自動資料處理 (ADP) 2005 Q2 法說會逐字稿

Good afternoon and welcome, ladies and gentlemen, to the Automatic Data Processing fiscal 2005 second quarter earnings conference call.

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

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

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

Please go ahead.

Good afternoon.

I am Karen Dykstra, Chief Financial Officer for ADP and as usual I am here today with Art Weinbach, our Chairman and Chief Executive Officer and welcome to our second quarter conference call.

You saw our earnings release this morning.

We reported 9 percent revenue growth this quarter with earnings per share of 42 cents which represents 11 percent earnings per share growth.

Overall, we had a stronger quarter with better key metrics, improving key metrics, and I think we are feeling pretty good at this point.

Very good about the momentum in our businesses.

And we base our revenue guidance the top end from 7 to 8, to 7 to 9 percent and our earnings per share guidance we refined to 12 to 15 percent growth at this point.

With those very few comments we are ready to go with the call.

As usual, we will discuss some forward-looking statements that involve some risks and you can find better descriptions of those in our periodic filings with the SEC.

We are ready to start the Q&A.

And as always I ask that you keep your questions to one at a time so Art and I can keep track of them and with that I will tell you we have about 95 people on the call today.

And I will turn back over to the operator to begin the questions.

(OPERATOR INSTRUCTIONS).

Greg Gould, Goldman Sachs.

Thanks and good afternoon.

On the employer services business, what was the checks per client increase in the quarter or change in the quarter?

And what is your perspective on how that should trend?

Well it was about 2 percent in the quarter and although we planned flat for the year I don't see a big change in sight for us for the rest of the year.

We've started moving up, I guess towards the end of last year.

We had in the middle of the year started getting a little bit of growth of 1.5 close to 2 in first quarter, it was close to two.

This quarter it's 2 so, eventually, we will flatten out.

But right now we are feeling very good with the 2 percent growth and the pace.

Okay and on new sales can you give us some perspective on how the confidence what supports the confidence in double-digit growth for the full year?

We have had a number of conversations with our various salespeople as we always do.

As we try and keep in touch with what is going on in the business, and as a general feeling, as they are looking at the pipelines and looking at where we are in terms of proximate closes and looking at the general receptivity to our products feels pretty good.

So we are feeling reasonably optimistic as we look forward and talk about double-digit sales for the year.

Certainly we are at 11 percent year-to-date so I don't feel like we are stretching a lot as we do that.

And, Arthur, comparisons do get tougher in the second half of the year.

That has been factored into the outlook?

Very much so.

Our pattern has actually changed somewhat over the last few years and we are very cognizant of the pattern of our sales and have, we believe, appropriately planned for that.

Okay.

One last question.

Can you give us an update on the BPO strategy?

What you're seeing there?

Growth and the profit outlook or -- ?

I assume you're talking about the employer services?

Yes that's right.

(MULTIPLE SPEAKERS) outsourcing.

Sure.

I think the pipeline remains very strong for our services.

We are feeling good about our products position.

We have had good sales in the second quarter.

We are projecting somewhere in the area of 40 million of revenue or so this year in the United States.

Remember we already have some of these services internationally so my comments are primarily here about our U.S.

COS business.

But our revenues are growing well with our success in the sales.

And as far as business margins, I still think we don't have specific guidance in terms of how to project that going forward.

We are in startup mode, we're building infrastructure and so on so our margins are nowhere near what they are in our traditional business.

But all in all, I would say still a lot of activity.

A lot of good comments and we are feeling very very good about that business.

Greg Smith, Merrill Lynch.

Wanted to find out on the new line, the P&L the clearing line and I realize that is not a full quarter.

But what kind of growth can we anticipate going forward in that segment?

I think it is really premature to think very seriously about that number.

It is a relatively small number at this point in time.

Part of the acquisition we had had a part of the Quick and Riley (ph) business which will actually be transitioning away from us.

So some of the revenue that we have now will actually go away.

So I think it is premature for us to be talking about anything meaningful within that line.

Having said that, I have to tell you that the market receptivity to our announcement has been, I guess surprised me a lot on the upside.

Might be the right way to say it.

People have been calling us as opposed to our necessarily needing to initiate the calls.

We have had a lot of interest and I am expecting that we will have some transactions that will be closing.

As we do those that will actually play into what the overall growth rate will be.

So right now, this was like a month and a half at $15 (ph) million of revenue and some of that goes away.

So nothing in there for you to be thinking seriously about in your model.

Just to help with those that are plugging in models and I know that you are looking for some more specific numbers.

Just for this year, I won't comment about where it is going.

After that, but just for this year we are anticipating in the area of $65 million of revenue for that segment.

Okay that is very helpful.

Thank you.

Quick one, back on the comprehensive outsourcing.

We have seen some of the other competitors in that space doing transactions.

Is there anything you feel like you may be missing that could create an acquisition or partnership opportunity or is it more just build vs. buy?

We are continually looking at the appropriate ways to expand the totality of our offering; and each one of those becomes a build vs. buy decision.

I think we will do the things that we think make the most sense in each case.

And the core services we already have.

That is one of the beauties of ADP's presence in the COS space.

There are always incremental areas for us to be evaluating and we are evaluating them.

Whether or not they'll turn into builds or buys is premature to talk about.

Last question, little bit out of left field.

Potential Social Security reform and individual account possibilities there.

Do you see any opportunities for ADP should that come to fruition?

That depends on which direction you're going.

Individual investment leads to more transactions.

We will be a beneficiary as our brokerage processing area and our brokerage services group overall will get benefited.

Some of the proposals I've seen have talked about increasing the amount of Social Security withholding by increasing the dollar limits and what that should go up to.

That would probably help us in terms of our tax filing business, but it is way premature for us to be talking about what might occur in some of those areas.

There are so many uncertainties around them.

Pat Burton.

Smith Barney.

Congratulations on the quarter.

My question is for Karen and that is the outlook for the interest component of the float given the recent rise in the short end of the yield curve.

Thanks.

As we noted in our release we had our first quarter in many where our yields in our portfolio actually exceeded the same quarter of last year.

So we are quite pleased to see that turn.

We had plans.

We thought we would have to have a turn somewhere in the second quarter and it actually happened.

We were at -- are you up on the portfolio with excluding gains and losses 6 (ph) at 3.3 percent compared to last year same quarter 3.2.

I think it will be in the same range in the third quarter and 3.3.

We are looking at maybe 3.5 by the fourth quarter.

So that will average.

The year will still average in the 3.3 percent range.

Craig Peckham, Jefferies.

Noticed that there was not any share repurchase this quarter at least, the diluted share cap went up.

I wonder if you could talk to that and review with us maybe how the closing of U.S.

Clearing may have influenced the activity there?

Also just a second question on U.S. Clearing.

Does the segment profit margin include any charges?

Let me take the first one on the share repurchase.

We actually did have some share repurchases in the quarter.

It was small.

We didn't note it in the press release, but through this point year-to-date we are at 6.8 million shares.

So about 1.4 million since we've reported last.

There were a couple hundred thousand actually that filled into January from us giving the exact quarter number.

Quarter number was somewhere around 900,000 to 1 million shares.

We actually did have some activity.

It really didn't have to do with the Clearing acquisition closing.

It didn't have anything to do with that.

The question on the -- are the charges in the Clearing services loss that we reported of $5 million?

No, that is really about the amount of what we expected and the loss, it does include of course amortization of intangibles that came with the transaction.

Somewhat of a cost of capital charge.

That is an internal mechanism that we apply to all our new acquisitions and that would be about it.

There aren't any major other allocations if you will, if that was part of your question.

We have said it was going to be a couple of cents dilutive during the year.

I think if you gross up a couple cents of EPS we'd get pretty much what we are expecting the loss to be for the year.

Okay.

Thanks for that.

Maybe looking at it another way in 2006, is that a business that we expect to swing back to profitability or is that a factor of just higher revenue in terms of more information work that needs to be done?

If you could just give us a little more clarity there?

It will take a while for some of the early stage integration to go through.

Whether or not it occurs in '06 or it occurs in '07 I think is a 1/2 question, but the -- a lot depends also upon the lease activity which I was referring to as so positive before in the market and the amount that we will spend in bringing up new clients and in expanding the business.

So it is pretty hard to tell at this point in time.

Yes I would add, I think, some of the more significant integration work will probably be done a little bit earlier maybe by the early '06 and some tail off.

But remember that our strategy here is not just to be in the Clearing business.

It is to expand to operations outsourcing and that is part of our growth strategy and it is a very scalable business.

So when we start to pick up and, hopefully, have some arrangements in the outsourcing side, I think that that will be a very different view of the income statement.

Randy Mehl, Robert W. Baird.

Good afternoon.

I had a couple of -- first of all a followup to that last question.

When we do expect the clearing business to be turned positive from a profitability standpoint?

If all goes well, I would like to think that it will occur within our '06 fiscal year.

There are a lot of uncertainties around that and numbers depends upon the clients that we get as we play with the scale issue that Karen was just describing and how it fits into our overall efforts.

That's what I would expect.

But, again, we are in very early stages so we will be able to clarify as we get further into it.

Karen, you made some comments about the interest rate.

What about the average daily balance and was there an unrealized loss balance at the end of the quarter?

Yes.

The average balances, claim for balances 10.7 billion for the quarter representing about 10 percent growth over the last year.

There were some realized losses in the quarter.

I believe the amount was in the 4 5 million range bringing us to around 9 million year-to-date which is a little bit more than we were last year at the same time.

At this point, our unrealized gains in the portfolio, because of the good news on the interest rates, is down to well under $100 million compared to a couple hundred million going back a year or so ago.

I guess I'll just ask one other quick one.

On the PEO, what did you finish in terms of number of work site employees and how did sales growth shape up there?

Well good news.

We are glad to hear you asd the question because we have just crossed the 100,000 employee mark.

Congratulations.

Right and we had 15 percent growth in work site employees through the ends of the quarter we were just under 100,000.

But now with a couple of weeks in, over 100,000.

For that business, our revenue growth is quite strong supporter in the PEO, in total about 22 percent, and our sales growth although we don't give specifics in terms of intact numbers on any the segment's employer services, it was solid.

It was not as solid, it is not as buoyant as it was the first quarter, but it was quite solid and we are very confident in the year with very strong double-digit sales performance in the PEO.

Well.

Great job in hitting that milestone.

Thank you.

Adam Frisch of UBS.

In terms of margins, was wondering if you are still expecting somewhere between the 100 to 150 basis points improvement in '05 overall and how much you think you can generate in the next 12 months or so?

Adam, are you talking about employer services or overall ADP?

Overall ADP.

I guess both actually --

Well in employer services we are expecting that kind of margin improvement.

We are at the midpoint of the year, just .3 percent over where we were last year.

You can see it in the numbers but we are expecting a bigger growth in the margins in the second half of the year.

One is, we always have higher margins in the second half anyway because of our year end activity in our third quarter.

We had some onetime charges in the second half of last year as well.

So I think that we are pretty confident that we are going to get a much bigger margin improvement in ES (ph) in the second half of the year.

And just from the leverage, we have good leverage.

We have good revenue growth and employer services and our natural business model would give us leverage and margin improvement in the ES even if I didn't mention some of the other items that I mentioned.

Overall, for ADP I think the margin improves and is expected not to be in the 150 basis point range.

More like 50 to 100 basis points across the businesses.

Thanks for that.

Second question was on brokerage.

Given the 18 percent growth in the mailings and the 18 percent growth in trades per day, can you explain why revenue growth is only up 4 percent and internal growth was (indiscernible) more intense pricing pressure there or what went on?

Yes.

That's a very good question.

The big metrics at 18 coincidentally.

Yes, our internal review growth was 10.

It does reflect two divestitures that we did in the second half of last year so that is one item.

Secondly in our back office, when we talk about the 18 percent growth in trade, we also couple that with a decline in the average revenue per trade which offset that.

So that was about 15 percent and that has been somewhat consistent.

That is what we expect and it is based on mixed NR (ph) base, tier pricing, which clients are growing and so on.

So that offsets the 18 percent.

And then in the investor communications site, we did have 18 percent increase in activity.

It was driven -- a lot of it was driven by I guess a resurfacing of mutual fund meetings which require proxies.

Different than the mutual fund activity that we're talking about the last couple of quarters.

These are actually meetings that require a proxy.

And they come as a lower weight mailing.

It is just a less expensive mailing so our postage revenues did not grow at the same pace with the number of mailings.

So that really explains why the revenue site was much different than these two particular statistics.

Just on that note on the trade on their revenue per trade, how long is this going to keep going forward?

Do we come to a point at some quarter, in the next quarter, two, three quarters, whatever -- where we start to anniversary that trend or is this going to be something that is kind of, at least in the near-term, is going to keep happening?

I would say, first, it will continue as long as trade volumes continue to rise, we will have clients that continue to reach other tiers in their agreements.

So the volume rising does create the issue with lower pricing per trade.

As far as the actual pricing per client, it is still declining but it is at a slower pace than has been in previous years.

It is still I would say -- the impact of that is probably low single digit real pricing decline vs. volume influence and mixed influence for pricing decline.

Got it.

But the mix is really a very important element of that.

I'm mean you have heard us talk about the matter of retail trading that is going on, the percentage of retail trading.

Probably the single item over time, other than the tier pricing, that will drive most is the presence of retail trades in the market and the more retail trades, the higher the average rate the trade will be.

Can I just ask you one housekeeping item, Karen ?

Yes.

If you can just break out the growth in, actually, I have two!

The growth in the beyond payroll from the growth in core and core tax products?

And then have you increased your '05 revenue assumptions for the B of A parent business?

Well the second part, no.

The revenue forecast for that -- is that what your question was?

Yes, is that still 50 (ph)?

For the second half?

No -- yes we originally planned around 50.

We did close on the transaction two months earlier.

So we now our forecast is now around 65 million for that.

It was in our original forecasting guidance.

As far as the mix, payroll and tax to percent growth in the quarter versus about 16 in beyond payroll and these are United States statistics.

Steven Weber, S. G. Cowen.

No. 1.

Last quarter you gave us in the press release the reconciling items which always are -- make up that difference.

Can you give us any help with that, Karen, at this point or are we going to have to wait for the 10-Q?

Well I can certainly help a bit.

I have some of the statistics.

I don't know if that was intentional or not or just timing for us, but we have -- I'll tell what the swings were.

I don't know if I have the exact numbers in front of me on all the reconciling items.

Basically claims is in other segment.

Claims revenue growth as we reported was about 6 percent, I think, for the quarter.

Basically there is revenue increase about $5 million.

We had an impact for foreign currency which was about $28 million.

That is (indiscernible) single item in the other segment in terms of the swing number.

And all the rest were (indiscernible) in terms of changes.

Then same for the NOI side.

Claims were a little bit part of the growth.

Foreign currency, a couple of million dollars and then the rest, no big swing items and all the other items.

Thank you.

Were there any other -- any unusual items in any of the other segments?

I noticed the dealer didn't have the greatest quarter from a profit standpoint year on year.

Is there anything that happened in there?

The answer is nothing unusual.

I mean the -- I think the swing if any, in profit, was marginal.

If you looked at the internal margins that we had, they were basically consistent with where they were a year ago.

So it is nothing unusual in there.

Some of the recent acquisitions, small transactions themselves might have had a small impact on that, but not very significant.

Lastly just back on the float income.

You have given us some guidance on what you thought the flow balances would do for the full year.

Are you more bullish about the balances at this point then that 7 to 8 percent you talked about in prior calls?

Maybe slightly but our forecast is still about 7 to 8 percent.

We were slightly ahead in the second quarter.

We will wait for the third quarter to see.

Sometimes we get bonus payrolls and something earlier in the December (indiscernible).

So our view on it really hasn't changed that much.

It's still 7 to 8 percent profit.

(indiscernible) Investment Research.

Given the fact that quarter to quarter you have now refined your guidance on the profit side and increased it on the revenue side, I was just wondering if there is anything you could tell us in terms of anything that you are thinking of differently quarter to quarter in terms of coming, let's say distilling selling these numbers down somewhat?

Have you changed your opinion on any areas or maybe improved your view in some, lessened your view in others?

Anything like that?

Essentially, could you talk about the process at all?

Sounds like a good question for Karen to answer because I'm not sure how I would answer it.

But the initial thoughts I have is, there's really nothing that is that unusual.

What is going on right now is a combination of momentum that is building in our businesses in part because of some of the investments we have made over the last year and part building of the sales forces.

And part some of the investment in product.

Combining with increases in employment within this country.

You saw the pace, you heard us talk about the pace for control number before.

We are talking about our balances being up.

We were just talking about brokerage transaction volumes being not so -- there are momentum within the general business environment, combined with the momentum within our business that is kind of moving things the way they are.

So there is really nothing that I would try to latch onto and say was unusual.

With that I'll I will let Karen answer the real question.

I guess when I think about the process, with six months behind us, obviously, some things have materialized.

We are waiting to see how we started off the year.

We tend to be in our planning process conservative about certain things that we can't control.

I would say on a revenue side, probably foreign currency is one of the things that we take a conservative view of.

We don't know what is going to happen and at least the first six months of materializing the strength in that number or the weakness in the dollar (indiscernible) said another way has held up.

And so therefore we acknowledge that we are still getting this lift in revenue from foreign currency.

And with half the year behind us, we have a change in the way we are looking at the full year numbers there.

Also in our process that you think, I think overall a comment that I would make is that ADP consolidated results are less predictable than they were years ago.

We do have differences as we get more and more that are not traditional core payroll businesses.

As our proxy business grows, which is also less predictable, the brokerage business and what is happening in those markets.

There is somewhat less predictability.

Then the last point I would say would be the brokerage business in particular lot of factors out of our control.

And with the fourth quarter being such a heavy revenue season for us, because that is when the processing season is, we are a little bit conservative as we start the year.

And as the year goes on and we have a little bit better view we can look at things differently.

There was nothing other than those few things that I mentioned and the fact that we are ahead of our plans in the first six months.

It was nothing huge that made us look at it differently or a change in our process that led to this clarification in our guidance.

Okay, just one more thing.

Could you tell us how things look outside the U.S.?

I'll start off, Art, and then (indiscernible).

In the ES and international front, we are -- the quarter was pretty good quarter from a sales standpoint picking up a little bit in Europe and as well I guess on a year-to-date basis from within that business, I would say the one distinct difference between Europe -- Europe being the biggest partner of the ES International group -- is that they are pays for control are not growing like they are in the United States at 2 percent.

The decline has softened over the last two quarters, but there are still some countries where they are down up to 2 percent.

So that is distinctly different in our international business.

We are feeling very good about what we announced as our relationship with SAP.

On the high-end and -- but we are investing in that production and in that service.

So this year their results are impacted by some of those startup cost in investments.

And then in claims, our international business is actually doing quite well compared to, especially compared to the United States but our acquisition last year we're feeling good about the growth in claims international is better and we feel good about the products and our ability to expand services in each of the countries.

I'm sure, Art, if you want to add color to this, when I'm finished I'll just make a comment about dealer and say that dealer from an international standpoint, slower revenue growth and slower sales growth in the European businesses.

However, still we feel pretty good about our position and we're overall doing better from an operational standpoint in dealer Europe.

We just completed an acquisition actually for dealer services.

A small DMS (ph) provider in Spain called Tsau (ph).

I'm going to say the revenue are somewhere in the $15 million range.

So progress there.

I would say that we are making progress in very difficult environments on a global basis.

And so whether the claims business -- we are gaining share.

We are gaining transactions; but the overall transaction volumes in the estimating world aren't growing at the pace would like them to do.

Similarly, in the dealer services business in Europe, we are feeling significantly better about our relationships with our clients and about the opportunities on the table for growth and we see this Spain opportunity as one that adds to that.

But overall the economic climate is not buoyant.

It is not, doesn't have the buoyancy that we have here.

So we are kind of fighting our way over the economic climate while I believe we are doing an awful lot of right things.

So I think we are better positioned for when the economies of these various countries come back and we have been for a while.

I think that this whole international area is a very important one for us.

It is one where it will become a growing part of ADP in the future.

We know how to do this business.

We know how to make money in this business; but it is a hard and it is a long process.

But I believe we have improved the infrastructure enough so that as the economies do come back, especially in Europe, we will be significant recipients of the benefits.

Cindy Shaw.

Morris (ph) and Cabot.

Thank you.

Couple more questions about the investment portfolio.

One of them the cash mix, another one that duration, and then I have a couple of questions after that.

Okay.

The duration was in step a little bit too close to the two years and what specifically is your question about the cash mix?

What percentage of the portfolio was in cash versus other securities?

I don't know how that in front of me right now.

We will put that in the queue, but I'm sorry.

I don't those statistics with me.

Right.

Then, free cash flow, operating cash flow and a question about interest expense.

I normally don't have cash flow detail with me at this point either.

I don't think that there is anything that unusual that happened in the quarter other than we did the acquisition.

We completed the acquisition in the quarter of our clearing business.

There was nothing else unusual in our normal cash flow quarterly spread that I can articulate that should have happened in the second quarter.

We feel pretty good about our cash from operations for the year, it being at about a billion 5 or so.

We talked about the treasury share purchases already in that it was a lighter quarter overall for treasury share purchases acquiring just under 1 million during the quarter.

Our capital expenditures were 44 million in the quarter.

So I think those are the big data points that you can use.

I will give you also -- sorry -- depreciation and amortization was about 75 million, 76 million.

So those are the things I think you need to work into what the cash flow but we will have more detail when we publish the Q and the follow-up second question was?

Interest expense in terms of absolute dollars has bumped up almost two times, about two times in last two quarters versus the year ago quarters.

What is driving that?

Is that just rising interest rate (indiscernible) we will be thinking about that going forward?

It is a combination, Cindy, of two things.

One yes, it is interest rate as they creep up and our average daily borrowings as part of our leverage strategy in our portfolio are off year-to-year compared to where they were in the first half of last year.

So the combination of that, I think you were talking about a $10 million kind of number compared to $5 million the previous year and in the quarter.

So, this is actually the short-term borrowings?

Yes, it's primarily related to the short-term borrowings related to our portfolio.

Gary Bisbene (ph), Lehman Brothers.

Couple of questions.

I guess just from big picture sense given the market share and believe that payroll outsourcing penetration remains fairly low.

It's somewhat curious to me that you are getting somewhere low single digit growth in the core payroll and payroll tax businesses.

I guess the question is, what are gating factors to faster growth in that business and what's the outlook for the next couple of years that the economy and appointment continue to be moderately stronger?

I think if you look at our overall penetration in the payroll world, I mean, paying in the number, 23, 24 million people out of a population of 120 million working people if you exclude some of agriculture and federal government.

So there's clearly plenty of room, but the principal driver is no longer payroll and tax.

I'm mean, it's all the other features in terms of what people want.

We continue to compete against software systems in the low end of the market.

Certainly against ERP providers as we get into the high end of the market.

But I believe the outsourcing solution is as strong a factor, today, as it has ever been.

However, the totality of what is being packaged in terms of the value, a lot of it goes beyond the payroll and tax.

People no longer buy just for the payroll and tax.

They buy for the larger pieces and the value that they place on it is more on the other pieces than it is on the payroll tax piece.

I think that is the reason that drives the revenue growth number overall.

The penetration number, I like to presume will continue to edge its way up over time.

Okay thanks.

I guess just a follow-up to that.

When you think about the employer services business in total and I guess being driven by this beyond payroll services, what is a realistic three-year organic topline growth rate to think about for this business?

Is there any reason that that can't at some point get to double-digit growth?

I think it is a function of working its way back to double-digit growth.

I believe that the intrinsic growth within this business in over any number of years is a double-digit level.

What happens as you go through the type of period we went through for the previous three years when the economy went down and when our sales, basically, were flat for three years in a row, in order to get your growth rate back, you have to significantly increase your sales rate.

That is not something you can do all at once in our business.

That's not something you can do in a six-month or one-year period.

So for us we need to have our sales growth rate being faster than our overall revenue growth rate for two or three years in a row.

If we do that and if we hold our retention, if our balances continue to get growth and our paper control continue to get growth, I think you'll see us back within a relatively few years.

Okay, thanks, and then one follow-up on the new clearing business.

Given that you are reporting that as a separate business unit, is this an indication that longer term, it is going to continue to be managed separately from your existing brokerage service business?

And maybe an indication that there may not be a whole lot of synergy with the existing business?

Or longer term, is there?

Is there a fair amount of synergy by owning both these businesses?

I think this is from more of a regulatory reporting issue than it is a synergy issue or how the businesses work together issue.

We believe that volume is a very important piece of the ability to succeed and be a low-cost producer within this business.

Therefore it is very important that we are able to leverage the back office processing that we are already doing as we get into the Clearing business.

So to think of them as totally independent would be inappropriate.

On the other hand, we clearly will run this as a separate business.

Just to clarify, it is being managed by the same senior folks that are managing (indiscernible) Hogan who is managing our brokerage back office EPS (ph) group.

So it is the same management and just to reiterate what Art said, it is purely a FAS 131 for the accountants on the call.

Issue in that we are required to report it separately because of the size of the -- some of the items on the balance sheet as well as the different regulatory environment.

Josh Rosen, CS First Boston.

The new order translated employer services.

If you could talk about where you are seeing relative strength and weakness there in terms of client size, that would be helpful.

Sure.

I don't know about in terms of, well, client size in terms with the segment.

We are seeing -- for the quarter we are seeing strength in small business.

We were particularly pleased with the strength that we saw in our major account segments this quarter.

A little bit softer than we have been in national accounts and good solid performance continuing in our PEO and as I said before a little bit of a rebound in our international Europe segment.

Just a second question would be around where you deem future investment opportunities as the most attractive?

And I am thinking less from an acquisition standpoint and more from an internal investment standpoint.

Clearly, the clearing operation is one that you're in integration mode at the moment and throwing some money into and hope to get returns out of.

Where else are you looking internally to ramp up spending or maybe not ramp up but continue to focus spending?

I would say, clearly, comprehensive outsourcing is one of our most important priorities.

And I say that comment stands not just employer services, national accounts which is where we talk about it mostly today, but as we look at the opportunities to expand our services in all of our segments and have a bigger bundle of services.

So that is an area that I would call on for investment, comprehensive outsourcing, or the outsourcing piece of the Clearing & Outsourcing business that we just got into is one that we would want to continue to invest in as a high priority for us.

Then I would say we're interested in geographic expansion as a different way of something outside of our normal investment and product and services as another area that we will be looking at continuing to invest and our sales force.

Last, but if I went up on that answer specifically, when you look at the new orders that you've generated over the last couple of quarters, within employer services, what are you seeing coupled with one another in terms of where are you seeing more bulk orders in terms of multiple product lines?

And where is that the most prevalent?

I guess if you look at our national accounts area, we have the broadest array of services; and those are pulling together to our BPO or COS offering.

But we bundle products in major accounts and we bundle products and offer different bundles in SPS (ph).

So that it is very difficult to be able to break out a clean answer to that question.

We have a variety of ways to purchase our services and bundled services is certainly one of the options.

So, there is nothing that is bundled together (indiscernible) more frequently than others in terms of whether it benefited administration coupled with payroll or anything along those lines?

Well, clearly, payroll and tax are the primary ones.

I think our TLM system or time and labor management systems are clearly one that are very popular today and are being bundled significantly.

We have a number of our 401(k) systems tied to various product offerings and we are trying to extend that in some areas.

So there are a whole bunch of different bundlings that are going on.

But I think POM is one of the ones I would (indiscernible) time and labor management is one that I would single out as one of our more successful today.

Rob Bourgeois from Sanford Bernstein.

Can you just give us the update on the revenue growth guidance by business units?

And that will allow us also to see where the upward guidance came from by unit?

And then I have some specific modeling questions there.

Our forecast for employer services really hasn't changed; it's in the 7 percent range and we tend to have some ranges so I don't know that any one of the existence units led us to increase our guidance at this point.

I think it was a confidence level in everything and the interest rate in some of the statistics and brokerage, basically all of those key metrics in combination with foreign currency that led us to the change in guidance.

I gave you ESO -- I will just reaffirm some of the other ones for you.

In brokerage, the full-year revenue growth forecast will be in the 2 to 3 percent range.

In dealer, it is going to be in the 12 percent range.

And of course with acquisitions and in claims, it will be -- claims total revenue growth, call it 3 (ph) percent.

In the brokerage unit can you tell us what the suppression number was?

And also the retail mix of the volume?

The suppressions were 34 percent in the quarter.

Stronger quarter overall.

We still think that for the year it will be around 35 percent.

And the mix is, the mix for the quarter was more or less 30 -- somewhere in the 35, 65 range. 36 maybe percent retail.

So 36, 64.

Let me clarify and be more specific.

Within the 36 percent retail, though, you have to be cautious because, one, that is not a tremendous growth over the second quarter of last year.

We also had a bump up in the second quarter of last year to about 35 percent.

But more importantly, there are a lot more non -- a lot more electronic trades that are in that mix what we call retail.

And that has been where the growth has come from in the electronic volume.

And they are just not the same kind of revenue characteristics as a pure retail trade from a non electronic provider.

Can you give us a point of view on the margin differential between the electronic trade and the normalized trade?

No.

That's fine.

Two final questions.

Can you tell us what the sales force growth was in the recent quarter where that's projected to be going forward -- are you going to ramp up your sales force investment in here?

Then just a comment on where the state of pricing in the industry is at this point?

Well, the sales force growth is up 7 percent in employer services.

That was about our plan and we are on that and I see that continuing through the year.

And the second half of the year is always where we start to ramp up and look at what we are planning for the next fiscal year in terms of growth.

And I don't know that we have done that at this point to project where we are going exactly with that number into next year, but it was clearly in the -- in our sights to do in this range. 7 percent maybe is a little bit more in the previous year and I don't know that would be that different as we think about the future, but we have not done our plans yet.

So look at what it would be for next fiscal year.

Pricing.

It's really very quiet on the pricing front.

I don't know that there's been any change in the environment.

It's just been very quiet across the board.

I would say in all segments.

So, does that mean in employer service about 1, 1.5 percent or so on the pricing increase front?

Yes I think we got closer to 2 percent this year.

And then Art, on the sales force front, you mentioned the need to keep sales growth higher than revenue growth for a few years to really meet the goals of getting back to double-digit revenues.

Is it likely, in your opinion at this point, that accomplishing that will require more investment next year and a significantly larger sales force?

I think you should anticipate a continuation in our sales force growth and the productivity of our sales force.

So I think it is going to take both of those things to get there.

So yes, I would anticipate there will be continual increases in sales force headcount.

I also believe that both the unit and dollar productivity that a salesperson can bring will be improving over that period and the combination of that will give us the results that we're talking about.

David Grossman.

Thomas Weisel Partners.

Art, maybe if you could follow up a question that was asked earlier about the brokerage business.

Independent of the mix of trades, are we now at a point where we can look at unit growth continuing to outpace the declines in pricing and by units?

And perhaps this isn't the right comparison, I'm using average trades per day.

For pricing, using the revenue per trade.

I think it is really a function of where the trades come from.

And to the extent that our largest institutional providers are the ones who are processing the most trades, then the incremental marginal revenue per transaction on those trades is lower.

To the extent that it comes from more of that retail mix that I was talking about, even if it is some of the electronic trades that Karen was talking about before.

I think the more it comes from there, then it would be less likely that you would continue to see the type of offsets that you have seen up until now.

That is hard to predict and I really don't want to put myself to position of trying to predict what is going to happen in terms of the market in terms of both retail trades and the growth of individual clients.

So if some of the larger clients account for the growth and hit these tiers, is it still pretty healthy margins despite what you see on the revenue for trade because the cost of processing that trade is less than it would be if it was gross?

Yes.

This isn't really a margin issue.

It is not a cost or margin issue.

You get up to volumes with these clients at which we will have very good margins, regardless of the value of the additional trade.

Because so much infrastructure is required in order to handle that.

So it is less of a margin issue.

It is really not a margin issue at all.

And, Karen, I know you commented on the impact of currency but could you perhaps repeat what the impact has been year-to-date from currency on revenue growth?

And I can't remember if you mentioned this or not but does that flow through to EPS or are there offsetting items where it's a relatively neutral impact on (inaudible).

The revenue impact has been in the 50, 55 million somewhere around 55 million 53, 55 million for the year -- on a year-to-date basis.

That was the six-month period.

It was about 28 million for the quarter.

There is a flowthrough to the earnings per share.

There are international businesses that there's smaller entities in many countries.

The margin is lower than our other businesses in the United States.

So the margin impact is not as high as if this was an issue of U.S. revenues.

So, yes, there is an earnings impact.

It is probably about a penny for the six months.

One last question.

Could you just remind us what the duration of the corporate portfolio is vs. the client portfolio?

We don't normally give out the differences in the duration.

Client funds are obviously longer as we leverage a good piece of that but I don't know that we normally give out specific duration details between the two portfolios.

The total is approaching two years right now.

Tim Willi.

A.G. Edwards.

Thank you.

Just a question again on the Clearing & Brokerage business.

You made some earlier comments about more, I think, of an emphasis on back office outsourcing over time.

Are you speaking more so of getting into the space where names like SunGard or DSP or others compete?

Where it's truly much more comprehensive in terms of all the places it touches in the back office as well as the different types of investments and financial firms?

If you could just clarify a bit there and whether that would be internally generated effort or be more reliant on additional acquisition to get there?

That is less what we're talking about when we are talking about outsourcing.

We are the range between what we do in our current back office processing business and the clearing function.

So if you think of the range of services that go from just transaction processes to clearing outsourcing will fill the holes between those limits.

It doesn't necessarily say we are going into all of the services that are provided by some of those other companies that you mentioned.

So we are just bridging a gap there between those two functions?

Mark Marcon.

Wachovia Securities.

I was wondering if you could give us some comments with regards to the expectations on brokerage services in terms of margin improvement?

You had very nice margin improvement this last quarter.

Where do you see it coming up for the year?

Yes we really did have some good margin improvement this quarter and you know our brokerage businesses are very scalable.

On both the back office side and the investor communication side so if you are going to get some or volume we are going to get improvement in margins there.

Our full-year forecast.

We are going to be ahead of last year's margins and our current estimate is somewhere in the 17 percent range combined, which compares to around 15 percent last year.

We will get that from the scale.

Certainly the majority of it is from the scale, but we also did divest two businesses at the end of last year which were -- they were either no income or a loss position.

I don't recall the exact numbers but there was certainly no margin in them.

Can you give us the organic revenue growth for the overall enterprise as well as for EF?

The organic growth was 9 percent for the quarter.

In ES it was 6.

In brokerage, it was 10.

So it was higher than our reported growth because of the divestitures and in dealer it was 6 and in claims it was flat.

And then, with regards to ES.

Can you give us a split between Beyond Payroll vs. core at this point?

Just in terms of total revenues?

Our forecast for the year is to have about 62 percent in (indiscernible) U.S. statistics; 52 percent in payroll and tax and 38 percent beyond payroll.

That just keeps moving in the right direction.

With regards to the new sales forecast, can you talk a little bit about why -- it was still solid this last quarter, but it did slow down a little bit, relative to the prior quarter.

Why would that have occurred this last quarter?

In ES, in terms of new sales?

I think the principal area would probably be our national accounts arena, where you're more susceptible to large transactions, both within the quarter of last year and within the current quarter this year.

And that was one of the weaker performers for this quarter although it is still at a very solid rate for the first six months of the year.

And as we were talking with some of the people within our national account business just where we are today, trying to get their flavor, their most current flavor, we are hearing is that the processes are good and our backlog's good.

Our orders, our future potential orders are looking very very normal.

Perhaps they are some of the very large deals that we look at in the past that may not be as many floating around as there were, but basically what we are hearing is caution because anytime we have a quarterly period which things are not always as strong as we would like them to be.

I think there is room for caution.

Really, a great deal of reason to be confident.

Also that we are doing the right thing so we have the right products in that we are heading in the right direction.

So, overall, always a reason to be cautious when we go through a quarter in any of our areas where the results are a little bit lower.

But nothing that would really be troublesome or nothing that would really be concerning, overall.

That is in our national accounts area.

If I talk about our small business area and our major accounts area, I think both of them perform very very well.

I spent some time in major accounts a little over a week ago and felt much more positive about the outlook in major accounts than I felt anytime over the last few years.

Part of it as Karen pointed out a little bit earlier today is that they're basically on plant and so it was easier to feel good about them when they have been behind plan for the last few years.

But more than that just in terms of how they are looking in the market, how they are feeling about the market, how our products are selling in the market.

There are reasons for enthusiasm.

So, overall, I think it varies by business unit but a lot of reasons for confidence.

This is (indiscernible).

The only other additional comment I would make about national accounts is that as I went back and looked at cost schedule, quarter to quarter performance, reenforcing that these large contracts display the numbers in national accounts.

We have had very large swings from quarter to quarter over the multiple years that I have looked at on from very high double-digit growth to very low the next quarter and then right back and so on and so forth.

It is really is a function of national accounts to not be quite the same consistencies as the other businesses.

Just adding in a little bit more color on that one.

On the national accounts side, do you think there is going to be any impact with regards to Oracle and PeopleSoft getting together potentially, swaying people more towards the outsource solution and also, along those lines, is it possible that sales cycles are taking a little bit longer as companies evaluate potentially more comprehensive HR outsourcing solutions, as opposed to onesie, twosie outsourcing solutions?

I think those issues are more behind us than they are in front of us.

I think a lot of the world has evaluated in-service solutions vs. some of the ERP solutions and are moving towards outsource solutions in a very positive way.

So I think we are feeling good about that issue.

That doesn't mean that things may not change.

That article in PeopleSoft may not come out with something new.

You always have to watch what is going on competitively within the world; but, overall, I think the service solution is holding its own very very well these days.

On the small business side can you give us an update with regards to your efforts with the accountants?

And also where things stand with Microsoft?

In terms of the accountants.

We are continuing to work a referral channel very hard and very well.

We continue to increase the services that we are providing to them and the outsourcing that they are providing.

We are continuing to generate leads from them.

In terms of the Microsoft venture, we are still in a very early stage where we have a number of test clients and where (indiscernible) I've heard doing very very well with those test clients.

One last housekeeping item.

Karen, you mentioned, I just didn't hear it correctly.

Did you say you had a realized loss on the funds held for clients?

Yes.

How much was that?

$4 million.

Kartik Mehta, Midwest Research.

I wanted to ask you, Art, about CPA strategy, for the small payroll business.

How that's performing and if it's meeting your expectation or maybe exceeding your expectations?

No, actually, I was just referring to that a second ago.

But I believe that it has been very important for us to work this channel, to work this channel very effectively.

I think we have made a tremendous amount of progress over the last couple of years.

I think we are extremely pleased with our progress.

We are extremely pleased with the number of incremental referrals that week are getting and the relationship that we are building with the CPA community.

So we are feeling very positive about it.

As you look at fiscal '05 and new sales have improved double digits for the payroll business, is that because the economy is improving?

Or is that maybe because you're marketing the product differently in any of your segments?

Yes, yes and (technical difficulty) more salespeople and it is because our product sets are being valued highly in the marketplace as we continue to improve them.

And that the value added that we bring to our clients is creating an environment that -- this is a good thing for us to do at this point in time.

I think it is a combination of a lot of things and certainly those are some of them.

So would you, one last question -- would you anticipate new sales being double-digit for the next two or three years?

Or is this because the previous years were a little more difficult?

Or is the formula set for double-digit growth for new sales for at least the next couple of years?

It is hard enough as you are learning, as you listen to us, for us to predict the quarter much less six months or a year or multiple years in terms of where sales will be.

What I believe is that as long as we have good economies to work on, that the strategies that we have in place which, as I mentioned earlier, will include increasing the number of salespeople as well as increasing their productivity while we continue our product leadership initiatives and investment in products that will bring incremental value added to our clients.

I believe we should have a sustainable double-digit growth capability for a number of years.

Does that mean that it will be a straight line or it will be that way forever?

The answer is obviously no.

But certainly I don't see anything that would preclude our believing that at this point in time.

Karen, on the (inaudible) controlled (inaudible) are you able to give anecdotally what it was per segment or how you saw it in each of the segments?

Yes as it's been it's been even healthier growth in the smaller business segment without -- we don't have those precise numbers by segment but it was close to 3 or more percent on the low-end and probably closer to 1 percent on the high-end and 2 percent right in between.

Thank you very much.

Bryan Keane, Prudential.

The retention continues to improve.

Could you just talk a little bit about what that might be?

And is there just less competition in the marketplace and less pricing pressure?

Our retention was very good.

Again we recorded the year-to-date as .7 percent growth.

Exactly a full point ahead in the second quarter.

We are always cautious at this point of the year of projecting what the full year is going to be because our third quarter is our really telling quarter in terms of how the full year will be as clients, a lot of clients if they are going to change they would do it after the calendar year is over.

But I think it's just -- I think we have improved our service in all of our segments.

We are very pleased with our retention improvement in small business.

We have been hanging in really well and strong for a while in majors and nationals.

We have done a terrific job in the PEO segment in terms of increasing our retention.

So I think it has just been a reflection of we are doing a better job in all of our areas and I don't know that we have any evidence of less competition driving our retention up.

I especially would want to focus on our client services aspects.

We spend a lot of time both on systems and on people and we have a group of people within ADP who perform miracles when it comes to service.

So we are right now in our busiest period and I think the great accolades go to these people who are able day in and day out basis to provide the kind of service that makes clients want to stay with us for an extended period of time.

And we are we reaching levels with client retention that are very gratifying to those of us who have been around here for a long time.

While there could be, as Karen said and as your question intimated, a lot of different factors in it.

The overall quality of the service is really the thing that is the primary driver.

One other thing I should have mentioned earlier too.

As we do more bundling of services and we were talking about bundled services earlier.

I was talking about time and labor management as one of the particularly strong products in addition to the payroll and tax.

As we bundle the services together, our retention has been going up for those clients that are in with us on more products.

It really does help the retention and that has been a factor in our increased retention as well.

I just want to ask on the overall picture, margins seem a little bit depressed due to the environment we were in.

Is there any reason why we wouldn't believe that margins could get back to the low 20, 22, 23 percent in the future?

I think we have all of our businesses are scale business and I would see the employer services now that we have gone through some investment periods and we're in a better growth cycle continuing to get increased margins with the scale.

In brokerage services, we have looked at a number of times and been asked a number of times, I really don't see us being able to get back to the margins and brokerage that we had say 3, 4 years ago where they were really much higher, before the consolidation had happened in the industry, and the compressions and so on.

So I would say that now on the brokerage side because it's a different set of clients, it's a different business.

Then as we try to grow some of these other businesses and comprehensive outsource and I think the nature of those businesses have some labor components that are not as prevalent as some of our other pure service bureau products.

And that will change the way we look at our margins going forward overall.

Then last question is, Art, any latest thoughts on increasing the dividend?

Basically the period in which we do that is (indiscernible) January 1 dividend payment.

So we have recently increased our dividend payment.

Without my precluding what our board might do at any point in time, I believe it will be an issue we will address again a year for now.

David Togut, Morgan Stanley.

Can you provide some observation on the competitive environment?

It seems like a number of your principal competitors are in transition, rentals and rent -- how is this affecting client decision making process, sales cycles, pricing and so forth?

Yes, it is hard for me to specifically identify what goes on in the market with some of the behavior of our clients.

What I can tell you is that we are doing very well in the dealer services business in terms of market share gains and in terms of competitive gains.

We are feeling very positive about where we are.

Similarly, you have heard our numbers in the employer services world and we are equivalently feeling very positive there that the market is being very receptive to our needs.

Whether it is also a negative reaction running away from someone else, that is not something I can really comment on.

Karen noted that pricing had picked up (technical difficulty) -- during the quarter.

Is that a reflection of perhaps an easier competitive environment or more the buoyancy in the economy?

I am sorry, Art -- I don't know that you heard the question.

The question was the 2 percent that I was mentioning in pricing and is that a reflection of competition or just a buoyant economy.

I think the 2 percent is the way we looked at the total, our pricing measures that we generally take in the beginning of a fiscal year.

And so that number has been -- maybe it was a little bit under 2 the last couple of years.

Little bit weaker and certainly in the last two years under 2, but the 2 percent is sort of -- I wouldn't look at it as a quarter, David.

It is sort of a full year number in terms of price increases that we have, our pricing measures that we have taken.

Some of this is just anecdotal, that we're not hearing the pressure and that is related to the economy in terms of clients that are just feeling their own pressure and unable to continue unless there is something done, but that has really been -- I have not heard that in a couple of quarters now.

I think it is really an issue from a year or so ago.

I think the economy has helped a lot.

Finally, on the reinvestment of free cash flow.

It seems like the pace of share repurchases slowed down.

The level of acquisition activity is not all that high.

Are you waiting on something in the pipeline or what is your latest thinking?

Our thinking really hasn't changed.

We continue to prioritize.

Investment in our business is our highest priority.

Acquisitions, next.

And then, treasury shares as our next option.

We continue to generate cash well and we will continue to act on our beliefs along those priorities.

Brandt Sakakeeny, Deutsche Bank.

Or not.

I don't know if there is a question.

Is Brandt there?

Karen?

Can you hear me now?

Yes.

The question I have, Art, actually goes back to the brokerage business.

I guess, going back to this revenue per trade issue, if you look at a lot of the online data, we have seen -- from the online brokers, it looks like that resell component did pick up a fair amount last fall in October, November, December.

So I am just curious.

Is there something more than the retail mix here happening that's exerting some marginal pressure on that pricing?

It is really the tiered pricing for the large institutional price an large institutional providers.

Those two items.

It is the retail mix and it is the tier pricing.

It is the combination of those two that are the primary drivers of the lower revenue per trade.

Thanks.

Everything else has been answered.

I appreciate it.

We are at this point concluding.

We are trading at $43.24 as of a few moments ago.

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

That does conclude today's conference call.

Thank you all for your participation and have a great day.