自動資料處理 (ADP) 2004 Q2 法說會逐字稿

Good afternoon and welcome to the ADP second quarter earnings conference call.

At this time I'd 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'll 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 as usual with Art Weinbach, Chairman and Chief Executive Officer.

And welcome to our second quarter of 2004 conference call.

As you know, we issued our earnings release this morning and we reported 9% revenue growth and earnings per share of 38 cents for the quarter.

Our revenue growth this quarter was helped by an increase in brokerage services activity and we're very pleased to report the 7% growth in our brokerage business.

Our earnings were about a penny ahead of consensus, we are a little bit ahead of our plans after the first half the year.

Our investment spending picked up a bit to $30 million in the quarter and will continue to grow in the second half of the year.

In general, things are looking a little bit better.

We have signs of improvement, particularly in Employer and Brokerage Services at this point.

Our key metrics are starting to pick up, the economy is certainly helping us and client fund balances in particular were strong in the quarter and continue to be, and our trading volume as you well know, has been very good lately.

So as we leave the second half, we're a little bit ahead of our plan and we have some more visibility to our key metrics and we have narrowed our guidance to between $1.53 and $1.58 earnings per share with mid single-digit revenue growth.

So, with those very few opening comments I think we're ready to go forward.

I'll say the usual, we discuss some forward-looking statements, that involve some risks, these are discussed in our periodic filings with the SEC.

We're ready to start the call, I'm going to turn it back to the operator.

I do ask that you try to keep your questions down to one at a time so that Art and I can answer them properly.

We have about 113 people signed up for the call today.

Our stock a few moments ago was about $41.80.

And at this time I'll turn it back to the conference call operator.

Thank you, ma'am.

The question-and-answer session will begin at this time.

If you're using a speakerphone please pick up you the handset before pressing numbers.

Should you have a question, please press star 1 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 the first question.

Our first question comes from David Grossman of Thomas Weisel Partners, please state your question.

Thank you.

I was wondering if you could maybe touch a little bit upon the margins going forward, you've done a really good job of kind of over the last couple years in terms of holding the margins, we've got some incremental investments that started, you know, in the first, I guess perhaps in the fourth quarter of last year.

Can you help us understand as the economy improves how we should think about the margin trend going forward, relative to historical levels?

And then just another question unrelated on the tax rate if you can give us a sense of whether the current tax rate is a good tax rate to use for next year.

Okay.

On the margin issue, right now we're in what I would say is a real anomaly, especially if we're looking at employer services where the most significant decline in the margin is taking place and this being caused by basically two things.

One is the acquisitions we made last year, both the Pro Business acquisition and the Scudder acquisition had dilution, are causing dilution during the course of this year and, therefore, have reduced our overall margins, and of course the other thing is the incremental investments that we've talked about.

In total Karen just said there was another $30 million within this quarter, I'm not exactly sure how much was Employer Services but certainly a significant piece.

I think as you basically hit the anniversary dates of these types of unusual items, what you ought to be anticipating is that the economy of scale benefits which we've gotten for many years will continue in Employer Services and basically across ADP.

So it would be normal to expect margin improvement from year to year.

Whether it's a half point or a point.

I mean, it really depends on where the revenues come from.

But that would be a rationale way to think about margins once you've anniversaried these dates.

I would add you really have to look at it for each of the businesses individually.

There's a lot of things going on as Art talked about, the leverage in Employer Services we would expect on a normal year some leverage in margin improvement.

Where's the growth coming from in Brokerage Services - you have the higher margin back office business, lower margin investor communications business, obviously interest rates play a big part in our margins, and so are we -- at what point are we in the interest rate cycle.

So all of those things need to be factored in.

I would say that if I could move to the -- your question on the tax rate, our current tax rate is 37.4%, I think we'll be able to improve upon that a little bit in the second half and into next year.

There's some state tax issues that we're working on, if some of the things fall our way, I would say we would probably if anything go lower, I wouldn't anticipate going any higher.

Great, thank you.

The next question comes from Greg Cappelli with CSFB.

Please state your question.

It's Greg and Josh.

To follow on the brokerage services division I wonder if we could get more data in terms of the trades and mix and other detail?

Sure.

The trades increased actually 1% versus the same quarter last year, which was a nice change in the trend.

As you know, trading activity has been stronger in December, and in January.

So it's nice to see an improvement and a growth in trades.

Our retail mix actually was up a little bit so we're seeing a growth in retail.

Our retail mix was about 35% compared to last year, that's up about 2%.

I want to remind everybody that we are now talking about, when we talk about a retail mix, we include Canada and one of our other product lines, SIS.

We did an acquisition in Canada at the end of last year which was heavily retail.

So overall this added about a point as well.

If you go back a year or so ago, we were talking about a U.S.-based only number.

So it's about 35% now compared to a comparable number last year of about 33%.

If I move to -- if you want to talk about the investor communications side, the -- our number of pieces, number of pieces delivered in the quarter was up.

The -- our number of pieces delivered is impacted by both the number of shareholders or holders as well as the number of jobs in the quarter.

So you have to look at both of those things individually.

The number of holders is actually down slightly.

And think of it like same-store sales.

So if you process the same exact proxy job one period in one year compared to the same last year, it was the number of holders in that equity, if you will, in the same transaction.

The number of holders is down slightly, we think it's going to be -- we're forecasting now it will be about flat to down slightly for the whole year.

The number of jobs, however, was the bigger driver in this quarter.

In particularly in the mutual fund jobs, not the proxy jobs but the interim jobs.

In total, I'll give you the number, the number of pieces was actually up in total, this includes everything was up over 20% for the quarter.

There was very strong growth in mutual fund activity.

Some of it was related to the regulatory issues and firms communicating their plans and addressing issues that have come up in the regulatory reviews.

Some of it is frankly from growth as we have had some sales, we have new client growth in the mutual fund area as well.

So I think that the quarter was clearly influenced by some of those recent regulatory issues, but some of it will carry into next year as well.

Just a quick follow-up, given what you said, what do you envision for the Brokerage Services margin?

Are we going in a double-digit territory here relatively quickly or otherwise, given your comments on the space.

I think the margin for Brokerage for the full year will be around the same as it was last year, which is double digit, about 14% last year.

You have to keep in mind that the end of the year, particularly in the fourth quarter, has our heavy proxy season.

So even though we're reporting growth in number of pieces in the second quarter, in general it's a lighter quarter, a much lighter quarter than we'll see at the end of the fiscal year.

And we have that heavy proxy volume, that drives up the margins automatically.

So I feel comfortable at this point that we're -- we'll be in double-digit margins for the full year.

Got it.

Thanks a lot.

Let me add a flavor comment to this, if I can.

Because you hear the numbers and you can get lost in the numbers a little bit, at least I can.

But the -- first trades are improving, it's been over a year since we've had any growth.

We have had the anniversary of some client losses that have played into that, but the overall tone in terms of trades is better.

The overall tone in terms of retail involvement, again as Karen said, is moving up a little bit, but it feels better.

The clients who we're talking to or talking about more activity, there is more activity there.

In the mailings that we have, while our stock record growth is kind of flat for the year, the inclination is to believe, as we see the pick up in retail involvement, that that should start moving in a more positive way during the year, and while we may get fewer mailings due to the mutual fund regulation and issues, again, the tone is that there are a lot more things going on than were going on before.

So just an overall -- we are seeing improvement in the overall environment in Brokerage, that at least to us is notable.

That's helpful.

Thanks, Art.

The next question comes from Mark Marcon with Wachovia Securities.

Please state your question.

Good afternoon, and congratulations on the performance relative to expectations, particularly in Brokerage.

I'm wondering if you can give us a sense in terms of what your outlook is in terms of competitive environment on employer services, what you're seeing in terms of pricing out there.

And kind of what your expectations are in terms of the margins on Employer Services as the year unfolds?

I don't think there are significant changes going on in the competitive environment and in Employer Services right now.

I think that the players are all competing, competing hard, so the same names that we always talk about, we talk about certainly Intuit and Paychex at the low end of our SBS business, and we talk about the Ceridians of the world and we talk about the ERP players as we come up in the world.

Our business has been a lot more price-sensitive over the last couple years.

I haven't seen any reduction in that price sensitivity at this point.

So if we get back to points where we were three and four years ago when there was a lot less price sensitivity, if we ever are going to get back to that, I don't see any of the inclinations towards our getting there at this point in time.

So I would say no major changes in the competitive environment with pricing staying pretty tough.

Okay.

The second part of the question was about Employer Services margin and I would say that we're looking at -- we're about -- we are at 20.7% margin, and year-to-date.

I would think we're going to be somewhere in the 21% range for the full year, obviously it could be a little bit higher or lower than that.

But we talk about an increase in acceleration of the investment spending in the second half of the year over what we spent the first half.

That's primarily in Employer Services.

We'll be increasing our spending there and continuing to invest particularly in sales there.

So, but I think we should end the year somewhere in the 21% range.

Okay.

And then with regards to Employer Services, can you give us a feel for what the margins would have been?

I know this is difficult, but if you've gone through the exercise internally, what the margins would have been had you not done the Pro Bis and Scudder acquisitions?

Go ahead Karen.

I'll let you work the math but I think we said originally that the Pro Business was, what did we say, 2 cents dilutive overall and a penny's worth about 10 million pre-tax overall.

And Scudder I'm sure was less than a penny so that's about the size of what we're dealing with this year.

Okay.

And so as we start looking out towards the following year, the incremental increase that we had with regards to investments, you know, should mitigate Pro Bis and Scudder would be more integrated, those would go away as head winds, wouldn't they.

You have to be careful of the ramp-up in the expenditures.

Because it's ramping up as we go through the first half of next year we will be up at a much higher level as we exit this year.

You'll have to be careful of that when you think about next year's margins.

Basically the answer is yes, both Scudder and Pro Business were a year ago and so those will be gone, basically we'll be in the second year of our integration and the comparisons will actually get a little bit easier than they are this year.

And the -- we won't have a similar type of increase in terms of the investment spending certainly to what we're doing this year but you will have to watch those quarters.

Got it.

And final question.

Karen, you did a great job in terms of breaking out on the 10-Q the beyond payroll and core payroll growth.

Can you give us those numbers for this quarter?

For the quarter, the beyond payroll growth was -- revenue growth -- and this is U.S. metric, most of the time with we talk about beyond payroll we're talking about the states or North America.

Beyond payroll, 15% revenue growth, payroll and tax was about nine, also talking about the U.S., but that's influenced heavily by the Pro and Scudder acquisitions.

Think about the payroll growth, pure payroll was probably in the 4% range, three or 4% compared to 15 or so in beyond payroll.

Thank you.

The next question comes from Craig Peckham of Jeffries and Company, please state your question.

Good afternoon.

I wondered if you could comment onto the order trend that you talked about for the first six months.

You said you were about 2% sales growth in the second quarter.

Can you remind us what we're looking at for the full year?

Well, I think we had a -- this is Employer Services that we're talking about, you're referencing the comment that we made in the release about that we had a 2% sales growth during the quarter.

We had, when we started this year we said we expected to see a double-digit increase in terms of our Employer Services sales.

We kink of backed off a little bit last quarter and said even if we don't hit that, our forecast kind of takes into consideration that we might miss it a little bit.

As we're looking right now, I think we're in the ballpark of double digit but that's too strong for me to call, and so I wouldn't want to call that at this point in time.

So I think we will see improving sales performance in part, because we had a lousy year last year, and the comparisons are going to be easier for us in the second six months.

So I'm expecting growth, I'd be very pleased if we were closer to double-digit number.

And I would also add that in addition to reminding you about the fall-off, which actually happened in the last three years, we fell off in sales, largely because we weren't close to making the number, and I don't anticipate that happening this year.

But also, that as you look at the first half and the second half -- what we need to get to in the second half, it's not like it's a big leap in terms of total sales expected in the second half compared to what we've done in the first half to get us up from where we are today, of 2% in this quarter, and flat to negative in the first quarter.

To get to close to the numbers that Art was talking about.

So it's not as big a stretch because of those comparisons.

Okay.

And maybe just to nail this one, the contribution, I should say the percentage of total 2004 orders coming in the second half compared to the first half, I again what would the relative mix be?

I mean --

Total --

-- orders come in the second half versus the first half?

At this point it's slightly higher in the second half, I don't know the numbers exactly offhand but I don't anticipate a big growth from the second half to a first half.

We get a big selling season in the October, November and December period each year.

Because of that with the year-end, it gets us up to under 50% but starts to get us close to it.

So it's in the high 40%’s in the first half of the year and the remainder is in the second half.

Part of it is what Karen was talking about before, just because we're a June 30 year-end, there are certain psychological impacts on our sales force that impact our last quarter of sales.

Okay.

Fair enough.

And just one more question: Back to the brokerage side, I was curious, can you give us a sense for how sustainable some of these large-scale mailing activities from the mutual fund complexes would have been?

I guess I'm trying to get a better sense for the maybe unusual nature of the situations we've even over the past several months?

I think there are a number of one-time, I can't tell you what the dollar revenue associated with those ones which I'd call one-time because they're so tied to the regulatory environment, hard for me to give you a good breakdown on those numbers.

But we're doing well in other areas.

We're signing up more clients for registered mailings, we are getting other activity in mutual fund world beyond just the activity around the regulatory comments.

So while I can't break down for you, because I don't know the number, exactly how much of it was directly related to regulatory issues, in mutual funds, I would tell you that there's clearly a sustainable piece in there.

Okay.

Thanks Art and Karen.

The next question is from Pat Burton with Smith Barney, please state your question.

My question has to do with the acquisition strategy, Art, as valuations now look like they started to move back up with the market, could you give us any commentary there?

Thank you very much.

We continue to look at acquisitions as a strategic part of our growth, and we will continue to do that.

So we have some transactions that we are always in the process of talking with, those continue.

I have not seen an uptick in pricing at this point in time.

Where prices are going up again in the market.

So I still see pricing having come down from some of those irrational levels that we used to talk about a few years ago, having settled and not yet having come back to the irrational levels.

All of that should say you should perceive us as willing and hopefully active players in the acquisition market.

As we continue again to look for strategic acquisitions that are going to help us expand our core businesses.

Because that's clearly where the primary thrust of our acquisition focus is.

Thanks.

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

Please state your question.

I wanted to follow up on a couple of things, Karen you made a comment about average daily balance moving higher, a bit higher than expected.

Maybe you can elaborate on that.

And quantify that.

And then also, I had a follow-up question related to the ICD.

Yeah, sure.

The average balance, client fund balances were $9.6 billion in the quarter, which was much stronger than we had originally anticipated.

And represents over 20% growth over last year, but Pro Business acquisition contributed at least 10% of the growth.

So it was probably internal growth of more like 10, 11%, which is very good.

It's related to what we're seeing as wage growth, bonuses being better.

Eventually we'll have some more stock option income in the results, and growth in our money movement products.

So we're very pleased at this point with the growth in balances.

The $9.6 compares to about $7.9 billion last year.

Okay.

Great.

And then on the ICD, I just took a stab at this, but I want to see if I can ask you a different way.

It looks like much of the upside in Brokerage came from that division, and mostly from jobs, not positions.

And I'm just wondering if you have a better outlook on positions or if you think that some of the -- a lot of the new activity that you've seen is recurring as we go into calendar '04?

In terms of the positions, our outlook is -- which is predicated in part on expectations, is that the number of positions will increase in the second half of this year.

So we're reluctant to forecast that at this point in time.

But our belief, based upon the movement that we're seeing in the market now, says that by the time we get to the annual meetings for some of these clients, we're expecting that the flat to slightly negative number that Karen was talking about up until now in terms of stock record growth, will be flat to positive.

So we're -- we are actually looking for a bit of improvement.

If we leave the stock record growth area, and we go to the kind of all the other things that we're doing, as I mentioned earlier, we have had positive momentum in some of those areas.

So while I can't tell you the exact number because I don't know how much that falloff is going to be from the one-time mutual funds, I think you could anticipate that on a period-to-period basis you should see relative growth in that piece also.

Okay.

Very good, thank you very much.

The next question comes from Adam Frisch with UBS.

Please state your question.

Thank you, good morning guys or good afternoon, rather.

On the outsourcing market, I'm surprised we haven't had any questions yet on this topic, but I think in the past Art you've said you're hesitant about getting into the more comprehensive outsourcing arrangements because maybe the margins weren't as good as your core business.

It seems from the release you're getting more focused on that market.

What changed?

And how are you approaching it and how do you plan on getting around some of the margin issues related to that highly competitive and price-intense area?

Thanks for the question and your recall on my comments is pretty good.

The -- let me make sure I qualify this right, because when we're talking about comprehensive outsourcing, when we are using this term since a lot of people use it differently, what we're basically talking about are multi-line, what we call multi-line transactions.

These would be things that combine the normal back-office process-type things that we do.

Think payroll and tax, think benefits services, think human resources, and human resource administration.

And we combine those with some front-office activities like employee call centers, direct employee access to the data, and we will expand over time into selected additional administrative processes.

The thing that's caused the change in terms of my hesitancy is that the market has said hey, we want this stuff.

And so as the market demand comes, and as our sales force is tuned to go sell what the market wants, we clearly have seen the opportunity and have said this is an opportunity that we have to follow up on.

So it's been led by market activity, and by what we're seeing as significant opportunity within that area.

The margins going forward will be lower, depending upon exactly which of these multi-line processes individual companies take.

And we're just going to live with those lower margins over time because I think the overall outsourcing business will have slightly lower margins.

It clearly will also have increased profits and, therefore, it makes an easy decision in terms of where we're heading.

We have created -- well, two things actually: In the Pro Business deal, we acquired a number of outsourcing companies, outsource clients, and that helped us with our perception in terms of where we're going.

And we have created a new organization structure with identified people who will be focusing on the coordination, that's necessary in order for us to provide the excellent services we think will differentiate us within this world.

So it's a -- it's being driven by an opportunity and it looks, and still in its early stages at this point, to be very promising for us.

How big do you think it can get in terms of resource allocation from ADP and revenue contribution as a percent of total?

It's premature for me to go out and try and talk like numbers like that.

I do see this as a very significant market.

When we talk about our national accounts market, and we talk about our major accounts market, and we talk about our small business market, each of them you can put in the $15 to $20 billion potential market size.

I think you can look at this market as equivalent in terms of size, as a major market opportunity.

So, big -- another big market for us to attack.

Okay.

Thanks for that commentary.

Turning to brokerage for a second though, I think it's kind been asked more on a shorter term view but can you assess for us within Broker Services what is more secular and what is more cyclical in nature with regarding where margins could go?

The reason I'm asking is because since the last downturn, there's been a lot of developments in the industry like consolidation of some of your customers, that is obviously affecting their volumes and hence the pricing band that they would fall in.

Could you go through some of the secular and cyclical issues within brokerage and give us a view for longer term where you think that market is going to be?

Well, I can try.

I'll try and wing it as I'm going through it.

I think the biggest secular issue that I've been worrying about in this market has been whether the retail investor had been so scared away from the market that they would not participate at the levels that they had in the past.

And even though you heard us talking about some positive movement at this point in time, it's still -- I mean, we're way short of where we were certainly in the late '90s period.

So a piece of that is still up in the air.

We'll clearly get a bounce-back but it's very unclear to me just how much of a bounce-back we'll get.

I think the consolidation in the industry is a real thing.

I think that especially over the last few years, as retail brokerage got weaker the firms ended up being the acquirees more often.

As retail involvement picks up, it's conceivable to me that retail brokers will be more active acquirers, and maybe that will change back but I wouldn't bet on it.

I would bet that the strength of some of the large institutional players and certainly the large banks at this point in time might make them the more likely acquirers.

So I think that that is a long-term issue for us to focus on, and is, you know, is a potentially real secular issue.

I think the pricing issue that you talked about in terms of when the clients get bigger, the incremental trade pricing goes down, I think that that's real.

But we provide so much value added to our clients that I think that will find a natural level and we will continue to do well in terms of our margins going forward on that score.

So I guess that's kind of it.

I, in general, I'm still remain very optimistic that the types of services that we can provide, especially to other than the very large largest firms, have so much value because no one else can afford to do what we can do and spread it over as many trades as many clients as we can.

So we bring an inherent cost advantage to the table, and we have excellent service.

So I'm -- I remain optimistic.

Do you think you might have to make some acquisitions in that area to kind of augment what you're doing within Brokerage, maybe expanding into other types of bank services outsourcing or things like that?

It's conceivable that we will continue to make strategic acquisitions to expand our market potential.

But I don't want to get specific at all about the direction.

Last question just on sales growth, obviously looking good from where you were telling us at the investor day, picking up, you expect a stronger second half.

Can you just kind of elude to, I'm not picking on you, can you allude to how much you think was due to internal issues and how much was due to the market in general, just experiencing a downturn like everything else that we look at?

I'll take a crack at it, Art you -- uhm, I think the way we look at our groups, that most of it was related to the market, I don't know and can't put my finger on one thing that I think "Wow we really didn't do that from an internal perspective."

We certainly in the last year -- up until the point we started fiscal '04 but going back to '03 and '02 we certainly did invest in and increase our sales force the way we would have normally done when we saw better markets.

So that was a difference.

And we've in fiscal '04 started to invest again in the sales in terms of increasing the sales force.

But I don't know, maybe Art -- anything that I would say that we could say "Wow, we really, you know, should have done something differently", we've realigned in majors and added and focused there, this year we're putting more sales people in some of the hotter areas like PEO like TotalSource, but I don't know that with the market going down as quickly as it did, and if you looked at our sales results going back a couple of years in Employer Services we went from, you know, two, three years at 20%, 20%, 20% to 1%, in such a quick period of time.

It's hard to say all of a sudden we did something wrong in a big way internally.

But --

I would say that the impression that says this is just market activity may be the right answer, but boy, we have sure done a lot to prepare ourselves for a market opportunity.

So we've made significant changes, and a number of our businesses we have increased our lead generation, in a variety of areas by -- we're feeling increased confidence now and so we're willing to rebuild our sales forces, we've targeted our sales forces, differently.

So we have done a lot of reorganization, a lot of focus in order to prepare us for doing better when the market gets better.

So it's going to be hard for me to break down how much is which, but we'll see how it plays out over the next several months.

Okay.

Great.

Thank you.

The next question comes from Bryan Keane with Prudential Equity Group.

Please state your question.

Hi, good afternoon.

On Pro Business in general, can you give us an update in how the integration is going there and how close you guys are to getting or can you get to where bring Pro Business margins towards those of ADP's historical margins.

In general, I think the Pro Business integration is going quite well, we're very happy with it, our client retention has been good, very good, I think it’s over 95% at Pro Business so that's the ultimate sign of how we're performing in dealing with our clients.

And our plans call for more integration and leveraging and, you know, some operational efficiencies.

I don't -- the -- whether it's exactly the same as the overall ES margins, I don't know.

I think it will be close once we get through with the integration.

We've moved, for example, the tax filing business, so we've totally integrated that with ours.

And the incremental margin we get on a piece like that is very high.

I would think that when we complete the integration, which will still take a while, and we refocus so that our sales activity is on the ADP products, which is a direction that we've been going, including this outsourcing thing which I was talking about how pleased we were with what we learned from Pro Business on it, I'm expecting their margins to be comparable and to be very good.

Because we, in effect, will be maintaining and not necessarily using the same investment dollars, going forward on that product set as we are in some of the others.

So I'm looking for good margins but it will take us a while to get there so don't leap to it.

That was helpful.

I was interested in your comments of a stronger sales growth in Employee Services.

I think you allude to investments in products in a larger U.S. sales force.

I guess which products in particular would help carry the load in the second half of the year?

And how much bigger is the U.S. sales force?

We have, when we talked about the incremental investments we probably highlighted two products our Pay Expert product, which is a -- an Internet front end on to our Auto Pay, our core Auto Pay product, which has been doing very well, and selling very well.

And our Total Choice product, which is targeted more for people who have been in-house users in the high-end of the majors and low end -- well, high end of majors, low end of national account marketplace.

And so that would be where the -- if I were to pick out two things, the most significant pieces of the investment would be.

I lost the second half of the question.

The second half was around how much of the sales force is growth and sales force, and I'd say when we started, the plans were somewhere around 7% growth in the sales force.

We're probably close to that and will continue to increase that throughout the second half as we ramp up and get ready for fiscal '05.

Okay.

And you can clearly see demand picking up for the reasons for the needed sales force additions?

We have increase -- we've reported what our sales results are.

As we look out, as we talk to our -- as we listen to our sales people and as we hear their optimism, we believe that the ramp-up is appropriate, but we're going to have to let the results speak for the real appropriateness as it occurs.

Okay.

Great, thanks.

The next question comes from Cindy Shaw with SoundView Technology Corp.

Please state your question.

Two questions.

One, you mentioned last quarter that your CPA referrals had been up.

I was hoping for an update on that.

And then on the Employer Services outsourcing business, if you could give us more color on the types of clients that seem to be showing a lot of interest in those services and the competitive landscape there as well?

Okay.

I'll take the first part of the question.

The CPA referrals, I remember talking about at the first quarter.

I don't have the equivalent statistic of exactly what the CPA referral increase is.

I think it's still pretty strong.

Our unit count is up across the board and in Employer Services sales it's up particularly in the small business segment where it's up double digits.

And I'm sure a good part of that is coming from better performance in the CPA referrals.

But it's not something is that we regularly track and will report on every quarter.

The second half of the question related to the comprehensive outsourcing and the types of clients we were seeing, and the competitive landscape.

The clients look like typical large corporations.

So there's nothing that I would differentiate in terms of service companies, manufacturing companies, global companies or other.

I think at least from the companies that I've seen so far, both that we have already signed and some of the ones who are actively talking to, there's no clear underlying trend I can determine, other than size.

They are all of some size.

I would say the competitive landscape is very significant, although interestingly, more significant the larger the client.

So as you get up into the very large clients, there are huge numbers the competitors in every transaction.

And it gets to be a little bit best competitive as the clients get a little bit smaller.

Can you maybe mention some competitive names that you've run into whose focusing more on the middle market and who you're bumping up against in -- and really feel a stiff competition in the larger companies?

As a matter of practice I try not to do that.

So I'm going to avoid, you know, bringing up the names who are specifically competitive to us.

I sure don't want any of those clients talking to us to go talk to them.

Okay, thank you.

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

Please state your question.

Good afternoon, thanks.

Can you maybe just a little more detail on an earlier question on your investment spending plan.

Should we continue to assume that you're going to spend at these higher levels as we look beyond fiscal '04?

And can you give us a sense, especially assuming the hiring and general economic climate is getting better whether you might actually add incrementally to that spending in fiscal '05 or beyond that?

Yeah.

I think you should think of the investment spending as definitely continuing into fiscal '05 and beyond.

We've said that we want -- that these increased investments would continue, you have to watch the rate as we started off a little slower this year in the first half so we're catching up a little bit more in the second half and, therefore, some of it might spill over into an even higher rate in fiscal '05.

I think that clearly as we see the opportunities, as we look at our performance and see the opportunities, we would decide if -- to increase our investments and to continue to do that in other areas as the opportunities arise.

Okay.

And then maybe just thinking a little bit about the returns on the investments, Art earlier you talked about pay expert and some of the existing products you're investing in.

Are you also sort of increasing your R&D if you will, investing in any new products that we might be looking for launching in '05 and beyond?

It's interesting, the actual investment dollars that we made as part of this incremental investment group were much more focused on products that were already in process where we thought we could accelerate the quality and the pace at which we could get it to market.

Right.

Much more than it was new ones.

So we have what I would call our normal development efforts which have a mix of -- always have a mix of what we call Horizon 1, Horizon 2 and Horizon 3 type of investments.

That would be kind of the normal type of investments.

So as we focus on the incremental investments very little of it was the so-called nuevo or brand-new type thing.

A little bit in Claims, for example, we had a couple of areas that I would say didn't fit into what I said.

But as a generality, what I said is very accurate.

So maybe as a final point on that, are you spending at levels the same levels that you might have been two or three years ago on kind of new product R&D or is that an area that maybe suffered during the downturn that you anticipate increasing spending on going forward?

I think we're -- if I look at our developmental dollars as a percentage of revenue, they have ticked up again, so that certainly this year we're at a higher level than we've been over the last couple years.

We may not be back to where we were three years ago, but if not, we're pretty close.

So I think we're pretty much back to normal.

Okay, that's great.

Maybe if I can a quick follow-up on the sort of nonsegmented revenue, what we call Claims and Other.

Can you give us some color on sort of what's in there?

I think in the last quarter you actually broke out several line items within that so we knew the components of sort of interest offset to Employer Services versus how much was Claims and so forth?

Right, there will be more of that in the filing, in the 10-Q filing, you'll be able to see it.

But to highlight it, Claims was down 5% in total for the quarter, Claims revenue, the total revenue was about $90 million.

In fiscal '04.

As I said, just down in 5% versus '03.

The other components of that category are the offset to the interest allocated to Employer Services at 4.5%.

I think -- I don't know this number off the top of my head, but I think that number was somewhere around the $25 to $30 million negative within the quarter results.

The other item in there is foreign currency adjustments where we allocate to our business units a standard budgeted rate for currency year to year and the difference in the rates to get to our actual revenues would go in that bucket, too.

I think that was a positive 11 or -- I think it was a positive 11 in the quarter.

So the real reconciliation will come in the 10-Q filing in a couple weeks.

Those are the three main items that are in that number.

And corporate -- no, corporate interest is in the income side not the revenue side, I take that back.

Thank you for the help.

The next question is from David Togut with Morgan Stanley.

Please state your question.

Thank you.

Can you provide more detail on the tax filing float in the quarter, specifically what percentage was overnight instruments versus longer dated securities?

And how should we think about the float going into 2005 in terms of the rollover of some of the one to two-year notes?

I don't have specific numbers of how much was in each bucket and again, there will probably be more on that in the filing.

Duration of the portfolio, in general, was just a little bit shorter this quarter than it was last quarter.

So it was averaging a combined 1.7 years, I think at last quarter, it might have been 1.8 or 1.9, a little bit shorter duration.

Our yield was 3.2% in the quarter compared to 4.2% last year, same quarter and we're still anticipating for the full year to be somewhere around 3%.

As far as how it impacts us going into next year, it's hard to call, the rates have been fluctuating a bit, if we had looked at it probably 90 days ago, we would have anticipated that we would have actually been -- had flat to somewhat pick up finally in interest, but the rates have changed again.

So it's hard to say at this point.

The rates in the last 60 days have, I think, gone down probably 50 basis points overall from when we were last looking at it in November.

But we won't --

Two, three, five year --

In the two, three, five, in the overall blended, not in the Fed Funds rate, but as we look at it, I think, we won't see anywhere near the kind of declines, if interest rates prevail where they are today, we won't see the kind of declines overall in interest income that we've seen in the last couple of years as we move into '05.

Just as a follow-up, assume we do see some pickup in fed funds rates in '05, would you see some lift along with that or would there be downward pressure from the roll over of the some of the two to five-year notes?

We have enough to reinvest that we would see a pickup.

Our general guidance would be any 25 basis-point change in all rates in the curves would give us about 11 million incremental pre-tax over a 12 month period.

Even though we do have monies invested out a couple of years, we have rollover of our portfolio that would naturally come up in '05 plus we have new funds coming in from new income.

So we would see the pickup in '05.

One question on the cost structure, I know that investment spending picked up a bit this quarter.

Just looking at some of the reported margins, it looked like the R&D spending, System Development margin held pretty flat year-over-year, which is where I would have expected to see more of an increase in the margin, at least the expenses but it's really the SG&A that picked up more significantly.

Can you just dig into at that a little bit?

I don't know that I have the details of what's in each of the lines.

I think as we -- part of our investment spending program was part of it was new product, but it wasn't -- when we talk about new product and, for example, investment in the pay expert and the total choice, that's not all systems and programming, a lot of that was infrastructure to support it.

And so some of that would fall into operating expenses as well.

And a good chunk of the Employer Services investments was also increase in sales force.

And that clearly would fall into the SG&A category.

And not being bogged down by the numbers, I would have said that I'm surprised, as I think of the individual businesses, because I don't really look at the consolidated numbers until they come out, I think that our development expenses are increasing.

So I -- if it doesn't seem that way, I'm not exactly sure why, because I think I can go business-by-business and say in the aggregate that sounds like an appropriate comment.

And clearly, on the SG&A side, our sales piece of that, we are expanding.

So I would expect the sales piece of the SG&A piece to go up because we are expanding the sales expense side.

But the real numbers are the one Karen's giving you.

And some of the employer of choice numbers are in the G&A side as well.

So that's also in SG&A.

Just as a final question, Art, do you have a target for systems development margin as a percentage of revenue?

No.

We don't focus on a particular number, we really look at it based upon priorities, business-by-business, and where we think the best opportunities are, and we'll make the investments around there.

Okay.

Thank you very much.

You're welcome.

The next question comes from Brandt Sakakeeny from Deutsche Banc, please state your question.

Good afternoon, two questions for you.

One, Art, can you remind us, are you planning with respect to Pro Business clients to convert them on your platform or maintain two-payroll platforms.

On the core platform they have, we are maintaining them on the platform, called a wind flex -- called Whitney platform and we are continuing on that platform.

They had a next-generation platform which was called Golden Gate and we are converting people off of that platform.

Okay, great.

I guess with respect to the second question, can you just comment on the competitive landscape?

I've just noticed in your sort of sales literature, particularly for national accounts, a lot of attention on total cost of ownership for internal payroll systems, and things like that.

Is that a response to something or are we reading too much into that?

Thanks.

I think what happened over the last few years is the focus on cost and replacing cost became paramount in terms of making new sales.

If I’d say before that people are always, everyone's always been focused on cost, but they're also very focused on the benefits and value add that they could get out of the systems.

So as we saw where the market went, now we changed some of our literature to focus on where we thought we would get the best impact.

I don't think there's anything more than that that you should read into it.

O.K. because it does seem to emphasize the in-house payroll and the sort of hidden costs you've got a guy named Bob and he's got a hidden cost type mandate.

Absolutely.

Well, if you think about the way companies measure their internal costs it's very hard to look at a full cost absorption method in terms of the real costs of processing payroll and benefits so it's a difficult analysis for companies to make.

If you do it accurately, I think you get results that show the remarkable efficiency of our systems.

It's hard to get people to look at it that way, that's what it's all targeted at.

Great, thank you.

The next question comes from Greg Gould with Goldman Sachs.

Please state your question.

Thanks.

Art, can you talk about sales force productivity in ES, is it tracking toward internal expectations?

Is there a way maybe you can help us out and figure out if the training and roll out of these new services is paying off as initially anticipated?

In our -- the easiest way to answer is in the first quarter our sales were lower than we anticipated they would be, which would mean while it was very proximate to the time of investments I would say we didn't get the pay back.

In the second quarter we were pretty close to where we expected to be so maybe a little bit.

But the real answer to that question is going to come into the future.

As Karen said earlier, and we increased our sales force 7% so far in the first six months, our total sales are not up 7%.

That in itself is not a productivity comment because as we bring in new people, it takes us a while to get them up to speed and to ramp up to the type of productivity levels that we would expect.

So the answer would be we have not yet seen clear evidence of increased productivity that would answer in a positive way that question, but we're betting that it's there because otherwise we wouldn't be making the investments we're making.

If I could just clarify one point in addition, when you think about it, it wasn't just the 7% incremental number of sales people, when you look at what we did in our major account sales force for example was really realign a lot of territories and focus and went to the different structure.

So even though the people might have been there the year before, they were in different positions, focused on different products and different avenues so they also had aproductivity ramp-up that we were dealing with in the first half of the year.

Okay.

And in terms of pricing, Art, you had mentioned that it is still tough.

Are there plans to raise prices on a net basis in fiscal '04?

I think our price increases are made at the beginning of the fiscal year, so you may mean fiscal '05 with that question.

Because in effect at the beginning of this year we put in an under 2% price increase in Employer Services.

We have not yet made that decision going forward.

However, I would be reluctant to believe that there will be significant price increases next year.

Did the price increase at the beginning of this fiscal year stick?

Pretty much.

Okay.

Thank you.

The next question comes from Steve Weber with SG Cowen.

Please state your question.

Good afternoon.

Could you talked about how organic growth in the various segments and in particular in the past you've given us some feel for -- you've talked about pieces and stuff like that, but what the actual revenues happened, in ICD and BPSD?

Sure, Steve.

The internal growth statistics overall, we had 6% internal core growth for the quarter, ES was 5%, Brokerage was 5%, that's a plus 5%, Dealer was 8%, and Claims declined 1% internal growth.

As far as the more detailed metrics in brokerage, the back office piece, transaction processing, was down 8% in the quarter, even though we did have a slight increase in number of trades, still other influences in that business.

So down eight, the investor communications side was up 15 in the quarter, which gave us the net of the 7% increase.

Could you just remind me what that looked like in the first quarter, if you have it there?

I don't have the first quarter, I have the year-to-date comparisons will be helpful.

The year-to-date, the back office was down 13%, and the investor communications was down -- I'm sorry, the investor communication side was up three.

Okay.

Now, given where you are right now, your earlier guidance had been, I think that you were going to be roughly flat in ICD.

Is that changing very much?

And then you said in BPSD you would be down 10 to 15%, it sounds like your sort of tracking there.

Are you changing any of that?

And you talked about the margins earlier, but what about the revenue?

Yeah, I would say Steve because of the better performance, particularly in the second quarter, I would look at the combined number for Brokerage as flat revenue, maybe down 1% for the year at this point I'm thinking in the back office piece.

I don't know that will be 10 to 15 down, maybe we'll be seven to 10% down or five to 10% down in the back office, and in the investor communications side we'll be up a couple percentage points.

Is that -- at this point I know the trading stuff you can't, but is that guess on or forecast on ICD, is that reasonably locked in?

Is there a lot of variability that could take place now?

As you know from our past experiences, there's not -- I don't think the brokerage side will ever say it's reasonably locked in.

On the trading side it's quite strong now, but I don't know what the activity is going to be for the remainder of the year, if something's going to happen that, you know, that's going to drop off a bit or if it will continue at this pace.

It's hard to call.

We don't tend to anticipate big spikes, nor do we anticipate the declines over where we've been.

I would say that our second half forecast for the back office is a little better than our first half, because we're better right now than it was in the first half, but not anticipating huge swings either way.

In the investor communications side, it's always hard to predict because we have such big volumes at the end of the year with the proxy season.

So we have a better idea of how many proxies we're going to deliver in terms of number of jobs, that doesn't change that much.

The stock record growth of course is a question, and we are anticipating it will pick up a little bit from where it was in the first quarter, first half but not much.

So, I would not say it's locked in, but going back to what we said earlier in the call, right now the momentum is pretty good, right now the signs are pretty good, so we're hopeful that it will turn out the way we're calling it at this point.

Okay, just a couple more things.

One, was there any -- in the first quarter there were a couple of special factors plus and minus.

Were there any such things, I mean, I'm sure there are little things in here, but were there any things notable in this quarter?

In terms of the investor communication activity?

I'm talking about the business as a whole, in any of the places?

Oh.

Besides the incremental spending.

The only change, I don't know if you noticed, the -- we took $4 million in losses in the portfolio in the quarter.

I did notice.

That is the swing from last year, where at this point second quarter was about $8 million in gains.

So there's a swing there.

But I can't think of one thing that was particularly notable as one-time events.

In any of the businesses in the quarter.

Okay.

And then my last question is: You bought $270 million of stock back in the first half.

Do you expect -- what would you expect the pattern to be, would you expect to buy a lot more in the second half?

Is this largely in influenced by the stock price which is doing pretty well?

We continue to have an appetite for treasury share repurchases.

But I'm going to limit my comments in terms of how much.

But I continue to think that the -- we're at a price still where the investment is good and where it's clearly antidilutive, significantly antidilutive to us, and so as our outlook solidifies, I think it would be reasonable to assume we would continue to be active players.

Thank you very much.

The next question comes from Adam Waldo with Lehman Brothers.

Please state your question.

Good afternoon, Art and Karen.

I want to go back to something you've discussed off and on over the last year or so on these calls and analyst meetings, that was your thought process and the board's around putting incremental capital investment of material size either through M&A or new infrastructure additions into the brokerage business.

Something you said earlier in response to another questioner's line of interrogation suggested you might be softening your position around limiting incremental capital investment in that business.

I wonder if you can update us a little bit more precisely on your thinking and the board's.

I don't think that that's correct.

I think we continue to look at the brokerage business as a very significant core growth opportunity for ADP, it's one of the areas we look for investments.

The reality is it's cyclical, it goes through cycles, we've been through a pretty tough cycle in the brokerage industry, this is not the first time we've been in it.

We've been in the business for a long time, I expect us to be in the business for a long time.

So don't think of anything that would be limiting our doing the appropriate strategic things from an investment viewpoint in the future in order to continue to take a position which is excellent right now in terms of our market position, and continue to enhance it.

So, no, there's -- anything -- if I said anything as I was talking about secular issues, that made it sound like anything other than total support in terms of where we're going for this business, that would be a misimpression.

And certainly I know the board shares my perspective on that.

That's very helpful.

Thank you.

One other big-picture question, Gary's been at the helm of Employer Services for a number of months, I wonder if you can update us with some specificity where he's been focusing his time and efforts back at the helm at ES.

First, if you know Gary, he's all over, and all over everything because his style is to be touching a lot of things and to be extremely knowledgeable and extremely detailed in terms of what's going on within the business.

Having said that, I would put two areas of primary focus.

The first and most significant is the sales arena.

Gary has spent a lot of time focusing on our incentives, the alignment of our incentives, our organization structures, the type of people we have, the investments we should be making.

And the second area would be in product in terms of the underlying architectures and in terms of the -- of things that we can bring to market relatively quickly in terms of creating even more availability for the sales force.

As we move forward.

So I would say those are the two primary areas that he's had, although again, I think of the people in Employer Services who listen to a call like this and who are saying boy, he's been here and he's been here and here also.

Yeah, I had some sense for that talking to people in the ES organization.

Finally, a couple of questions for Karen, if I may on the numbers.

Karen, could you give us a little more specificity around the $85 to $95 million of remaining investment spend in the fiscal second half, in terms of directionally where do you think that's going to fall by quarter if you can comment on that?

I'll try.

I don't know that I have a lot of specifics for you, but I think of it in terms of the employer of choice investments which we said, I think, was $40 to $45 million dollars in total for the year, as falling equally across all quarters.

Basically.

The remaining product and sales investments I think we started a little slower, and that's what we'll be ramping up in the third and fourth quarter.

I can't think of anything that's out of the ordinary that would pop it up strongly in the third quarter and then back down in the fourth quarter, nor can I think of anything that's one time in nature that would make the fourth quarter that much more than the third quarter.

So what I guess I'm seeing is I think it's still going to be a ramp-up, a little less in the third than the fourth but to hit those numbers.

I don't have the specifics around that to give you much more than that.

That helps a lot, thank you.

And very quickly, you talk qualitatively Karen at the start of the call about the disparity of margins between BPS and ICS.

I wonder if you can give us more quantification of what the margin spread looked like in the fiscal second quarter to give us some sense for the differences in variable contribution margin that BPS sees relative to investor communications?

Well, as you know, we generally don't give the specific margins of the businesses.

There's a lot of shared items between the two groups, and so it would be inappropriate to try to be specific for the margin in each business.

But the best way to think about it is the postage pass-through issue that exists on the investor communication side.

If on an annual basis you look at the postage and I'll ballpark it as somewhere around $500 million worth of postage revenue that falls into the ICD bucket, at a very low margin, I think you can kind of work with the numbers and think that is the one biggest influence that makes the investor communications side much less than the back office side.

$500 million for the full year.

For the full year, yes.

The quarter was about a hundred, the full year about $500 million.

Thank you all very much.

Okay.

The next question comes from Lloyd Zeitman with Bernstein Investments.

This is Lloyd, happy new year.

Same to you.

Thank you.

A couple of things.

I came on the call late so I apologize if this is already been addressed.

Looking at the release, I see essentially everything looks positive relatively positive to your plan for the first half and there was even a statement in there that the overall outlook for ADP is turning more positive.

Then I see the upper end of guidance for the full year has come down by 2 cents, and at the same time, another factor here is that your investment spending level could be as low as $130 million versus the $140, $145 that was initially set.

So I think with those positive taking the upper end of guidance down by 2 cents strikes me as curious.

Could you comment on that?

I can, Lloyd.

I think the reality is that we're doing a little bit better than we anticipated.

The other part of the reality is I'm seeing areas for expenditures where, if we have the opportunity, I'm going to make them right now.

And so we would continue to ramp up expenditures.

While the 130 could be there, it's less likely that it will be there if we ramp-up as [inaudible] if the overall tone of the business and if our results are progressing at the -- the way I'm hoping that they will.

So the reason for bringing down the top end of the range was much more around intention than it was result at this point in time.

And it just would be my intention at this point if we could find the right investment vehicles, I would be willing to continue to pump money.

If we see that type of growth coming that would have gotten us to that number.

Okay.

Also, something which wasn't mentioned, was there let's say a mix function involved in terms of your altering the guidance at all?

A mix in terms of let's say one business contributing more than another?

Well, no.

Obviously, brokerage is doing better relative to the plan than what we thought because of the factors that we talked about.

But overall, I don't think it weighed us significantly one way or the other to narrow the range the way that we did at this point.

Okay.

And also, could you just tell us what the PEO work site employee number was for the quarter?

The PEO work site employee number was 86,000, up about 9% from last year.

Okay.

Thanks very much.

You're welcome.

Thank you.

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

The next question comes from Jim Kissane with Bear Stearns.

Please state your question.

Karen, can I break out pays for control by client type or size?

And maybe any sense of trends since the end of the quarter.

Can you put to bed the concept of a jobless recovery?

,I wish I could.

Not with specifics.

In general, we think that the pays per control at the high end national accounts is still declining slightly.

And it's actually a little bit positive at the low end of the market in the small business services.

That's what we've basically been looking at for the last couple of quarters.

In -- and we noted in the release that the -- in outside the United States, however, there's still some softness, particularly in Europe, where some of the countries are still flat to down 3%.

In France, for example, it's about 2.5% down, the Netherlands in the quarter was a couple percent down.

Still some weaker results internationally.

And but you know, what's happening currently, we don't really look at it month to month.

I'll tell you that in the last year or two, I think even though we had a pretty -- a better second quarter ended December 31, when we started looking at the results in January it actually weakened a little bit.

That's what happened last year and the year before.

So it's too early to tell.

Thanks, Karen.

Okay.

The final question is from Dirk Godsey with J.P. Morgan.

Hi, I'm Tien-Tsin Huang, I'm in for Dirk.

Especially in the outsourcing arena it sounds like there's building demand there, I presume there's some overlap in demand coming from existing large clients.

So based on the broader outsourcing pipeline as you see it today, what is the mix between existing ADP payroll clients and nonclients?

It’s all nonclients.

All nonclients.

So actually it's interesting the way you express that, but we already have some existing clients who have had multiline transactions in the past, but I would not have said that this trend I was talking about was coming from existing clients.

I would have said these are new prospects we're talking to.

Understood, thanks for the explanation.

Okay.

Okay.

I think that is the end of our call.

As we're concluding we're trading at about $41.87.

Art and I would like to thank you all for your questions and interest.

Thank you.

This concludes our conference for today, thank you all for participating and have a nice day.

All parties may now disconnect.