Good morning. My name is Crystal and I will be your conference operator. 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. [Operator Instructions] I will now turn the conference over to Mr. Danyal 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 accompany today’s call as well as our quarterly history of revenue and pre-tax earnings by reportable segment. During our call today, we will reference non-GAAP financial measures, which we believe to be useful to investors and that exclude the impact of certain items. 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 now turn the call over to Carlos.

Thank you, Dany 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 will start today’s discussion by providing a brief update on the trends we have 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-in volume, job…

Thank you, Carlos and good morning everyone. During the quarter, our revenues declined as we felt the full brunt of a double-digit decline in employment among our clients combined with other recession-driven headwinds. But we believe we executed well and are well-positioned to do so for the quarters ahead. For the fourth quarter, our revenue decline of 3% reported and 2% organic constant currency was ahead of our expectations as pays per control and PEO performance were better than we have planned. Our adjusted EBIT margin was up 10 basis points in the quarter also well ahead of our expectations. We took certain costs actions in the quarter continue to benefit from cost savings related to our ongoing transformation initiatives and also benefited from lower selling expenses, which together offset the margin impact from the loss of high margin revenues related to COVID-19. Our adjusted effective tax rate decreased 210 basis points to 22.9% compared to the fourth quarter of fiscal 2019. And our adjusted diluted earnings per share was flat at $1.14 as lower year-over-year revenues were offset by modest margin expansion, a lower tax rate and a lower share count compared to a year ago. We ended fiscal 2020 with revenue growth of 3% reported and 4% organic constant currency. Adjusted EBIT margins up 60 basis points and adjusted EPS growth of 9%, all in a solid year, particularly given the significant decline in economic activity and employment that we faced over the last few months. As I move on to ES segment results, it’s important to emphasize how resilient the business performance was in the context of unprecedented headwinds, including a 10.8% decline in pays per control and a 22% drop in client funds interest revenue. During the quarter, our Employer Services revenue declined 6% on a…

Thank you. [Operator Instructions] And our first question comes from Mark Marcon from Baird. Your line is open.

Good morning. Thanks for taking my questions. One key one is just from a bookings perspective as you look out over the coming year and you gave us a bit of a sense for the cadence that you expect – which of the new solutions do you expect to see the greatest traction from? Which ones are you the most excited about and which ones could be the most incremental from a really long-term perspective?

Well, I think from an incremental standpoint – to start off with the last part of the question from a long-term standpoint, I think some of the investments we have made in some of our next-gen solutions, I think for me has to be one of the most optimistic in terms of potentially moving the needle from an incrementality standpoint right, because we already have a very large, as you know, bookings number and anything that we can add on top of that goes into the top of the funnel in terms of revenue growth. And that’s really was the reason for these investments is to really move the needle competitively and to improve our position from a differentiation standpoint. And so the early signs of course now somewhat temporarily interrupted by COVID-19 were positive in terms of the traction we are getting both with our next-gen HCM platform as well as with our next-gen payroll platform. So that’s kind of where I feel the most optimistic in terms of the long-term. In terms of kind of the cadence and more kind of the short to medium-term in terms of next year – really the fourth quarter is an important part as we have kind of been alluding to here in our prepared comments and some of that is really clearly the pace of the recovery. So, there is – we have an expectation, which I think is in line with generally accepted I think forecast, if you will. And you heard kind of as a proxy, the expectation that unemployment reach a certain stage by the end of the fiscal year end, those things are all proxies for GDP growth and you guys all have plenty of access to your own firms’ economic forecast and so forth. So, the…

Great.

Mark, yes, just to add a little bit more there in terms of by each segment for sure we are expecting sales growth across each of the segments in fiscal ‘21. And as Carlos said, down market seems to be resilient and has trended up since we were at the low point several weeks ago but down market has been trending up earlier. And then during the latter part of the year, we would expect up markets and international for that matter to continue along those lines, but for sure expecting sales growth across all segments. And to Carlos’ point, from a long-term incremental perspective, certainly expecting Next-Gen HCM to be a driver there, but our strategic platforms in the near-term RUN and Workforce Now have been performing really well in the market and we expect them to continue to perform really well in the market as we recover through this.

Great. Just as a follow-up, could you just give us an update in terms of where we stand in terms of the number of implementations on next-gen HCM or sometimes known as Lifion and also next-gen payroll this percentage of the client base has been converted?

So on next-gen HCM, you could probably appreciate for two, three months, that wasn’t really something that a lot of companies were focused on and for that matter us [indiscernible] unfortunate. But the good news is we did actually start a client just a week ago. So that is a ray of sunshine in what was otherwise a lot of dark clouds. So we had a number of clients that were set to be implemented in our fourth fiscal quarter, which delayed and one of those actually started here already in the early part of the first quarter. So that is encouraging but we are not that different from where we were before. So call it still a handful, I think we have like seven or eight clients live somewhere in that neighborhood on next-gen HCM. On next-gen payroll, there the target at the beginning from a piloting standpoint really was – clients are not quite the same size of next-gen HCM. So it’s a slightly different dynamic and it’s – and we’re making, in terms of numbers of clients more progress, but it doesn’t mean that the product necessarily is making more progress. It’s just the difference between the markets we’re serving. Next-gen HCM is really in the early stages aimed more at the mid-market, if you will, than really the up market even though we expect it to be our next-gen payroll engine across our mid-market and up market in the initial stages, it’s really mid-market. So I think we have somewhere around 100 clients sold. And I think maybe that same number implemented, if I’m not mistaken.

That’s right.

So we’re making some good progress there. And there the pace is a little bit better in the sense that we didn’t come to a complete stop on next-gen payroll and we continue to implement clients there and kind of move forward. But it’s a – this is a very challenging situation for our clients and we really need to kind of help them get through this situation and the crisis not necessarily press them to get started as quickly as possible although that’s obviously our desire from our standpoint.

Of course. Thank you.

Thank you. Our next question comes from Ramsey El-Assal from Barclays. Your line is open. Please check if your line is on mute.

Can you hear me now?

Yes, we can hear. Yep, go ahead.

Yes, go ahead. We can hear you, if you?

Hello, hello.

Pardon me, sir. Please proceed with your question. And we will move on to our next question. Our next question comes from David Togut from Evercore ISI.

Thank you. Good morning. Could you characterize the gross bookings performance in the June quarter prior to the backlog adjustment?

Yes, I mean I think we – we’re just trying to give a nod to our sales force in terms of – they were – they performed better than we clearly had forecasted and that we gave in terms of color, commentary during this same earnings call or during the earnings call of the last quarter, but they were still down significantly. So at the end of the day, we just want to make sure that you guys got the right impression that we weren’t disappointed and that we didn’t do worse than we expected. But from a mechanical number standpoint – think still down somewhere around 50% like if that’s a fair characterization. I don’t know if Kathleen has any more color there?

Yes, no, the gross bookings were slightly positive to what we had expected. The approximately, down 50% is right, which is what we have been anticipating. And then the backlog adjustment, which actually is part of our normal process factored into the overall bookings number being down slightly more than that for the fourth quarter.

Got it. And just as my follow-up, assuming the employment recovery proceeds as you have laid out Kathleen negative 7% unemployment by the end of FY ‘21, would you expect to be back on your sort of normalized growth path by FY ‘22?

Yes, go ahead Carlos.

No, go ahead, go ahead.

It’s a great question in terms of when do we return to previous levels of growth and profitability. And as you pointed out, a lot really depends on the shape of the recovery. And look, we have taken the best view we can and tried to share with you what we are thinking about that in terms of the shape of that recovery. But it really is going to depend on that. Last recession, it took a couple of years for sales and retention and revenue growth to return to the pre-recession levels. Now, is it going to look exactly like it looked last time? We don’t know. This crisis is different. The make-up of ADP is different. So, I hate to say it, but it’s going to depend on a lot of factors but returning to those previous growth rates certainly will not be in fiscal ‘21 based on what we see right now and we will update you as things change and as we go through the current year.

I think, maybe just add a little bit of – just in terms of my own observations from looking at the kind of the quarterly cadence, if you will and how – what the implications are for FY ‘22, it really depends on – are we thinking about sales? Are we thinking about revenue? Are we thinking about profit growth? And they are all kind of different buckets. But I guess and to Kathleen’s point, it really all depends – if this is unlike the financial crisis, not a two or three, the financial crisis really was – you go back and think about it, the kind of mini crisis that occurred over the course of the following two or three years. Remember, we had the European debt crisis. We had a number of things that elongated that situation, but that could happen here as well, and we are of course not scientists and we don’t know exactly what’s going to happen. But we’re using kind of the same forecast that I think all of you are using and if you make those assumptions around when the healthcare crisis passes, i.e., vaccines and therapeutics and so forth. If you follow that path then FY ‘22, when we exit in the fourth quarter of FY ‘21 – from a mathematical standpoint – I think you used the term growth rates, the growth rates are going to look pretty good in terms of as you exit from a booking standpoint and then starting maybe with profitability in the first quarter of FY ‘22 because in the fourth quarter of FY ‘21 we saw some NDE expense. But some of that – frankly is really the comparisons. So we have three quarters in FY ‘22 that are going to look pretty good. Because if we still think that the first couple of quarters of FY ‘21 are still impacted pretty significantly by COVID and by the first couple of quarters of FY ‘22 you don’t have that impact you are going to have some I hope some really good tailwinds on some of these growth numbers. But the key for me was looking at absolute booking dollars in the fourth quarter of ‘21 compared to the fourth quarter of ‘19 because obviously ‘20 is not a good comparison and looking also at our absolute profitability in the fourth quarter of ‘21 and our revenue in the fourth quarter of ‘21. And again, I feel some sense of optimism about ‘22 based on those exit rate assumptions with a capital assumption because this is – we are a long way away from having certainty and you have seen how fluid the situation has been. But I think the math I think works kind of favorably once we get through fiscal year ‘21 and particularly when we get through the first three quarters of fiscal year ‘21.

Understood. Greatly appreciated.

Thank you. Our next question comes from Jason Kupferberg from Bank of America. Your line is open.

Thanks, good morning guys. Just wanted to start with kind of a high-level question on the fiscal ‘21 guide, I mean, we have got revenue down modestly, but obviously EPS down quite a bit and that’s being driven by a little bit of tax, but really the 300 bps of EBIT margin decline. And I guess it looks like the transformation savings should largely offset the hit to float income. So, are we really just down to kind of isolating this against decremental margins that maybe people didn’t appreciate the – kind of the severity of or are there other factors there? Because I just think at a high level people were surprised to see how much EPS is going to be down relative to revenue for the current fiscal year?

Let me take a crack at a couple of high level things. And then Kathleen probably can provide some additional maybe detail to help in terms of quantify some of the stuff. But we – I’m not sure if it was clear from our comments last quarter or this quarter but having been through these types of – not through a healthcare crisis but I personally have been through dot com downturn, Y2K at ADP, 9/11 and the Global Financial Crisis. And our Board is a Board that is long-term oriented and it feels like despite how horrible the situation is, it feels like this situation is transitory and so one of the things that we have as a first principle is to maintain our level of investment. That doesn’t mean that we are not prudent around our expenses and I think we have been and I think Kathleen gave you some examples of some of the things that that we are doing. But we are going to add to our sales head count next year, which might surprise some people and maybe not something that you were expecting. And the problem is that when you model only one fiscal year for a company like ADP or recurring revenue model, if you decrease your sales cost or even your investment in product and technology, it actually looks quite favorable. And you can probably offset quite a bit of revenue decline. The question is, is that really the right thing to do long-term? We don’t believe that it is and so that’s one factor, philosophically. The second factor is that even though we clearly have some decline in the number of clients, the nature of the revenues that are going down is very high margin. So you mentioned client funds interest,…

Yes. Look, on the surface the guide to 300 basis point decline on the surface may sound like a lot, but there’s a lot going on in there. When you take it apart, I think it’s really – and you put it into the kind of buckets, I think you will see how we arrived at that guidance and that expectation, right? As we’ve talked about and as you know we’ve got obviously a substantial impact from loss – a very high margin revenue, right? We’ve got that high margin revenue. We’ve got clients on interest, which is a hurt on margin year-over-year. We also have growth in zero margin pass-throughs, which falls right to the bottom line from a margin perspective. That’s going to be a significant hurt for us where it hasn’t been as much in the past. And the continued investment along the lines of – look, we think it’s prudent and smart to take to continue our long-term view and to continue to invest in sales and in product. We are committed to that level of investment so that’s a hurt. And then you do have, as you pointed out, the transformation and other cost actions that we’ve been taking that only partially offset that. So I would think about it in those buckets in terms of, look, you’ve got this high margin revenue. You’ve got some other things that fall right to the bottom line like zero margin pass-throughs and client funds interest. You’ve got the commitment to continuing to invest and quite frankly, I think we have been executing really well from a transformation perspective and also in terms of looking at – as we navigate through this period the excess capacity cost that we have and being really smart about addressing those.

But I guess let me – just to provide a little bit of color on kind of our view because I learned the hard way from my two predecessors about some of these things. So if you just look at the sales engine aspect of our business and you look at it over multiple years, you can actually do the math that if our – if we decreased our head count, call it 5% or even if we just kept it flat and you assume the productivity continued on kind of its normal trend, which is a big assumption, but if you even – if you assume that, you can see the impact that has on revenue growth from multiple years down the road. So obviously, if you expect that you’re not going to be able to ever return to the same kind of sales productivity you had before, then you have to do something differently, but that’s not the expectation we have right now. And it’s critical to our growth in ‘22, ‘23, and ‘24 for us to maintain our investment in our sales engine. Not to mention in our product and our technology and a few other places as well.

Okay. Yes, that’s really good color. For my follow-up, I wanted to ask just about retention. I know you are forecasting the 50 bps to 100 bps decline this year. I wanted to see if we can get a sense of how that compares to how you exited the June quarter on that metric? And I’m really just trying to get a sense of whether you are forecasting acceleration in churn over the next few quarters or more of just kind of a stable and steady pace of churn?

Again, let me give you some maybe philosophical, high-level comments and then Kathleen, maybe can give you some color around the fourth quarter and some of the assumptions. So in general, we have been, and I’ve been again, having been through multiple downturns and crises, I have been surprised by the resilience of our retention and we think there could be a number of factors here. One of them could be all of the government stimulus, the Paycheck Protection Program, all these things might – these are all new things compared to the past that might be helping. There is also the potential that some clients are frozen in place, if you will, like, we’ve talked about how difficult our bookings have been. I think logic would tell me that that’s probably happening across multiple industries and multiple competitors. And so we would be – actually dishonest not to assume that that might be helping our retention in some parts of our business like the mid-market and the up-market because in the down-market it’s really driven more by out of business. So having said all that, I would say that a lot of these things are really about timing because if there continues to be government stimulus and there continues to be optimism about this being transitory, then I think this kind of holds. And you have probably some additional fallout in the downmarket as a result of out of business and so forth, but you don’t have kind of a major downturn or a collapse in retention. And that’s kind of where I am today that we are expecting what I would say is – I would consider these to be reasonable and modest declines in retention when you compare them to other downturns that we have some data on and some history about.

Yes, and we did do a lot of work around and analysis around what happened in the last recession and what happened to retention by segment. And I think we have got a pretty balanced view if you look at the decline in retention that we experienced in Q4 and what we are guiding to and expecting and planning for in fiscal ‘21. It’s basically in line with the retention pressure that we had during the last recession. So we will see. I mean, it’s really hard to predict. And to tell what level of support the PPP program has had and is going to have, but that’s our best view right now.

I think – I don’t literally don’t give it. But I think I feel like this is an environment where transparency is probably not a bad idea just to give you like – like, that’s why we gave you kind of the gross bookings number besides the net bookings number because you guys need to model this stuff so you can understand what’s happening here. But think the fourth quarter somewhere around couple of hundred basis point decline in retention, which I think again all things considered, I thought was, and most of that decline frankly came in the down-market. So, that to me feels like better than I would have expected 3 months before that.

Okay. Alright, well, we appreciate all the disclosure. Thank you, guys.

Thank you. Our next question comes from Tien-tsin Huang from JPMorgan. Your line is open.

Hi, thanks so much for all this detail. Just on the transformation initiatives, I caught all the details there. How about looking beyond those two initiatives? Are there any other potential actions that you could take, anything that could be material over a similar size?

Again, I will maybe give some high-level comments and let, I think Kathleen give some additional detail. We have a very large menu of things that we can do. This company has a very, very long history of navigating through multiple changes in environments and multiple economic circumstances and now I think we will add to our repertoire managing through a major health crisis and a pandemic. And so, we have – I don’t know how else to put it. We have a huge number of things that we could do, if necessary, and when necessary. This is an incredibly resilient business model. I recognize that this is unusual for ADP to be down the way we are, but it is what it is in terms of the economic circumstances around us. But believe me; we have a number of levers. So as I said, like some of these things are – and our business model are somewhat self-correcting. If in the unlikely event, there was a belief that there was a permanent impairment of kind of global economic GDP or growth vis-à-vis other industries or other companies, I think that we are in somewhat of a better place because the amount of money that we spend on NDE and on implementation alone would, at least for the short-term, would certainly enhance our bottom line and help us from a margin standpoint. That’s not what we want because the real value to be created here is through growth – like, through profitable growth, not by kind of shrinking our way into profitability. But we have no intentions of allowing ourselves to underperform, if you will, on a long-term basis below what we have delivered for many, many decades. And that’s what ‘21 is all about. But if circumstances change, we have a very long list and quite a lot of variable expense in our P&L and a very strong balance sheet and a very strong cash position.

So, Tien-tsin, thank you for the question, it’s a logical question because when you think about kind of the past and the history over the last several years, right, in terms of what we’ve been driving from a transformation perspective, you can see that we have had these – several kind of big major initiatives over the last several years, right. We had Service Alignment Initiative first. We have a Voluntary Early Retirement program. We told you about the workforce optimization and then the procurement and now the procurement continues and we have shared with you our work that we have doing around digital transformation. The question, what comes next? Quite frankly, I think there is a lot of runway and we have a lot to do from a digital standpoint and also from a procurement standpoint. It does get harder as you go, I will say, but there is a lot to do there. And a lot of the digital projects, first of all, the digital is certainly focused on our service and implementation, because there is opportunity there, but it is across the entire company. So every single segment and every single department, whether you are front-office or your back-office is tasked with thinking about digital transformation, automation, how do you make the work more efficient, how do you take work out? There is runway there. So I expect that you will hear us talking about that for some time to come. The procurement, well, it does get harder as you go. What I would say is, in an environment like this that we are in right now, in a downturn, it does present some procurement opportunities that may be didn’t exist a year ago – when you actually – when you go back and you are negotiating with vendors and suppliers and so forth. So we have got real work to do there. And as you heard us say in the prepared comments, we have expanded procurement to make sure we are capturing all the opportunities. From a real estate perspective in terms of, look, the environment has changed. The way the world is working has changed. Let’s make sure we are thinking about our real estate footprint in a fresh modern, forward-looking way to ensure we are utilizing the assets that we have to the fullest extent possible. We are understanding how we are going to get work done in the future. We are understanding how we can utilize mobility models where it makes sense to do that. So we have got a lot of work and some really good work to do here from a digital procurement real estate perspective.

And just one last comment on that, the other thing that maybe is under-appreciated but it’s worth mentioning here because again, we are typically not talking about these things as they are more longer-term, but if your question was really more about what’s potentially next, longer-term and not just in ‘21, our next-gen investments are the largest potential digital transformation effort we have ever undergone. And we always focus on them around what they are going to do in terms of our winning in the marketplace and our sales growth and our revenue growth. But trust me when I tell you that the business cases for those investments and the progress we have been making over all these years, there’s an enormous expectation for, call it automation, call it efficiency, whatever you want to call it and we don’t usually talk about our tax engine, we talk about HCM and payroll. But one of those next-gen investments is our tax engine, which again there, the early signs – we already have a couple of hundred thousand clients migrated onto that platform. And when you see how quickly we are able to make these legislative changes in that platform and the cost structure and the cost of support again, I would be very optimistic that one of the largest transformation efforts we will be talking about in the future when we look backwards is these next-generation investments. I am hoping they are also going to lead to big growth incrementality and winning more market share in the marketplace, but do not underestimate the value of these investments in terms of our back-office and also our cost structure.

Yes. No, thank you for that. That’s very complete answer. If you don’t mind, just one quick follow-up, you mentioned the legislative changes and a lot of the work and effort that you have put into that. And Carlos, I know I ask you this all the time. So I am going to ask you again, could we see more demand? I know you mentioned improved bookings momentum that you started to see, but could you see more demand for the service model in general here? I don’t know where you are seeing maybe some switching from or more demand for work but again election year, lot of complexity, probably more changes coming. Could that help you here?

I mean, I don’t see how it can’t. So and usually, I am not that optimistic or that definitive because if it were only the election, I would say, we will have to wait and see. But I don’t, again, I am not usually a pontificator, but I just don’t see how companies after all this don’t reassess not just kind of how they do HCM and payroll and so forth, but so many other parts of their business model where continuity and resiliency and so forth are critical and that applies to the smallest client to the very largest clients. I think that for a lot of us, I don’t think we are the only ones or the only industry or space where that’s going to be a tailwind but it’s hard to believe that this in a positive. Now, in what quarter and how do I qualify that because you have GDP going down, I don’t know, 30-something-percent in the second quarter. Even if people were thinking about that, that wasn’t really going to be a factor certainly in the fourth quarter. The question is how does that net out in the math, right, because you want to somehow be able to parse that out and understand how much of is incremental. And I can’t necessarily do that scientifically but intellectually, it’s hard to believe that it is in a tailwind going forward for us. And then on the election side, we like – we generally like change because – and it doesn’t matter whether one party versus the other. We are apolitical as a company. But usually when there’s change there is change and for employers. Employers are an instrument of policy of the government, it’s how public policy gets effectuated whether it’s through tax or all the various safety policies and – you are seeing all these changes in leave policies now to help manage through the health crisis. So that’s all incredible, I think opportunity for us to help our clients and when there is opportunity to help clients, that’s opportunity to sell new business as well.

Yes, agreed. Thank you. Have a safe rest of the summer. Thanks.

Thank you. You too.

Thank you. Our next question comes from Bryan Keane from Deutsche Bank. Your line is open.

Hi, guys. Good morning. I just wanted to ask take another crack on the margin question and looking at it from this perspective. The fourth quarter margin in ES was impressive to bring it to flat and you took a lot of the brunt of the hit. Just thinking about that fourth quarter versus the guide of down 300 basis points, I guess I am a little surprised that it doesn’t hold up better. Can you just contrast the margins in the fourth quarter being flat versus down 300 basis points from that perspective?

Sure. I mean, I think some of it is – Kathleen will go through some of the math but the client funds interest impact is much bigger I think going forward than it was in the fourth quarter because of the laddering that we do in our portfolio. The impact for example of bookings – we still had a lot of business starting because remember, there is a lag between bookings and starts. So I think you would all be very surprised by how much. Even though we had some delays in some – particularly for larger clients, we started a lot of business in the fourth quarter also and as kind of bookings decline now the starts and the amount of revenue that goes into the run rate declines as well as you move forward. And so you get that sales number back up again. So I think there are a number of just kind of mathematical realities that I think that hit us in the next two or three quarters in comparison the fourth quarter. But I think that, again, we are not going to do that, like, we are not going to provide quarterly guidance, but I would encourage you to attempt to do either a first half or a second half based on the tone that you are hearing from us or even attempt to do it by quarter because the view that we have of the fourth quarter, again assuming the assumptions are correct, I think paints a very different picture than the picture may be that you are getting by looking at a ‘21 number. I would also argue that when we talk about ‘21, its fiscal ‘21, which happens to be only 6 months of ‘21. For every other company out there when you talk about ‘21, you are talking about the beginning of January of ‘21 where everybody expects everything already to be back to normal and that is – in terms of assumption of things being back to normal. So it’s a little bit maybe tricky in terms of the thought process and the math. But I don’t know if Kathleen has anything to add on that?

Yes, I mean, yes, it’s a little bit hard to say, okay, compare one quarter to a full year particularly in a year like this when there is so much going on and there’s so much linearity aspect in fiscal ‘21. But what I will say is in Q4 we did have sales expense, our NDE was actually a little bit of a help in Q4 versus it ends up being a surge so that’s kind of one difference one to the other. And the other thing is, from a transformation perspective in terms of benefits and how the benefits flow, well, certainly being a favorable and a help for us in each year in fiscal ‘20 and in fiscal ‘21, in Q4 there is a pretty substantial impact favorability from transformation if you were to compare it to a full year fiscal ‘21. So it’s kind of a math of how it all falls out in a quarter versus in a full year. But again, think about fiscal ‘20 as sorry, fiscal ‘21 as look, you have got this high margin revenue. You have got top line stuff that falls right to the bottom line being the zero margin pass-through and the client funds interest. You have got our continued commitment to investments. So you have got that from sales expense partially offset by continued transformation work.

Got it. That’s helpful. And then just a quick follow-up, the elevated out-of-business losses, just trying to get a sense of how that’s compared in past recessions and then how much more do we have to go on that? I mean have you written down the majority of it and there’s just a little bit left over because I know in fiscal year ‘21 you are saying there will be some more losses. So just trying to get an impact of magnitude of previous recessions and how much is left? Thanks.

So that really comes through in the retention. So it’s not really, we don’t quote, unquote, write it down, right? So that really comes through in terms of the losses from a retention standpoint. We have like maybe others some clients that have quote, unquote stopped processing and, but they are still there, and so there is a question of which of those clients come back and which of those clients don’t come back. But we have modeled in the down-market, this is really a down-market issue. We hope that it’s a down-market issue. At least in prior economic cycle that’s been the case. And I think you see it reflected in our retention rate, but it’s very, very hard for us to say with any level of certainty, how that’s going to exactly play out in the future. We have looked at all the prior downturns, and we know that there’s probably some out of business that’s still there that’s going to occur. And a lot of this is, in this case is going to depend on government stimulus and whether there continues to be some support for small business or not and also just the overall level of GDP and obviously the overall pace of recovery in terms of people going back to spending on products that help small businesses survive.

Okay, thank you.

Thank you. Our next question comes from Lisa Ellis from MoffettNathanson. Your line is open.

Hi, good morning guys. I apologize. I am going to ask one more question on margins. Just a clarification on the backside because I think that may be the effect of the de-leveraging related to pays per control, I think a little bit steeper than we were expecting, etcetera. Is the implication of that that coming out of this as we get back to better employment levels late in ‘21 that you would see a sort of similar snapback, is that the way we should be thinking about it as unemployment improves? I mean, when we are looking out into FY ‘22 or are there reasons that we wouldn’t expect that to happen? Thanks.

No, I think that’s right. And again, hate to go back to, because I think I would encourage you like I am doing the focus on both growth rates, but also, because I know they are important in terms of models and so forth, but absolute numbers as well because if pays per control doesn’t grow in the fourth quarter of fiscal year ‘22 we have a serious problem; like if there’s not a big snapback of that number, like if there isn’t a huge snapback of bookings, we have serious problems. And so the only thing that we think is not something that we want to model improving is interest rates because it just doesn’t feel like is a basis for doing that, but I think if you take reasonable assumptions based on economic forecast, you do have a fairly significant snapback in terms of growth rates, if you will or improvement percentages. The question then is, what does that mean in terms of absolute numbers? And so if you still have 7% unemployment, by definition that unemployment rate is still higher than it was in the, call it third quarter of fiscal year ‘20 and that has some implications in terms of absolute level if you will, of pays per control and we have kind of modeled that in to our assumptions but for sure there’s snapback in the numbers. There is no denying.

Good. Okay, alright. And then just my follow-up is related to the PEO; as you are seeing because I know you don’t – your bookings are yes, related bookings so just a kind of question on demand environment for the PEO. As you are seeing companies adjusting now to the crisis and to the recession how is demand acting for the PEO? Meaning is it positive, because companies are looking to variabilize cost or are you seeing some companies move away from the PEO because of reducing benefits? What does that demand outlook look like? Thank you.

I think the demand so far. Our experience in the PEO has been that it was kind of in line with the rest of the business. It looked a little more resilient in April, which you may have heard that tone from us but then May and June, pretty much in line with what was happening across, yes, In terms of bookings demand. And I think some of that is because of just the sales cycle. If you think about the PEO the sales cycle resembles more the up-market. The lower end of the up-market than it does the down-market, even though the average client size is small and that’s because it’s a high involvement product and high involvement sale because you are basically turning over all of your HCM including your benefits your workers’ comp, etcetera. So, I think that’s what we have seen in the short term. If you look at again 20, 25 years worth of history, I can’t even believe I have been doing this for that long, but I started my career in the PEO and every time there is an economic cycle or a change, whether it’s dot com or financial crisis, whenever there is a lot of theories. And I think the secular demand and growth of the PEO doesn’t seem to be impacted by many things. So I would still expect that kind of solution to have a lot of legs for small and mid-size clients for a long time to come. In the interim, there could be ups and downs, because as you said if companies are quote unquote hunkering down and don’t want to offer benefits – at least in our PEO part of the value proposition is benefits and so – but so far when you look at sales results, lead generation activity, etcetera, there is no reason to believe that the PEO won’t recover in the same way that we expect the rest of the business to recover from a booking standpoint.

Terrific. Thanks guys.

Thank you. Our next question comes from Steven Wald from Morgan Stanley. Your line is open.

Great, thanks for taking my question. Could we just – coming at some of the implicit assumptions under the guidance another angle. Just curious what you guys thoughts are in terms of what you are seeing conditions on the ground wise in terms of geographic concentration. I mean certainly some parts of the country are more open than others, some industries are doing better than others, I guess, I am just curious if you guys could sort of separate out how you guys are thinking about that on the go-forward and the unevenness of the recovery and what that means for your client base? I know you have talked about being diversified, but certainly there is a quite disparate experience level across the country right now.

It’s a great question. I think you probably saw in our comments that we said that we observed in our data that there has been a slowdown in the last few weeks, so we are looking at the data weekly and we do look at it geographically, both globally in terms of by country but also within the U.S. by state. And as you would expect part of the challenge in the last several weeks and months has been in the places where you have seen some of the comeback in terms of the virus. The resurgence of the virus in kind of the southern states and also Texas and California, but nothing back to kind of the full shutdown that we saw in April, which is in line with what you are all seeing as well in the news and so forth. This is more about leveling off of growth rather than kind of a decline. So we have seen it in the same metrics that I talked about in the last quarter. So, I can see it in like the number of job postings and screenings and so forth that have – that were on an upward trend line and frankly it was certainly not a V, but it was a nice upwardly sloped trend language then it was translating into improved employment both in our numbers, but also in the government reported numbers, but we have seen a plateauing of that as of the last 2 or 3 weeks. And so that’s something that we – fortunately we re-looked at our assumptions for fiscal year ‘21 the assumptions we have for pays per control for the first quarter are around what the pays per control exit growth rate was for the fourth quarter and based on this…

That’s very helpful. Maybe if I could just squeeze a quick follow-up in here. Carlos, I think you have laid out at your Innovation Day earlier this year that the addressable market ADP sits in, it’s about $150 billion of revenue a year growing at 5% to 6%. Obviously, that’s changed given COVID, but I am just curious to get any updated thoughts you have around maybe where that stands today? But if you can really speak to where it stands today given the fluidity of the situation, how we are thinking about it coming out of it given your comments and Kathleen’s comments about the enhanced opportunity for the space you are in?

Listen there is a lot of smart analysts out there and industry analysts out there that would probably be better answering that question. And they probably are going to need a little bit more time and information to answer that question. But I will answer it the same way that I answered it earlier today, which is I don’t know by how much, but it’s hard to believe that past the transitory nature of the situation that, that growth rate for the industry isn’t at least what it is if not higher because and again, I am not trying to be arrogant that, that is only for HCM, but there are other industries that I think have, shouldn’t have tailwind from these events, where the acceleration of people to using cloud services and using what I would consider to be outsourced services so that you can focus on your core business, but also have resiliency. I think and also so that you can improve efficiency and you can improve productivity of your workforce and improve engagement of your workforce. All of those things I think are going to get tailwind and it’s across multiple technology sectors that I think are going to probably benefit on a longer term on a medium term and longer term basis from this unfortunate situation.

Great. Thanks for taking the questions.

Thank you.

Thank you. This concludes our question-and-answer portion for today. I am pleased to hand the program over to Carlos Rodriguez for closing remarks.

Thanks. So just a couple of final thoughts. One is I know I said it before, but we have navigated through a lot of issues over many decades. I have had the experience of being through several myself, whether it’s the dotcom recession, what happened after 9/11, the global financial crisis, because in that case, it was really a synchronized global downturn and now this health crisis. And the one thing that I would say about ADP’s business model regardless of I know the focus here is on the short-term, but if you stay focused on the long-term, it’s an incredibly resilient business model, financial model, but also business model. The value of our products and our services is key and one small anecdote, I think we may have mentioned it in the last call. But as kind of this crisis unfolded we had to become like many other parts of the economy, we had to go and talk to governors and leaders, including the White House to make sure that we were deemed an essential service, because we needed to stay in operation. And so I don’t know what better sign there is of a resilient long-term model than to be considered an essential service, because we definitely – we definitely are. We are glad we were there to help our clients will still be there to help our clients. But I think that speaks volumes to the long-term viability and also upside of the business that we are a critical service an essential service to the economy and to our clients. We are proud of that. And I am proud of what our associates did to live up to that expectation. And as to the next year again, I would just encourage everyone to think through kind of…

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating and you may now disconnect. Everyone, have a wonderful day.