintain high levels of client service and retention, which are vital for our business's success. It's not solely about cutting costs; it's about strengthening the business, which can sometimes lead to imperfect outcomes reflected in our spreadsheets. We've seen more benefits in the first and second quarters than we anticipated. We are committed to not only achieving our cost reduction goals but also fulfilling our targets for client service, associate satisfaction, and retention, all of which are essential for sustainability. While there are many details I could share about what helped us this quarter, I want to emphasize our long-term commitments from the 2018 Investor Day. As pleased as we are with this quarter's results, it doesn't fundamentally change our focus. It was a strong quarter, and we made significant progress in improving our cost structure, client satisfaction scores, and retention. There’s a lot of positive progress, but our aim is to build a long-term, sustainable, and successful business, which requires a thoughtful and careful approach. One of my main concerns has been ensuring we are backfilling positions at an appropriate rate to maintain our client satisfaction scores.

I will address the retention question. There are two key points to consider. First, our broader product portfolio, especially the data cloud, has helped increase value for our clients. Second, we have observed significant improvements in our client satisfaction and service scores, which have a strong correlation with client satisfaction, net promoter scores, and retention. Our service has been stable and has improved over time, as reflected in higher NPS scores. Additionally, we have completed upgrading our major account client base, which previously affected our retention rates. Now that our clients are on the updated workforce, we have seen a steady increase in retention rates over the past few quarters as a result of this migration effort. These are the two most important factors contributing to our strong retention this quarter.

Hi. Thanks, good results here. I just want to clarify the margin again if you don't mind. How much of the raise was due to the transformation initiative, the retirement savings coming sooner than expected or just finding more savings than originally expected. Maybe can you go through those numbers, again, Jan?

It's challenging to fully break down every source of margin expansion because the primary reason for our productivity growth is that we are increasing our labor force at a slower rate than our revenues. Several factors and initiatives contribute to this. We implemented an early retirement program that helped, along with a significant reorganization of our IT infrastructure that enhanced our processes. We've also seen a reduction in call volumes. The Transformation Office is pursuing various initiatives aimed at improving labor productivity, which is crucial for our business model since we are labor-intensive rather than capital-intensive. Therefore, we are concentrating on optimizing our major cost driver, which is labor productivity. Isolating these initiatives is somewhat academic because they are interconnected in their approach. Additionally, as observed in the second quarter and noted in the first quarter, the timeline for the refill catch-up has been slower than expected. This delay is not intentional; it has simply unfolded this way, and while it positively affected the margin, it's not aligned with where we envisioned the business to be. In my earlier comments, I mentioned that we estimate the full range of impact from the early retirement program to be around $150 million on a run rate basis, but we can refine that to approximately $120 million in impact for this year.

Versus the 100 before. Okay. And then just one quick follow-up on the bookings side, I understood that there was a little bit of slippage on those deals since closed, and that what's giving you confidence that you can still deliver the 6% to 8% because we all know that the top comps have been tough and you've been clear about that. So just to better understand your confidence there. Thank you.

I believe we have some clarity regarding what is happening in January. One point I raised in my comments was about the calendar, and I feel somewhat embarrassed to admit we encountered a minor setback in our planning due to changes in the calendar that altered the number of selling days compared to the previous year. For instance, last year we had several selling days around the holidays that we did not have this year. This situation provides some reassurance because we noticed a shift in performance from one quarter to the next, and we have visibility into the January results. While some of this can be attributed to the calendar, I want to be cautious because we don’t want to be seen as a company that blames external factors like weather for our challenges. Although this isn’t a weather-related issue, we need to be careful about attributing too much to calendar variations. Typically, we wouldn’t bring this up, but it became evident once we reviewed the calendar after the quarter ended that we faced a planning issue we didn’t foresee, and therefore we failed to communicate it externally.

Hi, thanks for taking my question. So just to be clear, the implication is that on the booking side, the deceleration this quarter was really more due to the calendar and to timing. So should we anticipate next quarter kind of a snap back to a healthier level?

That's a good follow-up question, which I can't answer because we only have one month completed. I was trying to provide as much insight as possible without breaking our protocol of providing guidance once a year. We don’t provide quarterly guidance and we really don’t discuss the current quarter. I would refer you back to our confirmation of our 6% to 8% guidance for ES New Business Bookings, which suggests that we expect a bounce back in the third quarter. This is a mathematical expectation; I'm not changing any guidance. However, I should also caution you that February and March are still ahead of us.

Good morning. Thanks for taking my question. I guess, first of all not to beat a dead horse on the bookings front but can you maybe talk about the new business environment and the selling season as it relates to the kind of competitive environment you're seeing both on the mid-market and upmarket, as well as on the down where you've been executing very well? Maybe talk about whether anything is really changing from a competitive or pricing standpoint that may be affecting any deal closures or whether you still have confidence as related to calendar thing?

The mid-market and upmarket remain highly competitive, as we've discussed in previous quarters, and this quarter is no different. We believe there are other factors that may have contributed to the weakness in our bookings, even though the competitive landscape remains consistent. Last week, I met with some salespeople in Atlanta to gain firsthand insight into the challenges we face in the mid-market, the upmarket, and I also spoke with individuals in the downmarket. We are confident in our product lineup and our strong sales force and their ability to execute. Despite some current noise in the system, we feel optimistic about the overall economic situation. It’s difficult to specify any particular reason for the challenges we're facing related to competition or the economy, and I wish we had something concrete to address, but we don't see any major obstacles that would prevent us from achieving our objectives.

I think maybe a little bit more detail, maybe too much sausage making here, but number one is you will recall that we in the last few quarters strengthened our enterprise segments offering by also now offering workforce now into the enterprise space, and that's a strategic move that has played out well and has resulted in a nice new logo growth for the enterprise space. So we're very pleased with that progress that we have been making and another comment regarding pricing, actually I think the broader discounting and also credits declines, all indicators of the health of the business have been improving in the quarter. I think largely driven also by an improvement in the service quality that's now starting to resonate in the market and helping also sales. So there's a bunch of positive things kind of underlining helping a little bit.

Thank you, everyone. There's a lot of emphasis on bookings right now. Could you provide us with the forward revenue sensitivity related to a 1% change in bookings growth? I recall that you previously mentioned some guidelines regarding this.

About $15 million in revenue. Remember that, clearly, if this is a timing issue from quarter-to-quarter, it's really not that big of a deal for us longer term because retention is a bigger driver. I think retention is 4x the impact or 1% of retention; it's a much bigger number. It's $50 million to $60 million. Sorry, 5x the impact I am being told. So that's why from a business execution standpoint we have to have our new business bookings grow overtime at the rate that we have put out there in order to grow the business overall, but the retention rate which we haven't gotten many questions about is equally if not more important and we experienced that firsthand two or three years ago, we've now fixed that, very proud of it. I'll try and take a little bit of credit right here.

Okay. That makes sense. And I was just curious on the downmarket bookings in the ES, I think you did highlight that as a bright spot, do you feel like you're taking share down market with new business creation particularly strong, Salesforce productivity?

I believe that all of these factors contributed to our success. Our downmarket business encompasses various services, including our insurance and retirement services, as well as time and attendance products, making it quite diverse. The business has been performing exceptionally well since we streamlined operations after upgrading to our new platform a few years ago. They've maintained positive momentum and remain highly competitive in the market. While I can't attribute our success to just one element, initiatives like Accountant Connect and our partnerships have been crucial. The team has executed these strategies very effectively.

The SBS business is, I think, just crossed 600,000 clients on run, so they're celebrating a big milestone for them.

Hey, good morning, guys. First question is on the PEO consolidation, obviously paychecks has made a couple of acquisitions in the PEO space, and there remain hundreds of small players in that space. But I know in the past Carlos, you've mentioned some hesitation around the ability to consolidate that space given different risk parameters. Can you just update us on your view on growth in the PEO business and whether that in your view needs to be organic or whether there is an opportunity to do some inorganic consolidation as well?

Thank you for the question, Lisa. It's a valid point. In the case of the PEO, there are some differences compared to the rest of our business. When you acquire a business, you are essentially buying platforms, people, existing clients, and historical underwriting decisions. It's somewhat similar to how banks or insurance companies operate, where you are taking on a book of business that you didn't underwrite yourself. However, this doesn't mean you can't get comfortable, which is likely what Paychex has managed to do. They analyze samples of clients that have been integrated into the book of business while assessing underwriting standards. Acquisitions in the PEO space or in banks or insurance companies happen frequently, but it's generally not in line with the ADP approach. We strive to ensure our business performs as effectively as the other ADP divisions. For instance, with ACE Insurance in terms of reinsurance, we aim for the revenue growth, margins, and profit of the PEO to align with typical processing businesses within ADP. This focus makes it challenging for us to seek out PEO acquisitions in the market, although we remain open to opportunities. We inherently have an advantage over some PEOs due to our internal referral systems, thanks to the thousands of salespeople we have in the field. We believe this organic growth potential deserves more focus than inorganic growth. That said, we are open to considering the latter, but it's fair to say that the bar for acquisitions is set higher for us than it might be for other types of acquisitions within our company.

Thank you, Lisa. The Global Cash Card acquisition represents a significant addition to the ADP portfolio, marking our second major acquisition. We are quite pleased about this strategic move to enhance our payment capabilities as a leading payroll provider both nationally and globally. We have seen great success with the Global Cash Card, which has showcased our capabilities and the integration of our existing card business with Global Cash Card. Our strategic initiatives outlined in our business plans are advancing well.

Thank you. So Carlos, just based on your comments earlier it sounds like there's a possibility at least, that you may be able to operate with lower headcount without impacting client delivery. So if I'm understanding that correctly, how would you use kind of that excess margin and what does that tell you if anything about the incremental potential operating leverage in the business?

That's a great question regarding the competing demands we face. We believe there is an opportunity for margin improvements, as we discussed during our 2018 Investor Day. However, we are focused on the long-term sustainability of the company. I mentioned last quarter that we will be turning 70 in June, and our goal is to continue investing in a business that lasts for another 70 years. This requires a cautious approach to avoid excessive short-term greed, and our Board will ensure we maintain this discipline. We will be careful to ensure that any margin improvements do not compromise client satisfaction, retention rates, or our investments in product development and research.

Great, thank you. Hey, Carlos, you've been working hard on retention. Could you provide us with an update on that? You reaffirmed the guidance where most of the progress has been seen primarily in the mid to upmarket sectors. Additionally, do you have any thoughts on the long-term potential for this?

I believe it’s important to revisit our 2018 Investor Day, where we shared insights about expected retention trends over the coming years. We are facing some structural challenges related to retention, especially in a down market, where businesses closing can lead to natural client turnover. However, we still experience significant controllable losses across all our sectors. Mathematically speaking, there is considerable potential for improvement in retention. Historically, ADP has successfully enhanced retention over long periods, which is commendable and likely attributed to our execution, higher attachment rates, and improved product stickiness. These advancements typically occur in small increments, around 20 to 25 basis points, rather than drastic jumps in one year. Therefore, it will take several years or even decades to further enhance retention because any gains in this area are crucial for our business model’s profitability and the value we offer to clients. Enhancements in retention greatly influence our business's economics, and we remain dedicated to this goal. Ultimately, we believe there is significant upside in retention, and achieving this requires excellent products, which we are actively working to introduce in various markets. In the case of the down market and mid-market, it’s clear that ADP has substantial room for improvement in retention.

We appreciate your questions today and we're very pleased with the start of the year. We're happy not just because of the strong financial performance we've had, but mainly because we've been able to achieve this while improving our client satisfaction scores, some of which have reached record high levels. I want to thank our associates, as they are the ones enabling us to deliver these record client satisfaction results, which in turn lead to strong financial results and great service for our clients. We appreciate their patience as we continue to enhance and refine our products and service tools during our transformation efforts. Change is not easy, but our associates have embraced it and are executing well against our transformation initiatives. We remain confident in the strategy we've outlined over the past few years and in the business performance we expect this year. We feel very good about the momentum for the rest of the fiscal year. Thank you for joining us today and for your continued interest in ADP.