Automatic Data Processing, Inc.

At this time, I would like to welcome everyone to ADP's fourth quarter fiscal 2020 earnings call. I would like to inform you that this conference is being recorded and all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, go to number one on your telephone keypad. To withdraw your question, press the pound key. to Mr. Daniel Hussain, Vice President, Investor Relations. Please go ahead.

Thank you, Crystal. Good morning, everyone, and thank you for joining ADP's fourth quarter fiscal 2020 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 fourth quarter of fiscal 2020. The earnings materials are available on the SEC's website and our investor relations website at investors.adp.com, where you will also find the investor presentation that accompanies today's call, as well as our quarterly history of revenue and pre-tax earnings by reportable segments. 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. 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. 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, Danny, and thank you, everyone, for joining the call.

This morning we reported our fourth quarter and fiscal 2020 results. Although we ended the year this year against significant headwinds related to COVID-19, we believe we executed well over the course of the last 12 months, and our product offerings remain well positioned to support sustainable long-term revenue growth as we continue to help companies and their workforces through all types of environments. For the quarter, we delivered revenue of $3.4 billion, down 3% reported and 2% organic constant currency, which was better than our expectations. And for the full year, we delivered revenue of $14.6 billion, up 3% reported and 4% organic constant currency. Our adjusted EBIT margin increased 10 basis points in the quarter and increased 60 basis points for the full year. well ahead of our expectations as we managed our expense base prudently to absorb the impact of a decline in revenue in the fourth quarter while simultaneously providing an elevated level of service to our clients. With this revenue and margin performance, our adjusted EPS growth was flat for the quarter and up 9% for the year. Considering the unprecedented and evolving macroeconomic situation, We are very pleased with our execution in the quarter and our current positioning, as employment continues to gradually recover from the steep declines our clients have experienced. The global health crisis from COVID-19 has clearly evolved over these past few months, and I'll start today's discussion by providing a brief update on the trends we've experienced. When we reported our fiscal third quarter results in April, we were just starting to see some preliminary signs of stabilization after weeks of rapid deterioration. More specifically, across our own data sources, including weekly payroll, clock and volume, job postings, and background screenings, there were multiple indications that we were reaching the trough. Now three months later, we do believe we saw conditions bottom in late April. Whereas our Pays for Control was trending down mid-teens in April, it has since improved to be down about 10% as we exited the quarter. And for the full quarter, Pays for Control was down 10.8%. better than we had contemplated in our outlook. Last quarter we also discussed our expectation for elevated out-of-business losses in May and June. Those losses ultimately developed in line with our expectations. This yielded a decline in our retention rate of 20 basis points to 90.5% for the full year, though if not for the elevated out-of-business losses in Q4, we believe our retention rate would have been up for the year. In fact, despite these losses in Q4, For fiscal 2020, we tied an all-time high retention for our mid-market and hit a multi-year high in our up-market. Looking ahead, while we have been encouraged by signs that the economic distress brought about by COVID-19 has started to ease in certain countries and several U.S. states, we are seeing continued or even increasing distress in others. And over the past several weeks, we've seen the pace of employment recovery slow. Accordingly, as we set our expectations for the coming year, we believe that the worst is behind us, but the global economic recovery over the coming quarters will be gradual. Kathleen will discuss some of our specific macroeconomic assumptions in more detail. I'd like to turn now to employer services and new business bookings. We reported a decline of 21% for the year, which was in line with our revised outlook, despite the limited visibility we had in making that forecast. And although this represents a significant decline, the actual execution by our sales force was better than what this reported growth rate suggests. As we mentioned last quarter, there are two components to our booking figure. Our gross bookings we actually sold in the quarter and adjustments for previously recorded bookings. Our gross bookings sold in Q4, while down significantly, came in ahead of our forecast. And most importantly, exited the quarter with improving momentum. This gives us confidence that buying behavior is continuing to trend in the right direction, which we believe will drive further bookings recovery in the coming quarters. Furthermore, our sales force has continued to adapt to this virtual sales environment as we've invested in training, stayed agile on sales messaging, and continued to foster our channel relationships. We are also continuing to see week-on-week improvement in leading indicators, such as referrals, appointments per salesperson, and demos scheduled. In addition to these gross bookings, we regularly adjust bookings we have previously recognized if, for example, a client is no longer expected to start within the original estimated timeframe or is starting with fewer employees than originally anticipated. These backlog adjustments are ordinarily immaterial to our bookings growth, but as we said last quarter, COVID-19 is causing some clients to delay implementations or to start with fewer employees than we originally signed. we made a larger backlog adjustment in Q4 than previously planned. And this offset the better underlying sales performance we experienced. Looking ahead, we expect we will likely see negative bookings growth in the first half of fiscal 2021, as we are still selling into an unfavorable macro environment. But we expect growth to be flat to positive in Q3, with much more substantial growth in Q4, driving full-year bookings growth of flat to up 10%. Beyond fiscal 2021, a key priority will be getting our sales productivity back to or above its previous level. Within our control are the investments we make, and in fiscal 2021, we are planning to continue investing in product innovation, digital sales capabilities, and leading-edge sales tools to drive sales productivity higher. In addition, at this point, we are planning to add modestly to the size of our sales force. and together we believe these investments will position us well to return to our prior new business bookings growth trend line as client buying behavior continues to normalize. Factors beyond our control, including overall GDP trends as well as the timing and scope of workers returning to their job sites, will in the meantime likely continue to impact our bookings. Moving on, service has remained critical to our clients. Our clients look to us for support and guidance in navigating through the complexities of key HR challenges and regulatory change. And our goal has been to serve as a trusted partner as they face COVID-19. Our clients have responded very positively to the robust service we have provided. and that in turn has led to record NPS scores in June as a direct outcome of our commitment to providing this exceptional level of service, and we expect this favorable NPS trend to have positive implications for us in the years ahead. In response to an initial surge in service volumes related to COVID-19, we redeployed hundreds of sales and implementation associates to help meet the service needs. While average resolution time spent per service request remains elevated as our clients work through complex issues, we have now seen our service request volume return to more normal levels, and we are happy to report that we have now deployed most of these associates back to their sales and implementation roles. We continue to keep watch on proposed legislation that could drive another surge in client service demands, and we remain prepared for such a scenario. We also continue to serve our clients through product innovation. During the quarter, we rolled out a range of solutions to help our clients through the crisis and prepare for the recovery. We implemented over 1,000 feature changes in response to 2,000 legislative updates in 60 countries, and we also had over 400,000 clients run over 2 million Paycheck Protection Program reports for a total loan volume of approximately $115 billion. Many of those clients have also now run the necessary reports to apply for their loans to be forgiven. Looking ahead, a key product focus is enabling a safe return to the workplace, and we're offering tools including touchless and voice-enabled clocking, health attestation, and enhanced scheduling and analytics to help clients manage their workforces as they resume workplace operations. We continue to make progress on our other major product initiatives, including the rollout of our next-gen HCM platform and paywall engines. Two weeks ago, we won yet another award for our next-gen HCM solution, the Ventana Annual Digital Innovation Award, and we remain excited about its rollout. Perhaps more importantly, despite shifting our workforce to a remote environment, we remain on track to hit our R&D development roadmap milestones. And just this quarter, we piloted NextGen HCM and Payroll in Australia. Our product team also launched our new workforce management solution in the down market, launched a new time kiosk in the Apple App Store, and we went general availability with Wisely Direct in our mid-market and down market. Now, taking a step back, I'd like to say that in every challenge, there is a potential for upside, and COVID-19 is no exception. We believe that the nature of this shock, in which businesses of all sizes have faced major uncertainties in managing their employees, has made the HCM partnership they have with ADP that much more valuable. And as companies emerge from this crisis, we expect them to see even more clearly the benefits of investing in robust, secure HCM offerings that include expertise and service to support their mission-critical activities. So although COVID-19 has created temporary headwinds in our growth, Past experience has taught us to stand firm regarding our investments and strategy as part of our commitment to drive long-term sustainable growth. The strength of our business model and balance sheet allow us to do exactly that, and we are well positioned in our product, service, and go-to-market strategy. Last, before turning it over to Kathleen, I'd like to quickly touch on our plans for our own associates. quarter, we discussed having over 98% of our workforce operating virtually, including our sales force, and we've been pleased with that transition and their overall performance in this environment. While we are well positioned to continue operating this way, we are in the early stages of bringing back a small portion of our workforce to the office on a volunteer-only basis. And I'm actually pleased to join you today from our Roseland headquarters, which we opened just this Monday. Thank you. Our sales force will continue to primarily engage with prospects and clients virtually, but they are beginning to conduct face-to-face meetings in some geographies to the extent that they and our clients and prospects are ready to do so. And with all that said, I'd like to once again take a moment to recognize our associates for their outstanding effort and the sacrifices they've made. I understand the monumental task of managing work and home life is a complex situation, and I also know it's not easy. A heartfelt thanks to our associates and leaders for their commitment. I'll now turn it over to Kathleen.