自動資料處理 (ADP) 2002 Q3 法說會逐字稿

Good afternoon, and welcome, ladies and gentlemen to the Automatic Data Processing quarter conference call.

At this time, I would like to inform you that this conference is being recorded for rebroadcast and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for questions-and-answers after the presentation.

I will now turn the conference over to Karen Dykstra, Vice President of Finance, please go ahead ma'am.

Good afternoon, I'm Karen Dykstra, Vice President of Finance for ADP. And I'm hear today with Art Weinbach, Chairman and Chief Executive Officer. And welcome to our third quarter fiscal 2002 conference call.

As you know, we released our earnings today for the quarter ended March 31st. We recorded one percent revenue growth for the quarter and 10 percent earnings per share growth which was helped by margin improvement in each of our businesses.

Once we get started, we'll be glad to cover any aspects of the release that you like. And in a moment, the conference call Operator will explain the format of the Q&A.

I did want to point out a few things, first of all I wanted to point out that our consolidated income statement for the three months and nine months ended March 31st will be available on our Web site beginning tomorrow, Tuesday, April 16th.

Also, I wanted to point out that we'll be discussing forward-looking statements that involve risks and uncertainties. Some of those risks and uncertainties are discussed in our period filings with the SEC if you wish to refer to them.

Today we have about 152 people signed up. And ADP is trading at about $55.17. And I'm going to turn the call back to the conference Operator for your questions. I would ask if you could keep your questions to a minimum, stay away from the multiple part question and stick with one question at a time as it does make it easier for Art and I.

Thank you.

The question-and-answer session will begin now. If you're using a speakerphone please pick up the handset before pressing any numbers. Should you have a question, please press one followed by four on your push button phone.

If you would like to withdraw your question please press one followed by three. Please standby for your first question

The first question comes from

with S.G. Cowen Securities, please state your question.

Good afternoon. Could you give us a little more color on the cost actions that you're under taking? And give us some feel perhaps for what you think the trend will be in your cost and expenses in the fourth quarter both sequentially and year-on-year?

Sure, I'll try. We have just begun our planning process for next fiscal year. And as such we really haven't finalized the cost cutting actions that we're going to be taking now.

I would say that we're probably in the range of 50 to 100 million at this point that we're thinking about. Most of that would come out of staffing issues. I think last year we had staffing and we had some reductions in capital and travel and some of the discretionary expenditures.

I think this year, this time around it's going to be a little tougher in those discretionary areas because we're all ready pretty lean. So I would say that the majority will be staffing. And it will be both a combination of current staffing levels and holding firm on hiring as we grow.

And in terms of next quarter, I think that we'll probably have the actions in place not for the entire quarter but probably by the middle of the quarter as we get ready to have them in full place at the end of the fiscal year.

Yeah, but I wouldn't -- you shouldn't expect to see anything substantive within the fourth quarter. There's some costs to implement some of the actions that we're going to take.

So I would be looking for the expense reduction to start to take place next fiscal year.

OK. Thank you very much.

The next question comes from

with Prudential Securities, please state your question.

Hi, good afternoon. I guess I'd like some color on the retention rates kind of where that's been for the quarter, what's that at?

And then average new sales, I saw that it kind of perked up a little bit to two percent. What is typical? Or what is average new sales in a normal economy? What should we look like? Or what should we look for that number to grow towards in just a little bit above the sales pipeline? Thanks.

OK. Let me start with retention. Retention was down about 1.9 percent for the quarter, and that brings us to about 1.4 percent down year-to-date. At this point, we can tie about 70 percent of the decline in retention to an increase in bankruptcies and that does really cross all segments.

The number has bounced around a bit in the quarter. January was clearly worse. And February and March were better, both better than January. So the number is, as I said, about 1.4 percent decline year-to-date. Our service levels continue to be excellent. And we can't control the bankruptcy's. But we are confident we're dong the right thing from the service side.

In retention I -- there is I wanted to mention total source is particularly good this quarter, total source retention after a typically declining in prior periods. Total source probably had the biggest improvement of retention of the different segments within employer services.

Switching to sales, sales were up about two percent in the third quarter over all probably up more like three percent in North America, and then a little decline internationally.

Last year, we ended the year a little bit weaker. And this actually is the first quarter that we've had growth and sales in a year. Part of that is because the quarter -- comparison for the third quarter of last year was a little bit easier. And if you recall, the fourth quarter of fiscal '01 we had a 20 percent decline in sales so our fourth quarter will be even a little bit easier than this third quarter from a comparison standpoint.

The sales results were a little bit lower than what we thought they would be in the third quarter, not too far off our expectations. We are seeing some of the elongated sales closing process, the same thing we've been talking about all year long really. A pipeline that's still very good.

I would say the majors was about the strongest and the weakest as national at this point. And also international sales after stronger start in the beginning of the year did decline, Europe sales declined in the quarter about four percent. We did have last year some positive impact form euro related sales.

So, you know, as far as what should it be in a good economy or in a normal economy, we had multiple years of growing well over 15 percent. We even had some, you know, closer to 18-19 percent. But I would say a normal is probably in the 15 percent range.

We had three consecutive years, I have to go back and really re-look at the numbers of right around 20 percent growth coming right into the slow down that started to hit us in '01. So I think that was -- I think Karen's number is better.

I think that that was a very strong period for us and we had very strong results during that period. Part of the that was the year 2K and some of the pre sales of the year 2K effect. So mid teens is kind of a more normal number for us and where I certainly wish it was right now.

And just to follow up on the retention, is any of that from competition? Any of the fall out would be from anybody -- any competitors purging accounts? Or could you talk about that environment?

I think that the bulk is bankruptcies which is one of the things that Karen said. In the January period when I thought we thought we saw some competitive losses. And while we couldn't actually totally tie it down to price, we thought we some price activity.

But since the results really got better during February and March, I don't really see any lasting effect of that. So I would say no unusual competitive activity.

Great. Thank you.

The next question come from

with UBS Warburg, please state your question.

Thanks. Good afternoon. Can you talk about the gains taken? And also the gains remaining on both the client and corporate debt portion? And how much of that was normal breakage rather used to fund to repurchases?

Sure. In the quarter, we took about nine-and-a-half million of gains in our portfolio which brings the total somewhere around 16 million year-to-date. The nine-and-a-half million for the quarter was not to far off what we did in the third quarter of last fiscal year which I believe was about seven-and-a-half. So pretty close to the same activity last year.

The portfolio, the remaining gains in the portfolio at this point is probably over $100 million. It has bounced around a little bit in the last couple of weeks, but going back a couple of months ago, we had well over 200 million of unrealized gains in the portfolio. So it's down to about 100 million at this point.

I would say most of it is normal breakage. It's not a big enough number to be meaningful in the normal maintenance of the portfolio.

OK. And then sales force attrition, have you guys seen any further developments from your investor day in any of your segments?

Sales force attribution has got -- we have like two components of it. In general because attrition throughout ADP is down actually. Our associate retention is approved across the board. We've seen similar things in most places in terms of our sales force retention.

The one exception to that would be our EBS sales force which is our low end sales force in employer services where we have not seen any improvement at all in retention.

OK. Speaking of different market segments, have you seen, Art, any difference in the small, medium or large customers in terms of which weathering the economy a little bit better than the others?

It's interesting, but right now we're finding the hardest sales environment is in the national accounts arena, where the sales cycle remains elongated. It's tougher to get closes. We continue to have a very strong pipeline, but that would be the one area that I would single out as the slowest for us at this point.

Yeah, I would say that on a

for control basis as well national accounts area has been the most significant impact in the shrinkage.

OK. And then as a final one, the share repurchase update what have you -- what did you do during the quarter? And what was the average price?

I've give you the year-to-date, we have about 13 million shares repurchased year-to-date about $50 average.

Great, thank you.

The next question comes from

with First Union Securities, please state your question.

Hi, good afternoon. I wanted to follow up on the

per control when you talked to us during the analyst day it was running down three percent year over year through February. Are you seeing anything in March?

Yes, well

for control overall for the quarter, let me start there,

for control for the quarter were down about three-and-a-half percent compared to last year. Last quarter, it was about three percent. And there's another area where the numbers were jumping around a bit. January was clearly a bigger decline, February and March were most consistent with the three percent range.

So I would say we ended March somewhere in the three percent range. Perhaps that's a flattening out of the decline, but it's just too early to tell with only months that the same minus three percent.

OK. And can you talk a little bit about float balance for the quarter average?

The float balances for the quarter, client float balances were actually the first decline that we've seen in client load balances. Since, as far as I can say that we've been tracking it for probably for like 10 years, it was down one percent.

The third quarter is our highest average typically. So they were about 9.2 or 9.3 billion the quarter. But again, that's a one percent decline. Sequentially it's an increase but the third quarter is typically our highest quarter of balances.

What led to the decline? Could you give a little color on that?

I think it was the pay shrinkage certainly. The decline in retention. The lack of merit increases, lower stock option income, that kind of thing that we've seen all year long.

We actually have seen a decline in the average wages for the first time in, you know, I think in any -- I the whole time we've been tracking this. And the -- if you include in the average wages, salary, bonus, stock option profits, everything you can think of that makes up that number, and you look at it compared to a year ago, it's actually down even though it's a modest amount it was down. And that is very unusual for us.

I mean you can say fewer merit increases, fewer bonuses and a lot less stock option profits being the principal causes. But our data doesn't break it down well enough for us to give you a better answer than that.

OK. So the reason why employee services was up year-over-year is that because of beyond payroll then?

Yeah, actually there are -- it's a combination of things that creates the environment for growth. And so it's the excess of sales over lost business within a period. It's a mode amount of price increase.

It's whatever changes occur in things like

for control, and average balances which kind of offset that. But it's the netting of a number of numbers together that actually creates the growth. Some of the so called beyond payroll arenas did continue to grow at a good rate. Although even in the beyond payroll arena the rates were slower than they had been six months ago or a year ago.

OK. Thank you.

The next question comes from

with Deutsche Bank, please state your question.

Thanks. Actually all my questions have been asked.

The next question comes from

with Adam, Harkness and Hill, please state your question.

Hi, good afternoon, it's

. What about the broker service business? Can you break out the mix of business there between communications and trade processing? Talk about any pricing initiatives on the processing side?

OK. Well let me start by saying that in the back office part of growth and services, we have -- a trend continued towards the institutional versus the retail transactions that we talked about and started talking about mostly last quarter.

Our average trades per day increased 17 percent in the quarter which was about 1.57 million trades per day. However, our revenue in the back office was about 12 percent decline. And we started talking about that we cannot correlate the trades per day any longer to revenue

trends and institutional versus retail transactions are clear and have a significant impact on the revenue per trade.

So our revenue per trade was lower because of the mix and firm trades have generally less work associated with them and therefore the revenue we trade is lower.

Much the mix of institutional versus retail you mean?

Yes, the mix of institutional versus retail is two-thirds, one third, at this point.

So in addition some other trends in the brokerage area. We've been talking about the discretionary spending and some of the categories, the financial services industry is clearly still cutting back on spending less on these items.

I would put our

business, our multi currency, clearing and settlement business in there. We have left time and materials transactions in business. And have out our

graphics business in there as well where we do the research print primarily. Both of those businesses are down significantly. Again, in the quarter, we'll go down 36 percent,

22 percent.

So that's -- putting that aside I will talk a little bit about investor communications, investor communications really still a very strong spot in brokerage. Our number of pieces delivered in the quarter in our investor communications group increased about 12 percent. And that correlates to about 11 percent revenue growth in that business.

Our postage revenue was about four percent in the quarter. And we've talked a little bit about the trends in postage with the suppressions, the number of suppressions being electronic delivery in house holding impacting our postage revenue, although it does not impact our profitability. But postage revenue was down less than the overall increase in the number of pieces delivery.

One other thing I want to bring up when I talk about investor communications for the quarter, the Hewlett-Packard proxy mailings. We had about $25 million of revenue in the quarter from the Hewlett-Packard mailings. More than half of that was postage revenue, postage related.

So the postage revenue actually declined eight percent if you were to take out the HP mailing. So the decline in postage again, suppression, I talked about. And also the lower weight of the packages that we've been talking about as well.

So I think that gives you the mix of the transactions in the quarter, and the continuation of the trends, particularly on postage and in lower revenue per trade.

So how will you grow -- get revenue growth back there to the double digits if it's not through greater volume? And there are probably fewer analysts writing fewer reports?

Let me try and explain how ADP works in general on a period to period basis. The thing that causes that the revenue per trade decline to take place is not the level of retail trades. It's the level of the retail trades compared to where it was a year ago.

So it's basically a similar number in terms of revenues per trades. So once we settle and we're no longer in this declining trend of retail trades which started with the dot-coms and the 9-11 and Enron and things like that. Once we're no longer in that, we're back to even, then the numbers start to relate or correlate again with trade growth.

Long-term trade growth as you've heard from us a number of times is compounded at something like 15 percent over the last what 20 or 30 years, 20 years or something like that. So that's a normal thing. What we're going through is a very serious grow over from a transition of a very high retail trade level to a much lower level.

Similarly, if you look at the investor communications business, the intrinsic growth in the number of positions since we entered the business until what's happening right now has been 15 percent? And with that type of intrinsic growth, we should be able to continue to grow at those types of levels.

So I think it's actually easiest to understand and brokerage because the underlying trends in both of those businesses that we're in, both have such excellent long-term growth. Now will it come back in six months, a year, three months I don't have a clue. But I do know that the long-term perspective is one that we should have confidence in.

All right, thanks.

OK.

Our next question comes from

with Morgan Stanley, please state your question.

Thanks, just a couple of questions. First, Art, if you could talk about the prospects of the dealer services business. I know you had hoped to get that back to double digit revenue growth over the next couple of years.

And then second, any updated thoughts on the acquisition front?

Yeah. In terms of dealer services, my optimism has -- remains unchained about our ability over time to move it back to a double digit growth business.

Actually, the quarter that we just finished while the results doesn't look great from a revenue growth point of view is actually a pretty good quarter. We hit the anniversary date of an acquisition we did a year ago. And that took a little bit of the period to period growth that we had out of it. And we also have a little bit slower period in Europe. But in general, we actually had a pretty good quarter.

Probably the most important indicator of that are the sales in our North American business. And we had an excellent double digit growth quarter. And I believe we're at a double digit growth rate cumulatively for the nine months. If you have that type of growth and you combine that with the excellent retention, where our retention's been good for a while, but it's really excellent right now, you have the underlying ingredients for growth.

Now one of the things Karen reminded me as we were preparing for today, was that as we are converting to an ASP model in dealer services we get less up front revenue and income from the initial sale of a new account. Now it's better for us over a long term because the profitability in ASP transaction is better than it is on an up front license transaction.

On the other hand it does -- it's another transition that we have to work our way through. But actually, I'm feeling very positive about where we are and about where we're going, certainly in the North American segment. I think in Europe the environment is still tougher. And in the post euro period we'll have some tough comparisons, but I'm feeling pretty good about dealer.

In terms of the acquisition scene, we continue to do some relatively small acquisitions. I don't believe in the aggregate they are that significant, but it does show that our appetite is still there.

We continue to look for somewhat larger transactions. And as we get close we'll let you know more, but as of this time I have nothing further to report.

Thank you.

The next question comes from

with Goldman Sachs, please state your question.

Thanks. Art and Karen, on the shift towards institutional trading in the brokerage services business. Do you feel -- is that shift starting to end? Do we -- do you think it stabilizes that at two-thirds, one-third mix?

I'm not sure we know,

. If you had asked me three months ago, could it have gotten down to a 30 percent retail mix I would have said well I really doubt it.

I think the fear level for the retail trader perhaps created by Enron, the Arthur Andersen relationships around the accounting issues, I don't know how long that's going to last and I don't know if it's going to get deeper. You read the same things that I read every say in terms of what's new in the newspapers and what's new with different companies on the front of surprising or unusual or changing disclosures.

So I don't know when that -- I don't -- really -- really don't know whether it's hit a bottom or whether it's going to continue down. Or whether if we get a little bounce in the market, the retail investor is sort of looking for a place to put his money and is going to bounce back quick.

I wish I had a better answer for you, but the reality is I just don't know.

One other question on the national accounts where business is still tougher are there any specific actions that need to be taken to help reinvigorate sales or is this just a time issue?

We think our product set is very good and it is competitive. We have our enterprise system which you've heard me talk about before which is our high end Internet integrated payroll HR system. Has had very good results. Our pipeline if we listen to what our sales people are saying remains quite strong. So we don't seem to be able to push the closes the way we did before.

I don't believe there's anything fundamentally wrong. That's a question we look at, we address and we worry about a lot internally. My belief is it's tied to the cycle right now and it's not fundamental.

I would add that what we've seen as the economy got weaker we've seen a shift in the decision making process at the large national account clients from the typically the Chief Human Resources Vice President to the Chief Financial Officer. And that shift has made it more of a process, a longer process, and a more difficult closure process for us because the financial executives are obviously in the cost containment mode especially in the larger national accounts.

So we have seen a little bit of a shift there. We continue to work it but it certainly has added time in the cycle of our closing.

But you are seeing those close after the sales cycle has elongated?

We don't have any specific reasons why we're getting knocked down at the CFO review level, it's just a longer sales cycle.

OK. Thank you.

The next question comes from

with Bear Stearns, please state your question.

Hi, Art and Karen. Can you give us a little more insight in terms of

for control maybe by the client size? And also, you know, sequentially it's gotten worse, but Karen you said it hit bottom in the month of January, I guess over three point negative -- over negative 3.5 percent. Was that better than December? Because I think the December quarter was down three percent in total.

Right. It's really the -- it's the steepest decline is at the national accounts level. And at the low end of the market in EBS it is not as significant.

In terms of the months, it was interesting, December and January were

. December, the month of December was actually a little bit better than the quarter that ended three percent. It was a little bit under three percent decline the month of December. And then January was much worse.

So we more or less look at them as a combination of the year end process, December, January. And look at it is a combination of, you know, call it three, three plus percent decline. And then February and March will go solidly three percent month. So they've all been -- I look at it all in the same range. And it did bounce around as I said. December was actually a little bit better than January and February in March for whatever reason

cut-offs.

It's dangerous

to look at something like December and January. This is a very unusual year. We had September 11th. We had a number of people who are on severance and layoffs. And when the period dipped and when they came off of the payroll it was just an usual period.

So I wouldn't read too much into that bouncing around. I think the last couple of months have been a little bit steadier. Does that mean we're bottomed? I go back to what Karen said before. I would like to think so but it -- the -- it's too soon really to tell.

Got you, thanks.

The next question comes from

with J.P. Morgan, please state your question.

Good afternoon. The sales growth recovery, it looks pretty good. Can you assign any of that to anything other than the easier comps?

I think the level of sales was not dissimilar to where it had been earlier. So the bulk of it I would say is the easier comparisons as opposed to an overall improvement.

On the other hand if you look at pockets I mean our majors accounts looked a little bit stronger during that period. Total source looked a little bit stronger during that period. National accounts looked a little bit weaker.

So I think when you put it all together what I said is correct, but clearly there are pockets that differ.

Yeah, I would say that as we look at the fourth quarter we really get a much easier comparison to last year because we had a weak quarter, the fourth quarter fiscal '01 was down 20 percent.

So when we look at our fourth quarter results we will get that lift in terms of what growth percentage. And the only other thing I would add would be that internationally, now we are starting to see weaker sales results. As a -- we are starting -- we had gotten some benefit last year from some one time euro activity and we don't have that this year.

Also I'd say that we're starting to see some of the signs of the things we saw in the States, not in just sales but in terms of

for control are starting to materialize in some countries in Europe. They were a lab. We hadn't seen it as much in the first half of the year, but more recently, we're seeing some of those statistics particular in countries like the U.K. where we're seeing our decline in the

for control for the first time.

And then on the top line, I believe at the analyst meeting you talked about the revenue guidance being in the low

. But I think at some point you sort of said three to four percent if I recall correctly. You can correct me if I'm wrong.

And how

how comfortable are you with the revenue growth for the fiscal year that you're talking about given this quarter and what you need to do next quarter. It seems like you definitely need some improvement in the business, not just easier comps for the fourth quarter.

Yeah, I think at the meeting I said I think low single digits, think threeish in terms of a percent. I'd say we were a little bit softer in March than I had hoped or expected, primarily around some of the things in investor communication service in terms of the postage revenue and other equivalents.

And therefore, you know, I think we're in the low single digits, you know, perhaps the two-three, as opposed to the three-four.

And then a broader question on brokerage. Are you thinking about going -- moving into new areas, maybe, some areas where you need to pick up some additional growth rather than focus on the business you've traditionally been in?

We see some great opportunities, although they're really extensions of what we're doing. For example, our ability to go global with our institutional products.

Now we're making -- we're trying -- as retail trading which we just talked about here domestically declining, and it's relatively weak internationally. But we're trying to position ourselves right now to be the player as retail trading grows on a worldwide basis. We see that as a very significant opportunity for us.

We've talked in the past about one stop shopping in our investor communication service business. And we believe the ability to go to the -- either the corporate secretary or the person in charge of investor relations and say -- being able to say we can do everything for you. You really don't have to go to a whole bunch of players in order to get it done.

We think that there is a lot of play in that area. So I believe as opposed to so called brand new areas, extensions of the areas that we're in right now, really look like the growth opportunities are pretty good.

Thanks a lot.

The next questions comes from

with Bernstein Investments, please state your question.

Good afternoon, folks. I have a couple of questions. And if you feel I'm using up too much asking too then you can ignore whichever one you feel you want to.

First of all, Karen you mentioned the ASP model in dealer causing something of a revenue slow down. I was wondering first if you could possibly quantify that to any extent? And also is that something that we're either seeing or we might see in the future in employer services with a move to an ASP model there over time?

And also in employer services, I was wondering, given the increased emphasis on let's say watching who you employ, I would imagine

maybe is taking a more high profile role. Have you found this to be a good door opener at this point?

OK. I'll try to get through -- I think I got them all, but let me start with the ASP and dealer. I don't really have a quantification for that. It's still pretty small I would say.

When we talked about the transition we're really looking forward as that grows it will start to depress the revenue on a short term basis. But it's still small enough that it's not -- it's nothing yet we've quantified at this point.

The reason is the ASP model does not come with the same up front fee for the system installation. We were previously on the on site model. We have hardware sales that's involved as well. And that hardware sales is not part of the equation anymore.

So that's why it will on a short-term basis reduce the top and bottom line growth. But over time, that model has higher revenue per client as over the client life. The bundle of services that's involved with the ASP model where we're really taking over the whole administration and the system and ongoing support for that will provide us more revenue.

As you looked at across at that model for employer services, employer services really doesn't have that same up front in that they are not selling on sight systems in the same manner. For the most part employer services is a service field all ready and so there isn't a transition from up front fees in the same respect as dealer going to ASP.

And I think the third part of the question was about

. And yes,

is doing very well. We are seeing that being a very good acquisition for us. There is a lot of interest in it. I don't have any of the statistic right here, but I know that when we talked about it in March we said that the level of sales when we handed that product off to our sales force really took off, so we're very pleased with that way that's going.

has been a classic example of what we would like to do. We actually entered into a relationship with

where we tested selling their product. We then ended up buying the company. We had a lot of experience with it.

We rolled it out to our entire sales force and it's been a very significant success. I agree with the question. I think the environment right now is one which favors trying to making sure that you've got the right employee, and you don't have any problems with that employee at the time you're hiring them. And that clearly plays into

capability.

So it's been a very successful, obviously it's still a relatively small piece of employer services but one that we feel very positive about.

Thank you.

The next question comes from

with Salomon Smith Barney, please state your question.

Hi, this

for

. Can you provide some clarity and other line breaking out claims is the first step? And then maybe the different components of what's going on in other?

OK. Claims for the quarter, I don't know if I have the exact numbers for claims in front of me, but that will -- that specific number will be available on the Web site tomorrow. Or actually I shouldn't say that, it's on the press release the claims dollar...

.

Claims is not on the press release, I'm sorry. I don't have the last quarter numbers to claims in front of me. But I can tell you that claims declined from one percent in the quarter. And I'll go through some of the businesses within claims an then I'll give you a better sizing on the interest which is the real reason that the other segment is doing what it's doing.

Just to help you I mean claims is a business that's going to do somewherebetween 300 and 350 million. And if you figure an average quarter is 75 to, you know, 85 or 88 million that's roughly what the size of it is.

Right. That's it. It's about 85 million. Now I'm looking at the numbers, it's about 85 million.

Within the claims business the IMS piece of claims declined about 14 percent and internationally the auto text business has been stronger. It's a little bit lower growth this quarter, it's six percent. But we still expect pretty good growth high single digits in the quarter.

Briefly, that's the update on the pieces within claims. The big swing in other for the quarter is really interest related. And let me give you a little bit more specifics on the interest income. If you recall we said that interest income is going to be about 150 million lower years to year fiscal '02 to fiscal '01. It's probably, you know, someone was saying 140 -- 150 million.

The first have of the year was 50 million less, the third quarter was 60 million less. That leaves the fourth quarter will be somewhere between 40 and 40 million less. A lot of it is that they were talking about the balances before, the biggest balances come in the third quarter. So we have the biggest impact of negative interest rate comparisons in the third quarter of the year.

And that's' really what's driving that other segment lower.

OK. That's good. One additional question if I may, separately on the joint venture announcement in Japanese market. That was kind of interesting. If you could provide some details on that? And why a joint venture versus an acquisition? Any comments.

Yeah, well we've been wanting to get into the Japanese market as part of our global expansion program in employer services for a while. I think one of the things that we learned early is it's pretty hard for a U.S. company to go in there without relationships and important relationships. So we were extremely pleased to find a company of the quality of

where we could enter into a joint venture in the payroll market.

Right now, the business is very, very small. It's basically little more than a start up. But the market is a very good one. And it's one that we're looking forward to being able over a period of years to make some significant headway in.

I think the more important question really deals with our attempt to get multi national clients in

on a global basis. And clearly Japan is a very important market. And so our ability over time again, because we can't do it right immediately to be able to offer these multi national clients the ability to have payroll services across a number of different countries including Japan and the Far East, we believe will be important over a long period.

We think that we are significantly ahead of anyone else in terms of being able to offer a multi national payroll solution at this point, even though we also have a way to go.

OK. Thank you both.

The next question comes from

with RBC Capital Markets, please state your question.

Yes, firstly I just wanted to clarify an answer to an earlier question on the competitive environment. Art, you said business -- the competitive environment is really improved, and I'm going to go back to analysts day real quick. And you had mentioned that the combination of a fairly competitive offering from your competitors in terms of price and the fact that your customers were looking to save money meant some of those customers were moving.

And if I can just clarify what you said, you're saying that really stopped in February and March is that correct?

I'm saying that if you look at a statistical overview that would be an appropriate conclusion. All of the analysis that we need to conclude that there's no price action and that people aren't as much because of price is -- I can't be definitive yet.

But certainly, if you look at it at the service level given the fact that our retention was worse in January and really improved in January -- in February and March I think that's a -- certainly a logical conclusion and you did understand what I intended to say.

OK. And then the other question, I was interested in -- you talk about a six month lag. And if we break it down into things like retention

for control, new sales activity, do you view us further along in that six month lag in any of those specific areas? And which should we look to, to see the earliest?

Yeah, I really wish I could answer that question positively. But the answer is I really don't see the indicators yet. The indicators are the ones you're very familiar with, the sales retention and

per control.

When the economy starts to improve as it will perhaps people will start buying again, and sales will be the first of those three to start to show a sign of improvement.

Retention I think as things get better people will feel freer to make moves, and therefore it's not clear whether that will improve or not.

per control is probably the last of the three to improve because historically as I mentioned at that meeting before, people will first go to overtime, then they go to temps. And only after they've exhausted those two and they need to do they start hiring employees again. And it's only when they start hiring those employees that the

per control number really goes up.

So those are the signs. I think six months is a kind of speech. We can't be exact. But in neither sales nor retention nor

per control have I seen a meaningful improvement at this point. I would have to say that I have not yet seen the signs of a start.

Thank you.

The next question comes from

with Thomas Weisel, please state your question.

Right, thank you. Getting back to the

per control, I was just wondering Karen, if you could, you know, possibly isolate how much of the decline relates to mix shift?

And then secondly, Art, I know this may be a tough answer -- question to answer, but would you expect once we get to a more normal economic environment that

per control on an absolute basis would go back to similar levels that we saw prior to the downturn.

Let me take the first part of the question. The -- actually the

per control statistic that we talk about is the number of people that are in our retained client base from one period to the next period, so none of it is really related to a mix shift. It's the clients -- the same clients that have been here period to period. And that's what we mean, it's more or less a same store sales kind of figure not related to anything in mix of the size of the client.

And on the so called more normal

per control answer, we've had growth over most of the '90s. I'd have to go back to the early days when we were recovering from the '80s, early '90s recession where growth was in the two to three percent range. And I would think we would expect as the economy comes back that we would get back to that type of annual improvement in

per control.

Again, as Karen said, that's same store sales. So that doesn't mean that the new businesses get mixed in in terms of distorting that number. So on a same company 12 months later than it was, I would expect that we would get back to the two to three percent growth rate.

So does that...

We've had many years of solid two to three percent history going back as far as we need tracked now, looking maybe at the last eight to 10 years. It was clearly in that range for a long period of time.

So does that imply then that the absolute level of checks per client would return back to more, you know, the levels that we saw prior or are they about those levels right now?

I think once the economy comes back we will grow over this decline that has taken place, although it will be a gradual grow over because it's more tied to the growth the economy than it is to what the number used to be. And I think the economy stays good it will be progress past the numbers where it was.

And that we'll continue to see that growth for a number of years assuming we have a number of years of a good economy.

Great. Thank you.

Thank you.

The next question comes from

with Robert W. Baird, please state your question.

Yeah, hi, Art and Karen. Just a quick follow up here on the international side, why the decline in new sales in that segment. It seems like, you know, the U.S. economy certainly took it harder than Europe has. So what was the rational behind that?

Yeah, let me hold to Europe because that's the biggest part of the answer, even though internationally we're broader than that. We got a bump from the euro. And we got some good sales activity for at least prior to the euro going into effect. And that was a very important positive. Not a lot different than the Y2K impact that we saw here in the U.S.

When you came out of that, you started to go into a tougher comparison. I think that's all that's happening. I don't think there is anything intrinsic in what we're doing or that we're -- or anything different from a competitive point of view is the economic lag that Karen was talking about taking a bit of a toll perhaps. But since the two are mixed it's hard to tell just how much each one is. But I'm betting that the bulk of the reason for the sales slow down is the poached euro effect.

OK. And then trying to understand this brokerage -- the contributions from Hewlett, I think you said 25 million in the quarter, was that correct?

Correct.

OK. So that looks like roughly a five-and-a-half influence on a revenue growth. Does that imply that and I know you get these things periodically, but it seems like without that we're talking about a pretty steep organic decline maybe eight or nine percent in the quarter. That -- do those numbers work? Or what's wrong with that line of thinking?

There's nothing wrong with that line of thinking. The -- the postage revenue which I was talking about earlier which was up around three or four percent in the quarter investor communications would have declined eight percent had it not been for the Hewlett-Packard mailing.

Similarly, the fee revenue in the investor communications business would have been significantly less gross percentage had it not been for the Hewlett-Packard mailing. So yes, it was 25 million in the quarter, which makes a difference.

But be careful and don't think of postage revenue as revenue in this business for the reasons Karen was talking about before on suppression on house holding and electronic delivery. We have a natural decline that's taking place as we transition away form postage to fee revenue.

And the -- I don't remember the percentage of the increase that we had in terms of the number of suppressions.

Yeah, it's about 18 percent year-to-date.

OK. And just a follow up question, there are a couple of things you mentioned, new sales in the fourth quarter the comparisons are easy, I think minus 20 percent. What should fourth quarter new sales in ES be given that comparison based on what you know now?

I think we're going to have a mid single to double digit growth in ESLs. A lot depends upon how the quarter rolls out, so I'm hopeful that's a conservative response.

OK. And then just final question, big picture question here as it relates to the numbers. The double digit earnings growth appears to be -- the record appears to be very much in tact here as we get toward the end of the fiscal year. How much revenue growth do you need next year to hit that 10 percent?

Clearly, this is something that has been discussed internally, so what's your best guess at this point?

I don't know that we're ready to make a guess at this point. We have just begun our planning process for next year, so it's a little bit early to tell. Clearly, we've taken some cost cutting actions last year, and we'll take some this year but it's too early in the process to be able to project that.

And obviously you'll get some help from rates presumably as well hopefully in '03?

Yeah I'm working real hard to avoid making comments about '03 at this point in time. So you have to permit us to wait until August before we actually go out and start talking in any depth about '03.

Permission granted, thank you very much.

If would add though just on the comments about rates, I will chime in even though we're not talking about '03, when you talk about rates, it's important to remember that this year we did not feel the full impact of the decline in rates. As a matter of fact, our average yields in the beginning of the year were well over five percent on a pre tax basis.

In the second have of the year we're lower probably in the four-and-a-half percent range. But the full year '02 yield will still bet let's say a blended average of 4.8 percent. So we did not get the full impact this year. And as we look at '03 I wouldn't assume that we're going to get a huge list from interest rates as well. At this point, who knows what interest rates are going to be? But remember that the first half comparison next year will be very difficult.

OK. Great. Thank you very much.

The next question comes from

, please state your question.

Yes, just to follow up on Karen, on those last comments you had on interest rates. If we were to assume that the yield curve were to remain fixed at today's levels going forward.

How soon would you grow over the interest rate issue? Or will you?

It's -- I don't have the exact time that we would grow over it. I would say again, the first half will clearly be lower next year if you looked at the prevailing interest rate curves. And it depends on when you ask because they float around from weak to weak they've changed.

But I don't know that it would be much different than the overall yield at this point that we're achieving in '02 as we look into '03 and try to project that. I don't know that I see much of an overall yield difference other than clearly the first half will be much slower, and the second half will equal out a little bit.

The declines in the Fed rates really went right to the fourth quarter as your -- fourth calendar quarter as you're aware. And the first time I'm going to feel optimistic is when we have 12 months of -- from the time of the last decline.

Now while we're cautious, we do believe we've seen the last decline in interest rate -- in short term interest rates at this point. Whether or not they yield curve will stay the way it is right now or whether it will flatten or steepen over time there is an awful lot that's got to play out and we're going to let it play out.

Have you changed your duration mix?

The duration we've been inching it up as you probably know. At the end of this quarter the average is about 1.6 years.

Unrelated question, you give in your press release internal growth, organic growth in the brokerage services. Can you give it for the other units? And also for the overall corporation?

Sure. Actually brokerage was the only business that had an internal revenue growth rate that was different than the reported revenue growth. So the others remain the same. The overall internal rate which is a decline of one percent if you take out acquisitions for ADP.

OK. Thank you.

The next question comes from

with Lehman Brothers, please state your question.

Yes, good afternoon Art and Karen. A couple of questions about employer services, if I could Karen. Could you give us a sense for the year-over-year revenue growth rate trends in the quarter? By client segment i.e. between national account, major market, and EBS total source.

I -- we generally don't get into the specifics of the segments at this time

.

Right. I thought I'd take a shot. OK. Maybe in another quarter. In terms of the buy back, Art, your thoughts in terms of trying to compete the remaining buy back authorization of a particular period of time. Do you have a particular period of time in mind for that? Or is it really going to continue to be opportunistic?

I see the buy back share amount as almost a fluid number. I truly believe that were I to go back to the board after we have exhausted the current buy back availability, assuming that the environment is similar to where it is right now that the board would continue to be supportive.

And in terms of when or how soon will we use the available buy back? I would say I'm not prepared to response with a specific time. But I continue to think that this is a good time for ADP to be acquiring shares.

Art, philosophically with the prospect of rates perhaps going up in the autumn of 2002, does that sort of macro thinking color your decision as to timing?

Not significantly. I think there are a number of times when we will have a good opportunities to acquire shares. Do I look at the ultimate dilution which is I think what the question really drives to is as interest rates go up the price...

Yeah.

changes? The answer is it changes in relatively modest ways. And so the buy back of share is a more strategic longer term issue. So I know you could expect to see as long as our cash generation remains as strong as it is, and it is very strong that our appetite will be there for a while.

Thank you very much.

The next question comes from

with Merrill Lynch, please state your question.

Yes, hi. A couple of quarters ago you guys talked about some installation deferrals. I think they were in both the employer's services and the brokerage services. What has been going on there this quarter?

Yeah, I imagine,

, that you're talking about -- we talked about implementation deferrals primarily in brokerage. Although, clearly when we talk about a little sluggishness in national accounts and employer services that would really be the same issue.

But where we've seen it the most has been in brokerage, in particular in our

business.

is our -- a product which requires an implementation. It's a multi currency settlement product. It's not like the back officer service pro product. And we typically get a fair amount of time and materials billings both for the implementation and ongoing service and maintenance for our large -- our large global clients.

And that is where we really saw the most significant drop off. That continues. Our

revenue as I said earlier was down 36 percent in the quarter, it's down 19 percent year to date. And that's really the biggest place that we see this.

So you're not really seeing that over in employer services? I mean cases of people, you know, signing deals with you for future services, but sort of waiting some indefinite period of time before installing.

Yeah, I would say there's probably some of it in national accounts. But it's really more the delay is on completing the closing process on the sell. And once it's sold, you know, it takes some time to get installed.

I don't know that we're seeing that much of a longer implementation process or a cancellation of implementations as much in national accounts. I don't have the actual data, but there may be some of it just not as significant as I'd say in the brokerage business.

OK. Great. Thanks.

The next question comes from

with Raymond James, please state your question.

Yes, in the national accounts segment of the business, as you see the decision being pushed up the chain of command, are you seeing the beyond payroll offerings become more important? And if sop, what are you hearing are your strengths and weaknesses of from clients in that area.

It's a bundle of services is becoming increasingly important as a part of the sale. And so the so-called beyond payroll becomes more and more important. As you go up market the just plain vanilla payroll and tax filing has become more commoditized than it was -- than it used to be.

But the bundle offering is still very good. And if we listen to the right things and we look at the right comparisons we still have a very attractive offering in that arena. So that part hasn't changed at all, although the closing cycle has elongated.

And how key is the health and welfare component being? Are you seeing that that's still an area that some of the traditional payroll folks are still trying to build out? And so clients are kind of single sourcing that?

We're seeing some of that, not as much as I would like to see, but we are seeing some of it. So as we have extended into the benefits arena, we're seeing some of those tie in sales. But we're also seeing independent trans -- stand alone transactions on both sides. So I'm seeing some but I wouldn't call it overwhelming.

Thank you.

The next question comes from

with S.G. Cowen, please state your question.

Yes, just to follow up, Karen, Art. If you had that $25 million -- that presumably the $25 million of HP revenue goes away in the fourth quarter. What do you -- based on what you see here with all of this stuff bulk and postage and everything else, what do you think the BSG revenue trend will be in the fourth quarter?

Well I don't have exact fourth quarter revenue growth for brokerage. But I can tell you that overall, we're forecasting for brokerage low single digits. You know, as you know, we've come down during the year on the brokerage revenue forecast, a lot of it due to mix of trading and the postage issue.

So I would now say it's probably in the low single digit growth overall. Remember that the fourth quarter is where we see the bulk of our proxy growth or proxy revenue, proxy activity. That means our numbers are larger in the fourth quarter. But depending on how much penetration we get of suppressions, electronic delivery and so on the postage revenue declines is really going to impact that fourth quarter investor communications growth as well.

So without the precise number of revenue growth for brokerage I think you probably come back into with my guidance for the full year for brokerage.

OK. Do you get any signal? Would you have any signal in the middle of April about suppressions when people have told you what -- how they want to do this?

No, we've had a -- we have a lot of information about suppressions. We're seeing a very significant move towards suppressions. The house holding has been much more significant than I personally expected not that I have any great wisdom in this area. And the move towards electronic delivery beyond house holding is also continuing to actually accelerate.

So, yeah, I think the trend is clearly continuing to move in that direction and it's something that we're very pleased with.

OK. Thank you.

Even though we get less revenue it's still a good deal for us. We're very happy with suppression.

I understand that. I'm just trying to do a little modeling here as everyone else is.

OK.

Ladies and gentlemen, once again, if you do have a question, please press one followed by four on your push button phone at this time. The question comes from

with First Union Securities, please state your question.

What was the D&A in the quarter?

The depreciation was about 73 million in the quarter, a little bit up from the prior '02.

OK. Thank you.

The next question comes from

with Robertson Stephens, please state your question.

Thanks, good afternoon. In light of the disparity you've discussed between

for control performance in your different market segments. I'm wondering if you could give us a little perspective in past cycles, you know, how

per control have progressed through the employment cycle?

And whether, for example, you might expect the worst as yet to come among your smaller employer customers? Or if this, you know, an unusual pattern in any way that the smaller customers would be hanging a little better than the national accounts.

The only thing I can tell you is that the precipitousness of the decline this year was much more significant than I had seen in earlier recessions. And so I was really more surprised by that.

I think large companies generally react more in terms of significant cut backs when, you know, to all of the things you read about in the paper when layoffs are taking place. So I'm less surprised that large companies have the biggest reduction in

per control.

I don't have any indicate that would say small business going to get worse than it is right now. So I just don't have any insight beyond that. And I can't really look backwards to the prior experiences that we've had and pull out a number or a statistic that I think would be relevant or would be helpful.

OK. Thanks.

Ladies and gentlemen, if there are no further questions, I will turn the conference back to Ms. Dykstra to conclude.

OK. Well thank you very much. We enjoyed talking with you today. We close today at $54.90. And I want to again thank you very much for your questions.

Ladies and gentlemen, that concludes our conference for today. Thank you all for participating and have a nice day. All parties may not disconnect.

END