自動資料處理 (ADP) 2005 Q1 法說會逐字稿

Good afternoon and welcome ladies and gentlemen to the Automatic Data Processing first quarter fiscal 2005 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 for questions and answers after the presentation.

I will now turn the conference over to the Chief Financial Officer, Karen Dykstra.

Please go ahead ma'am.

Good afternoon.

I'm Karen Dykstra, Chief Financial Officer for ADP, and I'm here today with Art Weinbach, our Chairman and Chief Executive Officer; and I'd like to welcome everyone to our first quarter of 2005 conference call.

We issued our earnings release earlier today and, as you know, we reported 8% revenue growth and earnings per share of 35 cents for the quarter.

Basically we had a strong quarter with positive key indicators and our better than planned performance, combined with the strength in our indicators in employer services sales and in brokerage/ investor communications, led to us raise our revenue guidance to 7 to 8% revenue growth for the full fiscal year; compared with our previous guidance of mid-single-digit revenue growth.

Also, our earnings per share guidance remains double-digit and, as you read in our press release, we're increasingly confident in that forecast given our stronger results in the first quarter.

So with those few comments, we're ready to begin the call.

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

And we're ready to start the Q&A.

As always, Art and I ask that you try to keep your questions to one at a time so we can keep track of them.

We're beginning the call with about 115 people on the call started up and with that I'll turn it back to the conference call operator.

Thank you.

The question-and-answer session will be conducted electronically. [Caller Instructions] We'll go first to Bryan Keane from Prudential.

Hi, good afternoon.

On the employer services side, both new sales continues to be strong at 14%.

What's the outlook for new sales going forward?

And then the second question's on pays per control, that was much better, 1.8 better than we expected.

You know, the employment market's been somewhat weak but a lot stronger at ADP.

Can you just maybe help us with what might be causing that?

You want me to answer--Art, I'll take the sales one first, and I'll briefly answer the pays per control and Art, I'm sure you'll want to elaborate on pays.

In sales, our outlook for the year is still double-digit sales growth in employer services.

We're very pleased with the 14% we had in the first quarter.

This is our third quarter in a row of better sales results and double-digit results and what we're saying for the year, we'll stick with a double-digit forecast and we're very pleased with the results; particularly in national accounts and in total source as we mentioned in the release.

Our pays per control, at 1.8% growth, is really-- and across the segments -- it's a little bit stronger at the very low end of the segment and it's more or less flat up in the national accounts area.

Also, I would mention that in Europe it's still weaker than in the United States and we're still seeing a bit of decline in some of our larger European countries.

That statistic is a measurement of, as we said our release, 125,000 or more payrolls across all of our segments.

It's basically those that are on our AutoPay product that were here the same period in the prior year--they had a similar processing the same period in the prior year.

And Art, did you want to add?

Let me comment a little bit on both of them actually.

On the new sales, first, we're very pleased with the quarter that we had.

But sales in ADP is a momentum issue also and so we have good momentum right now.

Our pipelines are good, the activity is good, the number of new sales people that we brought on during the last year are becoming more experienced, more trained, which generally leads to increased productivity so that we're feeling better about where we are.

So not only did we have a good quarter but the double-digit forecast for the year feels a lot more comfortable today than it did, you know, a few months ago.

And on the pays per control, this is a number that we've been talking about for long time.

We have a basic product called AutoPay, and what we do on our AutoPay client-- our AutoPay product which, as Karen said, goes from very small companies, or reasonably small companies, up to very large companies.

We actually measure how many people are being paid as of a date a year ago on an individual account.

And on that same account, when it processes a year later we measure the exact same statistic.

So it is not an estimate.

It is not based upon sampling.

It's an exact number of what the number of increased people are on those accounts.

So it's a number we feel very comfortable about.

It's hard for me to explain why our numbers may differ from what statistics other people are seeing but I'm very comfortable with the number and very confident that it's accurate.

Okay, that's helpful.

And just in that new sales is it driven by core payroll or is it more beyond payroll, or is it a combination?

It's always a combination, but clearly our accelerated growth is in the beyond payroll areas.

But the sales -- the relative sales must be greater in the beyond payroll area.

But overall it's good in payroll as well.

In particular in national accounts with the comprehensive outsourcing.

Those are payroll accounts as well as the benefits accounts and time and labor management, so it's--both are better.

Okay, great.

Thanks.

We'll now go to Adam Frisch with UBS.

Thanks, good afternoon.

Just following up on the last question on pays per control, the disconnect between the economy and now two consecutive quarters of improvement.

Maybe just describe a little bit more like what led to it.

What are your customers telling you?

Any there any, kind of, one-time impacts in the quarter?

And then, finally, do you think these or even higher levels are now sustainable going forward?

These aren't numbers that we talk to our clients about.

These are numbers that we calculate based upon data that we have.

So it's not a question of opinion, it's a question of fact, and the facts are pretty much where they come out.

What would we anticipate going forward?

It really depends on where the economy goes and employment goes within this country.

I think that when we set our forecast at the beginning of this year, we talked about no growth in pays per control, and that's what's built into our plan for the year.

So, given where we are now, being ahead by the 1.8% that Karen was referring to; we're in pretty good shape relative to our plan, but I don't have any more clue than anyone else as to whether or not it's going to go up or down from here.

Okay, and then a follow-up on the new sales.

Obviously this was the easiest comp you faced all year at negative 4%.

Last year, obviously fourth quarter was at 19% on the positive side.

Should we expect sales to accelerate as we move through the year?

And then if you could also comment on the current pricing environment and whether you replenished your pipeline for the sales made in the quarter.

Well, just with the beginning of the question, the sales-- surely last year, the weaker quarter that we had was the first quarter with a negative 4% growth compared to the prior year.

But on average it was still a good quarter and, as I look at the quarters for the rest of the year, there isn't any tremendous hurdle that we would to have get to above what we did in the first quarter in absolute numbers to get to our double-digit forecast.

If that's helpful at all.

It's not like we suddenly have to grow 20% over the volume that we did in the first quarter to meet our full-year expectation.

The other part of your question related to pricing, what was going on with pricing in the overall market.

I think it's very stable right now.

So some of the discounting that we talked about two years ago, a little bit into a year ago.

There's less of that going on.

We seem to be much more stable in terms of the overall pricing.

And the last part of it was in terms of replenishing the pipeline.

I believe our pipeline is increasingly strong despite the strong results.

Great.

And then a final question on margin for the year.

Are you still expecting about 100, 150 basis points in fiscal '05 overall?

Yes, in that range.

Great.

Thank you.

Cindy Shaw with Schwab SoundView has our next question.

Hi.

Congratulations on a nice quarter.

Couple questions.

Obviously interest rate environment are hurting on the longer term outlook, but not this quarter.

If you could give us some sense for what's going on with portfolio duration, percentage of the portfolio in cash, average balances and average yield; and also I have a follow-up question after that.

Okay.

We had -- our average balances in the quarter were 10.2 billion compared to about 9.3 billion in the prior year.

That's client balances.

So we had about a 10% increase in balances, our plan was a little bit lighter than that; so we're a little bit above our plan in that respect.

We're expecting the full year to be somewhere around 7 to 8% growth in client balances, and we still are expecting that, that's more in line with what we thought in the beginning of the year.

Our yield was about 3% in the quarter.

Our original plan was maybe a little bit higher than that, and it compares to 3.4% yield last year in the first quarter.

We did take $6 million in losses in the first quarter, around 5 to $6 million in losses compared to about 1 million of gains in the previous year the first quarter.

Our cash balances were somewhere in the $2 billion range for corporate cash as we ended the quarter, and did you have a follow-on?

The duration.

The duration was about 1.9 years which is slightly higher than it was as we exited last year.

Okay.

And the 3.4% that it was the combined portfolio, not just the client portfolio?

Correct.

And then another question.

On the employer services margins, if you back out the float income, it looks like they dropped 30 basis points from the year-ago quarter.

Is that due to the incremental spending or is there something else going on there?

Well, I think it's, basically, some of the spending that we started in the beginning of last year in employer services grew through the year, so some of that might be catch up.

I'll tell you, we don't calculate the margin with and without the 4.5% interest to have the number in front of me.

But we're expecting a little under a point and a half or so of margin improvement in employer services for the full year.

And that would come from, basically, getting over the dilution from prior year acquisitions, some of the catch-up on the level of investments and some of the one-time charges that we took at the end of last year won't repeat.

Great.

In addition we get the normal scale benefit that we get in employer services, so that contributes 3 cents, 5 cents, whatever the number is.

Right, that's right.

You said a couple quarters ago, I think, that 100 basis points is pays per control is worth about 8 to 9 and 3 to 4 cents on the bottom line.

Does that still hold?

Three to four cents on the bottom line.

No, I don't know that statistic.

If we talk about pays per control, a 1% change in pays per control.

Around $20 million.

Probably end up being 2 cents--and if you add it for the full year and it was spread out over the full year.

Yeah, there's different ranges that we talk about there.

I always like to answer the question--it's a much broader question, because if we had that kind of growth in pays per control generally it's because things are a little bit better in the economy and we will get higher client balances because of it, we will get higher participation perhaps in the 401(k) plans; and there's a whole lot of other places that we would see this grow.

So on a payroll only, the number might be some number 10 to 15 and then if you add some of these other numbers, maybe it's 15 to 20 million.

But that's generally the way I think about it, the way Art described it, is 15, 20 million is 1% improvement in pays per control.

Great, and then the client balances were a little better than you expected you said.

Any idea what's driving that?

Actually, a lot of it is because of the increase in pays per control because we expected flat for the year.

And since we had the growth, that contributed, more people on the payroll will mean more withholding dollars for us.

We've also had some strength in Canada with a little bit of change in a withholding tax law; but primarily it's the pays.

Now with Bear Stearns we have James Kissane, and we do ask you to please limit the number of your questions.

Okay, yeah, Karen, Art can you discuss the sales in the small employer arean how the CPA wholesaling strategy is going, maybe how many CPAs you have signed up?

Thanks.

First, our sales in our SBS, our small business services business, have been consistent and above plan-- above our planned expectation right from the beginning of the year.

So we're feeling very good about where we are.

And, again, if you follow the comments that I was making earlier about where we're heading on that.

What was the second part of that, Jim?

The CPA strategy, the wholesaling relationships you're forming, maybe how many CPAs you have signed up, the receptivity amongst the CPAs.

I don't know the number of CPAs that we've signed up but I can tell you that as a strategy, we have found it to be a successful strategy.

It's one that we are continuing and the one that we will continue to focus on as we go forward, because we have been finding this methodology of creating CPA relationships has been a good increment over the normal referral relationships that we've had in the past.

So we're feeling very good about it and our focus on it.

Do you have any idea, Karen?

No, we're not tracking those.

I don't know what the number of CPAs--

Okay.

Thank you.

Josh Rosen with Credit Suisse First Boston has our next question.

Yeah, thanks.

This is Josh and Greg at CSFB.

Just wanted to drill down a little bit into the investor communications business.

You mentioned in the press release that mailings increased 22% compared with last year.

Would be curious as to just --first, just a little bit more color into that number, and if there were anymore of the more one-time benefits from the mutual fund scandal that you talked about the last couple quarters?

Yeah, it certainly was a stronger quarter than we anticipated.

Some of it was because of the mutual fund mailings.

Some of it continued into the first quarter.

Our estimate is that the mutual fund mailings contributed somewhere around 25 million pieces of the 175 million pieces that we did in the first quarter.

Think of it as slightly under $10 million in revenue.

We expect this to tail off.

Most of the mutual funds have communicated at least once at this point about their particular situation.

Whether they continue to communicate more regularly because of the oversights-- and the focus is a matter of question, I think we have to wait to see.

But we're certainly not anticipating that we're going to continue with this kind of volume.

So it did contribute a bit to the first quarter.

Basically, we did have a higher number of-- stock record growth in the first quarter, was on a very small base.

So our base of mailings in the first quarter is one of the smallest during the year.

As you know, all the volume comes at the end of the year.

So we're still thinking that for the year we're going to have about maybe 9% or so increase in number of pieces.

So don't count on the 22% continuing for the whole year.

That was quite a big number.

We were very pleasantly surprised by the numbers, both in the stock record growth and in the overall number of mailings.

But the change from earlier in the year and our outlook as we look forward doesn't -- makes it look like it's not sustainable at those levels; although if we get to the 9% or a little bit better than that growth in pieces that Karen was referring to we're going to feel pretty good about this year.

Okay.

Thanks much.

Now we'll hear from Randy Mehl with Robert W. Baird.

Yeah, I have a question related to your acquisition strategy, but Karen you mentioned on yield-- 3%, I think, as your yield on this average daily balance.

Was that the right number?

Yes, the 3% did include the losses in the portfolio.

So if you excluded the losses it was more like 3.2%, but 3% was more the fiscal '05 number compared to 3.4% which was last year's first quarter.

Okay.

And then, obviously, you've done quite a few small acquisitions and one fairly sizable one recently and in the brokerage area.

Your strategy has been historically to focus more on employer services in terms of the acquisition efforts.

Is that something that we should expect going forward, or are you changing tact a little bit here?

I think the highest priority remains employer services if we can identify the right opportunities and look forward to them.

On the other hand, in each of our businesses, where we see the right strategic acquisition, we are willing to make acquisitions.

So highest priority would continue to be employer services.

However, you shouldn't think that that would be the only places where we would make these transactions.

I think as we get into the clearing business in brokerage that should open up some additional opportunities for us, and I would look forward to considering those in our dealer services business.

We closed some relatively small but important transactions over the last year.

And I would hope that we would be able to continue on those also.

Okay.

And then just one follow-up to that.

Total source strong again in the quarter seems like you've outperformed your peers in that area pretty consistently, at least over the last year and a half, two years.

Is that a function of -- well, maybe you could comment on why you think that is, and is this becoming a bigger part of the employer services area in terms of strategy going forward?

Let me try to address the first part of the question.

The strength that we talked about in the PEO on the sales side, part of it is because, if you recall last year in the beginning of the year we had a very slow start.

So it is stronger compared to the first quarter of the year.

I think that we wouldn't expect that kind of strength all through the year, although it's certainly still one of the highlights and still one of strongest growing products in employer services.

It's just, last year we did come out of the gate a little bit--a little bit softer.

We're finding demand for the PEO product is real.

It's real, it's aggressive.

Our numbers get inflated a little bit because we have the Workers' Comp numbers in there and medical cost benefits, which are pass-throughs that run through our numbers.

But if you look beyond that at the core of what we're doing, there is definitely demand for the broad service offering that we offer in a PEO business -- like Total Source.

So I anticipate that the total numbers of revenue and the total number of clients are going to grow and continue to grow pretty significantly.

I mean, we're going to be up close to 700 million probably -- are you looking at me funny, Karen?

I don't know what the --.

Our total PEO revenues -- whatever the number, something like that, it's a big number where we're going to be in our PEO revenues this year--

600 million.

600 million.

And that's a--when you start talking about the type of percentage growth that we have on top of that, you see that that really is a significant business and significant opportunity for us.

So, yes, I believe we're on a path where we should be able to sustain that for awhile.

Now we'll hear from Pat Burton with Smith Barney.

Hi, congratulations on the quarter.

Could you give us an update on the discretionary spending in the quarter and the outlook for the remainder of the year?

Thanks.

By discretionary spending you mean the incremental spending plans that we've made over the prior years.

We basically aren't doing that this year--we're basically not doing it.

So what we did is we increased our level of these incremental or discretionary expenditures right through the fourth quarter.

We came into this year with those numbers at the higher level where they were in the fourth quarter and those numbers should pretty much stay at around that level for the full year.

So, in terms of incremental discretionary spending, there really isn't any additional amount that I'd put into this quarter.

Okay, and a question for the Karen.

On the yield outlook for the remainder of the year what do you anticipate the portfolio to do on the yield side?

Thank you.

For the full year we're estimating about 3.2%, which is compared to 3.0 last year for the full year '04.

Thank you.

You're welcome.

From Sanford and Bernstein we have Rod Bourgeois.

Yeah, Rod Bourgeois with Bernstein.

On the dealer services side you showed strong 13% growth.

That looks like share gain.

To what extent was this upside surprise, really for you guys internally with the 13% number materially above what you expected?

And can you also comment on how sustainable that 13% growth number is going forward?

Yeah, I should give you our internal growth statistics.

Nobody's asked that yet, but I might as well quote them now, all of them are internal growth in our businesses.

Employer was 6%, which was the same as the reported revenue growth; brokerage internal growth was 11%, higher than our reported number because of some of our divestitures at the end of last year; dealers internal growth was 7%; and claims was 4%.

So, no, the 13% should not continue past this year, but we are expecting fiscal '05 to be in the 12 to 13% range because of some of the acquisitions that we did at the end of the year.

We believe the internal growth rate should be around 8%.

In terms of sustainability, we've had a couple of good years with dealer services and I think should we complete our sales forecast which is, in total, in the high single digits and 10% in the traditional North American business and continue with our strong retention; we should be able to stay up there in that range.

I would caution that our sales in the first quarter were actually weaker than that.

We basically were down, actually, on a quarter-to-quarter basis in dealer services in terms of our first quarter sales but we believe that that's related to a very strong fourth quarter that we had and really is not representative of where we're going to end up for the year.

So, our pipeline is good, our optimism is good, and there are some large potential transactions that occur when they occur.

So we're still optimistic about where we are for the year.

But our sales growth in the quarter, actually, was a little bit below where we were.

But, in terms of the overall question are we gaining share, I believe that we have been gaining share over the last few years and are continuing on that trend right now.

Great and, Karen, can you just follow up?

You gave us the internal growth number for the quarter.

Can you tell us the internal growth plan for the year for each of the units?

I believe I can.

I think in employer services it should be in the 7% range.

In brokerage, I believe, lets see, our internal growth for brokerage, maybe around 6%.

In dealer it should be the 8% or so internal growth for the full year.

And in claims, I don't know if I can do claims.

I probably--

3%.

Okay, great.

Very helpful.

Thanks, guys.

We'll now go to Brandt Sakakeeny with Deutsche Banc.

Is the B of A acquisition still scheduled to close in December, is that on schedule?

And can you also update with how things are going on your broker dealer applications?

Thanks.

The B of A acquisition is supposed to close-- we're estimating November 1st.

That is ahead of our original schedule.

We originally thought by the end of December but we got some earlier approvals and now we're believing around November 1st.

Great.

And with respect to the--just a couple of quick questions on your tax rate that came in a little bit-- was that just due to higher nontaxable interest income?

And then also on your D&A, that did step down actually in the quarter.

Was there any reason behind that?

Yeah, just taking the tax question first.

We reported a tax rate 37.1.

We believe that's what will be around for the year.

It's really the non--it's not the non-taxable investments.

We're primarily into taxable investments now for the last couple of years.

So the difference has been some favorable state tax settlements and that's the majority of the reduction in our tax rate.

As far as-- the second question was on --.

Was on the step down on the D&A.

We had some fall-off of depreciation & amortization from prior years in the quarter.

So it was lower-- certainly was lower than what we ended last year, but it was just the timing of some fall-off versus when some things are going to start picking up.

I would fully expect that the depreciation & amortization expense is going to grow, because we've increased our capital expenditures in the last year and our forecast is higher for this year as well as some of the acquisitions that we'll be bringing on and the intangibles that come with that.

So the D&A for this quarter should not be the forecast for the year.

It should grow and increase throughout the year.

Okay, great.

Thank you very much.

Actually, I just wanted to add one thought on the tax rate comment that Karen made.

And that is that even though there are these one-time state settlements that are bringing the -- that are affecting the rate, we believe that this is a sustainable rate going forward.

So we don't think these are one-time aberrations that will cause a decline in a given quarter or a given year and then go up again in the future.

We think we're at a sustainable level.

Now with Bank of America we have Marta Nichols.

Good afternoon.

Thanks.

Karen, I think you mentioned on the last call that you are expecting average client balances to be somewhere between 11.5 and 12 billion this year.

Is that still in line with the 7 to 8% increase that you mentioned earlier in the call?

Are we kind of think about the same number?

Yes, same number.

Okay, great.

And then have your margin expectations for any of the segments changed?

It sounds like most of your top line expectations are close to or slightly ahead of where you were when we last talked but I think you were expecting employer margins to be up 200 basis points and brokers to be up 100, and so forth.

Can you just take us through what your expectations are for margins now?

On the pretax margin side.

Yeah, in employer services we're roughly in the same place.

No real shift there.

And I went through some of the reasons before on the call with the leveraging of the revenue and so on; and the acquisitions.

In brokerage there's a potential for a shift in margins.

It really will depend on the volume in investor communications, as that comes through for the rest of the year, and the extent of which postage is included with that; because that tends to be the lower margin business.

And to the extent that we had a little bit more of that kind of activity in our brokerage business in the beginning of the year, if that carries through for the rest of the year, the margins might be a little bit lower in brokerage for the full year than we originally thought, you know just slightly.

And in dealer services and claims it'll be around the same.

Okay, and then just a quick housekeeping question.

How much do you have left on your your repurchase authorization?

Are we at about 22 million shares now?

Good question.

We have 22 remaining as of September 30th, yes.

Okay, great.

Thanks.

Tim Willi with A.G.

Edwards has our next question.

Thank you, good afternoon.

Just one question on revenue growth and new sales.

Could you, I guess, maybe shed a little bit more insight to how revenue growth, let's say over the next 18 months or so, should track relative to double-digit new sales growth and assuming that pays per control would be, you know, a 1 to 2% kind of increase on an annual basis?

You know, right now it's sort of a 5 to 6% growth rate in employer services.

Should that gradually migrate up more towards what you're seeing on new account sales plus the PPC growth?

There's not a direct easy correlation to make between the growth in sales and the growth in revenue.

Revenue is affected by a whole bunch of things, of which sales is a very, very important part, clearly the largest part; but retention is also a very important piece.

Price increases are important, incremental services are important.

So there are a--acquisitions obviously impact it.

So there are a number of things that cause the revenue growth to not be the same as the sales growth.

The reality is, if I look at employer services, over the last three or four years we have had relatively flat sales growth.

Grew a little bit more this last year but it's been relatively flat.

But our revenue growth continued, although not at robust levels, during that period.

So what we need to do is compound out couple of years, two or three years of double-digit growth in order to start moving that overall revenue growth number back up.

So you should presume that if the sales growth is good, the revenue growth will move in the right direction, but it'll move a lot slower than the sales growth number.

Okay, and then a follow-up, if I could, on the -- I guess your equivalent of HR BPO, the complete outsourcing solution for the, I guess, more mid to larger size clients.

Any comments you could make on the quarter relative to signings or pipelines there?

It continues to be strong.

We had a number of clients that had started at the end of last year.

We typically don't name the big clients, but you would recognize the names of the deals that we have and things are going quite well.

We have a very strong backlog in terms of the sales pipeline, we have a good solid backlog of clients to be implemented this year.

We'll probably put up another 10 or so clients in fiscal '05, and things are going well.

Great.

Thank you.

Stephen Weber with S G Cowen has our next question.

Good afternoon.

Karen and Art, could you go into a little bit deeper into BSG and what the revenue trends were in ICD and BPSD?

And, I guess, if you could make--also make the reported and the adjusted organic growth that would have been there.

I'll try to answer those questions.

Think about BPSD piece, which is basically the back office, the majority of that business is the back office processing business, was down about 1% despite the growth in trades that we had in the quarter.

And the ICD piece was up about 9%.

So that gave us a yield of about 6% overall.

The internal growth would have been a couple percent growth in BPSD, you know, 4 or 5% growth.

And ICD would have been, probably, 13, 14% because that's the group that had the divestitures-- well, they both had divestitures in them I should say; they both had a small divestiture in each piece.

So I think that answers your question, Steve.

Could you just --it kind of broke up.

The internal growth for BPSD was --.

3 or 4%

3 or 4%?

4.

Okay, thank you.

And are there -- when you look at the results, other than that capital losses, et cetera, were there any wrinkles or things that we ought to pay attention to that would have affected the margins in any of the business?

You mean other than the loss on the portfolio that we took?

Yes, other than that.

Nothing that strikes me as being very unusual.

There are always costs that go both ways in any given quarter, it's a large business but there's nothing that I would think would be an extreme change.

Okay, thank you very much.

Now from Morgan Stanley we have David Togut.

Thanks.

Art could you discuss the high end strengths of NES a bit more and I'm wondering whether you saw any impact from Sarbanes-Oxley in the quarter.

One of your competitors highlighted this actually as a source of pressure on growth.

Actually I would have said the opposite about Sarbanes-Oxley for us.

Because our processes are as strong as they are, and we've been able to get these SAS 70, if that means anything, views done so that we have a very strong position in both our marketing and in our delivery in terms of the quality of our systems and the quality of our services.

So we've actually used Sarbanes-Oxley in a positive way in terms of gaining new business.

So I would have called it a strength for us and we have been strong in our national account market.

I think our core product set is excellent today.

I think the comprehensive outsourcing BPO, that Karen was referring to before, was strong even though we are reasonably conservative in the way we report those numbers.

Some of the implementations on comprehensive take over a year and we try and only look in our sales number at the first year's revenue on some of these numbers.

So, even with that conservatism, our numbers have been very strong.

So I would call it good markets, the right products for the markets right now, we're doing well against the ERP providers and the COS market is going pretty well.

So it feels good.

Yeah, and I would add that we've got a great sales force, a motivated sales force with momentum at the high end.

Do you have any statistics--

Wish I'd said that.

Do you have any statistics on the enterprise product?

And sales statistics?

Enterprise?

Enterprise, we continue to have enterprise clients and we continue to sell the product, but there's nothing big or different that I would talk about in the enterprise area.

Just finally, will the board give any consideration to raising the dividend payout ratio at your upcoming meeting?

The dividend payout is a board decision.

The board will certainly consider all of the elements as it addresses that but I'm really not in a position to talk at all about what actions the board might take about the dividend at this point.

Moving on we have Greg Gould with Goldman Sachs.

Thanks.

Art, is there a way to quantify -- and I know this is is probably going to be a difficult question, but a way to quantify how the investments have paid off in new sales and how much more they could help?

Yeah, that is a difficult question.

We have spent a fair amount of time on each of our investments trying to look at the investment and look at the types of returns that we're getting.

And you find that it's very hard to define what is incremental and what isn't incremental at a given point in time.

I would say if you looked at, you know, Pay eXpert which was one of the products in employer services that we were talking about and were very proud of.

I mean, the rate of growth of that product is very high, over 50% at this point in time, and that is a good high margin product for us.

So that would be an example of one that I would say is doing very well.

But the reality is it's very hard to track specifically where the -- how much incremental benefit we got from some of that investment because it was added to existing investments that we were already making.

So it was an acceleration of investment in a lot of places as opposed to a--something that you could identify and see the results that clearly.

Never-- having said that, I'm absolutely convinced that those investments were an important ingredient in helping us improve our product set and beef up our sales force and accelerate our growth rate.

Okay and just one other question.

On the new orders in the quarter, I know you mentioned that nationals were strong, but can you, sort of, talk about the relative growth rates in majors and SMB?

Was majors the slowest of the three?

Yes, majors again was the slowest of the three.

So it would have been national accounts, small business, and then majors.

In that sequence.

Do you see anything that would change the--increase the momentum in majors over the next few quarters?

As I listen to what the people in our business are saying, there's reason to believe that we will improve the momentum.

On the other hand, we've been disappointed in the past and I don't want to get too far ahead of myself in terms of projecting anything there.

But, actually, when I listen to both the optimism and the reasons for the optimism, I think there's some very good reasons for --that we would expect to see improvement and not that far out; so relatively close.

But we'll see.

Thank you.

David Grossman with Thomas Weisel Partners has our next question.

Hi, thank you.

Art, you know, in light of some of the internal growth metrics that you've thrown out for the year, and given that we haven't really been in a "normal environment" for several years here.

How should we think about internal growth for the ES business going forward more on a secular basis?

I don't know if that's a question you can address.

Then similarly, I guess, brokerage has even more moving pieces and, you know, perhaps you can shed some light on that as well.

I think on ES, prior to the time of this downturn we were a solid double-digit grower for many, many years.

Perhaps in the recession before this we slowed a bit, but certainly not to the degrees that we did during this downturn.

I think we're heading back towards that double-digit.

If you grasp the sales comment I made before, it'll take a few years, it'll take some time as we move in that direction.

So I wouldn't anticipate it too quickly, but if we can put together a few good sales years in a row, I think that that business is a double-digit growth business.

I think the brokerage one is much harder for me to respond to.

The reason for that is our brokerage business expanded-- the number of trades expanded at a compound rate of 15% for 25 or 30 years until the last few years.

Investor communications mailings compounded out at a double-digit rate for every year we were in the business until the last year or the last year and a half or so.

So now we've come through that.

We haven't yet seen the rebound that would get us back to that type of intrinsic growth.

So I'm hard-pressed to say we're going to get back to those double-digit levels going forward.

So, certainly, I still conceive of brokerage as a growth business, but I would be a little bit more cautious in terms of saying it could replicate the types of growth rates that it had in the past.

So, given what you've seen over the last couple of years in pricing on the processing side, do you think we've bottomed there or do you think there's still room for those pricing to decline further?

In the brokerage?

On the processing side, right.

On brokerage processing.

I think that the reasons for the decline have been large clients getting more business, and they have tiered rates that are lower.

And so, I think that trend is going to continue.

I don't see anything that's going to prevent that from continuing.

Also, the businesses that we lost when the retail firms were getting gobbled up, those were higher rate businesses because they had the retail rate.

And so our rates came down as we lost those businesses in the consolidation of the financial services industry.

I'm hopeful that that consolidation is going to taper off or end and therefore we won't see that type of a decline.

So I would anticipate a continuous decline in our overall average rate, but not at the rate that it's been over the last few years.

Great.

Thank you.

Now we'll hear from Mark Marcon with Wachovia Securities.

Good afternoon and congratulations.

I've got two questions.

One just a point of clarification, with regards to the margin expectations for this year-- Marta-- I thought Marta had asked about employer services and my notes had indicated that the -- that the expectation was 100 to 150 basis points of margin improvement for the year.

I just wanted to see if that was still correct or are we looking at a little bit more there?

In the employer services, it's still about 100 to 150 basis points.

Okay, great.

And then similarly for the entire organization, also 100 to 150 basis points?

Yeah, for the overall organization it's a lot more to be considered, but at this point it's probably on the low end of that, maybe 100 basis points, but I would leave the range 100 to 150.

Terrific.

And then can you talk a little bit about how much E-TRADE ended up adding to this quarter and it sounds like it was added at the end of the quarter.

What's the incremental bump that we could see in fiscal Q2 from having E-TRADE in for the full quarter?

E-TRADE, I believe came up in the early part of September, so we added in for about one month.

The average number of trades varies, but I would think if you put it in the 60, 70,000 trades is probably a reasonable number.

Again, based upon what's going on.

I would say that's reasonable for where we are right now.

I think they had stronger activity when the retail markets were stronger a few months ago.

I'm hopeful that if the retail markets come back they'll have stronger activity again in the future.

And, again, I'm not ready to convert that into a pricing algorithm for you or revenue algorithm for you or anything like that.

Okay, fair enough.

Thanks.

Lloyd Blightman with Bernstein Investment is next.

Hi there, folks.

First of all, the additional dilution from the US Clearing acquisition, is that due to the fact that you're going to be bringing it in about two months ahead of original schedule?

That's part of it, yes.

Part of it is that we're bringing in two months ahead of the schedule, part of it is because we had some -- two clients lost prior to our-- obviously prior to our closing that are known losses that come out of the equation; and, for the most part, that's the bulk of the change.

Okay.

And also the funds held for clients, that was up 44% year-to-year at the end of the quarter.

Was there anything unusual there?

Was it the day that the quarter ended or something like that?

Yeah, if you're referring to the balance sheet, the funds held for clients and then the asset and the liability, you can't really compare those to the prior year.

There's so many things that have to do with it, the day that the quarter ended, and all of these things impact it.

So I would never look at that as a gauge for real client balance growth and the actual client balance growth was 10% in the quarter.

Okay.

And in the other segment, profit was down year-to-year.

Could you give us some color on that?

It was -- the profit--the majority of it was the losses in the portfolio.

That's where that ends up in other.

So the fact that we took about 5 million or so of losses on the investment portfolio compared to the prior year where we had about a million in gains, that's a $6 million or so swing, and that's the majority of the decline.

Okay.

And let's see, last but not least, the number of employees in total source.

96,000 work site employees, I believe that was.

It was up 15% to 96,000 work site employees.

Great.

Thanks very much.

You're welcome.

Now we have Greg Peckham with Jefferies.

Mr. Peckham?

We'll now take our last question from Greg Smith with Merrill Lynch.

Hi.

This is Susan Chen for Greg Smith.

Can you comment on this quarter's brokerage margin?

It's sequentially down, some of them due to lower revenue, but what's the impact from the volume mix and now what's the impact -- how much of the impact is from pricing, like revenue per trade?

Is there any one-time expenses in this quarter for the brokerage services?

No, there's not really one-times in the quarter.

You really to have take the different groups.

Sequentially, it might be down, but that's because in the fourth quarter we have the high volume proxy activity.

So the fourth quarter's always going to be the stronger quarter for us.

In the first quarter we have very low investor communications activity so that would generally be lighter.

If you compare it to the first quarter of fiscal '04, in both groups the margin's actually up a couple of points.

So it has nothing to do with -- anything one-time going on in the business.

Additionally, toward the end of last fiscal year we divested some small businesses, one in the transaction processing group and one in the investor communications group.

Both of which were very low margin businesses, so that also helped with the margin improvement on a year-to-year basis in the brokerage group.

What's the institutional mix in this quarter?

The institutional mix was more like 70% in the quarter.

So it was a higher -- I guess it was about the same as the fourth quarter of last year, but it was higher than we had anticipated.

We had thought when we did our plans that we would continue to see some more strength on the retail side, but instead it was 70% institutional.

And the revenue per trade decline year-over-year?

Revenue trade declined about 15% year-to-year.

Most of that was due to the higher institutional mix and the clients that were part of that mix.

So what Art was saying before is that it's not that we've had this significant change in pricing environment with brokerage, it's the mix of clients that are in our base, and as they reach higher tiers, higher volume, their rate per trade does go down.

So the majority of the drop in the rate per trade was because of the mix being higher institutional and because of the large clients in our base that had the majority of our growth.

Thank you.

Ladies and gentlemen, due to time constraints we are going to take no further questions.

I'll turn it back over to our host for any closing comments.

Okay.

Well, thank you very much for your questions.

As we are exiting the call, our share price was somewhere approximately $42.81, and Art and I both thank you very much for your questions.

That does conclude today's conference and we do thank you for your participation.

You may now disconnect.