自動資料處理 (ADP) 2004 Q4 法說會逐字稿

Good afternoon and welcome, ladies and gentlemen, to the ADP fiscal 2004 earnings conference call.

At this time, I would like to inform you that this conference is being recorded, and that all participants are in a listen-only mode.

At the request of the company, we will open the conference up for questions and answers after the presentation.

I will now turn the conference over to Karen Dykstra, Chief Financial Officer, please go ahead, ma'am.

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

And welcome to our fourth quarter of 2004, conference call.

And as you know we issued our earnings release for the quarter and the full year earlier today.

We reported 9% revenue growth for the quarter and the full year.

Our earnings per share, we reported 36 cents for the quarter and $1.56 earnings per share for the full year.

Overall we had a stronger quarter, with key metrics improving.

And during the year, we beat our original expectations.

And as we did that, we took opportunities to accelerate some expenses into the fourth quarter, which were about $30 million overall.

So we were very pleased with our results, and especially pleased with the positive momentum and employer services, especially with sales retention and pace per control all improving and with those very few remarks, we are in better position and have solid plans for a fiscal '05.

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

These are disclosed in our periodic filings with the SEC.

So we're ready to start the Q&A and the conference call operator will come back in a minute to explain the format.

Art and I ask, as always, that you try to keep your questions down to one at a time so that we can answer them.

And today we have about 115 people on the conference call.

And I will turn the call back to the conference call operator at this point.

Thank you, ma'am.

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

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

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

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

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

Please stand-by for your first question.

Our first question comes from David Grossman with Thomas Weisel Partners.

Please state your question.

Thanks.

Karen and Art, I wonder if you just could provide a little bit more granularity on your revenue guidance for next year.

I think you were talking about mid single digits of revenue growth.

Wondering if you could perhaps provide some details looking at the employer services, versus brokerage, versus float.

Sure.

Our employer services revenue growth for next year is anticipated to be in the 7% range.

Our revenue growth this year, 10%.

For the full year was influenced as you know by our acquisitions at the end of fiscal '03.

And our internal growth this year was about 5% so employer services revenues will be growing next year to 7%.

And our brokerage business, our revenues are forecasted to grow at least at this point, our expectations are 5%.

It's about the same internal, by the way, for next year. 5% is comprised of about 9% in our back office or transaction processing segment, which does include about $50 million for half a year of the clearing acquisitions that we announced.

And 3% in the investor communications division.

Overall, our growth that is forecasted for fiscal '05 in our brokerage business is probably on the conservative end.

And as you probably know, it's very difficult to forecast the trading activity as well as some of the investor communications activity.

This year we were fortunate enough to have some incremental mailings because of mutual funds -- regulatory oversight which helped our revenue growth.

And next year, we're not anticipating that to repeat.

Also we were fairly conservative with our assumptions around stock record growth and overall mailings in our investor communications site, if anything within our overall plans that's probably the part that we were the most conservative on.

It also has the most variability and, therefore, we're comfortable keeping it at the forecast that we have just provided.

In our dealer services business, our revenue growth is forecasted to grow 12% next year.

Some of that is helped by acquisitions.

As you know, we did an acquisition of EDS' business, Dealer Management Services business, since the second half of this year as well as another smaller acquisition or two, internal growth should be in the 8% range in dealer services.

And claims revenue growth next year should be in the 6% range helped by the acquisition of a Dutch claims processor that we completed in the third quarter of this fiscal year.

Interest rates as we said in the -- in our press release, we assume the current yield curves.

So whatever's currently built in, that is the way we project our interest income in the future.

Our balances are anticipated to grow 7% next year.

Now, 7% is coming off of 24% client from balanced growth in fiscal '04.

And that warrants a little bit of explanation.

First of all, 24% was about 12% internal growth.

The other half coming from the Pro Business acquisition.

And 12% was helped by increases, SUEY (ph) rates helped by increased wage growth, stock option income, bonuses, sort of a rebound from tighter periods that materialized during fiscal '04.

So although 7% sounds lower, is lower, I think it might be little bit conservative.

We tend to -- we tend to build our clients' balance plans conservative, as well.

But, what you should hear is we certainly don't anticipate returning to the 12% range in fiscal '05 that we saw in -- that we saw in fiscal '04.

So I think that hopefully covers the high points on all of the revenue growth assumptions.

Maybe a little too much, Dave, or more than you asked for --

No, no.

Thank you very much actually.

Just two quick follow-ups.

And on the investor communications side, I know you're obviously taking a much more conservative view.

And I guess, just wondering whether in fact you're starting to see, you know, the momentum from the initial surge slowing down and that underlies a conservatism or whether in fact you really don't have much visibility but you're just taking a more conservative tact.

And I guess a similar question on the float balances.

Just wondering, you know, whether you're seeing wage, you know, growth starting to slow down a bit.

And I know you talked about the SUEY benefit last year, but just in terms of some of these other variables that relate to more macro factors, whether in fact you're seeing a slowdown or whether in fact, you know, you're just being conservative going into the new year.

I'll take the investor communication and leave the float part of that for you, Karen.

It's actually quite the opposite of the way the question was phrased.

We're actually -- saw accelerating growth in our number of mailings during the course of the year.

The stock record growth number, which basically underlies the number of proxies that we mail actually improved each quarter right through the fourth quarter.

The number of one-time mailings during the year was heavily influenced by the mutual fund regulatory environment.

During the second half of the year.

And we basically assumed that none of that is going to continue, and that's a kind of -- mitigates against what would otherwise be better growth.

But the actual trends that we saw continue to show improvement right through the end of the year.

So on the initial fund mailings, though, are you starting to see that flatten out, or --

The regulatory-related mutual fund mailings we are seeing flatten out.

On the other hand, the total number of -- of mutual fund mailings are -- are continuing basically along the same trends that they've been at.

Great.

Thank you.

The second half I think to your question was around the client balances.

And are we starting to see it flatten out.

Actually that's the quarter was just as strong as the year with 24% growth in the client balances.

I think the -- keep in mind the calendar and how it -- and how it works.

The SUEY rates increased in the beginning of the calendar year for the most part.

Also taxes withheld are generally much higher in the first and second quarter of a calendar year up until the point where people reach their maximums and then they drop off.

So we will see a decline beginning in the first quarter of fiscal '05, a decline in our growth rate.

And we are not assuming that the Tsui (ph) rate increases will go backwards, the Tsui rates themselves will go backwards, but we're not assuming that we're going to have another incremental increase in most tax rates.

So it's just anniversarying those periods will bring us down to what we believe to be the 7% range.

Great.

Thanks very much.

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

Please state your question.

Good morning, Art and Karen.

I wanted to follow-up on that last question real quickly here.

On investor communications.

Art, you mentioned records improved each quarter.

Did you see -- for the year, did you see growth in positions?

Yes.

The overall growth in positions was about probably 3% in total for the year, and if you recall, our comments as we were coming through the prior quarters, we were flat or down a little earlier in the year and then we kind of got the flat.

So it showed, it reflected a good fourth quarter.

And the fourth quarter is the peak mailing period for investor communications services.

Because most annual meetings take place during that period for year-end companies.

Yes.

And the important thing to remember is there's a number of positions which did end the year somewhere in the 3% to 4% growth range.

And hen it's a function of the number of jobs, the timing of the jobs, proxies obviously for the most part happen once a year.

Just a matter of which quarter they might fall back and forth within a different quarter.

But for the most part, they happen once per year, and then there's all the interim mailings, elective communication, mutual funds, proxies, mutual funds, nonproxies, things like that.

So it's a combination of all of those items.

The other thing that we probably should mention for the quarter as we're talking about brokerage statistics and the revenue growth and the activity, we did see a good increase in suppression in the fourth quarter.

The suppression rate jumped up to 37%, which as you know is good for us.

We get incremental fee revenue, less postage revenue, but incremental fee revenue in a slightly higher absolute margin on the -- on that activity.

So it went up to 37% in the quarter, 33% for the full year.

Okay.

That's good color.

I appreciate that.

And then buy-back activity seemed like it was a little below what I would have expected for the year just given your good cash generation.

How should we look at that going forward?

And into fiscal '05?

I think you should continue to believe that we have an appetite for treasury share acquisitions.

The -- if I look at our cash flow, our cash flow is going to continue good.

Our capital expenditures were actually up a little bit to around $200 million during this last year.

But overall, we're not capital intensive company.

So we will continue to have funds available for our primary objectives beyond putting them in the business which includes acquisitions as our primary objective, and then treasury shares and dividends.

So I think you should anticipate a continuation of the treasury share repurchase program we've had up until now.

So is it fair to assume that the pace will be similar to '04, all things being equal?

Yes.

Except that all things are never equal.

So therefore, if all things were equal, you could assume that.

But we're not specific in terms of exactly what we're going to do with any individual point in time or any individual week, quarter, month.

So -- so I think you could assume in general a continuation of the program along the lines that it's been.

Thank you very much.

I appreciate it.

The next question comes from Jim Kissane with Bear Stearns.

Please state your question.

Thanks.

There was a nice improvement in pace per control in the quarter.

Karen, can you give us a little more insight by client size, whether it was more national accounts or more in the small employer area?

Thanks.

Well, the -- just to clarify, Art, when we quote our pace per control statistics, we're measuring our auto pay pace per control, which is our core product mostly in the mid market.

We don't track specifically the other products and, therefore, it's hard to give an exact number for pace per control on the low end, pace per control on the high end.

Overall, I would say we've been seeing better pay growth on the low end, and a continuation of tougher stats on the high end national accounts.

Going back, and we don't have the specifics for the quarter, but we were still seeing declines not too long ago at the high end national account side.

And I think that that trend's -- it still prevails today.

Great.

Is it possible to break out the growth in beyond payroll from the growth in core payroll and core tax?

Well, I have some statistics.

The -- the payroll and tax for fiscal '04 grew about 11%.

This is in -- we do this in the United States.

We don't do it for other parts of the world.

But for payroll and tax growth 11%, and beyond payroll growth was, 16% in fiscal '04.

The11% was helped by Pro.

So that number was probably more like 6% or 5% without the pro-business acquisition.

And as I think about next year and the revenue growth plan, again, sticking with the U.S. base where we have the, I'm sorry, the beyond payroll products, I think that number would still be in the 5 to 6% payroll and tax.

And then beyond payroll, 14%, 15%.

Okay.

Thanks, Karen.

You're welcome.

The next question comes from Rob Burgious from Sanford Bernstein.

Please state your question.

Yes.

Can you talk about the September quarter, whether you're comfortable with the estimates there?

I know the press release indicated that earnings growth would accelerate throughout this year.

Can you just talk about the outlook for the very next quarter.

Well, without giving specific guidance on earnings per share for the quarters, as we typically don't, what we're trying to indicate in the release is that our earnings per share would be rising through the year for a couple of reasons.

One, interest rates comparisons.

We believe that our interest rate comparison in the first quarter of '05 will still be negative, our average yield 3.1% compared to about 3.4% that we earned in fiscal '04 in the first quarter.

Those numbers get a little bit closer together or -- in the second quarter, and then actually start to improve and we'll start earning more in the second half of the year in '05 than we did in '04.

Assuming that the current interest rates are what's in place as we go through the year.

So that's item one.

The second one is really the expense level growth.

When we talked about the incremental investments, and I'll take us back to a year ago March, so March, 2003 where we announced that we would have 150 million to 200 million of incremental spending program.

We spent about 50, 60 million in the fourth quarter of '03, and then we said we spent in total somewhere around 170 million in fiscal '04, including the 30 million of one-time charges.

So the way we broke that out and the way -- the way that that spending occurred over the years, as you can see in our press release happened to grow throughout the year.

So we went 20 million in the first quarter, 30 million in the second, 40 and then 55 -- or 50 million in the fourth quarter.

And so when you get to the first quarter of fiscal '05 if our current run rate is around 45 million, which it is for those type of expenses which we said will continue, that would compare to about 20 million that we would have spent in '04.

So it will have a negative comparison on those investments, as well.

And so those are the kind of things that we look at, and therefore without giving a specific number for the first quarter, we think that the first quarter will be very low compared to the rest of the year because primarily those two issues.

Okay.

And just to continue that discussion, with the double-digit earnings growth guidance for fiscal '05, if I plug in 10% earnings growth, that gets you to $1.72.

Should we assume that $1.72 is sort of the worst-case scenario, and sort of downside to that number would require sort of, you know, economic weakness and sort of erosion in some of the leading indicators that have recently turned positive?

So I mean, in other words, is $1.72 the kind of rock-bottom number and then upside to that is -- is a function of what happened to some of the economic metrics?

I think that the reason that we give double digit is so that we won't be very precise.

We have attempted -- up until the last year when we unfortunately had to revise some numbers down or last year and a half, I guess, have been very consistently either correct or have beaten our forecasts going back for a whole bunch of years.

So I see this consistent with what our historic practice has been.

We believe that the number that we -- the forecast we have made -- we've given is makable.

Karen has referred to a couple of the assumptions being conservative already as we've gone through this.

And you can deduce what you would from that versus the assumptions that you would make on the same kind of items.

So I don't want to talk about exactly what the double digit means, but we certainly have a high confidence at this point in the double-digit amount.

Okay.

Great.

Rob, if I could just add on a comment there.

Just -- just to state that actually in the last year we did not reduce our guidance down.

It was two years ago.

In fiscal '04, we actually were right -- just about right in the middle of our range and increased our revenue guidance as we went through the year.

You're right.

But it's still so painful to me from two years ago.

I can't get it out of my mind.

Okay.

And Karen, are there any portfolio gains being assumed in the guidance?

Or is that just assumed that the gains nonexistent?

It's assumed that we do not take gains.

Okay.

Excellent.

Thanks for your help.

Thank you.

The next question comes from Bryan Keane with Prudential.

Please state your question.

Yeah, hi.

Karen, could you give us some of the brokerage trade metrics and then maybe retail versus institutional, as well?

Yes.

Brokerage trades for the quarter were up 15%.

They were $1.485 million for average for the quarter.

It ended up being just under $1.4 million average trades per day for the full year, or 6% growth for the full year.

In the quarter, the retail percentage actually declined a fair amount.

Down to 30%.

So we had 70% institutional and 30% retail.

Which equated to, and when you correlate that to our actual revenue growth in the quarter in our back-office business, in the specific business we're talking about, it was only 2, 3% in the quarter.

And that was because of the mix change and related decline in rate per trade that happened in the quarter.

I want to talk about the trade and how to look at it going forward into fiscal '05 because I want to introduce a new -- a new metric and it relates to the mix.

As we talk about our guidance for '05 for brokerage, if you recall before I said that the back office or transaction processing side of the business would grow 9%.

Some of that is the acquisition of the clearing business which is assumed to be a half a year.

About 50 million.

And let me peel it back a little bit so you know specifically the size of the revenue business I'm talking about.

In total, if we had about 1.750 billion in our brokerage business and 500 million or so is the back-office piece of it, within the 500 million there's the 50 million or so that we'll get from the acquisition next year.

And then there's about 100 million of businesses that are not rising and falling with the trade activity our Willco business, international business, our fixed income business, ICI.

So we're talking if you peel all those things back, we're talking about our core back-office processing business next year in the $350 million range.

So as we look at what we might do next year, and think about our trade growth, we think our trades will actually be up somewhere in the 14, 15% range next year.

But we have to put that in context.

We will be implementing e-trade in the first quarter.

Think of the September time frame.

And e-trade is more electronic trade.

So whereas we used to talk about retail and institutional, now I want to talk about retail, nonelectronic trades, retail electronic trades, and institutional.

So our mix in -- in '04 of the nonelectronic trades for the whole year was about 29% with 5% basically electronic trades, and the other 66% institutional trades.

As we look at fiscal '05 because of the implementation of e-trade, our mix of electronic trades will more or less double.

And electronic trades are closer to institutional rates.

They're not institutional trades, so I wouldn't put it in that mix of institutional trades, but the pricing is closer to institutional clients because they're normally the higher volume kinds of -- of clients and the -- and because of the work involved.

So when we talk about fiscal '05, although I said our trade volume might go up 14, 15%, I believe our rate per trade will then go down somewhere in the 10% range.

Mostly because of the mix shift toward the electronic trades, and because of -- of the tiered pricing that we have been talking about for a long time as you get to these higher institutional volume clients.

You get to different tiers and their pricing agreements.

Overall what you should hear is pricing is still declining in terms of renewals.

But at a slower pace than previous years.

And think about a couple of low single-digit pricing impact on renewals.

There's a long answer because I wanted to make sure everyone understood you can't count the trades the same way next year as we increase our electronic trades with the implementation of e-trade, and I wanted you to understand the context in which we're planning.

What was the rate per trade in this particular quarter?

We don't actually give out the rate per trade.

Overall, the rate declined 14% in the quarter, and again it was primarily because of the change in the mix.

And the retail percentage and the mix of the higher institutional clients.

Okay.

Also in brokerage in the quarter, the operating margin was a lot higher than I had anticipated.

Was there -- is that just an improving market, better pricing?

Is there something to read into that?

Well, the margins in the -- in the fourth quarter are always better, and that's because all the volume comes in our proxy services business.

So even though in the beginning of the year you -- you will see lower margins in our investor communications business, it does all build up and the fourth quarter the profit comes in.

So it's always going to be like that, Bryan.

And will margins next year probably still increase slightly year-over-year?

Yes.

I -- I think margins will have a slight increase next year.

Mostly because of increased leverage with increased revenue, but also because we divested some of our less profitable businesses during this year such as our International business -- printing business as well as our OMR, which is our foreign-exchange products business, which were less profitable.

Okay.

And let me just ask a question on the new sales growth.

Obviously 19% was even better than you guys expected.

How does that grow throughout the year?

I think the comp might be a little bit easier in the first quarter.

But in the press release, I think it said double digits.

Does it stay about, you know, a double digit low, double digits throughout the year or should there be some spikes there?

Should be relatively constant.

A lot of the skewing that occurred in prior years occurred mostly because we had very weak fourth quarters.

Or because we had some very unusual transactions right around our cut off at the end of June.

We really don't have that this year.

And the comparison should be more normal during the year.

So I -- I would not see or expect a very unusual skewing during the year.

Okay.

Great.

And finally, Karen, could you just give us the organic revenue growth by segment for the quarter.

Sure.

For the quarter, the employer services was 5%, brokerage, 7, dealer, 9, and claims was a negative 4.

Thank you very much.

You're welcome.

The next question comes from Steve Weber with SG Cowen.

Please state your question.

Yes.

Good afternoon.

Number one, could you help us a little bit -- this is my standard question.

Can you help us -- those reconciling items a little bit in the fourth quarter.

The float adjustment.

It seems a little -- there's something skewed in here.

Was there anything unusual?

If you could help us out, I'd appreciate it.

On the -- on the other segment you're referring to, Steve?

Yes.

Please.

Okay.

The -- let's see, nothing usual really with claims.

The tax filing offset or the way we think about the adjustment to float was certainly worse this year than last with the high increase in the volume of funds.

So think about for the quarter at least -- it's a 30 million kind of number in terms of worsening from period to period.

And there was really not a lot of other major items that were in the numbers.

Okay.

My second question is, can you give us some color on how much leverage you think there is on the margin in employer services in fiscal '05?

What would be helping that, I assume volume would help, it and what would be restraining it?

How much of that incremental spending swing sort of falls there?

Well, I -- I think -- the way we normally think about employer services is that in a normal year, we might get a half a point of margin improvement just from scale.

And I think we still believe that that is the case.

In our plans we've contemplated increasing margins due to scale.

I would say we're expecting somewhere between 1 to 1.5% margin improvement in fiscal '05 overall.

So we'll get closer to the 22% margin level.

First of all, we're going to pick up some -- some points for the last year's acquisitions, which were dilutive by a couple of pennies are now basically break even for us.

So Pro business and the scatter acquisitions that we did at the end of '03 impacted us all year in '04.

And now are turning and will help us with margin improvement.

And then we've got all the one-time charges, the 30 million by the way was primarily in employer services.

There was a couple of million dollars in brokerage also.

And all the businesses had a little bit.

Think of it mostly as employer, plus the majority by far of the incremental spending was in -- in employer services, and getting back to the conversation we had earlier about the way that the spending on investments felt during the year, we will have some of those unfavorable comparisons earlier in the year.

And that would be in employer services.

So I'm thinking we might get a point to a point and a half margin improvement next year.

Okay.

And then lastly, Karen, the last conference call you mentioned that the maturing, I think you said the maturing debt on your float balance would be -- was going off at about 3.7% for F '05, is that still the case or was there any switching or things that would change that?

Yeah.

I don't know that it's a different number.

That's within the range that we talked about the last time.

Our maturities are coming in around 3.7%. 3.6 to 3.8, it's in that range.

And we think that our yield next year will be 3.3%, in that range, compared to a full year of 3.1% or so this year, excluding gains in portfolio and losses which we took this year.

Okay.

Thank you very much.

You're welcome.

The next question comes from Greg Gould with Goldman Sachs.

Please state your question.

Thanks.

To follow up on the employer services operating margin, Karen, I know you probably don't want to get into too much quarterly detail.

But can you give us a sense for how much it should bounce up from the 11.8% operating margin in the fourth quarter going into the first half of next year?

Are we looking sort of mid teens?

The 11.8% number is really a very unusual number related to the activity.

I think if you look at the more normal seasonal aspects of employer services, other than the grow overs that Karen has talked about in terms of the expenses, you'll see a much more normal type of margin throughout the year.

But be careful of those grow overs in the first six months.

Right.

Okay.

And now that Pro business has been anniversaried, can you give us an update?

I think originally when the company was acquired, the hope was that it would be accretive by about a penny in the second fiscal year, is that still the case?

I would say that we are extremely happy with what's been going on in our Pro business acquisition.

I mean, the best part of it has been the client retention which is probably the issue we talked about and worried the most about at the time of the acquisition, which has continued to be an excellent, really an excellent level during the year.

And so we actually did a little better than we anticipated in terms of the metrics this year, and we assume that will continue as we go into '05.

Okay.

And one last question, Art, on business process outsourcing.

Can you give us sort of an update there, and is it still the case that ADP is really focusing on BPO areas that are part of its original heritage, right, the high-volume processing areas?

All right.

First I'd say that we're continuing to make progress in the BPO arena.

We are active and we have been active in a number of transactions.

More so than clearly when we talked about it before we said the market was kind of pulling us in this direction.

Then market has continued to pull.

I actually had this kind of anecdotal conversation with the head of our national account business just a couple of weeks ago where he reminded me that of five kind of significant deals that we were competing in a couple months ago, we actually won all five.

Which means that we're in the area in which we're competing, which is really the space below a very large account, it's the space below that, we are very competitive.

I don't expect to win every one.

So please don't hear that number as a predictive number for you.

But it says that we're there in the market.

There is a fair amount of activity, and we're winning our share.

So I'm feeling very good about it.

Okay.

Thank you.

The next question comes from Adam Frisch with UBS.

Please state your question.

Thanks.

Good afternoon.

Just before I started my questions I wanted to congratulate Bryan on his question.

I think he actually asked more than I did a few quarters ago.

I will have to come back next time and try to get it back.

Trying to bridge a gap here guys, between the visibility you have on '05 and the descriptive guidance you gave for next year.

Art, I appreciate what you were saying that you kind of wanted to give yourself some leeway here.

But, what are the swing factors that we should be looking for, the issues that you're looking for that would make you give maybe a more definitive range going forward?

What are the main, you know, factors to be determined so to speak that you're looking at?

I don't think they're different than the things we normally talk about.

Interest, we're using the current basically where we are today, what will happen in interest going forward, it will have a lot to do with where we're going.

We talk this year about the importance of employer services sales to our overall results.

I think that those -- that continues to be a very, very important item for us.

One that we're heavily focused on.

I think it's one that you should also be focused on.

There's -- it's very difficult to predict in brokerage exactly what's going to happen on a day-to-day basis to say nothing of a month-to-month, quarter-to-quarter basis.

But both trade volume and mix, retail mix as well as the number of mailings will be prime swing items for us during the course of the year.

So those are the ones that pop into my mind right away.

Karen, are there any you'd add to that?

That's the primary ones.

Those are always the main.

I mean, obviously sales and then employer services as it's not going to affect the immediate revenue numbers.

But as you go through the year, making the sales, particularly getting into the year-end period is important to us.

Okay.

What would be the things that I guess maybe worry you the most going into '05?

Is there a specific client relationship or set of contracts out there, or is it basically the continued secular trend that we saw last year?

I mean, what would you say are things that you are most concerned about?

Well, I think the biggest issue that's gone on for us over the last couple of years has been the continued consolidation of the brokerage industry.

And so if you look at the -- at the significant acquisitions, significant mergers that have taken place, a lot of them have impacted us because almost everybody, a lot of the people in there have been our clients.

And especially as the retail sector was weaker, a lot of the acquirees were retail players.

So those transactions are things that I would continue to worry about.

I continue to worry about anything significant that goes on with major deals within the financial services industry.

Other than that, I think we have probably a terroristic tack which would impact -- could impact both the economy and the brokerage world at the same time, would be the type of thing that would create another -- whole other level of uncertainty and could disrupt us for a period of time.

But as you know, we're a trend business.

And our -- we generally move through trends, and I think the trends are starting to move in a positive way for us.

So I'm looking forward to taking advantage of those trends while we continue to make significant investments in how we continue to grow this business, not just one year, but for multiple years in the future.

Great.

Thank you very much.

The next question comes from Pat Burton with Smith Barney.

Please state your question.

Hi.

A two-part question.

Karen, could you please reconcile the pretax income contribution between the three units in the quarter.

And then what the claims other number is with the total of 338 million.

Was there a large, favorable swing in the claims other component in the quarter?

I -- I attempted to go through that a minute ago.

No, the claims -- claims itself was up about 10 million.

For the year.

Compared to last year in the fourth quarter.

So -- and then there was some puts and takes in some of the other areas, but the biggest number probably being 30 million or so negative in the -- where we -- we placed the difference between the 4.5% allocated to employer services and the actual interest rates earned.

And then offsetting some miscellaneous positives in some of the other accounts.

So there's not a -- it's not a whole lot of big swings other than that.

I think we're talking about -- total 338, was it 348 last year in terms of total consolidated pretax.

Okay.

Thank you.

The second part of the question is, per Art's comments about watching out for the comparisons year-over-year in the first half.

With the expense levels, would you expect earnings per share to be down in each of the first and second quarters on a comparative basis year-over-year?

Thanks.

You know, I don't know that it would be down.

It certainly will be much lower in the first -- especially in the first quarter, and then a little bit better, we're anticipating, in the second quarter.

But at this point I'm not expecting it will be a decline.

And no -- I don't ever want to say never, we're not going to give specific guidance around the quarter.

And if I were to give a range, I would be -- it would be -- I don't know that I put the negative in the quarter.

But, you know, a lot of things can happen.

I'm glad Karen answered that because I would have said no.

Thank you.

The next question comes from Cindy Shaw with Schwab Soundview.

Please state your question.

I had a couple of questions.

One, I was wondering if you could give us some thoughts on the operating margin trends you're expecting for the services business, in other words backing out the float income through the year in terms of how you see this trending versus fiscal '04.

And then also, if you could give us a sense for what you think the corporate portfolio balance will be for the year.

And I know you said you didn't anticipate any gains.

Would you anticipate any losses on the portfolio?

Let me take the second part of the question.

I might ask you to repeat the first part.

I'm not sure Art and I got the first part.

But the average client funds we're anticipating should be in the area of 11.8 billion compared an average 11.1 billion in fiscal '04.

The average yield we think will be somewhere in the 3.3% range compared to about 3.1% in '04.

And both of those are excluding any gains.

We are not planning and normally do not plan to take any gains in the portfolio.

This year we happened to take losses.

Our total in the fiscal year was somewhere close to 8 million in losses taken in the portfolio, compared to gains of close to 30 million in the previous year.

I think that was 30 million in fiscal '03.

So that answers the first part.

If you wouldn't mind repeating the second part -- the original first part.

The first question I was actually asking about the corporate portfolio rather than the client portfolio and if you could clarify if the yield was overall for the blended portfolio.

We don't generally give out the differences in the yield.

We are only talking about blended.

In general, corporate tends to be shorter so they're a couple of tenths of a percentage shorter, I mean lower with the shorter investment.

Okay.

And do you have a projected corporate portfolio balance for the year?

Well, I -- let's put it this way.

We have a 2.1 billion of cash and marketable securities at the end of June.

Our cash from ops generally is in the 1.4 billion range.

And we don't necessarily go through the detailed planning of treasury share purchases versus acquisitions and so on to come up with the precise plan of corporate cash balances during the year that we would like to disclose.

Okay.

And then the second part of my question was, if you could give us a sense for how you think operating margins minus float income will trend during the year, how they might compare to the year-ago quarters.

Operating margin minus float income?

For consolidated ADP?

No matter how you look at it, I think as long as we're growing and in -- in our business areas, we are a scale business, we should show margin improvement excluding funds in each of our core businesses that go along with the growth.

So unless it's a very unusual thing like a new product startup or something like that or an acquisition that takes us in a different direction, none of which I think would impact the question that you have right now, I think it will be appropriate to assume that the operating margin excluding float would continue to improve marginally in each business.

And is that for the year?

I expect from your comments that incremental investments that may not be the case early in the year?

I think that, yeah -- I think that in general you could assume that it will take place throughout the year.

Those incremental dollars may offset what would otherwise be that normal growth.

So then it wouldn't be true in the early part of the year.

Great.

Thank you.

Thank you.

As a reminder, ladies and gentlemen, please pick up the handset before asking your question.

The next question comes from Mark Marcon with Wachovia Securities.

Please state your question.

Good afternoon.

Was wondering if you could -- since you helped us out with regards to the margin improvement in employer services, I was wondering if you could make similar comments with regards to brokerage and dealer services.

Well, I -- I think brokerage should be a slight improvement next year.

And as I mentioned, we -- we divested two of our businesses that were less profitable.

The International Printing business which is about 25 million, $30 million business, not profitable.

And the -- our OMR foreign exchange product businesses.

So both of those divested late in fiscal '04 will help with some margin improvement in brokerage services.

In general, we've talked about the fact that the -- the brokerage clearing acquisition will be about a penny dilutive in fiscal '05.

We're assuming that will close around -- will have about a half a year's worth, and that will cause us to go down about a penny.

And then I think that the rest of our businesses, there's nothing -- nothing much unusual happening.

I think they would be -- continue to get some margin improvement with their scale.

And so when we roll all of that together, are we talking about 20, 30 basis points of margin improvement for the year?

We're talking bout 2%, roughly 2% in brokerage.

I would say 1.

1% in brokerage?

1% -- it was 2% before the clearing acquisition.

So 100 basis points?

So 100 basis points.

Okay.

Great.

And how about dealer services?

Dealer will be about -- flat, maybe slightly down.

Just down because of the two acquisitions done late in the year.

And both of those have some -- some integration to do.

So generally when we do an acquisition early on, it becomes a little bit less profitable than it was before we got our hands on it.

And so I think everything else remaining the same, they didn't have a lot of one-time in dealer this year and so the acquisition activity probably will keep it at least flat, maybe down ever so slightly next year.

Great.

And what was -- what was CapEx for the full year and where do you think it will be for '05?

Capital expenditures was 204 million for fiscal '04.

And the forecast for '05 will be somewhere between 225 to 245.

The reason for the increase that we're projecting for next year are two-fold.

One is we've got some carryover from fiscal '04 projects, facilities projects that were started and not completed.

And that's got a fair amount of carryover that will take us into fiscal '05, as well as some infrastructure, data center infrastructure improvements that we're planning.

So it is a little bit higher rate than we normally have, and at this point our forecast is somewhere between 225 and 245.

Great.

And then just one strategic question and two just housekeeping questions.

The average float balance for this past quarter, was that about 11.9 billion?

The average float for the quarter was around -- somewhere close to 12 billion.

And was the -- was the yields, did you say it was 3. -- you said it was 3.1 for the year.

What was it for the quarter?

2.8. 2.8, excluding gains, it was 3.0.

Okay.

And then finally, in terms of the new business sales growth, that was terrific this quarter.

Can you talk a little bit about where you're seeing it in terms of whether it's in the small business arena or whether it's in majors or nationals, and what's -- what's driving that?

Well, I -- I think, first of all, it was -- really pleased with the 19% growth in the quarter.

And second quarter in a row was stronger sales performance, all of the major markets were positive in the United States.

And all geographies except Europe was not as strong.

So it was -- we showed strength in all of the businesses in the quarter.

Probably the strongest was majors and -- and small business.

Majors, rebounding after a very weak fourth quarter of fiscal '03.

So you have to keep that in mind.

But, still in all, very good, solid performance.

And very good across all of the major segments.

In terms of where we continue to see the strength and how we think about it, we're pretty pleased with our plans and that next year, double-digit forecast, we've got on average we've invested in our sales force, and on average we'll have somewhere around 7% higher number of salespeople next year than this year.

So we're assuming some productivity improvement there, as well.

We're doing really well, with some of the beyond payroll products.

On a sales front, we are anticipating a strong year in the PEO next year after a softer year in fiscal '04.

We're counting on strength from comprehensive outsourcing, which we talked about a little earlier.

We're counting on continuing momentum in the SBS in our small business, I think we have it.

And as I said some productivity improvements, as well.

Great.

And lastly, pricing in ES, how is that going?

Stable, pricing is stable.

We have about 2% price increase in our plans, but in general the pricing environment is stable.

Great, thank you.

The next question comes from Adam Waldo with Lehman Brothers.

Please state your question.

Yes, good afternoon, Art and Karen.

Thank you very much for the comprehensive MD&A this quarter.

You're welcome.

Starting at a very high level, Art, there's been a lot of speculation in the financial services industry trade press that the institutional equities business over the next couple of years could move to a locked market like what we see in the fixed income market i.e. the absence of customer flow conditions.

If that were to develop, how would that affect the brokerage services business, in your view?

It's very hard for me to answer that question because any time you are going through changes like that, exactly how the clients will respond is a difficult thing to assume.

But if you look at what we're doing in the fixed income business, we have a very good business in the fixed income business.

We have major market shares, and we've continued to grow very nicely.

And I would assume that while the scale may change depending upon the levels of activity, that the types of services that we provide are always going to be in demand.

So it -- I don't really -- we've had pressure on fees as the whole structure has changed over the last few years.

We've had pressure on fees as tiering, as people have gotten very large.

And have hit tier levels.

I assume similar things like that might continue.

But I don't think that it will be a significant change from where we've been.

So would it be fair to say, Art, that it's your belief that, if you will, that the major structural changes in the brokerage industry and financial services industry as regard to that business have occurred in the downturn absent another round of M&A to come back to your earlier point?

Yes.

I'm hopeful.

I mean, I wish I knew the answer to that question, but I'm certainly hopeful that that's correct.

I think the important thing to understand is that we provide a very core value-added service which is just cheaper to do because of the scale that we do it in than it is for anybody else to do individually.

And, therefore, there's always going to be a need and a demand.

That doesn't make it easier, it doesn't mean it doesn't end up in negotiations in terms of how you define value.

But the core, the core values are there.

Fair enough, thanks.

And then drilling down into your business in the ES division, Karen, I wonder if you could just give us some color in terms of the variance of year-over-year growth rates in both new client sales and overall revenue that you might have seen amongst national majors and SBS in the quarter.

We actually -- if you're talking about units in terms of new clientele, we actually were fairly consistent in the -- in the, I don't want to say the quarter necessarily, but for the full year in terms of small,, majors, and national accounts.

So we've got -- am I answering your question?

No, Karen, that would be very helpful, I think, to the extent that you could quantify for us, you know, the degree to which you saw new sales growth in nationals versus majors versus SBS for the year even if you don't have them handy for the quarter.

And also any quantification you could provide on revenue growth rates for those clients, size segments.

Well, as you know, we normally don't give that out.

I know, but I thought I'd try again.

But you know, just to give you the flavor for the -- for the quarter, the sales were, as I said before, strongest in majors and in the SBS segment.

Majors have the more favorable comparisons to the fourth quarter of fiscal '03.

For the full year, between the SBS segment, majors, and nationals, they were all very close in terms of their overall sales growth.

So there isn't much to distinguish between the segments on a full-year basis.

And that's about all I -- I can give you because you know we don't generally give out the revenue components.

I understand.

Thank you very much for that detail.

Okay.

The next question comes from Greg Smith with Merrill Lynch.

Please state your question.

Hey, good afternoon.

I was hoping you guys could just talk a little about the Bank of America acquisition and sort of what have led up to that acquisition and where you really see the opportunity.

Yeah.

We have been looking for a while at the clearing space and at opportunities within the clearing space.

We -- we have a very significant back office presence where we process a lot of transactions and extending into clearing seemed to be a very logical way for us to leverage the assets that we already bring to the table.

And we have spoken to and looked at a number of different opportunities, and I think we were very fortunate that the Bank of America opportunity became available and we were able to go forward and close it.

If you recall from some of the strategy comments that we've made in the past we had talked about extending our core offering.

We really were looking at a broader outsourcing offering of which clearing would be a piece of that broader outsourcing offering.

So this fit very clearly into a strategic plan that we've laid out and have been following for a period of time.

The low end of the market for people who were dealing with us as the economy got worse and as brokerage transactions got worse, a number of them were going to third-party clearing companies as opposed to continuing to sell clear.

And therefore, we were losing some business in that arena.

We felt that if we were in the clearing arena, we would make it very easy for companies who were already doing business with us to be able to stay with us and for us to gain the additional revenue that would came with clearing.

So we saw it as a win-win for us.

And we're very pleased that we have this opportunity to enter the business.

And then one of the things you had been talking about at the last analyst day was maybe trying to mitigate some of the volatility in the brokerage business?

I just wonder how you sort of square this acquisition with some of those earlier comments, and are you still looking at additional opportunities, sort of in brokerage that would be more recurring revenue based possibly?

I think what we have looked for are different basies other than just transactional volumes in terms of the basis on which we derive revenue.

And if you look at the clearing operation, it is not as transaction based as is our core business.

So actually it will create, still a volatility, no question volatility related to the overall -- how well the brokerage industry does.

But less directly related to day-to-day trade volume.

I think, you know, absolutely there -- as brokerage market continues to be the most volatile market that we're in.

And an extension in the brokerage market expands the overall volatility within ADP.

Having said that, I -- I don't think this is a significant stretch over where we were.

Sure.

Makes sense.

And then lastly, just to switch gears.

You mentioned pace per control in Europe continued to decline.

I was just wondering what your sort of outlook for Europe is, what's embedded in your guidance, thank you.

I don't have the specifics with me, but I believe that it's somewhere around flat to slightly negative for next year.

So the main countries that we're in are currently declining still between 1 and 2% and I would say that our guidance would contemplate in the range of a flat to minus 1 or 2% again next year and we would still be within the range for our guidance.

Okay.

Thank you.

You're welcome.

The next question comes from Loyd Zeitman with Bernstein Investments.

Please state your question.

Hi, folks.

First of all, could you tell us what you think the tax rate will look like in the current fiscal year.

For fiscal '05?

Yes.

Our tax rate should go down another small amount.

We're currently at -- fiscal '04 was 37.4%.

And we're anticipating somewhere in the area of 37.1%, call it, you know, it could be anywhere, 37.0 to 37.2.

So our guidance contemplates small improvement again.

We've had some favorable tax, state agreements and resolving of some issues at the state level which is driving most of the improvements.

Okay.

And in the PEO business, I believe, Karen, you mentioned earlier that you see a strong '05. '04 was a pretty good year also.

Could you give us some color on that, and also I could use the number for the employees in the business at quarter end.

Okay.

Sure.

The -- the -- there were 94,000 work site employees at the end of the year.

Up about 10% from last year.

We had a good year in the PEO.

We did 25% revenue growth for the quarter.

And for the year, somewhere around 28% revenue growth.

We're looking at next year being in the area of about 18% revenue growth.

Where we were a little bit softer, where we're referencing is in new sales in fiscal '04.

We were a little bit softer than we had expected.

But we're expecting a strong sales growth here for fiscal '05.

Basically, some of the growth as you know in the PEO was from some of the workers comp cost and some of the benefits passed through, which helps get to those 18% revenue growth numbers.

And did I -- did I cover your questions?

Yeah.

That's fine.

And the last thing I wanted to ask about, the investment spending in '04, could you give us some idea as to how that was allocated between the segments, and also for fiscal '05, could you tell us are there any -- let's say different priorities in terms of the 180 million that you're planning on spending versus the 170 that you spent in fiscal '04?

Well, let's start off with the majority of investments for -- for both years are in employer services.

So in employer services, of the 170 which includes the 30 million of nonrecurring charges, the majority was in employer services.

Of the recurring carrying forward piece probably 35 to $40 million was employer services.

In the quarter of the nonrecurring, 30 million, about 25 million or so of that was in employer services.

The -- of the incremental spending, probably 10 million in brokerage, 8 to 10 million in dealer, and, you know, another 7, 8 million in claims in terms of the way it all starts out.

But the 180 million that we're talking about next year is a run rate that we're at today.

So if we are at a run rate of 45 million a quarter, that would -- that would calculate out to 180 million average for fiscal '05.

And they're basically the same allocations, they're the same projects that we're talking about.

Okay.

And are you going to be growing the sales force again in fiscal '05?

Yeah.

We -- we planned around 7% average growth in -- in salespeople for '05 compared to '04.

And that does not include what we'll plan in terms of a ramp up as we normally do at the end of the year to get us prepared for fiscal '06.

The bulk of the growth in the sales force has taken place as we got through the end of -- of last year.

So we have the sales force in -- in place.

What Karen's talking about is -- is generally as we're getting into the third and fourth quarter of the year, we start rebuilding our sales force so we can get a kickoff for next year.

And so that's what we're talking about.

But basically, the hiring that got us to that 7% full-time equivalent-type person in the field, I mean most of that has been done by June 30.

Not all of it but most of it.

Okay.

Thanks very much.

The next question comes from Tiansing Wong with J.P. Morgan.

Please state your question.

Hi, just two quick questions.

First, how many did you end up growing the employer sales force in fiscal '04?

Secondly, how much of the mid single digit revenue growth expected in fiscal '05 is coming from known acquisitions?

Thanks.

The sales force and employer services during '04 grew around 9, 10%.

That was compared to what we exited fiscal '03 at.

That ramped up during the year, and what we're talking about now is when we look at fiscal '05, and the number of salespeople that we've got planned in fiscal '05 on average is 7% more than it was in '04, if that -- if that helps clarify the question.

So if you just took the ending point of fiscal '03 and looked at probably the ending point of fiscal '04, it would be a little bit higher growth number like 9 or 10%.

Understood.

In the -- contemplated in our plans really is the clearing acquisition that we talked about was about $50 million of revenue and brokerage.

That's contemplated in our plans.

We normally don't put any acquisitions in our -- in our plan numbers.

In this case, we had already signed the agreement.

It was just a matter of getting the regulatory approvals, and our confidence was quite strong.

So we put the -- and it was a significant acquisition for us strategically.

So we put it in the operating plan.

There might be a very small acquisition in Canada that technically didn't close yet, but might be 10, 15 million that's also in the employer services plan.

But that's it.

We don't include any other acquisitions that aren't closed by June 30.

I think the easiest way for you to think about it is think of it as basically internal growth.

We didn't have big acquisitions that would have changed the overall growth number a lot.

We -- we sold some businesses, we acquired some businesses.

So maybe there -- if it's just a marginal rounding, I think, as opposed to anything significant, that would differentiate the real internal growth rate from the growth rate you see.

In the clearing business, that acquisition should close by calendar year end?

We believe it will close before the end of the calendar year, yes.

We've made an assumption of a half a year.

There are a number of regulatory approvals that we're in the process of getting.

And so it's hard to know exactly, but our assumption is before the end of this calendar year.

Great.

Thank you.

The next question comes from Brandt Sakakeeny with Deutsche Bank.

Hi.

This is David sitting in for Brandt.

Another question on pace per control.

I was wondering if you could provide some color on how pace per control metric trend ed through the quarter and any insight you could provide into how July is trending, and also if you could give any insight into your expectations for pace per control in fiscal '05.

Thanks.

I believe it went up toward the end of the quarter, Art, do you remember?

June, I think, was probably stronger.

But, we try not to look at each individual month because it is better to look at a full quarter as the trends kind of go up and down.

Depending on when the cut offs are.

But I think it went up at the end of the quarter.

Yeah.

We have to be very careful because cut offs can impact our number.

We did find that our number was stronger in the month of June even though the total employment statistics that you read were weaker.

But we can't tell whether or not that's cut off or otherwise.

So I think it's one of the reasons we try never to talk about a month-to-month basis is it's very difficult to get any accurate -- too accurate an estimate.

So on a quarterly basis, we have a lot of confidence in our numbers.

But on a month-to-month basis, you have to be very careful with it.

Our assumption for next year is that it will be flat.

So -- in the United States, we don't assume that we're going to continue to get improvement.

I hope that's conservative.

I think we'll see -- I don't really have data for July yet.

But I'm hoping that the trend continues.

We had two quarters in a row of positive growth in pace per control.

The signals are there in the economy, so I'm hoping that that is one of our conservative assumptions in the plan this year.

Okay, great.

And just a follow-up question.

Looks like there was a bit of a step-up in D&A this quarter.

Wondering what that was related to, and what we should assume going forward.

And then also, just wondering what to -- what expectations we should have for realized gains and losses in fiscal '05?

Well, I think that you should assume that we'll always strive to be more transparent.

And although I don't know specifically what numbers or what extra you might be referring to in MD&A, I think that our goal is always to try to be more and more transparent, as we think of things that become clear to us that need more -- more clarification, we'll expand on it.

Was that what the question was --

Was that your question on MD&A.

Well, it just looked like the depreciation and amortization number was a bit higher than -- than in previous quarters, and I was just wondering what it was related to.

I thought you said MD&A.

Adam had said earlier, thank you for your expanded MD&A.

I think that you see in the -- the depreciation and amortization figures the -- some small escalation in capital spending in the year and then perhaps some intangibles from acquisitions.

But I don't think there's anything unusual there.

Anticipation into next year would be where we give a guidance of an increase in capital for next year.

For the items that I talked about and those will fall into the depreciation and amortization category.

Yeah.

About half of our dollars of the -- we run 300,000 or whatever the number is, and about half of it is depreciation.

Half of it's amortization.

There's nothing unusual going on in there, as we continue to do these acquisitions, we -- the amortization of intangibles in the early years for the type of acquisitions that we do is kind of large.

So you get a bump in that number over a short period of time.

The increased capital will slowly increase those numbers.

But that's -- I don't think there's anything unusual going on.

Okay.

And then on realized gains and losses for '05, any expectations there?

Nothing planned.

Okay.

Thanks very much.

You're welcome.

The next question comes from Josh Rosen with Credit Suisse first Boston.

Please state your question.

Yeah, thanks.

It's Josh and Greg.

Just following up on the investment that you've made.

You've spent, you know, it looks like about $200 million the last five quarters.

And you've covered that most of that was with in employer services, a good portion.

Could you just talk more specifically about, you know, where you've had the most success with that investment.

And in terms of -- I know not specific with terms because some of it was divestiture related and such.

But just as you look at where you've had the most success investing in your business and where -- how that translates into, you know, fiscal '05 and beyond in terms of where you see further opportunity for investment.

I think one of the things that we talked about as we started this investment was focusing especially in employer services on selected products.

One of those products I think that I specifically talked about at that time was something we call Pay Expert.

That has been a -- a very significant success and the return on our investment has come to us much quicker than I might have anticipated from some of those investments.

I think that and -- that type of an investment, a product investment as well as the investment in building the sales force which we referred to a number of times in terms of how that will play out next year are the most obvious ones.

We also put a fair amount of money into what we call employer of choice initiatives.

And these are things to help the associate retention that we have in ADP and the overall morale and feelings in ADP.

And I think those have been successful.

So our retention levels have stayed at exceptional -- associate levels have stayed at exceptional levels.

And when you're in a business like ours, a service business, it's really so important to get longevity in terms of some of these critical positions.

So I think those are the ones I'd highlight of our positive investments.

Okay.

Thank you.

And just to follow up just on the overall perspective you.

I mean you guys obviously cover a very broad section of the economy.

With your business from the client standpoint.

Would just be curious on your reflections on how things are feeling today, even relative to where they were a month, two months ago, as we look out into -- the rest of your fiscal year now but the rest of calendar '04?

If I look at the trends that we're seeing in our business, I -- I would say that things are improving, and are continuing to improve.

I read the same things that you do about other people within our business sectors and some of the slowdowns that they've been talking about and some of the deferred acquisition decisions that they've been talking -- not deal with, but client sale acquisitions, not -- not company acquisitions.

Some of the slowdowns that deferred decisions on closing those sales and to be honest with you we haven't seen them.

And so if I look at our trends, our trends have continued to move in a positive direction.

Thank you very much.

The next question comes from Marta Nichols, Bank of America Securities.

Please state your question.

Thanks.

Just first a quick cleanup question.

The 1.4% growth that you mentioned in the press release for U.S. pace per controls, does that compare to the .6% number that you gave us in the third fiscal quarter?

I just want to make sure that we're talking about the same number, and that it's not -- the 1.4% is -- is U.S. only and the .6 was also U.S. only.

Yes.

What we said in the press release was actually 1.5% in the quarter and .4% for the full year.

Those do equate to the .6% that we talked about in last quarter.

Okay.

So typically when you're giving us pace per control we're talking exclusively about U.S.?

Yes.

Just wanted to confirm that.

Okay.

And then can you tell us how much you've got left on your repurchase authorization?

Oh --

That's a good question.

I think we have about 20 plus million, 28 --

As of June 30, we had close to 28 million remaining.

Okay. 28 million shares?

Yes.

That sounds like a better number than 20 something.

And given that we've already had a lot of questions on employer and brokerage and, Art, you have a tendency to get indignant if nobody asks about dealer, I was wondering if you can give us a little bit of color on dealer, given that it looked like it had a very good fourth quarter, maybe even better than it had for the earlier part of the year.

I am so happy you asked me that question.

You have made my day by asking me that question.

Dealer's doing really, really well.

I mean our dealer sales, we had an excellent quarter.

We had an excellent year our client retention is just excellent.

Some of the new products that we've talked about before our CRM product, our application service provider, ASP product, our telephony products, our alliance sales in the low end of the market, I mean, they're all doing very, very well.

And so I think the business is really doing well.

I think that we really have competed well, and the people, the associates within ADP understand that business, and understand the markets as well as any of the markets that we're in.

And they've done a terrific job.

So thank you very much for asking.

Because we really have had a -- a really an excellent movement in the right direction.

Well, I'm glad that I could please you so much.

Just specifically I guess, as long as we're on dealer and Art's very excited about it, the -- Karen, you mentioned that the margin should be slightly down in fiscal '05 but that that's attributable primarily to the two acquisitions that were made.

Should margins and dealer other than those acquisitions actually be up slightly given the growth?

The top-line growth?

Yes.

Yeah.

They would normally be up.

I think that our -- our margins excluding the acquisitions would be improved.

Outside of the basis just in North America, the margins are improving.

In our other businesses, and in our European business.

So without acquisitions, our internal margins actual do go up.

I actually do have the stat, and it's slight improvement year to year.

Okay.

And then maybe just to go back to the investment spending conversation.

We've talked about all of this as investment spending.

It's clearly not the type of thing that you're capitalizing necessarily.

But I'm curious about it because we're treating it as sort of incremental versus where you were before this investment spending was announced.

But I would guess that a lot of -- specifically things like the employer of choice initiatives, if you're improving incentives and improving pay scales and so forth, -- are you really considering this ongoing expense at this point so that at some point we kind of stop talking about it as incremental or -- or separate from the rest of your overall expense line items?

Yes.

And now that Art has thanked you and I will thank you for that because I -- really don't intend to continue to talk about incremental spending going forward.

On a serious note, we have talked about this incremental, 150 million to $200 million which we announced in the face of a tough economy and weaker results a year ago in March.

And we sort of have been tracking that as incremental to the spending we normally have -- had been doing and a raised investment level.

And we have said all along that the majority of those expenses would become part of our ongoing run rate.

And that is exactly what has happened.

The employer of choice expenses are part of our run rate.

We won't see a catch up again, they're part of our -- our base expenses now.

Other than the fact that it took us a little while to ramp up in fiscal '04 to the level that we're at, it should be the same run rate next year.

And as we exit the year of about 45 million a quarter.

And we really won't be talking about incremental spending in this way because it's really -- it was designed to track a few investments that we thought we needed to step up and to track to see those investment through.

But when you then get past them, we make incremental investments in all of our businesses all of the time.

Investments in people, investments in R&D, investments in sales force and so on.

And it's really -- there's no science to carving up which is incremental any longer.

So going forward, we intend to not be talking about that and thank you for bringing up that question, as well.

Okay.

Thank you very much.

The next question comes from David Togut with MSDW.

Thank you.

Art, what are your top three priorities in the year ahead?

And how would that change in the five-year perspective?

I didn't hear it clearly but it sounded like it was the top three priorities for the year ahead and then how would that change going out, is that the right --

Right.

If you were to take a three to five-year look, as well.

Yeah.

I think our priorities over any short-term period, which I'll talk about in terms of a one year is to do right things in the business that will both achieve our plan and will set us on the appropriate base for the future so that we're never playing with a short-term outlook.

So that we're playing with both a short-term outlook and a -- and a longer term outlook.

I think in addition to that, we have had a very high focus on service levels for a number of years here.

We've improved our service levels and our retention in ways that I tell you I'm actually blown away by how -- how well the organization has done.

We will continue to focus on that.

The -- we have a program on product leadership which is one that says we want to be in a position to be able -- we're the market leaders in most of our markets already.

We want to be on a sustainable basis.

The new product innovator within our markets.

We're focused on that, it's a high priority for me.

It's something we have to -- we have to work on.

And the one I would add that would be newer to that is I think we learned a lot over the last couple of years about sales execution issues.

For years, because we grew so consistently and because we've had large sales forces for a long time, we believed that we could -- that we just could keep doing it.

And I think we learned that we really have to focus on sales execution and leadership and sales execution.

And so that again is a critical priority for me as I look forward right now.

As I look forward over a longer period, these things that I've been talking about will continue to be important priorities.

I would continue to like to see us grow more on an international basis.

I'd like to see us improve the scale of our international business.

That's turned out to be difficult for us.

On the other -- it's difficult because we can't find the transactions that will give us rapid growth.

On the other hand, we found that we can take our business globally and make money at it.

So how we get to do that on a greater basis would be a priority.

Another one would be taking the types of thing that we do either in money movement or in the breadth of employer services, services and extending them in logical ways where we have some synergies with what we already have in place, but take us in creative new market opportunities.

And I think that there's a significant opportunity primarily building off of our ES strengths in those arenas.

So probably a long-winded answer for you, but I mean, that's kind of the way I see it short and long term.

Just to flush out your answer on money movement.

Could you perhaps be a little bit more specific?

I'm sure you're familiar with our tax filing business.

And we move very significant amounts of money through our system each year.

So we already have in place an infrastructure that enables us to very efficiently move significant amounts of money.

We also have access to employees -- of our clients' dollars at the point of payroll because basically from the point of payroll it's put into a bank account and then it goes out either in terms of direct deposit or an ADP check or client check, or however -- a payroll card or however people are getting money at that point in time.

And I think we can extend the things that we do in the general money movement area in order to be able to hold onto those funds longer and direct those funds to their ultimate destination better.

I don't want to be more specific than that.

But I mean that's generally what I was talking about.

And just as a quick final question, Art, you've talked about perhaps doing a strategic acquisition for a number of years, and you have had a number of tactical to perhaps small strategic acquisitions.

Do you anticipate perhaps pursuing a larger transaction in the next year or two?

I can anticipate it as much as I would like.

But I have zero credibility in this area because I have anticipated it for too long without results.

And therefore, don't anticipate it.

If it happens it will be a fluke.

Okay.

And --

But we'll still try, right, Art.

We'll still try.

But we'll still look.

Since you highlighted client retention, do you have specific targets for the three main businesses in '05?

Of course.

I mean, we set targets for each of our business.

I'm not sure we lay them out.

We do it by area.

I mean we have incredible detail in terms of the types of retention goals that we're setting within our business.

It's -- it goes down very deep within our organization.

Could you match the 100 basis-point increase you showed in ES for '05?

You know, we had a record year last year in '03.

We had a full 100 basis points on top of that in '04.

I would be ecstatic with another 100 basis points on top that in '05.

Okay.

Great.

Thanks a lot.

Very good.

Thank you.

Ladies and gentlemen, we have time for one more question.

The final question comes from Tim Willi with A.G. Edwards.

Please state your question.

Thank you.

Two questions.

Both on the margin, if I could.

In regard to sort of I guess the longer term perspective, given the increase in the expense base that you just talked about as a result of the plans that happened over the last year, when you look out at the operating platform and the money that's spent to put you back on a track toward attractive internal revenue growth, do you think it's possible to get the operating margin of the company back up towards those peak levels of three or four areas ago?

Or will it likely be not able to get that high, just because of the amount of money you intend to keep putting into the business to ensure, you know, revenue growth and product innovation for many years down the road?

And then I have a quick follow-up.

I've had a long-term perspective that our margins are very good within our business.

And therefore, revenue growth over a long period of time should really determine what our growth will be.

In periods like we're in right now, when we're rebounding from a weak economy and a weak brokerage environment, you're clearly going to see margins improve faster than revenue growth.

But if you assume that you're in a kind of a normal period that never really exists, then I think you should think long term that we're happy with our margins.

We have built-in margin improvements every year from the type of business we do on the scale basis.

And we would probably choose to reinvest most of that going forward.

So I think our margins are clearly going to rebound at this point.

I'm not ready to say whether they'll get back to those levels or not.

But they -- they'll clearly rebound as the economy and as some of these statistics get better.

But then as you go beyond that, those -- we'll be making decisions each year in terms of what we see as the right trade off between margin improvement and investment in future growth.

Okay.

And --

My follow-up question was on the COS operation.

Sounds like there have been some very encouraging results.

And I understand that it's still a fairly small part of the overall revenue pie.

But do the encouraging results so far at all prompt any thought of whether or not to accelerate investment in that operation, whether it be product and capability or just the sales force, anything along those lines?

Yeah.

Let me just finish adding onto the last question if I could just add another comment to put this in perspective.

We've been asked a number of times whether margins can get back to their old -- their old rates.

I've been asked a number of times that question as it relates to brokerage services.

You have to also keep in mind in addition to things that Art said about our choices to invest and how we -- how we investment with the cycles, some of our businesses that are growing within employer services have some pass-through components that as well as we may do and the more they become a component of our revenues and the mix, our margins are not going to be what they used to be.

The PEO is a perfect example.

Growing 25%, 28% this year, that has a pass-through component, and so it's never going to be the traditional ES margins, and we think that business is going to grow faster than the traditional employer services business.

In our brokerage business, we -- I don't think we're going to return to the days where we had the huge margins and above all we've lost a lot of that retail business through consolidation and the faster that our investor communications business grows it also has pass-through component called postage.

So in addition to what Art said which I think is the primary issue in terms of how we invest and how we -- we try to manage that over the years, you also have to keep in mind that the mix will keep us from getting to those old margin levels as the success of some of these new products grows.

Your other question was about comprehensive outsourcing.

I think we have made investments there.

We invested in the sales force.

We had a sales force, we added the whole management team, leadership team for comprehensive outsourcing.

And I think that we're at this point doing the right things to get that business kicked off.

I'm not sure that it's necessarily a question of is there more product investment that we can make or additional people.

I think our challenge is going to be to get up and running with a couple of significant, larger clients and then add that to the base we already have.

Which we're already doing managed payroll for a number of clients.

And that's where we're going to put the money is making sure that we do the implementations right, and we get a good base to launch from.

Okay.

Thank you.

Okay.

I think that's -- that's the end of the call.

So I will sign off now.

Telling you that we are -- we were at $40.94 as of a few minutes ago.

And Art and I both thank you for your interest and your questions.

Thank you.

This concludes our conference for today.

Thank you all for participating and have a nice day.

All parties may now disconnect.