Don McGuire: But those are the two impacts. So, the biggest impact was the reserve adjustment on workers’ comp. And the other big item there is the lower SUI costs. So, there is virtually no margins on SUI. So, SUI comes down at the top, it certainly improves the margins. So, those would be the two major impacts on the margin improvement in PEO.
David Togut: Got it. And then just as a follow-up, Don, could you walk through your strategy on managing the tax filing float going forward? We have got a pretty steeply inverted yield curve right now, which means it’s actually more expensive for you to borrow in the commercial paper market and invest flow medium-term duration bonds. Are you thinking of shifting the investment portfolio at all in the year ahead?
Don McGuire: We have had that strategy in place for some 20 years or so. And we have realized about $2.8 billion of incremental benefit from that strategy. And so we have a strategy in place. We always revisit these strategies and look at them. It’s true that the yield curve is inverted for the seventh time in 50 years. How long that continues, not sure. But we will continue to look at that strategy and see what we need to do, if anything, to change it as we go forward. But it is something we have been committed to and we followed closely. Near-term, certainly we have benefited this quarter because of the inflow of funds in calendar Q1, there is a big balance or a big benefit there to us. So, as we go forward, we will continue to look at the opportunities and decide if we need to make any material changes to the investment strategy.
Danny Hussain: David, one point worth clarifying because this has come up before. If you look at the last slide of our earnings presentation, you will see a disaggregation of client short extended and long. And one thing I think is worth emphasizing is that we are net long exposed to the client short. In other words, if short-term interest rates went up and up and up, that would actually be beneficial to our earnings and our margins. It just shows up in two different places, which can often cause confusion. But it’s actually not hurtful to us to have these higher borrowing costs because we have more dollars invested long in the client short portfolio.
David Togut: Understood. Thank you.
Operator: Thank you. Our next question comes from Mark Marcon with Baird. Your line is open.
Mark Marcon: Very good morning everybody. Maria, you talked about modernization. Can you talk about the areas of emphasis? And one area that I am particularly interested in is international and what you are seeing there in terms of opportunities? Thank you.
Maria Black: Sure. So overall, I think modernization is really about end-to-end. So, think of it as product and continuing to make investments in ensuring our products are next generation, if you will. And that’s certainly the case across many pieces of our portfolio, and you are well aware of the investments we are making in next-generation technology. I think product is a big piece of it. I think other is the internal modernization. So, that would be everything from go-to-market to call it, the seller ecosystem modernization. I think I have spoken to that quite a bit in the past as well as how we actually serve our clients. And again, we reference that today. So, kind of going back to modernization specifically in our opportunity in international, we are very excited about our position in international, very excited about the opportunity that we have.
And this is definitely an area that we have been modernizing. So, if you think about each and every country that we serve over 140 countries today that we have offers over time, we have been modernizing the platforms, and we have been consolidating platforms. But to your point, Mark, that work is not done. And so we still have that journey that we have been on is the journey that we are going to continue. But as we do that, we are also focused on ensuring that we continue to make the investments to the platforms, and we continue to make the investments into the overall ecosystem of how we serve our clients international to really drive further, call it, opportunity. And so there are still places in international, and I will probably leave it with, we will be back next quarter to talk more about things such as our growth strategy.
But I think as it relates to international all of that modernization should also yield a growth opportunity for us because it’s still a big world and there are places that we – even though we are in more countries than anybody else, there are countries that we don’t exist, there are segments within certain countries where our offer still has opportunity. And so we were incredibly excited about the overall international space where we are, the work that we are doing and where we are going.
Mark Marcon: That’s great. And Maria, can you talk a little bit about just what the appetite is? And obviously, it’s diverse across the globe. But broadly speaking, are you seeing a greater level of interest in terms of modernization of HR and HCM systems across the globe? Certainly has been an ongoing trend in the U.S. for quite some time. But just I am hearing from others that there is a pickup in terms of RFPs that are occurring things of that nature and that we could be at the early stages of higher levels of growth, international macro notwithstanding?
Maria Black: What I would suggest, Mark, is that over the last few years, the conversation in the international space has definitely shifted a bit, and I could suggest the same thing, which is that it’s picked up. And so that conversation today tends to lead with more of a global offer, global system of record kind of conversation. So, we walk in today and we have a conversation with a client more often than not about how many countries are you in and where can we help serve you and how can we tie it all together to make an ability for that client to really see across multiple countries and have more of a unified experience versus, I would say, perhaps 5 years, 10 years ago, it was more of a country-by-country conversation.
Today, it’s more – it starts with a multi-country conversation. And so I think all of that suggests, but it appears you have heard from others, which is the narrative in the international is shifting. I think there is greater demand for HCM offerings in international as it relates to companies now that are more global than they have ever been. And certainly, the hybrid environment has accelerated that a bit. And the ability for companies to be able to see their workforces and make talent decisions, headcount decisions across multiple countries. That’s a very different conversation today than it was just a few years ago. And we see that when we have, we just recently, actually, this quarter, we had all of our international clients together at an event.
And the topic is about their transformation. It’s about their HCM transformation and the partnership that we have with them to solve for them. And I think the beauty of ADP is that we have the ability to solve the MNC, the multi-country piece. And we also have the ability to solve the in-country. And a lot of times, for clients, it’s a mix of both. And so it’s really about the flexibility we have in our partnership options to serve these clients in a very unique way.
Mark Marcon: Perfect. Thank you.
Operator: Thank you. We have time for one more question. And that question comes from Tien-Tsin Huang with JPMorgan. Your line is open.
Tien-Tsin Huang: Hey. Thank you so much and you covered a lot already. I just wanted on the down-market side, given the success in the bookings here. Just curious if that’s changing your thinking and investing more or even less, maybe in ASO versus PSO then the digital sales versus the seller ecosystem? I am curious as we are going into fiscal ‘24 here, if there is any maybe change in thinking in prioritization there?
Maria Black: So, we have leaned into the down market in terms of the investments we have made. So, when I think I referenced earlier the seller headcount as we head into the final stretch here and how pleased we are with the investments we have made in headcount and the ecosystem around them, so investments into the channels, things of that nature. And as all of that turns into more productivity because the headcount is actually gaining tenure. It is primarily setting those investments have been in the down-market. So again, think our SPF platform, the retirement services, insurance services, most of that also comes into our digital sales organization, also known as the inside sales. So, we are making investments into inside sales to really serve the down market.
And what I would suggest is that from our viewpoint at this point, the demand is there. We have leaned into that demand and we will continue to lean into the demand to drive the growth that we are driving out of the down-market as long as it exists, if you will.
Tien-Tsin Huang: Yes. No, I am glad to hear it. If you don’t mind one more question. Just I have to ask you since you mentioned Maria with AI. We have been getting a lot of questions on generative AI and ChatGPT. You mentioned being smarter around serving up PEO when necessary at the right time. But just broadly speaking, how are you thinking about generative AI and how that might help you run your business better, both from a sales perspective, but also from a delivery perspective, support standpoint?
Maria Black: Yes. Thank you, Tien-Tsin. I am actually – I am thrilled you asked this question because I was counting on it during this call because it definitely seems like it’s the topic du jour. But the real answer is, just like everybody else, we are incredibly excited about generative AI. We have been very excited about AI for quite some time. You mentioned what we have been doing for our sellers in the PEO, that’s broad-based work that we have been doing for a long time and continued to invest in AI into making us more efficient. That example is about our sellers. We are making similar investments even with the new technologies that are out there to really look at how we can make our service associates as well as our sellers more productive.
So, you think about all the things that an agent, if you will, does today to support a client and some of the generative AI tools that can drive a different level of efficiency. And we are very excited. We have I think it’s something around like 44 different work streams that are underway currently to take a look at different ways that we can leverage these tools internally. That’s also notwithstanding the opportunity that it creates for our industry, right. So, if you think about the HCM industry, there are still very many things inside of HCM that are administrative in nature in terms of whether it’s job descriptions, performance reviews, things that are maybe handbook, things that are very tactical that really a time pulled back the practitioner from doing what they want to do, which is be a strategic partner.
And so we are really excited to put these tools also into our product for our clients and our practitioners to be able to lean into. So, all that said, we are very excited about the opportunity. One thing I would point out because it’s important, and it’s also very topical right now, which is that the good news is we have been doing a lot of this work. And as such, we have standards. We have a way to think about the ethical nature and that kind of comes at parity with who we are, given that we have the big data, if you will, behind ADP and the 40 million wage earners that we pay. And so when we think about all of this, also with the lens of doing it the right way and making sure that it’s applicable, it’s secure, it’s compliance, all the things that you would expect from ADP.
But no doubt, Tien-Tsin, that we are excited about the opportunity it creates for us internally and the opportunity that it creates for us and our product to really serve the industry, right, and make this entire industry that much more strategic and not much more exciting. So, great question.
