自動資料處理 (ADP) 2004 Q1 法說會逐字稿

Good afternoon and welcome, ladies and gentlemen, to the ADP first quarter earnings conference call.

At this time I would like to inform you that 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.

Please go ahead, ma'am.

Good afternoon.

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

And welcome to our first quarter conference call for 2004.

As you know we issued our earnings release earlier today and we reported 4% revenue growth and earnings per share of 32 cents for the quarter.

Our earnings were about 3 cents ahead of consensus.

We are a little bit ahead of our plans after the first quarter.

Part of it we didn't spend as much on investments as we would have liked.

This accounted for about a penny of our over planned performance.

We also had some small one time charges in the first quarter of last year which brought our SG&A expense in our other segments up last year and made for some favorable comparisons to this year.

Now before we start the Q&A session I am going to turn it over to Art for some opening remarks.

I actually wanted to do cover one topic also before we got started on the call.

As many of you have probably read in our press release of a couple days ago, Russ Fradin, who was running our Employer Services business, elect to do resign.

I can tell you Russ is a terrific guy and he accomplished a lot of good things at A. D. P. And I can tell you I also really like him.

We wish him very well.

In answer to some of the questions that Karen received since the announcement as you'll here today, no, no, there is nothing new or different going on in Employers Services that's related to this announcement.

Gary Butler, who is our President and COO, will also assume responsibility for running Employers Services.

Gary, for those of you who aren't familiar with his background, has run Employer Services as well as Dealer Services previously in his long tenured career here at ADP.

He actually came up through the sales route in ADP.

And has been spending a fair amount of time since, or recently I should say, in Employers Services sales.

So we are all confident Gary is going to do a great job in that avid roll.

Over time Gary will figure out the best succession path and we will then figure out and we will communicate with you on, as we go forward with the next stages.

So I just wanted to clarify that since it wasn't part of the direct announcement that was put out in this release.

Thank you.

Okay.

Before we start, some comments.

During today's call we will discuss some forward-looking statements that involve some risks.

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

We are ready to start the Q&A and the conference operator will explain the format of the Q&A.

We do ask that you keep your questions to one at a time.

And we have about 125 people on the call today and I will turn it back to the conference operator now for your questions.

Thank you, ma'am.

The question and answer session will begin at this time.

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

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

If you'd like to withdraw your question please press star two.

Your question will be taken in the order that it is received.

Please stand by for your first question, ma'am.

Our first question comes from Randy Mehl with Robert W. Baird.

Please state your question.

Good afternoon, Art and Karen.

My first question or my only question is related to Employer Services.

It appears that you saw an improvement in September given the numbers you discussed.

I think you said 5% down and now you are saying 4% down for the entire quarter.

Could you maybe discuss the improvement you might have seen in September and how things looked as we have gone into October.

I think you have to be very careful in looking at any single month in terms of an overall sales trend.

I am very uncomfortable saying that, wow, we were down 5% when I talked to you in August and here.

I guess it's, in September that was, 30 days later there's a 1% change.

I'd not like you to really build into that that it's meaningful.

What I would convey, though, is as I've been talking with some of our leadership, some of the people who are involved in sales in our Employer Services business, I've heard some, I'd say more positive vibes in terms of where things are going and what the trends are.

So while I wouldn't read anything into the one month, and we have a long way to go obviously to reach our objectives, our double digit sales growth objectives in Employer Services, some of the underlying tone I would say feels a little bit better.

And there's no need to change that objective or target at this point?

We are cautious on that objective.

I think we've expressed that previously.

But as we also said the way the sales impact and the delay between sales and implementation, it really won't have that big an effect on this year in terms of our expectations for this year.

Okay, thank you very much, I appreciate that.

The next question comes from Greg Gould with Goldman Sachs.

Please state your question.

Thanks.

On the investment spending or the incremental spending for this year, can you give us some perspective on how you expect to see it unfold for the remaining three quarters?

Is it evenly distributed roughly or is there one quarter where there would be more spending than the other two?

I would suspect it will have a slight ramp up as we go through the fiscal year.

Just to put it in perspective, we said we would spend more or less 140 million or so this year between the employer of choice and the product investments.

In the first quarter we were a little bit behind.

I said it was about a penny.

So figure it was about $10 million in total behind where we thought we would be, and that we fully intend on spending the full amount this year and I would say pretty even across the quarters but I would say there's got to be some ramp up towards the end of the year.

We are into the middle of October and still trying to get some of the people hired to do some of the, in some of the areas.

But I wouldn't pick one quarter and say, wow, it's really going to come through in a big way in a particular quarter.

Okay.

And with Gary assuming the roll in Employer Services, should we expect to see any changes in strategy or particularly given his background in sales, in the sales force?

Gary as you know is in his Chief Operating Officer role has been a very heavy player in the development and the evolvement of the strategy in Employer Services.

So I wouldn't expect to see major changes in that area.

In terms of sales, Gary really stepped up his involvement in the ESL scene over the last few months and he sees things and I am sure he is going to make a difference in that area over a period of time.

Any time you take somebody with a background of 20 plus years immersed in the type of sales that we do here in A. D. P. , it's got to be beneficial.

Thank you.

The next question comes from Marta Nichols with Bank of America.

Please state your question.

Good afternoon.

Thanks.

I have some questions about the accounting changes, specifically the change in the interest income calculation and the interest rate that you're using behind that calculation.

Is there any reason why rather than just kind of changing that interest periodically as rates change that you don't just allow the interest rates that are apparent in the market to go ahead and flow through those numbers and just report the interest income separate from the service income so that we can see the trends there.

Well, I would say that first of all we like to look at our Employer Services business and understand the real growth in the business, the real growth in the client base and what's going on in the underlying factors in the business without the influence of the interest swings.

We can't control that obviously, so we like to understand Employers Services as it is.

If we let the interest flow through as it is obviously we wouldn't be able to do that.

We try to not change the interest rate that we allocate to Employer Services very often.

So we try to pick a rate that we think we are going to be able to hold for a couple of years because obviously we don't like to go back and change the comparables for the prior year's in each quarter.

But we do it when we think that the gap is widening enough that it's distortive to look at Employer Services with either too high or too low of a factor included in the revenue.

Marta I would add to that on the first part, I'm a really big believe in the concept of management responsibility and people being measured based upon things that they are responsible for.

The way we manage the flow of funds is our treasury function both invests and makes decisions around duration and a lot of things that the management of Employer Services really has nothing to do with.

So if we really want to measure performance of each of those groups it's easier for us to just hold it constant in Employer Services.

Let the fluctuations occur in the area where the people who have responsibility are working.

So I think it's a much better way for us to manage and understand exactly what's going on within the Employer Services business.

So I'm really very much inclined to keep it the way it is.

Hopefully the 4.5% is a more rational level than the 6 percent, although it felt a lot better at 6%.

I guess the point is, though, do you not accomplish the same goal if you just disaggregate the service revenue from the interest income revenue?

Because as you said the interest income revenue, there is something sort of artificial about holding it at an interest rate that you are not recognizing so if you just disaggregated it and reported it as a separate line item it would be the underlying services trends, right?

It's an excellent question and I obviously omitted an important point as I hear you express it that way.

When we think of the way we price Employer Services, there are two elements to that pricing.

One is a fee and the other one is the interest that we are able to earn on the balances during the time that we hold them.

We could actually move those numbers in one way or another but the so-called revenue that we derive is a function of the two of those numbers taken together.

So the real revenue responsibility when we price a deal and we make a decision in Employer Services is what's the aggregate of those two numbers, both the float as well as the fee.

And therefore the responsibility for that piece really does rest with our Employer Services business.

Okay.

That's helpful.

Thank you.

Good.

The next question comes from Greg Cappelli with CSFB.

Please state your question.

Hi, Art and Karen, it's Greg and Josh.

Hello.

We wanted to just turn it to Brokerage Services if we could for a second here.

Can you give us some more color, perhaps on the margin in the quarter and then Karen, could you give out some of the standard metrics that you usually give out, the positions, the trades and the retail mix?

Sure.

The margin in the quarter was clearly lower than it's been in awhile.

I would say that part of it has to do with the lower overall business in Investor Communications.

The first quarter is an extremely light quarter.

All the heavy volume comes in at the end of the year.

So there is normally a lower margin in the first quarter than when we get to the heavy proxy season.

Our margins were influenced by a couple of things, first of all in the backoffice business they were influenced by some of the larger retail client losses from consolidation that we talked about all through last year, in particular Scott Trade, which we had in the first quarter of fiscal '03 which we don't have in fiscal '04.

So those types of consolidations really impact the backoffice margins, backoffice has a higher level of fixed costs associated with it.

In Investor Communications, we saw a couple of things.

As I said first of all it was an overall smaller quarter because that's the way that the business runs.

And we saw a fall off, continued fall off in our graphics business, graphics printing which still has a research print component which has been steadily declining for a long time now.

And that impacted the margin as well.

So I think our projection for the year on margins is not that it would stay at this low level that it was in the first quarter.

I think it clearly was the lowest quarter that we anticipate and as we think about the year in Brokerage we should see relief later in the year just from some of the grow-overs that I started to mention before like the consolidation from some of the larger clients and compressions that we were still dealing with in the first quarter of fiscal '03.

The one other item - I don't mean to get into too much detail because I'm not sure that that's helpful, but one of the things we do is we do these mutual fund meeting mailings, and those were lower in this quarter.

And that's much more of a fixed cost business to us than some of our other pieces in the old ICD, the whole investor communication business.

So more of that drops to the bottom line.

Mutual funds, I mean that timing is up to the individual mutual funds.

Over some period of time the same number of mailings will go out but we can never tell what's going to happen quarter to quarter.

But that has kind of a disproportionate impact even though the numbers aren't that big on the margin during the quarter.

Art, just as a very quick follow up.

I know you get asked this a lot but any changes in thoughts strategically with this division over the next couple of quarters?

I believe that we've done a lot of the right things and that we are on the right path.

I think we have seen a bit of an enhancement in terms of the overall environment, certainly our trading activity feels a little bit better than it does.

Although I want to be careful I don't get out too far ahead of the curve while our forward-looks and our Investor Communications Service actually look a little bit more positive than they did just a few months ago.

No, I think we are okay strategically.

Thanks Art, thanks Karen.

The next question comes from David Togut with Morgan Stanley.

Please state your question.

Thanks.

Art, you've indicated that the upcoming November board meeting is an important one where the board will review dividend strategy.

Can you give us a sense of how you think about the relative priorities for the use of free cash flow between dividends, stock buybacks and acquisitions, and maybe any preview of what's to come here?

I am going to be very careful not to give you a preview of a board action that has not taken place.

My own thoughts on this are really consistent and have been for quite a period of time.

I think the single highest priority for us in terms of the excess cash which we generate, which we clearly do, is the acquisition program.

And if we can find the right acquisition and find the right opportunities, we will continue to aggressively pursue them.

We are looking for good strategic transactions.

We are looking for transactions where we get a good return for our investment over time.

They are not always that easy to find but we are diligent in terms of looking for them.

We will continue to do that and nothing would make me happier than spending our free cash flow and some of our cash balances in terms of acquisitions.

I believe that treasury shares continues to be an excellent investment for our shareholders in ADP, because I do have a lot of confidence in this business.

Perhaps the overall tone which has been negative is more level right now than it's been for awhile.

That's the overall business tone.

So I'm expecting that ADP is well-positioned for the future, therefore I think the treasury share repurchases are a good thing and will continue to be a good thing.

Dividends, clearly there is a focus on this, clearly we understand the benefit to our shareholders, who we are obviously very serious about, of the changes in the tax law that have recently occurred and our board will carefully review the question of our dividend as we get to this November meeting.

Beyond that I really can't say anything.

If you could offer just a brief update on the ProBusiness acquisition, where you stand in terms of integration and financial outlook?

We are still in the early stages of the overall integration.

We are well on our way but that process is continuing.

I think the thing that's most positive to me is that our client retention has been very positive and remains very positive.

I've also been very impressed with the service levels within our ProBusiness, within the ProBusiness company.

I think both of those are going very well, both my feeling about service and the client retention, which makes me feel very positive about the long-term outcome of that acquisition.

Thank you, Art.

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

Please state your question.

Thank you.

Art, could you maybe just talk a little bit more about the sales trend that you have seen thus far, I guess through the end of October and any thoughts initially on what implications, if any, you think it may have on fiscal '05 particularly given your most recent comment was I'm feeling better about the business, the tone feels better, maybe it feels like we bottomed?

I think the numbers are what the numbers are and I don't think we should get ahead of those numbers in anyway, David.

Our results are for the quarter, which is through September, it's the last full month that we have, are down 4%.

They are also below our planned expectations for the first quarter.

So don't hear that in a way that says, wow, things are robust and things are great in this area.

The absolute fact is that the numbers are what the numbers are.

What I was saying is in some of the communications that I've heard from people who are close to the action, some of the tone seems better than I've heard it for awhile and, therefore, there's some reason for optimism.

But my view has always been, follow the numbers and as we report them we will let you know exactly what they are.

Let's not take my comments to get us too far ahead of the game.

Can you give us any sense for, just based on historically evidence, how that may trend during the year where you can kind of make that up and will we look particularly at the December, March quarters of evidence of making up lost ground, if you will?

Let me try that, David.

Traditionally the second quarter is a big quarter for us.

So it's a very important selling cycle.

We are just in the midst of it now, November, December, big months for us.

So we will have a much better idea when we get through the selling cycle coming up.

But what we had the last couple of years is a fall off in the fourth quarter because we were under our plan for a good part of both the last two per fiscal years and so as a result of that there was a fall off in the fourth quarter as people weren't in the hunt any more.

And what we would have expected since we had a pretty weak fourth quarter of fiscal '03, we would expect it to come out of the gate really strong.

Now what you are hearing is we didn't come out of the gate really strong.

We had anticipated a more or less flat kind of sales performance in the first quarter and we are a little bit under that.

So that gives us some cause for concerns.

We have a lot of ways to go through the rest of the year.

On the other hand, we've put a lot of things in place that we believe are going to help accelerate the sales in the second, third and fourth quarter.

The easy one is the math, that the numbers just get better in the fourth quarter so we will have easier comparisons, but also we increased our sales force in Employer Services by about 7 percent, maybe about 200 people.

That wasn't all in place day one as we started the year so we still think that that's going to help and kick in and we will see some benefits of that through the year.

We've also done some things in Majors in terms of segmenting the sales force, the hunter farmer separation.

We put in some product specialists and taken some actions there.

We've expanded some territories and Total Source and so on, so all of these things I think will help us achieve our sales goals as we make it through the year.

But nonetheless, we are a little bit behind where we thought we were going to be and as I said the second quarter is yet to come, that's the big selling season.

Great, that's helpful.

Thank you.

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

Please state your question.

Thank you.

Just kind of a 30,000-foot question, but obviously one of the issues overhanging the industry is this concept of a jobless recovery.

The Federal Reserve Bank, I think it was of New York, put out an interesting piece it kind of addressed this topic, their conclusion being that compared to the mid 70s and the early 90s where industry sectors undergoing structural job losses was about half the economy, today that's about 80%.

So, Art, I guess the question is have you done any work to analyze the payroll base to kind of look at how diversified you are across industry sectors, and in particular whether you have any particular concentrations in like financial services, communications, transportation, technology, those areas?

We are actually very broad in terms of who we provide our payroll, human resources services to.

If I were to highlight an area I would say we were stronger in the services side of the business than we are in the manufacturing side.

I would say that we really crossed the board in terms of things like the financial services industry, we have a number of clients in the financial services industry, probably a little bit less in the telecommunications industry, although we are represented there.

But I wouldn't, other than that broad service versus manufacturing component, I wouldn't read too much into that.

On the broader subject of the jobless recovery, I think a lot of this obviously has to do with the productivity gains that we have been seeing over, certainly over the last several years.

And to the extent that those productivity gains are really being driven by people just cutting costs and trying to run in a leaner way, I'm confident that as businesses grow that jobs will be filled and that will be replaced.

To the extent, on the other hand, it's really technology driven and the productivity is technology driven, then that I think is going to continue.

Now, the question is how much of each is there and how long will it take.

I don't have the answers to that.

You've got to speak to people who are economists really to get a response to that.

I appreciate the color, thank you.

The next question comes from Stephen Webber with SG Cowen.

Please state your question.

Yes, good afternoon.

Karen and Art, if I can go back, you mentioned you had the small one time charges in that Other.

If I go back and look at that and take out the corporate interest and other income at the profit line that's been a negative for each of the last three years until this year and it was 23 million negative a year ago and then swung to a $22 million positive which is about a nickel a share.

So my question is, can you size how much those charges were or can you give us some flavor of whether we should annualize or look at that $22 million of what I guess I would call operating profit from a modeling standpoint going forward?

Let me give this a try, Steve.

I don't think it's anywhere near a nickel in terms of those charges.

The way we look at it is, within the release you see the various sections that we quantify, the foreign currency, the cost of capital, detail, the interest offset in a table.

You can see the variances, component by component, and then there's somewhere in the text or in one of the tables, the corporate interest income and I think that's clear in the release, you get all the components.

The rest of the other I think is just the general administrative things that happen, whether this quarter is representative of a way to go forward, I would assume it was probably as good as any last year.

We had these small one time items.

I don't know exactly the number.

My guess is maybe it was $20 million or something, total.

It wasn't anywhere near a 5-cent kind of number.

This year the only unusual things that happened in the beginning of the year was that instead of having some small one time, maybe we had a couple of small one time positives that are unusual, like small insurance recoveries and things like that, legal settlements.

But, again, nothing big so maybe instead of a little bit of charges it was a little bit positive.

So that's probably the only swing factor.

All of it I would say has nothing to do with the ongoing run rate of the businesses.

So hopefully you can piece it together from the table, from the interest and from the comments that I've made about it.

I don't think there's anything else in there that was representative or recurring income.

I guess the other piece that I should state, within that other segment we have claims which was more positive this quarter.

That was probably 3 to 5 million more positive on an income line this quarter.

It just happened to have a stronger quarter this quarter.

We got through some of the medical claims charges and, [INAUDIBLE], we divested a business last year.

So claims was more positive.

We also have some other small businesses, travel, clearing business, small businesses that were in themselves 1 million, 2 million more positive this quarter than last quarter.

So there are some small businesses that were favorable as well, to try to give you a little bit more detail on it to try to help you with that.

There was a minus 23 to the plus 22 which works out to 4.7 cents.

So I wasn't implying the charges were that, that's very helpful.

One other question, if I could.

Can you give us an update, Art, on these new products you have in ES, I'm particularly interested in Total Choice and Pay eXpert, where they stand in terms of your roll-out?

We are still in the early stages of the Total Choice roll-out.

It's a new product.

It's a new payroll system.

It is in the market right now.

We are selling it in the market right now.

But we are still in the very early stages.

So the numbers become relatively small.

Our Pay eXpert product is doing very well and we are extremely pleased with the recent activity that it's had within the marketplace and we are quite comfortable with some of the investments we've made in the product and where it's leading us to.

I would say both of them are on track at this time.

Total Choice has to do a little bit with some of those things that Karen was talking about in the sales area, where we dedicated some salespeople to the product.

So any time you change the people selling and you dedicate new people you have some start-up time that it takes.

But I think in both of those we are doing pretty well.

Okay.

Have you got any bugs or anything in there that you think you have to go back and fix in Total Choice?

Any time you are introducing a new product, any time you introduce releases there are always some bugs that you are dealing with.

So while I have no idea exactly what numbers we are talking about, I am sure that there are some that we are working on all the time.

Even in products that have been out for years, there are always things that we are working on to improve.

But I haven't heard of anything that's a serious problem or something that I would say would change my prior remarks.

I would add that you have to be careful when you talk about a bug in a payroll software.

So something that needs to be tweaked here, there's nothing in the product that is not making them function properly that is calculating payrolls properly and so on.

When you talk about bugs, you are talking about literally, yeah, we ought to move this here or there, a tweak, some tables as opposed to - I don't want anybody to get the impression that there are bugs in the payroll software.

There certainly are not in the way that most people think about bugs.

Are we delivering accurate, solid product?

Absolutely.

But think again, there are always tweaks and changes that go on.

That's what I was referring to and I appreciate the clarification.

Thank you.

The next question comes from Adam Frisch with UBS.

Please state your question.

Thank you.

A lot's been made about the growth of outsourcing and specifically HR outsourcing.

Since you stated, Art, at the last investor meeting, that you don't want to get into the broader market.

Do you view that as an incremental growth potential for ADP, via affiliation with other vendors and if you could also comment on how early or late in the game you think it is in terms of alliances.

We saw, or heard, IBM and [INAUDIBLE] talk about opportunities, [INAUDIBLE], not sure if they're doing the payroll themselves, can you talk about that angle of that market?

I think that we have already become a partner to other people in the broad outsourcing market and I think that we are a preferred vendor, I would say, in terms of a lot of our services that we provide as we go forward in that area.

So I think that it's an area that you should expect to see us continue.

I think that, listen to your interpretation of my comments and the overall outsourcing arena that they sounded much less than my belief in terms of how important it is and how important it is that we play an important roll in that area ourselves as well as joining with other people.

So it really becomes a question of just how broadly you define outsourcing.

When I think of people doing the total computing outsourcing for companies, that's not the business that we are going to get in.

When we talk about elements of the payroll, the tax filing, the benefits, the human resources, pieces which is our core business and as we continue to expand that offering, that will be defined to a lot of people as most of the outsourcing that you really want to do within these arenas.

I think you ought to expect to see us playing and playing hard in these areas.

So I want to make sure I am not mischaracterized in terms of saying, hey, wait a second we are not going to be doing that because the reality is we are.

Thanks for clarifying that.

Are you still comfortable with flat pays per control growth for full year '04 despite the year over year decline in the first quarter against what will be this year's probably easiest comparison?

I would say it's close enough.

It was under half a percent in the quarter and the news that's been coming out has been more favorable about employment.

It's close, I would still be more comfortable saying it will probably be about flat.

I think my voice is going to save you guys from my normal list of questions.

If you could just discuss my last question, various segment of employers services, major, nationals, etc., any differences you're seeing in terms of trends in pays per control, retention, pricing, anything like that we should be aware of?

Let me talk about it.

Mostly from a sales and growth perspective, retention is strong in all of the segments and improvement in all of our segments.

And the trends on pays per control, I don't know that there's a noticeable difference between segments in terms of the decline or flatness in pays per control.

In the sales side I would say that we are strongest or stronger in a small business segment and still in National Accounts than we are in majors.

And actually in Europe, we've seen some recent weakness.

The economy is slowing down in France.

They are having some slowness in the large account market in France and in majors, still a little bit of weakness.

But on the small business side, it is better, our unit sales in particular are stronger in small business.

We have strong double-digit unit growth this quarter and had about 40% more units coming from accountants than previous quarters.

And so we are particularly pleased with our progress on the small business side.

PEO is off to a slower start this year, although we still believe that we will have a strong, over 20% growth here in sales in the PEO.

It's hard to explain.

It had a slow start.

We more or less at the end of last year pulled a lot in.

They installed a lot at the very end of the last fiscal year and then started out with not as big a pipeline.

But we also added a lot of sales force to the PEO and opened some new territories.

So we are still pretty confident, I would say very confident in our growth in the PEO.

So that's probably, as we go through the segments, the highlights of the segments.

As I said the retention and pays per control, I would say pretty good in all of the segments.

Thank you very much.

The next question comes from Pat Burton with Smith Barney.

Please state your question.

Hi, thank you.

A follow up to that question would be, with the 5% internal growth number in Employer Services, where was that growth coming from given the new sales and the drop in pays per control?

Was that add-on products?

Thanks.

Well, I think certainly some of it it was add-on products.

I would say the way we think about Beyond Payroll, the Beyond Payroll growth for the quarter was probably somewhere around 19% because there was some strength in some of our categories and our products.

And payroll growth was also influenced by the acquisition, as you know the internal growth was 5%.

Even though sales were less year-to-year there was still positive influence on the payroll, core payroll base from new sales.

Retention was better.

Pays per control did shrink a little bit but it didn't bring down the number that much.

In the Beyond Payroll category, the strength is coming from some of our new products like Screening and Selection Services which grew 19% in the quarter revenue growth.

Now, these are smaller businesses so the numbers can get big in terms of the growth.

But, still, 19% growth there.

Our PEO business, which grew over 30% in the quarter, was influenced by some of the benefit cost pass-throughs, but the real growth still in the PEO was probably still in the 15% range.

And Retirement Services grew and our Time and Labor Management grew 18% in the quarter.

So we are seeing some really strong growth in some of these smaller businesses.

I think there's a possible misconception in the question and maybe it's important that I clarify it.

But when we talk about sales growth, we are talking about our sales, this is whether it's a new account or it's additional business, but it's a revenue that we book during this quarter that compared to where it was a quarter ago.

But the revenue is a different number.

I mean, the revenue is the ongoing number of the dollars that we are continuing to get from our clients.

But even at the levels of sales that we are talking about when they are flat, that still generates growth.

Because it's, if you think of sales as a percentage of our revenues, it still is a positive and adds to the overall growth of the company.

So you should definitely assume that there is growth even in a flat sales performance at this point in time.

The other area I would talk about is, in some of these areas, we talk about these items, they sound relatively small, these so-called Beyond Payroll areas.

We got some big things, obviously, like the PEO and our benefits business.

But we also have some of these smaller items which, something like a stand alone tax business, is going to be over a $50 million revenue business this year.

Something like wage garnishment, which is a product that we talk about, is going to generate over $50 million of revenue this year.

So there are a number of pieces that are continuing to grow and continuing to do very well.

So it's very dangerous to just try and deal with one number and draw a direct correlation to what that means in terms of the overall revenue growth of the company.

Thank you.

That was very helpful.

The next question comes from Adam Waldo with Lehman Brothers.

Please state your question.

Good afternoon, Art and Karen.

Art, with Gary settling back in day-to-day closely in Employer Services, how are you all thinking about any potential changes to incentive plans or sales quotas on new business, that sort of thing particularly as we enter the key November, December time?

I don't think you are going to see anything that's going to change our sales quotas or sales plans within the next couple of months.

I think as Gary gets more involved, clearly he is going to make the decisions that he thinks are appropriate in terms of how we drive the business and that will have to play itself out.

But you are dealing with, we are in the middle of October right now.

We are right in the middle of this key selling season that Karen was going to talk about.

So you don't get an instant reversal or a instant change in the way we are going to do anything.

So I think it would be really unfair to Gary to think you are going to see something that's going to be mammothly different in the pre-holiday selling season.

Okay, didn't think so, just want to do double-check.

Karen, a couple numbers questions, could you just, getting back to an early question, could you break out for us the ICD volumes and trade processing volumes on an average trades per day in the quarter at BS?

Sure.

The average trades for the quarter were 1,250,000, which is down 13% from last year.

As I mentioned last year we were still pretty strong and included some of those larger retail clients like Scott Trade for the quarter.

The mix for the quarter was just for the core backoffice U.S. business was about 26% retail which compares to the fourth quarter of '03, about equally, about 26%.

Now I'd like to include our Canadian business.

We did an acquisition at the end of last year which grew the size of our Canadian business and it is mostly retail plus one of our other products.

So if you combine all of our products we had about 34% retail activity in the quarter which was higher than our fourth quarter of '04, doing it sequentially as opposed to going back to the first quarter of fiscal '03 where we had some of those other clients.

And it was influenced, the growth there was influenced by this Canadian acquisition as well as a decline in institutional volume.

So the retail mix was about 34% as I said and as we look towards the year, if you include all those products, we are thinking it will probably stay in that range, although what we are hearing from clients, what we are hearing is a momentum, I think Art might have mentioned it earlier, that there certainly seems to be buzz around more retail activity returning in the retail growth that would be more positive.

In terms of the Investor Communications side, we had a 7% decline in the number of pieces in the quarter.

What's that mean, that means that fewer mailings, the comparable number of holders in each of the mailings was a little bit down quarter to quarter.

And on top of that Art mentioned earlier, we had less mutual fund mailing, less activity in general, so 7% less overall Investor Communications mailing.

So it's fair to say that we've probably run the course on the cost reduction initiatives at Brokerage based on conversations at the recent analyst meeting.

How should we think about variable contribution margin with incremental revenue, in particular at the trade processing business as we move forward from the current cost base?

I think the capacity that we have right now in our backoffice is significant.

So we clearly have excess capacity.

If it's as simple as an incremental trade coming in and existing client, then I think you are going to see a very significant piece of that drop to the bottom line.

The same way we rode that curve down, I mean if volume picked up we would ride it up certainly to an extent.

So think of it as relatively fixed structure with capacity right now so that incremental trades would drive a high margin?

Okay, that's very helpful.

Then just finally, Karen, what were the average float and corporate securities balances during the quarter?

The float was, you mean the average daily balances, I assume?

Yes, precisely, for both the float in the corporate portfolio?

It was average balances of client funds of 9.2 billion.

The average, that compares to 7.7 billion, by the way, last year.

About 800 million of it was due to ProBusiness but that still leaves pretty good growth, very good growth around eight or 9% real growth in client fund balances which we are seeing ahead of our expectations in the first quarter.

Some of it is wage growth, clearly.

Some of it relates to growth in some of our money movement products that we normally talk about.

So very positive there.

The average yield for the quarter was, combined corporate and client funds, around 3.4%.

It compares to 4.5% in the first quarter of fiscal '03.

Thank you all very much.

The next question comes from Mark Marcon with Wachovia Securities.

Please state your question.

Good afternoon.

Just want to make sure I understood something correctly.

Isn't Beyond Payroll around 33% of total ES revenues?

Right, it's around that.

It's probably a little bit higher now, 35, 36% primarily of the North American revenues, yes.

And did you say that new sales in Beyond Payroll were up 19%?

I said that some of these categories had revenue growth, so revenue growth in those categories was 19%.

One of the bigger components of that was the PEO which had very strong growth and as I mentioned had the pass-through component which influences the revenue growth.

Isn't part of that the Scudder acquisition?

We are talking about regular growth, right.

That 19% was not just internal growth.

So that 19 percent, I believe, included some acquisition growth.

So you have to be careful with that number.

Did I say that right?

That's absolutely correct.

The Scudder enhanced our retirement services growth and that was about, think of that as about a $40 million annual revenue number that came with that acquisition.

What I was trying to figure out is, when we talk about new sales, rather than look at it in terms of client segments, where are you seeing this, it sounds like the strongest growth is in obviously the total in Beyond Payroll and it sounds like the core, would it be fair to say that core, the core part in terms of processing and tax filings would be down significantly more than 4%?

Absolutely.

If the other services are selling better which they are then just the so-called basic part would be also.

If I looked at the sales number in the first quarter, the weakest areas are PEO which was our strongest area last year, we are kind of weak in Canada where we were strong last year.

Having spoken to the business unit leaders in both of those businesses within the last 24 hours, I know that they are both quite comfortable that this is mostly timing and not an intrinsic issue.

Other times when I've talked to you in these calls, I've said, deferred client decisions, we just can't reach a point where people are moving.

I'm not saying that right now.

I'm saying, yeah, there are some aberrations in these numbers but it doesn't sound from what I am hearing like it's an intrinsic market problem at this point in time.

So again I want to be cautious because we have to see how it plays out and the numbers are what they are.

The Majors arena is the other one which is a little bit weaker than we would have liked or expected given the weakness in the fourth quarter.

And again I am a little more cautious there.

We will have to see although, again, I think there is room for optimism there, also.

In terms of like when we look at the double-digit new sales growth for the year, how much of that would be coming from core payroll and tax filings as opposed to the Beyond Payroll services?

I don't know how to answer that question because I have to do calculations in a way that I don't really do them.

But clearly the growth will continue to be higher in the Beyond Payroll business which means it has to be lower than whatever we end up with in the core payroll and tax business.

With regards to Brokerage Services, could you remind us what the goals were for the year?

The goals for the year, the revenue we think will be somewhere around a 5% decline in the Brokerage Services, probably 10% or so, ten to 15% we are expecting in the backoffice and somewhat flattish in Investor Communications as a goal.

And we were assuming basically a decline in trades per day but from our internal base we weren't expecting a pickup in the market in terms of trading activity and Investor Communications we were assuming that our stock record growth was sort of like a same store sales equivalent would be about flat.

And because of some of the less profitable units that you've divested and shut down, what was the expectation with regards to profit?

We were expecting that the margin for fiscal '04 would be roughly equivalent to fiscal '03.

Does that still feel good given the first quarter?

We are on track in the first quarter.

I know that the margin was particularly low and as I said the Investor Communications side in particular because it's a smaller quarter and the business growth normally does happen in the end of the year with the heavy processes, but we are not surprised by our results in Brokerage.

We are slightly ahead of where we thought we would be after the first quarter in Brokerage.

Great.

Super.

Thank you.

The next question comes from Bryan Keane of Prudential.

Please state your question.

Hi, thanks.

Karen, I just want to reconcile your comments about the quarter.

You said you guys beat first call consensus by 3 to 4 cents.

I know a penny of that was probably less investment spending than expected.

Was there 2 to 3 cents, then, of kind of upside to your model business, fundamental upside or was that just bad modeling on the analyst part?

Good question, Brian.

Really I can't say what was in the, why it was off versus consensus precisely.

Everybody's model is a little bit different.

I did say consensus was 3 cents higher.

I'm sure at least a penny of it was related to the slower start we had in our investments.

So that would account for a third of it.

Then we were a little bit ahead of our plan in the first quarter.

I'm sure that was a part of it as well.

But, you know, reconciling exactly to consensus would be too hard for me to do at this point.

What was the upside end onto plan?

Our businesses and Employer Services, I think the investment spending was a little bit slower than we thought, probably just general cost containment and controls were effective and so we didn't get up to our hiring plan and Employer Services.

In Brokerage, our trades were higher than plan and that fell to the bottom line.

So those would probably be the two biggest components of why we were ahead of plan in the quarter.

Claims believe it or not had a good quarter.

It's not big dollars, I understand.

It certainly surprised us on the upside, I think during the quarter.

Just switching gears, Art - when we talk about the sluggish core payroll sales, is that, do you think, the more you look into it is that due to the economy, is that an ADP problem, is that just a secular issue with the payroll market?

What's the causes of the sluggish sales there?

Probably all of the above would probably be the best way of describing it.

But I think it's a cop-out.

I think in general we ought to be thinking about the core payroll is going to be a slower growth business than is the Beyond Payroll services that we have and therefore sales in that area will be slower.

But that is a very large market.

It is a robust market.

We have significant opportunity and I think we ought to be able to perform in that market and I think you should look for that performance from us.

So I don't want to take any easy ways out on that.

Then just finally on the Brokerage side, the trades in some of the positions and even the pieces a little bigger decline than I expected especially with the markets picking up?

Was there any customer attrition loss there or anything else to describe maybe a little less growth than we expected?

There were no customer losses that were new to us in this quarter that would be of any size.

I think, it was not below where we thought it would be.

The biggest issue is really the clients that we had in the first quarter of '03, some of the larger clients in retail that we knew we would have a grow-over issue with.

So we actually were ahead of our expectation on the trade processing.

On the Investor Communications, it was a little less than we thought, probably because I would assume it's more in the mutual fund area.

Some of these mutual fund proxies have been held off for quite sometime.

It's not required to do annually but it's got to come back eventually, I think it's safe to say.

So we were expecting to have a little bit more of that activity.

Again, it's not big enough to make us change the way we think about the full year.

Okay, great.

Thanks.

The next question comes from Jim Kissane with Bear Stearns.

Please state your question.

Just following up on that.

What portion of your Brokerage business is actually from mutual funds?

It's not a huge number but it is clearly a more fixed cost component than some of our other components within the Investor Communications side, obviously.

I've just gone through this whole thing, Jim, talking about how the backoffice has excess capacity but as we think of the investor communication it's margins have a bigger impact when we flip one way or another, either up or down.

I would add it's not a huge number on an annual basis.

It's a bigger component of the first quarter.

That's true.

Than it is for the full year, because the corporate proxies activity is so much heavier and it happens at the end of the year whereas we normally have a little bit more even flow with mutual fund activity, so it is a bigger component of the first quarter.

Makes sense.

Art, if you go back to the tax filing question earlier.

If you just use 4.5% as the current yield what's the split between fee income and the float income in your tax filing revenue?

Again, it's not a number I can call off right off of the top of my head but it's a number which we can calculate.

So it's one that we could come up with.

What I can tell you is that we bundle tax filing as a part of our sales in many cases right now and, therefore, it's kind of a single price that we are offering to the client because we've been doing it for so long and so much of our base is on tax filing.

So it's kind of imbedded but I don't know exactly what the right way to think about that breakdown.

What I can tell you is that as interest rates have come down, obviously, the float piece of it has been less which is one of the reasons we are, as we look at the job responsibilities, we are reducing it from the 6 to 4.5.

And stock buybacks in the quarter, can you give us a number.

The stock buybacks in the quarter were 1.7 million shares which you should not take as any indication of the rest of the year, the bulk of what Art said earlier about our appetite for share repurchases.

Great, thank you.

Next question comes from Michael Melman with Melman Research Associates.

Please state your question.

Thank you, Art.

I want to follow a little bit on some of these incremental margin questions.

You talked about communications, it's sounding like it's almost 100%.

Could you give us some idea in the Brokerage side on the backoffice or is it a backoffice reversal of what the incremental margins are on the backoffice and on the communications and also size those two pieces of the business?

Thank you.

I think I was trying to express earlier the incremental margins in the backoffice processing piece, in part because of the capacity that we have in the business, would be very, very high.

I don't know how you put a number on that but it would be very, very high in terms of the way you think about it.

As we have spent these last three years living through a decline in volume, it's been very painful because that plays out on both sides.

So if we had more volume it would be better.

On the Investor Communications group has a number of different components to it and each of them has a different margin component.

But as a general rule you have to think of the margins in investor communication being lower than the margins in our trade processing.

And the reason is because we have a postage pass-through as a part of all our communications.

So basically the postage becomes both revenue and expense and, therefore, it makes the overall margin less.

So the relative size of the businesses is, Karen knows the numbers a lot better than I do but if you look at total revenue, the Investor Communications is probably twice the size of the backoffice processing number, but, again, a piece of that is the postage pass through that I was referring to before.

So I know I bounce around a little bit Michael but I hope that responds.

Right.

Thank you, Art.

The next question comes from Thatcher Thompson of CIBC World Markets.

Please state your question.

Good afternoon.

You mentioned double-digit growth in the small business segment.

Can you tell us how much of that growth typically comes from CPA accounts referral?

We said double-digit unit growth in the small business market.

No, I don't have the exact number of what came from the CPAs.

What I was saying was that our CPA activity in units did increase by 40%.

But I don't have the exact component of how much we get on a quarter or annual basis in units from CPAs.

Has there been a particular change in strategy in the last 12 months to target CPAs and if so exactly what are you doing that's different?

The answer is absolutely we have targeted CPAs.

I can also tell you we've attempted to target CPAs a number of times in the past and has not been as successful as we have been this time.

There are a number of techniques, I would just as soon not get too specific in term of the things that we're doing, but we are clearly increasing our communications with them.

We are increasing the types of services that we offer to CPAs that makes it easier for them to deal with us as they deal with multiple different accounts that they would refer or that we would be processing for them.

So again without being too specific we've tried a number of things in the past.

We are trying some new things right now and our recent success has been positive.

Okay.

Thank you.

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

The next question comes from David Farina of William Blair.

Art, you made a statement early on about your fee for the tax pay product being part fee and part interest on the float.

Have you guys adjusted your fee proportion?

I know somebody asked you what the percentage was.

I think what he was trying to get at was if you've lowered your interest assumptions are you lowering the cost of that product to your customer, is it kind of blended in, or have you upped the fee component?

You follow my question?

Yes, absolutely.

No it's a very important question.

We've ridden the interest rates down so we have not passed that on to our clients in terms of additional fees.

That's a decision that we were faced with.

That was a decision that we made.

The positive side is the flip side of that, is we do not intend to change our fees as interest rates go up.

So we've played that down but it clearly, the fee piece we've kept independent and the same way we were saying we have the people within our business think of a relatively fixed interest rate, that's kind of the base that they are pricing off of is thinking from a more of a fixed rate long-term interest rate mentality than the short term variations in interest rate.

Given you kind of set the rate of 4.5%, I know one of your competitors does in fact hedge.

Is that something you guys have reconsidered in this environment or you just kind of figure it is going to be what it is?

We have reconsidered and considered not doing anything different than what we've been doing.

Okay.

And lastly, one last quick question for you, couple press releases out of some lesser companies about hiring some ProBusiness people.

Anything there or is this kind of normal acquisitions turnover?

I would say it's normal acquisition turnover.

We've clearly had some overlap with the territories and the sales force with ProBusiness.

We've hired a number of and retained a number of the sales management and sales force there and so I think it's just the normal break that happens when you have an acquisition like this.

Okay.

Thank you.

We do have time for one more question.

The final question comes from Robert Tung of Smith Barney.

Please state your question.

Hi, if I may, two questions.

First, in terms of your float balance, your investment float balance, what's the split between long-term and short term securities?

And how much needs to be reinvested this year?

I don't know if I have all the specifics on that.

I think you'd probably find some more detail on that in the quarterly filing.

I will tell you that the duration of our portfolio which is a combination of the corporate and client funds is about 1.7 years, which is about where it's been for awhile and it probably will stay that way as we look at this year.

The exact amount that's rolling over this year, it's generally around 20 percent, no more than 20, 25% of the total portfolio that would role in the year.

But I don't have all the specifics here.

That's very helpful.

Thanks.

And my second question is with regard to your EPS guidance of this year, the range remains $1.50 to $1.60.

I think consensus is somewhere in the middle of that and yet in this quarter you guys were about 3 cents above consensus.

In looking at third quarter and for the year can you give us a little bit more sense for what your EPS guidance would be for this second quarter as well as whether you see yourself for this year more towards the high-end of your $1.60 range or toward the low end of your $1.50?

I think we were very careful to reaffirm our forecast and are very conscious in terms of who ADP is and the way we can forecast, usually, that we left ourselves a breath of room.

So I really don't want to get into more specifics either on the way the quarters are going to break down or whether or not we are any place other than where we've been in terms of that $1.50 to $1.60 range.

I think the comments that Karen made and that we made earlier in the conversation that said we felt pretty good about this quarter and I think those are indicative.

But I don't think we should read anything more into it then that.

So I am very comfortable staying with that broad range and saying that that's where we are for this fiscal year.

And for this quarter you mentioned that your investment initiatives plan expenses were 10 million below plan.

How much did you actually spend in the third quarter on growth initiatives?

In our first quarter, in this fiscal quarter, I think it was probably in the $20 million range.

I think as you think about it it was 140 million in total, and so that would be, if you assumed it was all even it would be about 35 million for the whole year but I don't think we ever thought we would get to the whole pace at the first quarter.

So it's probably somewhere in the $20 million range that we spent.

Okay, thanks a lot.

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

Okay.

We are now trading at $37.84, at least as of a minute or so ago and Art and I want to thank you all for your interest and your questions.

Thanks.

Ladies and gentlemen, this concludes the conference for today.

Thank you all for participating and have a nice day.

All parties may now disconnect.