Automatic Data Processing, Inc. (ADP) Citi’s 2023 Global Technology Conference (Transcript)

Automatic Data Processing, Inc. (NASDAQ:ADP) Citi’s 2023 Global Technology Conference September 7, 2023 4:00 PM ET

Company Participants

Don McGuire – CFO

Conference Call Participants

Peter Christiansen – Citi Investment Research

Peter Christiansen

Good morning, everyone. Welcome to Citi Fintech — I am sorry. That’s the other conference. City Global Tech. Glad to have everybody here. My name is Pete Christianson. I’m on City’s payments processors and IT services team. Great to have you and we’re really excited today. We have ADP, Don McGuire, CFO. Thanks for joining us and I think second year. Second year in a row.

Don McGuire

Second year in a row. Thanks Pete. Thanks for the invitation.

Peter Christiansen

Absolutely. Absolutely. A lot of exciting things going on here with the business. A number of dynamics certainly going on in ATM payroll more generally and we’ve had a number of sessions on the HR side today and it just seems like the complexity is just getting more and more, which we like, which is good, for sure, but why don’t we start.

Let’s dig into a little bit more on the demand environment and then I’d love to go into some of the strategic priorities that Maria laid out on the last call, which are getting a lot of — a lot of chatter and talk about one of the things I certainly want to highlight, client retention is still so robust, which is really interesting ES bookings, growth still, highly resilient, pretty interesting, increasing demand for outsourced HR services, continues to decline, and particularly in just in this last quarter where we would expect to see some deceleration. It seems like the bookings growth is still sticking there. Just wondering if you could talk to that, what you’re seeing in the demand environment, I would say just in the last quarter or two, and perhaps what are some signals that you’re seeing on the demand front?

Don McGuire

Certainly, we had a very strong year with 10% growth in the ES segment and certainly a very, very strong fourth quarter. So that was very positive. I think the demand environment continues to be pretty strong and pretty resilient. Generally, I think you touched on some of the reasons for that. Certainly the complexity of the payroll industry and the complexity of what clients and prospects need to do things efficiently and to the letter of the legislation etcetera, is not getting any easier.

So certainly, we do expect that the demand environment will continue for a long time. It is a $150 billion market. So we think there’s lots of room to grow and we will continue to grow, but our demand has been strong and you touched on a few things there as well, in terms of just the expertise.

So Maria laid out three pillars. She laid out strong technology. She laid out expertise in outsourcing and she laid out global, and I think that we think that focusing on all three of those attributes or pillars, if you will, are going to be very helpful for us to continue to drive. So bookings and growth over the mid and long term.

Question-and-Answer Session

Q – Peter Christiansen

We’re going to dig into each one of those pillars in a little bit, but I do want to — one of the things that caught my attention last quarter and particularly some of the puts and takes. Clearly, HRO in mid-market continues to be a standout. What do you think that’s driving that value proposition at this particular time?

Don McGuire

I think it certainly was a standout. It used to be a standout. It’s back to it’s that middle pillar. It’s that expertise and outsourcing. It’s very difficult to find individuals to work at your company to do these things and be up to speed on all the complexities and the regulations and the requirements. So companies are more and more willing to look to us to take that burden off of their shoulders and to step up and do those things on their behalf.

And I think as back to just complexity increasing across the industry, whether it’s here in the U.S. or domestic — or North America or globally, it’s getting more and more difficult to keep yourself in line and so companies are looking to outsource as much as they can to make sure they stay compliant and effective in paying their people and paying them accurately efficiently and to the letter of the regulations.

Peter Christiansen

It’s just been a powerhouse just for a number of quarters, not just the last quarter and continues to be a standout that is impressive. I do want to touch a little bit on down market and I believe you’re not the only provider that’s kind of called this out. We’re starting to see a bit of a normalization in new business formation. There was a ton of new business formation during the pandemic. We’re kind of coming on the other end of that book out or the end of — the other end of that book end.

Nothing too dramatic on the downside, but at least normalization maybe some out of business losses picking up there. Nothing too dramatic, but just wondering what ADP stake is on what they’re seeing in the down market as it relates to that area?

Don McGuire

Yes, I’ll start with new business formation. New business formation continues to be pretty strong, all things considered. So, we’re happy to see that. So it’s good. Certainly on the normalization of other businesses etcetera, we are seeing a little bit of that, but go back to your opening comments about our retention, our retention has improved across the business and it’s improved significantly in the small business segment. And I would say that if we look back to where we were pre-pandemic in ’19, I think the improvements in NPS scores, the deployment of the run engine across all of our 800,000-plus clients in that space, I think we have seen a step up.

So although we’ve seen a bit of a normalization in the other business etcetera, I do think that our improved NPS scores and the way we deliver our services, is going to result in a step increase in our retention rates in the down market in particular.

Peter Christiansen

You know, I have this conversation with clients often and I think about the pandemic, particularly for the HCM providers, payroll, seem like it was a step change and more users going to the big national providers. More tech demands needs complexity like we highlighted earlier, but the service model also was the stand-out, building a lot of goodwill with your underlying users, but, given all of the rapid changes, what’s happening. Anything investor should think about that era and all the hard work that was kind of put in during that period and how do you see that benefiting the brand more generally as we get into a more normalized period?

Don McGuire

Yeah, there certainly was, there’s no doubt that during the pandemic there was a lot of trepidation about changing, but you had to deliver good service and I think we did that and given our global footprint and where we operate, we literally had thousands and thousands of changes to make in multiple countries across the segments to make sure that we could comply and keep abreast of all the regulation changes that all these governments were rolling out to keep people paid, keep people and employment, etcetera. So we’re very proud of what we did there.

I also think that we have a very strong training organization. We make sure that our associates know how to deal with customers. They know what to expect from our customers and I think they did a very, very good job and certainly we saw our NPS scores improve through the pandemic and they’ve continued to improve. So it’s more than a pandemic bounce if you will.

I think we’ve instilled confidence in our client base and that’s going to continue as — for a long time. So earning the loyalty of those customers and keeping them longer, I think is something that we’ve done and something that’s going to continue to help us go forward.

Peter Christiansen

You talk about the balance of trade competitively and you can break that down in a number of ways across all the different market segments. There’s certainly — they’re a big national provider than you also have the regional self-filers and all those areas, but what I think would struck me is the service model versus that pure software kind of model. It seems like the service model standing out a little bit and it’s benefiting you competitively. Do you think that’s part of the reason? Obviously, the tech has come a long way and you guys have an outstanding platform, but do you think that service model is making a difference?

Don McGuire

Absolutely. I think that’s what we say about ourselves. We’re a technology company with service and so it is very difficult to build a product that is used seldom. So if you think about a situation, you think about some of these used cases where an employer may for the first time have a paternity leave or have a retirement or termination, you can build all those things in a software and they are in the software, but if you only have to use that once a year, once every six, seven months, then the chances are you’re going to struggle with it.

So we’re very proud of the fact that we have to reach us through chat and voice, email, whatever, multiple channels. And we can take your query and we can answer it quickly for you. So we think layering that service on top of world-class technology is a winning formula. And I think we all know that our employees use our own software to provide these services to clients, specifically in the HR outsourcing that we mentioned earlier. So we have to have having good tech, not just for the clients externally, but we also use the same tech internally. So having a good product with good service on top is a winning formula.

Peter Christiansen

That makes a lot of sense. Another area of talk is what’s going on in the PEO? Just kind of interesting, because the juxtapose of what’s going on in HRO, less insurance attachment rate, but you’re seeing this great pick up in other areas of the outsourcing business still. What do you think is driving some of that preference change, value proposition perhaps and do you think there’s a point where we start seeing PEO begin to normalize, returning to previous growth rates? How does the company think about that business in particular?

Don McGuire

Yeah, I think we need to wind it back a little bit and just look at the growth we had to come out of the pandemic. So the PEO growth exploded coming out of the pandemic. It was a very easy way for employers to go find staff, not just to do the work they do in their own businesses, but also to get people to do payroll and HRO on their behalf, safety training, etcetera, that they were really struggling to find associates in the marketplace to do.

So now we’ve got some good — we have to go over problems, certainly keeping up those growth rates, coming out of the pandemic’s been somewhat difficult. Certainly things have started to normalize and things are starting to come back, but we do believe that it’s really a strong value proposition.

You mentioned the attach rates, the attach rates have bounced around a little bit on some of the medical and some of the benefits, but we believe that a lot of most clients come to the PEO because they want to have the opportunity to offer those Fortune 500 type benefits to their employees in a small company, whether the employees choose to take on those benefits themselves or sign up for benefits. That’s for the employees themselves, but generally, the employers want to offer these benefits to attract employees to their companies. And we think that’s a very strong value proposition. We think it’s going to continue to grow and get back to the kind of growth rates we had pre-pandemic.

Peter Christiansen

Fantastic. That makes a lot of sense. Let’s dig into some of those strategic priorities and the pillars that Maria laid out last quarter. I’d like to start first on the tech side, the tech development side, things like next-gen payroll, next-gen time, implementations are now kind of speeding up on the enterprise side. It seems like there’s a lot going on here.

Well, obviously there’s a user experience and engagement improvement, hopefully, but how do you think about monetization on top of some of these new changes? Does this help drive attach rates for increased module sales? Does this help on the pricing front? What about cost of delivery, too? Those are, I think, key topics that some of these tech innovations that ADP is driving could have meaningful impact.

Don McGuire

Yeah, so the tech innovations, I’ll start with our — it’s a small business market. So certainly having those 800,000 plus clients sitting on the single platform run, certainly helps with the efficiency and the margins, etcetera, being focused on one engine and being able to make sure that new development and new features, new functions, etcetera, are focused in your spend, just focused in a single area. That’s certainly helping us.

As we go up into the mid-market, we’re talking about our workforce now and pie offer, our next-gen workforce now, and that’s certainly more and more of our new sales are landing on that new product. Once again, gives the customer the ability to do more things on their own, policy-based engine as opposed to more code-based engine. So certainly more modern. Once again, lots of customers do more and also takes pressure off of us to provide those services or those changes directly. So lots of opportunity.

And then just generally across the business, we continue the journey outside of North America to make sure that we’re getting to best-in-class products in most of countries. So even though we still have some work to do admittedly, we do know that most of our sales in individual countries go to the best-in-class product in that country, and that certainly is also helping as we continue to move to fewer and fewer platforms and better and better margins.

I should also mention that in the enterprise space, and we have mentioned this on the earnings call last quarter, that we do expect to close down three more platforms in our enterprise space once again, improving the efficiency and getting our focus on the future of products.

Peter Christiansen

Simplification, clearly an opportunity there. I would imagine it’s a lot easier and certainly time to market to bring new feature functionality as it comes when you do have more of a unified set of products.

Don McGuire

Absolutely, and you also get to make sure you focus more of your spend on single products, as opposed to diluting that spend across multiple platforms.

Peter Christiansen

That certainly makes a ton of sense. In addition to this, a little bit on the enterprise end of things, [indiscernible] has been a next-gen kind of platform that you’ve talked about for quite some time. Seems obviously the pandemic was a hindrance to a lot of the implementation work there, and we all know that enterprise implementations can be lumpy at times, but it seems like that is now beginning to finally accelerate. You feel good about the implementation schedule going forward. Can you just update us where we are in that timeline, and how do you see some of that playing out for the remainder of the fiscal year?

Don McGuire

Yeah, so first of all, we did have a very good quarter with respect to sales of Lithium [ph] at the end of fiscal ’23. So we certainly have a healthy list of clients to implement, and we still have strong pipeline. So we are making progress, although I will say that it’s not nearly as quick as we would like it to be. We always wanted to be faster, but it does feel like the momentum has increased, which is very, very good for us.

I also think though from an investment perspective, that given the size of our national account business, which we’ve shared with you on several occasions, it’s going to be a while before that product actually starts to move the overall revenue needle to the extent that we would like it to, but we’re actually starts to move the overall revenue needle to the extent that we would like it to, but we’re certainly making good progress, and we’re very confident in the success we’re going to have.

Peter Christiansen

I think on the enterprise space, which is always tricky cycles, what have you and a lot of enterprises are getting more challenged right now, but I would imagine over time it would be a lot easier to drive new product innovation on top of these things. I think I even remember Carlos [ph] discussing there is still a lot of clients on mainframe, and you need cobalt engineers to engineer these changes. So it’s quite — it’s good to see that things are starting to come around there.

Don McGuire

Well, things are moving — we’re very — we’re happy with the progress. Be happier as a CFO, they’re going faster, but I didn’t — I have to say that.

Peter Christiansen

International is obviously another big topic that Maria laid out, expansion in Europe, Asia Pac, another key priority. Can you give us some of the taste of the incremental efforts that there are to bring ADPs product portfolio internationally. I think we, in an earlier discussion, we were talking about, there’s the interface level, then there’s the gross to net all that, and then I think you mentioned something about last mile, which I thought was super interesting. Can you lay out some of those complexities versus implementing, new users here domestically?

Don McGuire

Yeah. So certainly the international is a big opportunity for us, and enterprise international kind of overlap somewhat. So I think it’s important just to call out that our global view engine that we — our global view offer that we have, we’re now going into a big country, 44 and 45, so Morocco and Israel will be going live soon, and we now pay literally millions of employees on that platform around the world, including here in the US. And then we have the Salergo [ph] offer that is the long tail of fuel of those big companies who may have 4,000 to 5,000 in a single country. But then we have 200 or 215 in smaller Baltic countries or somewhere else in the world. So we’re able to put that together into a single experience through a front-end dashboard.

So it’s allowed us to continue to grow through in the multiple countries, and in some cases, the small — the small countries are served by our own payroll engines in many countries in Europe. And in some cases, we have partners in some smaller, much smaller countries where it may not make sense for us to have our own offer. But we are making progress there, and it’s continuing to grow.

But if we think about things like next-gen workforce now and lithium and pie [ph] is a pay engine, there are two things that we’re putting into all of our development, one is security first, that’s such an important thing in our industry with respect to data privacy, etcetera, and the second is global. So the pie engine division, and more than just division, we actually have the pie engine working in several countries around the world. We’re extending that, and we are looking to have single pay engine becoming the go-to engine in more and more and more of our business.

And one of the things we announced in the last earnings call is we’re bringing the roll [ph], which is a product we have here in the US to international, it’s important to know that the pie engine is underneath the roll. So we’ve already started that deployment, and we think that’s an exciting place for us to be.

Peter Christiansen

How should investors think about scaling in some of these new markets, the go-to market, obviously in some of your international markets, you rely on partnerships, then there’s certainly the organic route, maybe even M&A could play a part of this scale up. And this is going, I know this is a multi-chapter kind of process. However, if you can paint a broad brush, how does ADP think is the right way generally that they’re going to scale in some of these new markets?

Don McGuire

Yeah. So I’d break international down into two areas in particular. So we do have domestic offers. So if you go to, we are number one payroll provider in France. We are the number one payroll provider in Brazil, or we’re number one or number two in Australia. So if you look at the domestic market on its own with down market and mid-market clients, we’re already doing very, very well there. And then back to the conversation we were having earlier about global view and the enterprise international type clients, we already have a different product there for those much larger clients.

So as we think about going forward in some of these markets, the big ones, in particular, getting the more modern offers, the workforce now pie type, the payroll engine, into these markets and giving us back to the opportunity to focus on fewer engines, so that our spend and our development is more focused, that’s what we’re going to, and I think that’s going to help us continue to scale.

Peter Christiansen

But you talk about best of breed a lot, and then it seems like, this is a bit more of a platform approach and I guess when you go into these markets, how do you think, how do you think about your go-to market in terms of that way? Is it, hey, we lead with a certain level in land and expand kind of strategy. We beef up certain modules along the way for these particular markets or that kind of approach. Or is it, hey, let’s sell the whole platform at once or nothing. Well, you can eat buffet.

Don McGuire

Yeah. So I think it’s important to know that we’re on the ground in 40 countries today. So we have good distribution. We have good presence. And I think that differentiates us from others who are announcing that they’re going to international. We’ve been there for a long time. We’re on the ground. We understand from, from A to Z at the other end. How to get the front end in and how to get those taxes paid and those remittances made. So we understand the whole component, if you will.

So I think as we land, I think it’s more, how do we get more commonality between the countries where we’re in. So we can continue to scale across the product and the countries. We’re not really — there’s not a lot of countries where we’re not. So there’s not a lot of us — need for us to land and expand. I think there’s an opportunity for us to deploy some of our newer next gen offers in more countries. And make sure we can grow more efficiently with common products, better scale, more efficiency, etcetera, as we move forward.

The other aspect of international, just like in the HRO market here in the US is there’s an awful lot of HR outsourcing if you will. So we do offer similar things to HRO in multiple countries around the world too. And we’re using our own products in the background to do those things. So we are continuing to grow in that way as well.

We can offer HRO type services in France, Brazil, Italy, pick a country in many, many countries. So we’re rolling through that aspect as well in international.

Peter Christiansen

But also the timing of the next gen development that plays a crucial role.

Don McGuire

Yes, and it will certainly run again, but less recommendation. We also, in the last, we just bought one of our, a payroll [ph] of our partners [ph] in Sweden on Friday. So about a small another tuck-in on Friday. We bought our South Africa partner not too long ago. We bought a company called Securax out of Bangalore to provide a time and attendance engine for the Middle East, India and the Philippines. So we are adding some adjacencies to our existing presence. So I think we can continue to grow in that way as well.

Peter Christiansen

Really interesting conversation earlier and I think I’ve been asking everybody this question. It’s really AI and how it can help cost the delivery. Also engagement to both system of record system of engagement at the same time and you had some interesting comments, a lot of it really on the active agent side and tailoring that service model. You’re using generative AI to simplify things more and to increase automation. Can you take us through, that journey? Perhaps also talk about the level of priorities. Is this is a big bang event for ADP or is this something more gradual thought process more longer term, it will come to fruition?

Don McGuire

Yeah, I think there are lots of opportunities with Gen AI and I can tell you that once a week, with the list of the executive committee spend an hour with some very expensive consultants. Making sure that we’re focusing on good projects and making sure we’re prioritizing accordingly. So that is something that we do we do weekly.

I do think it’s going to be a bit of a build. I don’t think there’s a silver bullet and we’re going to see a step change tomorrow. I think there’s a lot of good ideas out there. I think the agent assist is one example. I think in our case, because we do have a million-plus clients, just the sheer volume of queries we get and the opportunity for us to use Gen AI to go through and parse those queries and understand what’s coming up. Most frequently, does that mean we can make changes in the journey through our products.

Does it allow us to provide answers and perhaps provide those — some of those answers directly to our clients without the need for an agent in the middle? There’s all kinds of opportunities there, but I do think it’s going to be a bit of a — it’s going to be a bit of a build. I don’t believe that we’re going to see a — we’re going to wake up on Tuesday morning and find out that things have changed incredibly. It’s going to be gradual. It’s going to take time to deploy these things.

Peter Christiansen

So now 500 basis point increase to the EBITDA. Not tomorrow. But it’s a big pool. It’s a big pool to drive efficiency from so it is the opportunity side is impressive.

Don McGuire

It is. The opportunity side is impressive just on the sheer number of clients we have, and what we can learn from having that many clients. The other place where Gen AI can be helpful for us is because we have so many clients, we have a database of clients in client information, second to none. So we have the opportunity to use Gen AI to mine that database for particular used cases or to understand what’s going on in the market better to provide information to others who may be looking for employment verification or other types of things. We have a very, very large database to work with.

It also leads to the opportunity to do natural language queries around. It’s easier now than it was 10 years ago to answer hard questions about who joined the company between the 02 December and the 03 January, but if you can start asking those questions in natural language as opposed going through the drop downs and screens, trying to get to that answer today, that’s going to be very, very powerful. And when you’ve got as many employees, 40 million that we pay underneath, what you do, we think that’s a big opportunity.

Peter Christiansen

That seems like the differential, and we did also talk about that earlier as well. The tool sets could be common, but not just you, but for all your peers and brand enterprise software and service providers, generally, it’s really about the data. And having that depth of data is the real difference.

Don McGuire

The data is key for sure.

Peter Christiansen

That’s interesting. And I do want to talk a little bit about the fiscal year ’24 playbook. This year, outlook calls for 47% ES booking growth, moderate client attrition, which was encouraging, but also 130 basis points, 150 basis points of ES margin expansion, a multi-year high, in part, afforded by the higher floating income, but can you discuss ADP’s balanced approach versus growing the business, driving the top line, but also delivering consistent year-over-year margin expansion?

Don McGuire

Yeah, so we’re very focused on margin expansion and the float has been certainly nice to have. I think, though, what we’ve done at ADP for the last 74 years or so is we’re always focused on the long term. So even though there’s been lots of pressure from investors to have all of the float dropped at the bottom line, we made sure that we had a good process, a regulated process, to make sure that we invested into appropriate amount into the business.

So last year we talked about adding salespeople. We talked about adding some service capability, and in some ways to cope with the growth we were having beyond float increases. So making sure that we have a balanced approach is something that we always do and as we shared in our earnings call and as you can see in our release, we do have continued opportunity with float because we do have a number of a lot of our investments are maturing that are certainly currently at interest rates below what we’re currently earning. So as those mature and we reinvest, we do expect we’ll have some tailwinds from float for a few years to come.

However, just to temper that a little bit, we’re not going to see the growth that we saw that last year. We’ll continue to see growth, but not 80% like we did last year.

Peter Christiansen

It’s a while to come on, but it stays for a while.

Don McGuire

And I think — and that’s one of the differences, by the way, to what we see from some competition. We have had this laddered approach to our investment strategy for some time. It’s a bit of an opportunity cost to that today because short rates are, with the inverted yield curve, short rates are higher than long rates, which is only five times the last 50 years. So that will normalize as well. We expect otherwise, all the capital market, theory in the world are out of the window at some point that will normalize. And we do think it’s a right strategy and we will benefit from it.

Peter Christiansen

I think its super interesting that you bring up reinvesting some of that float and this is an area that I’ve been trying to drive with some clients. It’s interesting now, particularly in the down market, right, and you think about your competitors. As float becomes more of a feature, the view is, hey, okay, now I can invest some of that into pricing, into retention and market share gains. And you can use that as a tool where a lot of your competitors are disadvantaged in that area. Do you see float income as a tool per se to drive market share in the areas on the payroll side, specifically?

Don McGuire

I would say indirectly. I think having more float income allows us to perhaps spend more on organic development, could allow us to have the opportunity to do more M&A, but indirectly. So, but I think it’s important to use the float effectively, so to make sure that you’re not letting it all simply drop at the bottom line and you’re taking the opportunity to invest.

What we have done at ADP and we will continue to do is we grow incrementally. We’re not, shark teeth type growth company. We like to grow consistently, persistently, and expectantly and so, that’s what we’re going to continue to do. So, we’re making sure that we invest, reinvest accordingly.

Peter Christiansen

Now, that certainly makes a ton of sense.

Don McGuire

I do want to talk a little bit about in that being in particular, at least my mouth, and I could be off a little bit here, but back to the envelope, incremental flow drives about 30 basis points to 40 basis points of the firm-wide margin expansion in fiscal ’24. So, I guess we should assume, or investor should assume, pricing tailwinds, cost inflation, FX, modest positive to the EBIT margin, that does make sense.

Peter Christiansen

And then, one of the areas, I do want to back to the PEO side of the business, and we’ve seen a lot of healthcare premium inflation here, ADPs, completely insured and hedge there. Do you think this opens up, will be — present a challenge for some of your peers who do not have same level of protection, and does that offer ADP an opportunity?

Don McGuire

Yeah, I don’t want to speculate too much on what’s going to happen to them, but what I would say is that we think that being fully insured for the medical is a bright thing to do. Back to my comment earlier about shark teeth, we continue to deliver consistent earnings and they’re predictable, and I think if you’re uninsured, you risk not being predictable, and I think part of what investors like about the ADP model, be it in PEO, be it in ES, is that we have good predictability, and so not being insured in that segment, I think makes you — it exposes you to risks and lack of predictability.

Peter Christiansen

That certainly makes a lot of sense. I thought it was important to drive that point though. Let’s chat a little bit about capital allocation, then maybe we can see if there’s any questions from the field. You mentioned a small talk in last week, just recently, and as I look back historically, we have this big mind map of ADP’s historical actions.

Seems like the more chunkier, bigger M&A activities have occurred more towards downturn areas, where I assume there’s a lot more evaluation opportunities, but as we think about M&A going forward, are the opportunities or at least the focus on your end, is it capabilities? Is it scale? Is it adjacencies? What are some of the areas of interest that grab your attention?

Don McGuire

Yeah. So as you know, we haven’t been the most acquisitive company. So we are very disciplined about what we buy. I think that if you go back to maybe the 70s and the 80s in particular in EMEA and perhaps here in the US as well, but we did a lot of acquisition, and we ended up with a lot of extra product, if I can say it that way. So we’ve done a really good job of cleaning up our portfolio.

So one of the things we’re not going to do is just go buy revenue and additional platforms to say we’re bigger, because if you’re going to buy a platform, you’ve to have a goal for what you’re going to do with it. If you’re going to buy it with the intention of migrating all those clients, fine, but we’re not going to go buy platforms and we need to do some client book acquisitions, etcetera, which we do in the small end of the business. We’ll continue to do those things.

But I do think that the most important thing that there’s always a good pipeline, good opportunities to go buy things now. Valuations have been a bit high. I think valuations are moderating. I’m not so sure they’re totally realistic yet, but they are moderating, but the most important thing in my mind is that if you acquire things, they have to be good adjacencies, they have to be added to your business, and they have to fit your selling model. We sell on a recurring basis, and if you can’t buy things that sell on a recurring basis, then that’s difficult for us to model internally and direct ourselves for us towards doing.

So we don’t sell big one ticket items. We sell X per employee per month. And if we can buy things that fit that model, whether they’re adjacencies in time or HR or PEO or anything else, if we can buy those things, they fit well. Those are types of things we’re going to focus on.

Peter Christiansen

But maybe more sporadic or more cyclical things, maybe not as much of interest, more tentative enhancing kind of areas, or more of a focus.

Don McGuire

Yeah. We’ve done a couple of small technology acquisitions. Those are fine because they’re happy with our tech stack and improving some APIs and whatnot that we’re doing. But generally, there’s lots of opportunities to buy things out there, but it’s just, do they fit our model? And is it something that our sales force can consume and they’ll be comfortable selling the way they sell today, because asking our 8,500 sellers to change the way they sell is hard.

Peter Christiansen

Now, I can answer — my next question a little bit right there and then I am going to see if there’s anything from the field. Valuations that was those interesting to hear, but there are a lot of opportunities out there.

Don McGuire

There’s always a point really.

Peter Christiansen

Just wanted to check to see if there’s any questions out there from the field. No. All right, good. I get a chance to do some corporate finance nerd out question right now. Here we go. So one of the things I think people find attractive of this business is such a high level of return on equity. Your return on invested capital by our calculations is going up 500 basis points just in the last year, nearing 49%.

That’s after we exclude client fund balances and that kind of thing. But at the same time, you have rising interest rates, across the capital is going up. So when you think about target areas for ROE for the company, cost of capital going up, how do you think about capital allocation also OpEx allocation in the mind frame of those that are we kind of level that you’ve been maintaining and proving over time.

Don McGuire

Yeah, I think it comes back to capital allocation question right. So number one is organic investment. So what are we investing organically in our product and our capability to deliver the product. I think that’s the number one question.

Peter Christiansen

And with scale, you get the operating leverage.

Don McGuire

We get the operating leverage with scale and…

Peter Christiansen

Yeah, the internal returns that just follow.

Don McGuire

Good returns, etcetera. Yeah, so and then of course, we, as you kind of go down the list should be reusing, given we have such good returns should we be doing more acquisitions, right.

Peter Christiansen

So that makes the decision more difficult I would assume. So as you look at possible things out there, can you bring that up to the same level or even help to improve your overall level of ROE in the mid-40s, which, there is not many companies at that level.

Don McGuire

It’s pretty good.

Peter Christiansen

It is pretty good. Fantastic well done. Thank you so much. This was a really interesting conversation. Always great to have you.

Don McGuire

Thanks, Pete.

Peter Christiansen

Thank you.