Automatic Data Processing Inc (ADP) — Q3 2019 Earnings Call Transcript

Thank you, Bryan, and good morning everyone. Thank you for joining ADP's Third Quarter Fiscal 2019 earnings call and webcast. Earlier this morning we released our results for the third quarter of fiscal 2019. These earnings 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 and pretax earnings by report of the segment. During our call today we will reference non-GAAP financial measures, which we believe to be useful to investors and that excludes the impact of certain items in the third quarter and full year of fiscal 2019, as well as the third 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 expectation. 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 everyone for joining our call. Before we get started with the earnings discussion I'd first like to welcome Kathleen to the call, into her new role as ADP's Chief Financial Officer. Kathleen comes to us with a strong operating background and we look forward to her contributions in partnership as we execute on our transformation initiatives. I also know that she is looking forward to the opportunity to meet with you over the coming months. Let's now move to a brief review of the quarter. Jan will then take us through the quarter results in more detail, after which Kathleen will take us through an update to our fiscal 2019 outlook. This morning we reported our third quarter fiscal 2019 results with revenue of $3.8 billion, up 4% on a reported basis, 5% organic constant currency. This revenue growth was in line with our expectations and continued to be aided in part by the strength of our Employer Services down market offerings and multinational solutions. Our adjusted diluted earnings per share grew 13% to $1.77 per share and benefited from continued strength in our margin performance, lower adjusted effective tax rate and fewer shares outstanding. We are pleased with the overall results this quarter and we believe our performance continues to highlight the underlying strength of our business model. I’d now like to turn to our sales and marketing initiatives, starting with our solid 10% growth in Employer Services, new business bookings for the quarter and then discuss some of our recent sales and marketing investments. First, we are pleased with our Employer Services new business bookings performance this quarter which benefited from broad-based growth. With three quarters behind us, we feel good about our overall progress this year. At the same time we continuously work to identify new opportunities and investments and learn to leverage our world-class sales force to help drive sustainable growth and build on our position as a leader in the growing global HCM market. With this in mind, at the end of March we completed an agreement with a mid-sized regional payroll services provider to convert their clients to Workforce Now or RUN, depending on business needs and complexity. From time to time we leverage our scale to engage in transactions like these where we acquire a client list from a third party for the right to sell and convert those clients onto our platforms. While historically not significant enough to call out, this transaction was larger than usual. The timing of this agreement means that while it did not impact our third quarter new business bookings performance, we do anticipate incremental benefit in the fourth quarter of fiscal 2019 from this investment together with some added expense pressure. We are confident that our sales force and implementation teams are well equipped to capture this new opportunity, however the timing of the impact from our conversion efforts will depend on the needs of these clients. With that said, as we work to execute on our plans to capture this new opportunity, we are raising our ES New Business Bookings guidance to 8% and 9% growth for fiscal 2019 from our prior guidance of 6% to 8% growth. This deal was not contemplated in our second quarter guidance and we believe that even without this new opportunity, we would have achieved at least the low end of our previous guidance range. Moving on to our recent brand initiatives. At ADP we have always taken great pride in delivering solutions that help simplify complexities for our clients and their workers. Part of our transformation effort has been to execute towards that goal and we’ve continued to make great progress on that front. With this progress in mind, earlier this year we felt it was an opportune time to launch a new brand platform to better reflect the changes we've been making. This initiative represents an important step in our journey to enhance the employee experience with innovative HCM Solutions and insights designed with the worker as the central focus. We carried those thoughts through our brand campaign which asks, what are you working for? In partnership with our clients we asked them and others to share stories about the world of work through the eyes of their people, bringing to light a range of motivations and passions. The key insight from these discussions is that work is about more than what you do. It's about achieving something greater for oneself and others. Our goal in this campaign is to elevate the discussion around the evolution of work and promote a dialogue about what motivates people in the workforce and how we at ADP, in addressing these evolving needs, are always designing for people. This new brand platform and tagline is an expression of what ADP stands for and reinforces our relentless determination to rethink a better, more personalized world that works so everyone can achieve their full potential. Continuing on the theme of work, a few weeks ago I had the opportunity to attend our 26th ANNUAL ADP Meeting of the Minds Client Conference. This event affords us the opportunity to engage in a deeper and broader matter with our larger enterprise clients on their challenges, while also sharing with them our perspectives on the latest trends in HCM, including what we're doing to help employers and their workers tackle these issues. As the world of work changes, the challenges that employers face are becoming increasingly broad and complex. What was clear from the conference is that employers seek a strategic HCM partner, not just a software vendor. We are in need of expertise, someone they can trust and someone who will also help them rise to the new challenges in the face of an increasingly complex and fast-paced world of work, one where the war for talent remains intense. With a record number of attendees at the conference this year, the feedback was very positive throughout the event. Clients and prospects were able to spend time learning about new products and functionality, not only from our experts but also from nearly 40 of our strategic partners, including a record number from our ADP marketplace. As a leading global technology company providing HCM solutions, we are uniquely positioned to help employers and their workers, whether it's through solutions that can help them with recruitment to retirement or through our unmatched big data capabilities, I was proud of the reception we received for our continued efforts to deliver innovative solutions with excellent service. The focus that we are putting on our products and services are only part of our strategy to deliver stronger solutions to our clients. We also believe in a more integrated product strategy and a more open ecosystem. We see shifts not only in how our clients want to connect with us, but also in how workers connect with each other, notably through collaboration platforms. These platforms are reshaping how people communicate and access information within a company. With products like ADP's Virtual Assistant Bot, employees and HR leaders now have the convenience of a tool that can help them remove friction in the employee experience by allowing them within the collaboration platforms to view their pay summary and deductions, make time off requests and more, all while also reducing the time spent by HR and payroll practitioners on low-value added tasks. This allows them to be more strategic and focused on driving business success. Innovations like these that enhance the employer and employee experience are continuing to help drive improvements in our client satisfaction and net promoter scores, an important element in our ability to reaffirm our expectations of 25 to 50 basis points of improvement in ES Revenue Retention for fiscal 2019. Receiving positive recognition for our efforts from both our clients and third parties bolsters our confidence in our investments. Earlier this quarter we were especially pleased when we were recognized for our vision and strategy by Everest Group who named ADP a leader in the Peak Matrix Multi Country Payroll Outsourcing and Multi Country Payroll Platform Report, and once again named ADP a leader and star performer in its Annual Peak Matrix for Multi-Process Human Resources Outsourcing Providers. We are also proud to note that we were the only provider selected as both the leader and star performer among the vendors evaluated, underscoring the strength of our position, as well as the improvements we continue to make. In April we also announced that Nelson Hall once again recognized ADP as the overall leader for next-generation payroll services, highlighting ADP's ability to meet future client requirements and deliver immediate benefits to payroll services clients. It's rewarding when influencers and clients alike recognize us for our progress. Now for one final thought before I hand the call over to Jan, at ADP we are proud of our efforts to foster a culture of learning and development in order to better attract, train and retain top talent. This is why I was especially pleased with this quarter to see that we were once again included among LinkedIn’s top companies for 2019. This award highlights the Top 50 companies that were most in demand by job seekers and I'm pleased to say that we moved up 21 places to number 20 on this list. Overall, our investments in the business are showing positive momentum and we are pleased with the progress we are making against our objective of driving sustainable, long-term growth. With that, I'll turn the call over to Jan for his commentary on our third-quarter results.

Thank you, Carlos, and good morning everyone. Our consolidated revenue this quarter was $3.8 billion, up 4% on a reported basis, 5% organic constant currency, and as Carlos said, this was in line with our expectations. With that said, we have been seeing more pressure from the impact of FX, which drove approximately 1 percentage point of pressure this quarter. We continue to see strong momentum throughout our down market HCM offerings. In addition, excluding the impact of FX, we are pleased to see continued underlying strength across our international offerings, in particular from our multinational solutions. I would also like to remind you of the PEO, SUI revenue timing impact last quarter, which also impacted our third-quarter consolidated revenue growth by approximately 1% and PEO revenue growth by approximately 2%. There was no impact on our full-year revenue estimates from this event. Our earnings before income taxes increased 12% and adjusted EBIT increased 10%. Adjusted EBIT margin was up about 140 basis points compared to last year's third quarter and included 20 basis points of pressure from acquisitions. This margin improvement was slightly ahead of our expectations and benefited from a few key drivers. In addition to benefiting from our early voluntary early retirement program, we also continue to see incremental efficiencies within our IT infrastructure helping to drive improvements in our overall cost base. Also we continue to execute on a number of tactical and incremental transformation initiatives, which while none are individually significant enough to call out collectively are helping to drive net productivity improvements across the business. The benefits from these initiatives together with the impact from our underlying operating approach were partially offset by incremental investments in the third quarter related to the launch of our new brand platform and growth in selling expenses. Our adjusted effective tax rate was 23.5% and benefited from the impact of corporate tax reform, certain tax credit adjustments and the release of reserves for certain tax positions, and a small amount of unplanned stock compensation tax benefit. This rate compares to our 24% adjusted effective tax rate for the third quarter of last year. Adjusted diluted earnings per share grew 13% to $1.77, and in addition to benefiting from our margin expansion and a lower effective tax rate was also aided by fewer shares outstanding compared with a year ago. Now for our segment results. For Employment Services, revenues grew 3% for the quarter, 4% organic constant currency and we are in line with expectations. As a reminder, we had anticipated a deceleration from the first half as we have now lapped the acquisitions of global Cash Card and Work Market, and our revenue continues to be impacted by pressure from FX. Interest income on client funds grew 24% and benefited from a 30 basis points improvement in the average yield earned on our client fund investments and growth in average client funds balances of 4% 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 lower SUI kind of collections. Also, as we mentioned last quarter, we continue to expect lower SUI rates and the impact of FX to put added pressure on to our balance growth for the reminder of the year. Our same store pays per control metric in the U.S. grew 3.1% for the quarter. Moving on to Employer Services margin, we saw an increase of about 230 basis points in the quarter, which includes approximately 30 basis points of pressure from the impact of acquisitions. This continued strength is a result of the same factors I mentioned earlier regarding our consolidated results which are continuing to help to improve our underlying efficiencies. Our PEO services grew 6% in the quarter and as I mentioned earlier, this revenue growth experienced approximately 2 percentage points of pressure in the third quarter due to the PEO SUI revenue timing impact we experienced last quarter. This pressure was also the primary driver for lower PEO revenues excluding zero-margin benefit pass-throughs which grew 2% for the quarter. This timing issue does not impact the full-year revenue guidance that Kathleen will shortly discuss. Average worksite employees increased 8% to 554,000 for the quarter. Overall, we continue to see some positive signs of normalization in the retention compared to the pressure we had seen last year among our larger PEO clients, and we’re also starting to see some positive signs from the changes to our sales incentives that we made last year. We therefore maintain cautiously optimistic as we head into our fourth quarter regarding the continued gradual reacceleration of the growth in the average worksite employee, in particular given the volatility we may experience during our fiscal year Fourth Quarter Annual Health Care Renewals. The PEO segment's margins decreased 10 basis points for the quarter due to growth over pressure from incremental selling expenses and adjustments to our loss reserve estimates related to ADP Indemnity, offset by operating leverage within the business and benefits from our voluntary early retirement program. This margin performance was ahead of our own expectations as we continue to see sequential reductions in our ADP indemnity loss reserve estimates, as well as lower than expected growth in the zero-margin pass-through revenues. We continue to benefit from the underlying strength of our business model. We remain committed to reinvesting in the business and to leveraging the strength of our organization to drive change. Our results this quarter reflect our success in driving these initiatives and we are pleased with our progress this year. And with that, I will now turn the call over to Kathleen for our fiscal year 2019 outlook.

Thank you, Jan, and thank you, Carlos, for the warm welcome to ADP, and good morning to everyone on the call. I'm looking forward to meeting many of you over the coming weeks and months. I'll start now with the outlook for Employer Services. We now expect revenue growth for fiscal 2019 to be at the lower end of our previous guidance range of 5% to 6% growth. We narrowed our guidance this quarter since we expect slightly elevated pressure from the impact of FX and as I will discuss shortly, we have also narrowed down our guidance for interest income from client funds as a result of changes to the forward yield curve this quarter. We continue to anticipate growth of 2.5% in our pays per control metric. We are raising our fiscal 2019 ES New Business Bookings Guidance to 8% to 9%. Regarding the agreement that we completed in March, I'd like to highlight that this was not an acquisition of a business. We will, however, be recognizing an intangible asset for the acquired client list. We are not disclosing the purchase price for this asset, but you will see some activity related to this investment in additions to intangibles on our cash flow statement. And starting in the fourth quarter we will begin to amortize this intangible asset in accordance with our policies for similar transactions. While we anticipate incremental expense from our brand efforts and the increase in our sales guidance, as well as incremental amortization related to intangible assets, we are raising our ES margin outlook and now anticipate full-year ES margins to expand about 225 basis points from our prior forecast of 175 to 200 basis points. Our outlook also continues to contemplate 50 basis points of acquisition drag for the year. Moving on to the PEO, we continue to expect 9% to 10% PEO revenue growth in fiscal 2019 and 8% to 9% growth in average worksite employees. We also continue to anticipate 8% to 9% growth in PEO revenues excluding zero-margin benefits pass-throughs. With the better than expected performance in our PEO margin this quarter, we now expect margins to be up 25 to 50 basis points as compared to our prior forecast of at least flat. With the continued reduction in our loss reserves related to ADP Indemnity we've adjusted our estimate to 25 basis points of growth over pressure on a full-year basis from our prior estimate of 50 basis points. I’ll now go to the consolidated outlook. With the adjustments to our ES revenue outlook we now anticipate total revenue growth at the lower end of our 6% to 7% range for fiscal 2019. We continue to expect the growth in average client funds balances to be about 4%. We are adjusting slightly our expected growth in client funds interest revenue to about $90 million from our prior estimate of $90 million to $100 million, and for the total impact from the client funds extended investment strategy to grow about $70 million from a prior estimate 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 at least 150 basis points compared to our prior forecast of 125 to 150 basis points. This outlook continues to include approximately 30 basis points of pressure from acquisitions. With the benefit for this quarter to our effective tax rate, we are lowering our adjusted effective tax rate expectation to 23.8% for fiscal 2019 compared to our prior estimate of 24.4%. And with these adjustments to our outlook, we now expect adjusted diluted earnings per share to grow 19% to 20% from our prior forecast of 17% to 19%. We continue to be pleased with our overall execution. And with that, I will turn it over to the operator to take your questions.

Good morning and thanks for taking my question. Well, Carlos, Jan, and Kathleen nice to meet you. Wondering if you can talk a little bit about the new type of deal in terms of taking over for existing payroll providers. Just how does that compare to when you win a new client just from an economic perspective and how big is that opportunity as we look out over the next few years.

Well, in terms of helping you size it, I think that based on the comments you made about our new business bookings. I think you can back into it. It’s about a 2 to 3 percentage point impact for the year on new business bookings growth. So that gives you a sense of from a bookings standpoint what the size of the opportunity is. And just in terms of elaborating a little bit more on it, we actually do these types of deals on a much smaller basis on a fairly regular basis and have been doing them for 20 to 30 years where small providers that are either retiring or selling out, want to sell their book of business, we are not really interested in buying additional platforms or frankly taking infrastructure or offices and so forth. So we structure it really as an agreement where we buy the right to convert the clients and we get some help, and some assistance from the seller. But in essence it looks a lot like a typical new business and the economics would look a lot like typical new business with the exception of course that we have to pay some acquisition costs if you will to the seller. But the way we organize the effort is very similar to a typical sales effort in a sense that we send out either through our inside sales force or our field sales force, people to get the client to sign a contract with ADP, because we are not buying contracts and we're not buying the business. So they become an ADP client on our pricing terms and we in essence implement them with our resources onto our platform. So it looks a lot like a business-as-usual. The reason we had to call it out is obviously the size. These typically are frankly really small, a couple of thousand, even in the hundreds of clients CPA Firm or an owner of a small payroll company may be retiring. This is a much larger transaction that has a material, somewhat material impact on our results and our guidance and we thought it was important to point out. We are being a little bit coy about the details because obviously for competitive reasons we are literally right in the middle of converting all these clients. So our sales force has already been out for several weeks selling and converting these clients and we've begun the implementation process. But most of our competitors are aware of this transaction that was going on. So we just rather not talk about it more than we have to, just to make sure we give you the proper context and the proper guidance.

I just meant from a strategic perspective, longer term do you see more of these types of opportunities coming up as you and some of the other large national players have invested more behind technology and smaller regional players just can't keep up.

Yeah, I wouldn’t call this a small regional player. So this is probably as you get more information about it, I think it will become obvious. This is kind of the last of its kind as far as I'm aware and just for historical purposes, I was personally involved. In 2007 was the first time that I met with this organization about trying to create an opportunity for us to acquire this business or in this case the right to convert these clients and there were people before me who had already been having those discussions. So this has been going on for quite a long time. So I would say this is in the category of relatively unique and in terms of size and also type of payroll provider that it is.

Great, thank you.

Hey thanks, good morning guys. I just wanted to ask a follow-up on that point with this new agreement. Is there anything baked into the revenue guidance for the year and can you give us a rough sense of how many clients this involves and then just was there any promotional pricing or any extra promotional pricing in Q3 to help fuel the bookings rebound that we saw, the 10%?

There was nothing incremental in Q3 in terms of just answering that question first, which I think is somewhat unrelated to the other questions. So the answer to that is, not that I'm aware of. There was no – nothing artificial done or nothing – remember part of – I tried to explain in the second quarter and hopefully this is some indication that we were giving you guys the right story is that calendar wise we had a couple of days of selling that moved into the third quarter from the second quarter. So if you remember we had a relatively weak second quarter new business booking. So I think some of it is calendar. Frankly it’s even better than we expected based on just the calendar explanations. So I think it was just an overall good rebound and good performance. In terms of the size of the transaction impact on revenues, just because of the mechanics that our business operates on, as I mentioned that our sales forces are literally right now getting sales orders, converting the clients and we have implementation, people starting the implementation process. We have implemented some clients, but it was – it's an insignificant impact on revenues for the fourth quarter, but a significant impact on booking in new business bookings, which is why we've adjusted the guidance the way we have. The other factor that I would mention is, as you do your work on margins and so forth and you might notice some pressure in the fourth quarter, there's also again typical of the way our business works. We have a significant pressure from an expense standpoint in the fourth quarter as a result of incremental selling expense and in this case we also have the amortization of the intangible without the offsetting revenues because they haven't started yet. Some of them have stated, most of the impact on revenues is in the first quarter and beyond of next fiscal year. So it's a meaningful headwind from a cost standpoint and the other thing to keep in mind is if you recall, last year's fourth quarter we had very, very strong margin improvement. So the comparison is difficult, plus we have this fairly significant expense pressure from this transaction which obviously hurts us in the fourth quarter and it’s slightly dilutive. I think we figured it’s a couple of pennies I think we talked about?

Yeah, a couple of pennies in the fourth quarter.

But it will help us I think on a go-forward basis, because obviously by the first quarter almost all of that selling expense will have – and implementation expenses will be behind us. The amortization expense will still be with us, but most of the acquisition and implementation expenses will already be behind us, and then we’ll have the revenue and incremental margin from that business. So again, had we just made sure that we don’t overcomplicate this, if we had a – which we’ve had in the past. If we had a blow-out fourth quarter sales results, it would be about the same discussion. We would have had a lot of incremental selling expense and implementation expense, and it would be good news for future growth and for revenues that it will be pressure in the short term on the earnings.

Right, right. So that kind of leads to my follow-up question just on margin, because obviously the execution continues to be very strong there. So you are absorbing some of these incremental costs, yet you did raise the guidance again for margins for this year. So I wanted to talk a little bit about just your plans to backfill some of the roles that are being vacated or have been vacated by the early retirement program. How are you thinking about that now versus what you initially envisioned in terms of backfilled percentage?

It's a great question. I think the way that I look at it, just from a 40,000-foot level is really headcount growth year-over-year, because there's so many other pieces of noise like this incremental expense pressure we have in the fourth quarter that’s the best way to really kind of – given that most of our expense is really people related is really FTE growth year-over-year and I think on that basis as we expected and as we predicted and as we encouraged our organization to do, we closed some of the gap that we had in the first quarter by the third quarter. So we're still ahead and we wouldn't be increasing our guidance if we hadn't been still ahead. So we’re still a little bit ahead of where we thought we would be in terms of not backfilling as much as we expected, but we closed some of that gap. Now that was the appropriate thing to do because we want to make sure that our client retention, our client satisfaction, our NPS score stay. I think it’s at the record levels that they are in some of our business units, so that was an important objective for us, which was to extract incremental margin and efficiency out of the organization and out of the business, but at the same time making sure that we stayed focused on client satisfaction and client service. I think we're doing that, I think we've landed the plane in a fairly good place. I think the organization responded well. I think to the absorption of the early retirement reductions, as well as the reworking of some of the things that we do and some of the processes that we have in order to make sure that we can continue to deliver the high levels of service that we have with fewer people.

And maybe I'll add within the nuts and bolts, as a reminder we anticipated the impact of the early retirement program to happen in your life. The impact of approximately $150 million and we are anticipating that to be true going forward. So the overall opportunity has not increased, but we captured in this fiscal year a higher percentage of that total number, which we now expect slightly to be below that and like 140 – I would say roughly $140 million to $150 million. So we think Jason that the overall assumptions regarding the back hiring and the backfills remains intact.

And I think in terms of new contact this was a fairly large undertaking that we hadn't been through before. So I think in the context of you know the guess work that went into the backfills and the pacing of those backfills and so forth, I think the organization did a great job.

And maybe I'll add a more tactical comment because this quarter really had an unusual revenue growth outcome. Just reminding everybody that much of that in the PEO of course we explained with the timing of SUI revenue collection and a couple of other one-time moving items also and we had also a timing effect of revenue relative to processing days in the second quarter that moved into the second quarter on the site. So once you adjust for all of that, actually the organic revenue growth rate for the company is fairly close to where we want it to be and if you look on a year-over-year comparison I think we remain optimistic about an acceleration of our organic revenue growth, in particular in the ES segment that should really drive overall, long-term success of the company. And as you know, we have built-in scale in our business model. A growing company and shows competitiveness so that’s a strong commitment to drive the revenue growth as we had indicated going forward.

Got it. I did want to go back to the transaction that you announced with what I think is a large bank distribution channel. Without that I believe you said you’d be at the lower end of the bookings range. Is there something going on there with regards to competition, prior year comps pricing, something we should be aware of that is temporary affecting that bookings performance and typically when you buy these sorts of portfolios, I’d imagine they don’t quite have this richer set of portfolios of services you have. So is that an opportunity?

The last part of your question is there's definitely an opportunity there because you're right, our portfolio's a little bit broader. So we are very bullish and very optimistic on the transaction. Just to clarify, we didn't say that we would be at the low end. I did say we would be at least at the lower end and so we feel based on the third quarter bookings performance, based on momentum we feel pretty good about our situation around the business booking. So maybe we weren't strong enough in conveying that. But I think our sales force is executing quite well. I just want to clarify also, it may not have come through that. I've been working on this deal personally for more than … for 2007, I think, since 2007. I don’t think anybody’s working on it before. So we didn’t just run out and try to make an acquisition to make the quarter or to get our booking number up for the fourth quarter. I wish it were that easy because we tried many, many times to make this happen over the course of a decade and this happens to be when they occurred and we would have taken it any time any day, because it's good for our shareholders and its good for our business and we’re very, very pleased that we have it. But we have no concerns about anything happening in the macro environment, on the pricing front or otherwise to make us feel less positive about our sales force, our distribution and our new business bookings.

Thanks, good morning folks. Kathleen welcome. Jan, it was a pleasure working with you. All the best! I guess my the first question is, in both ES and PEO you seem to have, you seem to be trending more to the lower end of revenue expectations, you did well on margins. I want to ask how you are now thinking of sort of this revenue growth versus margin growth trade-offs. All these margin initiatives have been successful, but is it leading you too much in one direction versus the other and specifically what do you need to do to get up to your 7% to 9% mid-term growth rate?

So I mentioned two things. First on Employer Services, I think we tried to be clear that we have a little bit of additional FX pressure which is obviously something that we don't control over or we don't factor it in at the beginning of the year. So I think that’s – at least for now that’s some of it, because you would see from our third-quarter bookings that we feel pretty good about the long-term future trajectory from a revenue growth standpoint. On the PEO I think we cautioned I think over many years and even when we did our Investor Day, that a very large part of our guidance around PEO revenues and overall ADP revenues is that the growth of pass-throughs, which has no impact on dollars of profit. It has an impact on margin because the slower those pass-throughs grow, they actually help us with our margin percent objectives, but the faster they grow the more they hurt that margin. And so we’ve cautioned and encourage people not to get too caught up. If the source of weakness is pass-through revenues, that's really not a value creating revenue stream for us. It’s part of the way we – the business model and its part of the way we bill our clients, but I would say that the tone you should be hearing from us on the PEO is actually quite positive. It has been positive since the first quarter and was positive even entering into the first quarter and the only thing that changed from six months before that was the pace of pass-through growth which slowed in a meaningful enough way that it put pressure on the top line revenue growth for the PEO. But I would encourage you to stay focused on kind of the revenues, excluding pass-throughs and worksite employees and the other metrics which we feel are actually strong if not ahead of where we expect them to be. And maybe I'll add a more tactical comment because this quarter really had an unusual revenue growth outcome. Just reminding everybody that much of that in the PEO of course we explained with the timing of SUI revenue collection and a couple of other one-time moving items also and we had also a timing effect of revenue relative to processing days in the second quarter that moved into the second quarter on the site. So once you adjust for all of that, actually the organic revenue growth rate for the company is fairly close to where we want it to be and if you look on a year-over-year comparison I think we remain optimistic about an acceleration of our organic revenue growth, in particular in the ES segment that should really drive overall, long-term success of the company. And as you know, we have built-in scale in our business model. A growing company and shows competitiveness so that’s a strong commitment to drive the revenue growth as we had indicated going forward.

So, as you can tell from our comments, we are really pleased with the rebound in our bookings. We are happy with this transaction that we consummated in late March. I think we have good momentum and our financial performance has been strong. But I also want to call out to the comment and the question about retention. We really wouldn't be able to perform on a long-term basis as well as we're performing if we weren’t really delivering strong client satisfaction and better products. So I want to also complement our associates and our organization on staying focused on NPS scores, on client satisfaction and on building stronger products because the performance of the financial side doesn't come without those factors. And all while we are doing that, we are trying to transform our business and I think become more efficient. So there is a lot of effort and a lot of work and I appreciate all of that everyone is doing. Last thing I just want to mention is obviously we’re very excited about having Kathleen here with us and everyone will get to know her, but it's bittersweet moment here with Jan leaving. As always, even the way he handled this transition was a total class act. So you know we've been partners here for a long time, prior to us being either CEO or CFO, we've been through a lot together, we've done a lot and I just want to thank Jan one more time for everything you've done not just for our shareholders and for all of you who are here on the call. But he’s also done a lot for our clients, our associates, and he did quite a bit for his community as well. So Jan, I thank you again, and I declare you not only Ironman Athlete but Ironman CFO.

Thank you.