自動資料處理 (ADP) 2004 Q3 法說會逐字稿

Good afternoon and welcome, ladies and gentlemen, to the ADP third 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 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.

And welcome to our third quarter 2004 conference call.

As you know, we issued our earnings release earlier today.

We reported 11% revenue growth and 50 cents earnings per share.

Our revenue growth was helped this quarter by an increase in brokerage activity and we were pleased to report 13% growth in our brokerage business.

And based on the stronger brokerage revenues, we did increase our full-year revenue guidance this quarter to high single digit growth compared to our previous forecast of mid-single digit growth.

Our margins, as you can see, declined in the quarter as we anticipated and based primarily on increased investments in the integration of last year's acquisitions.

We did confirm our full year earnings per share guidance, it's still $1.53 to $1.58 per share and we mentioned, including $30 to $35 million of nonrecurring expenses that we anticipate in the fourth quarter.

So, in general things are looking better.

We have clear signs of improvement in both our employer and brokerage services business.

And before we get started with the call, I'll also take the opportunity to mention a few transactions that we've completed recently.

In our brokerage services business, we divested two small businesses.

Our graphics communication international operations and our OMR business, which is basically our foreign currency derivatives products businesses.

Both of those businesses were about $25 million in revenues each.

On the acquisitions side, in our claims business, we acquired a Dutch provider of auto, estamatics (ph) and other insurance products called ABZed, with revenues of over $40 million annually.

And in dealer services we acquired the ARG Group within EDS, which is the exclusive DMS provider to the Saturn retail network.

We closed that transaction at the end of the quarter and that's also worth about $25 million in annual revenues.

There were one or two other smaller transactions that we did in the quarter, but these are the four that I wanted to mention.

And all of these transactions combined are not material to our earnings.

So, with that, those few comments out of the way, I'll -- I'll say that we will discuss some forward-looking statements that involve some risks, and as usua, these are discussed in our periodic filings with the SEC.

So, we're ready to start the Q&A and the conference call will explain the format.

Art and I both ask that you please keep your questions to one at a time to help us keep track of them.

We have about 105 or 10 people on the call at this point.

A few more signed up.

And we're, at this point I will 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 speaker phone, please pick up the handset before pressing any 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 2.

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

Please stand by for your first question.

Our first question comes from Cindy Shaw with Schwab Soundview.

Please state your question.

Yes, hello.

I wanted to see if you could give us color on the trends in the Employer Services business by segment.

Well, sure, I think that -- first thing, the most important thing is the increase in our sales growth in the quarter.

And that was more or less across the board in all of our major segments.

Sales growth was up to 10%.

The national accounts and SBS probably being the strongest of all of the -- all of the segments.

Unit growth was up 10% in the Small Business segment on a year to date basis, and international, in general, is weaker.

Canada is positive but Europe, in general, is weak.

Our sales forecast, which is 6 to 7% growth range in Employer Services, from high single digits, is slightly below our last forecast.

Still based on very strong double-digit growth in the fourth quarter, but comparing to our last forecast, we are probably going to finish a bit lower in majors, in the PEO and in international business, just to give you a little flavor for that.

In majors, and the PEO we've had our largest increases in the sales force this year and some change has caused some distractions impacting the productivity, but in general, the sales were -- we're pleased with the sales, clearly that we had double-digit sales in the quarter.

The difference between 6 and 7% increase and 8 and 9% increase, which is our previous forecast, is about 10 or $15 million in total sales.

So, I want to emphasize we're moving in the right direction, even though our sales forecast is a little bit lighter than we last forecasted.

We're still very pleased with the sales results this quarter and very confident that we will have a stronger fourth quarter forecast, as well.

So, I think that that covers the sales scene.

And our retention, as we said in our release was excellent, just excellent.

Over a point an a half over last year's record levels and reflecting I think good -- very good client service in a critical client retention period of year-end.

So, also very pleased with our retention.

Pays per control, as we mentioned in the release, is moving up finally.

The first time in a couple of years in the United States that we saw some growth in our pays per control.

Internationally, a little bit weaker.

And so in general, I think the signs are moving in the right direction.

We're very pleased with the Employer Services or -- or all of our metrics seem to be moving in the right direction.

You know, we always talk about these three key metrics, which are kind of the -- the forerunners for what we're going to do in the business and those were the ones that Karen was going over.

And that's sales, retention and pays per control.

The other one that's moving is these balances, the client balances, where we're really up significantly over last year, and over our expectation level.

And this is either because of increased compensation, increased bonuses, maybe some stock option profits fitting into the numbers, but that's another piece of data that -- that's really -- makes us feel like the trends, at this point in time, are really good and are really moving the right way.

So, we're feeling good about each of them relative to where we've been, certainly.

And the pays per control and retention, is that pretty consistent across the board or do you see any difference from one segment to the other?

The Small Business segment had started to rebound earlier than the rest.

And, I think that's still the case today, a little bit stronger in the - at the low end of the Small Business and probably a little bit weaker still up at the national accounts level.

I think pays per control in the international, as Karen said, is -- has continued to be down and weak.

Each segment has improved but the national accounts are still the weakest of the segments.

Great, thanks very much.

Your next question comes from David Togut with MSDW.

Please state your question.

Thanks.

Hello, Art and Karen.

Hi, David.

Could you go into a little more detail on the brokerage business, specifically the average trades per day?

And just remind us of the retail institutional trade mix?

Sure.

We obviously had a strong quarter in brokerage.

Our trades per day were up a -- a quite strong 22%.

They're about 1.5 million compared with last year.

The mix was up to 36% retail in the quarter.

What's going on with the trades, first of all, the -- there was clearly strong trade growth.

Somewhat offset by the lower revenue per trade.

Revenue per trade was down about 9% in the quarter.

And that happens as you move up the curve in terms of our pricing tier.

So, between shift and mix, between certain clients, and the increased volume moving us into different pricing tiers, we actually had a decline in average revenue per trade of 9%.

All that said, we still have an increase in revenue in our back office business.

Just to give you a flavor between the two businesses, David, our back office processing group was up about 11% in the quarter, and our investor communications group was up 13% in the quarter.

So, they both were -- were strong.

And are you starting to see the impact of just better capital markets activity, IPOs, M&A and so forth?

Is that starting to pull through?

I think it's starting to pull through a little bit.

I don't see a lot of that in our investor communications business.

Some more volume and transactions.

What we saw - what, I think the biggest item that we saw was a reflection of the continued regulatory issues in the mutual fund industry as we saw another quarter with this increased volume related to the mutual funds.

So, we mentioned it last quarter, I will mention it again this quarter, that we had some -- a large amount of additional mailings.

I think it was in the range of 28 million additional pieces delivered in our investor communications group, generating probably an additional $12 or $13 million of additional revenue, just related to the increased mailings in mutual funds this quarter.

Okay, thank you.

You're welcome.

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

Please state your question.

Hi, good afternoon.

Art and Karen.

Could you explain the nonrecurring expenses in the fourth quarter, specifically, you know, where that would fall?

Sure.

First I want to say, of the 30 to $35 million, there is no single large item.

So, it is an accumulation of a bunch of smaller items.

But think about it in two ways.

We're continuing to invest for the future, for future growth and we're taking some actions to improve our cost structure.

And within that context, I will give you some examples of where we are.

We're accelerating some activity in sales, like implementing some sales tools and training and marketing initiatives, those are mostly almost entirely in Employer Services.

We're moving out of our Wilco London facility to less expensive space, which is based on our smaller Wilco organization.

So that's obviously in the brokerage -- will be in the brokerage results.

We announced we're shutting down a piece of our health and welfare call center in Stanford, Connecticut a couple of weeks ago, to better integrate it with our existing Salt Lake City and Des Moines benefits businesses.

So those are the kind of examples, again, no one of them is particularly large.

And most of the activity, we hope to complete by the end of the fiscal year, which is why it's nonrecurring and hopefully not carry over some of these expenses into fiscal '05.

Randy, I would say, think of this as positioning us for the future.

I mean, that's what we're really doing.

We have the opportunity right now and the comfort in terms of where our forecasts are, to feel good about where we are and therefor we have an opportunity clean up some things.

But each of them is done for the very precise purpose of positioning us well for the future.

And -- and that's the kind of thing that's happening.

It's really $30 to $35 million is not a giant number in terms of our scheme of things.

Okay.

Thank you very much, I appreciate it.

The next question comes from Adam Waldo with Lehman Brothers.

Please state your question.

Good afternoon, Art and Karen.

Hi, Adam.

I just want to make sure I clarify something about the fiscal third quarter results, and the guidance around elevated investment spending.

You've increased your elevated investment spending to fall in fiscal year '04 guidance from the prior $130 to $145 million to $165 to $185 million, an increase of $25 million or about 2.5 cents in EPS per share.

Is it fair to say that's largely, as Art indicated, relatively discretionary matters that set you up for the future?

Or are there any margin pressure issues or held back investments from the downturn we should think of being in that increased number?

I don't think there's anything unusual in the numbers.

There's nothing that I would say is a carry over from the things we had talked about before.

We have continued to pursue some of those significant investment opportunities that we've had earlier, but these -- these are really incremental and slightly different, in terms of nature, for the most part from what they were -- from what the other ones were.

Okay, thank you.

And then also, you noted in the press release that you've repurchased 11 million shares, or about 1.8% of your gross diluted share count at the end of last year for about $40.50 average price, year to date.

Such buyback levels would appear to indicate that you're shooting for anti-dilutive levels of buyback this year, relative to shooting for longer term shareholder wealth creating levels of buyback like we saw last year.

If that's a fair statement, how would you guide us going forward in terms of prioritization of surplus capital among acquisitions, buybacks and dividend increases?

Well, I believe we will be continuing our treasury share repurchase program.

I think we've been on it for a while and I think you can reasonably expect us to continue it.

But the priorities really have not changed.

I mean, my highest priority is to reinvest in our core businesses and our existing businesses.

Second behind that, would be acquisitions and third would be treasury shares.

And only past that would we talk further about dividends.

Thank you very much.

The next question comes from Greg Gould with Goldman Sachs.

Please state your question.

Thanks.

Karen, you mentioned in the incremental spending in the current June quarter, some of the costs were -- are focused on helping reduce expenses.

Is there an incremental cost savings we should think about that we could apply to fiscal '05 from these investments?

Yes, but the number would be small.

I mean, if the total amount of the investments was 30 or $35 million, the amount would be small.

Some of them would be -- those that I talked about that were focused on sales tools for sales productivity and marketing initiatives, those will materialize with our sales results next year.

Certainly a Wilco operation in a different facility will be a small -- a small savings, it's not anything that is going to make it to -- big enough number on the page to move anything.

But sure, the ones that we were doing them to help next year.

But the sizing is too small at this point - and hard to find when - you'll see it -- hopefully you will see the sales results will reflect some of these investments.

Okay.

And so for bookings in the fourth quarter in ES, what is sort of a -- a range -- with the math -- I don't have the year-ago numbers, but what kind of growth rate would you expect in new sales for the quarter?

I'm calling it strong double-digit growth rate.

I think of it as, you know, call it somewhere around over 15.

I mean if the number could move from there, stronger than this quarter.

This quarter was 10, so, you know, I'd say it's in the strong double digits range to get to the forecast.

I kind of raced through some of those steps before, so, let me make sure you heard it right.

As we look at our full year, we're expecting 6 to 7% growth overall for sales for -- for worldwide ES sales.

And that still calls for a strong double-digit fourth quarter, but we're pretty confident in that for the fourth quarter, we're already, you know, had a strong quarter in the third quarter relative to growth to the previous year.

If you recall, we had a soft quarter in the fourth quarter of fiscal '03.

In addition to that, we continue to increase our sales force and grow our sales force.

This year, right now we're at 9% or so over, in terms of sales associates, where we were last year.

And we'll continue to add to that number as we -- as we get ready for fiscal '05.

So, we're feeling pretty good about the sales forecast.

Yeah, our year-to-date sales increase is still about 2%.

So, we still have to have a very good quarter in order to move it up to the type of numbers that Karen is talking about and we're expecting it.

Great, thank you.

The next question comes from Adam Frisch with UBS.

Please state your question.

Thanks and good afternoon.

What is the current sales growth in that 6 to 7% range, Karen that you were talking about, suggests about where organic growth can can be in in fiscal '05 for ES?

At this point we're -- it's early to get into what we anticipate for organic growth in '05.

We normally go through our planning process right now in the April/May timeframe and there are so many variables that have to come to be, to be able to give a good forecast for internal growth for ES next year.

You have to remember, Adam, that these sales numbers are a lumping together of very small accounts that get installed very quickly, and very large accounts that can take six to nine months, and it really is hard to play out exactly what the impact will be.

It is important that we accelerate our sales growth at a faster rate than our revenue growth in order to get to the type of growth that we would like to get over time.

So, that's an important way to think about it.

Okay.

Second question on the extra expenses that you talked about in the press release.

I think the total of it going up -- that was a prior question.

How much of that is a carry through into '05?

Or is a lot -- how much of that, I guess, range is recurring and how much is nonrecurring in '05?

When we were originally talking about the incremental investments, we said that most of it would be recurring and think of it as a -- a level of expenses that would carry through into next year.

This incremental nonrecurring charges of 30 to 35, for the most part, that will not carry into next year.

At least that's our intention as we get a lot of these projects done by the end of the fourth quarter so we don't carry the expenses --

So a little might dribble into the next quarter, but it's not going to be material and not recurring?

Right.

Okay.

And last question on brokerage.

How much of the growth was from extra compliance and the regulatory mailings and so forth?

And is that primarily a one-time thing, that you're seeing?

Obviously the trades were up, but is that a one-time thing you're seeing, and that's why you increased the revenue guidance?

Or are you saying brokerage is turning and you have more confidence in a better, more sustainable growth rate?

Well, I think all of that is true.

Brokerage has been turning a little bit, and we have a little bit more confidence in a stronger growth rate, but clearly the regulatory compliance helped.

Think about it this way.

It was -- the last two quarters had some of these mutual fund regulatory compliance mailings and they were both around 12, $13 million each.

So, think about it as $25 million or so of incremental revenue for brokerage, probably split half and half second and third quarter.

Take that over our core results.

That's how much it helped us.

I don't know that that will continue into the fourth quarter.

I certainly didn't expect it to be as healthy as it was again in the third quarter.

You know, maybe it's still going on a bit, but that's the kind of nonrecurring -- I think that's the kind of nonrecurring issue that we would not anticipate to continue very much longer.

But I think the underlying trends, whether it was the similar to the question we had in the IPOs and other activities before, there's just more activity going on.

And that more activity is creating additional mailings.

And in addition, the number we normally talk about, this stock record growth number, which is how many positions are there, how many different stocks individuals hold?

That number has now flipped into the positive column.

I think we've been minus in the first half of the year and now we're either flat -- we're flat on a cumulative basis, which means we were up in the third quarter and our -- our forecast is that we will stay up in the fourth quarter.

So all those things just say that directionally the business is moving in the right way.

Okay, thank you very much.

The next question comes from David Grossman of Thomas Weisel Partners, please state your question.

Thanks.

Art, can you maybe just help us again on the brokerage side?

There is a lot of pieces moving in terms of consolidation of customers and, you know, anniversarying of pricing, et cetera.

Can you give us an idea of when, if there is a point in time, when you do anniversary the loss of some of the customers that you may have, due to consolidation as well as, you know, the mix shift to retail when we anniversary, you know, some of those pricing issues?

Yeah.

The -- I think two big ones have already anniversaried this year.

That's one of the things that contributes to where we are right now.

And that was Scott Trade and Investech Ernst.

I think we have a couple more that will be coming up probably this quarter in the CIBC got out of their capital markets business and -- and triMark left us.

Those kind of occurred in the April/May/June period a year ago.

So, we should anniversary those.

You're probably talking $10 million, I don't know the real number, but something like that in terms of annualized revenue from those companies.

And then we have other ones that we've talked about, probably the biggest one of which is the Lehman acquisition of Newburgher.

Both are our clients but we actually ended up a lower rate because of the -- because of that issue.

And that -- that occurred sometime later, sometime, just a few months ago.

So, I think those are the big things that are going on on the timing on the -- on the consolidation.

On the compression side, those things are pretty much behind us at this point in time.

Maybe there's a little lingering, but I don't think there's very much -- very much left.

So, that's pretty much where we are at this point.

We're starting to work our way out of those and you can never tell what's going to happen.

Obviously there have been large mergers that have taken place that could affect us.

Certainly, you know, the JP Morgan Chase and Bank One, both are fixed income clients of ours.

We don't know exactly what's going to happen there.

Beavate Fleet (ph) is another relationship, so there are things out there that we have to make sure we understand what the impact is going to be.

But for the most part we're anniversarying these things with the bulk of them being behind us right now.

So, with those acquisitions, would you, you know, expect the revenue portrayed to continue to compress, you know, throughout FY '05 or do you think you will start seeing stabilization?

I think as the big people got bigger, you're gonna still have this tiered pricing impact ,and that will continue to put pressure on the revenue per trade.

As acquisitions go through and you end up more volume, that will put additional pressure on trade -- on revenue per trade.

So, so I guess I'm not ready to say it's over.

I think it will continue.

I'm hopeful it will continue at a lower rate than it has.

And the last couple of years before this, I don't remember the number, Karen, maybe you do, but I think it was down -- we're down like 17% a year or something.

And so we're actually better at this point than we were in the past, and I think we're on the right trend in that direction.

And hopefully this consolidation phase will be behind us as the retail market improves, but that we'll have to see.

Great, thank you.

The next question comes from David Farina with William Blair.

Please state your question.

Yeah, first question.

I know you don't want to talk about next year, but should we start to assume as we anniversary the big spend that you'll see EPS grow in excess of revenues going into '05?

And then what -- is that a fair assumption?

I -- again, I echo what Karen said.

It's really premature for to us be talking about '05.

When we talked about the incremental investments, we said those were going to be continuing.

I think that that is appropriate and factual.

I also think it is appropriate to believe that we should start to show margin improvement absent an unusual transaction like an acquisition or something else that would hold it down as we go forward.

Fair enough.

And my brief follow-up.

Anything, you know, in terms of -- of the competitive signs, anything different?

I mean every other company talks about ADP and wins there and so forth.

Anything different on -- in the competitive picture?

No.

Not -- not -- there's nothing I would -- I would pull out and say wow, there's -- there's some change that's really going on.

I think we're in competitive markets.

The competitors continue to be the same people who we know.

We all know each other well and I think the only competition is basically at the same level it's been.

I'm not seeing anything unusual.

Okay.

Thank you.

The next question comes from Mark Marcon with Wachovia Securities.

Please state your question.

Good afternoon.

In terms of the new sales growth that you're looking at for this -- for this quarter that we're in currently, you know, last quarter, when you did the 10% it was going up against a weak comparison.

Now you're going against not such a weak comparison.

How confident are you in the -- you know, in the new sales growth?

And then secondly, where's that coming from?

Is it primarily in your Beyond Payroll?

And -- and can you talk a little bit about the split that you're seeing there in terms of Beyond Payroll relative to core payroll processing?

Yeah, I think, first, the quarter that we're in right now does have a weak comparison to last year, as well.

So, I think we will, same as this quarter, the third quarter, we will have an easier comparison as we look towards our fourth quarter growth.

You know, we're saying, and I said, strong double-digit growth in the quarter.

You know, we started out the year with a plan that was double-digits and we've come off that in the last couple of months.

And as I said earlier, our forecasts have been off a little bit, our results, I should say, have been off a little bit from our forecast, primarily in a couple of areas where we had the largest increases to our sales force, and therefore different territories and a lot of distractions and, again, international has been -- has been weak.

So, as we look at the fourth quarter, I'm seeing -- now we're saying it will be 6 to 7%.

Obviously we have to wait to get through the quarter to see the end results and -- and we have been softer than our forecast before, but we -- we really have increased our sales force significantly this year.

I said before, 9% overall worldwide, and continuing to do that and continuing to invest in the -- in the sales force with tools and support and so on.

But the growth is coming from first -- it is stronger in national accounts and SBS and we have good unit growth at the low end of the market in SBS.

National accounts has been strong and the -- the influence of the comprehensive outsourcing that we talked about last month has helped a little bit, as well.

But in general, the national accounts and SBS has been a bit stronger and across all of the segments, our Beyond Payroll products are helping.

Clearly the pace of growth of those products is -- is stronger than the core traditional payroll and tax products, but just to give you some examples, our new -- our TotalPay product is growing, our time and labor management product is growing very nicely.

Tax credits services, our health and welfare products this year, are growing very nicely on the sales side.

Outside is Beyond Payroll and traditional payroll and tax, our Pay eXpert series is really very strong.

And that's mostly in the majors market at this point.

So, there is a lot of reasons why - that the sales are starting to pick up and -- and hopefully as we continue to increase our sales force, that will continue to happen.

Great.

And then if I could just follow up, and not to beat a dead horse, but just in terms of the incremental spend, I want to be sure I understand the numbers or have them right.

Originally my understanding was 2004, the incremental spend was going to be about $150 million.

Now it looks like it might be upwards into the $185.

You wouldn't anticipate that while those -- that incremental spend is going to carry through, you wouldn't anticipate that you would have additional spending above and beyond that into '05, would you?

I would say that --

In other words, there's an incremental jump above the 185 that you added this year?

I would be very surprised if there was another incremental bounce beyond what you've seen here.

I would agree with that.

And keep in mind, we -- we are -- we are taking advantages of opportunities to invest where we see the opportunities.

We obviously had a stronger performance in brokerage and -- and -- and have seen some opportunities to invest clearly in our employers services business and continue to do that.

But you have to balance that with, okay, we increased our spending, we targeted certain products, we targeted the sales force, we targeted, in each of our businesses some of these things.

In general, though, we will have, as Art said earlier, you can always anticipate that our businesses are scale businesses, and with more revenue growth, will be more margin improvement, as well.

Uh-huh.

And this last, you know, this last increase, I mean that's something that potentially could go away next year, right?

That is clearly our intention.

The kind of projects that we're talking about and the items that I mentioned, we hope to finish by June 30th.

Great.

Thanks.

The next question comes from Rob Burgious (ph) with Bernstein.

Please state your question.

Yes, Rob Burgious, with Bernstein.

You're seeing the margins in the brokerage business turn as volumes pick up.

Yet in the Employer Services unit, you know, you're seeing return on the top line, but it looks like the margin improvement is being delayed here and some of that, obviously, is the investment.

But I'm wondering if there are other things beyond the investment that might be causing the rebound in margins and Employer Services to be more delayed or more muted than it otherwise would be so that we can kind of gauge the scale leverage picture going forward?

Yeah, that's an excellent question.

It is true that we're seeing the turn in brokerage, although we always expected to see the pickup in brokerage in the second half of the year as the proxy season kicks in and it's just a natural increase for us, because of just the proxy season, as we head into the third and fourth quarter.

But getting back to your question on ES, clearly we're impacted by these incremental investments, which, the majority of them were in the Employer Services.

We also did two -- two larger acquisitions that we did last year at the very end of last fiscal year, was a Pro Business acquisition and the Scudder acquisition in our 401(k) business.

Both of those combined in at about we'll say around $200 million of incremental revenue to Employer Services this year with very little, if no, incremental income in the employer services line.

So, those are clearly diluting the margins in Employer Services, just from those two deals.

And -- and the other thing, in addition to the -- to the investments and the acquisition is really the -- the mix in Employer Services as its growing changes and some of our stronger growing areas in Employer Services, like the PEO, have some pass throughs in them.

So, PEO, which is growing, let's say around 25% this year, has a fair amount of pass through.

So, there will always be a lower margin with that business.

Our majors business, which is our highest margin segment is growing slower than the other businesses.

So, that's also influencing the overall margin and Employer Services.

So, those are the other components and then investments that you have to put in the -- in the picture.

Got it.

So, the -- can you give us a gauge -- I mean clearly the investment -- I'm assuming the investment pace as you move into '05 may stay flat in absolute terms, but I guess as a percentage of sales you do get leveraged there.

And then on the acquisition front, can you give us a gauge on when those businesses will start to generate meaningful profit and if that profit gets back to sort of corporate average?

Yeah, I think that's true.

We will start to see the scale next year and in terms of the acquisitions the -- both the Pro Business and Scudder should be turning.

I think we said that the first year would be dilutive by a couple of cents for Pro Business and maybe a penny or under for a Scudder, and we anticipate that as we go through fiscal '05, those will turn around.

By the latter part of the year, Scudder will take just a little bit longer of a trail to it.

Excellent.

And one thing we didn't capture in that is the EPO business.

As that scales up, at this point, is that any meaningful sort of dilutive effect on your margins as that business ramps?

Or is it at this point still kind of immaterial in its effect?

You asked about the EPO?

Correct.

In Employer Services?

Correct.

In Employer Services?

There will be some start-up costs in it, but a lot of it is taking the products that we already have in different businesses and integrating them better and -- from a management and a responsiveness to clients point of view, finding a more cohesive way of communicating.

So that is investment, but it's not huge.

Yeah, and I think that's not influencing, really, our margins much this year as that business does scale up, as it does get to be a bigger business within our national accounts group that obviously will have some lower margins on an ongoing basis.

Great.

Thanks for the helpful color.

Thanks.

The next question comes from Pat Burton with Smith Barney.

Please state your question.

Hi, congratulations on the sales pickup.

Thank you.

My question, Karen, is the yield on the portfolio in the quarter and if you could just give us an update on the duration ,so as rates presumably move higher from here, how that will play out for you guys?

Thanks.

Sure, the yield in the quarter was 2.9%.

So that's the first time we dipped below 3 for quite some time.

But that was about what we expected.

We expect that the fourth quarter will be a little bit lower, maybe 2.8%.

And the full year will be around 3%.

The -- the duration was about 1.9 years, so it picked up a little bit from the second quarter.

It's about the same as it was in the first quarter at this point.

So, we will be exiting the year even a little bit lower on the overall yield front.

And the last question, the unrealized gain portion?

Oh, I'm sorry.

The unrealized gains, about $280 million at the end of March.

Thank you.

You're welcome.

The next question comes from Bryan Keane with Prudential.

Please state your question.

Yeah, hi.

Good afternoon.

I guess, Karen, with all the divestitures and the acquisitions or at least there were a couple of them in the quarter, could you just break out organically the divisions, employee services, brokerage, dealer, claims in the quarter?

Sure, first of all, the overall internal growth was 8% this quarter.

Employer Services was 6%.

Brokerage was 13%.

So, the divestitures didn't really have an impact on brokerage this quarter.

Dealer was 7% and claims minus 3%.

Okay.

And then trying to draw a relationship to new sales, to organic growth.

I guess with your comments, Art, then if new sales can grow into double digits or at least at a significant period of time, we should continue to see employee sales, organic growth, probably get stronger?

Yeah.

I think that's correct.

If the Employer Services sales, as a percentage basis outstrips the growth in the -- in the revenue, then all other things being roughly equal, which they should be in an environment like that, you should absolutely expect that.

You should expect to see the overall revenue growth start to accelerate.

Okay.

And I wanted to ask about the investments you've already made over the past three quarters.

I know it's $165 to $180 million for the year.

But can you give us any color in particular on how those investments have done so far?

Have you been happy with your investments?

And do you think that's going to benefit the company in '05, '06 and beyond?

Well, for the most part I'm happy.

If I told you was I happy with every one of them I would be exaggerating.

Not every one of them worked out exactly the way I would have liked.

Some of them have exceeded my expectations.

One of the things Karen mentioned about things that were going very well was this eXpert, this Pay eXpert, our eXpert payroll system.

That's really far exceeded my expectations, some of the others, some smaller ones, haven't progressed at the same rate or at the same pace.

If I look at it overall, I think we did the right things.

I'm maybe we were lucky, maybe our timing was good, but l look back and say wow, we made a good decision in stepping up the investments at that time.

Because I think it really brought our product set to a point where we can increase the sales force with the degree of confidence that we're doing it right now, and believe that we're going to do -- we're going to do well over the next few years and that it will accelerate our growth.

Okay.

Great.

And finally, Art, just your latest perspective on acquisitions.

I remember, I think, during the analyst day is seemed you were warming up to maybe adding some portfolios.

Is there any update on the acquisition front?

I'd love to do more.

I mean that's really the answer.

I'd love to find the right transactions and I'd love to do more, but nothing happens until it happens and there's nothing any warmer now than it was a little while ago.

So...

I don't want to give you any false expectations about imminent transactions.

And that would be on the more Employer Services, brokerage area or something else?

My highest priority right now would probably be in Employer Services.

I think we see great opportunities in that area, but I'd look at any one of our businesses.

Two of the acquisitions Karen referenced before were dealer and claims.

And certainly in brokerage we're going through a positive rebound right now and we would absolutely look for the right opportunities.

Okay, great.

Thanks.

The next question comes from Steven Weber with SG Cowen.

Please state your question.

Yes, good afternoon.

A couple of things.

Number one: On -- just to go back on incremental spending.

In the last couple of quarters you told us how much it was in the quarter.

Can you give us some feel for what it was in the third quarter and -- and why you still kind of leave it out to nonrecurring you still have a pretty big bracket for Q4?

It was about $40 million in -- in the third quarter.

And -- and -- and why, Karen, would there still be a big bracket, we're two months from the end at this point?

We always said all year we'd be having to ramp up until we get to the full year results.

So, some of the things just took a little bit slower to took off and as I said, we continue to invest with them.

So, the actual run rate will be higher as we exit the year, if that's where you're leading and that's where your question is, than it was in the beginning of the year.

And if you annualize that 2 will be higher than the full year amount.

But it just took us a little bit longer to get some things going.

Okay.

And in the past you've been -- you've raised your revenue guidance here.

Can you just give us some color where you think that's -- I'm particularly interested in brokerage because none of - what you said at the end of the second quarter doesn't fit, obviously, with what's going on.

So, could you just kind of give us a feel there and where you think the margins are going to end up for the full year on -- on both of those as compared to last year?

Both of those being brokerage and --

And ES.

Okay.

The -- right now we're -- we had originally said we'd probably be about flat in brokerage.

Now with the increased volumes we'll be somewhere in the area of 4 -- 4 to 6% growth, depending on how much volume we get in that.

You know, you get such a swing factor in the proxy season in the fourth quarter and the postage is hard to call.

So -- I would say somewhere between 4 and 6%, perhaps growth in brokerage.

With margins roughly equal to last year, still.

We -- we had a 14% margin last year in brokerage and I -- I think we'll be close to that.

We're currently at 11% year to date in brokerage, but as I said before, the heavier proxy in the fourth quarter usually does bring that up a bit.

And we are seeing, assuming that the back office trading volume continues at this kind of high level, that is healthy margin dropped to the bottom line revenue.

So I think that we'll probably be in the 14 or so percent range in brokerage.

And Employer Services, we have been forecasting the lower margin all year.

I would say you can think of the margin somewhere in the 21% range for the full year.

And revenue growth -- do you see -- do you see much change in that from what you did in the first quarter?

No, we were -- we were somewhere in the 9 to 10% range all along in Employer Services and still in that range.

Probably closer to 10.

But it depends on international.

International's been a little bit weaker.

Right.

And was -- just one last question.

In -- in all those reconciling items, can you give us any help with -- was there anything flukey down there?

Because it's a little hard to -- you give us the three big pieces and we try to look for that middle factor.

Are you talking about the other segment, Steve?

Well, the other segment, right, and all of those reconciling adjustments.

I wasn't sure if you were still on ES or not.

Okay, so your favorite topic, other!

Right.

First of all, the big factors in other this quarter claims was lower than it was previously.

Claims was -- think about it as about $8 million in income or so lower.

Some of it was this incremental investments.

Most of it was the incremental investments we were targeting towards claims.

Claims actually had a fair amount of the pie of incremental investments relative to their side.

That kind of kicked in in the quarter, as well as some costs related to the acquisition that I talked about as we transition and integrate that acquisition.

Additionally, some of the things you probably can get to, and I'm sure will be in the filing, you see that corporate interest is lower by about $8 million.

Our gains in the quarter were only a half a million dollars, compared to $8 million last year and there's -- there's kind of the main -- the big items that you can call out and look at the year-to-year comparisons.

Okay.

One last question.

Of the incremental 30 to $35 million of nonrecurring, is that -- how does that split between the three big pieces of your business -- or four big pieces?

It -- it's mostly in Employer Services.

Think of the majority of it in employer.

There will be some in each of the businesses.

You know, I talked about that -- that small facilities issue and brokerage.

The Wilco facilities charge and so on.

There's a little bit here and there but most is in Employer Services.

Thank you, that's very helpful.

Okay.

Next is Greg Smith with Merrill Lynch.

Please state your question.

Hi, good afternoon.

You guys have touched on this a little bit, but I was hoping you could talk about the comprehensive outsourcing of BPO, just maybe some of the initial successes as well as the challenges you've seen as you've kind of entered that business.

We're really haven't changed a lot from the message that we talked about I guess about a month ago.

So, what we're finding is a -- a market poll that's very clear.

The market is looking for a broader service than where we were before.

We are leaping into that at this point in time.

One might say we should have leapt a lot earlier, but under any circumstances, we're clearly leaping into it right now.

And we have a number of transactions that we have completed.

We have several transactions that are in process.

It is not our -- our style to mention names and so I'm not going to go through them, but they're names you'd know, you know.

They're meaningful-type company names and we'll have to see how it plays out.

So, the impact of this in our numbers will not be felt for a period still to come to any large extent.

But we're off the ground and we're clearly seeing successes in the market.

Okay, and just one quick question on the international pays per control.

You said it was still down.

Has it improved any?

It -- ever so slightly in France and the Netherlands it's still down 2%.

It was maybe down 2.5% or 3% last quarter and the U.K. is actually a little bit worse than it was last quarter, also down around 2%.

Okay, so of a mixed picture.

Thank you.

The next question comes from Lloyd Zeitman with Bernstein Investments.

Please state your question.

Good afternoon, folks.

Hi, Lloyd.

Let's see.

First of all, could you tell us what the number of PEO employees was in the quarter?

It was about 90 thousand.

Okay.

And also I didn't get an exact number for pays per control, did you give that out?

We said it -- I don't know if I gave it out, but it is .6% growth in the quarter.

Okay.

And given the current interest rate situation and I guess in acceleration of an expectation that rates will be moving up, is there anything different being done in terms of management of the portfolio?

Not really different at this point.

You know, we obviously are always looking at that.

You know, we did have a slight movement up in the duration but nothing -- nothing that was really an intentional change in the way we manage it.

So, no, you know, we'll continue to look and -- and perhaps when we feel the rates are moving, you know, maybe we would go a little bit longer, but we never make any, you know, really material changes in the way we manage it.

We actually reduced the duration a year ago.

I mean so we're -- I don't remember the numbers, but we were certainly higher a year ago.

We reduced it to kind of a level that we're at right now with an expectation that interest rates are going to go up at some point in time.

But we still do have a long-term objective of having a more rational program in terms of when maturities hit.

Okay.

And regarding the additional 30 to $35 million of nonrecurring charges, your guidance, which is unchanged, includes this additional amount, which is about 3 or 4 cents a share.

Is that correct?

Correct.

Okay.

So, essentially without that you would have, I would imagine, moved guidance up somewhat?

Well, we could have still been in the range if we had 3 or 4 cents, our range is a 5 cent range --

Yes.

Maybe a little bit over it, but it's about 3 or 4 cents.

Okay.

That's fine.

And last but not least.

Could you give us some idea -- I'm asking this because, Karen, you mentioned earlier in claims, the incremental spending was relatively large for the size of that operation.

Of course, we could still be talking small dollars, but I'm just wondering if you could give us some ideas as to how much of those incremental dollars Employer Services took in the third quarter?

Of the -- of the -- the nonrecurring is going to all happen in the fourth quarter.

But of the $40 million or so of incremental charges that we were talking about since the beginning of the year, it -- it's about $30 million or so whould have been in ES in the third quarter.

Okay.

Thanks very much.

You're welcome.

The next question comes from Adam Hershick with Banc of America Securities.

Please state your question.

Hi, it's actually Marta Nichols with Banc of America.

I'm wondering if you can you talk a little bit about the trends at TotalSource?

I think you mentioned that the PEO business had been either slowing down or you were expecting to be somewhat slower in terms of growth and that's been obviously a big driver for you.

I assume it's still growing nicely, but can you tell us about the trends there?

Sure.

Last year we had a really strong sales year in TotalSource and we have a strong revenue growth year.

But what actually happened was, we finished the year very strong in the fourth quarter of fiscal '03 and actually drained the pipeline a lot more than normal and so we started off very slow.

In TotalSource.

As the year has progressed we've done a little bit better each quarter, but we're still clearly far off what our original expectations were for growth.

But we also have added a fair amount of sales people in -- in TotalSource and opened up new territories -- obviously three, four, new territories.

So, there's been a lot of activity there.

And again, I think the biggest issue in TotalSource was the way we exited the year and -- and started off so slow, but each -- each quarter is getting a little bit better and we're feeling pretty good about the way we'll start off fiscal '05.

What was the growth there in the quarter?

The revenue growth in the quarter was 28%.

Although a lot of that is pass-through.

So, you know, figure it's about 15, 16% processing revenue growth without the pass through benefits and worker's comp.

Right.

And then just back to the point on incremental spending, not to beat a dead horse, but of the -- of the $165 million plus in incremental spending that you've done or that you're planning to do in total, is there a chance that at a point in time, say into fiscal '05, you will actually scale back any of that spending?

I know you've talked about it being part of a permanent part of the expense structure going forward.

But I'm wondering that sort of exclusive of what you've identified as nonrecurring, are there pieces of it that you perceive could potentially be sources of cost savings going forward?

The reality is that -- is that not every number is going to continue.

But the impression that you should be left with is that it's a continuing expenditure.

So I mean, if we don't do it -- there are a lot of different things that we spend money on.

I think you should assume that the expenditure level that includes this is an appropriate way to think about the business going forward with the exception of a nonrecurring piece that Karen was going to talk about.

Okay.

So we really should be looking at revenue levels -- at sort of your revenue growth a run rate basis, but thinking about the cost levels as not growing as quickly as we were, going into fiscal '05.

That's correct.

Okay, great.

Thank you so much.

The next question comes from Greg Cappelli with CSFB.

Please state your question.

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

Hello.

I guess wanted to -- on the guidance for the year, is -- is is the incremental investment spending really the primary reason you have a wide range given you're a month through the quarter already?

We just didn't, join, we didn't -- you know, we didn't shrink the range, is probably the best reason why it's still as wide as it is.

The reality is that it's -- it's narrowing as we get into the -- into the fourth quarter.

But clearly where we are is the appropriate -- it's clearly in the appropriate range at this point in time.

But I don't think there's a better reason than that for it.

Clearly one could argue that we -- we could have narrowed the range.

Okay.

I like the leave the flexibility there.

As we've seen over the last year, year and a half, we've identified a number of investment opportunities and I like to keep it flexible, we can stay within the range.

That's why Karen calls the shots on these things and we do appreciate it.

I guess that's what we were thinking is that even though there's only two months left, there still could be opportunities from an investment perspective that pop up.

One more thing, you mentioned the 14% margin on the brokerage services side.

I'm wondering if you can just comment, I know a lot of this will depend on mix going forward and what happens with volumes, but -- but what is the longer term thing and where can that margin go?

Can it get back to, you know, higher -- at one point it was over 20%.

I'd like to get your thoughts there.

I don't think we should anticipate we're going to see a rush back to the 20%.

I think some of the -- these pricing pressures we talked about in the back office will -- will certainly put pressure on, unless volumes really take off to tremendous levels.

But nevertheless, it's a scaled business and so if you -- if you get incremental volume and over a relatively fixed cost structure, you should do very well, and I think our margins will increase.

I don't want people starting to have visions of 20% again.

It took us several years to come down from there and it will probably take a number of sustained years before we can get up there again.

Okay.

One final one.

You mentioned acquisitions and then -- you know, the potential for that going forward at any time.

Art, what do you see as the most attractive area within brokerage services where you'd like to, if you could, add to it?

Well, I think we've -- I think we've had tremendous success.

I'm getting a bit of an echo here.

I think we've had tremendous success in expanding our investor communications services business beyond just the area of proxy mailings.

You know, just the -- the stock record growth positions that we talk about.

And I think you should continue to see, as we continue in -- on a kind of one-stop shopping mode, to see expansion arenas there.

As I look at the back office, I'd like to see us expanding the number of services that we're providing to back office clients.

I think there are opportunities in that area and we're continuing to pursue them.

Thanks very much.

The next question comes from David Togut with MSDW.

Please state your question.

Thanks, just a quick follow-up.

Could you update us on your search for a new president for the Employer Services business?

Right now, Gary Butler, who is our President and Chief Operating Officer of ADP overall, is doing double-duty in that position and we expect him to continue in that position for a while.

So I hope we didn't give the impression that it was going to be an imminent change.

On the other hand we are continuing to evaluate both internal and external people as we -- as we look at the overall needs that we have within the business.

So, you would anticipate that Gary would do both jobs for a while, and sounds like there is no particular near-term urgency, around finding a new head of ES after Gary?

I got to tell you, I -- I really would love to see Gary spending more time in his Chief Operating Officer role, also.

So, it's hard for me to say there isn't a sense of urgency around this, but on the other hand there is no burning bridges, there is nothing that I find especially troublesome in -- in where it is right now.

Okay.

Thank you very much.

The next question comes from Adam Waldo with Lehman Brothers.

Please state your question.

Thanks very much.

My follow-up has been answered.

The next question comes from Michael Millman with Research Associates.

Please state your question.

Thank you.

This is a very basic question, but when -- when you talk about sales, what's the metric you're using?

And then sort of related to that, you indicate that you're seeing the best improvement in pace for control in Small Business and -- and worst in large business, but your sales are somewhat reversed.

Let me -- the sales metric that we use was an estimate of the annual revenues to be derived from -- from new orders.

It could be from an existing client, from new products or new clients.

So, it's an estimated annual value of -- of an oncoming new order.

And the sales growth, then, is just that number compared to the same number at a previous year, same quarter.

When we talk about the -- the metrics of pays per control that is -- that is a number that reflects the number of employees in the clients that were the same clients that we had the previous year.

So, think of it as a same-store sales kind of metrics.

And what we were saying was that the - In the Small Business area, we saw a little bit of improvement earlier in the pays per control, then the National Account area, for example, the larger clients where the number of employees on their payrolls were still declining a little bit more than the other businesses.

So, there is no direct correlation between your sales and the particular strength in the segments?

Not immediate.

There's -- you think about the sales as being the -- the outlook for the next 12 months and the pays per control being reflectingof what actually transpired in the quarter that affected the revenue.

Okay, thank you.

You're welcome.

Thank you.

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

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

Please state your question.

Hi have a -- I have a quick follow-up, Karen, you went over some of the mix dynamics that have caused the Employer Services margin to decline.

I'm wondering about pricing, particularly in major accounts, whether you've seen any easing of price reductions or, and what your outlook for pricing is, I guess, throughout the segment?

Yeah, I think the overall pricing is -- has been relatively unchanged in the major account market.

If there's been pressure at all it's been in the lower end of -- of the market, kind of think of it as 50 to 100 -- 50 to 100K area.

But nothing that's really changing on a period to period basis right now.

So, I am not feeling any unusual pressures there.

Nor, honestly, are there real changes even in the National Account or on the Small Business arena.

I think in the National Account arena our setup got reduced but that was really a year ago and I don't think that -- I think it stayed at the lower competitive levels at this point in time, but I don't think there's any further pressure that I'm feeling.

Okay.

Just one other question.

I think you've talked in the past about yield on the portfolio in '05 being consistent with '04, all things being equal.

Is that still the case, looking out?

It seems like you'd almost need some help given where you're going to start the year?

Yeah, you know, the -- the -- the curves certainly have been moving.

My best guess at this time, based on the current curves, is it will be close to where we will end this year.

So, a lot of it will depend.

When we start the year, we tend to have -- sometimes we have less short balances because of corporate cash and there's a whole bunch of things that influence the yields in the particular quarter.

But at this point, my best guess is, it will be close.

We have embedded in our portfolio a rate of about -- of the -- of the maturities coming up for fiscal '05, just the maturing investments for '05.

The embedded rate is about 3.7%.

So obviously that's still higher based on where we are today than the investment opportunity for those kind of securities.

Just a way to think about it.

And roughly what would the reinvestment rate be if you looked out right now?

It's hard to say.

Clearly lower.

I would say -- I don't want to call it because so much will be dependent on what, you know, if we're -- how much we're talking about.

The timing of what -- you know the quarters, if we were talking about, the reinvestment rate in the first quarter versus the fourth quarter of next year.

Clearly it would be lower.

We bought at 3% in the last quarter, right?

Overall, yes, over all investments.

So, if you think broadly, you know, those are maturing at 3.7, we've been around 3.0.

That would be a way to think about it, if nothing else changed.

The only thing we can be sure of is, something will change.

Okay, thank you very much.

I appreciate it.

You're welcome.

The next question comes from Mark Marcon with Wachovia Securities.

Please state your question.

A couple of quick detail questions and then an overall question.

What was the average float bounce, exactly, for the quarter?

The average float balance, $13.3 billion.

Remember, and that was -- I'm glad you asked because Art mentioned it earlier but we didn't get any other follow-ups that was very strong growth in the quarter. 13.3.

Now, the third quarter is always our highest quarter and then it reflects the -- the new tax year and the year-end bonuses and things that kick in in January.

This year we're particularly helped by increased Dewey rates in some of the states and that kind of thing truly was a very strong balance this quarter.

Okay.

And then what was the average yield on the corporate -- corporate investments?

We generally don't give out the two different corporate versus clients.

Corporate is always lower.

Okay.

You've given that in the past, haven't you?

I don't know, I'm not on the call every quarter on the call to get into the differences.

I can give it to you at some point, but I don't have it here.

Okay, and then lastly, you know, new sales are picking up.

What are you sensing from clients?

I mean, are the sales cycles getting shorter?

Are you sensing more optimism?

What's your overall feel from that perspective?

I have antidotal comments, really, only to make.

As I met with several sales people in different offices, just as I've been visiting, I'm almost at the fluke of the visit, I'm hearing positive things.

I'm hearing that we have the right products.

I'm hearing that the receptivity in the market to our products is good.

I'm hearing less of the delay in terms of people not wanting to make a decision.

I'm hearing a little bit of, you know, people have to make a decision right now because they kind of waited long enough.

So, I would say it's -- it's purely antidotal, but the antidotal evidence is positive.

Wouldn't your sense be that it strengthened throughout the quarter in terms of those general feelings and is continuing now and should continue to build?

I really don't know that.

I mean I -- I would hope that's right.

I'd like to believe that's right.

But I can't tell you that I've had -- that a period's a period, week to week type of comment to give me the confidence to be able to say that.

All right, thank you.

Thank you.

Due to time restrictions, ladies and gentlemen, I will now turn the conference back to Ms. Dykstra.

Okay, we're about to wrap up.

Before we wrap up the call, I have an additional comment.

Nobody asked a question about the Dealer Services and I must take the opportunity to talk about Dealer Services.

They really had a terrific sales quarter.

Growth in sales was 24% in Dealer Services this quarter.

So, I didn't want the call to go by without congratulating the folks in Dealer for a terrific sales performance this quarter.

That being said, we are concluding the call, we're trading somewhere a little bit over $45 a share and we appreciate your interest and questions.

Thank you.

This concludes our conference for today.

Thank you all for participating and have a nice day.

All parties may now disconnect.