自動資料處理 (ADP) 2003 Q4 法說會逐字稿

Good morning, and welcome, ladies and gentlemen, to the Automatic Data Processing Inc. 2003 earnings conference call.

At this time I would like to inform that you this conference is being recorded 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, Chief Financial Officer of ADP.

Please go ahead, ma'am.

Good afternoon.

I'm Karen Dykstra, Chief Financial Officer for ADP and I'm here today with Art Weinbach, our Chairman and Chief Executive Officer.

And welcome to our fourth quarter of 2003 conference call.

We issued our earnings release earlier today for the quarter ended June 30th.

And we reported 4% revenue growth.

And earnings per share of 36 cents for the quarter.

For the year, we reported 2% revenue growth and $1.68 earnings per share.

And our quarter and year included about $60 million of incremental restructuring charges.

We previously announced that we had closed on the acquisition of ProBusiness at the end of June.

The ProBusiness results did not impact our fourth quarter earnings, although the June 30th balance sheet does include ProBusiness.

Our guidance for fiscal 2004 is $1.50 to $1.60 per share.

The range is larger than our normal guidance as there continues to be uncertainty around the economic recovery, including items like employment levels, brokerage activity and interest rates.

And with those very few opening comments I think we're ready to get started.

Before we start the Q&A, I will cover the normal forward-looking statements, we're going to talk about these today, involving risks and uncertainties.

Some of these are discussed in our periodic filings with the SEC, if you wish to refer to them.

And with that, we have about 150 people signed up for the call to day and at about 1:30 our stock price was trading just under $36 and I will turn it back to the conference call operator now for your questions.

Thank you, the question and answer session will begin at this time.

If you are using a speaker phone, please pick up the hand set before pressing any numbers.

Should you have a question, please press star one on your push button telephone.

If you would like to withdraw your question, please press star two.

Please stand by for your first question.

The first question comes from Adam Waldo with Lehman Brothers.

Please state your question.

Good afternoon, Art and Karen.

A couple of questions about revenue drivers and margin drivers within Employer Services and Brokerage Services in the quarter.

This quarter you went back to not disclosing the key revenue and margin drivers, as you had last quarter.

And I was wondering, Karen, if you could take us through key drivers around pace per control, pricing, net new client adds and employer and similarly on the brokerage side give us a sense for trading volume, shareholder communication volumes and retail / institutional mix?

I would be glad to do that Adam.

We had crammed a lot into the press release with our year end guidance and so forth, so I promise we will continue to give guidance and disclose on the quarter some of those key statistics.

Thanks.

In Employer Services, the sales growth for the quarter was about 1%.

As you know in the release we said that the full year was a decline of 2%.

Our retention was improved by just under a half a percentage point for the quarter, for the full year it was a full point above prior year results.

Our pace per control declined just about .4%, so also just under a half a percent for the quarter ,for the year that made it up under a point decline.

Call it .7, .8% decline in pace per control for the year.

In Brokerage, if I could turn to Brokerage, our trades were down 18% for the quarter.

That makes it about 13% for the year decline.

Our mix was just about 26% retail.

Although when you include some of our other product lines, and our Canadian product line, that number was just above 30%.

So in the future, when you hear us talking about our mix of retail and institutional we will probably lean for the more fully comprehensive statistic which is now just over 30%.

In Investor Communications, our pieces were down about 6% overall.

And I'm sure during the call I will go into a little bit more detail into some of the trends in Investor Communication and what drove that number down.

And our suppressions were up to about 30% in the quarter.

I think that gives you the bulk of the primary drivers in EF and in Brokerage.

Very helpful.

Art, a quick capital allocation question if I could.

Could you update us on your thinking around future share buy backs and potentially,future dividend increases, in light of the tax law change?

As you know our appetite for share buy backs has been there for a while.

We acquired some 27 million shares as we said in the release this year, and spent just shy of a billion dollars on it.

And that appetite will continue.

The payout that we've had has been, on our dividend, has been somewhere around 25% to 27% over the last few years.

That's an area that we will continue to evaluate as we go forward.

Certainly our Board is the one that ultimately makes those dividend decisions.

So given what has happened with the tax law it is something we're all looking at right now.

We basically, when we make dividend changes, make them effective in January, so as we get closer to, that we will be focused more on that question.

Thank you.

The next question comes from David Togut with Morgan Stanley.

Please state your question.

Thank you, Art, recognizing it's a little early yet, can you give us a sense as to how you're thinking about '05, at least in terms of broad brush strokes?

If you look at some of the macro drivers you cited as pressuring '04 rates, Brokerage trading volume and employment?

And perhaps some thoughts as to whether we continue to see this above trend R&D, you know, in '05 as well.

It is a little premature since we're just beginning '04 for me to start talking about '05.

What I can tell you is, that some of the investments that we've made, some of the incremental investments that we talk about in the release, and that, you know, we've discussed before, are in both the development area and in getting some of our products to the market earlier, and beefing up our sales force.

To the extent that those are there, I would presume that they should start generating revenues, incremental revenues for us.

Which would play out hopefully within '05.

Profits again, it depends upon the mix of the products as to when the profits will come in.

But it really is very premature for me to be talking about macro economic conditions.

As we've seen over the last six months, it's been very hard for us to predict what is going to happen in the next three months to say much less what is going to happen over the next year.

Obviously, if, you know, if the economy gets better, the Brokerage gets better and in the fall interest rates go up, we are going to do better but it is really premature for me to talk about that.

When I look at the level of R&D investment, which is ticked up a little bit now, because of these incremental investments, I believe that those levels are required.

And therefore, I think you should think of those levels as being embedded into our ongoing investment focus because development of new products is a key part of our product leadership strategy.

And we will be spending the money necessary to continue to be a product leader.

Okay, thank you.

The next question comes from Greg Cappelli with CSFB.

Please state your question.

Thanks, Claire.

Karen, should we take that -- Art, that last comment I guess to mean that the 200-plus million that you're putting back into the business is a level that we can expect to see from a re-investment standpoint up and beyond perhaps previous levels going forward as you continue on?

Yeah, I'm trying to say that we are creating a new level, a new base level with this level of expenditure and you should look at growth off of this level as opposed to thinking this is a one-time investment.

The reality is, some of it will be one-time.

Some of it won't.

Some of it we'll replace with other things, so it not as pure of an answer as the one I'm giving you.

But clearly the direction of the thinking that I want to you have is one that says yeah, just presume this is embedded in our cost structure going forward.

Okay.

I understand.

Just two quick follow-ups.

One on the Employer Services, one on Brokerage.

On Employer Services, can you update us in terms of -- I know, I think it was a couple of quarters ago, you were talking about when you started to talk about this reinvestment, you know, sales turnover, and having to retain key people within that division, on the sales, and customer service side, can you update us there on how that is trending?

Yeah, we actually finished an excellent year in terms of our Employer Services, sales turnover.

We were over 10 percentage points better in our retention rate than we were in the prior year.

So we think we're doing some of the right things and in making sure that we are treating our people right and that we're giving them the right environment in which we can retain them because we think experienced sales people are very important in terms of where we are going forward.

In our Small Business Services segment, in the low-end of 50 and under, we improved even more than that, that 10%.

So we really are feeling very good about where we are as we position ourselves for this next year.

As we talked about when we were talking about these investments, we're actually beefing up our sales force in Employer Services.

So we're going to be -- at least our plan is to be up around 200 people over -- in '04 from where we are in '03.

So, we think we have more people, we think we have better retention, which gives us more tenured people, if we have the products, and we work on the products, we think we're going to have the right products in the marketplace.

So we think we've done the right positioning in order to position ourselves for a return to growth as we go forward.

Very helpful.

The Brokerage Services question, was just a volumes you mentioned, Karen, did that pretty steadily pick up throughout the quarter?

Yes.

Yes, clearly May and June were running above April.

And July at the moment is -- in the same range.

So yes, it has escalated.

Great.

Thank you very much.

The next question comes from Adam Frisch with UBS.

Please state your question.

Thanks, good afternoon.

Going to Employer Services for second.

Operating margins were, I think, down year over year after being up for the prior three quarters.

Was there severance included in there or could you explain kind of what happened this quarter, the reversal of trends versus the prior three?

Right, within Employer Services there were restructuring charges.

So -- of the 60 million dollars in restructuring charges, 35 million were in Employer Services, so without -- without the restructuring charges, we would have improved by 1.2% for the whole year EDS, in the quarter clearly was impacted by that.

But also had some additional investments, when we started these investments, we actually started some of them in the fourth quarter and some of those hit Employer Services also, but as Karen is motioning to me right now, it is very small.

I guess we should start doing video calls. [ Laughter ]

If you could provide some color on the demand in pricing trends within the EVS major accounts segments within Employer, that would be helpful also.

Was that demand and pricing trends?

Yeah if you're seeing the customers coming back and also the pricing.

Yeah, if I talk about our overall -- the sales and what we're seeing in the market, we end up each year around June 30 with sometimes our internal structures driving our sales results.

So people who are having a good year and are gonna make a good year, really push at the end of the year and get good results, and people who given up, kind of give up and defer their sales into the next year.

So it gets a little harder when I look at a short term to give a response like that.

I would say that in the -- having said that, now that I've qualified it sufficiently, I will give you the answer.

In the Small Business arena, we're finding opportunities, and we are selling.

We're not finding -- it is not robust.

It is kind of a continuation of where we've been.

But clearly, there are opportunities.

In the major accounts area, we probably had the biggest impact of what I was just talking about, where we really ended the fourth quarter of last year very slow.

But then as we -- in the very early parts of July, we've been strong, so it is very hard to measure exactly what is going on in that market, because it is too tempered by our year-end activities.

In the national accounts arena, we had a very strong year overall last year.

We finished the year strong and we started okay this year, also.

So a little bit mixed by market.

The other part of your question related to pricing.

I'm not seeing significant change in pricing.

There is pricing pressure in our businesses.

More so in the national accounts arena and in the parts of the major account arena.

More of it around our implementation processes.

But I don't think there has been any notable change over the last few months that I would call to your attention.

Have there been any -- that was helpful, Art, thank you for that.

Karen, has there been, between sales growth, retention and pace for control, anything across your three major markets where you see one kind of a lot better or a lot worse or are they all kind of generally in that range you spoke about on a prior question?

Well, first in sales, the growth has clearly been stronger national accounts than the other segments.

Stronger and majors has been the weakest of the segments in the year.

So that's the way it would lay out.

And that -- as Art said, was for the quarter, it continues for the year.

In retention, all of the segments had good improvement in client retention for the year.

And in pace for control, I would say about even.

I think as we went back a quarter or two, we might have seen a little bit higher fall off at the National Account segments and a little bit more stabilization at the Small Business Services level.

Interestingly in this last quarter, it really was closer to even.

It was almost inverted in that the National Account piece was a little bit stronger than Small Business Services.

But not different enough to really make a difference.

So very close in all three segments.

Okay.

Switching gears on to investment strategies.

Are you changing at all with regard to your strategy going forward for float balance or -- still kind of duration is still kind of of in that high one, low two's area?

I think we're a little bit shorter now, a little bit, as we ended the year, where our mix is a little bit shorter, call it duration of about 1.6 to 1.8 years average.

And as I look at '04 I think we will stay in that area.

How much of your investment income was due to breakage in this quarter?

About 7 -- we took about 7 million of realized gains in the portfolio for the quarter, ending up being a little under 30 million for the year.

Okay.

And then, Art, last question.

Your assumptions included in your guidance regarding the major inputs to your business interest rate, employment levels, things like that, what are your numbers include for '04?

You said in the press release that nothing major - no major improvement but if could you expand on that a little bit?

Yeah, I will take that one.

For the interest rates, we always try to use the most current rates that are out there in the yield curves reflect that -- with our re-investment mix we will probably be about 3% overall yield for the year.

Down from 3.9% for the full year.

That will start off a little bit higher.

So I would anticipate we will start the year in the first quarter probably around 3.3%.

And as we go through the year, it will trickle down a little bit and we will end the year just under 3%.

And in terms of employment or as we -- we plan pace per control, we are assuming flat.

Flat to fiscal '03, so no decline, no further decline but we're not counting on an improvement in pace per control, either.

And then in terms of Brokerage, which is the next biggest factor, in terms of trading, we're still assuming a somewhat of a decline in volume, that's year to year, so you know, call it 5 to 7% decline in trade.

Some of that is clearly because as we started fiscal '03, we still had -- we still were at a higher trading level and we hadn't lost some of our more profitable retail clients at that point in the first quarter.

We were still processing for Scott Trade, for example.

And so some of that is just still the effect of having that be into the full year.

So we're still thinking it is going to decline about 5 to 7%.

Having said that, it -- we're planning a range of about 1.2 million trades per day which is about what it's been running, the 1.2, 1.3 million trades per day right now.

In July, we are running slightly over our plans amounts, and we hope that continues.

Okay.

Are you forecasting segment growth levels?

For broker and employer for the entire year or no?

For Employer Services, our growth will probably be double digits, I think around 10% next year.

Remember that that includes the acquisitions, most notably the ProBusiness and the Scutter Retirement Services acquisition that we did late in fiscal '03.

So I would think about the internal growth rate in ES being more like 5 to 7% but with the acquisitions it will be double digits, I think 10%.

In Brokerage, it will be around -- we're planning around a 5% decline in Brokerage overall.

That incorporates what I just said about the trading levels, the back office will probably be down about -- we'll say between 10 and 15% and Investor Communications will be about flat.

So it will be bring it to about 5% decline level.

That's the guidance we're giving at this point.

Thank you very much for answering.

You're welcome.

Thank you.

Before I take the next person let me please remind you to limit your questions to one or two. [ Laughter ] The next question comes from Jennifer Dugan with Merrill Lynch.

Please state your question.

Thank you.

I'm wondering if you can give us a little bit more detail or insight into the ProBusiness acquisition now that it is closed?

What kind of revenue contribution you're expecting for in '04?

What, if any, kind of repair work needs to be done to the sales force there?

We had heard there were some retention issues during the acquisition period, et cetera.

And also, I'm sorry for the multipart question, also, how is the tone of the conversations with these ProBusiness clients been going now that the deal is done?

I'll start off with the easy part.

Which was the revenue expected.

So I'm looking at somewhere in the range of $150 million of revenue that we anticipate for the year.

And I will let Art comment on the clients conversations and the tone.

We've had a number of conversations that you would expect with clients.

I think as we discussed in some of our prior calls, a meaningful percentage, I don't remember exactly what it was, like 30 or 40% of the ProBusiness clients had at one time previously been ADP clients.

So we have spoken to them.

So far, the reactions have been positive.

And we're feeling very good about it, but the reality is you have to let it play out and we will see how it plays out.

We have factored in some retention assumptions into our overall planning.

And it is way too soon for us to be able to give you a handle on where we are against those assumptions.

But if you asked me about the feeling that we're getting, we're really feeling very positive about it at this point in time.

We do have some additional services that we can offer to those clients, we have some global offerings that are attractive to a number of the clients, so we've had some very positive conversations, but it is really premature for me to respond one way or the other.

There was some turnover in the sales force, as I understand it, prior to the acquisition, I haven't gotten numbers or any changes that have occurred since we have taken over, so I can't give you a current update on that.

But I can tell you if there were anything happening on a significant scale, I'm sure I would have heard about it.

So I think you can get some comfort from that.

Yeah, I think I would just add, just for clarification that even -- even though it seems like a long time ago where we first said they we were going to -- we intended to acquire ProBusiness, we did get clearance at the end of June.

And the process really kept us out of the conversations for a long time, so we've really just started to get a little bit deep with the folks and the clients at ProBusiness, really just a couple of weeks since the end of June.

So, it is a little bit early and I will anticipate we will have more information at the next time we talk.

Great, thanks.

The next question comes from Dirk Godsey with J.P. Morgan.

Please state your question.

Good afternoon.

I have a fairly high level question about the Brokerage Services business and I was wondering if you have separate for us a cyclical issues that really you can't do a whole lot about, from some of some of the secular issues that might also be holding back the recovery of that business?

And what you can do to address those secular issues going forward?

Sure.

The cyclical issues are I think reasonably well known as we look at the activity.

I think the secular issues are troubling and obviously are out of our control.

One of them, and the one we're probably most focused on in our back office business, and it obviously affects our Investor Communication business also, is the level of retail involvement.

The number that Karen gave before, when she said it declined to 27% and are -- just our basic Brokerage system, are around 30% of our trades, when you add in some of the other service -- some of the Canada and our SIS business.

Those numbers are remarkably low by any historical trends that we've seen.

And they have come down very, very dramatically over the last four years.

So the real question is will those rebound and at what level will they they rebound?

I believe that since we get paid more for per trade for a retail trade than we do an institutional trade, the presence of the retail investor is very important to us.

Another thing that has happened within that business is as the industry consolidates, and as the larger players get more -- acquire more and more of the trading volume, our pricing structure is a tiered volume pricing structure.

So that as the volumes for a large player go up, even if they acquired one of our existing clients, for example, we will generally get less per trade than we would have gotten in under the old method where they were separate companies.

So therefore, we have both a revenue pressure from volume and we have a pricing pressure, and those two are secular trends that -- so the retail buying and the consolidation are secular trends that I think are something we have to be aware and that we have to take actions, which we are working on strategically but I'm not readily to share at this point, in order to create incremental opportunity for us.

A lot of the retail piece of what I just said plays into the Investor Communications side, because that's based upon positions, retail positions, where people own a lot of different companies, even if it is a few shares of each, has a lot to do with the number of mailings that we have.

The other thing is more cyclical, that goes on, Investor Communications, and that's the one-time activities, I think as the market returns, as IPOs come back in the market, as there are more contested elections, it will get to a more normal level of activity.

So hopefully, in that answer, without going into too much depth I separated out some of the key cyclical and key secular issues.

That was helpful.

Is there a time line have you in mind relative to when we might hear more about how you plan to address some of the secular issues that seem to be more challenging?

As we get into a position where we're comfortable relating our strategy and not worrying about the competitive aspects of it, we will share those with you.

Thank you.

The next question comes from Randy Mehl with Robert W. Baird.

Please state your question.

Good afternoon.

I want to start just with a clarification.

What level of gains to you assume for fiscal '04 as it relates to interest rates?

And then were the rate numbers that you threw out, Karen, including or excluding any gains?

Well, the yields we talk about generally excluding gains.

We don't usually plan for gains in a portfolio.

In reality, the normal maintenance with the size of unrealized gains, which by the way at the end of June was close to $365 million, obviously we generally have them.

I would not suspect that the activity for next year would be dramatically different than it was for fiscal '03.

But having said that, we'll see.

We don't generally plan for a lot.

But I would assume we will have a little bit each quarter, is the way to think about it.

So is it fair to say that maybe based on the current rates, 2.8, 2.9% is sort of a reasonable bottom in terms of what you should earn in the portfolio?

Well, we -- right now, as we look at it, we could be exiting the year about -- at those kind of yields, somewhere between 2.7, 2.8, 2.9, I think that's is the way we would exit the year.

Okay and then I just wanted to ask about the ICD trends.

What were -- what was position growth or decline in the quarter, and what are your assumptions behind ICD?

Actually, the position growth for the quarter, I'm not sure exactly what it was for the quarter.

Was it 1%, minus 1%?

It was minus 1% for the full year so it probably wasn't that much different for the quarter.

Think of it as negative one and the prior year was probably more like 10 or 11.

When I think about Investor Communications, there are two things.

One is the position growth.

Obviously, the number of people that we have to communicate with in a -- within a proxy delivery drives the volume.

And the other is really the number of jobs, or the number of contests, the number of specials, the number of opportunities that we have to communicate.

So position growth is one aspect of it.

We're looking at next year, around the same, so we planned about flat or down 1% for next year as well in terms of positions.

And then in terms of the number of pieces, I said before that the pieces in Investor Communications Services were down about 6% in the quarter.

We really had a very -- another very slow quarter in terms of specials, in terms of mutual fund delivery, so in particular, the mutual fund activity, registered mutual funds were down 77% in the quarter.

It sounds like a huge number.

For the year, it was down 42%.

Our specials and contests were down 64% for the year.

So these types of jobs, not the normal equity, you know, annual proxy statements but these special types of jobs were down significantly.

And that is the other piece other than stock record growth.

As we look at next year, we're assuming around the same kind of activity, maybe a little bit more proxy -- I'm sorry, mutual fund activity as we see a little bit of signs of improvement there.

But again, we're assuming about flat or minus one in the stock record growth.

So when you put it all together, you expect that division to be roughly flat?

For next year, when you put it all together, it will be -- right now I'm thinking a slight decline.

There are other pieces in the division that, you know, we get into a Graphics Communications business, which is part of what we call the Investor Communications Service, which is research, prints and financial services print, which is still -- we're still assuming a decline in the research print activity.

It is still very low, so when you put it all together we're still talking about a 1% decline or so for next year.

Great.

Thank you very much.

I appreciate it.

You're welcome.

The next question comes from Thatcher Thomas with CIBC World Markets, please state your question.

Karen, question for you.

Last quarter, you mentioned that if trading volumes were running in Brokerage Services what they ran in the third quarter, then '04 would be roughly 40 to 60 million dollars lower than '03 on the pretax line.

Obviously, things have changed.

What would be your forecast now in light of the last three months?

Well, our plan calls for a decline still in the -- in the back office side of the business.

And right now, our plan and our guidance still is around that number.

Call it 50, 60 million of declining revenues.

Think of that as high margin revenues.

Because the comparisons still to the fourth quarter -- to the first quarter of fiscal '03 are very difficult.

So even if -- even though we've been up in May and June, the average for the fourth quarter in terms of trades was a 1,000,290 trades per day.

That is still lower than what we started the year at which was over 1.4 million trades per day, so the comparisons are still difficult even though May and June happen to be a little bit better in terms of volume.

Okay.

Thank you.

The next question comes from Pat Burton with Smith Barney.

Please state your question.

Hi.

My question has to do with two things, number one, would you anticipate any additional investment being required in the Brokerage business, in the Brokerage products as we move forward?

And the second part is just an update on anything in the acquisition pipeline generically.

Thanks.

We're always investing in our Brokerage product set.

And I think the answer is very clear that we would like to continue to extend our offering.

By offering more services to our existing clients as well as getting additional clients.

In order to do that we have to keep developing the incremental product that will help generate those incremental revenues.

So I think it is appropriate to assume that we will continue to be making development investments.

And we will be continue to focus on those opportunities that are going to generate revenue growth for us in the future.

So absolutely don't think of any diminishing in the relative development investment in Brokerage.

Acquisition pipeline.

What was the part on -- what was the question on acquisitions?

Just generally where you stand, how acquisitions look in terms of pricing?

Things like that.

Thanks.

Yeah, we are actively talking to a number of different opportunities right now.

They are in various stages.

Pricing has become more reasonable in our view than the impossible levels that we thought it was at two or three years ago.

But still doesn't reach that level where I think people really should be when they have the great opportunity to sell themselves to ADP but we may never -- we may never get to quite that -- quite that level.

I think overall, our appetite is there for acquisitions.

We are engaged in conversations.

But the nature of this game is until something happens, nothing happens, and so we really don't have anything specific to report, nor do I think that I want you contemplating any significant acquisitions as you think about where we're going.

If it happens, we will certainly be -- you will be among the first to know.

Thank you.

Okay.

The next question comes from Stephen Weber with SG Cowen.

Please state your question.

Yes.

Good afternoon.

A couple of clarifications.

Number one, the -- you mentioned 60, 80 million dollar negative swing in floated investment income.

Is that apples to apples?

Or does that include the float from ProBusiness and the hit to your investments from buying ProBusiness.

That's one.

Number two, Karen, I look at the float balances and know ProBusiness had a bunch of float, and it is only up about 4 or 500 million dollars.

Is this there something funny going on there in terms of the compares?

Yeah, the 60 to 80 million does include both the interest on client funds for ProBusiness, and ProBusiness average daily balances were -- a little over 900 million, somewhere between -- call it 920 million.

And it also includes the loss of interest on the cash that we paid for the acquisition.

So the first answer to your question is yes.

When you look at the floats Steve, if you're referring to the float balance on the condensed balance sheet information that we provided, think of that as a point in time, June 30th obligation, assets and obligation.

It's not the average during the year, so it is greatly influenced by cut-offs and the day of the week that June 30th is.

So actually, if you take out the ProBusiness client assets and obligations, the number would have gone down year to year for the ADP.

The other ADP client fund.

Because June 30th was I think a Monday this year.

And last year, it was -- it was not.

And so it is just greatly affects the timing of when we make those payments.

It has really nothing to do with real balance growth.

Okay.

I was surmizing that.

If I could follow-up on one.

Art, what are you, in building your revenue model, for Employer Services, what are you assuming in terms of new sales growth for this year?

We actually have spent a lot of time on that question, as you might anticipate, and we are looking at a year of double digit growth in our Employer Services sales.

And I say that in full recognition that we haven't delivered double digit growth over the last two-plus years.

We think there are a great number of reasons for it.

I touched on some of them earlier when I talk about the build-up of the sales force, I talked about the quality of the products that we have, within the market, I talked about the weak year-end and some of our markets, where I expected to get off to a -- a faster start this year.

So -- on all of those, we have reasons for optimism.

If you really look at what happened over the last couple of years, our fourth quarter has been much weaker than what the historical patterns were for the prior decade.

And from what we would have expected.

It is our belief that if we get off to a good start and if we are somewhere around our plan, as we enter that fourth quarter, the fourth quarter comparisons should become much easier, which will help us fuel this double digit growth.

On the other hand, if you look at our overall forecast for the year, we gave a wide range in our forecast.

We gave $1.50 to $1.60 so we have room for upside surprises and maybe even a downside surprise so -- in the overall sales scene.

Okay.

Thank you very much.

The next question comes from Greg Gould with Goldman Sachs.

Please state your question.

Thanks.

It is just a follow-up on the question about the sales pipeline.

Is there anything different in the pipeline right now that you can see that could either translate into bookings in Employer Services, stronger or slower than anticipated?

I think the month of July didn't tell us very much.

I mean other than we are basically on plan.

I actually had a conversation with the head of our Employer Services business this morning, where we were talking about whether the PeopleSoft issues right now might be creating additional opportunities, for us, and the answer is that's not clear.

Our national account sales have continued to be strong kind of throughout this period.

Apparently there are some deferred decision making that is going on, whether or not those deferred decisions will come to us or not, you can't tell, but that deferred decision is on top of a good success rate for us, so that is actually means that the pipeline is reasonably robust.

But other than that, there is nothing that I would point to.

Now, I would add, I think even though, as Art said, we're running fairly close to plan as we start the year, all of the conversations seem to be good, the people are feeling good about the way they're starting the year.

Clearly, when you look at the plan skewing, and Art certainly said that we allow ourselves a range in our sales forecast, because our guidance contemplates a possible lower outcome, our beginning of the year expectations should be lower.

We will start out the year with lower sales, call it flat, in the beginning.

And then grow up to the -- as we exit the year.

So, I know you said that, Art, I want to emphasize that again, because the fourth quarter this year, '03, and previous years, have been quite weak, therefore the grow-over comparisons looks so robust.

So think about a very flatish kind of beginning in sales and then escalating to that sales growth at the end of the year.

And as I said, I think people feel pretty positive about the way we're starting the year right now and people are on plan and feeling the pipeline is good.

Karen, one other question.

Do you have a sense or how should we think about the stepped up investment spending progressing by quarter in fiscal 2004?

Is it more weighted toward the front end?

It will grow during the year.

I don't have specifics on that, Greg.

But we've got a pretty good start with -- as Art mentioned earlier, we started a little bit in Employer Services in the fourth quarter of '03.

But it will clearly ramp up during the year.

It is not right out of the box.

Some of it involves hiring people.

And development.

And things like that.

And sales.

We said we were going to invest and increase our sales force by a couple hundred.

We're making progress but clearly there will be somewhat of a ramp by the time we get to the full level.

Thank you.

The next question comes from Kartik Mehta with Midwest Research.

Please state your question.

A question on Employer Services.

In the past what has been your experience in terms of new business formations turning into new sales, on the small company side of things?

New business formations in a good economy has been a -- very important part of our growth.

A lot of our accounts come to us for -- as their new accounts that are getting formed.

We have significant bank referral relationships, we've been beefing up our CPA relationships, and so it is generally a -- a big positive.

Now, obviously, over the last couple of years, the formation of new businesses has been much slower and therefore that's impacted us, but I would put that in the -- within the cyclical world.

So if the -- if we get back to the level of new business formations that we were in, in the mid to late 90s, that certainly would be a positive for us.

Is there a lag, I guess, are most of the clients or some of the clients that you sign up, what would be the average number of years they've been in business?

I guess what I'm trying to get to, if we start seeing an increase in new business formations is there a six month lag before that results in sales?

Or is it a year lag before that results in sales for ADP?

Actually, if you -- if they're small businesses that are starting, which is what most of the new business formations are, it is relatively quick.

I mean the businesses form, they have to make a payroll decision, and they're going to make a payroll decision somewhere in the very early months.

As you get into larger businesses, it is rare that you get a new business formation that's larger.

So that's where the lags would really -- would really take place.

So new business formation, generally are relatively short connection time.

On the pays per control, Karen, what is the sensitivity in terms of pays per control, if you go from a negative one to flat, or flat to upwards 1%.

What's your sensitivity to earnings from -- for that particular metric?

I think that the -- in general, the pays per control, - First of all, let me clarify, when you talk about pays per control and these trends we're talking about as a retained base so it is only sort of a same store sales comparison.

We do have some fluctuations in pays per control, based on the number, based on sales trends, and other frequency issues, but in general, I think of it as worth probably around 10 million. 10 million if it is not the retained base, overall, in terms of revenue, on an annual basis.

On the retained -- if you're just looking at auto pay, it is about five.

So you know, the segment that we measure and I would talk about, it is about five.

If you think about the whole base it is closer to 10.

Thank you very much.

The next question comes from Bryan Keane, with Prudential.

Please state your question.

Hi, good afternoon.

My question is to drill down on Employer Services sales growth, I think that is the key metric you guys have pointed to.

And that struggled over the last year or so.

Is that due to secular and cyclical issues do you think, Art?

Well, I think it is very clear what the cyclical issues are.

The secular issues are always harder -- harder to find.

Now, we look at some of the things that we're doing internally in our sales force and we always see room for improvement.

In terms of things.

I wouldn't call those tied to the cycle.

I talked to that -- I would refer to those as things that we have to do, that we have to execute better.

If it is talking about macro trends that are taking place in the market, I don't think there are major macro trends that have really affected our ability to continue to grow and grow very well in Employer Services.

I guess my question on the major, and then the, you know, some of the bigger payroll customers that you have, do you have to -- in order to grow sales there, do you have to basically have competitive wins?

Or do you have to get people to move from in house to outsourcing?

Well, our -- the market share we have in majors is very significant.

I don't remember what it is.

But call it -- you know what it is, Karen? 60%? 60% or so of the market.

What we have said is we can continue to gain share on the service side, as we compete against the normal competitors, but really, the key to accelerating that growth a lot is getting more of the in house users to move to ADP.

And we've been talking recently about a product called Total Choice, which we think brings to the in house user all of the benefits of in house use as well as the opportunities of having a service solution.

So they get to review the payroll.

They get to make changes to the payroll.

They get realtime response on their payroll and yet they also can get some of our tax filing services, our wage garnishment, all the other types of services that we offer.

That is just entered into the market basically on a test mode right now.

But we think that that is something that is important to track.

Because if that is successful, then that will change the relative mix, we believe, more to service from in house and will be an important element of growth.

So we have to keep winning against the service competition.

And expanding the service offering, as well as getting additional revenue from those existing clients, and we have to convert some of that in house system and we think we're very close to the right product, which will put us in a position to be able to do that.

The investment that you're making in Total Choice, and Pay Expert and Enterprise platforms, that is going to take a while, it looks like, for that to pay off and move the needle or is that something we can track this year?

Or you know, next year?

Well, each one of them is a little bit different.

Pay Expert is in the market now, we have to create a another version of it, we should get a relatively quick turn on getting some incremental sales there.

Similarly, in Enterprise, it is a matter of upgrading.

Total choice is a new platform.

It will take us longer but certainly, as I was just referring to it, it is important strategically to us to be able to succeed there.

But I certainly would expect the path to be longer, though.

Okay.

Great, thanks.

The next question comes from Mark Marcon with Wachovia Securities.

Please state your question.

Good afternoon.

Could you give us the operating or the pretax margin assumptions that have you for Employer Services and Brokerage services that is inherent --

I didn't hear the -- for Employer and Brokerage, for what?

The pretax margin assumptions that you've got.

You mean with -- for our guidance for '04?

Right.

For Employer Services margins, I would think that -- I think next year you should expect a decline of about 225, 275 basis points in margin.

Why is that?

One, we we've got the acquisitions to absorb.

The ProBusiness and Scutter acquisitions will bring, plus tax credit services and some of the other ones that we've done, call it over 200 million of revenue, with very low contribution on the pretax line early on as we work through the transition and integration of those businesses.

Additionally, the investments in Employer Services, including the Employer Choice investments, I think we're going to end up spending 80 to 90 million of the incremental investments, will be within Employer Services, offsetting the savings, call it 50 million or so savings, from the restructuring charges that we did in fiscal '03 within Employer Services.

So those are the things that I consider that I think will impact the margins next year.

Additionally, some of the faster growing businesses within ES, like the PEO for example, has a lower margin due to a pass-through component.

And some of the other add-on services are initially lower margin, and although some day will be the same type of margins as a traditional business, but some of those services are growing at a faster pace than the Payroll business.

So that impacts the margin.

And lastly, majors, which is the slower-growing of the segment, is our highest margin area.

So as you add up all of those thing, the things that I said, that would cause what I'm looking at as a 225 to 275 basis points decline in margin next year for Employer Services.

Moving on to Brokerage, I think next year, the margins will be about flat in Brokerage.

Some of the restructuring activity that we did in Brokerage will certainly take effect in fiscal '04.

We've announced that we were getting out of our time and materials business, and our Wilco, U.K.

Processing business.

The decline in the back office which is the higher margin of the two segments will make the margin in the back office side go down again in fiscal '04.

And then the Investor Communications side, margins will improve next year.

And so those will more or less offset each other and I would expect that the margins in Brokerage will be about flat next year.

Great.

And you can give us a feel in terms of ES, what percentage of ES is now beyond Payroll and what was the discrepancy in terms of new sales growth and Beyond Payroll versus traditional Payroll?

Well, the components of the Beyond Payroll in fiscal '03 were about 34% Beyond Payroll, 66% Payroll.

As far as a sales breakout, I think that the Beyond Payroll sales growth -- well, I don't have an exact specifics, by product, Beyond Payroll versus traditional Payroll.

But clearly, some of the higher growing products are in the Beyond Payroll category.

The PEO, for example, sales growth last year was 24%.

We're thinking even higher for fiscal '04.

Our Total Pay product is one of the faster growing products, although that wasn't as healthy of growth in fiscal '03, we didn't have a high growth sales year in Total Pay, we expect a good sales growth in '04.

Our Time and Labor Management product is also expected to be a strong grower.

So those -- those products Avert, I should mention Avert because sales have been -- we are expecting good growth out of that as well.

So I think those products are helping the sales growth of those -- those additional lines.

But having said that, you know, we're also expecting very good things out of the investments that we talked about, it is the products that we talked about investing in, Total Choice, Expert Series and Enterprise are now are growing very well from a sales growth standpoint.

Again, what Art said, was we will see the revenue turn into a big business for Total Choice.

Yeah, because it is very early on, but the sales of those product platforms are very good, in the early stages and I expect to see those continue.

If I looked at the plan for fiscal '04, we will probably move the needle up a little bit.

In terms of components of mixed Beyond Payroll, Payroll, so maybe 35% Beyond Payroll and 65% Payroll but also keep in mind that that includes the acquisition of ProBusiness which was largely Payroll and Tax and did not have a big component of the Beyond Payroll service, which by the way is a nice opportunity for us to cross-sell into that base.

Great.

And last, last part of that, is just what your expectation would be for price increase, in ES.

I think we're expecting similar pricing actions in '04, as we did in '03.

The same level, not percentage necessarily but around the same level of pricing actions.

Same dollar level, lower percentage level.

So --

Around 2%?

Under 2% price increase.

Great.

Thank you.

You're welcome.

The next question comes from Jim Kissane with Bear Stearns.

Please state your question.

Thanks.

Just a quick question, Karen.

Can you break out the internal revenue growth for Employer Services in the fourth quarter?

Thanks.

Sure, it was 6% in the fourth quarter. 5% overall for fiscal '03.

Great.

Thank you.

The next question comes from David Farina with William Blair.

Please state your question.

This is Mary O'Toole for David Farina I just have a clarification and quick question.

The investments that you talked about in today's press release, those are in addition to the investments you talked about in March, is that correct?

No, the press release talks about the overall sizing of those investments.

We talked in March, we talked about 150 to 200 million of incremental investments along the three lines.

Growth initiative, Employer Choice initiative, and some cost actions.

And all the things that we talked about in the press release relate to that same number.

It was at the high end of the range closer to the 200 million that we ended up spending.

Okay.

And are there any changes from March about how are you going to actually allocate those investments?

Any material changes I should say?

I realize most of them will be within ES, are there any material changes in how you're going to spend that money?

No.

No, I think when we originally talked about it in March and in April, we didn't really give sizing of the categories, but we always said we would spend more of it in Employer Services, and as it pans out, that's where we're spending the majority of the investment funds, in Employer Services.

Okay.

Thank you.

You're welcome.

The next question comes from Marta Nichols with Banc of America Securities.

Please state your question.

Great, thanks.

I'm wondering, just going back to Brokerage Services, if you could talk about what you're seeing on the pricing side there?

And whether or not you're still feeling some of the, you know, secular issues, specifically hurting pricing, and the lower profitability at your Brokerage clients without having any kind of lasting impact into '04 and beyond?

There continues to be pricing pressure within the Brokerage business because the -- in part because the clients have been weaker.

We have generally been able to either renegotiate longer contracts, or to do something where we did accommodate some of the pricing needs of our clients.

I would love to say I'm current enough to tell you that that has stopped as things got better the last few months.

I'm really not, so I can't tell you whether or not there has been any short-term change within that.

I can tell you that as we are looking forward, that is not one of the factors that we're thinking is going to have a significant impact in the lower price per trade that we were talking about before.

So we think it is the other factors, it is the grow-over from the consolidation, it is the larger accounts doing more revenue.

It is things like that, that are going to affect the revenue per trade, much more than -- much more than the question you asked.

Okay.

And Karen, can you -- I'm not sure if you mentioned this when were you talking about trends in Brokerage, but can you talk about what revenues per trade was in the quarter and the year?

The revenue per trade was -- it declined about 13% in the quarter.

And I think it was around the same for the year.

In that same range.

Okay.

And then just a couple of quick housekeeping questions.

Can you remind us what you're looking for for capital spending and give us some thought of what you're thinking of on the tax rate for '04?

Sure.

I think there will be an uptick in capital spending next year.

Some of this related to the investment programs that we talked about.

And some other perhaps facilities spending.

So my forecast right now, it is about 150 to 175 million in capital spending for next year.

Which is higher than we've been in the last couple of years.

But still very modest.

But still very modest.

Some of it, I think, is a little bit of a catch-up.

So -- but I think the range is warranted.

We -- our original plans may have been a little bit higher than that , but I would say it probably would be the 150 to 175 range.

The tax rate, we're assuming will actually go down and improve to about 37 1/2%.

So we had a -- if you noticed in the quarter, we had a little bit of decline in the tax rate, as we resolved some state tax issues.

And we are anticipating in fiscal '04 another decline in the tax rate, reflecting some more state tax reductions, and some -- and some improvement in some international issues that we've been working for a while.

So it should be around 37 1/2% next year.

Great.

Thank you very much.

The next question comes from Robert Tung with Smith Barney.

Please state your question.

Yes, a two-part question.

Regarding your Pay Expert product, any change in the relationship with IBM on that product?

And also, your thoughts on -- I know Ceridian, on their last call, mentioned potential partnerships down the line with IBM regarding kind of Payroll, which hasn't been IBM's BPO specialty.

And the second part is, just kind of, the expected share count for fiscal '04.

You can do the share count, Karen.

Go ahead.

Well, the share count one is an easy question, which is, I think we will see an -- I'm assuming it is going to be somewhere in the, you know, 608 million range.

It is going to be -- you know we have our normal issuance of shares for the employee programs, and then we have the timing of when we bought purchases during the year.

We never include share repurchases.

Future share repurchases in our estimates, in our forecast.

On the other question, about the Expert series, and IBM, perhaps you can expand a little bit on your question.

I'm not sure I understand the relationship with IBM part of the question.

Oh, okay.

Because maybe I was looking at an old press release on your web site.

Seeing that -- I think IBM provides kind of the software platform for Pay Expert?

Is that correct?

Pay Expert is a front end for our -- an Internet front end for our Auto Pay System which does run primarily on IBM equipment.

But there is no -- there is nothing in there that I can -- I can make sense out of in terms of what the specific that might create an issue would be.

So I must be missing something here.

Let me rephrase.

Has IBM ever approached you guys regarding kind of more of a partnership to supplement their kind of HR / BPO efforts because of your expertise in payroll?

You mean, as part of their outsourcing, their total outsourcing efforts?

Where they're trying to take over total outsourcing and they're trying to enter into it?

Yeah.

We have had discussions with IBM, as we have with virtually all of the large outsourcers, who have looked to us from time to time to provide payroll and human resource services, as parts of those things.

So yes, in a very general way.

In a general way, okay.

And just getting back to the share count question, within that 608 range, how much of it is from employee incentive plan stuff?

Is it something like a plus -- a plus 6 million, Karen?

That is about -- that is actually is about right.

I think each year, we're issuing -- I don't know, 4 million, 6 million in terms of shares, whether it is the purchase plan, option, dilution, things like that.

Okay.

And then just if I may, any thoughts on a slight increase in the dividend in fiscal '04?

Actually, I kind of referred to that earlier, and I said that that will be a Board decision that we will review as I am sure most companies are, we make that decision basically at the end of the year.

And as our Board meets at around that time, we will be prepared to address it.

I'm not really prepared to address it before then.

Right.

You mentioned something about January?

Yeah.

Thanks.

Okay.

Thank you.

Ladies and gentlemen, we have time for one or two more questions.

The next question comes from David Grossman of Thomas Weisel Partners.

Please state your question.

Thanks and sorry if I missed this, Karen, but can you just review what the client and corporate average float was for the quarter and the year?

And how we should expect that to trend with ProBusiness in fiscal '04?

The average -- the average balances for client funds, David?

Yes.

In the fourth quarter, the number was -- was just over 11 billion.

That did include some -- I'm sorry, forgive me.

I'm looking at a future forecast.

That would be nice fourth quarter already to get to --

That's '04.

But it was 9.6 billion in the fourth quarter of fiscal '03.

And again, ProBusiness contributes just over 900 million of average daily balances.

As we look to fiscal '04, we are anticipating an uptick, and I'm going to say it is over 10 billion on average for the year.

That does include, again, the 900 million in Pro funds, so think of it in terms of around 5% growth would be a normal, excluding Pro, type of balanced growth that we're expecting.

Okay.

And just to clarify your comment about the rates, what in fact was the fourth quarter yield?

The fourth quarter yield excluding gains was 3 1/2%.

And your guidance was you think it will just exit the year at a little bit under 3, right?

I think next year we should average somewhere around 3% for the year.

We will start the year over 3.

You know, call it 3.3 or so.

And I think by the time we exit the year, we will clearly be under 3.

Great.

Thank you.

Thank you.

Our final question comes from Lloyd Zeetman with Bernstein Investments.

Please state your question.

Okay.

I thought I was going to get left out here.

Never Lloyd.

Never.

Well, thank you, Art, I appreciate that.

Okay.

Let's see.

In terms of the additional investment that you folks are making, first of all, I believe you did about 10 million in the third quarter so that means about 50 in the fourth.

You mentioned earlier that 35 million was in Employer Services.

Could you tell us where that other 15 million shows up?

Sure.

If you talk about the 60 million in total restructuring, the 35 was in Employer Services.

Almost entirely in the fourth quarter.

In Brokerage, it was about 10 million.

Some of that, the majority of that was actually in the third quarter.

And in claims, it was about 15 million.

Mostly related to our shutdown of our medical claims product line, and that is it.

There was very little, close to zero in Dealer services.

So that is how it all shakes out.

I would imagine that the -- within Employer Services, there is a piece of it that we won't recover.

Or we won't get a benefit for until fiscal '05.

That relates to the shutdown of our U.K.

Government Payroll business.

And in Medical Claims, that actual reduction will happen over the course of fiscal '04.

So we also won't see all the cost come out until fiscal '05 for those pieces of it.

And could you give us some idea as to what kind of savings you would anticipate from the closure of Medical and the elimination of this Payroll operation?

And also, what the impact is on revenues?

Well, in the -- in the U.K. business, in Payroll, the revenues last year were about 15 million.

So ultimately, by the time we get to '05, that will go away.

There is the -- the loss on that I'm going to say 5 million or so loss that will go away when we ultimately exit that business.

In the claims, medical claims -- It will take us a while to exit that business.

That is not a clean, you know, it is over and it is done with, it is going to take us 12-18 months to exit the business.

Okay.

In the -- and just finishing, on the medical claims side, that business in fiscal '03 was about 50 million.

In -- next year, it will probably be down to under 20 million, as also similarly it will take us the course of the next 12-18 months to exit that business.

So it won't all go away at one time.

And that business has a loss.

I also want to say it is probably in the 5-10 million range in terms of a loss that ultimately will go away when we finish the exiting of medical claims.

Okay.

And let's see.

You've broken down -- everything has fallen into I guess three categories.

And we've discussed this first category.

The other of course has to do with your efforts in product development, which you've discussed.

The last one, the 40 to 45 million on Employer of Choice initiatives, essentially, I take it from what you've said earlier in the call, and I may be wrong on this, is that we should look for growth from this level from here on out.

So I would imagine essentially what you're doing is you are upgrading overall compensation, and you will move up from there?

Is that correct?

That's correct.

This is an adjustment to compensation.

It is reinstating some bonuses that we eliminated previously.

It is increasing the amount of salary increase that we are going to be giving to people this year.

We're changing some medical benefits by providing some internal medical services, where we're going to have doctors on our own staffs where there will be some startup costs, although honestly, I believe that may be a savings for us over a longer period of time.

So there are a number of things that we're doing, you should consider those built into the process, and our ongoing expense structure.

Okay.

And also, the 90 to 100 million going after these various growth opportunities, and the 40 to 45 million on Employer of Choice initiatives, these are all dollars that will be spent in fiscal '04; is that right?

Right.

Right.

The -- in total, the 90 to 100, I think there was a small piece that was in fiscal '03, a small piece within Employer Services, on the product investment.

Think of it as 5-10 million dollars.

But the majority would all be in '04.

And all of the Employer of Choice would be in fiscal '04.

Okay.

Fine.

And just one more little thing.

If I might, could you give us the number for work site employees, and PEO at the end of the year?

Sure.

I think that was 85,000.

It is the total number for the year.

Grew 13% to 85,000.

Great.

Thanks very much.

You're welcome.

At this time, I will turn the conference back to Ms. Dykstra.

I would like to say one thing before Karen makes her closing comments.

I was disappointed in one thing in this call.

No one asked me about Dealer Services.

And we had a terrific year this year in Dealer Services.

We had a double digit growth in revenue.

We had a double digit growth in earnings.

We had a regaining of our momentum in a business that had slowed previously.

We have excellent products in the market right now.

Our ASP model, our CRM, some of our networking solutions, are all have very good growth in front of them.

And we're feeling very good about that market.

So if I leave you with no other message, let me tell you, Dealer Services is really doing great today.

Thank you, Art.

I think that was very appropriate that you added that -- those comments in there.

I'm also disappointed we didn't get a question on Dealer.

But let me conclude the call today, as we -- as we're exiting, we were about $35.80, trading.

And we'll conclude, we thank you for your interest and your questions today and we enjoyed meeting with you.

Thank you very much.