2023-05-31 11:13:06 ET
Automatic Data Processing, Inc. (ADP)
TD Cowen 51st Annual TMT Conference
May 31, 2023 08:30 AM ET
Company Participants
Joe DeSilva - President of Global Sales
Conference Call Participants
Bryan Bergin - TD Cowen
Presentation
Bryan Bergin
Let's get started here. My name is Bryan Bergin. I'm a services and HCM analyst here with TD Cowen. First off welcome to TD Cowen 51st Annual TMT Conference. I appreciate everybody joining us today and for this great two day event. ADP really needs no introduction, among the most recognized payroll and human capital management providers globally. But with us today, we've got ADP's President of Global Sales, Joe DeSilva. Joe, first off, thank you for being with us today.
Joe DeSilva
My pleasure. Good to see everyone.
Bryan Bergin
I think what would probably be best to start is if, Joe, you can give a background. You've been with the company nearly 20 years now?
Joe DeSilva
Yes.
Bryan Bergin
If you can give a little bit of a background on your journey in different roles within the organization, and then we'll get right into it.
Joe DeSilva
Yes, sure. So as I shared, I've been with the company now nearly 20 years, coming up on my 20th anniversary. If you kind of bifurcate it between running P&Ls and sales, majority in sales, but I've had the pleasure of running our Retirement Services business, I run our down market business. I run a portfolio of businesses, specifically Retirement, Insurance Services and our downmarket or what we call our SBS small market business. And then back into sales year and half ago, a year and half ago running Global Sales for ADP. So I've had the pleasure being on both sides of the coin and seeing the client experience through that lens.
Bryan Bergin
Yes, great. Yes, great purview across the organization. And certainly, we're going to dig into the sales, the strategies and the structure there. But to begin, there's clearly angst in the HCM sector right now. There's investors just seemingly waiting for a rollover unemployment, the rate conversation about peak rates, but demand seems like it has been relatively steady. And I'd like to start there. Just on demand. Can you kind of give us a set -- maybe a level set on the current state of HCM client demand and really how it broadly compares over the last year or so, any nuances across employer size or regions, things like that?
Joe DeSilva
Yes. Maybe we should knock on wood first. Demand has been -- demand remains healthy. So let me unpack it in a few different ways. Generally speaking, demand is healthy. We feel good. People are still hiring employees, there's still a need for HR and that applies in all segments of where we play. If you kind of go down a level and talk about this year versus last year, there's really no great change. In other words, the demand is still there. Now last year, we had to compare to COVID. So if you look at the growth rates last year, they look significantly higher. But if you kind of normalize for that, there's still continued demand there for our products. And truth be told, I mean, you heard on our earnings call, we continue to -- we've had good health and good growth trajectory this year, through March, which is great and getting excited for a finish year. When I think about the business segments, so for the team, for the group here, again, we're global. You think about the different segments. Down market, we continue to do really, really well. So with our product RUN, Retirement Services, Insurance Services, we continue to do really, really well. Great product resonates in the market, easy to sell, easy to demo. In the mid-market space, we continue to do well.
I would point out one product that we -- there's demand for, which is our HRO product or our Comp Services product. I would tell you at the upper end of the major account or mid-market space starting to see some slowing of the deal cycles, but I wouldn't call it a trend yet. And by the way, to be a little bit more specific on that. When I say delays in deals, it feels like there's more people involved in the decision making than there was pre-pandemic, not a delay because people are questioning whether they should go with -- move their offering. International and enterprise. So international has been somewhat up and down. They deal with their own challenges, whether it's the war in Ukraine, inflation. Keeping an eye there and on enterprise, just given the deal cycle time, that's a very long deal cycle time. They are more impacted by the macroeconomic environment. So keeping an eye there. But I think the general message to take away from this is that the HCM industry is a great industry to be in; one, because when times are great, you're offering a value proposition that allows people to grow; when there's questions or times of potential recession or slowdown, you have a value proposition that helps business owners. So it's a great industry to be part of.
Bryan Bergin
Okay. So a relatively stable decision making or maybe a couple of more reviews from CFOs, characters like that, right?
Joe DeSilva
Yes.
Bryan Bergin
Otherwise, a good message overall.
Joe DeSilva
Great message. Absolutely.
Bryan Bergin
Okay. Let's dig in on the HRO versus the PEO dynamic. So maybe talk about why you're seeing that strength in the HRO and what more recently as the PEO, how has that performed?
Joe DeSilva
Sure. So let me unpack that as that two kind of bifurcate between HRO and specifically, Comp Services and our PEO offering. I would tell you, Bryan, and for the group, I've heard through different calls and stuff outside that, is there somewhat of this making a decision for HRO in lieu of PEO, I don't see that. I see that, to be a matter of fact, HRO is doing a little bit better, but it's not something that's a trend where you would say it is in lieu of the PE offering. Both offerings still resonate significantly in the market space. HRO is doing a little bit better. But I don't see it as people are now shifting from PEO focus to the HRO focus in any -- by any means. On the PEO front, so unpackage PEO for just a moment there. So if you look at PEO and you heard on our earnings call, in the first half of this fiscal, it's a bit of a slow get off for us. I think there's a couple of things you got to look at. Number one is you got to look at the compares, right? Look at the compares to last year. Last year was an outstanding year for us in PEO. And I wouldn't -- I don't want to thinks us. I wouldn't call it an anomalous year, but I don't know that we've seen growth rates like that just given pent up demand from the pandemic. So that would be number one when I think about our PEO.
Number two, what I would say is that being said, like, listen, it's probably plausible to say there's some macroeconomic impact there, but I wouldn't call it a trend where people aren't interested in the product or shifting to HRO. That said, just to support my perspective, if you look in Q3, we've accelerated our bookings in PEO. We had a stellar robust March, and now the focus is on making sure we carry that forward for the rest of the year. So the wrap around that one for me, Bryan, I'm not seeing people trade one for the other. There's still demand. HRO is doing a little better. PEO remains a really, really great offering with great demand. People still want Fortune 500 benefits at that level, they still want to outsource and get the help necessary. It's a great offering for us.
Bryan Bergin
Is there a traditional, like a different profile of the traditional customer of the PEO versus one taking the HRO services?
Joe DeSilva
Not necessarily. I mean, it ultimately comes down to how much do you value in outsourcing, everything in that co-employment to just wanting the outsourcing component, that would be the distinct difference between the two. But back to my earlier comment, there's not somebody who walks out every day and says, I value just doing outsourcing component versus the co-employment. There seems to be objectivity between the two.
Bryan Bergin
Okay. And inflation, you're not seeing that like on the benefit side or anything like that, that is notable?
Joe DeSilva
I would say it's not notable. But I think it wouldn't -- it would be unfair to say it doesn't have some impact. I think it's plausible to say that, that is having an impact across all of the PEO.
Bryan Bergin
Okay, fair. Let's dig into the down market. So you've had certainly strong SMB client experience, given your experience of running SBS. How do you expect SMBs to react in the current environment as it relates to HCM [need]? So anything today that you see different versus prior slowdowns, assuming -- everybody assuming there’s a slowdown that's to come? How do you expect the SBS business to react?
Joe DeSilva
So let me start with, we all -- I watch the same news and read the same articles that everyone else does. And every time I sit down to do a forecast call with our SMB space, it just is remarkable to me the continued growth in health in the SMB space. And what does that boil down to when you talk to the sellers on the ground? People are still hiring. And if they can't hire, they still need help with HR tasks. There's still demand in that SMB space. So as we sit here today, the health in that space continues to be fruitful and it doesn't seem to be slowing, which is a good sign for all of us for that matter. When I think about my experience running it, like, look, I don't -- there's never a time where I woke up every day and said, oh my God, I'm worried about a downturn for us. The reality of it is, is that during a downturn, what we saw is if there's anything more than just a shallow recession, if we go deep, listen, there's the impact to retention. Small businesses can't sustain that as long as, call it, mid and enterprise clients for sure, but there's also trade-offs, small market or down market companies or small businesses are more willing to buy during uncertain times. So there's trade-offs that you make through that cycle.
I am, at this point, feel good about the health of that demand there, I feel good about the health of the business. And I do believe at the end of the day, I think you may have heard in the group here, you've heard on our earnings calls, Carlos, our previous CEO and our current CEO, Maria, talked about ADP being an all weather company. We're not weatherproof, an all weather company. That value proposition down market resonates during great times, which is you want to attract, grow and retain your employees, we've got offers for you. Downtimes, you want to talk about cash flow and conserving cash flow, we have opportunities to help you through our products. So that value proposition pivots one way or another, which gives me -- listen, I don't want to see any level of a downturn by any means. But I feel like we're prepared for if and when it happens.
Bryan Bergin
Okay. I thought it was interesting, in the most recent quarter, you did call out the fact that even though in the upmarket, there may have been a little bit of slack in the PPC. It was absorbed by the SMB base.
Joe DeSilva
Yes.
Bryan Bergin
I think that shows the resiliency.
Joe DeSilva
By the way, there's multiple. And I should point out for the group here and I know you're aware. In the SMB space, we have our downmarket product, of course, RUN. But our retirement services product continues to do really, really well down market. Our Insurance Services product continues to do really, really well down market. Not necessarily downmarket focus, but wage payments, tax remittance. There are businesses that continue to do really, really well for us.
Bryan Bergin
Okay. Let's shift to the sales organization. So can you just give an overview of how ADP sales and marketing organization is structured?
Joe DeSilva
Yes, sure. So we are a global organization. So obviously, we cover the globe. When you think about our sellers, we have roughly a third of our sellers that sit what we call for digital sellers or for this group inside selling across the phone, about a third of them. Roughly about 50% of our sales are to new clients or new logos, 50% of our sales are to the existing client base. Kind of wrapping around that, if you will, as we have a marketing organization that we continue to build out, we see marketing as a really big opportunity for us given the current times and where the market is going. And the other part of the sales organization, too, is an organization we refer to sales operations but think about that as the tools that we give our sellers to be effective in the marketplace.
Bryan Bergin
Okay. And I guess any notable difference you're aware of in your go-to-market and your sales organization structure versus the competitor competing HCM firms?
Joe DeSilva
I would say the size, scale and reach of ADP, we're big. So again, we're global. We cover all market segments, PEO, Retirement Services, Insurance Services, it's very hard to replicate. I think last year, just as a point of reference, I know that you know, some in the room haven't heard, I mean, last year, we did over $1.7 billion in our Employer Services bookings. If you bolt PEO on top of that, over $2 billion, it's just a really, really big, robust model that's tough to replicate that plays in every market. It's a big machine. So I wouldn't say that we're necessarily different, we're just big in size and scale. And that big in size and scale comes a significant investment to make our people better. It's tough to replicate.
Bryan Bergin
Yes sure, lots of scales and advantage there. What is the rough size of the overall quota carrying sales force on that and just give us a sense of how rate at which it's grown over time?
Joe DeSilva
Yes. So right now, if you look at quota carriers, people that are selling our products, we are over 8,000 quota carriers across the globe. We grow that somewhere in, call it, the single digits each year. I think what's important to point out, very important, because my guess is you'll ask me at some point what's important to me in growing this thing, is that balance of headcount and productivity. So while we grow with headcount, the total addressable market for ADP given where we play is significant, to be able to cover that market with head count is important. So when I go into planning, while we have 8,000 quota carriers, grow at single digit rate, very important in that calculation is making sure we have the right level of productivity, and productivity is increasing over time as well. I talked about our marketing organization as well. And then, of course, we have a channel focus, a big component for us is being able to sell through channels. So more specifically, when I say channels, think about CPAs, brokers, financial advisers, franchises, ERPs, they are a critical channel for us. So we have an organization that paces out there to make sure we continue to drive penetration. Just as a point of reference for the team, if you look at our down market, 75% of the units that we sell will be with a channel, a CPA bank. 25% are mid-market, 50% in our enterprise space. So that is a big focus of ours, over and above our quota carriers call it going, well, it's not door-to-door anymore, but our quota carrier is selling direct to businesses.
Bryan Bergin
Okay, that's helpful on the go to market. What's the range of sales cycles as you go from low end to upper end?
Joe DeSilva
24 hours, the lower end of the market. So we've really advanced our model over time. So we are in a -- today, we could go out to a buyer and have them started in the downmarket in 24 hours. At the upper end of the market, again, we get into very complex deals that have multi-country. Those could be upwards of 18 to 24 months. On average, it's somewhere less than 12 months but it depends on the size and, of course, the there as well.
Bryan Bergin
Sure, sure. Okay. Now you've been leading the global sales organization for about a year and half. Maybe talk about some of your top priorities and focus areas.
Joe DeSilva
I just alluded to it before. If you said to me, Joe, what is -- in the next three to five years, assuming you make it, what is the most important thing for you in this organization? It's driving productivity. Now that's not a profound thought. I wouldn't be the first Head of Sales in any company to get up here and say how important productivity is, but I want to kind of elaborate why I believe it's more important than ever. Number one, the buying dynamic has changed significantly. So if you think just about a traditional sales funnel, people have more access to information, they have access to pricing, they have access to demos, they have access to more information than they ever have. Why is that different because now you're meeting the buyer at a different point in their journey. Instead of creating the awareness, you're coming in when they're in consideration. You have to be able to react to that sales process, understand what they've been through and be able to meet them in that journey and help them, number one. Number two, listen, there's more competitors than there were before. Good, better and different, there's different experiences that a buyer goes through. Some cases, elevated it. Some cases, may deteriorate it. But we expect our sellers to be better in that process. So when I think about all that I want to accomplish, it's continue to grow our headcount in that single digit rate and single digit rate, but I really want to expand on our productivity in a meaningful way to make our people truly the best across all segments and making sure that we drive the productivity, and that productivity is meant to drive the best buying experience you've ever had with ADP.
Bryan Bergin
How do you do that, so how do you help them?
Joe DeSilva
Yes. So there's a multitude of ways on how you do that. First, the most basic is your new hire training program. So one of the things that I'm excited about is, we have now fully expanded our new hire training program. So maybe a point of compare, there was a world a while ago where you come in as a new hire, you go through -- and by the way, the new hire training I should caveat. New hire training is different by segment. So maybe we'll get into how we -- where we hire our people, but let's start in the SMB -- in this down market space. There was a world where you come in, we train you for a couple of weeks, we put you out on the street, you work with your leader, and that's your on the job training. That training was highly effective. But with all the things that I just shared with you, multiple competitors, so you need to understand multiple products, you need to understand how to objection handling in a bigger way than before. People have more access to information than they've ever had. So you need to understand all that information.
So the first step is making sure -- and we are, we've rolled out a really robust new hire training program. That new hire training program will be here for 20 minutes going through all the detail. But starts with, you come in, you go through a couple of weeks, you go out, you come back again, you go out, you come back again. In addition to that, driving productivity is critically important, making sure our leaders can coach and make our people better. When you have 8,000 sellers across the globe, upwards of 1,500 leaders or whatever the number might be, these are -- having that -- making sure those people are effective at coaching, our people, is really important. The leaders will go through that training as well. The next step there, Bryan, which is critically important is, okay, we've trained you. Are we giving you the tools? So we've given you the knowledge. We have given you the coaching. And are we giving you the tools to meet those buyers in their journey? The tools are critically important to helping our people gain access, making sure that we have the information available that's important to the client. We're serving up to the client, what's important to them. Those would be kind of the three examples I would give in truly driving sales productivity.
Bryan Bergin
Okay, that's helpful. Let's dig into the tools aspect. And maybe just more broadly, the tech -- the usage of tech within sales and marketing, within the go-to-market. Maybe any examples that you can share as it relates to technology playing a larger part in the sales process?
Joe DeSilva
Yes, there's a multitude. So we probably have -- what I would say first is we are often given tons of complements on the tech stack that we have for our people. It's truly about, when you have that many sellers making our people smarter, giving them a 360-degree view of the client. We have a million clients, serving up when that client is ready to buy something different because they've grown in size, they've gone backwards in size. So tools to give them that visibility, tools to cadence management. How often do you touch a prospect or a client? What's the right level of touches? How do you coordinate that across multiple business units? AI, leveraging AI for coaching. So our calls are recorded, then we can pull those recordings and there's AI that actually monitors all the calls that will say, hey, here is a training point relative to X, Y or Z to truly make our people better. Tools are critically important for us, being able to create videos for our clients versus just calls. There's a significant amount of tools that we continue to invest in and a big component. My belief is we can invest all we want in the tools, but making sure that we're training on those tools, we're driving utilization through the leaders is the most important point.
Bryan Bergin
Okay. It wouldn't be a tech event without digging into AI a little bit here. So just generative AI, are there ways in which you can leverage that within the process right now?
Joe DeSilva
Undoubtedly. So I've actually created a team for -- that works with -- directly for me that is serving up use cases on a regular basis to make sure that we are staying in front of this on where generative AI could play a big, big role. I think we're -- I wouldn't say it's early because this is moving fast. I think there's a lot to learn. But if you said to me, Joe, where could it play the biggest role for you? It's in our tools, making sure that through that sales process there's something that can help them. Basic stuff. Just listen to a sales call, could it recap an e-mail for you to the prospective buyer. There's a significant role it could play. What I want to make sure and what we're doing is making sure we're moving fast. Staying in front of this, serving up the use cases, what works now, how do we leverage and put out what we can now, and then I think there's a maturity cycle of generative AI that we want to see take place. But I want to move fast here and we're staying above it.
Bryan Bergin
Okay. Let's talk a little bit about the reps. So can you talk a bit about where you're sourcing reps from, and does it vary based on the market that they're selling in?
Joe DeSilva
Yes, of course. So the simplest way to think about it is, again -- because we're big, think about downmarket, mid-market, upmarket, and then you have PEO, you have international. Think about a feeder pool that kind of bleeds through [Technical Difficulty] much on selling and we could teach them bottoms up on how to sell, that [feeder] pool is significant to feed mid-market, mid-market feeds enterprise, so on and so forth. That being said, I also am a big believer in, I want constant outside-in perspective. So making sure that we are hiring in the mid market in our enterprise space, making sure that we're going to market to get sellers that have experience that have a different perspective on whether it be a competitor or other products, whatever it might be, just have a different perspective where they can bring value to the organization to constantly pulse check us. Are we on the right things, is there something we need to evolve? So I would say it's kind of a combination of the two, probably majority of feeder pool from down market up.
Bryan Bergin
Okay. And when you look at that upper end, you're happy to take HCM, comp training, elsewhere, you're happy to take other enterprise sales in tech? Are you looking for a diverse mix or do you lean more toward the HCM?
Joe DeSilva
I will take a diverse mix. I'd probably prefer HCM, and I'll tell you why. I'm biased. We are the biggest. We are the best. I think we teach the MBA course in sales at ADP. I love teaching those foundational principles of sales in ADP. That's tough to learn sometimes. Bring that HCM experience in from somewhere else, fortify whatever skills they may not have, I think that's the winning match. But trust me, we've had plenty of people that have come from outside HCM that just understand the sales process, understand the value to the buyer and whatever it is they're selling, we'll take them. I'm not objective to having those people as well.
Bryan Bergin
Okay. Why don't we pause here and see if the audience has any questions. No? I got a point. Okay, let's shift to retention. So can you talk about sales force retention, how rates have trended there in recent years and the means to improving those?
Joe DeSilva
Yes. So we were not shielded from, call it, the Great Resignation. So our turnover rates were significant as well. And we've seen that normalization back to -- I would tell you, in some of our business units, we are better than pre-pandemic levels, which is really, really great for us, a significant part -- it applies to any organization. But when I think about the size and scale of ADP and our growth, a huge lever for us is tenure. And back to your question around like how much do you -- how many -- what is your hire rate in the year, and it's single digits. And we had a great hiring year this year, which puts us in a great position in terms of strength and tenure. But when I look at our organization now, I would say we've normalized at my level. Looking at some of the business units, we're better than pre-pandemic levels and in a really, really good spot. And I think part of that, Bryan, which is important, I wake up every day, realizing that more than ever, our sellers have a choice of where they want to work. And it's not that, that wasn't the case before, but it was limited. They have a choice now. And part of it is making sure that we continue to fix silos, fix friction, make sure that our people, when they come in every day, any salesperson -- what excites a salesperson, believe it or not, is not the money, it's visibility to the opportunity, a pathway to the opportunity, limited friction, the tools, the incentives, the compensation to allow them to get there. That is a core focus to us. So while I appreciate that there's probably been normalization, if you will, across the board in terms of turnover, I am, with my leadership team, really focused on making sure that the only choice they have is here. And it's not because we're just the biggest and the best, because they get everything they need to truly win in the market.
Bryan Bergin
Okay. And obviously, a big focus on productivity. Can you just give us a sense on how you're measuring that sales rep productivity? And in general, how long does it take for a new rep to get to a full level of productivity?
Joe DeSilva
Yes. So we have a very important KPI, we call ASP, average sales productivity. At the end of the day, for me, it -- it's not for me, the math says lower end of the market, it's quicker to get to the productivity, you can get there in a year. The further you go up, those productivity, it becomes a lot harder to get there over time. And there's -- the levers in each of those markets is a little bit different in helping them drive the productivity. By the way, the productivity at the upper end of the market is also a function of what is the total addressable market that we have, how many people do we need versus down market, we have the opportunity to really continue adding headcount in our small market, retirement, insurance. We will add headcount in our upper end but you're not going to add at the rate you will downmarket just given the total addressable market. So your lever up here in terms of ASP becomes really important in helping people get there.
Bryan Bergin
Okay. And now you mentioned, what 50% new logo generally is each year? Talk about the client account relationship, the upsell motion and have there been any changes in that process at all? Maybe just give us a sense on how you target upsell opportunities.
Joe DeSilva
Yes. So maybe give you my perspective on both in terms of how I lead my organization, which is what's important to me, is we do both, but you can't do one in lieu of the other. We have to continue to grow market share. So anything you see from me, it's about growing market share. And that is not in lieu of, you have to continue to drive clients, you have to continue to have market share in a really big, meaningful way. On the client piece, continuing to grow that there hasn't been a significant change. So let's think about it this way. We have our digital sales organization, which is our inside salespeople, who we face off with the client base, who we arm with the right products and the tools to serve up those products at the right time to those clients. It hasn't changed much. Now if there's some -- if there's new regulation that comes out that we believe can help our clients, that goes to the top of the priority list is to make sure we get that out there. Other than that, we're pretty consistent. And again, as our client base grows, we grow that group of people as well. What I don't want to do is over index that people. I want to make sure it grows with the client base and we stay just as focused on growing market share.
Bryan Bergin
Okay. last call. Any questions from the audience? All right. So we're going to close that on the regulatory environment. So you just mentioned that. So you said Retirement Services. Can you just talk about the current opportunity for ADP there? And what do you see happening in the US regulatory environment, maybe how do you see that business performing in the coming years?
Joe DeSilva
Retirement Services is -- again, I'm biased. I was Head of Sales and I ran the business, but it is an outstanding business for us. Candidly, the HCM space as a whole, whenever there's regulatory change or there's any type of legislative change, that becomes an opportunity for us. So in this case, in Retirement Services, you've got SECURE Act 2.0, we've had state mandates. What ADP is known for is mobilizing behind the opportunity in a really big way. So as soon as SECURE Act 2.0 was approved or passed, we'd start mobilizing around the opportunity. We did really well through the state mandate so far, continue to grow our business. We'll continue to do that. As far as what's upcoming, I don't know. Right now, the focus is on SECURE Act 2.0. Our team is ready to go and that continues to be a great business for us.
Bryan Bergin
I think we're going to end it on that. So Joe, I appreciate all the color here. We've covered a lot of ground. Thank you again.
Joe DeSilva
Thanks, Bryan. Thank you to everyone for hanging on there. I appreciate it.
Bryan Bergin
Thank you.
Question-and-Answer Session
End of Q&A
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Automatic Data Processing, Inc. (ADP) Presents at TD Cowen 51st Annual TMT Conference (Transcript)