Automatic Data Processing Inc

NASDAQ:ADP

Earnings Call Transcript 2019-Q4

[Operator]

Good morning. My name is Carmen, and I will be your conference operator. At this time, I would like to welcome everyone to ADP's Fourth Quarter Fiscal 2019 Earnings Call. [Operator Instructions] I would now turn the conference over to Mr. Christian Greyenbuhl, Vice President, Investor Relations. Please go ahead.

[Christian Greyenbuhl, VP, IR]

Thank you, Carmen, and good morning, everyone. And thank you for joining ADP's fourth quarter fiscal 2019 earnings call and webcast. With me today are Carlos Rodriguez, our President and Chief Executive Officer and Kathleen Winters, our Chief Financial Officer. Earlier this morning, we released our results for the fourth quarter and full year fiscal 2019. These 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 and the timing of these items along with a reconciliation of non-GAAP measures to their most comparable GAAP measure can be found in our earnings release. Today's call will also contain forward-looking statements that refer to future events and, as such, 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.

[Carlos Rodriguez, President & CEO]

Thank you, Christian, and thank you everyone for joining our call. This morning, we reported our fourth quarter and full year fiscal 2019 results with revenue of $3.5 billion for the quarter up 6% reported and organic constant currency. We ended the year with total revenue of $14.2 billion up 6% reported and 7% organic constant currency in line with our expectations.

We are pleased with our ability to balance the strong top-line revenue growth with a substantial 160 basis points of adjusted EBIT margin expansion for the year. This margin expansion was ahead of our expectations as we executed well on our transformation initiatives, including our voluntary early retirement program, while also benefiting from increased operating efficiencies. When combined with share buybacks and a lower adjusted effective tax rate, we delivered very strong 20% adjusted EPS growth this year. Our core drivers of growth are also strong with Employer Services new business bookings growing 11% in the fourth quarter and 8% for the year. We are especially pleased with this performance given the difficult compare in fiscal 2018 when bookings grew 19% in the fourth quarter and 9% for the full year.

To put our Employer Services new business bookings performance into perspective, this year we sold approximately $1.6 billion of new annualized recurring revenues, which is a testament to the strength and scale of our sales force. When you add in the results of our PEO bookings, which grew double-digits in 2019. Our overall worldwide new business bookings continue to perform in line with our June 2018 Investor Day expectations, benefiting from our investments in targeted incremental selling opportunities as well as investments in our sales force, product and improvements in our productivity.

We are very pleased with our strong recent track record of Employer Services bookings in fiscal years 2018 and 2019. With this in mind, we have continued to invest in our distribution and currently expect Employer Services bookings to grow 6% to 8% in fiscal 2020. As a reminder, the fourth quarter of fiscal 2019 benefited from incremental organic sales related to our recently completed client list acquisition, with this strong second half performance in fiscal 2019, following a strong second half performance in fiscal 2018, we anticipate a difficult compare in the latter half of fiscal 2020.

Our Employer Services revenue retention rate is another important indicator of the health of our business. And as you will recall, this is the first year we provided guidance for it. We are pleased to now report an improvement in our retention rate of 40 basis points to 90.8% in 2019, which was in line with our expectations. This increase was driven primarily by our midmarket business, which is benefiting from rising NPS scores following the completion of our platform migrations in late fiscal 2018, continuous investments in our Workforce Now platform and service related transformation initiatives. This puts us closer to our all-time high of 91.4%, which is no small accomplishment given the amount of change we've been undergoing as an organization.

Our strategy is working, and on a broader level our efforts over the past three years to improve the service ability of our clients by migrating them to our strategic cloud-based software solutions and simplifying the service experience, while also closing sub-scale locations and transforming our client service model through our service alignment initiatives have contributed to improvements in our client satisfaction scores in overall service costs. You will hear more from Kathleen shortly on some of our more recent transformation related investments and anticipated benefits. But before that, I would like to briefly discuss some of our recent efforts around our product and innovation.

The global human capital management market is strong and continues to benefit from an evolving regulatory landscape that increasingly elevates the value of HR as a strategic business partner. At our June 2018 Investor Day, we shared how we intend to position ourselves to take advantage of some of these trends. One such trend is the evolution of payments were employers increasingly recognize the need for differentiated payments and financial wellness offerings in order to attract and retain talent. A recent study by the ADP Research Institute identified that nearly 80% of employers in North America believe that companies will need to customize their employee payment options to remain competitive in the war for talent. While two-thirds of employees say off-cycle pay options such as the ability to choose pay frequency would make a difference when considering a job offer.

At ADP, we continue to invest in new solutions in the tackling is evolving trends with ADP's wisely pay we are enabling our clients to provide their employees with a fully electronic and proprietary payment solution which we complement through our financial wellness tool the my wisely companion mobile app. Recently, we enhanced our electronic payment functionality with the launch of widely now, which helps organizations and their HR departments address compliance risks by bringing automation to Instant Payments such as off-cycle and termination fee. With these solutions organizations can leverage ADP's compliance expertise to pay unscheduled or off-cycle employee wages in order to meet the diverse range of local employer requirements.

Tight labor markets -- the tight labor market has also increased the importance of recruiting. Organizations are increasingly looking to utilize technology that enable a more seamless and effective recruitment process. Providing employers in an integrated offering that equips the recruiters with tools that effectively identify and connect with top talent is therefore paramount and helping them stay ahead of the competition. It is with this objective in mind that ADP recently integrated ADP recruiting management, our all-in-one automated recruiting platform with LinkedIn recruiter system connect. The integration allows recruiters to easily export basic profile data into ADP recruiting management while servicing critical candidate information in real-time into Linkedln recruiter.

With this integration, recruiters have access to everything they need in a single time saving workflow without the inconvenience of manual data entry, moving between systems or repetitive candidate outreach. Innovations like these demonstrate our commitment to delivering best-in-class products, and earlier this month, we were pleased to be recognized by both NelsonHall and Everest Group as a leader in their respective recruitment process outsourcing assessments. This is just one example of how most mid-and large-sized businesses today use multiple systems and vendors to manage their workforce needs. The seamless integration of solutions is critical to ensuring that employee experience is executed flawlessly.

As the HCM markets largest digital source for people management solutions, ADP Marketplace enables employers to build this more flexible HR ecosystem to fit their needs. This approach to providing an open ecosystem is integral to our open API strategy, and is a foundation for our next generation HCM solutions. We were therefore pleased this quarter to host our second Annual ADP marketplace partner summit, which allowed us to recognize our partners for the creativity and success of their solutions, while also allowing them to share in best practices. We are proud to have been the first HCM vendor to launch a marketplace and we're pleased this year to see our total number of partners grow by 33% with ADP Marketplace now offering almost 370 solutions across the HCM spectrum, representing 40% growth over the past 12 months.

Let me conclude my remarks by saying that our evolution towards becoming an HCM technology company that provides great service would not be possible without the dedication of our associates, who are integral and helping us accelerate our pace of change. We are proud of their efforts to deliver innovative solutions like these to our clients and for their efforts to ensure the success of our transformation initiatives.

And with that, I'll turn it over to Kathleen for her commentary on our results in the fiscal 2020 outlook.

[Kathleen Winters, CFO]

Thank you, Carlos, and good morning to everyone on the call. As Carlos said, we're pleased with our financial results for the year. We continue to make progress in delivering leading cloud-based software solutions to our clients and improving the client experience through our ongoing service and transformation initiatives. Our focus on delivering top-line revenue growth while also improving the efficiency and effectiveness of our operations in order to drive sustainable long-term value creation is working.

This morning, we reported full-year revenue growth in line with our expectations at 6% on a reported basis and 7% on an organic constant currency basis. Our adjusted EBIT increased 15% in with ahead of our expectations. Adjusted EBIT margin was up about 160 basis points compared to fiscal 2018, and included 30 basis points of unfavorability from acquisitions. This margin improvement benefited from both discrete larger transformation initiatives and various operating efficiencies. The details of which I will now take you through.

First, we completed a voluntary early retirement program with an annualized recurring cost saving of $150 million in line with our original expectations. However, due to the timing of our backfill hiring we realize the full benefit in fiscal 2019. We do not expect any incremental savings from this initiative in fiscal 2020.

Second, this year, we fully realize the remaining benefits from our service alignment initiative. Having completed our hiring needs in fiscal 2018, we exited the remainder of our previously identified 68 subscale service locations for an annualized recurring cost saving of approximately $60 million. This was in line with our expectations as we achieved most of these cost savings in fiscal 2018, while fiscal 2019 benefited from the lapping of approximately $20 million in dual operating costs.

Finally, following our recent platform migration efforts this year, we also saw continued benefits from efficiencies within our IT infrastructure. These cost savings initiatives were further supplemented by a number of smaller more tactical transformation projects that have collectively helped to drive productivity improvements across the business. Some examples of these initiatives include an enhanced client relationship management system. Our ongoing investments to automate manual tasks and elevating the use of artificial intelligence, which together help reduce contacts per client. The benefits from these initiatives were partially offset by the investments in our new brand platform and growth in selling expenses.

Our adjusted effective tax rate for fiscal 2019 was 23.8% and benefited from the impact of the lower federal statutory tax rate due to corporate tax reform, partially offset by the loss of certain tax deductions. This rate compares to our 26.2% adjusted effective tax rate for fiscal 2018. Adjusted diluted earnings per share grew 20% to $5.45 and in addition to benefiting from our revenue growth, margin expansion and a lower effective tax rate was also aided by fewer shares outstanding compared to a year ago.

Now for our segment results. For Employer Services, revenues were in line with expectations and grew 5% reported and organic constant currency. As a reminder, this fiscal year we experienced approximately one percentage point of benefit from the impact of acquisitions, which was offset by the impact of FX. Interest income on client funds grew 20% and benefited from a 30 basis point improvement in the average yield earned on our client fund investments to 2.2% and growth in average client funds balances of 5% to $25.5 billion. This growth in balances was driven by a combination of client growth, wage inflation and growth in our pays per control, partially offset by lower SUI collections. Our same-store pays per control metric in the US grew 2.7% for the fiscal year.

Moving on to Employer Services margin, we saw an increase of about 230 basis points in the year, which included approximately 50 basis points of unfavorability from the impact of acquisitions. The strength of our performance this year was enabled by some of the same factors that I mentioned earlier when discussing our consolidated results. PEO revenues grew 9% for the year to $4.2 billion with average worksite employees growing 8% to 547,000 both in line with our expectations.

Revenues excluding the impact of zero margin benefit pass-throughs grew 8% to $1.5 billion, also in line with expectations despite continued pressure from lower workers' compensation and SUI pricing. Margins increased 60 basis points for the year due to operating efficiency within the business and benefits from our voluntary early retirement program. We also saw a better than expected changes to our ADP indemnity loss reserve estimates with about 10 basis points of unfavorable year-over-year impact in fiscal 2019 as compared to our previous estimate of 25 basis points.

We are pleased with the strength of our results in fiscal 2019. And with the year now behind us, I want to share a few thoughts related to our balance sheet, cash flow and financial liquidity. We have a robust business model with high levels of operating cash flow, our strategy is to leverage the strengths of our model to reinforce our competitive position by first and foremost reinvesting in the business. We believe that balancing investments in innovative solutions, client service tools and distribution is critical and helping to strengthen our market leading offerings. And we supplement these investments through a disciplined approach to M&A. We also remain committed to returning excess cash to shareholders through dividends and disciplined share buybacks. And this year, we returned approximately $2.2 billion. Finally, our strong balance sheet multiple sources of liquidity and AA credit ratings all help support our $2.2 trillion in global client money movement operations and our investment strategy for our client fund's portfolio.

Let's now move to our fiscal 2020 outlook. Starting with Employer Services, we expect 4% to 5% revenue growth in our Employer Services segment, which includes anticipated pays per control growth of about 2.5%. We also expect Employer Services new business bookings growth up 6% to 8% and for our Employer Services revenue retention to improve 10 basis points to 20 basis points.

Moving on to margins; we expect margin in our Employer Services segment to expand by 100 basis points to 125 basis points. Our margin growth continues to benefit from a combination of operating leverage together with the impact from our various transformation initiatives.

Regarding our PEO segment, we expect 9% to 11% PEO revenue growth in fiscal 2020 and 7% to 9% growth in PEO revenues excluding zero margin health care benefit pass-throughs, both driven by an anticipated growth of 7% to 9% in average worksite employees. We're pleased with the strength of our PEO bookings in fiscal 2019. But healthcare inflation remains high and as we anticipated, we experienced volatility and some churn in our fourth quarter. Accordingly, we anticipate being on the lower end of our average worksite employee guidance range at the beginning of the year, with a gradual reacceleration of our growth rate as the year progresses.

We meanwhile continue to expect lower workers' compensation and SUI pricing to have an impact on our total PEO revenue growth. For PEO margin following a strong fiscal 2019, we anticipate margins to be flat to down 25 basis points in fiscal 2020, which includes approximately 50 basis points of unfavorability from adjustments to our ADP indemnity loss reserve estimates.

I'll go now to the consolidated outlook. We anticipate total revenue growth of 6% to 7% in fiscal 2020. This outlook contemplates interest income on client funds of approximately $580 million to $590 million and net interest income from our extended investment strategy of $585 million to $595 million. This outlook is approximately $30 million lower than our June 2018 Investor Day estimates for fiscal 2020.

With that said, we expect to overcome some of this interest income pressure through operating efficiency, and we anticipate adjusted EBIT margin to increase 100 basis points to 125 basis points in fiscal 2020. With more expansion in the second half of fiscal 2020 given our very strong first half margin performance in fiscal '19. In addition to benefiting from our operating leverage our fiscal 2020 margin growth is anticipated to benefit from the following two transformation initiatives.

First, during the fourth quarter of fiscal '19, we recorded a severance charge of approximately $26 million related to a broad-based workforce optimization effort focused on spans of control and management layers throughout the organization. Second, this year we're accelerating our procurement transformation efforts through a number of initiatives aimed at third-party vendors and internal expense management. These two initiatives combined are expected to generate about $100 million of savings in fiscal 2020. We anticipate our adjusted effective tax rate to be 23.8% in line with last year, this rate includes about 50 basis points of estimated excess tax benefit from stock based compensation related to restricted stock vesting in Q1 of fiscal 2020, but it does not include any estimated tax benefit related to potential stock option exercises. Given the dependency of that benefit on the timing of exercises. We expect growth in adjusted diluted earnings per share of 12% to 14% in fiscal 2020.

I'll now share a few thoughts resulting from the discussions that I've had with some of you doing my first few months here at ADP. At our June 2018 Investor Day, we set target ranges through fiscal '21, and we've been pleased with our progress to date. In particular, we are pleased with how our associates have responded to the challenges that we have set and with how the business is executing on our strategic plan. It's now been a little over a year since we share those targets, and a few things have happened since then, including the adoption of ASC 606. Therefore, we felt it might be helpful to share a couple of reminders.

First, you will recall that we based on our Investor Day targets on ASC 605, and we provided you with the anticipated ASC 606 impacts to margins. Second, our growth targets were baseline off of the mid-point of our fiscal 2018 guidance at the time and we subsequently reported our fiscal 2018 results better that exceeded our expectations. So although we are not providing a re-issuance or an update of the targets we provided at our June 2018 Investor Day. To better assist you in today's earnings presentation you will find a recast and walk of certain of our Investor Day targets using fiscal 2018 reported results and the ASC 606 basis of accounting.

Taking a step back, we are pleased with our performance in fiscal 2019. And we continue to make great progress on our transformation initiatives. We have a lot of opportunities ahead of us and we're excited to continue to challenge ourselves to become an even stronger organization.

With that, I will turn it over to the operator to take your questions.

[Operator]

[Operator Instructions] And we'll take our first question from the line of Jason Kupferberg with Bank of America.

[Jason Kupferberg, Bank of America Merrill Lynch]

Good morning, guys. I just wanted to start maybe on the bookings side of things, just looking at the fiscal '20 guidance. It's actually in line with your typical annual target even though you do have that tough grow over as was highlighted in your prepared remarks, especially in the second half. So I just wanted to see if you can go into the visibility on that target. I mean it's a stronger guide than we were expecting in light of the comp issue just maybe deconstruct the market a bit in terms of where you see that sustained strength coming from. And as part of that, if you can just clarify what the bookings contribution in Q4 was from the quasi-acquisition, if you will?

[Carlos Rodriguez, President & CEO]

Sure. Let me just start by the -- I guess the first part of the question and then maybe Kathleen can address the quantification in terms of the numbers in the fourth quarter. But we look at a number of -- I guess, objective things in terms of trying to come up with our bookings forecast for the next year. As you know, that is the number that we have the least visibility on, because it's unlike the rest of our business which is recurring revenue. This is every week, every month, every quarter, start from zero in terms of new business bookings. But having said that, we have a lot of historical information around. For example, sales force productivity, so we call sales per diem or average sales productivity and then we have the number of sales people that we have hired into the system over the past three or four months, and so that, that all goes into a model and you add on top of that are feeling some subjectivity around new product strength and in some cases may be acquired products that we have and that's really how we come up with our number for bookings. So I think borrowing changes in the economy and borrowing kind of -- some kind of external shock or factor. We've been doing this way for decades and it works. We have a certain amount of head count that we had, we have a certain amount of productivity that we drive toward then we change our incentives and ratchet them up in order to drive those productivity improvements. And then we have kind of new products that we introduced to try to help our sales force get that productivity and also help us competitively in the marketplace.

So all other factors remain relatively constant. Even though there are tweaks here and there, depending on the segments, but no big changes in pricing, no big changes to report on kind of other fronts other than as you insinuated kind of business as usual. Although that underestimates the difficulty of selling the amount of new business bookings that we have to sell every year in order to hit our target. But that gives you a little bit of a flavor of how we kind of build our planet's -- it's a tried and tested approach and we did have a little bit of a challenge because of the grow over from the fourth quarter client acquisition list, but we feel good about our momentum and I think our headcount adds were probably in the 4% range, I think it was. I'm not sure with the exact number was, but our head count is exactly where that's the one variable historically it would behind in hiring that can generally create an issue for us and if we are in good shape on hiring or even ahead of the game, it gives us a little bit more confidence and I think we're exiting the year fully staffed and I think with a good head count in our sales organization. And I know, Kathleen, if you want to address?

[Kathleen Winters, CFO]

Yes. And maybe I'll just also comment a little bit on the process having come in and been here for a couple of months now and coming in with a fresh set of eyes or different set of eyes looking at the process. I mean, I can attest to the very detailed bottoms up process that we go through in terms of, as Carlos said, looking at head count looking at productivity improvements. How does new product functionality or new product add to the growth. What is the market conditions look like. I mean, we've kicked the tires on this process and is a really, really solid process. I'm really happy to see that. In terms of the year-over-year and the growth of -- particularly the client list acquisition. I mean, look, we're really, really pleased with how the organization, sales organization performed and the end result for fiscal 2019, it's a little hard to exactly parse out and identify the exact impact of that client list acquisition. Because we think about it in terms of look it's truly organic, we've got a sales force and sales associates that we've had to dedicate to go out and work those conversions and close those sales on balance we're just really happy with the outcome we had in 2019. And we think we've got a really very balanced and solid outlook for 2020.

[Carlos Rodriguez, President & CEO]

And so -- I just went back and listen my notes, our head count actually is a little bit stronger is around, a little bit over 5% in terms of. So that's actually probably better than historical norm and we did have conversations about six months ago that given the discussions out in the external market about the economy and difficulties potentially -- difficulties with the economy is before, obviously, the discussions about lower rates etc. And we decided that we're going to take a little bit of an insurance policy and add a little bit more headcount in our sales organization. So I think we're entering the year in a very good position from a headcount standpoint.

[Jason Kupferberg, Bank of America Merrill Lynch]

Okay.

[Christian Greyenbuhl, VP, IR]

Jason, I would just add briefly to that to Carlos' point about headcount investments, they are in put more focused on inside sales, which is in line with what we outlined at our Investor Day that we were going to try focused on.

[Carlos Rodriguez, President & CEO]

And one last comment about that, because I think you referred to as a quasi-acquisition. So it was just to be clear was -- we bought the right to convert clients and so every single client had to be resold and re-implemented. We bought no platforms, no assets, no people, just to be clear, because that was a very difficult and an incredibly well execute is probably one of the best executed initiatives I've ever seen. That was months and months of planning, and it was executed virtually flawlessly.

[Jason Kupferberg, Bank of America Merrill Lynch]

Okay, that's really good color. I just wanted to switch gears for a second over to PEO. I mean, if we just reflect back on the Analyst Day last year. I think, the three year revenue guidance to the CAGR there on PEO was 11% to 14% if memory serves. I know we did 9% in year one, and at the midpoint in year two, I think we're looking at about 10%. So how should we perhaps recalibrate our expectations a little bit in terms of what the realistic three year CAGR is, and at the end of the day, is that just attributable more to variations in the WSE growth as opposed to some of the pass-through pieces or the SUI pricing as you reflect on kind of what the thought process was a year plus ago versus today.

[Carlos Rodriguez, President & CEO]

Sure. So for 2019, as Kathleen was talking about things that we needed to kind of provide some clarification on from Investor Day, because as time goes on more things change so ASC 606 was one of the things that we highlighted. But another thing that we've tried to highlight every quarter since the fiscal year started in '19, because given the timing when we gave our Investor Day guidance it was June, and it was really just a month later that our benefits billing cycle changes for our PEO. In other words are open enrollment takes place because of the way our fiscal year works that's when our renewals take place in our PEO and that's when we give visibility really to the biggest pass-through which is a zero margin benefit pass-through.

And as we mentioned last year around this time, we were pleasantly surprised have gotten kind of given what was happening with healthcare inflation, low health care renewals, lower than we had anticipated, certainly in our Investor Day. Again zero margin, so no impact on EPS, but certainly had an impact on growth in '19 of total PEO revenue. We also had a renewal of our workers' compensation policy that ended up being again lower than we had anticipated. That was a smaller impact in the zero margin health care benefits pass-through. But the combination of those two items is really the largest component of the difference between Investor Day guidance in 2019 PEO performance.

Now, we move on to 2020. Now you start to get the impact of what is a combination of that -- of the slower pass-through growth, but also slightly slower worksite employee growth, so it's really a combination of those two factors. I just want to give you a little bit of color, because it depends on '19 versus '20. And as Kathleen mentioned in her prepared remarks in '20 our health care renewals, which we do now have come in line with historical expectations. So that portion for 2020 is more in line with what we've had historically. So '19 was really the anomaly when it comes to zero margin, pass-through, but we still have pressure from workers' compensation pricing coming down and SUI pass-through also coming down in 2020.

And again, these zero margin or low margin pass-through costs coming down in cost or price is generally a good thing competitively for the PEO. So it has relatively small impact on the overall profitability of the PEO and very little impact on the overall profitability of ADP. But certainly impacts the headline revenue number.

[Jason Kupferberg, Bank of America Merrill Lynch]

Thank you.

[Operator]

Thank you. And our next question comes from Lisa Ellis with MoffetNathanson.

[Lisa Ellis, MoffetNathanson]

Hi, good morning, guys. And great results. Here, if I would call correctly, I believe your new high-end product is in beta testing with a handful of clients. Could you -- as really peaking out into 2020 now. Could you give us an update on where you are in that rollout? What type of feedback you're hearing what features our clients liking the most about that product and kind of what's the timeline for the rollout? Thank you.

[Carlos Rodriguez, President & CEO]

Sure. You're obvious -- as you can imagine, we're very excited about we've been for several years working on a solution that will really address some of the needs in the market that are unmet today. We just as a little bit of color before I get into that, keep in mind that we also have our Workforce Now platform that we've brought up into the upmarket space, which has really helped us competitively quite a bit. There is a segment of the market where Workforce Now works very well for larger clients, if those larger clients are "simpler" and don't have kind of global needs and relatively simple benefits needs. And so, it's been a two-pronged approach in the interim of using continuing to use Vantage and investing in Vantage and also bringing Workforce Now up into the upmarket. Those two things in combination I think have led to -- we consider to be good unit growth in the upmarket, which is very satisfying for us.

But obviously, we believe there's a lot of upside with our new Lifion platform. And so, this is the first year where we've had clients in pilot. We do have a sales team, which we have expanded just very recently. So we are not in general availability, but we are selling new clients, and I would say that our sales expectations have -- I think it's safe to say, been in line to maybe even exceeded our expectations. So we're very happy on that front. But now we have a lot of work ahead of us, because we've got, I believe it's about four or five clients that are implemented and live, and obviously in the agile development approach we are continuing to improve and add to the platform as we bring on clients. And so, we're just in this gradual process of making sure that we can get to the point where we can have exponential growth of the platform and for that we need to make sure that we are fully ready with our implementation resources that we've been adding sales people. We've been adding implementation resources, and I think 2020 is a year where we expect to get traction in the market, particularly in the second half of the year.

But again, the caution of course is given ADP's size and our $14 billion in revenue. This is not something that is a one or two year horizon story, this is in terms of impact on ADP is a very, it's a long-term investment and is expected to have a very long-term and positive impact on our competitiveness. But we shouldn't be expecting if -- in fact, I would say, it's fair to say that, in the short term it really create some financial pressure, because we're putting a lot of the -- besides the R&D investments that we've made over the last four years or five years. Now we're investing heavily in sales distribution and implementation. And as you know, especially in the upmarket that doesn't translate into revenues until 6, 12, 18 months down the road depending on the size and complexity of the client.

[Kathleen Winters, CFO]

Yes. So we did -- we had given a range of sales units that we had expected and we were at the high end of that range that we had given as Carlos said, we've been adding to sales and implementation team there, but we'll continue to do so during the course of 2020 for sure. So yes, we'll start to get more feedback during the course of the year as we do these pilots with the clients and we'll keep you updated on that.

[Carlos Rodriguez, President & CEO]

And I think, since you -- I think, very specifically talking about Lifion. But I think it's worth also mentioned, we have couple of other next-gen projects that are progressing quite well as well. One of them is more back office or tax engine, but it's very exciting, because, I think, it should lead to some real scale and efficiency gains there and more flexibility for our service organization also for our clients. But our new payroll next generation payroll solution is also kind of progressing well. I think we have around a dozen clients again in pilot. That's it also a global platform with a rules-based engine. We are very excited about that in terms of the flexibility that it will give us in terms of our core business around payroll and that's also progressing quite well. And I think we are intending to ramp up our sales, implementation resources on that front also.

[Lisa Ellis, MoffetNathanson]

Okay. Well, I'm excited about your new tax engine. Different topic, in your 2020 guidance, you're forecasting again about 2.5% pays per control growth, which implies a pretty robust outlook on the US economy. Can you highlight what you're seeing in your underlying numbers that's giving you that level of confidence as you look out into 2020. Thanks.

[Carlos Rodriguez, President & CEO]

It's a very fair question. I'd say the -- given that we're not economists and don't have a crystal ball, probably the biggest factor we look at is trend and momentum. And I think we had 2.7% in the fourth quarter if I'm not mistaken, just to check. And I think it was two point something -- 2.8% before that. So we're believers that when it comes to the economy, the economy behaves somewhat similar to ADP, which is things don't change that quickly overnight, unless there is of course, some kind of external shocks. So could that number end up exiting at a lower rate by the end of the year due to an economic slowdown. I mean, that's up to the economists to the forecasting to predict, but based on what we're seeing like in the trends and the momentum we just issued our employment report actually this morning, and it was once again, I think, kind of in the target if you will, I think it was 150-something thousand jobs. So it feels like there is still some gas in the tank, and when you look at labor force participation we do, even though we're not economists, we do look at these things. And yes, unemployment is very low and that should make it a little bit harder to find people, but there are still a lot of people out there. And I know there explanations around the baby boomers retiring and so forth, but it appears every month that we and the government everyone else is surprised by the ability to bring more people into the workforce. So we think that at least for the next couple of quarters that feels like a good bet. And I think, beyond that probably up to the economists.

[Lisa Ellis, MoffetNathanson]

Perfect, thank you. Thanks, guys.

[Operator]

Thank you. And our next question comes from Bryan Keane with Deutsche Bank. Your line is open.

[Bryan Keane, Deutsche Bank]

Hi, guys, just wanted to ask on employee services growth. I know at the Analyst Day we talked about 5% to 6%, it's only modestly different now 4% to 5%. And just a different factors going into that guide now from what we've learned over the last year. And also I think, Kathleen, you talked a little bit about beating expectations and revenue which had some impact as well? Thanks.

[Carlos Rodriguez, President & CEO]

Yes, I think there are -- let Kathleen talk about the math, but just as an overall big picture. Again, as we get further away from Investor Day, there's a lot of things that go into the mix for Employer Services. For example, we do now include client funds interest in Employer Services. And so, we're getting slightly less contribution from that in '20 versus Investor Day and versus '19. We also have a little bit of FX pressure that obviously, it's not something that we forecasted an Investor Day. So I think those generally would explain, I think over the two years of '19 and '20, I would say that Employer Services growth is in line with Investor Day.

[Kathleen Winters, CFO]

Yes, I don't really have anything to add further. I mean, those are the factors, as Carlos mentioned, that is various puts and takes. But generally in line with those expectations.

[Bryan Keane, Deutsche Bank]

Okay. And just as a follow-up one to ask about the M&A pipeline and what you guys might be looking at to continue to add and supplement to the portfolio? Thanks so much.

[Carlos Rodriguez, President & CEO]

Well, we, this fourth quarter client list acquisition that we made I think, piqued our interest in using our capital in more than just kind of the traditional organic fashion. And we did do a few acquisitions. If you recall, we acquired Global Cash Card. We just acquired Celergo, WorkMarket. So we planned to some seeds, and some of those were really investments in the future. So, call it, two, three, five, 10 years down the road WorkMarket as an example. We're incredibly excited about our strategically, but it's just because of its size and relation to the size of ADP. Today, it doesn't really change the numbers a lot, but it could down the road, it's a very large market for freelancers out there so.

So the question is, besides that, or the things that we can use our capital for that would have a greater impact on the kind of short-term revenue, if you will, and we're certainly interested in looking. But we're also highly disciplined right in terms of requiring the right kinds of returns. And as you know, the bar for us is -- one of our bars is that we are trying to avoid adding a lot of additional platforms, because we've been working very, very hard to rationalize platforms and the migrate clients onto our strategic platforms. So that does create a little bit of a high bar, but it doesn't mean that we wouldn't be willing some extraordinary circumstance to make an exception of was a very strategic opportunity, we may be willing to spend the time and the effort to migrate clients off of an existing platform onto our platform, like we did with Global Cash Card as an example.

[Bryan Keane, Deutsche Bank]

Okay, helpful. Thanks so much.

[Operator]

Thank you. And our next question comes from Mark Marcon with R. W. Baird. Your line is open.

[Mark Marcon, Robert W. Baird]

Good morning. You have really nice progress with regards to the client retention improvement. I'm wondering if you can talk about how broad base that was, it sounds like there is really good improvement on the midmarket? But wondering to what extent that extended to the other areas. And then, you're looking for some more improvement going forward. I'm wondering if that's expected to be broad based or how we should think about that?

[Carlos Rodriguez, President & CEO]

So, yes, a little bit of color is that the reason we called out as we usually do, we try to call at the one or two things that are the most significant in terms of moving the numbers, but whether it's retention or other parts of our business -- the rest of the business is performing relatively well, it's very hard to generate that kind of improvement. So in terms of additional color, in our SBS business, as an example, we had record high retention, but it was off of what was already a very high retention rate. So, what I'll call it modest improvement in retention, but frankly very satisfying, because we're trying to -- we're trying to stay away from quarterly or specific business segment discussions about retention, because there is, there can be volatility in those numbers. But to see the SBS retention improve on top of where they already were after five years of improvement was very satisfying.

But the real standout was really our midmarket business and it really performed according to script. So we -- as you know, we once had some very difficult times in 2017 with a combination of ACA have been happening right in the middle of what we're trying to migrate our clients off of our legacy platforms onto our current version of Workforce Now. And what we said at the time was that we wanted to -- the script was and we wanted to follow what happened in our downmarket business where we consolidated and migrated all of our clients onto one single platform called run, and after that for four or five years we had very healthy increases in retention, very healthy increases in new business bookings and just great performance in this business around margins and so, for fiscal year '19 we're very happy that our midmarket business followed that part of the script of really taking the benefits of a simpler environment both for our associates and for our clients and we're hoping that there is more gas in the tank.

And in the rest of the business performed, I would say, well, we don't have any -- I don't think there any places where we have -- we will rise to the occasion of us mentioning that we had a big dip in retention in Employer Services.

[Mark Marcon, Robert W. Baird]

That's great. And then, it sounds like there's a lot of excitement around on demand pay. I'm wondering when we think about the concept and the promise that that hold. How should we gauge that relative to being realistic in terms of when it's actually going to really generate material revenue? How do you envision that rolling out over the next two to five years?

[Carlos Rodriguez, President & CEO]

My instinct would tell me slowly and with very little impact, but it could be important competitively. And so, I think being able to provide these solutions in a market where again we already have a very large new business bookings number, and we have every year to grow that, that number we need up every weapon in the arsenal. So we are still very positive and optimistic about that business. And, but over the course of a couple of years, I would say, I would have modest expectations around financial impact. Longer term, we have a lot of -- we didn't buy Global Cash Card without keeping in the back of our minds that this was a potential very large opportunity for us down the road. But again, I hate to sound like a broken record, but in relation to the size of ADP, we look at all these things over the course of three, five, seven years rather than what's it going to do in the next couple of years.

[Mark Marcon, Robert W. Baird]

All right. I appreciate that. And then lastly, just on the PEO side, any changes in the market that you can discern Carlos with regards to just when we take a look at on WSE growth and how we should expect trends to unfold or any regional differences anything that's changed with regards to the promise there?

[Carlos Rodriguez, President & CEO]

No, I mean, I think it's still, it's still a little bit of the same, a similar story where we do say in the industry says the same thing every year, but it's still true that it's a relatively under penetrated market. So I think there is no, there is no lack of opportunity in terms of addressable market out there. I think the key is really being very disciplined about your health care and you're workers compensation, so that you have a truly long-term sustainable and viable business model. And I think we've tried to follow that approach by taking no risk on our health benefits and being very disciplined and careful on workers comp or we have indemnity which is run by corporate, which provides the pricing to our PEO, and frankly where we also offload most of that risk.

As you know in our 10-K, we fully disclose the way we color basically that risk to a relatively small number. So I think the key is just really focusing on the value proposition and not getting distracted by the short-term fluctuations in volatility of health care costs. And I think, that's served us well, and that's we're going to continue to do. We have obviously inherent advantage in -- that we try to exploit of having a very large installed base and a very large referral network called the ADP sales force outside of the PEO. And so, you heard us talk last year about tweaking these incentives in the midmarket. We had great results from that. We had double-digit growth and referrals from our midmarket business. I think you saw it translate into really good results and our new business bookings. I think we talked about double-digit bookings growth in the PEO for the year.

So we're feeling pretty good about the PEO business and I think nothing that I can see has changed dramatically. The environment compared to three or four years ago, there is less rhetoric around -- regulatory issues and obviously ACA people go back and forth on that, but there is enough state and local regulation that small companies deal with that. It's a target rich environment for whether it's a PPO or some of our other traditional services. It's very hard to be a small employer out there.

[Mark Marcon, Robert W. Baird]

I appreciate the color. Thank you.

[Operator]

Thank you. And our next question comes from Samad Samana with Jefferies.

[Samad Samana, Jefferies]

Hi, good morning. Thanks for taking my questions. I'm curious when you think about the $1.6 billion of bookings that you added in -- in fiscal '19. I'm curious maybe you can give some color on the composition, when you think about it as core payroll versus some of the additional offerings that are in Employer Services. What was particularly strong and what drove the outperformance relative to expectations. And then I have one follow-up question.

[Carlos Rodriguez, President & CEO]

I'm sorry. Back to the beginning of your question, you're telling about 2019?

[Samad Samana, Jefferies]

Yes, of fiscal '19 as you think about the strong bookings performance within Employer Services. If you think by product or by the services that are offered in Employer Services was there anything that stood out in particular -- as particularly strong and/or that drove the outperformance.

[Carlos Rodriguez, President & CEO]

Yes. And I think we were kind of generally in line with the last couple of years about where we were in terms of about 60-40 in terms of the breakdown between new and upsell opportunity, and that's kind of not that far off from our historic numbers. A couple of other places where we had good results, we talked about SBS in the down market, they were on a great trajectory to begin with. And I think the client list conversion "acquisition" that we did at the end of the year helped that even more. So we had just really great results in SBS, but our International business did well, also particularly because of the MNC multinational sales that we have with global view Celergo streamline. So that was also a big positive. And frankly, our domestic upmarket business did pretty well, we had a good, they had a good year on new business bookings. So we were pleased with that. So we had -- I would say, probably SBS is probably the standout with some tailwind because of the client list acquisition. But I think we had broad based strength.

[Samad Samana, Jefferies]

Great. And then just a follow-up on the additional $26 million in savings expected from the changes internally to the structure to make things more streamlined. I'm curious if that's something that's part of a more to come, or is that what maybe the last of what you see as restructuring that's needed as part of driving efficiencies or how should we think about that in the context of that new $26 million and then with the $150 million of savings driven by the -- is there additional efficiencies that the company seems that can drive from that perspective. Thanks again for taking my question.

[Kathleen Winters, CFO]

Yes, thanks for the questions, Samad. Just to clarify, the $26 million was the charge we took the severance charge in Q4 of 2019 related to the workforce optimization, if you will efforts in terms of span -- looking at spans and layers. And so forth, that will drive in addition to that plus the procurement work we're doing will drive about $100 million of savings in fiscal 2020.

[Carlos Rodriguez, President & CEO]

And I would say that, just to add a little bit of color to you, because your comment about are we done with kind of trying to look for efficiency gains or we done with the restructuring. The answer is no. I think that -- very large complex global organization and I think we have a lot of opportunity for improvement. We probably always will. But I think in the short-term, we have a lot of opportunity just because of what we're seeing with the capabilities of our new platforms as an example, they really -- I think highlight the opportunities we have for automation for digitization and for efficiency. And so we intend to continue to stay on that path here for some time to come. So I think we're -- the answer is, we're not done. I think, we are still working on that.

[Kathleen Winters, CFO]

Yes, I mean, and just kind of add-on to a little bit more there is really a lot of energy and alignment. And those two things together really important, a lot of energy and alignment in the organization around doing this transformation work on those. It's a lot of hard work, there's a lot of execution work going on, but there's also a lot of work around developing the pipeline. What is the next set of projects that we're doing in areas like, is there potentially more on procurement, is there more in terms of how we utilize our facilities automation projects. I think there is a whole host of things that we can look at here.

[Samad Samana, Jefferies]

Great. That's really helpful color. Thanks again for added additional detail.

[Operator]

Thank you. Our next question is from David [ph] with Stifel. Your line is open.

[Unidentified Analyst]

Thank you. Carlos, you've done a good job of outlining how the operational changes system in there that ADP over the last two years as well as describing the new product initiatives underway. How should we think about which of these will be most impactful to revenue growth over the next 12 to 24 months.

[Carlos Rodriguez, President & CEO]

I don't mean to insult you, but I don't spend a lot of time thinking about the next 12 months, because the -- like, this thing is a ADP is that from a recurring revenue standpoint, the momentum that we have is hopefully discernible right in terms of when you look at retention, you look at new business bookings and you look at the momentum of our business. And we tend to spend more time on the kind of 24 months and beyond timeframe. But having said that, I think some of the recent acquisitions that we made over the last couple of years. I think our -- strengthening our product line, I think that the next-generation products that are actually really getting sold now and getting implemented have the ability to start really moving the needle on new business bookings. But those have relatively modest impacts on our overall revenues, just because of the size of the business. So it's not because of lack of excitement around the things that we are doing that I say that, that the 12-month horizon is really not something that I spend a lot of time on. It's just because of the math in terms of the way the math operates. But I think that we have a number of things that we've been working on for, and it's not really just over the last couple of years. We focused a lot on the last couple of years around kind of increasing the pace of change moving faster and also becoming a little bit more incrementally efficient whether it's through the voluntarily retirement through the strategic alignment initiative or some of the other things that we've done.

But I think our sales force, our products and the rest of our business continues to execute at a very high level. Unfortunately, now we're getting that the benefit of those -- that execution plus we're getting reasonable margin improvement, because of some of these actions that we've taken. So we're very happy and very satisfied with the performance and I don't expect to be any less satisfied over the next 12 months.

[Unidentified Analyst]

Right. I think that fair. The question was operationally, obviously, you've done a great job, which is impacted retention and service levels, which obviously impacts also new sales. I guess I'm trying to understand whether or not some of the product initiatives could in fact be more impactful, if you will over the next 24 months or so, or do you think it's going to be just kind of an even kind of contribution as it's always been over the last several years.

[Carlos Rodriguez, President & CEO]

Well, since you mentioned 24 months, that's a different story. So I do think that given the ramp and the kind of the lines that we have on the charts on the grass, if you will, what we expect from our next-gen products. I would expect that over the 24-month horizon, there will be a measurable impact particularly on new business bookings from next-gen. But in the kind of the 12-month timeframe, the things we've done for example around moving Workforce Now into the upmarket. I think it has been incredibly impactful and helpful in the upmarket competitively for us. We're also using our Workforce Now platform in the PEO now and in our HRO business, which has been incredibly impactful. So now we have a very large next-gen platform, because we consider Workforce Now to be next-gen as well and to be out there competitively. So that's very helpful. This retention improvement that we've talked about beneath the surface of that is really big improvements and NPS scores, client satisfaction and referenceability. And I think that probably got alone has the single biggest potential impact on our sales force and our growth because we have a very large distribution network out there. And any improvement in productivity for them because of any kind of tailwind, and I think that reputation and referenceability and client satisfaction provide that tailwind, I think can really move the needle.

And then lastly, the run platform our downmarket platform just continues to execute incredibly well and they continue to innovate and we have a couple of things cooking there as well in terms of things in the downmarket that we think could also strengthen our hand in the marketplace as well there.

[Unidentified Analyst]

Great, thanks for that clarification. And just one other question, really just on cyclicality. I just looking at the headlines and we will report this morning and some of the reports from paychecks in their monthly reports over the last several months, it looks like small business hiring is challenged with the tight labor markets. And is that typical for this stage of the cycle? And have you seen any impact of that in your downmarket business or the fee?

[Carlos Rodriguez, President & CEO]

I -- you kept that a little bit of a disadvantage, I don't think I even looked at my own employment report, I look at the headline number, which is 150-something thousand, but it sounds like there was something about small business employment slowing there, but I don't -- I think that based on kind of the trend, if you will over multiple months. I don't think there's anything really to read there. It is true that our pays per control number comes largely as a -- from a subset of our auto pay, payroll engine, which is does not include SBS. But we're not really seeing anything -- I mean our impact would be -- we would feel it, if there was a big issue in SBS, we have pays per control growth in SBS of 1.7 for the year. Not sure if I have prior years that I could compare that to, but it's positive, and it's growing. And the question about the cycle that we probably have some data around that it, I have to go back and look at, but that's probably more of a question for economists in terms of what turns down first is it large employer hiring or is a small business, hiring it's not sure that I have that one at the tip of my, on my fingertips, but there's really nothing, it's roughly comparable. So it's roughly comparable --

[Unidentified Analyst]

Last year's growth rate in SBS pays per control roughly comparable to this year.

[Carlos Rodriguez, President & CEO]

Yes, pay per control -- yes, so, that feels similar-ish, it doesn't mean that it can fluctuate from month-to-month, because I don't want to contradict our employment report. But in this kind of economy, I just don't think that there is so much demand out there and you saw the consumer spending numbers and you see what's happening in the consumer sector, a lot of small business serve that part of the economy. It's just -- it's hard to believe that small business employment is going to have a dramatic slowdown here anytime in the near future.

[Unidentified Analyst]

Great. Thank you.

[Operator]

Thank you. And our next question is from James Schneider with Goldman Sachs.

[James Schneider, Goldman Sachs]

Good morning. Thanks for taking my question. Carlos, good to see the retention improvement in fiscal '19, the 40 basis points. If you go back and look at fiscal '19 by segment downmarket and midmarket and upmarket. And clearly you've talked about the downmarket haven't done better for some time. Did the midmarket retention kind of performed to your expectations. And as you look into fiscal '20, what do you expect to kind of the line share the retention improvement come from?

[Carlos Rodriguez, President & CEO]

The midmarket really outperformed our expectations in fiscal year '19, the way we build our plan for '20 is even though there are probably some tweaks here or there. We are getting back to kind of close to record high client retention, so there would be -- I would considered, I would call a modest improvements expected in various parts of our business and others kind of flattish, because we just want to be realistic about the potential for retention in the absence of for example, some large change. So as an example in the midmarket we expect further improvements because we continue to still get benefits from the migrations in the consolidation of our platforms there. Excuse me.

[Kathleen Winters, CFO]

It's pretty modest, as we said 10 basis points to 20 basis points improvement for next year and spread pretty evenly across the board across the different market segments and there's always puts and takes, but it's pretty evenly spread in terms of where that improvement comes from and as you're at these high levels, and particularly in small business being at record highs. The higher you go the harder it is to get that incremental retention improvement, but obviously something we're continuing to focus on.

[Carlos Rodriguez, President & CEO]

And just one last little piece of color. I didn't go back and look at where our retention rates were over the last, call it 10 years. And we are now at a higher retention rate, then we were pre-crisis. So if you look at '06 and '07, our retention rate was actually lower in Employer Services than it is today. Despite the fact that the mix of our business is more heavily tilted now towards our downmarket business than our upmarket business, and that's in large part as a result of the outperformance if you will. So we are downmarket business has grown faster over the last 10 years than our upmarket and midmarket business. And the downmarket business has a lower natural retention rate, just because of out of business in bankruptcy is and so forth. And so even though SBS is at record highs that retention rate we've told you before is still lower than the midmarket and the upmarket retention rate. So the fact that the overall ADP retention is higher today than it was pre-crisis, despite what is a very, a much larger downmarket business, I think it's impressive.

[James Schneider, Goldman Sachs]

It's good to see. And then on the PEO business. I think, Carlos, you called out a couple of items related to some increased client churn in the quarter. Can you may be kind of talk about what drove some of that was it. Specific offerings was a competitive, was a pricing, and I guess, how do you feel about kind of improving that metric going forward in the next couple of quarters?

[Carlos Rodriguez, President & CEO]

That's a good question. We spent some time kind of trying to find the silver bullet there in terms of what kind of drove this. And I think it feels like some of it was the health care renewal, which is not out of line with historical norms and just remember that for us from a health care standpoint we take no risk on health care, so we pass-through whatever health care costs we have. I would say that '18 was the anomaly, where we had a lower-than-normal health care renewal and then now we are back to kind of a more normal health care renewal and that may have had some impact in terms of client shopping because it's a relatively large part of the overall employment, employer cost. But we looked at it, we sliced and diced by size of client by industry, by geography, etc. And it's hard to find a pattern. Now happen to think that's good news, because that means that we think it will potentially something that we can work our way out of and reaccelerate the growth there. But the renewals were actually in line with our expectations. So last year's when we were currently surprised with the old story of may be a little bit of a grow-over issue for the clients themselves because and we got a little over excited about the good news last year. Now, even though these healthcare inflation rates are back to kind of historical norms still compares to what was better the previous, the previous year. But there may be other noise that I'm not aware in the system, but I can't really put my finger on anything that's permanent or with what's kind of mentioning.

[James Schneider, Goldman Sachs]

Thank you.

[Operator]

Thank you. And we have time for just one more question. And our next question will be from Tien-tsin Huang with JP Morgan.

[Tien-tsin Huang, JP Morgan]

Hi, thanks so much. I know it's getting late. Appreciate the time. Just on the margin outlook. I'm curious if we were to go back to the nice margin walk that you provided at the Analyst Day. Curious what's left to do to get to that 23%, 25%. I know you re-basing it here with 606 and what have you, but what's left to do another voluntary early retirements mostly done it sounds like service alignment mostly done where is the focus from here?

[Kathleen Winters, CFO]

Yes. So, as we mentioned a little bit earlier, we've just been looking at kind of org structure, if you will. And looking at spans and layers and so that will benefit us. And I think where we're doing some procurement work, but I think there is a lot more to go on the procurement side. And as I said, the organization is really energized around not only executing what we have, but saying what else can we put in the pipeline? So we've got some things near term that will help us near term in the pipeline and then we're working really hard to say, okay, what helps us two years out and three years out, and after that, there could be a lot of automation work that we can do across the organization, whether it's front-line or back office. I think there is a lot yet to go in terms of identifying those opportunities. So a lot of execution work we still have to do and we'll be working a lot on identifying new things to.

[Carlos Rodriguez, President & CEO]

I think to be a little bit more -- to be even more explicit the transformation office that we've set up. And I think, as Kathleen mentioned the whole management team, I think is committed to kind of this increased pace of change. I think that we've been talking about. So to be very clear, we actually have initiatives for '21 already. So we -- that's '21 that wasn't -- didn't misspeak there. So even though we're talking about '20 in terms of financial guidance we're meeting and talking now about things that we're working on during fiscal year 2020, that will have an impact on '21. And it's a number of different initiatives, we're not ready to talk about them because we're just not at that stage yet. But you should expect us to be talking about things that we're working on along the lines of what Kathleen mentioned, and we have those things already in process of getting ramped up and some of them require investments and that's built into our operating plan as well.

On the negative side, even though we've done all these positive things back to the investor days. Since you were asking about Investor Day and getting to the margin, one thing is not going to help us is if interest rates stay at the same levels as they are today. That would be a reasonably heavy headwind for us in '21. If you go back to Investor Day, I think you can do the math we provided you with what we expected the balances to be and what the forward curves we're seeing at the time. And unfortunately the forward curves are saying something different now. Of course, we have our optimistic hats on, and even though short-term rates might come down. That's less of an impact on us than kind of the mid-term rate. So if the 3s, 5s and 7s move up a little bit as a result of hopefully continued economic activity in a more positive outlook about the future and about inflation, we could get some recovery there. But as it stands today, I think we were very clear that we have about a $30 million delta for '20 versus Investor Day. And if it's $30 million for '20, I can guarantee you it's a bigger number and for '21 and I think the math is relatively very poor.

[Kathleen Winters, CFO]

I think if you just assume the same forward curve that we see today, if you assume that you'd be in about the same level of client fund interest in '21 as we're expecting in '20.

[Tien-tsin Huang, JP Morgan]

Yes.

[Carlos Rodriguez, President & CEO]

Yes, like I said, we have a lot of stuff, we are a lot of stuff cooking. So we're not a -- we've learned to be agile, we've learned to be a debt and we will adjust to the environment, if necessary. And just as a point of reference in terms of being able to adjust I'll just point out that I took some notes here last night that we went in the pre-crisis our yield, our average yield on client funds was 4.5% on approximately I think it was $15 billion to $16 billion in balances. And the yield on our client funds when all the way down to 1.7% before now getting back to 2.2%. And so, if we were able to grow through an improved margins and improved profit going from 4.5% yield to 1.7%, I think will be okay. Because the good news is from 2.2% to 0 is less than 4.5% to 1.7%. So even if we go to zero, ADP will continue to chug along. We'll continue to grow and will continue to find ways to generate margin.

[Tien-tsin Huang, JP Morgan]

Yes, I know you're thoughtful about what you can control. So just really, really quick, I promise. Just on the PEO side, I know a lot of questions. We've seen a couple of assets trade Carlos in the last year. So I'm curious if that changed your thinking on maybe one just scale up in PEO.

[Carlos Rodriguez, President & CEO]

I'm sorry. Say one more time.

[Tien-tsin Huang, JP Morgan]

Yes. We've seen a couple of acquisitions, right, take place on the PEO front here in the last nine months or so. If I'm counting right, just curious did that changes your thinking I want to maybe do deal on it.

[Carlos Rodriguez, President & CEO]

I misunderstood. I heard trading and I thought I you were referring to something.

[Tien-tsin Huang, JP Morgan]

Yes, I -- which is my [indiscernible].

[Carlos Rodriguez, President & CEO]

That's alright, that's alright. I think we have the same I think position that we've had all along, which is -- we have capital we after paying dividends and after a modest share buybacks, we have excess capital and we would love to deploy it. And I think we love the PEO business, but again, at the risk of a broken record, we're highly disciplined and sensitive about price, which matters in terms of what you pay in terms of valuation. But in the PEO business, there is another dimension of discipline around the quality of the business that you're buying, because again, most of our competitors take more risk than we do and that creates the potential for more volatility in their business. And so whether or not these assets that are trading that's fully contemplated or recognized only history we'll tell, but we understand this business fairly well and we are -- I guess, I will leave it at that. I think we just careful about it I'm sure that that's factored into any kind of due diligence, and it is what it. So we are where we are. But we would love to find an opportunity to grow our PEO business inorganically if the opportunity were to arise.

[Tien-tsin Huang, JP Morgan]

Got it. Congrats on a good clean results guys. Thanks.

[Carlos Rodriguez, President & CEO]

Thank you.

[Operator]

Thank you. And ladies and gentlemen, this concludes our Q&A portion for today. I am pleased to hand the program over to Carlos Rodriguez for his closing remarks.

[Carlos Rodriguez, President & CEO]

So I want to thank everybody for joining us today. We obviously had a strong year you could hear our optimism and hopefully it came through. We have a lot of stuff going on. We executed on our voluntary early retirement program. We're very excited. It didn't come up in the call. But our new brand platform, I think is, is important, it's something that is new to us as a company and I think, we think that could incrementally help our sales force and make them more productive. And we talked a little bit about all that we have going on with our next generation solutions, which I think should power ADP for the next three, five, 10 years and hopefully more years to come with these global platforms.

And last thing I'll say is, for those you who are not aware, we actually reached our 70th birthday this year as a company. And it's not every company that survive that long. And I thought it was just a second to reflect on what is it about ADP, that has allowed it to make it through so many technology changes through so many economic cycles. And I'd say that the one thing that I keep coming back to is the commitment of our organization to focus on our clients and to deliver value to them and to deliver service. I think is probably the thing that all of my predecessors would say, and I would reiterate, is the key to our success and we've done that by staying focused on our associates, by staying focused on what they need by listening to them and supporting them and they then deliver the outstanding products and the outstanding service that we deliver to our clients. We then stick around with us and deliver great returns for our shareholders.

And so it's been a great run for seven years for our Company, I think all of our associates who, today, continue to carry the torch and continue to execute and work hard on our strategy to take us forward. We remain incredibly optimistic and positive about the future and we really appreciate your support and your interest in ADP. Thanks again for joining us and appreciate it. Thank you.

[Operator]

And with that ladies and gentlemen we conclude the call. You may now disconnect. Good day, everyone.