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 First Quarter Fiscal 2021 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. [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 first 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's website and on 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 pretax earnings by reportable segment. During our call today, we will reference non-GAAP financial measures which we believe to be useful to investors and that exclude the impact of certain items. A description of these items, along with a reconciliation of non-GAAP measures to the 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 our call. This morning, we reported excellent first quarter fiscal 2021 results. I'm very pleased to say that across the board, we delivered a very strong start to the year that was well in excess of our expectations. For the quarter, we delivered revenue of $3.5 billion down just 1% on both reported and organic constant currency basis. And our adjusted EBIT margin was up 120 basis points, coupled with a slight increase in the effective tax rate versus last year in a share count reduction. Our adjusted diluted EPS grew 5%, much better than our expectation three months ago, which was for a meaningful decrease in EPS. On this call, we'll discuss the changes that drove ADP’s better-than-expected start the fiscal 2021. In Q1, macroeconomic conditions continued to gradually improve and we executed extremely well in several key categories, including better-than-expected sales performance, a continued commitment to client service and prudent expense management. Let me start by covering key macro related trends to provide context to our results. Specifically on pays per control, out-of-business losses and client funds interest. During the first quarter, pays per control, which as a reminder declined 11% in the fourth quarter was in line with our expectation for high single-digit decline with a year-over-year decline of 9%. And a continuation of the trend we saw into our fiscal 2020 year-end, employment small businesses continued to show the most improvement, while large businesses actually showed some degradation as we exited the first quarter. Out-of-business losses performed better-than-expected as small business losses stabilized and a substantial number of clients that had gone inactive last quarter have restarted processing activities over the last three months. Finally, average client funds interest rates declined in line with our expectations for…

Thank you, Carlos, and good morning, everyone. We had a great Q1 with the combination of gradually improving macroeconomic conditions and outstanding execution, driving better sales retention and overall volume. We do expect to continue to face a number of headwinds over the course of fiscal 2021, as the global economy continues to recover from the effects of the COVID-19 pandemic. But with our strong first quarter, we now see the potential for a better full year outcome compared to our outlook three months ago and our updated guidance reflects this view. For the first quarter, our revenue declined 1% on a reported and organic constant currency basis. Clearly a nice start out of the gate and better than we were expecting three months ago. Better bookings and retention rates were the main drivers of revenue favorability. And that coupled with expense favorability resulted in a year-over-year increase of 120 basis points in our adjusted EBIT margin. As you will recall, we anticipated that first quarter would have a modest acceleration in bookings compared to the previous quarter, but a greater year-over-year revenue decline than we experienced in the previous quarter. And that much of this loss revenue would be at very high margin. Instead, our booking swung to a year-over-year increase, revenues declined only modestly and our margins expanded even with the sales and implementation expense generated by a much stronger than expected bookings quarter. Several factors drove this margin favorability. First, with a more modest revenue decline than expected in Q1, we saw less associated margin pressure than expected. In addition, the better retention we had in Q1 also translated to lower bad debt expense than we had originally contemplated. We also continue to execute our downturn playbook with our entire organization carefully managing headcount and discretionary expenses.…

Thank you. [Operator Instructions] And our first question comes from David Togut from Evercore ISI. Your line is open.

Thank you. Good morning and good to see the upgraded guidance. As we entered the critical year end selling season, I hear the caution around factors like partial lockdowns in Europe and the U.S. election. But can you give us some more detailed kind of insight around your expectations for new bookings potentially have RUN, Workforce Now, Vantage and our surveys of your customers pre-COVID, we were hearing a lot of demand for Workforce Now, especially into the bottom of the market up to 4,000 to 5,000 employees per company.

Yes. I mean, I think that we'd like to be – given the momentum we just demonstrated, we'd like to be really optimistic, unfortunately, we all watch the same news and the backdrop in terms of these issues, it's not just Europe, I think there are some concerns here in the U.S. as well. And what we saw from April – March, April May, is that we stick to our story that our clients – if our clients are hunkering down and are unable to make decisions, it impacts us. So we remain positive because it doesn't feel like there's going to be a full lockdown across the board nationally like there was here in the U.S. last time. And we've clearly adapted, I mean we've – you can see it in the quarter, how much progress we've made in terms of being able to sell virtually and use online tools and really ramp up our digital marketing and a lot of other things that we can talk about that we've done to adjust our salesforce. But for us to tell you what our view is of RUN and Workforce Now and enterprise sales in the next two or three months, honestly is difficult other than to stick to our story around our guidance, which is really more about the full year and couching it in optimistic, positive and good execution terms, but also with some level of caution, because we're still dependent, I think on the healthcare situation and to some extent on the economy as well. One of the questions that you're not – you didn't ask, but I'm sure people are wondering is about this – question is stimulus. And that's another one that I wish we could tell you that we have kind of a scientific…

I'd just add one other thought here or comment here. In addition to what Carlos said, I mean, look, obviously we're very encouraged and we're optimistic because of the great outperformance in Q1. But as you heard us say, we're very cautious because of the various uncertainties that we mentioned. But I would also say, we're cautious because as we look back in history and as we look at how in other recessions, how we recovered from that. We do see a period of chopping as it's not all kind of a straight line up in terms of the recovery during the great financial recession after that, we had I believe it was six quarters of negative sales growth after that and it was quite choppy actually. So we're expecting there to be some choppiness here as well. So I just wanted you to be aware of that.

Understood. As a follow-up, how do you see the current economic environment affecting the case for outsourcing of payroll and HR services? In other words do the economic challenges that businesses face make them want to focus more on their core business and outsource payroll and HR services?

Yes. I mean, I think that's safe to assume that we would probably be on the side of the ledger of businesses that would benefit “under normal circumstances post pandemic”. So in other words, once we get through the transitory nature of the challenge, I don't see how it's not a positive backdrop for companies like ADP and outsourcers who help people, first of all, maintain business continuity, and second of all, focus on their core business as you imply. So I think it has to – again, but we have – what do we – how many points of growth is that, only history will tell, but we think it will – we think it’ll be a positive.

Understood. Thanks very much.

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

Hi, good morning guys. Thanks for taking my question. Wow, the recovery in bookings is pretty fantastic. I know you provided a little color around using your inside sales to train your outside sales. Can you just even provide a little, like, what is your sales model looking like right now? To what extent are you using kind of digital marketing and digital onboarding? Can you just give a little bit more color around kind of what happened and what changed over the course of the three months to drive that recovery?

Sure. I'm not sure that the call is long enough though to be able to give you all that, because one of the differences between us and some of our competitors, which I would see it as a positive, if I were all of you, is that we're very diversified both geographically and also across segments. So the answer unfortunately is complicated and it goes area-by-area. So in international for example, we're very happy with very strong results versus expectation, but also frankly, very strong results versus the prior year. But there were a few larger deals there, I think there were few global view deals that helped. And when you look at the core best of breed, like in-country solutions, we also outperform there versus expectations, but not as well in terms of versus the prior year, which is obviously understandable given the pandemic. So that's international. And then you move to the U.S. and the story in a downmarket is different and the midmarket is different than the upmarket. Although across the board, we were better than expected. But the growth year-over-year varied, because I think that's the biggest surprise, which we're frankly very excited about is that we have positive growth. But if you decompose it, it's a different story in each area. And we had tailwinds in the downmarket, I think as result of some big recovery that was probably some pent up demand, the PPP loans probably frankly saved a lot of small businesses and provided a lot of cash to small businesses to continue to kind of run their businesses and make decisions around purchasing solutions like what we provide to help them run their business better. So it really – by the way, our upmarket was also good and strong. So that was…

Okay. And then for my follow-up, I know you called out the payroll engine and adding 100 additional clients this quarter. Can you just remind us or update us on sort of where you are in that overall rollout and what the kind of rate and pace of that is?

So I think we have a total of a couple 100 clients, and I would describe that as still are very early compared to ADP’s size. So if we were a startup, you'd be really excited. And I think we have a $20 billion market cap right now with only 200 clients, given what I've been seeing in the market. But the reality is that relative to ADP size and given our profile as a company and so forth, you got to take it in context, but we can't help, but be excited, because two years, three years, five years, 10 years down the road, it's going to be a big difference maker. I think it is, and that was our plan, when we built the business case, we've been at it for three or four years, this is a global scalable new payroll engine, it's incredibly exciting in terms of what it's going to do in terms of feature functionality, and hopefully client satisfaction, but also cost to maintain, cost to develop. But as you know, we have approximately 800,000 clients, sorry, 900,000, that's not fair because RUN, this has nothing to do with RUN. But a large portion of ADP's business is still on our current versions of our payroll engine, which by the way, all of these payroll engines are transparent to the clients. I don't know if any of you guys understand that, but Workforce Now and Vantage and Lithion, and all of our products are the front ends are really what our clients experience. And it's just important to remember that this is not like the transitions we had with Workforce Now, or even with RUN, because this is a gross to net engine that is really kind of underneath the hood, if you will of what the clients are experiencing on the front end. So that's positive too, because we don't anticipate a major migration effort, if you will, when we get to that, which is still at some point in the future.

Terrific. Thank you. Nice job.

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

Thanks so much. Good morning, really terrific new sales results. Just to add to what Lisa asked at the beginning there, just thinking about ROI on your sales investments. Did you lean in really hard in this quarter there, and I'm sure everyone was motivated to drive sales, but could we see more return on some incremental investments as you go throughout the fiscal year? I was trying to understand the timing of some of the investments you put in place, and also if there is any call-outs on pricing on new deals, especially on the enterprise side.

Yes. So on the sales investment, what I would say is maybe think about two big buckets in terms of investment from a headcount perspective and continuing to invest in marketing and digital marketing. The headcount investment, we kind of try to do that on a very steady pace over time, and that's been consistent with how we've thought about it and approached it. It was somewhat modest headcount investment in Q1 and that will ramp up during the course of the year, we're planning to continue to focus on and do that. And for sure have committed funding and resources, if you will from a digital marketing perspective to help support the bookings.

Terrific. And then on pricing, anything – any call outs there?

No. It's really – we really don't see any – I'm sure I know we did and I think some of our competitors did things to try to help our clients. And even in some cases prospects like there was a couple of examples of people giving away like three free months. And I think one competitor was doing six free months, et cetera. But – and one competitor changed their pricing online, but then changed to back a couple months later. So I would say there is nothing to report. There is really very little change in the pricing environment. This is not – I don't think this is really a question of pricing. I don't think you can impact end demand in a significant way in this environment through that, that would not be – certainly would be our view, that’s not how to drive growth.

Great to hear. Just my quick follow-up, just on PEO and sort of the sales outlook there, given some of the same caution and uncertainty with the election and maybe insurance. Do you – are you more bullish or less bullish on PEO here as we go into the second quarter here versus 90 days ago?

I'm always bullish on the PEO. I was born in the PEO. And as you know, so the – I think the – as usual my answer has to be, if you look at the short-term, we have a lot of pressure in some parts of our business because of the healthcare situation. And the question is, do you want to look through that or do you want to stay focused on us, for example, in the PEO when you have clients shrinking, we from a discipline standpoint have some rules around that can sometimes affect – create adjustments, if you will, in our sales results, it puts pressure in the short-term on the sales results i.e., call it audits if you will. So if a client was sold and was valued at $1,000 and 12 months later, they're now valued at $900 because they're paying fewer people than we're collecting less revenue, which as you can imagine is happening with the majority of our clients that affects our PEO sales results. So I’d say that the fact that workers’ compensation, prices and costs have come down, which is part of the revenue picture, there is a lot of short-term transitory things. But I would say on a unit basis, our results were very good in the quarter. And we’re very happy with that. And I would say that again, if there is any businesses that are going to be even more from a pure positioning standpoint, stronger coming out of the pandemic, the comprehensive outsourcing businesses, which PEO is one of them should be very compelling value propositions, because, as people look back a year or two from now, they might be thinking, I really don't want to go through that again. I don't want to be figuring out how to process, forget about payroll, because that – we have that covered. But most people – a lot of our clients do not use us for health benefits, processing or management of open enrollment, they don't use us for time and attendance, they don't use us for workers' compensation and our comprehensive solutions take care of the entire picture. And I think if you're a small and mid-sized business, if I were you, I'd be thinking about making that change, maybe not right now, because you've got other things that you're focused on, but I think six to 12 months from now, I would expect people to be seriously considering any options they have to deal with multiple things that are very critical to the ongoing operations and to their employees, but they may not have thought of pre-pandemic.

Got it. I was going to get you on the phone and start selling them. Thank you for that update.

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

Hi, this is Mihir on the Jason. Thank you for taking our questions. Maybe I can just follow-up a little bit on bookings. If you could maybe just talk a little bit about trends you saw in a F1Q and what you're seeing even now, I guess, between small, medium and large. Anything different worth calling out that we should be considering? And then just relatedly on booking. Was there any negative booking adjustment in the F1Q booking numbers?

I'm sorry, negative adjustment in which Q?

In the booking number this quarter – like in terms of booking number this quarter?

No. We had a minor – I would say we had a minor, we talked about last quarter that we had taken some reserves because we expected to have – obviously clients that were going to cancel their orders and so forth to abuse laypersons terms. And I think that's exactly what happened. And I think our – we did reverse some of that reserve, but it was actually very much in line with the actual client. We had identified, we didn't do this kind of at a very high level. We had specific clients when we booked that reserve in our “bookings”, we had identified a list of clients that we thought were probably going to cancel in this first quarter. And I believe the two things…

Yes, and so we utilized – we basically utilized a portion of that reserve, which is a normal course of how it happens. I guess Q4 was just an outsized amount for that, we call it the backlog adjustment. It's just outside obviously because of the COVID impact and a portion of that was utilized in Q1, but nothing significant other than that.

I think it's safe to say it would not have made a difference. I mean, it clearly would've made a difference if we hadn't had the – but if you want to know what our gross bookings performance was, it was not affected by our gross bookings performance, it did not affect our gross bookings performance. You would have had basically the same picture.

Understood. And then just any trends between, just small, medium or large businesses, what you were seeing this quarter?

Other than noise, I think we – probably the strongest performance was in the downmarket because much to everyone's surprise, there is strong business formation. And we saw that as kind of – we talked about that in our last call, remarkable recovery in small business very quickly at the beginning of the pandemic, both in terms of pace for control in kind of all categories, including this kind of new business formation. And I would probably add a note of caution there that to me is counterintuitive, and whenever in my career I've seen something that doesn't make sense, it generally – I think there is probably a little bit of payback at some point, I'm hoping I'm wrong, because if there is a relatively quick solution to the healthcare crisis, it's possible if the government managed to get small business through this relatively unscathed through PPP and all the other things that they've done. But in general it's a counterintuitive kind of situation. But we'll take it, it was positive.

Yes. The other areas where we saw some particular strengths, and I think we mentioned already on the international side, particularly Canada was very strong for the quarter and also our compliance services area. So things like employment verification, unemployment claims, things like add more compliance of services related stuff saw a very strong performance in the quarter.

Yes, it’s a great point. Like we don't always talk about some of these businesses that we have that are very good businesses, we call them standalone businesses. And we did have some good tailwinds from some of those businesses quarter. But again, I would tell you that they don't change the overall picture, but important to note that those were helpful.

Understood. And then just, if I could follow-up real quick on your EBIT margin guidance, you had a pretty nice raise in the guidance. And I was just wondering how much of that is driven by the stronger top line outlook versus changes in your expectations by expenses. I know you mentioned an extra $25 million in transformation savings, but were there other factors because it doesn't look like, it's just float income didn’t change all that much. So anything else if you could give us there? Thank you.

I would say it's safe to assume that most of it is as a result of that. But that I don't want to take away from us in terms of our execution, because, if we have higher revenue, we also frankly have more clients more employees to pay. So to the extent that we believe we can hold the line on expenses, some companies, you have to cut expenses, in our case, we just have to hold the line and that's probably good news, but I would say that mathematically you're on the right track, which is – that's a big factor. The incremental revenue is – a lot of it is flowing to the bottom line and helping our margins.

Yes, definitely that incremental high margin revenue is the biggest contributor, but also, as we said look, we've been really focused on making sure we're doing a good job on cost control. We're keeping a close watch on headcount. We talked about investment in sales, but other than sales we're really controlling everywhere else from a headcount perspective. Very tight on discretionary costs, transformation work is coming along very nicely. We did a little bit better with the higher retention, better on bad debt expense in Q1. We think we're cautious about that because we think it could come and hit us in Q2 and Q3. So we've built that into our expectation. But those were the contributors.

Thank you.

Thank you. Our next question comes from Ramsey El-Assal from Barclays. Your line is open.

Hi, good morning. And thanks for taking my question. I wanted to ask about the contribution to bookings performance of delayed, kind of bookings getting realized this quarter versus sort of net new bookings. I'm just trying to understand the contribution from maybe sort of a backlog of delayed bookings and how material that was. And then also to just understand what it is, sort of a pipeline of these delays that should flow in, kind of continue to flow in as we get a little deeper into the year or was there more of sort of a one-time catch-up that happened in the quarter with some of these delayed deals, does that makes sense?

I’d say the only place where it's really meaningful and quantifiable is probably in the international space where we had, I think I mentioned a few global view deals that were delayed if you will, but that's actually not a – I wouldn't call it, that's not something that was in the – necessarily in the backlog because we hadn't sold it yet. So we don't actually book a sale until it doesn't go into the backlog until we get a contract. And so these were things that were in process, if you will, or in the sales process. And maybe we thought it was going to close in May or June, but by the way, maybe it wouldn't have – even without a pandemic, like there's really no way to, this is all frankly speculation stuff that we do when we get into these kinds of conversations. But I say that's the place where a field like we had a few large deals that we thought were going to close in the fourth quarter and didn't, by the way, client decisions, not us trying to move them from one quarter to the other. We want to get businesses as fast as we can. So we are always trying to book everything as quickly as we can, but some client delays in the international space, it's really not honestly a factor in the downmarket and very small factor in the mid-market in terms of controllability. We can't really sway our clients that easily from one way to the other. Maybe a little bit of that in the upmarket and in international, but you really can't do that in a downmarket and the mid-market. So I would say, there's a difference between, I guess I'm not sure what the nature of the question is, but I think I already said that there could have been some – in some segments of our sales force, if you have a terrible year and you're in the last month and you're not going to make the year, there's sometimes the tendency for people to hold and start that business in July. But I think you saw in our comments that August and September were also strong. So it doesn't feel like – people don't like hold something from May and June, and then book it at the last day of September. They typically put it in the first week of July. And so again, based on my experience and what I've seen here over the years, there was probably a little bit of that didn't make a material difference in the sales results. And it is where it is. We had a great start and I think great execution. And besides us leaning into our sales investments, the really big difference maker here is our sales force leaned in to drive results, right. And we're incredibly grateful to them for that.

All right, that helps a lot. I appreciate it. And just a quick follow-up on the – if you could give us an update on the rollout of the Next Gen HCM and the Payroll engines relative to, let's say three months ago or four months ago, how do you think COVID is going to impact the roll out of some of the Next Gen technologies? Is it going to be – you mentioned some delays, I think previously, but how is it looking now?

Well, we had – I think we had a good quarter like – frankly, if any client to me is a good point. It's good news. And I think we had three or four. I think Danny probably…

That’s right. Yes, we had a couple of them, good sales.

We had some sales like closed. In other words, we got people to sign contracts in the quarter. Like, I don't know about anybody else, but I'm not spending a lot of contracts in this kind of environment. Like we just – the whole focus of this call is how we're focused on prudent expense management and trying to keep expenses down. So when people are coming to me, selling me things, I'm generally not a big signer on those types of things. So just shows, I think the value of – of our value proposition that people are still signing up because I think they believe that it will not only help them in the short-term, but that perhaps it can make them more efficient even in the short-term. So I think that is a good sign, right, of the strength of our products and the solutions and the pitch that we have. But that was good news. I mean, we were pleasantly surprised.

And we have several dozen, I think in implementation, active implementations right now. So the sales are continuing, the backlog, the implementations continued to scale up. So really no significant or substantial change in the outlook.

I think besides the sales, we actually started, I think a number of clients, three or four also.

Yes. We're in the double-digits now.

These are clients – we actually sold new clients, new contract that are now going to go into the implementation process, but we had clients that were in the implementation process, a few of which delayed starting in the fourth quarter, but then we started them here in the first quarter. So I would say that's all the news. And on Next Gen Payroll, you heard what we said and sold 100, which again, I think is pretty damn good news, like in this kind of environment.

Agreed. I appreciate your answers. Thanks so much.

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

Great. Thank you. Good morning. So I'd love to come back to the margin. I know some be in over the head, but maybe just a couple of other sort of ways to look at it. It seems like the way you're all looking at it going forward is, if macro cooperates in the higher margin pieces of the revenue could drop to the bottom line and drive incremental upside from here. Is that the right way to think about it? And generally, should we assume that implicit in the remaining three quarters of the year, the lower margin implicit assumption for at least a couple of those quarters is really more dependent on the macro than it is on your piece of investment, which I think we maybe collectively thought was going to be more robust than the headwind relative to what it ended up being this quarter?

Okay. So just to clarify, remember we outperformed not because we stopped investing or didn't invest as much as we said we were going to invest is because we outperformed on the top line, right. In terms of our revenue, even though some of it was clearly expense management and so forth. But I would say that the answer to that question is that, it's hard to wrap your head around our economic. I know it's hard because most companies don't operate this way, but for example, the better things get in terms of the macroeconomic, the more we're going to invest. And I know that's not going to make some people happy, but like for example, our fourth quarter, like our fourth quarter, like if things play out the way we planned in terms of the original guidances and we're not changing anything on you, but like our fourth quarter where we have easier comps, we would also expect to have great sales results, right. And those great sales results on a comp basis will also bring with them sales expense. And to the extent, we can get some of these clients started and our sales results improved, we're going to start also investing more and stepping on the accelerator and implementation expenses. So this is all carefully planned, carefully controlled as Kathleen was alluding to, like, this is not some kind of free-for-all in terms of expenses, but this is an amazing economic model. I don't know if you can see what we just delivered and what we're telling you that assuming that the situation cooperates with us, we probably will be either flat to slightly up in terms of revenue for the year. So that would mean that, we'll continue our streak of ADP of never being negative revenue growth, which is pretty remarkable, right. We had a massive decline in volume in the last quarter, massive declines in new business bookings. And you see now granted, this is not what we are targeting like, we'd like to have high single-digit revenue growth. So it's kind of weird that we're excited about flat, but it's all about the context and it's all about relativity. So it's really a great economic model, but the economic model is a long-term economic model. You have to invest in sales, implementation, and product to drive the results. This is not – we're not running the business quarter-to-quarter. And what that means is the minute we see the sunshine – the sun shining we're going to become boasted. It doesn't mean that our expenses are going to get out of control, but you will see our sales and our implementation expenses gradually come up. And along with that, some point our service expenses as well. But that's great because the most important driver of long-term value of this company is growth. It's not what the margin in next quarter or this year.

I understood. Sorry.

Yes, just some more color from my perspective. I mean, I would just say, look, we continue to be, as we always have been very, very focused on growth and efficiency and becoming more and more efficient every day. So we're going to continue to invest where it makes sense for growth and for efficiency. So we talked about sales headcount and continuing to support that investment, investment in product. And we invest in efficiency, all of the digital work that we're doing isn't, it doesn't come for free. You have to make investments to be able to drive that efficiency improvement. So we're focused on all of that and we're going to continue to do that.

And Steve, just one last thing to tie it back to our guidance. You're right. Certain macro factors will have an outsized impact for the next two quarters. And so what we've contemplated is pressure in retention and pays per control, both of which come at high incremental margins. If ultimately those come out better than forecasted, as you suggest, they would represent upside to margin.

There's a few others, like Kathleen mentioned bad debt expense is also something that, frankly has been shocking in the last six months where we've had, honestly like decreases in our bad debt expense, which makes no sense at all. So hopefully that will continue, but we didn't plan for that. I think we didn't roll forward three quarters of lower bad debt expense.

Right. Okay. That's all very helpful. Thank you. And then maybe as my follow up there, I think it was asked a little bit before, but Carlos, you were just talking about it a little bit ago there of just kind of wanting to grow mid to high single-digits. If we rewind the tape back to January and you guys talked about the markets you were in and how you were growing, sort of seemed like the way to think about it was you were generally growing in line with the market. And I think your earlier comments indicated, next few years should be an uptick, but there's going to be choppiness of course. I guess I'm curious how you guys think of ADP's positioning relative to other platforms. And obviously, you had a really strong quarter. But for the last several years, you've seen a lot of other platforms growing, in excess off of much lower basis. I'm just curious how you think about it today versus six months ago versus a year ago. If we are to see this uptick in HCM demand and outsourcing demand, where you feel about ADP's positioning in that market?

Well, I would answer that question just by saying that we just invested hundreds of millions of dollars in new platforms in our key markets, because we intend to take market share.

Couldn't be clearer than that. Okay, I'll leave it there. Thanks guys.

Thank you. Our next question comes from Kevin McVeigh from Credit Suisse. Your line is open.

Great. Thanks. Hey Kathleen, you talked about kind of out-of-business and the guidance looks like it calls for kind of elevated losses in Q2 and Q3. Did it bottom in Q1 and gets better? And then I guess just along those same lines, can you talk about, is there a way to also frame clients that are maybe still in business, but not processing at this point? So I guess, two different questions, just trying to get a sense of a, where the out-of-business did it bottom Q1 and then improves in Q2, Q3, and then as your way to frame no clients still in business that maybe aren't processing at this point?

Yes. So on the first thing, the out-of-business, I would not say it bottomed at all. In fact, we did not see a significant impact from out-of-business in Q1. I think the shoe has yet to drop there is how I would say it. And that's what we are forecasting and guiding that we're going to see some pressure from that in Q2 and Q3. That come in Q2, is there more stimulus that helps support it and we don't see it in Q2 and maybe it doesn't come till Q3, I don't know, but we're planning, I think we're cautious about it. And we're planning to see that pressure in Q3 – Q2 and Q3, sorry.

And on your question about clients not processing, we did mention that a number of small businesses restarted in the first quarter but there is still a sizeable chunk of companies that have gone inactive and remain in that state.

And to be clear, there's just – in case there's a misunderstanding there that doesn't have – it has nothing to do with our business bookings, right. So that affects our revenue and affects our losses to some extent, but this is unrelated to business bookings. Because the word restart might confuse some people.

Yes, so higher than it would be in a normal period. It's come down from where it was at the peak in probably April, May, June, it's come down from there, but it's still higher than normal situation.

Got it. And just to wrap that point, Carlos, it's fair to say that, with the stimulus, it probably helped those inactives a little bit that maybe would have fallen into bankruptcy. Is that a fair way to think about it too?

No question about it.

Cool. And then just real quick, it looks like the midpoint of the revenue guidance for ES is a 300 basis point improvement versus 150 basis point improvement for the PEO, any puts and takes to – I know it's not one-to-one but is it just kind of the client mix that where you'd seen a little bit more upside on ES as opposed to PEO or just any thoughts around that?

No. Other than – that's actually a great question, which we'll go back now and decompose that because we hadn't looked at it that way. At least, I hadn't. But I would say, my instinct would tell me that has more to do with how the operating plan is built than any macroeconomic or other major explanation. So I honestly, I wouldn't read much into that.

Okay. Thank you.

Thank you. And we'll take our last question from Mark Marcon from Baird. Your line is open.

Hey, good morning. And thanks for taking my question. Just with regards to the bookings performance this quarter. To what extent, do you think it was due to the sales force basically recalibrating and being able to get out and getting more at bats, relative to higher batting average. So, in terms of thinking about the win rates, and then I have a follow-up with regards to Next Gen.

That's a great question. And I have some sense of that from looking at the data right from the quarter. And I would say that our win rates are in line, I think a little bit better in some cases against a few competitors, which makes us very happy. But I would say, there's not a lot to report there that is, I think good news, but consistent if you will, in general. So it's probably more the former, right, which is the at-bats. And you could almost use the – what I call it, the traffic analogy, right. So ever since the pandemic started, whenever I go out on the roads, I do the traffic check and traffic is much higher and has been much higher over the last two or three months than it was in March and April. And that probably has something to do with, talking to just people on the streets, but people on the streets turn into people buying things and people going to restaurants and people going back to their workplaces and so forth. So I hate to be so crass and so simplistic, but I think that ADP is a very large company, which we're very proud of. And the gravitational pull of GDP and economic activity is strong in both directions. And I think we benefited a lot from, I think it's safe to say better than most people. I mean, I think this is not an ADP issue. I think most economists have raised their expectations about GDP. Unemployment is lower than everyone thought, even though labor force participation is lower. In general, things are better than people thought they were going to be and call it, May, June at this point. And we have benefited from that. I think that's I wish I could take more credit and give you a more complicated answer, but I think that is actually what's happening. The traffic is up for sure.

Great. And then just a short-term and a long-term question, but the short-term one is basically just as we're here in the key fall selling season, how do you view, Carlos, the kind of the mixed dynamics with regards to, hey, there's more uncertainty there's – this resurgence with regards to COVID, there's the election, perhaps not a lack of stimulus, but at the same time, things are more complicated. HR is more central. How does that end up impacting kind of the new sales, the bookings expectation, just here in the core selling season. And then the longer term question is Next Gen Payroll, Lifion, they've gotten really nice awards. You've obviously been inhibited by the pandemic in terms of being able to go out there and talk about it with clients. But when things get a little bit back to normal, how would you expect the penetration of those elements to go over the next year, two years, three years? Like when would we see a bigger penetration? So as they've gotten really good rewards.

Yes, I think on the first part of your question, it's of course – the last question, of course, has to be the downer question, because I think that that's a hard one for me to, I've been so optimistic the whole call, so I hate to like bring us all down. But based on what I'm seeing right now, both in the U.S. and in Europe. And the fact that this is our key selling season, I wish I could tell you that I'm incredibly excited and bullish and so forth. I just want to get through this damn thing, right. And get out to the other side. And I'm looking forward more to the third and fourth quarter and the fourth quarter and the next fiscal year than I am to the next two or three months, because the combination of the election with, I mean, you guys all see the same thing that we're seeing. And again, got to apply the test of common sense and the test of common sense would tell me that this is a, let's just try to keep us up beat, let's just call it a fluid situation.

It's going to be choppy, right. I mean, we thought we'll cover it from the last recession that it was choppy. And I'm fully expecting it's going to be choppy this time around too, particularly right, we're in Q2. We're in the fall, going into the winter, it's cold, we've got areas where there's resurgences that people might be hunkering down again. So Q2 might be challenging, but even in normal situations, normal years, right. Bookings are going to be lumpy quarter-to-quarter. I'd focus more on the full year, the annual and the longer term view.

And again, of course, we also thought that the first quarter was going to be terrible and it turned out to be home run. So they easily go the other way, but I'm a man, I’m like, I speak the truth, right. In terms of what I know and what I think at the time. And I spoke the truth in our last earnings call, and obviously I was wrong because things turned out to be much better. And I hope that happens here again, but that's my story. And I'm sticking to it, but one quarter or two quarters or three, it's not going to make a difference in ADP's long-term trajectory. What matters is the second part of your question, which is what do we intend to do? And what do we expect in terms of penetration rates and rollout of kind of our Next Gen platforms. And by the way, it's not just about Next Gen, I hope you guys understand that we are making some fairly sizeable investments, ongoing investments in Workforce Now. Workforce Now, now we have a version, if you will, I shouldn't call it a version, but Workforce Now is also on AWS in the cloud. So we've completely rebuilt Workforce Now to be as modern and as Next Gen, as Lifion and as our Next Gen Payroll engine. We also have been doing an enormous amount of work on RUN in the same vein, both at the guts of it in terms of the technology stack, but also on the user experience. You know what the investments we made in data cloud, you know, what we have with ADP marketplace, so this isn't an across the board increase in investment over methodically over the last six to seven years that I just summarize it by saying what I said once before, our intention is to have all of these things parlayed into taking market share and growing ADP faster than market and faster than the economy.

That's great. Thank you.

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

Well, thank you all of you for listening. Again, in summary, I just want to, once again, I think compliment our associates and our leadership team for incredible execution in the short-term, but I hope you also heard our commitment to the long-term in both in terms of sales, R&D, client service and all the things that drive growth and long-term value for our shareholders. And hopefully, for all of you who represent them. We remain committed to expense management, the digital transformation, all the things that Kathleen said, but we are somewhat holds into obviously the circumstances around the economy and the healthcare crisis. But we remain optimistic that this is – and it's the reason for optimism, and this is a transitory situation that we're going to get through it, hopefully in the next three or six months to the point where things gradually start to get back to normal. And then ADP can get back to the normal growth rates that we're used to. So thank you again and appreciate, you’re supporting, you're listening to us. And I hope that all of you continue to stay healthy and safe. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.