Maria Black: I would say that’s always the case. I think every year, as we go through renewals, as we go through the year-end cycle, you have clients that are choosing to buy into the PEO and you have clients that are choosing to exit the PEO. When I look at where we get our clients from, obviously, I think we’ve cited multiple times that about 50% of the new business that comes into the PEO comes from our existing ADP base that would suggest that at least 50% come from a non-PEO environment, and we somewhat tend to return them the same way. So that’s not to say that clients don’t, at times, we don’t trade customers between us and the other PEOs. But generally speaking, I think that’s always the case. I don’t believe there is a larger trend toward that this time than there has been in the past.
I think, really, in the end, it’s really a byproduct again of kind of what we saw with the renewal post pandemic and what the impact of that as we headed into this selling cycle, if you will.
Kartik Mehta: Thank you very much. Appreciate it.
Operator: Thank you. Our next question comes from Ramsey El-Assal with Barclays. Your line is open.
Ramsey El-Assal: Hi, thanks for taking my question. I also wanted to follow-up on the PEO and particularly on the bookings reacceleration. I’m just curious how much of that reacceleration is sort of from a better kind of external demand environment versus changes in your sales strategy? I’m just trying to figure out how much is sort of push versus pull when it comes to that recovery. And I guess the underlying question is your confidence level that this reacceleration is a sustainable trend?
Maria Black: Fair. Thank you, Ramsey. We are excited about the PEO reacceleration, specifically what we saw in March and obviously, how we feel stepping into this final stretch. I think it is too early to comment on the finish, but the pipelines are strong. What I would tell you is that I’m bullish about the demand in the market for the PEO and the overall value proposition. So all things being equal, I think we’re positioned well as anybody else as it relates to the overall PEO, I guess, demand, if you will, right? So I don’t think it’s a – the reacceleration was really, in my mind, more a byproduct of top of funnel filling the pipeline. We made a lot of investments into our seller ecosystem and the PEO. We have incentives that we can pull.
In addition to that, we’ve invested into – and I think I’ve talked about it a couple of times on these calls. We’ve invested into artificial intelligence that actually looks across our base to a project where we are actually looking at the ADP base to try to serve up the right, call it, PEO seller at the right time to the right ADP clients. So we’re getting smarter. I am not doing a good job saying it outside of we are getting smarter in terms of who we are actually targeting on the PEO using technology today that didn’t exist. So, I think all of that has kind of yielded to what I would say is a strong execution by the PEO sales team to drive the reacceleration that we would expect and that we are excited to see and optimistic that it will continue.
Ramsey El-Assal: Okay, great. And a quick follow-up, when you look across the business, are you seeing any vertical-specific areas of softness maybe tech or commercial real estate or financial services? Are there any worrisome kind of verticals that you are keeping an eye on?
Maria Black: Are you referring to the PEO specifically or the overall macro?
Ramsey El-Assal: I know. I should have been more clear. Just more broadly across the business, are there any – you guys have a pretty broad macro view. And I am just curious if there is any specific areas that are causing any concern in terms of recent trends?
Don McGuire: Yes. Maybe I will jump in. I think in terms of verticals, certainly seeing all the reports and reading all the things about commercial real estate that everyone else is. That’s – we look at the breadth and the distribution of our client base, it’s pretty broad. So, I am not so sure that we are seeing any particular verticals that are causing us any undue concern at this time. I would say, has been reported, Maria mentioned it in the prepared remarks, certainly, the enterprise space, the up-market space is where there has been a lot more layoffs announced, etcetera particularly in tech. So, we are looking at that. We have said in the past though that’s not the biggest part of our business. So, even though there is some more softness in that end of the market, it’s being more than offset by the success we are having in the down in the mid-market. So, from a particular vertical, nothing in particular.
Ramsey El-Assal: Okay. Thanks. Appreciate it.
Operator: Thank you. Our next question comes from Samad Samana with Jefferies. Your line is open.
Samad Samana: Great. Good morning. Thanks for taking my questions. Maybe first one, Maria, just I wanted to maybe get a better understanding when you are talking about a change in maybe the investment – investing philosophy of the company just as you are adjusting to the macro environment evolving as well. Is that more around maybe pulling back on hiring? Is that more about maybe redirecting where resources are? Can you maybe just help us better understand what that translates into? And maybe how we should think about that impacting both the top and bottom line?
Maria Black: Yes. Thanks Samad and good morning. I am happy to talk about modernization. It’s one of my favorite topics as all of you are probably learning from my prepared remarks. And I think it’s important to think about the modernization journey we have been on and how it really can set us up for kind of future growth and future margin, if you will, as a company. And that’s really what it’s all about for us. I think we have been undergoing transformation. We have been undergoing modernization for years. I would actually suggest that ADP has been modernizing for the last 73 years as we have invested in technology to make things better for us as a business to become more efficient, and we have been investing in our clients and in product to make it easier for them.
And so I think that’s not a new cycle. The way I think about modernization is really a client first lens, right. So, it’s really about all the things that I cited. It’s about taking out friction. The way I think about the investment, which is your question, Samad, is it’s an imperative for us to continue to invest in modernization because it’s the modernization that over time has really allowed us to reinvest in growth and reinvest in the business. And we are committed to a continued journey of growth and margin. And as a result of really the way we have been able to do this. So for us, it’s really about both. It’s really about the end, right. So, it’s about growth and margin expansion. And I think this virtuous cycle that we have been on really as a company for a very long time, which is we make things easier, we make them better.
We become more efficient. We make things better for our clients, and that allows us to invest in growth and it allows us to invest in – back into our shareholders, if you will, in margins. So, it’s really an end story and it’s key to who ADP is and it will be a key for us as we go forward. In terms of the commentary that I made around how we are thinking about it and the macroeconomic backdrop, it is an important time to make sure we are making the right choices and the right trade-offs. I mentioned earlier, we have been in the middle of our strategic planning process the last quarter. And as we have gone through the business, if you will, end-to-end, rest assured that we are trying as a company to make the very best decisions to have the very best outcomes as it relates to growth and margin.
Samad Samana: Great. I appreciate that. And then just one quick follow-up for Don, I was just looking at the guidance by segments and the margin for ES, it looks like you have settled it out at the – within the range at the lower end. I am just curious maybe what drove that? Is that – is it purely float contribution driven, or is that more the result of just bookings being better, so expenses being pulled forward? Just help me understand why that was narrowed to the lower end of the range, please?
Don McGuire: Yes. I think there is a couple of things going on. One, certainly, we are continuing to benefit from bookings growth, retention, price pays per controllers all a little bit stronger. And we certainly are getting lots of tailwinds. We have lots of tailwinds in Q3, in particular, from client fund interest. So, that’s been very helpful for us. The things slow a little bit from a client from an interest perspective in Q4. So, that certainly is not as helpful as it was. And we are of course, as Maria just mentioned, we are taking advantage of some of those extra flow funds that we have to invest – reinvest in the business or continue to invest in the business on modernization. So, it’s all about I think trying to find the right balance and still delivering the – as we mentioned, higher end of the earnings per share prediction or guidance.
So, it’s all to find the right balance, and we will continue to invest in modernization and deliver improvements as we go forward.
Samad Samana: Great. Appreciate taking my questions. Thank you.
Operator: Thank you. And our next question comes from David Togut with Evercore ISI. Your line is open.
David Togut: Thank you. Good morning. Could you walk through the 140 basis points of PEO margin expansion in Q3? It seems pretty notable given the deceleration in PEO revenue growth. And in particular, could you unpack the size of the workers’ compensation reserve release in Q3?
Danny Hussain: It was $17 million. You will see it in the Q compared to $7 million last year. So, it wasn’t a huge amount.
