自動資料處理 (ADP) 2001 Q3 法說會逐字稿

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Ladies and gentlemen, thank you for standing by. Welcome to the Automatic Data Processing third quarter earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in the question and answer session. At that time if you have a question, you will need to press the 1, followed by the 4 on your telephone. As a reminder, this conference is being recorded, Monday, April 16th 2001. I would now like to turn the conference over to Mr. Richard J. Haviland, Chief Financial Officer, at Automatic Data Processing. Please go ahead sir.

Thank you. Good afternoon everyone and welcome to our third quarter conference call. Also on the call with me today as usual is Arthur F. Weinbach, Chairman and Chief Executive Officer of ADP, and also Karen E. Dykstra, our Corporate Controller, Karen has been increasing her involvement in the investor relations area over the past year, I think many of you, probably already have spoken with her, and she will be helping out with some of the Q&A today. So, we will give her a roll of hard 2 questions. As you know, this morning, we reissued our earnings release for the quarter ended March 31st, and we have very good earnings growth, prior to the mid-February Bridge write-off, we reported 17% earnings per share growth for the quarter. Many of you, I think, were probably at our analyst meeting, March 15th, I think as this call progresses, you'll see that things haven't really changed all that much in the past 4 weeks. The key staffs, the key trends, remain pretty much as previously described. Revenue growth has clearly slowed as a result of weaker economic conditions. We have had 10% revenue growth for the quarter, and we are now forecasting about 12% for the full year ended June 30th. We think we have reacted quickly and responsibly by instituting a series of expense control initiatives in order to bring our expense structure in line with the lower revenue expectations. We discussed some of those initiatives in March, we now expect those actions to result in about $150 million of lower annual expense run rate by June, and would otherwise have been the case. Our current forecast for earnings per share growth is 16% to 17% for the full year. As we go through the call, we will go into as much detail as you'd like and in a moment the conference operator will explain the format for 3 the question and answer, but first a few administrative items. First, to plan out in today's call we will discuss some forward-looking statements that obviously involve risks and uncertainties; some of those risks and uncertainties were discussed in our periodic filings with the SEC, if you 00:02:29 wish to refer to them. Second, we have, when I last checked about half-hour ago, 208 analysts and investment professionals who signed up for this call, that's I think an all time recorded for ADP. In addition, the call is now available in a listen-only mode through our ADP website, there will be some additional listeners also. Alright if you have your calendars handy, our earnings release for the fourth quarter and the full fiscal year will be Monday, August 13th, and as usual at that time we will give our forecast for next year fiscal 02'. As we get started, ADP has been trading a little bit over 50, and at this point, I will turn it back to the conference operator for your questions.

Thank you. Ladies and gentlemen, if you wish to register a question for today's question and answer session, you will need to press the 1, followed by the 4 on 4 your telephone. You will have a 3-tone prompt acknowledging request, if your question has been answered and you wish to retire pulling your request, you may do so by pressing the 1, followed by the 3. If you are using a speakerphone, please pick up your handset before entering your request. One moment please for the first question. David Togut from Morgan Stanley. Please go ahead with your question.

Thank you. Could you take us inside your recent thinking on the 50 million-share repurchase announcement? Did this reflect your view that the stock is inexpensive here or just that it represents a better value relative to acquisition opportunities? Thanks.

David, the board, at our last meeting authorized the 50 million shares. The reason is that we were able to acquire, I guess 12 or 13 million, probably, at the time of that board meeting, and our appetite at the type of pricing that we are seeing in the market remains positive, so I think it was an indication that they did not expect us to come back with the frequency that we have in the past in order to be able to acquire a significant number of shares. As usual, we won't talk about the prices at which 5 we buy or which we don't buy, but certainly from the fact that through now we've bought close to, that's about, 15 million now, Rich.

I think through the quarter, it was just a little bit shy at 14, and we probably purchased another million or so subsequent to that.

And so I think the indication at 15 million is that we've acquired so far is that we're very positive on the investment that the prices that we've been acquiring at. So, watch and see, but I feel very good about having that 15 million share authorization in our pocket.

Does this at all reflect your view on the acquisition pipeline?

It's really not directly related to the acquisition issue. I mean, we've been able to issue unauthorized shares so we wouldn't need treasury share authorization in order to be able to do acquisitions, also our cash position as you know, is very significant, so we have significant cash for acquisitions, and knowing my place, I'm going to avoid trying to relate what the pooling rule changes might mean to 6 that answer, but if the pooling rules do go away, it eases off our ability to use treasury shares, to buy treasury shares without worrying about the consistent formula we had to follow in the past.

Okay, thank you.

Your next question comes from Jennifer King, from Merrill Lynch. Please go ahead.

Hi, at the analyst meeting that you are talking about how new sales have floated at the high end, I just wonder if that demand trend has changed at all in the last month. And also, I am wondering if you guys are sort of viewing this as a temporary freeze in decision making and hope to actually see a bit of resurgence as everybody gets a little more comfortable with what's going on in the economic environment?

Jennie, since the last meeting in March, we really haven't seen much change in the sales activity, we had said that we saw a slowdown after the first 6 months of the year running about 13% growth in Employer Services. We saw a very sudden slowdown in this decision-making processes. The drop was more in 7 the majors and national accounts area, and we believe our pipeline is still pretty robust, so in the last couple of weeks, and through the month of march, we didn't see any change what we had said at the March meeting. Year-to-date, we are still up about 8% over last year in sales. As you think about it over the long run, we think a weak economy will increase our outsourcing opportunities and past experience has shown that, that will be the case, but at this point it's hard to project the timing.

And most review the current slowdown is counter intuitive, again as Karen said, I think it makes intuitive sense to me at least that as time goes on, as economic time slowdown, that ought to increase the trend towards outsourcing; that certainly haven't been the result that we've experienced over the past month or two, so at some point in time it's my belief at least that, that ought to turn, but it has not yet.

Okay great, thanks.

The next question comes from Greg Gieber from AG Edwards. Please go ahead with your question. 8

I'd like to carry up, follow a little bit further on Jennifer's question. You said you see no real change in the trend at mid-market and national and Employer Services. He gave us a little insight on what you are seeing in your emerging market at our Hartland division, and also talk about what sort of sales activity you are seeing in Dealer Services and in Claim Services.

In Employer Services, we've seen a slower growth in all of the segments within Employer Services. The bigger drop occurred in the majors and national account area. But overall, national accounts are still the fastest growing of the businesses. Majors and EBS are some where in the same area, more or less in the same plate. In Dealer Services, we saw for the quarter actually, a better quarter in sales, particularly in Europe our sales growth was better in our Professional Services Business. So overall, although I wouldn't count in one quarter as a trend, especially in Dealer Services at this point, we did see a somewhat better quarter in Dealer Services.

Greg, when you look at the sales statistics Karen just went through, 9 and when you look at the revenue shrinkage, it was "only" 2% for the quarter, which is better than we've been in a while, it's really the first time in a long time we've had some encouraging news in Dealer, again as Karen said, and you probably heard from us over time, we try and not get too carried away with a one quarter change and calling it a trend yet, but I'd like to think that it's only the start of the good news, the good sign of we are going to be coming out of Dealer in the future.

There's one other question on, in your press release you talk about, you know, sales being lower as a result of both weaker economic condition and lower interest rates. Could you quantify just how much came what the variance was relative to interest rates??

You mean the revenue.

The revenue side.

The revenue that we reported during the quarter..

Yeah.

We thought it was 10 between 1/2 and 3/4 of 1% or something like that...

Rough calculation, because you know you are dealing with what it would have been, or what it could have been, but, you know, somewhere around 3/4 to 1 point of revenue growth slowage, if that's the word, came from the lower interest rates.

Okay. Thank you very much.

The next question comes from [________________] Please go ahead please.

Good afternoon Arth, Rich, and welcome Karen. It is a great quarter here to jump in and answer some questions. I think, there are a lot of them out there, but you said in the press release that 150 million is what you expected in terms of savings, that's obviously a lot of margin improvement. Should we expect some of that to be offset by negative operating leverage or should this be purely incremental to the normal margin improvement you might have expected to see.

Well, I think, as people that follow us know, we have an inherent 11 margin improvement that's baked into all of our businesses, we have a huge beneficiary of economy of scale, changes in technology and such, so I would expect that underlying margin strength to continue. Having said that, with slower revenue as we have seen it's obviously not going to continue, left to its own devices to the same degree that it has, so I think that the expenses that we will be taking out, will offset that, but we are going to be impacted by lower revenue, as I think we had indicated.

But you shouldn't hear that - to think that our margins won't go up. I mean, clearly, as we are continuing to grow revenue, and as we are holding our cost structure much tighter than we have before, there is going to be a positive impact on margins, so directionally you will see margins going up, although certainly Richard's comments were accurate.

Okay. And could you give internal growth and margins for the three major units please?

Sure. Overall our internal growth was 7% for the quarter, and in 12 Employer Services it was about 11%. Previously, we have been running somewhere between 12% and 13% internal growth in ES. This quarter it slipped a little bit to 11% as the new business sales have slowed, we still think the ES total revenue growth will be in the 12% to 13% range for the year. In brokerage, it was basically flat without the acquisition of Cunningham. The internal growth was basically flat. We have talked in the past about the comparison to last year's very high trading volume in the third quarter. If you recall, last year same quarter, we did about 1.6 billion average trades per day. That was a very difficult comparison and truly extraordinary growth, so comparisons get a little bit easier as we look into the fourth quarter of the fiscal year. And we think that the total revenue growth for brokerage will be in the 18% range for the full year. In Dealer ....

Just to add one thing - We did about 1.3 million trades during the quarter on an average, and that was down about 300,000 from the million six that Karen was talking about, but another way of looking at it is, believe it or not that was our third best quarter ever, and it is only if you really think 13 how crazy and incredible that boom was a year ago, that you realize that you have the kind of drop that we are talking about, so, very unusual, very unusual comparison. I think the number, Karen, you were saying for the first half of the month was.......

In April, we were in the 1.3 million average range for the first few weeks of the month. Trading volume has been higher in April, but our trade is about 1.3 million equal to last year, fourth quarter, as a lot of the volume is institutional trade and they come in bigger blocks and if you think about it, the retail volume and the smaller trades add to our revenue growth. So, the first few weeks of April looks pretty similar, to explain that 1.3 million trade. In Dealer, our internal revenue growth was a negative 2% and claims with 7%, and I believe the second part of the question was about margins. Overall, our margin for the quarter was very good, 271/2 percent. Its up a couple of points, about 3 points, versus last year prior to the Bridge write-off. We expect the margins to be strong for the full year, up about 21/2 points or so over the last year, and as we said before, about 1% of the improvement is due to the investment and 14 exchange to taxable instruments. Quickly, through the other businesses, ES margins were also strong for the quarter over a percentage point better than last year. We are expecting about 23% for the full year. Again, over about a percentage point improvement over fiscal '00. In brokerage, our margins were about 18% in the quarter and year-to-date, and again talking about the extraordinary trading volumes last year in the third quarter were actually a couple of points below what the margins were last year at the same period, because of that high trading volume. We are expecting about 20% for the full year through margins and brokerage. This again will be down a few points over last year, a couple of things, one is because of the trading volume in the third quarter. We talked about building up our infrastructure in the back office to help us with that trading volume, and also because of the goodwill that comes from the Cunningham acquisition. So all of those things combined what we had planned and expected this year. Dealer margin was about 15% for the quarter and year-to-date and we expect it to be in that range for the full year as well.

[________________] 15 okay, I'll let others ask questions and come back. Thank you very much.

Patrick Burton from Salomon Smith Barney, please go ahead with your question.

Hi. Thank you. Could you give us an update on the investor communication side of brokerage, and whether sustainable growth rate is there, number 1, and number 2, a wrap up of the new clients on the trade processing side of the business? Thank you.

In our investor communications, at least for the quarter, we had about 231 million pieces mailed which is about 6% growth versus last year. For the year-to-date we are up about 16%. We have seen a later timing with companies as they begin their yearend process this year, and we fully expect that their proxy season will still be in the 16% to 17% growth range. We are right in the midst of the heavy proxy season right now, and we fully expect we will be in that 16% to 17% range.

That 6% is not more, I think an anomaly than anything else. It has 16 more to do with cut offs and timing and it is really not indicative. So I think the year-to-date number and the forecast for the full year, which are both, I guess, in that 16% to 17% range is a much better way of thinking about it.

And in the ramp on the new customers?

The new customers in the back office business NDB, is expected to start during the month of April actually .......

That's a little bit delayed from I think what we told you previously, maybe 30 days delay, but we are expecting it to start in April, that's right.

And Leeman conversion is going very well. We have been getting some revenue from Leeman since earlier in the year, but the conversion is going quite well and we expect to get the majority of it done by the June timeframe.

Thank you. And then could you just give us an update on [_________________] and where that stands? Thank you very much. 17

[__________________] gone, so I think at this point, they are totally out of the numbers that we were talking about certainly in March.

As of February...

Yeah..

As of February till we go on......

Thank you.

The next question comes from Jim [________________] from [________________]. Please go ahead.

Thanks. Could you give us the growth and pace per control and where there any trends in the quarter.

Yes, actually pace for control, which used to remind everyone how we talk about pace per control is the measure of the number of people we pay in our retained client base from one period to the next period, so you exclude new clients and lost clients, it's really a measure of how our retained clients are growing 18 our employee base, and for a long period of time we are at the 3% growth range. Until recently, and I believe, we said in the January call and again in March that we are staying closer to 2% growth and pace per control. Our actual growth, more recently, is around 11/2 percent growth and pace per control. We don't usually get into the 1/2 percentages, but because it is an important trend, we got that much more fine with the measurement this time round. I guess I would say that it is one indicator, it does not have a dramatic impact on our results or an immediate impact on our results, it is more of an indicator of where the economy is going.

Okay. And just a follow up on the new sales, I mean, given it what you would expect, you know, pick up in a tougher economy given that there are any competitive factors with people announcing, you know, new products, whether it's already in a pro business.

I don't think there is any competitive impact at all that's going on there. I actually think that our products set today really lines up exceptionally well against the competition and you really want me to wax 19 enthusiastic for a minute, and I'll take this opportunity to do it I guess.

Yeah.

The product opportunities that we have in progress right now are really terrific, not just in Employer Services, but really across all of our businesses. I guess one of the questions that you might have is, as we are cutting back on expenses, as there are no cost containment thing, we are cutting back on key areas like product and product development, and you know, I may be kidding myself, but I don't think I am, I think our product set and the things that we are going to come out with over the next several months, which means within this calendar year, are going to put us probably in the strongest product position that I can remember as being in a long time, and if there are things that you have probably heard us talk us about in the past, in the low end of the payroll business there is easy pay net, that was our low-end Internet payroll offering. This was the year where we had a number of kinks that we had to get out of our system. I think we have got most of them out of the system at this point in time, and I am looking for really good growth there. We also have this 20 product that I know we talked about at the last meeting, but it is Pay eXpert and it's more fully featured than the easy pay net, but it is an Internet browser-based inclined payroll service, and it is going to tie into a broad base of other expert products, but this is a scalable product, which we really introduced in majors, but we now think we can bring down into the EDS marketplace and that is going to give us a tremendous product, I believe, advantage in that marketplace. Majors as pay expert is in the market now. Our early responses to it are very positive and it is selling well. We have another product that we are talking about targeting the upper part of majors and really finding a product to penetrate an in-house market, and we internally recall Chicago as a kind of a codename, which means, I don't know what the real name of it is, but this product was also going to go on a pilot this year and it's a, I think it is going to be a tremendous opportunity for us in terms of stepping up the penetration in that in-house market. In national accounts, we got this enterprise product, this focuses on the up-market on clients of larger size with more complex needs, it is in the market now, it is getting very good acceptance, and we are getting 21 to talk to a lot of people that we were not able to talk to in the past because of these products, so I just covered payroll, I could talk about our other businesses also, but I think you get the idea, because we are doing similar things across the other businesses. We really have stepped up the investment. We put in a product leadership initiative about a year ago, and I can't tell you if that is the reason because a lot of these things have been in develop for a longer period, but as I said at the beginning, I feel really good about our product competitive position today, and gentlemen, I really appreciate the question, that gave me the opportunity to carry on like that.

Thanks Arth.

Are you ready for your next question?

That's right.

Greg Gold from Goldman Sachs. Please go ahead with your question.

Thanks. Wonder if I could followup on that. When you guys mentioned that the sales pipeline in Employer Services is still 22 strong, can you elaborate a little bit more on that, and how you except new sales to, you know, it is awfully hard at this point, but how we should except new sales to progress over the next few quarters, based on what clients are saying to you guys. Should we start to see a pickup or is it too murky to tell right now.

Just as we were walking down here, the head of our national accounts business was in the hallway and we asked him, we said, well what's really happening with the sales pipeline, and he said, it's as robust as it has ever been. The old store being delayed and decisions are being delayed, but he said it's very robust. So I think what we are seeing in the whole sales arena right now is kind of a continuation of what we have been talking about. We got a lot of deals in the queue, but the actual decision making and the willingness to close is a lot slower than it has been, now when is this going to turnaround, I really don't know the answer to that, sorry. I don't know if this going to be a month, two months, three months, five months. I know, at some point in time, we ought to get this move to outsourcing, which we have seen in prior soft markets start to kick in. So 23 there should be an uplift even if the economy doesn't improve, and even if the decision making deferrals continue because there are going to be companies who are going to say, I got to do something, and this is a time to outsource because I don't want to spend the money developing things internally myself, but I really can't give you a good handle. I know, as we have been forecasting the remainder of this year, we have been quite cautious in terms of our sales forecasting.

Can you tell us what kind of sales you are targeting for the fourth quarter?

I'd try to say real cautious Greg, without given you a number, but it is a low single digit number.

Okay, thank you.

Robert [________________] from CIBC Oppenheimer. Please go ahead with your question.

Yes, thanks. I have a couple of questions. Following on that one, at what point will the new sales growth or [slowness] in the new sales growth start to materialize or impact results. Its delayed by 24 several quarters, I suppose. Is that right? Can you talk about it a bit?

I think it started to impact us on the revenue side already as evidenced by the internal growth rate and Employer Services being a little bit slower this time around than in previous quarters. You know, one of the virtues of ABP over time is that we have been able to control our expenses in such a way that you don't always see things like that impact on the bottom line, even though there may be a softening in revenue. So, again I think we have been very diligent in that this time around also. So, I think it will take, you know, an extended period before you really start seeing it on the bottom line, although, you know, if we went into a [________________] session and stayed there for multiple years, I am sure you will see the bottom line also, we are not immune to it, but on the revenue side, I think we have already started to see a little bit of softness.

I think, if I could just add to that. On the low-end, our low-end sales generally installed within a couple of weeks. At the high-end, it has a large national 25 accounts; it is months before it installs. So you got some of the impact that we are feeling right now, some of the impact is a lagging impact and it is going to occur somewhere between now and the next six months in terms of what we are seeing for slower sales, but the beauty of the recurring revenue model that we have now, is the sales that we are selling today don't kick in, until the future, so we have a better vision in terms of what our cost structure is going to be like, as we look out over that between now and a 6 month period. So, we pretty much know what the pace of [________________]is going to be, and we are trying to adjust our cost structure in order to be able to do it. As Rich said, I think our track records have been pretty good in the past, we will see how good we are this time, but I think you are hearing on this side, we think we have pretty good visibility and we have a lot of confidence in terms of our ability to within a range, to see where the revenue is going in the future.

That's very helpful. On followup question. Can you comment on the investment portfolio, and you know, there has been a lot of speculation that you guys may have taken some gains this quarter, is that correct? Have 26 you changed your thought process on that?

Given the decrease in interest rates, I would say, that I guess virtually every single investment we have that's more than, longer than an overnight investment probably has an unrealized gain associated with it right now. I think as of March, we probably had 160 to 170 million or so of unrealized gains, but when you are in a position where every single thing you own has a gain associated with it, it is almost impossible to avoid gains. Any type of normal account maintenance at all, whether it's switching a type of investment, or switching a maturity or switching a sector, it's going to generate a gain.

I understand that, I just meant to say..

[________________] at the analyst meeting now that you may start to take some gains here.

In this particular quarter, we sold out $800 million worth of treasury shares..

Purchased treasury shares.. 27

And in order to fund those we had to sell some investments and as a result, we have about $7 million worth of gains that took place in this quarter on a year-to-date basis, I think it is about $8 million. If you look forward to the fourth quarter, you know, we are not planning on any, but again, you know, none of them contemplated within our forecast, but on the other hand it's almost impossible to turnaround without generating some.

I go back to the comment that I made at the last meeting. This is not what I was talking about, this is just breakage, this is just normal breakage, so we have not done anything to recognize gains at this point, when we do, we will let you know.

Okay, that's helpful. Thank you.

David [________________] from William [_______________]. Please go ahead with your question.

Good afternoon, can [_______________]put little bit more color, you told us what you won't do, for that figure of 28 150 million, so what exactly are you doing in terms of the crosscut.

Sure. I think a lot of it comes from expense avoidance as opposed to actual cutting. We are in a mode of continually growing our revenues and as a result we are also continually adding to our expenses. So the degree to which we can simply not add expenses that would otherwise have come in the normal course of events that is a major part of that 150 million between now and June 30th. In addition, we are doing all the normal things you would expect in terms of reducing travel, and capital, the use of consultants, and so forth, and there will be some head count reductions out of it also, but again, I think the most significant piece is the expense avoidance.

Thanks Rich.

Adam Walder from [_______________] please go ahead with your question.

Yes, good afternoon. Following up on the topic of the 150 million in annualized cost sales target for the end of the fiscal fourth quarter. Where were we in terms of 29 capturing those as of the end of the March quarter?

I think we have pretty much captured our plans as to achieve the 150 million. I am not sure a lot of them, you know, have been fully implemented at this point in time. I think we started in, you know, probably in the February-March period and, you know, we won't be complete. Again, a lot this comes from avoidance they won't be complete until June 29th or June 30th. But I think our plans are well underway, they are very visible to us. We have a lot of comfort in them. I am not sure all of the expenses are there yet though.

I would say very few of them really of the 100. I don't know what the number is, but of the 150 million savings, the easy things like reduced travel, reducing meetings, cutting entertainment, I think we got a relatively quick start on those, some of the other things that longer time, so I don't know what the number is, but I would think it is certainly small in relation to the 150 million.

So, Arth and Rich, would it be fair to say that we haven't captured much yet, 30 but we have firm plans in place and it is in peoples incentive plans in terms of it there are new variable plans from which they are managing?

We operate in a very decentralized organization structure, as I know, you are familiar with. We do have strong corporate awareness which is our way of being able to rattle off all these numbers here that we are doing. But we, basically, function in a decentralized structure. So, what we are doing in an environment like this is we give the heads of our business units objectives and awful lot of leeway in terms of what they need to do to achieve them. So, yeah, our business units have very clear dollar goals, and I think that we have a lot of confidence in terms of the feedback that they have given us as to what the types of actions are that they are trying to initiate that we are going to get there. So, yeah, I would say, very clear, very specific, very defined responsibilities, very defined accountability.

Okay. How much did currency impact the top and bottom line during the quarter?

I think, you know, 31 the dollar has certainly been strengthening and continuing to do so over time. We have a several year trend at this point. During the year-to-date, I think, the dollar strengthened about 6% or so against the European currencies, and 5% against Canada and UK and is a little bit more in Brazil. So, it has impacted our revenue. We probably had a negative about 1% decrease in our revenue for both the quarter and the year-to-date. I think, I don't know the impact on earnings, although it would be less than that on an overall basis, I think our margins, internationally, are lower than they are in our domestic businesses. So, 1% revenue impact, somewhat less than that on the earning side.

Okay. Final question, do you all have heavy-end in the key balance sheet figures for the period ended this quarter, can you relate for the Q on those.

We don't have too many of the March numbers, I can give you a couple of February numbers if that would be helpful.

I will just go ahead and wait for the queue, if that is okay. Thank you very much. 32

That's fine.

Lloyd [_______________] from [_______________] please go ahead with your question.

Good afternoon folks.

Hi Lloyd.

Hello.

First of all, I just want to remark on something, your double digit earnings increase is now almost 40 years, it looks like you are getting double digit increases in investor participation on the poor people as well. In the broker side of the business, could you tell us how your receivables stand with your e-brokerage customers at this point? Are you seeing, lets say, any slowness in terms of payment, and also another question concerns the profit margins in that segment as a whole. You have been running at about 17% rate for 9 months, the fourth quarter of course is a big quarter. You still have the goodwill from the acquisition, you have I believe, the investor communication side of the business is somewhat lower margin as 33 well, so in order to get up to a 20% level for the full year, from 17% for 9 months, it sounds like, you know, might be kind of tough. Could you elaborate on that a bit?

I am going through the receivable side first. I don't think we have noticed any sort of deterioration at all in our processing back office receivables. As Arth indicated, the uses were central awareness, we do try and stay tuned in to these developments and I haven't seen any change, any deterioration at all. So, I think we are still in good shape there.

As he relates to the question about the brokerage margin and how to achieve the 20% for the full year in our investor communications business, so much of the activity happens in the April-May timeframe that you can't really even look at the first 9 months, so we except to get to that 20% level because of the very heavy proxy season that is still ahead of us in the fourth quarter.

Otherwise, the margins that we get in the fourth quarter are by far the highest margins in the year in that 34 business. Though, because of the first 9 months the volume is so much lower, you get much lower margins in those entire 9 months.

Okay, and last, but not least, could you talk about the Cunningham acquisition and how that's going?

I think when we acquired Cunningham strategically, we said, this was a very important link for us as we tried to deal with the investor relations function on a broader basis than we have right now in our ICS business, and what we believed is that we will be able to get some of the clients to prepare proxies and let us do the printing on the proxies, perhaps eventually some annual reports and other products, and they would be able to deliver those products in the right quantities to us because we do most of the mailings of street name, obviously we still have to deliver some to registered shareholders also. We have had a number of, what I call, cross business unit sales between our brokerage unit and between Cunningham, so in the early stages, I would say that we are on the strategy, and it feels pretty good. We have had some expense issues which is not unusual for us, and if you are used to watching what happens to us in most of our 35 new acquisitions, we take a good business and we immediately put in a whole bunch of things that cause margins to go down. So, we have certainly had some expense issues that we are watching, but on an overall basis, we are feeling very good about Cunningham, and we think that strategy has a significant opportunity for us in the future.

Thanks very much folks.

Adam [________________] from US Management. Please go ahead with your question.

Good afternoon, a quick question regarding Employer Services. In the annual, you point out that on funds collected, but not remitted, you credit that sector with a 6% standard rate. Based on my calculations, you are going to get something of close to 2% hit on operating margins. If in fact the said continues to be aggressive and you have to lower the standard rate. Am I doing the math correctly?

Well, I will give you my math and then you can compared the two. We have indicated that for every 25 bases point 36 change in rates, if that were then to be held constant for the next 12 months, it would amount to about a $12 million pretax hit to ADP. Now that would be both client funds and the corporate funds. Although, you know, 3/4 of that, then you wrap 7.5 billion or so of client funds, 2.5 billion of corporate funds, you could break up the 12 billion if you wanted. And yes, we do charge Employer Services at a standard rate of 6%. We want them to run their business and worry about growing float as opposed to worrying about what is happening with interest rates..

Growing their business.

Growing their business, and the dollars a float.

I am sorry, go ahead.

As opposed to what type of investment we choose to make, so we show them at 6 % as the proxy, for rational rates over a period of time. So all that is one way of saying that when the rates change you won't see the impact on the Employer Services numbers. It will show up in the consolidated numbers, and in 37 our table where we give the business segments, it will show up in the other category, but Employer Services results would remain steady.

And then should we expect, if in fact, these types of yields persist on the lower side, would it be reasonable to expect that you will try to get some explicit rate hike out of your clients to make up for the reduced yield that of the float?

Probably not. You know, there have been times in the past when, maybe there was a governmental action that has speeded up the flow of funds to the government and as a result we have lost earnings. I guess the last major one was EFTPS a few years ago, and there we did go out and seek and achieve price increases to offset it. On the interest scene, I think we are in the mode of saying that, you know, interest rates are going to go up little bit over time, interest rates are going to go down over time. We really don't want to go, you know, affecting the billings of our clients by, you know, every year coming in with an adjustment, because of interest rates. So, you know, now that interest rates continue to go down to 1% over 38 time, God forbid, you know, may be we will have to, but it is not our intent at the moment.

For the mean time, I will leave it alone.

Thank you very much.

Michael [________________]from [________________] Capital Management. Please go ahead with your question.

Yes. Hi. To start to get a sense of how the quarter progressed, can you please talk about the growth of the business or the deceleration that you saw as the quarter progressed?

I think the easiest way for us to look at that is to talk about the Employer Services sales prospective. We cruised through December in great shape. We hit the wall in the middle of January where things started to slow. I think January was still the best month of the quarter, because for at least half of the month of January everything was fine. February and March were pretty much the same. I don't think I saw a lot more deterioration in March, so 39 I would say we softened in February and March. I think there is a gradual deterioration, we probably saw that in the pace per control number in terms of what is going on in the economy a little bit. You can think 2% to 1.5%, it was 2% in the quarter ended, December, 1.5% this quarter, that may not sound like a lot, but that really is a meaningful slow down. I am not sure we could say it was that much different in March than February, but it certainly was different in March and February, than it was in January. So in general, I would say it has come down, probably continuing to soften, but unclear, because the distinction between January and February was much greater than the distinction between February and March.

I guess I am very encouraged by the fact that it does not seem that March got worse than February, but I am a little concerned about I guess is that the analysts meeting was middle of March, and the revenue growth number that you are giving us today versus the one given on March 15, is a bit lower which would either indicate that you were expecting the business to ramp back up or things deteriorated a bit more. I am just trying to 40 reconcile the positive and the negative in my mind.

I just heard Richard and Karen speak, but I mean my view was, I don't think for a lot of our people in our business, who haven't been through the type of slow down that we have had before, it was hard to really get the mindsets set up to say hey, this is here and it is going to continue. So we would look at the sales pipeline and say, God these deals have to close. They are all lined up, they are going to close. And therefore, the optimism in the early stages was greater, as it dragged on for a few more weeks, then, I would say that people are getting more realistic in terms of their expectations. I think that is the kind of change that occurred, but I think we are talking breakage as opposed to anything significant.

Okay, I am very sorry, because just one last followup on that. I guess, I was under the impression as I said earlier that new business wins don't really impact revenue for a while, so if, I guess how would business closings in the last month impact the revenue growth for this next quarter, given 41 that, that I understand how the business works correctly.

It varies a little bit by segment within Employer Services. When we go out and sell a company at the lower end of the market, somebody with 20 employees, you know, they can be up and running, you know, tomorrow or the next day. So there is almost an immediate closure between the sale and the revenue being produced. On the other end of the spectrum, if you go up market and you deal with a company with 50,000 employees that can be a 6 months sales process, and once you complete the sale, it can be another multiple month of installation and conversion. So the farther you get up market, the more complex the products set, the more complex the client needs, and the longer it will take, but down market and even in the lower part of major accounts, you start feeling that fairly quickly.

Great, thanks.

Sure thing.

Navin Thakkar from Massachusetts Financial Services. 42 Please go ahead with your question.

Yes, thanks. I will make it quick since it is getting a little late. Can you just refresh my memory, my memory serves me, the fourth quarter of last year you had $32 million of cost that were one time in nature of converting to a taxable portfolio, and what portion of the 45 million in investment spending last year would you say was one time?

Let me do the investment piece first. Just to bring everyone's recollection to the common base, we went through a transition of our portfolio that had been heavily oriented towards [________________] and we are now in virtually, you know a completely taxable environment. And we did incur about $32 million worth of losses as we went through that conversion. It wasn't all in the fourth quarter though Navin; it was spread between the third quarter and the fourth quarter. You know, if I had to guess I would say, 20 of it in the third quarter, 10 of it in the fourth quarter type of thing. What was the other question?

45 million of incremental investments last year? 43

Yeah.

How much of that, my impression was that a lot of that is ongoing, and I was wondering if there is any portion of that that could be considered one time in nature. My sense is that interest float reduction is going to hurt you, but there is some smaller portion of offset from the transition of your funds and then also from this $45 million investment.

Yeah, on those investments, I do not have a precise number, but I will throw my guess out there and will see if Arth wants to come up with his. If I had to guess I did say maybe about 25% to 30% of the whole thing was of a one time nature that doesn't recur, and the other piece being recurring.

I would have said that it was our intention as we stepped up the investments and the allocations of investments that we were trying to make a lot of them one time. Now the nature of the type of investments that we make, actually, you can't just start an investment then all of a sudden it is over in 30 days or 60 days, but some of them do have some duration lives, I would say Rich's number is 44 right, but that some of them do end also 3 and 6 months further down the end so that there is a tail off on some of those. They are all not continuous investments.

Great. And then retention, I don't think anyone has asked about retention, you have mentioned that it was strong. Can you give us a little bit more color of what retention was like in the quarter and how it friended?

Our client retention and Employer Services was very strong in the quarter. It was actually over 1% point better than it was the same period last year and this is, we are through the critical year-end period, in January and February, we might see some followup on retention, so we are very pleased with the results. Actually, we had plans for this year for about half a percent improvement for the full year. So we are, at this point, well ahead of our expectations.

Great, and then could you just give me, do you have any more color on, you made a point that when the economy softens your sales actually do better given that the 45 outsourcing value proposition is higher? Can you give me a little bit more color on...?

Sure, actually I am not sure how much additional color there is but first of all, as you know, it's been a long time since we've had an equivalent type of slowdown, so I am going back a number of years to the prior ones of these that I have been through while at ADP, and what happens is individual companies need to do something in the payroll human resources area. You can't just keep doing what you're doing forever, and as people are facing up to that decision, they, when they are under pressure, don't want to make their own internal investments now. They don't want to add people. They don't want to add to their fixed cost structure. So what they want to do is outsource, so that if for some reason they need to cut back further, they can cut back that [________________] service as opposed to cutting back on additional people, and so we would anticipate, and I would anticipate that the marginal client and that margin grows with the length of time that a recession is taking place. That marginal client group will more and more make a decision to go forward and do something and to outsource. So that's really what 46 I was referring to. I don't think I have any numeric base that I could give you on that, but I can tell you that anecdotally that's very clearly what our experience has been in the past.

Thank you.

Steven McLaughlin from Merrill Lynch. Please go ahead with your question.

Arth, I have a tough ball [_______________] question that I know that you will throw over to Karen. You and I have been tracking this company for a while Arth, and you are going faster now in this recessionary weak economy than you ever did before, this 16% or 17% pace. In the past, it was 12% or 13% slowdown, and that's not the case right now. What's different about automatic this era than in the past? It's the same business and it's kind of a similar mix, so what's changed to make you grow faster?

I think what's happened, Steve, is that the strength of our businesses and the strength of our products has been improving over the last few years, and as 47 we've been branching out further from just payroll into more additional value added services, as brokerage has started looking on the global area both with our institutional product and more recently, with our retail product as investor communications have gone into electronic filling and the elimination of deliveries and replacing them with an electronic transmission of the information. I think all these things that we've been talking about, basically had us at a higher growth rate coming into this period than we've been in prior periods. So I can't tell you that the impact is any different this time than what we've seen before. I just think we were stronger when we started, and I certainly hope that this is relatively brief and we'll be stronger when we finish.

So you are kind of indicating that you think it might be somewhat sustainable or at least the days of the 12% and 13% growth rates are not going to recur again.

If we stay in a prolonged slowdown, our growth rates are going to slow. I don't think there is any question about that. I was really talking about when we come out 48 of it. I think the strategies and the intrinsic issues that we had in place, had us in place for a higher sustainable growth rate than we used to be before. Back when, before the economy slowed down, and we went to 16% earnings per share growth a year ago, and this year we were in the 16% or 17%, I said we didn't do that with a belief that it was a one year or a two year phenomena. We believe that as long as the economy stayed good, we thought we saw visibility beyond those two years without my wanting to ever get specific about the number of how far it could go. Nothing's really changed, in my belief, other than the economy's softened and clearly we are going to feel the impact during the softening period.

Great. Thank you Arth.

Thanks Steve.

Michael Baker from Raymond James. Please go ahead.

My questions have been answered. Thank you.

Edward Lee from Bank of America Securities. Please go ahead 49 with your question.

In terms of, let me just follow up a little bit on that retention question, 1% better than last year plan, 1/2% improvement - how much of the improvement in the ES, Employer Services margin is really kind of a function of this improved retention, and is that really continuing to be the key and try to half up the margins and do we expect that improved retention to continue to help boost the margins even as slowing revenue environment going forward.

And I can't give you a precise number, but I think people will understand that retaining business in Employer Services is a very significant portion of our margin improvement. The fact, you know, when we go out and sell a new client we have to pay for commissions and new business expands and getting a client up and running, where if we can just get him to stick around a little bit more, all of those costs are out of the way and the revenue then comes in at a high margin, so I agree with the thesis, but I don't know how to quantify it precisely. It is an important piece though. 50

I want to confuse you further if I can, and my apologies in advance for doing this, but in our model, we pay our sales commissions upfront, at the point of sale, so even though we don't recognize our revenue as we have been talking about now until the client actually gets installed, and then over the next 12 months we will get the revenue, we actually incur the expense up front, so in this strange world of ADP, as your sales, not your revenues, as your sales are a little bit softer, your sales expense is a little bit lower. When sales are very strong, your expense is very high, so as sales slow a little bit you actually get a contribution to margin, a positive, short-term contribution to margin because of lower sales expense....

You mean just assume not have......

Yeah, Yeah I'd rather have good sales and pay that money all the time, but that's another phenomenon that occurs within our structure, and again I apologize for going into that level of detail.

Thanks very much. 51

Michael, please go ahead with your followup question.

Thanks. A couple of follow ups on retention, can you give us a sense of how much of the improvement was due to, maybe, bankruptcies being less, or from the payoff of the investments you guys have made over the past few years. Then, secondly, international performances - what do you guys seeing there in Employer Services and what's the outlook?

Well on the retention side - Yeah maybe one way to think about that, is that when we started our investment program, our world class service program, I think in fiscal 1997, and prior to that point in time we had been running at about a 1/10th of a point improvement, each year, in retention. We started that program in 1997, and we have spoken about it over the years. We have spent a lot of money, put a lot of attention there, really got it deep into the culture of our business, and since the start of that program, we have been up 5/10th of a point, a year, so, I think, that, while I don't know how much is the result of your bankruptcies or more bankruptcies, I think, the lion's share of 52 it is a result of the programs and the investments that we made, and the fact that it truly is embedded within each of our people in ADP right now, the desire to go out and deliver world class service.

The second half of the question was how are we doing internationally. And I think, I would say we are not seeing any of the slowdowns that we have seen here, in the US, in terms of our international numbers, so our internal growth rate in ES, as well as our overall growth rate internationally is better than it is here. Our margins have been improving, internationally. I think our audit tax business in claims has had a very strong period, and even we were having difficulties in Europe, we had a stronger period over these last few months than we have had before, so I would think that our international piece is going very well.

It is international now, at a point particularly Employer Services where I could become a more important growth driver, I know over the past few years, you've worked in a great acquisitions and then made some management changes there. Are we 53 getting to the point where it is going to be a more significant growth driver?

I think you will see it grow at a healthy rate. I think we have had difficulty in the European part of the world in terms of finding acquisition candidates that would permit us to expand into additional countries. Also, in some of the countries, they are basically software markets, and it takes us longer because we have to educate the market in terms of the benefits of service. So, it's a different type of sale and it's somewhat longer cycle to turn around and to grow in those areas. As we expanded into Australia earlier this year, I would hope and expect you would see further geographic expansion, although perhaps not in Europe where the bulk of our revenue and Employer Services is right now. So, I am trying to be cautious with it. I'd say, look for good growth, don't look for extraordinary growth, and if we hit a few good things, maybe, I'll be a little conservative in that response.

Thank you.

[_______________], please go ahead with your followup question. 54

.. Slowdown affected pricing in Employer Services at all?

I missed the beginning of it could you repeat it please?

Has the broad slowdown affected pricing within Employer Services?

I think the answer is no. I think we have been seen either on a competitive basis or on our own any notable change at all in pricing.

Okay. Karen mentioned that all three major units within Employer Services were slowing. If we comment on the smaller markets is it the same closure issue in the small market or is it that pace per control number that's affecting it? Maybe you could comment on that.

I'm not quite sure I follow, but the sales and closures are basically, what we are seeing closures softening across the board. One of the questions we were looking at earlier was, was there a geographic trend to this? Now, frequently you see things that start on the 55 coasts and then start to move to the middle of the country. Really it's very unclear. We really haven't seen that. It's spread more evenly than that as we are seeing the slowdown right now. So, I don't think we've detected anything that I would point out as unusual. The pace per control number really doesn't affect us.

Last question under the PEO business, how did you finish in terms of number of worksite employees and what are the growth trends like there?

In our PEO business, we finished with about 70,000 worksite employees compared to 80,000 at the same period last year. And what we have been talking about recently is, really a cleansing of our base and pruning of our base as we have aggressively looked at the risk and profitability profiles. Our client base was actively been pruning the clients. In addition, for those of you who follow the industry, know that their workers' comp cost, and workers' comp rates have gone up significantly recently, and in January, the client saw a big price increase related to the cost of workers' comp. This, in addition to the pruning of the base, really saw a 56 big impact to our number of worksite employees beginning in this quarter. Having said that, our sales in the PEO area are still quite strong at over 20%. Our revenue is still growing 20%. So, we're quite pleased with the growth prospects of the business and we're actually still quite comfortable and confident in the business model itself.

You might ask, how can the revenue grow that much when you're number of worksite employees has declined by that much, and the answer is just that we have targeted a different type of client as part of this risk profile that Karen was talking about. And as we've targeted this different part of client, our revenue per worksite employee is significantly higher. So, what you should kindly hear from this is, while we are in the midst of changing the model, the risk profile of the type of client and the amount we charge, and I at least believe that the opportunity within this business is still very, very positive and very significant. So, don't hear that number the wrong way because I still believe there is very significant opportunity here. 57

Thank you very much.

[_______________] from Robertson Stevens. Please go ahead with your question.

Good afternoon. In light of the slowdown in the economy in general, have you noticed any changes on the competitive land front specifically with your traditional competitors, as well as with the new foray of fidelity into the employee payroll business in general?

I think the answer is really no. I think that our historic competitors [_______________] HX and [________________], and more recently, pro business are seeing similar things, I believe that the type of things that we are seeing and I don't see any substantive change really in terms of their behavior in the market. I guess I lost the second part of that.

Any changes with the foray of fidelity entering into the payroll business on the competitive front.

We're really not 58 pumping into fidelity. So, the answer is when you get into the real competitive marketplace, as opposed to the advertising, we really are not seeing a significant presence yet. Nevertheless, believe me, we are watching them and watching them very closely, and we will continue to do so.

Thank you.

Edward Lee, please go ahead with your followup question.

I wanted to ask a little bit about the tax filling [________________] and income there. Can you give us some color on what that specifically, how fast that grew in the quarter, and just the tax filing so balanced, what you project for the year, and how much that is up?

I don't think we have seen any real changes there at this point. We completed last year fiscal 00' with an average daily balance of, I guess it was 6.9 billion, and yeah, we set our plan this year somewhere around 7.7 billion, and we have been over that plan by, you know, a couple of hundred million or so. So, you know, we have been recently forecasting somewhere around $8 billion for the full year. 59 So, no real changes there. On the earnings side, I think we continue to look at a forecast of about 4.2% for our overall portfolio for client funds and the ADP funds. Even then, in spite of the lower interest environment, you know, we obviously got some visibility to this and started forecasting it, building it into our forecast a little while ago. So, we're still at about the 4.2% forecast for the year.

Okay, the 4.2% forecast is relative to last years yield, is that up or down, or about the same?

Last year was 3.8%. If you include that 3 some odd million dollars worth of losses that we took when we converted the portfolio. If you excluded them, it would have been 4.1% for the full year.

Thanks very much Arth.

Lloyd Simons, please go ahead with your followup question.

Hi. I just wanted to try and clarify the impact of the cost savings that should be at 150 million run rate by the end of 60 this fiscal year. Could you give us some idea as to how much of this 150 million run rate will be incremental to fiscal 02'?

I'm not sure I follow you Lloyd, we are saying that if we had done nothing different, by the time we got to 02', our expense run rate would have been $150 million higher than what we are now planning on it being. So, I am not sure what you meant by incremental.

Well, what I'm thinking is, you started on these cost savings around the February-March period, so some of that benefit is accruing to the current fiscal year. Of course, a greater portion of the total cost savings will fall into fiscal 02'. So, could you give us some idea, let's say, is it maybe 40 million impact in fiscal 01', and therefore, an incremental 110 million impact in 02', anything like that?

Yeah, I think that, in reality, there is really very little impact in the current year as a result of these actions. In some cases, there is cost to make this happen whether that's severance or consolidation cost that we have to incur. So, those extra expenses in the current year, I think, will pretty much 61 offset the savings that we're going to generate as a result. Now it's not precise, it may be plus or minus 10 million one-way or another, but the bulk of it, now that I understand, the bulk of it is truly incremental next year.

Okay, thank you.

Sure thing, Lloyd.

One again, ladies and gentlemen, if you have a question, please press the 1 followed by the 4. I'm sorry there are no questions at this time, please continue with your presentation or any closing remarks.

Thank you. As we wrap up the call, I think we'll close at pretty much where we entered the call or maybe a little bit higher, but I do want to thank you for your interest in your questions. We always enjoy meeting with you and hearing from you. Take care.

Ladies and gentlemen that does conclude your conference call for today. You may all disconnect and thank you for participation.