Automatic Data Processing Inc (ADP) — Q3 2021 Earnings Call Transcript

Thank you, Crystal. Good morning everyone and thank you for joining ADP's third quarter fiscal 2021 earnings call and webcast. Participating today are Carlos Rodriguez, our President and Chief Executive Officer; and Kathleen Winters, our Chief Financial Officer. Earlier this morning, we released our results for the quarter. Our earnings materials are available on the SEC website and our Investor Relations website at investors.adp.com where you will also find the investor presentation that accompanies today's call. During our call, we will reference non-GAAP financial measures, which we believe to be useful to investors and that exclude the impact of certain items. A description of these items along with a reconciliation of non-GAAP measures to their most comparable GAAP measures can be found in our earnings release. Today's call will also contain forward-looking statements that refer to future events and 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. And with that let me turn it over to Carlos.

Thank you, Danny. And thank you everyone for joining our call. This morning, we reported another strong set of quarterly results that were ahead of our expectations. With revenue growth of 1% and adjusted EBIT margin down 90 basis points, combining for a modest adjusted diluted EPS decline of 2%. This of course was the final quarter before we begin to lap the impact of the pandemic, and I'm very proud of our organization's ability to have delivered positive revenue and earnings growth for the first nine months of the fiscal year despite unprecedented challenges in the economy and the labor markets. I'll start with a review of some of our key performance drivers and an update on the operating environment we’ve been experiencing. This quarter, our Employer Services New Business Bookings reaccelerated and we delivered 7% growth, a strong result for the team. The improved year-over-year growth compared to the second quarter was driven by every business unit. Importantly, we ended the quarter on a particularly strong note with record March sales performance that was well above pre-pandemic fiscal 2019 levels, which we see as a positive signal for client engagement in the quarters ahead. The selling environment will likely continue to evolve, month-to-month, and with differences on a regional basis as COVID cases and the reopening trajectories stabilize. We are optimistic that with vaccine deployment progressing steadily, our clients are in the best position since the pandemic started to begin making buying decisions again.

Thank you, Carlos, and good morning everyone. Q3 represented another strong quarter for us with our performance on both revenues and margins driven by excellent execution across the organization. Our revenues grew 1% on both a reported and organic constant currency basis, which represented a slight acceleration versus Q2. We delivered this growth despite incremental drag from client funds interest versus Q2, as well as some incremental pressure related to our usual seasonal Q3 revenue drivers such as annual W-2 Form. I'll share more on these in a moment. As anticipated, we also experienced a margin decline as we continued to make additional growth in productivity investments and as we experienced a more significant client funds interest revenue decline compared to prior quarters, but the 90 basis points of margin decline was better than our expectations. Combining this revenue and margin performance, our adjusted EBIT was down 2% to $1.1 billion. Our adjusted effective tax rate increased slightly compared to the third quarter of fiscal 2020, as we had less contribution from excess tax benefit on stock comp, but our share count was lower year-over-year driven by share repurchases, and as a result, our adjusted diluted earnings per share of $1.89 was down a modest 2% versus last year. For our Employer Services segment, revenues declined 1% on a reported basis and 2% on an organic constant currency basis, demonstrating steady growth rates compared to last quarter, despite additional pressure from two sources as I just mentioned, both of which were fully anticipated. First, with greater pressure from client funds interest, our Q3 has a seasonally larger client funds balance than other quarters of the year and as a result, it skews more to cash and cash equivalent investments where interest rates have been pushed down to near zero. As a result, our client funds interest declined 32% versus last year with average yield down 70 basis points, more than offsetting our strong balance growth, which improved to 6%. Second with the headwind related to seasonal Q3 revenues like the annual Form W-2 which effectively makes our Q3 slightly more sensitive to pays per control and employment turnover trends and other quarters. Looking past these two headwinds, underlying ES performance showed sequential improvement driven in part by continued record level retention that was partially offset by slightly lower than expected pays per control. Employer Services Q3 margin was down 120 basis points compared to last year ahead of our expectations. We continue to invest in headcount to support our growing client base. We also started lapping lower incentive costs from last year and we experienced greater pressure from the lower client funds interest revenue compared to the first half of this year. But at the same time we kept our focus on prudent cost control and continue to execute on our transformation initiatives.

Hi, thanks so much for taking my question this morning. I wanted to ask about the increase in person engagement with the sales force, can you kind of contrast for us the productivity you're seeing from those in-person meetings relative to the remote meetings? Is that something that we should consider to be an incremental sort of driver of productivity maybe beyond what we were expecting, as we go forward?

Yes, I think that's right. I think you would look at it really as incremental, because if you recall our first quarter, we had pretty robust sales results really with almost 100% of our sales force working virtually at that point. So we expect that the increased activity, if you listen to the tone of our comments that it's really incremental and hopefully gets us quickly back to the same productivity levels we were pre-pandemic, which we were approaching in the third and fourth quarter here, and then hopefully beyond that, because obviously part of our model before was that we expected some incremental improvement in productivity each year, in addition to increases in headcount and when you combine those factors in addition to kind of new products and other things, that's what kind of drove our new business bookings growth, the combination of increases in headcount, and increases in productivity. So you're right; that's the path is this will help us get quickly back to our previous productivity and hopefully allow us to exceed that, which is important for us in terms of our long-term growth expectations.

Okay. And I wonder if you could comment too, on the environment around potential tax reforms. As I recall when the corporate tax rates fell, that was translated into lower client interest balances for you or client funds balances for you. I know it's early days and everything needs to move through Congress, but can you comment on the degree to which some of these changes may or may not be factored in your budgeting process or what you're expecting here in terms of tax changes going forward in the impact on your business?

I believe there is considerable discussion within the team regarding various topics, particularly the potential increase in tax rates for higher-income individuals and capital gains taxes. Currently, the primary focus seems to be on the corporate income tax rate. While I don't think there's a direct impact on our balances, it clearly affects ADP as a corporation.

Yes, you're definitely right about the individual tax brackets having an impact on our float balance. So, back when we had the previous corporate tax reform in the individual bracket changes, it was a headwind. I think about a percentage point or in that ballpark. So in theory, what will drive the tailwind to our growth will depend on the actual change in rates here and what that means for overall individual income taxes. So it would be a contribution that is not factored into our outlook at this time, but obviously it's something we would benefit from.

Terrific, thanks for taking my questions this morning.

Thank you.

Hi, good morning. Thanks for taking my question. I got just a quick housekeeping and then longer-term strategic question. You guiding I think to 4Q EPS slightly below the Street. Is there any margin pressure to call out in the fourth quarter?

I believe that the pressures we are experiencing are largely self-inflicted, presenting us with an opportunity to invest in our long-term growth prospects for 2022 and beyond. Kathleen has highlighted a couple of key areas where we are investing. Therefore, I can confirm that there is no mysterious margin pressure. The business trajectory is positive, and indeed, every metric has shown sequential improvement. Even our pay per control, although modest, has decreased by about 6%. Based on our data from the beginning of Q4, we expect this to improve and anticipate continued enhancement due to trends in unemployment. Overall, we find ourselves in a strong position with considerable momentum. Those familiar with our company know that we typically reinvest when we experience such momentum, which is evident in our plans for the fourth quarter. These are intentional decisions we are making.

Yes.

And that's exactly right. And I'll just add in, in addition to what I think is smartly doing those investments in the fourth quarter and accelerating some of that, we've also got some year-over-year comp things going on right? As you would expect with selling having been down Q4 last year versus Q4 this year, we'd see incremental year-over-year selling expense in Q4 as well.

Got it. And just my follow up is, it was very impressive to see bookings kind of back to fiscal '19 levels. Really strong. Can you maybe talk a little bit about how Next-Gen Payroll engine is helping bookings?

It's a relatively modest contribution because despite our level of excitement about really all of our Next-Gen platforms and even Roll, which you could argue that that's a NextGen solution as well. Again it's just because of the size and scale of our company like right now from a dollar impact standpoint, it's really not, that's not what's moving the needle really across the board, really in every business unit in every channel and every category, our bookings have been improving again sequentially every quarter and they continue to do that this quarter. So we believe that medium to long term, that's the key to us, sustaining kind of our multi-decade growth rates is these Next-gen platforms, but I just continue to caution everyone to because we want to give you the updates and we want to continue to focus on next-gen and I like, I appreciate the question important to kind of separate what's driving the quarters and what's driving the next fiscal year versus what's driving the next three to five years. And I would say that Next-gen payroll is going to be increasingly important in the next year or two from a bookings standpoint and we'll start to probably make a difference and will then give you that color in terms of what difference it's making, but we should be cautious about revenue impact, just because of the recurring revenue model just takes a while for that to get into the revenue growth numbers, but it was positive, but really not. Now, we're really moved the needle.

And I would just add that we shared that we sold hundreds of clients on our Next-Gen Payroll engine with Workforce Now, just for context, that compares to typically a few thousand clients that we sell in the mid-market. So it's still a piece of the overall puzzle. But as that scale to become the majority and then ultimately all of our mid-market sales then you truly feel the incremental benefit.

Got it. So...

That comes really the message there.

Thank you. Great stuff. Thanks.

Good morning. Thank you for taking my question. So I wanted to ask about down market and great to see the introduction of Roll to target the micro customers. I was hoping you can speak a little bit more broadly about evolution of competitive landscape through the pandemic down market, how RUN has done and kind of coming out of the pandemic, what opportunities exist for ADP to continue gaining share in the segment as I believe it has done prior to the pandemic?

Well, I mean I think there are a number of moving parts. And I think it probably depends on people's current business model. So, as you know, our business model is really more about providing not just a software-based to support right support you call service, you can call it compliance, and I think what we saw this year with all of the activity that the government had around the various stimulus programs to help companies and individuals and so we're that created a lot of complexity for employers, it appears that we're entering into an environment where despite the pandemic hopefully fading, there will be increased levels of government activity around employment and incentives and that kind of that kind of thing. I think that's a good environment for ADP and for our down market business because most small businesses don't have the time or the inclination to really focus on these things and to take care of these things. So it works for some clients and we believe that that's why we're rolling out Roll, no pun intended, but once you get to even a little bit slightly larger you do end up running into issues that you need help with and you need support and you need advice and much of that can be automated, but you still need it. So for example, a lot of our PPP support reports were automated. So it doesn't mean that somebody has to get on the phone and have a discussion about your PPP report, but you have to be focused on providing the support and the compliance in addition to just the software. So I think that helped us this year and again, so to answer your question, how do we believe we're set up competitively right now? I think we're set up excellently competitively because we now have very simple solutions for the micro-market where people want to self-buy, self-install, and don't have complexity and maybe don't have issues with taxes or compliance or don't want to ask questions, because it's not priced or built to ask questions. But we also have the ability to provide this assistance that is important for even small clients for sure it's important for mid-sized clients and for larger clients, but I think what really got highlighted this year is that small clients need a lot of help and need a lot of assistance and you can see it in our growth rates in our retention in our client satisfaction, like in all of our metrics in our small business division that we happen to be in the right place at the right time I think to be able to help our clients and then hopefully benefit from the tailwind of the demand that that's going to create on a go-forward basis. So anyway, long-winded way of saying, I think we're in a great position because of our business model.

Got it. Excellent. And then a quick follow-up from me on the global business. So just thinking about what we're seeing now, I think is strong kind of bifurcation of the recoveries in the US and abroad. Strong expectations for US recovery in your business in Global, is it growing, is it going slower? And is the implication that global might be kind of headwind to growth over the next couple of quarters?

As usual for us, things are a little more complex when you peel the onion back, there is a little bit more complexity because you're just the image you have is correct, but it hasn't really translated into the results, our results have actually been quite good internationally, both in terms of bookings as well as just the performance of the business overall in terms of revenue, pays per control etc. Some of that is that a large portion of our business is in Europe and there were a lot of government programs there as well to help companies and to prevent high levels of unemployment. And so for example, our pays per control metric never got to the negative levels that we saw in the US, in Europe, so that was a benefit. At the same time, our bookings have been quite strong and I have to admit that I've been looking for the explanation for that other than really good execution on the part of our sales force as they moved into a virtual environment because they had to sell virtually there as well. But I would say it's strong differentiation of our products. Again, the service aspect to our solutions, the ability to provide support and to provide compliance and help, all of those things probably helped our bookings performance internationally as well. So I would say that our global business actually is probably one of the bright spots. I would say despite what is obviously a very difficult environment, and we obviously feel for our businesses in not just Europe which now it happens to be improving again, particularly in the UK, but we're having challenges now in Toronto, we're having in Canada and in Brazil, we're having challenges. Obviously, as you know in India as well. But it has not translated into negative results. So I think it's a testament to the resiliency and the strength of the business model. But I don't want to take anything away from the fact that it also obviously shows great execution by our international leaders as well.

Got it. Thank you very much.

Sorry about that. Question for you on ES versus PEO performance. It seems like pays per control appear to be a key difference, can you just dig in more on the mix aspects that seem to drive a pretty notable disparity of performance between those two. And should we expect that difference to persist in 4Q? Or do you expect more even performance?

I don't think we've shared that data, so I'm surprised you reached that conclusion, but it might reflect our tone. There isn't a major distinction between ES pays per control performance and PEO; both have shown improvement each quarter. We generally avoid very small clients, so we don't have many clients with one to five employees. The average client size in the PEO is around 40, which skews slightly larger than our typical small business client size. I looked at these figures last night, and everything lines up well; the PEO is performing slightly better in terms of absolute pays per control and has been improving sequentially just like ES. Also, I might get in trouble for saying this, but last night I received a note from the PEO indicating we had our first positive pays per control week. However, pays per control can fluctuate based on payroll cycles, so we can't draw too many conclusions from that. This is the first week we've seen a positive pays per control in the last 12 months, which is a very encouraging sign.

Okay. And then just on margins, you showed outperformance here in the quarter. But at the same time you've called out incremental headcount investments higher incentive comp, and I think elevated implementation costs, can you just talk about the drivers there and then how do we connect the elevated implementation cost with more efficient digital onboarding commentary?

Well, the efficient digital onboarding, I think we were pretty clear with FPS, we would love to at some point in the future extend that into the mid-market and maybe someday into the upmarket. But as you know, like you know better than us, because you've talked a lot of the competitors, there's not a lot of digital onboarding going on for example of large complex ERP installations, not to pick on any competitors, but it's pretty. I know the images that the stuff, all kinds of its installed itself, but most of many of our competitors use third parties. So there is still quite a lot of implementation activity and expense, whether it's done by the seller of the solutions or if it's done by a third party. We haven't have a model where we do a lot of it ourselves. And so as bookings pick up and demand picks up, we need to add to our capacity for implementation in particular in the mid-market, the upmarket and also global, which as I mentioned has been strong. So it doesn't mean that we're not adding in the down market also. But in our small business segment as we alluded to, and as I think you pointed out, the digital onboarding capabilities obviously reduce the need to grow headcount as much as we otherwise would have. But even in small business, we have a lot of growth in bookings and so it's a matter of the trade-off of how much can we onboard digitally versus how much we still need some help with, in terms of people being involved in. In terms of some of the other items that, we alluded to, I mean, some of this is just kind of natural to the business model, as we bring on more clients, we obviously expect productivity improvements every year, whether it's in sales or implementation or everywhere, but we are seeing a recovery of our business and very strong GDP forecast, and so, we're anticipating improved prospects for bookings and for revenue and for growth, and we need to make sure that we have the right staffing levels based on the productivity metrics that and the productivity goals that we have to be able to handle that business, so we can maintain our high level of client satisfaction that we've, that we've experienced. And then we have some natural growth in expenses like I think Kathleen alluded to sales expense is clearly something that grows as you have sales success and as sales grow year-over-year. So I wouldn't, I wouldn't read too much into it rather than that, we made some conscious decisions to reinvest in some specific things in the fourth quarter to really position us well for 22 and beyond, but most of this is just kind of natural stuff where, again, as our revenue growth picks up over time, we still have a great incremental margin business where we would expect to have good operating leverage as we grow those revenues.

Okay, thank you.

Good morning and thanks for taking my questions. Wondering if you can talk a little bit about the investments in Q4, just in terms of Next-gen, Wisely, marketing and advertising, just how much incremental spend will there be and are you seeing signs with regards to Wisely, that the interest is picking up and therefore, that's a great place to invest?

I don't think it's appropriate to provide specific numbers. You can likely estimate based on the trajectory we’re on. This is not going to be in the hundreds of millions of dollars. I appreciate the short-term focus you have, but I wouldn’t read too much into the fourth-quarter results. We've been focusing on long-term goals, and when we identify areas to enhance our bookings, client satisfaction, or efficiency, we invest in those. We've consistently communicated our investments over the past three quarters, and that was a strategic choice at the beginning of the year. Thankfully, we experienced positive surprises in revenue and other areas. We committed to investing during the downturn, and that’s what we've done. We believe there are several smaller initiatives that might pressure our fourth-quarter margin. While I understand your questions, I think it may not be the right approach to provide a specific number. Danyal might be able to offer additional insights.

I think of these as adjustments to our Q4 spending rather than significant changes to the program. It's fairly modest, and as Carlos mentioned, it doesn't involve hundreds of millions of dollars.

Your Wisely question, Mark. The one thing we did see was stimulus drove some uptick in the card spent per card. Other than that, during the pandemic, there hasn't been any real notable changes in the Wisely growth trends. So really it's the per card economics that have seen a slight uptick recently.

Yes. And I think it's something that we've been excited about. But again, it was hard to get excited about, there was a lot of natural tailwind because people wanted more digitally oriented payment methods in the last three quarters, but from a focus standpoint like for the first couple of quarters of the year, we were focused on a lot of things, and this may not have made it all the way to the top of the list, but it was on a top of the list kind of pre-pandemic, if you recall, and so I think, I would see this as more of a re-emergence of some of the themes and some of the things that we had been talking about that excite us because I think the opportunity is a big one, I'm glad that the team brought this forward in terms of as an investment opportunity because we were excited about it, call it 12 to 18 months ago, we should just as excited about it today. But admittedly, it wasn't our number one focus, and in the middle of the pandemic, if you will, at the beginning of the pandemic.

Yes. And then just one last comment is we always look very hard at the timing and amount that we spend on marketing and advertising but with economic activity continuing to have momentum and pick up and client engagement picking up, we felt this was the right time to increase that a little bit as well.

I really appreciate that color. And it is completely consistent with the long-term track record. Going back to Art. Even before, Gary, can you talk a little bit about this Danyal or can you just remind us what the sensitivity on the pays per control to revenue is?

It's 25 basis points of revenue impact for every 1 percentage point change in pays per control.

I appreciate that. Thank you.

Great, thanks. Hey, Carlos, I think you alluded to kind of a record high on account none of us have sensed about. Can you give us a sense of where that splits across enterprise mid-down market and how that sits relative to historical trends in the business?

Yes, I can provide some insights. While we haven't disclosed the specific breakdown by business, I can offer a general overview. We experienced 6% growth, totaling 900,000, with similar growth for RUN and WSN. Global view also had comparable growth. From a client growth perspective, our strategic platforms performed well in this challenging environment. The overall growth rate is significantly influenced by our small business division, which has the majority of our client base. Regarding Workforce Now, remember that we launched it not just in the mid-market but also saw success in the upmarket and within the PEO. Additionally, our PEO platform is thriving in Canada, indicating strong growth there, which is quite gratifying for us. I hope this provides some clarity.

Now, that's helpful. And then just on the retention, real quick, I think you took it up from the 125 basis points, up from 100 basis points. Can you just refine that a little bit, is that kind of the Q4 run rate or is that the full year number of this at being fourth quarter is even higher than that? Or is that infinite? The EPM number, and then just any thoughts you could just maybe frame on a little bit more.

You've stumped us.

I think we said in the opening remarks that it's on the Q3 performance being stronger than expected.

Yes, I think it's been quite consistent, and it's actually remarkable, which is why we continue to exercise some caution. We hope there is no regression, and we are not planning on it. For those who have been following us for a long time, when we see a shift of 10 to 20 basis points in retention, it's significant. Therefore, achieving this level of retention on top of last year's performance is impressive. We are enthusiastic about it, and the key for us is to assess the retention figures closely. There has been considerable improvement in controllable losses, which relate to service issues, among other factors. We are hopeful that we can maintain some of this gain, but we are realistic enough to recognize that some elements tied to business reopening and government stimulus may lead to some fluctuations. However, consistency has been evident; it seems every quarter shows improvement within the same range year-over-year. This is why we adjusted the full-year forecast slightly higher than before, though we are not trying to communicate any specific message regarding the fourth quarter in particular.

Helpful. Thank you.

Hey, thanks so much. I think a lot of good questions already. Just thinking about the retention feels like it's industry wide to some degree. So just trying to better understand your new sales, the reacceleration is it driven more from upselling, and in new business formation, and any surprises in the net switching over the balance of trade from a head-to-head standpoint?

I don't have much to update you on. We monitor everything related to the balance of trade. It's difficult for me to comment on retention compared to the rest of the industry. You would have the expertise on that because a casual review of some 10-K filings makes it hard to compare, as some companies report their annual recurring revenue retention differently than their overall company retention. It's challenging to provide a clear answer. I would suggest that retention could be more variable than you might expect due to the fluctuations in growth rates, which have significantly contributed to our ability to exceed expectations. Our revenue performance has been quite impressive given our circumstances. We also have a significant headwind from client funds interest, which should ease in the fourth quarter and next year, although there may still be some impact. This quarter was particularly tough, and over the past nine months, we faced a $130 million setback just from client funds interest. When everything is considered, it’s tough to outperform without robust retention. We’ve looked into how we compare to some competitors and feel optimistic about our potential for retention to be a significant factor in our performance, alongside other elements that we haven't fully explored yet. I don't think there are any major issues currently; we have been performing slightly better against our usual competitors regarding the balance of trade, although some still pose challenges for us. Overall, we are comfortable with our position and committed to continuing our growth. Many of us appear to be benefiting from broader economic growth, and it seems that there are some regional providers also contributing. We are seeing growth in our units within Workforce Now and RUN, indicating that we all have the potential to grow in this environment, which is positive for everyone.

I'm glad you mentioned that; we shouldn't take it for granted. Regarding client satisfaction, would you attribute the notable increase more to the support efforts your team has invested in, the Next-gen platforms, or the digital initiatives? Or do you think clients are simply developing better goodwill with ADP as they spend more time with them during these challenging times of the pandemic? I'm trying to understand whether this could lead to a compounding effect in retention if it continues.

Yes, I think it's a great question. We are trying to determine this because it's crucial for the long-term value creation of the company. You clearly understand the business well enough to address all the points. The key issue is evaluating each of those factors, particularly the goodwill that was established. There were times when clients could only consult with us regarding the PPP loans and tax credits. When you purchase software, you can reach out for technical support, but for tax-related guidance, that's not possible with other providers. We have clearly built significant goodwill. However, business realities dictate that goodwill isn’t lasting, so we aren't planning to rely on it for the next five or ten years. This brings us back to the fundamentals of client satisfaction—being available for our clients in all situations, not just during the pandemic. Another crucial element, alongside goodwill and our digital initiatives aimed at enhancing user experience, is that we did not panic at the start of the pandemic. We faced some criticism for this, but we chose to maintain our investments not only in R&D but also in headcount and implementation. Although we experienced some turnover and a temporary dip in our workforce due to decreased volume, it was vital for us to navigate this phase while fulfilling our commitments to clients. It's important for us to keep an eye on productivity, as we aim to improve it. However, we can't be naive about the implications of a lower headcount on net income, especially regarding client satisfaction and retention. The challenge is to find the right balance, which can be monitored through various systems to assess client satisfaction levels in relation to our responsiveness and the training of our staff. Many factors influence this, but the key is our commitment to delivering high-quality client service, which we have demonstrated. If we could manage this during the pandemic, we can do it at any time.

Yes. Got it. Thanks so much.

Good morning, guys. Thanks. I just wanted to start with the bookings question just to make sure you've got the expectations right here, just trying to do the math on the Q4 implied guide. I think it would be about 90% growth. So I wanted to see if that's accurate, obviously you've got the super easy comp there and maybe as part of that can you just talk about some of the activity you've seen through the first month of the quarter. I mean I assume you've got pretty high visibility here, just given that you raised the low end of the full-year guidance range for the bookings?

Hey, Jason. It's Danyal. You don't have the weightings by quarter. But what's implied for the fourth quarter is over a 100% bookings growth. And for example, we're tracking right in line with expectations.

Yes, I would say that you should not read too much into that beyond what we mentioned. We are still very optimistic. We believe we will continue to see sequential improvements in productivity, but the growth rate is really tied to base effects. It doesn't matter whether it hits 110 or not, as that's not the focal point. I think you're trying to derive a number based on percentages. If I were you, I would consider looking at the second quarter or possibly the fourth quarter of 2019 as a good reference point. We do not expect to achieve 100% productivity levels in the fourth quarter, but we should be approaching the levels we saw in 2019, with some other minor variables to consider from that time. I don't want to make any definitive claims about that being the perfect comparison, but I hope this information helps.

Yes, your comparisons would certainly be more significant. I wanted to ensure everyone has the correct numbers for their models for the quarter. Regarding the payments per control, you mentioned it was slightly worse than expected in Q3, and you've adjusted your Q4 expectations downward. I'm curious about which part of the portfolio is influencing that because it seems somewhat inconsistent with the strong US employment data we're observing, which continues to exceed expectations.

Yes, it's entirely related to timing. The data shows this, and we have other indicators like job postings and background checks that support it. You shouldn't read too much into it, and we did not adjust our fourth-quarter expectations at all. In fact, we emphasized that we kept our full-year outlook the same, despite the third quarter appearing a bit softer, because we believe we are still on a positive trajectory. We're observing the same trends in employment and unemployment as you are, and we expect these pay-per-control numbers to improve quickly. Keep in mind that we're discussing numbers that reflect the situation up to the end of March, which covers three months. The data for March appears differently compared to January. It can be hard to remember how challenging things were back in January and February, which paints a different picture than what we saw in early April, and even in the last week of March. So, I wouldn’t draw any conclusions from this other than it being a matter of timing.

Yes, just to clarify, there was a slight adjustment to the Q4 number, and we are maintaining the full year guidance at a decline of 3% to 4%. So these are very minor changes.

Okay, perfect. Thank you, guys.

Good morning, thanks for the question, Carlos. I believe the high customer satisfaction scores and the goodwill reflect ADP's capabilities and the service business model. However, clients' needs are evolving, and we have heard from some of our other companies that talent acquisition has become even more challenging than in the past. I remember during the last Analyst Day that ADP had made significant progress in enhancing its recruiting management tools. How do you think you compare competitively in that area, especially regarding recruiting management tools? Do you believe this could be another avenue to sustain the high retention levels you are currently achieving?

Absolutely. You're correct that some of this is cyclical. About 12 to 18 months ago, people sought tools beyond just client acquisition tools. We need to be mindful of not just shifting focus but ensuring we can consistently support people throughout the entire lifecycle of HCM, which is particularly crucial right now. I would highlight two points: first, we develop our own tools, including those for recruitment management and an RPO business, along with other tools to assist in the talent acquisition process. We also maintain strong partnerships with several well-known companies, which enhance integration and support especially for small businesses and mid-market clients in fulfilling their recruiting needs. We have made significant investments in our recruitment management platform and talent acquisition tools, unrelated to the pandemic, and we expect these to contribute to our overall value proposition and bookings growth. Typically, there’s a core set of solutions, with recruitment management and tools like time and attendance being incremental to the basic HCM package. We're optimistic about our offerings, and our app marketplace provides an easy and seamless way for clients to utilize various HCM solutions. This includes partners who can help meet your talent acquisition needs, even if clients feel that ADP doesn't have everything they require.

That's helpful. And apologies if this was addressed earlier, but given the change in the yield curve, has there been any thoughts on potentially extending duration of the portfolio or any other investment selection choices as you head into '22?

It may not be particularly significant to highlight, but the yield curve currently shows that 5 and 7-year rates are performing better than 2 and 3-year rates due to the Fed's management. There are certainly tactical opportunities available. However, our duration has remained consistent since I became CEO, and I do not expect any changes in our laddering strategy or client funds interest strategies. The positive aspect is that the worst impact from client funds interest appears to be behind us, which has been challenging, with a $50 million drag this quarter alone. This underscores the strength of our business since we have managed to overcome that drag, resulting in a $130 million outcome for the year. We anticipate better times ahead. An interesting chart caught my attention; in 2008, we held $16 billion in balances and experienced $685 million in client funds interest. This highlights the change in interest rates over the years. Today, our balances are in the mid $20 billion range for the year, and we expect this to continue. If we consider potential inflation and review inflation breakevens along with other indicators, we are optimistic about the future for client funds interest.

And the adjusted EBITDA margin was 19% back then. You're already above that, that's great, thank you so much.

My questions have already been asked.

So as you can tell from our comments, we continue to, I think, have the same level of optimism, as we had last quarter and we're really, really thankful for the performance of our sales organization and also our frontline associates in terms of what they've been able to do for our clients and at the risk of ending on a negative note though, all of this positive, and all of this positivity and enthusiasm, we don't want to overlook the fact that we still have some challenges and some people still have some challenges in other parts of the world. This is a US headquartered company with over 80% of our revenues in the US. So that's probably why you're hearing all of this optimism, but we're not only in the US, we have associates in India, in Brazil, in Canada, and in Europe. And the situation is not the same there. Even though the businesses are performing well, we just as back in the spring of last year, it was enormous suffering and challenges here in the US among our associates, the same thing is happening for some of our associates in some other parts of the world, in particular in India. And we are not going to forget them, we're doing everything we can to help them. We appreciate what the US government is doing along with the Indian government and local governments to help as well. And we look forward to helping them kind of get through the same difficult situation that we managed to get through and they too will have their vaccination rates pickup in all of those parts of the world and they too will emerge from the pandemic. But it's clear that it's going to take a little bit longer and we should all remember to be there to help them and support them in any way we can, and I think people will do exactly that. But, having said that, we are close to seeing the situation in the rearview mirror here and we're really anxious to see our growth rates, we accelerate to kind of where we were pre-pandemic here at some point in the future and getting back to the business and to helping our clients with their challenges and helping our associates build careers and helping all of you and our other shareholders and stakeholders get a fair return for their investment. So again, as always, we appreciate your interest in ADP and we appreciate you tuning in and we will be back in a quarter with our outlook for fiscal year '22. Thank you!