自動資料處理 (ADP) 2005 Q4 法說會逐字稿

Good afternoon.

My name is Shannon and I will be your conference facilitator.

At this time I would like to welcome everyone to the Automatic Data Processing Incorporated fiscal 2005 earnings conference call.

I would like to inform that you this call is being recorded and all lines have been placed on mute to prevent any background noise.

After the speakers' remark, there will be a question and answer period.

If you would like to ask a question during this time, simply press star then the number 1 on your telephone key pad.

If you would like to withdraw your question, press star, then the number 2 on your telephone key pad.

Thank you.

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

Ma'am, please go ahead.

Good afternoon.

I'm Karen Dykstra, Chief Financial Officer for ADP and I'm here as always with Art Weinbach, our Chairman and Chief Executive Officer and we want to welcome you to our fourth quarter 2005 conference call.

Earlier today, we reported 10% revenue growth and $0.44 earnings per share for the quarter which represents 22% growth over last year.

For the year we also had 10 % revenue growth and reported $1.79 per share or 15% growth over last fiscal year.

Before we get started with the call, I'm going to cover a number of items for clarification.

The first is I wanted to mention that we had in the fourth quarter of last year about $0.03 per share of non-recurring charges in our -- in our results.

Mostly they were in employer services.

This year, although we had some restructuring charge, they were about half of that amount and they were primarily in dealer and claim services.

We also, as you say in the details of the release, had about $0.01 a share in losses in the portfolio.

That would be about $.03 per share for the whole year.

And as you know as interest rates have risen, the portfolio has more of a mix of unrealized gains and losses in it and especially in the last couple of weeks as --as rates have moved our portfolio moved what was as -- as we ended the year an unrealized gain position of about $30 million is now a net unrealized loss position of -- of $50 million or so.

So this reflects the higher interest rate environment compared to what's in our portfolio and means that we will earn higher interest rates as we reinvest the funds.

And then getting back to the results, before I talk about the -- the guidance, just -- we had a terrific quarter.

Overall, we're feeling great about our momentum particularly in employer services, where our sales results were very strong across all of our segments.

We had a real strong finish on the sales side.

We had another year of good solid improved retention.

So, overall, I think the comments about the -- the results for the quarter and the year are that we feel very positive about it.

And as we look at our guidance for fiscal '06, it's worth clarifying in -- clarifying again, option expensing and how that plays into our guidance.

So we will be adopting the stock option expensing in fiscal 2006.

Had we adopted in fiscal '05, our results would have been lower by about $0.22 per share.

The $.22 per share is about $0.02 higher than our previous forecast of about $0.20 per share and this difference is reflected in our fourth quarter.

So, as you know for fiscal 2005, and prior years, that amount is disclosed in our footnotes and not in the body of our financial statement.

However, as we move into fiscal '06 and we begin expensing stock compensation plans, our forecast includes now $0.18 to $0.19 per share, which is lower than the $0.22 per share that we had in '05 because we reduced number of option grants as do associates starting in fiscal '05.

And again, that number will re -- be reported within our guidance, within our earnings, and as we go through the year, we'll obviously share with you the -- provide the 2006 numbers with and without option comparative to 2005.

Some highlights of our -- of our guidance for fiscal 2006, our revenue growth is going to be in the high single digit range, slightly lower than it was in fiscal '05.

Mostly because we're not counting on the extra point or so of growth that came from foreign currency this year.

ES has the strongest growth in -- in our plans with 9% overall, including about 10% growth plans in the -- in the U.S. and that includes a double digit sales forecast for '06 and another year of strong improved retention.

Our brokerage and dealer services revenue forecast are both in the mid single digit growth range and claims this forecasted to be at the high single digit growth.

Our earnings per share growth at 15 to 20% forecasted for next year is based on at least 1% margin improvement in each business.

It includes improvement in our interest income.

A slightly lower in -- effective tax rate, and as usual, we don't plan per share repurchase, although we normally do share repurchases during the year.

One final point about the -- the guidance, and it's around our tax rate, clarification, a rate without option expensing, in 2005, it's been 37.1 all year, it would have been around 36.9 next year, slightly favorable based on the favorable mix of -- amongst tax service system, but with the stock option expensing, the rate would have been 38.2 % in fiscal '05, and should be about 37.7 % in '06.

All that sounds very confusing.

But the -- the -- the net of it is that the big increase in -- in the rate is because of stock option expensing,and the decrease that we're showing now, if we put the stock option expense in both years from the decrease from '05 to '06 was caused by the net option expense being lower than it was in '05.

So hopefully you got all those numbers, be glad to repeat the later if you've got any follow-up questions.

But getting back to my opening comments, we feel really very good about the -- the quarter, the way we ended our fiscal '05, and are -- are very confident with our forecast for fiscal '06.

And with that, we can start the call.

I am going to pass this all back over to the conference operator.

I'm -- I'd like to say, as always, we have some forward looking statements and involve some risks.

Some of these are discussed in our filings with the SEC.

And as usual, I'll ask if we could try to keep our questions to one at a time.

There are about 100 people on the call today and at this point I'll turn it back to the operator for questions.

(OPERATOR INSTRUCTIONS) We will pause for just a moment to compile the Q&A roster.

Your first question comes from Kartick Mehta with Midwest Research.

Good afternoon, Karen and Art.

A question on the ES.

Your pays per control continued to improve and it looks like it is 2 % again for this quarter.

We continue to hear on the news that large companies are laying off -- laying off employees.

That doesn't seem to be having an impact on your business.

Is that an accurate statement?

And if so, may -- maybe you could talk about why?

The -- first of all the 2 % number that we talk about a lot of times is basically what we call same store sales or if you take a specific account at the beginning of the year and measure the same account at the end of the year, how many additional employees do they have.

And that's about 2 %.

And that's mostly in our major accounts.

Really our account -- our auto pay product, where we get that.

But as we look across all of our sectors, we're currently showing growth in all of our sectors, including national accounts.

So that comment would have been true, I think nine months ago, I'm guessing, I don't remember whether it was nine months or 12 months or -- or ago, but it was true up to a point, but that turned a few months ago and has been positive for a while.

So we are showing positive improvement in pays per control in each of our segments today.

Your next question comes from Greg Gould with Goldman Sachs.

Thanks.

Karen, I wanted to clarify the -- the guidance.

It is based on the -- the pre-tax yield at about 3.5 %, correct?

Rising about 30 basis points?

The -- the pre-tax yield of 3.5 is for fiscal '05.

We had a client fund yield of 3.5.

If you look at the -- as we look forward to '06, there will be a little over 30 basis points improvement in that -- so call it 3.8.

For the clients fund portfolio.

One thing that -- that you'll note in -- in the text of the -- of the contents of the press release is provided a little bit more detail than we previously had and some of that more detail was around average yield on client funds and average yields on corporate funds, so what we're talking about here is the average yield on the client fund portfolio, which should be around 3.8 % next year.

Overall, the combined client and corporate fund portfolio, as we look at next year, should be in the area of 3.7 %, which is also about 30 basis points higher than it was for fiscal '05.

Your next question comes from David Grossman with Thomal -- Thomas Weisel Partners.

Thanks.

Karen, could you perhaps speak or maybe Art, on -- on your comments about the margin expansion?

Is that both with and without the options, and if you could, just maybe review what some of the primary drivers of that expansion will be?

Year-over-year?

Yes, the margin expansion comments are -- are without the options.

And we talk about margin improvement in each of our major businesses.

You'll -- in -- in our release we talk about that the business units will not have the option expense in them.

So when we -- when you see it in our fiscal '06 it will be in the other category.

You won't see it in ES brokerage or dealer services.

But what's driving the improvement in each of our businesses, primarily scale, across the board, in the businesses, we have natural scale in the business, and particularly pleased in employer services where the mix of business where the growth is coming from is actually lower margin business, high growth, but lower margin, and so the one-point margin improvement is on top -- it is overcoming the fact that the mix of the business has the lower margins in it.

Like the PEO, which has a -- a pass-through component in it.

So it is coming from scale.

In -- in dealer services, for example, we are getting past some of the additional implementation fees and acquisition integration expenses that we had in '05, that we will be largely past as we get into '06.

And in brokerage, it's -- we've been investing, we've been pruning some unprofitable businesses over -- going back last year, but it's just a reflection of the scale of the businesses, and we, over the years, we've -- the last couple of years, I think we've stepped up some of the investments that we've made and now that's somewhat flattening out and that's that statement holds true across all of our businesses.

We've talked the last couple of years about incremental investments and while we're continually making them and we'll -- we'll always make them, the sort of excess ones that we were making over the last couple of years played in the margin.

So, you'll recall our margin actually dipped over a couple of year period, and now it's kind of moving back to a -- a more sustainable scale.

Level.

We have a follow-up question from Mr. Greg Gould with Goldman Sachs.

Thanks.

I accidentally got cut off.

I apologize to come back in.

On just to circle back on the float issue, we're basically assuming the yield stays relatively flat with what -- what you just reported.

But rates seem to be going up so it looks like this is a conservative view.

Is that right, Karen?

Or are you factoring in more losses from the portfolio as well?

Well -- we're we're factoring in at least a 30 basis point improvement in the yield year to year.

So we are factoring in -- in that the current environment is improved.

So let me give you the -- the data again in case I misspoke the last time.

Our overall yield in '05 was 3.4 %.

That's a combination of corporate and client funds.

We are anticipating somewhere in the area of 3.7 % overall yield next year.

Specifically, the client fund yield will be 3.8 % in that range next year, compared to about 3.5 % in -- in '05.

And obviously, the corporate yield is -- is somewhat lower.

So we are factoring in the -- the improvement in the interest rate environment.

We do not normally plan losses in the portfolio within that guidance.

Okay.

Thank you.

Your next question comes from Bryan Keane with Prudential.

Hi, good afternoon.

The new sales growth up 16 %, that kind of jumped out on me.

Obviously, that's one of your all-time highs, or at least over the last several years.

I guess is that -- if you break down, it looks like comprehensive outsourcing is doing well, beyond payroll, but just looking for some color on that.

And then my second question is just on retention.

Client improvement continues to be part of the formula going forward, can you talk about some of the things you're doing there?

First, on the sales side, prior to the time that we hit the -- the post Y2K period and the slow down we had been compounding out our sales at about a 20 % growth rate a year.

Having said that, it's been a number of years now since we were able to get back to the type of growth that we had for the whole year in '05 and certainly the 16 % was -- was a good quarter.

I think the thing that makes us feel really the best about what we're looking at is this isn't isolated.

It's not a few large transactions or a few large deals that are generating the results.

Each of our business units has -- had this good double digit growth.

Certainly for -- for the year.

And so as we gain momentum, we also have that momentum going forward.

Our PEO business was probably the -- the most stellar performer among those with sales growth of well over 20 %.

But overall, it was a very balanced -- very balanced growth, and a -- and an excellent -- excellent overall performance.

On the retention side, our -- we're -- we're just very proud of what we've been able to accomplish in our client service, in the -- we sent out these report cards to our clients, we call them client surveys, and we get continuous feedback, every month, on an important percentage of -- of the total number of accounts that we have and those scores have been going up.

And with it our retention has been going up.

So I think there is a direct correlation between the very significant focus that we've had on service and on an improving service and what the results are.

It's not an issue of a single new thing that we're doing.

It's not a -- a single new system or a single new methodology.

It's really outstanding execution across a lot of people all the time that makes it happen.

Okay.

Thanks.

Your next question comes from Cindy Shaw with Moors and Cabot.

Thank you.

I wanted to dig in on the margin issue in the portfolio a bit more.

On the margins, the gross margins have be -- been declining on a year-over-year basis for all of fiscal '05.

And even if you back out the -- actually more so if you back out the contribution from the float income, if you could comment on where you see that going, and -- and what would drive any changes?

And then also after that, I'd like to dig in on the portfolio just a bit more.

Cindy, can you help me out with what data you're looking at to help us, cause we're -- defining gross margins, with and without the portfolio, what numbers are you looking at just so I -- I understand your specific question?

Yeah, basically, I assume that the float income on client funds is 100 % margin, which is probably not exact but close enough, and backing that out to get to the gross margins on the balance of the business without the float income.

But, even if I don't do that and just take reported gross margins they have been declining.

Our -- our overall pre-tax margin, and as a way we look at it, then it may not be exactly the -- the way that you're looking at it.

But our overall pre-tax margin, I believe because we finished the year at 19.7, up from 19.3 last year, for the quarter, we were 17.9, up from 16.2 last year.

That's the way -- where we look at the -- the overall pre-tax margin.

Yes, slow, does drop primarily to the bottom, it's not 100 % as you say, but we do look at that as a -- as a driver and that -- and there was a significant increase in float revenue through year to year.

But in terms of overall balance, the margin -- or pre-tax margin is increasing now.

We don't normally look at our -- our margins and say take out client float.

Because that is a -- a significant and integral part of our business model and the way that we price on employer services so we wouldn't normally take it out of the equation.

So I -- I'm not sure what else to add to that comment.

Art, do you want to add anything?

Yes.

I -- I think it's -- I think about it very differently.

So let me spend a second trying -- trying to explain it.

With -- with most of our clients, and this is certainly all of the large clients and a lot of the clients in our major account, everyone understands the concept of float, understands how interest is charged on float and it's really an alternative of do we increase our fee or do we charge -- or do we earn the float.

We could increase the fee and pass back part of the float to them, so there really is an alternative in the market, and it's -- the market is remarkably well educated in terms of way this has worked.

Perhaps that's not as true in the low end, and the small business arena.

So when I think of the float -- or the interest income that we're getting on the client funds, basically as just an alternative to fees.

So when we work on models and we work our business models, those models are based on -- on both of those together.

They're -- they're clearly not separate.

As Karen was saying, it's part of the way we think about pricing and it's just an alternative way of pricing the product.

So we don't -- we don't look at it, or at least I certainly don't look at it by pulling out interest and saying oh, no, no, no that's separate and we ought to be managing all the other pieces.

We -- we manage it together as a single bundled revenue because that's the way -- that's really the way we think of it.

Maybe I can follow up with you offline on that question then.

On the portfolio, a couple of more pieces that haven't been covered, any sense for what the balance on the corporate portfolio will be over the coming year?

A clarification, you'd said something about portfolio losses not being in guidance, so I was wondering, if -- if I understood that correctly, and also the duration on the portfolio?

Okay.

Is -- the duration is somewhere closer to 2.3 years, it's a little higher than it's been in the past year or two at this point.

The corporate balances -- normally we have, call it a ballpark average of $1 billion free cash flow.

So it -- it largely will depend on what type of acquisitions, share repurchases, and such that we do in fiscal '06.

We normally don't have a specific number to guide on the corporate balances, but think about it as a -- a -- a -- in -- in an average year, we'll have about $1 billion additional free cash flow.

The yield, perhaps I -- I can give you the yield on corporate funds. 2.9 % was the average yield in '05 and we're anticipating an increase to about 3.4 % in fiscal '06.

And that is on the investable balances, was -- was about 3, a little under 3.5 billion in -- in fiscal '05.

So, to make sure I understood you correctly, and I -- and I -- I'm not following you, the corporate investment balance, if I understood correctly for fiscal '05, was about 3.2 billion for the year, you're not saying that that's going to go up by 1 billion in fiscal '06, are you?

I -- I -- we -- we don't have specific numbers to -- to provide at this point.

But what I'm saying is on average, our free -- our free cash flow will provide about $1 billion in balances and it will largely depend on our -- if our -- if our cash from operations is abou -- is above 1.5 billion and we spend 250 million on capital expenditures, which by the way is about what our forecast is for next year, and in round numbers, 350 million on -- on dividends, and then factoring in share repurchases and acquisition, the share repurchase and acquisitions are -- are the numbers that fluctuate more than that we don't have specific guidance on.

But I -- I believe it will go up.

But at -- again, it depends on the share repurchase and acquisition activity.

Are you saying it could go up by $1 billion to more on the order of 4 plus billion, balance for the year?

If we did nothing in the treasury share area, if we didn't change any of the other numbers, didn't change our dividend policy or if we didn't increase capital beyond what our current plans are, the answer is yes.

We generated -- we -- we're going to generate $1 billion, a billion plus, I don't want to give a number, but over a billion and a half in -- in free cash flow and we spend some of it on some of these things and so you are going to average somewhere around a billion in left over if do the optional acquisitions, treasury shares and things like that.

Let -- let me also clarify that this 3.2 that we we're talking about is divestible balances.

It's not -- it's not what we consider at the end of the period, if you look on our balance sheet, you won't find that in the cash balance at the end of the quarter.

It does include leveraging activity, and we -- we leverage the portfolio and have borrowings during the period and -- for -- for many days during the quarter.

So it is an investable cash number.

It is not the quarter end cash number.

So, I just want to make sure everybody understands that.

Okay.

And that you could clarify, if -- if losses are in the guidance, with the loss balance up, it -- it seems hard that -- to imagine that you might not be taking some next year?

Yes, loss balances are not within -- are not within our guidance.

Our net position is about $50 million right now as of -- as of yesterday.

That includes some gains and losses in -- in the various instruments.

And as the interest rates move and as more of the portfolio turns to a loss position then anything that we do to -- to position for cash needs and any kind of maintenance on the portfolio would generate some losses.

That's -- that's typically what happens.

So, but -- but right now, our guidance does not include the -- any losses in the portfolio.

It often doesn't include the reinvestment if we were to move some things around at the higher interest rate, should we -- should we do that.

Right.

Thank you very much.

Okay.

Your next question comes from Josh Rosen with Credit Suisse First Boston.

Yes, thanks.

Just wanted to follow up on -- on the new order of growth in the employer services division and -- and first just ask just what -- what gives you the confidence did in -- in maintaining that double digit levels as you get into the fiscal '06, particularly anything that you've done on -- on adding sales resources, et cetera?

And then second, just very related here, just curious when you look at '05 performance, you guys in the past have talked about the core payroll product and then I think you guys used the terminology of beyond payroll I'm just curious what the -- the growth mix looks like there?

Yes.

We're -- we're very pleased with our performance this year that -- that we've shed and we're -- we're very comfortable as we provide the guidance as we look at next year.

What's -- what's happened basically is we've got into a more consistent adding of sales force over the course of fiscal '05, and continue to do that into fiscal '06.

Our average head count increase in the sales force in '05 was about 5 %.

It's probably going to be in the 7 to 8 % range as we look at fiscal '06.

So we're comfortable that we're adding the right -- the right level of staffing.

We also are counting on some level of productivity improvement, call, it , the productivity improvement that'll come with more seasoned sales people plus the -- the penetration and the -- the success of our product, and our products and especially the ones that we mention are doing quite well and we're comfortable in that that thing will continue.

The growth coming from PEO, for example, the time and labor management and those products where we're -- we're quite comfortable that the productivity will come and the -- the head count increases will be well utilized.

So, as we look across the segments we are seeing that momentum in all the segments.

It's not just spurring from one area and so it makes us comfortable as we look forward.

I want to add to that in our international area we also had after some slow years, had a very good year that we finished in '05 and we're very optimistic in '06 also.

So even though the -- Europe, which is the predominant part of that, the economies haven't rebounded as well as we'd like.

Our -- our product positioning and our sales force positioning is -- is going very good right now.

So we're confident there.

I think there was a follow-up question that you had about the -- the mix of beyond payroll and -- and payroll.

Our -- just to give you some statistics, our revenue growth for the year, fiscal '05, was about 4, 5 % payroll and tax, 17 % beyond payroll.

Those are U.S. statistics by the way.

And as we look at the new -- the combination of new sales coming in the door, it is approaching 50/50 in terms of beyond payroll products versus the traditional payroll and tax.

Okay.

Thank you.

Your next question comes from Rod Bourgeois with Sanford Bernstein.

Yes, I wanted to hone in on the brokerage business.

It looks like your strength in the investor communications by and in terms of pieces delivered offset the -- the weakness in the brokerage trading volume.

Can you -- I guess -- a couple of questions looking forward, is the strong volume growth in the investor communications part of the business, is that sustainable?

Or what's the outlook for '06?

And then also in the clearing business, do you still expect to break even in that unit by the end of fiscal '06?

Yes.

I -- I think your -- your assessment is correct that the strength of the investor communications business offset the flat environment in -- in the back office, was actually decline overall in revenue for the fourth quarter in the back office of a couple percent while the investor communications group grew about 7 % for the quarter.

And that is the way we're looking at it as we look into fiscal '06 and the guidance, the trade growth, as we think about the next year, trade growth will likely be offset by a -- a decline in average revenues per trade, resulting in another flat performance revenue performance in the back office.

Investor communications, we're expecting more revenue growth, call it 7 % range of revenue growth, and it's coming from about 6 % growth in stock records, so the number of people owning the equities can be communicated with, and it came this year, the -- the better performance came from a lot of special mutual fund activity, re -- resurfacing of meetings and -- and some non-recurring kind of mutual fund meetings.

So as we look forward to next year we're not necessarily counting on that to repeat.

Some of it we -- we -- we are expecting to repeat but not the kind of growth that we saw in that activity.

We are thinking that the stock record growth will be about 6 % again.

And -- and that's why we get to a -- a mid single digit kind of guidance overall for brokerage next year.

The other part of the question was about clearing and whether or not we would be achieving a breakeven by the end of '06.

I can tell you our current plans certainly still have us on that path.

However, there's a fair amount of uncertainty given what's going on in the industry right now and certainly the Ameritrade, TD Waterhouse potential transaction are -- are agreed upon transaction would be one of the things that affects us because part of that plays into our clearing business.

So, I'd -- I'd say we have to wait and see, to see how all of that transpires.

But there's nothing that's occurred in our business.

There's nothing that you should see in the reported number, for example, that would take us off of the concept that we would be approaching a break even as we exited '06.

Your next question comes from Gary Bisbee with Lehman Brothers.

Hi, thanks.

A two part question, if I could.

Looking at the pre-tax margins, and specifically the employer services, it -- it had a larger sequential decline into the fourth quarter than we've seen in the last -- in the last couple of years.

And I guess I wondered if there was any real reason -- reason for that drop off in the margin there?

And then the second part of the question, going back to an earlier one, I realize you may not think about the gross margin as a primary factor, but it looks -- it looks to us like it was the lowest quarterly gross gross margin in seven years, and so I was just wondering if there was anything specifically -- maybe it is a mix shift issue but some reason that the gross margin was -- was so weak this quarter?

The employer services margins were actually lower last year at the same time, and some of it was some of the one time charges that I talked about, so the overall pre-tax margin percent was 14.5 %, in the fifth year compared to 12.1 last year.

It is generally somewhat of a lower margin quarter.

What happens in the fourth quarter is we'e busy hiring up some people, a lot of sales people, for -- for the upcoming year.

And we don't necessarily have the same productivity then in the fourth quarter than we do, so we're in sort of over hire -- hiring up mode on the sales side.

We also typically have, at least in the last couple of years, a lot of our kick off meetings at the end of the year and -- and those kinds of organizational planning and kick off events that come into play in the fourth quarter, too.

Which somewhat drives it down and so last year, we were a little bit lower.

This year, it's still a lower sequential quarter than we normally have but I --I wouldn't read anything into it.

There's nothing more unusual than that into it.

The third quarter is typically the biggest with the -- with all of the year-end processings, W-2s and such.

As you look at, again, the overall margin, if you're talking about gross margin for ADP overall, the fourth quarter of 17.9 (ph) was a 1.7 % higher than the 16.2 we reported same quarter last year.

I guess that's a -- that's a pre-tax number?

Right.

But -- but that's fine.

If you think about it that way.

But if I could just ask one follow up.

It 's sort of a macro question.

Given generally less attractive growth prospects and -- and profitability and financial returns in the non-employer services businesses, would you guys ever consider spinning those businesses off, or -- or are there real reasons that you think having this portfolio together is in the best interest of shareholders long term?

Thanks.

I -- I think we have to be careful of ever saying nothing -- everything is permanent, or nothing -- nothing would ever happen, but we're in businesses because these bus -- businesses have very common characteristics and they're all recurring revenue base, they're all information services.

They're all computer based.

They all have direct sales capabilities.

They -- they all play at reasonably high margins as opposed to low margin businesses.

They all have a very heavy service component.

So there are techniques and things that we can do both in the technology and in terms of some of the processes that we follow that we think cross the businesses that we have.

So therefore, we are -- we very much like our portfolio, but I again, I -- nothing is forever and anything can happen, so I don't want to lock that comment in to -- to say nothing would ever occur.

Okay.

Thank you.

Just -- I want to go back on that first question, because it's come up a couple of of times now on the gross margin, and as I expressed earlier, I -- I don't focus on it that way.

But if there is an implication or a question as to whether or not there is something really unusual going on in the business that's -- that's reducing our margins, in any significant way, the answer is no.

It's just there.

There's no unusual occurrence.

It could be that there was an additional investment in one place.

It could be a -- a ramp up of additional sales as Karen was saying.

But there's nothing that I would call very unusual or something that I would think would be -- would be of concern.

Your next question comes from David Togut with Morgan Stanley.

Thank you, Art.

Could you comment on pricing and ES for fiscal '06?

Yes, we have planned about a 2 % price increase for '06 in employer services.

That's consistent with where we've been over the last two years.

I think probably the more important part probably what the question really related to was what the overall environment is right now and we are not feeling significant price pressures within our market.

So I think pricing is probably as stable as it's been for -- for an extended period right now.

The -- or -- or the value of our products is standing very well within the market.

And -- and secondly based on our estimates, have you about 1.1 billion of excess free cash flow after Cap Ex and dividends.

So my question is, if you don't have a significant acquisition opportunity in the pipeline, and perhaps you do, what is -- what is the probability that the board would consider a significant increase in the dividend?

Because, certainly that excess free cash flow should be there on an annual basis, given the consistency of your business.

We -- we've addressed this question many times in the past and we will continue to address it and ultimately it is a board decision.

But as we prioritize where we'd like to spend the so-called excess cash balance that we -- we have, our first priority remains the strategic acquisition arena.

And so we're working hard to find the right places where we can make those investments.

The second area has been treasury shares and we will continue to look there.

We have increased our dividend, I think we -- we brought up the payout ratio to about 33 %, I think that was two years ago, or last year, and so it is something that we look at, and we'll continue to look at, but it would still be third among those priorities that I just outlined.

And just finally, just revisiting your comments Karen on the tax filing float yield, what -- what assumptions drive the 3.8 % overall for '06?

Are you looking at the current yield curve or are you looking at other metrics based on what -- what you think the fed chairman will do?

And any thoughts you might have on just the duration of the instruments that are rolling over?

Because, that's a piece of the puzzle we don't have in the financials.

We don't know the duration of the instrumenting rolling over, these five year notes rolling over at lower rates or two year notes rolling over at higher rates.

Right.

The -- yes, we're -- we're -- we're not trying to second guess what the -- what's -- what's in the market right now in terms of what we anticipate the -- the rates are going to be, so we do use current yield curves.

Our plans were probably baked about a month ago and there's been some movement in the yield curves in the last 30 days, but we -- we generally lock in on the plans and say whatever the yield curves are, that's what we're going to anticipate.

Our duration rate, which right now is up 2.3 years, we -- we expect that to be about the same as -- as we look going forward into next year, David.

It -- it's probably going to be in range.

It could fluctuate a little bit up or down but I -- I would say it is probably going to be in the 2.3 year range going forward.

We -- although I don't have specifics for you right now about the average duration rolling off, I think we -- we estimate about 5 billion of investable funds will come forward in fiscal '06 to be reinvested at the -- at the current yield curve.

Thank you.

Your next question comes from Greg Smith with Merrill Lynch.

Hi.

Karen, can we get the organic revenue growth in the quarter and for -- for the full year?

Yes, the -- the additional metrics that were in the press release this -- this time around, just -- you might have missed it in a table, what we have provided in the press release, the internal revenue growth for at least our -- our three main businesses, employer, brokerage and dealer service, so that's one.

But the internal growth for the -- for the ADP consolidated for the quarter was about 9 % and about 9 % on a year to date basis.

And the only other one that we didn't really provide was, I guess, claim services which was somewhere in the area of 2 or 3 %. 3 % internal growth for the quarter, 2 % for the year.

Okay.

Thanks.

And just one other question.

Can you talk about the comprehensive outsourcing business, how you see that rolling out?

And are you seeing competition increase in that area?

Thanks.

It's interesting, as we look at the comprehensive outsourcing space it continues to be very active and we continue to have a significant number of prospects.

The -- the area that's getting extremely competitive is the very high end of the market.

And we're really playing a level below the very high end of the market in terms of where the bulk of our opportunities and the bulk of our deals are coming from.

So I -- I would say that most of the competition that you're really referring to is occurring in companies with 15,000 and more employees.

And while we're in that area, in terms of a number of our accounts, we're really feeling more activity as we go at that number and below.

And -- and just quickly, when -- when one of your customers decides -- one of those larger customers decides to maybe go with a different third party for a comprehensive outsourcing contract, do you typically lose the payroll piece?

Or -- or are you able to retain that?

It varies depending upon what the relationship is.

So with a number of people who play in this area we will continue to provide the payroll.

It's interesting, even in the days when the -- if we thought the competition was the ERPs, the enterprise resource providers, we kept our payrolls in many of their human resource systems.

Now as we see service oriented people, a number of them still combine with us or still use our -- our payroll system.

So it really depends.

It -- it's -- you'd have to know each individual case in order to really get a direct answer.

Thank you.

Your next question comes from Pat Burton with Smith Barney.

Hi, it's Rob Tung for Pat Burton.

With some of the trouble that one of your com -- your chief competitors behind them, I was wondering if you could outline any change in the competitive market?

I think the competitive market is -- has remained competitive.

How does -- how's that as a -- a way to express it?

Certainly, we have different players in different markets.

Each of those markets, though, has remained competitive.

And even though we -- some of our competition has been weakened a little bit over the last period, we're -- we're talking about people who have been in the business for a long time.

And they have ups and down, but they will rebound and so I -- I would not say there is a significant change in the competitive environment.

Although I certainly -- our sales results would say we're doing pretty well.

Okay.

And I -- I may -- I apologize if I may have missed it but what -- what are your tax rate assumptions if fiscal '06 without the stock option expense?

With -- without the stock option expense, they would have been 36.9.

Although you'll never see that reported in -- in fiscal '06 and -- and the actual results will be 37.7, which will be the rate with option expensing.

Okay.

And just finally, in -- in -- in looking at your strong sales growth -- employer services sales growth numbers in -- in -- in the recent quarter, I guess 16 % and 13 % for the year, and then looking at your, I guess, ni -- 9 % organic revenue growth assumptions in '06, what -- what -- in terms of the disconnect, the linkage is there, could you just outline some of the puts and takes to arrive at -- at that lower revenue growth number?

No, there's not a direct correlation between our sales number and the revenue growth number.

They really are -- are two totally different metrics.

The sales number for us represents the first 12 months of new business or additional business.

The new business from new clients or additional business we get from existing clients.

And it's just -- you -- you figure out what the monthly revenue is going to be for the next 12 month, so it happens in June, it can be the next 12 months, if it happens in January, it's -- it's the next 12 months.

But we add all that together into a sales number, which we then compare to the prior year, which gives us a sense of what's going on in the market.

That is only one element of overall revenue growth.

Things that we talk about like pays per control, and the investable balances and the interest that we earn, and investable balances, the retention, the -- how much long we keep our clients than -- than before, price increases, the -- all of those things, transaction volumes, all those things impact the overall revenue growth number.

So you can't do a direct correlation between sales growth and revenue growth.

Having said all that, sales growth is the single largest determinant of future revenue growth, so -- but it is not a direct correlation.

Okay.

Thanks.

Your next question comes from Brandt Sakakeeny with Deutsche Bank.

Thanks.

Good afternoon.

Art and Karen, quick question o -- on the brokerage business again.

I think when you had made that clearing acquisition, I think the reason behind that was to -- was to provide a -- a broad suite of services.

Have you found that that's actually been -- been fueling growth on the processing side of the business and actually helped to -- to drive additional business?

We certainly have found it helpful in a number of negotiations that we've had.

I can think of at least a single major case where it was a predominant factor in our extending our relationship.

So I would say it has created a -- it's created opportunity which will really play itself out as we -- as we go out.

I can't give you a half a dozen instances right now where -- where I would say there was a direct correlation to extending the relationship.

Okay.

I think what we have though, is we have a number of clients who currently are on our back office system who have been clearing -- have been self clearing, who would now really look, since there's no conversion to go through, at outsourcing through us.

That has created a number of leads as those leads mature, I think we'll retain a, --it'll it'll be another piece of retaining significant parts of the brokerage volume.

Okay.

Great.

Thank you.

Okay.

Your next question comes from Craig Peckham with Jefferies.

Good afternoon, Art and Karen.

I wanted to follow up on an earlier question about some of the competitive dynamics for new business.

Obviously, 16 % new order growth in two straight quarters is pretty impressive.

Could you maybe give us a sense for how much of that you think may be coming from improving win rates as opposed to just overall market improvement?

I don't have a good number for that.

It's a very good question and my -- my sense of it is that the market has improved and that the number of prospects considering doing something different in the payroll arena has improved.

So I think part of it is opportunity and part of it has just been the right product set and the right sales force in the right place at the right time.

But I -- I can't give you a good breakdown because I don't know the number.

Is it possible to estimate how much of your new orders are coming from COS these days?

It -- it -- comprehensive outsourcing, if that's the question, it's a very small percentage of the orders coming from comprehensive outsourcing.

So just to put it in perspective, our sales number, if you think --we -- we talk about growth, and we talk about 16 % growth, and 13 % growth for the year, the sales number itself, and this may help with some of the revenue tie in question that was asked earlier, it's somewhere in the area of $840 million annually.

And -- and that equated -- that -- that was the -- the growth got us about $840 million.

Comprehensive outsourcing, although it's a -- a hot product in national accounts and the -- the high ends of the market, really added maybe in the $25 million range to that number.

It was not a significant number.

Now, some of that is because it hasn't been added to the sales number yet.

Some of it we self gate because we don't allow a recording of a large contract before certain criteria has been met.

It's not that it hasn't been signed, but we don't like to push in a lot into the sales number if we think it is going to take a year and a half to get the client up and running.

So we self gate that number, so there is a healthier backlog of items that have not even made its way into the sales number yet, although we've clearly have signed agreements.

But I hope that -- that helps putting in perspective 25 million on 840 million.

I just want to add one thing to that.

Again, we have to be careful with the definition of terms, as we use these things.

What -- what we have called multi-product offerings, which would use multiple ADP services, we have a lot more than that.

But when -- when we're talking about COS, we're actually talking about our our taking over some of the HR administrative pieces of what the client was previously doing.

So there are incremental services.

So in terms of multi-services, very large transactions, we have a lot more than the number that Karen just described.

But in terms of this specific pro -- incremental procedure, which ties it all together, then that's exactly on point.

So I just wanted to clarify from a definiational point.

And thanks for clarifying, and just to put a finer point, of the $840 million again represents the -- the annual value, correct?

Yes.

That's -- that's the annual -- the value of annual new sales that will become recurring revenue over the next 12 months from when they were reported.

Okay.

Great, thank you.

And each of those lasts on average, nine years, something like that.

So -- but that'd be another way, if you want to multiply it by nine you can get the way some people count sales.

No one is suggesting you multiply that by nine.

Thank you.

Your next question comes from Adam Frisch at UBS.

Thanks, good afternoon, guys.

Just -- I don't want to beat a did horse here but I think there was some confusion earlier in the call about margins, Art.

I appreciate you kind of trying to clarify that.

But looking at '06, I guess the best way to clear up the issue is excluding the investment gains or increased interest income from better rates and -- and yields on the portfolio, et cetera, should margins still be up 100 basis points in '06 excluding those investment gains?

I think that would pretty much clarify the issue.

I think the answer is we include not the gains but we include the inch -- incremental interest that we get from the increased balances as part of the overall revenue and when we talk about the 1 % margin, it includes that number.

So to the extent that you're saying, no no take it out and that all drops to the bottom line, then it would be less.

Yes, but I -- but I think, to clarify, also, when we said we're going to have a -- a 1 % minimum margin improvement, that is in each business regardless of the investment gain.

So if you look at employer services, if our margin for the year was just over 22 %, we're saying that we're going to add a point of margin improvement to that business, which does not get affected by interest rates.

It clearly has higher client balances in the number, which drives interest income, but that's part of the model.

That's part of their business.

But remember, that we keep the interest rate constant in employer services, so that it's not influenced by interest rate environments.

So in ES, we're planning at least a point improvement in their overall -- we're calling it pre-tax margin, the way we -- we talk about a pre-tax margin in ES and that statement is true for each and every one of our -- our large business segments.

Okay.

That I think should pretty much clarify everything.

And along the same line, would ES growth still be along the lines of where you projected it to be in the press release, excluding the -- the increase in -- in -- well, I guess you're saying the increase in ES growth on the revenue side will be the guidance that you gave of high single digits, and that includes increased client funds, correct?

Yes.

The -- the guidance in ES is 9 % and -- and it always includes client fund balance growth and client fund balance growth is not a -- again, does not relate to interest rate fluctuations, it's additional funds from clients because we sold more, because we retained more and because we had -- and our clients grew.

So their -- their -- their num -- number of employees grew.

Or that the products that our clients signed up for within the employer services base had more money movement aspects to them, like some of the, pay card or fsa card, or things like that, will increase client balances so it's -- it's real business growth and it's not in -- influenced by interest rate environment.

But that always is in the ES revenue guidance, and therefore, in the pre-tax guidance as well.

Okay.

And then on new sales, in -- in ES, can you break out, I'm not sure if you were asked this already, I think you might have been asked something similar, but not the exact question, but the new sales growth driven by the sales force expansion and how much was driven by an increase in demand and what your sales force expansion plans are for '06?

The -- call it 7 to 8 % sales force expansion in '06.

We have about 3,000 sales -- head count worldwide and we're planning on an average of 7 to 8 % head count growth going in -- into next year.

So that would mean that we were going to get some level, a couple of points of productivity improvement on that whole base to -- to get a double digit overall sales growth forecast.

Okay.

And then last question, if you can just update us on the progress of your BPO product.

The bpo in -- in --

HR.

Sorry, in HR.

Oh, COS, is that what you mean?

Yes.

Yes.

The -- what we were saying before, the overall sales, we talked about the overall sales in comprehensive outsource, I think the backlog is -- is quite strong.

The -- the pipeline, as we move -- as we look into '06 is quite good.

We're actually focused on bringing the target sales a little bit further down in the -- in the size client base, so some of the original deals that we talked about that grew our comprehensive outsourcing revenues in '05 and kicked it off in '04, were some of the larger transactions and larger companies.

And our focus is really to bring that model and that managed payroll model and doing more administrative services for the client well down into the core of national accounts base, so hopefully more clients, but an average size as opposed to a lot of larger clients, and also ultimately bring it down into major accounts as well.

So that's what we're focused on and we feel really good about our progress thus far.

We've got somewhere around 190,000 employees on comprehensive outsourcing right now.

That's sort of a new stat that we just started reporting or tracking.

That's number of employees that we're processing that we're doing the service for.

And does that need to go lower down due to the fact that pricing or yield terms are a little bit more onerous at the high end?

I think it's just our core -- our core space.

That's where our national core -- national account space is.

As you move upper, into the -- the higher market, you do get into some of the services that perhaps we don't provide at this time.

You get into some of the consulting or staffing or some of the things that perhaps are required in the very large bundles in the high ends of the market and our -- our core is really not -- not in that high end.

Got it.

Okay, thanks, guys.

Your next question comes from Mark Marcon with RW Baird.

Good afternoon.

Just wanted to get a feel for in terms of dividing core payroll versus beyond payroll, it sounded like 50 % of the new sales are coming from -- from beyond payroll.

I was wondering if you could give us the relative size of -- of the revenues for each and then I have a follow up question?

The revenue size of the --

Yes, what percentage of -- of ES is -- in terms of ES revenues is now beyond payroll?

Okay.

The -- the -- the stats that I normally provide are U.S. stats and their distinction, there might be some beyond payroll in our international businesses but you should consider our international almost entirely payroll and tax.

They don't have the -- the benefit side, or mostly payroll and -- and very little tax, actually.

In fiscal '05, the beyond payroll made up 38 % of the total U.S. revenues, and the U.S. revenues were somewhere in the area of 4, a little under 4.5 billion of the total.

Okay.

And then in terms of -- in terms of the penetration rates, when we think about the new sales that are occurring in --in beyond payroll, which are quite impressive, can -- can you describe how much of that is going towards brand new clients and how much of is that is -- is cross selling to existing payroll clients, and -- and how much longer do you have to go in terms of the -- the cross sales to existing clients?

The largest bulk of it is sales to existing clients.

I mean where we already have a -- we already have a client, we're continuing to sell our service to them, the relative penetration numbers are almost always very low in -- in those num -- in those things.

So if we think of a total pay product, or time and labor management product, I mean that -- that's what we would think of.

I think you also hear us talk about stand alone products.

So when we talk about a stand alone tax product, which is in itself probably $100 million revenue business, that -- that obviously is unrelated to our -- to our selling additional services to our base clients.

And in our retirement services area, we have a mix.

And our bent -- health and welfare benefits we have a mix of -- of payroll and non-payroll.

So it's really all over the place.

No, go ahead, Karen.

The only other thing I would add is a good chunk of that also comes from our PEO, which is all new named clients.

The PEO is -- is not additional to existing SPS clients, it's a -- PEO is a big chunk of the beyond payroll and it's all new clients.

That -- that is a major addition to what I said.

Yes, I was -- I was just -- I was wondering if you had a feel in terms of that penetration, in terms of existing clients other than it being relatively low?

Well, just to give you a perspective, I mean -- time and labor management, let's talk about -- the big ones that we're talking about: PEO is all new client, time and labor management, we have hundreds of thousands of controls in employer services, of controls meaning clients, basically.

The -- the numbers rela -- that are using time and labor management this point is 46,000.

So lots of room to grow, we have, as I said, not all clients would use the time and labor management products is a very small end of the market, maybe you should take them out but there's hundreds of thousands of clients that are -- that are large enough to use a -- a time and labor management product, and we have 46,000 using that product just as an example.

In -- in terms of retirement services, a very similar number of -- of clients using retirement services products.

And you know, Cobra, FSA, we're talking less than 5,000 clients using those products, so enormous amount of room to -- to move up and to -- to penetrate into the base when you talk about those kind of products.

So hopefully that gives you a little bit of a better -- better flavor.

That's helpful.

And one last question, just with regards -- I know it is early, but any update that you can give us on the -- the Microsoft joint venture deal?

The fall --the launch will be in the fall.

We're very pleased right now with the way that the -- the tests are going, and the people that are -- that are using in -- in the test period, so there's really nothing more to report other than we're excited about it, we're anxiously awaiting the fall to see how it all goes.

But -- but it's going well.

Getting closer.

All right.

Thanks.

Your next question comes from Lloyd Zeitman with Bernstein investment research.

Good afternoon Karen and Art.

First of all let me thank you very much for supplying all the supplemental information.

It definitely makes all our lives easier.

I have a few questions here.

First of all, could you give us some color as to why you anticipate EPS growth to be lower early in fiscal '06?

Let's say relative to the back half of the year?

There's -- there's no one reason why the EPS will grow over the year other than timing of the growth in the businesses, and sometimes as we ramp up in terms of sales, getting ready for the full year, there's no specific reason why, trying to think if there was anything -- the portfolio balances will grow earlier in the year.

It's an expense issue as opposed to a revenue issue.

I mean if -- if that -- if that's what the question is.

So we have beefed up some expenses which will be hitting us more in the early part of the year relative to a year ago and then we will play themselves out over the year.

So it's more of a timing of expense issue than -- than it is a revenue growth issue or -- or anything else that's unusual.

Well, I would imagine since -- since have you more leverage in the back half of the year, that -- that is probably at least part of the explanation, is that --

Well, yes, part of it and I'm sure I should have said earlier, too, as we look at the -- the seasonality of our businesses, the -- the strength -- a lot of the strength is coming from employer services, the strongest quarter is usually the third quarter, for employer services.

And within brokerage, the strength is coming from investor syndications and the strongest quarter there is the third and -- and especially the fourth quarter.

So that's why the -- the growth will accelerate in the second half as well.

Okay.

And could you tell us what your pension cost impact was in -- on the income statement in fiscal '05 and what you anticipate for '06?

I don't have it in front of me.

I'm going to guess.

Okay.

I'm going to guess and say it was in the $25 million range for '05 and -- and it -- it was higher '06, but I don't know that it was materially higher as we look at '06.

That would be my ballpark guess.

Okay.

And also, could you tell us how many employees there were in PEO in the fourth quarter?

We moved up to 113,000 employees, up 21 % from last year.

Okay.

And could you give us maybe some guidance on where you anticipate this might be in fiscal '06?

No -- I don't have the work site employee number in '06 but our -- but our revenue growth in the -- in the PEO should be over 20 % again in -- in fiscal '06.

Part of that's past the -- the processing piece will be a little less, probably between 15 and 20 % growth.

Yes, part of it is past us.

Okay.

Fine.

And just one other thing, there -- there was an article, I believe it was in the Wall Street Journal about a week or so ago, concerning 401(k)s and how companies essentially are controlling these as opposed to giving the employee control, because the employees don't really seem to be doing anything with them.

And I was wondering how you see this impacting your presence in this particular area?

I would imagine it should make it more attractive for outsourcing since this would just be another thing for corporations to do that they really don't want or need to do.

That's an interesting trend.

I think it's -- it's premature for us to know whether or not it'll have a significant impact on us one way ort other.

So I -- I -- I'm not going to really -- I could just be guessing, Lloyd, to be telling -- to be agreeing with you, to saying I'ld like to think it's going to be helpful, but I don't have a feel for it yet.

Okay.

Thanks very much.

Your next question comes from Tim Willi with A.G. Edwards.

Thank you.

Good afternoon.

A couple of quick questions.

One, Karen, do you happen to have the adjustment for foreign exchange?

Could you divulge that in the

You know, I -- I don't have it with me.

Be -- but I would tell that you I believe it's going to be posted to our web site within a -- an hour or so.

Okay.

And would the same apply for the -- the float adjustment?

Yes.

Sorry, we --

Great.

Then another question I had.

You've mentioned FSAs a couple of times in answering questions.

I was just curious, obviously a lot of talk and buzz around the HSA market, and, I mean, is there a like opportunity here for ADP to participate in what a lot of people are projecting to be quite a strong area of growth admittedly off of a small base and that kind of product that an employee serves?

We've included it in our -- our PEO offering.

So -- so it's the first place where we've introduced it.

So as we look at our additional health and welfare arenas, it's one what we're still studying and trying to see what the best way for us to -- to implement it is.

So we're watching the area very closely.

Right now the only place the service is offered is in the PEO.

Okay.

And is that kind of product also generate balances for the client funds?

The way you structure it and get paid for it or does that not contribute -- or would -- would not contribute to client fund balances?

I would think that there would be a form of client fund balance assuming that it's running through the payroll and being withheld from the payroll similarly.

Now, there are a number of additional -- there are a number of ways that this can be handled, but the answer is probably.

Okay.

Great.

Thank you.

Your next question comes from Tien-tsin Huang with JP Morgan.

Thanks.

Quick question on dealers.

It sounds like you're expecting a little bit of a slow down there in fiscal '06.

Has something structurally changed?

Actually -- ac -- go ahead, Karen.

We -- dealer -- the -- the revenue growth will be slower as we look at '06 al -- although the internal rate will be very close as -- as we look at revenue growth.

What's happening is with the success of our ASP, our application service provider model, of bringing clients up on our system basically and hosting it for them, it does take away from the upfront one time revenues that we were -- that we were -- had part of our results in the last couple of years and we've been really been going through this transition for a couple of years.

It is continuing.

Our processing revenue growth, which is important the we look at our future and recurring revenue growth, is actually high single digit growth versus single digit growth so that's where you see it.

We also have some continued weakness in our professional services organization which really serves training programs and various services to the auto manufacturers and that is a -- a slower growth area for us.

But -- so there's not a -- nothing really that's fundamentally changing other than a little bit slower because we're enjoying less of the one-time revenues up front charges.

The ASP model, although we don't have those one time up front has a -- a larger absolute profitability over the client life cycle.

So it is a more profitable long-term model for us.

We also believe that we're improving our market share even as we're going through this.

And part of that is some of the large mega-dealer accounts that we talked about before that -- that we've gotten and so more -- there's nothing fundamental in the business that you're hearing.

Okay.

That's helpful, thanks.

Your next question comes from Franco Turrinelli with William Blair.

Thank you, my question has been asked.

We have time for one or two more questions.

Your next question comes from George Godfrey with Banc of America.

Thank you.

Karen and Art, I want to circle back on a question asked earlier.

Operating expenses as a percentage of revenue here in '05, 46.7 %, if I look back in '02, they were about 42.4 %.

Why is it about a 400 basis point increase, more expensive on the operating expense linea?

If I look at your other expense items, selling and g&a, systems development, depreciation, they're basically about what they were three years ago.

Yes.

I -- I would suspect it's probably a lot of -- a lot of reasons why, one of the bigger reasons is as the -- as some of the businesses grow like the PEO, I think there's some pass through costs that get -- that -- that are increasing the operating line and it's a mix of businesses, and so on, in there as well.

Probably the one single biggest item, especially if you look at employer services, is probably the -- the growth in the PEO in that model, has some more pass through and it is impacting the operating line.

So, just so I'm clear, if I look at employer services which are about a little under 60 % of total revenue three years ago and now it's about 61 %, the incremental PEO relative to the overall employer service mix is just a lower margin business?

Yes, it -- because it has the benefits and worker -- worker's comp pass through component.

It is a lower margin.

And it's been growing at 20 % plus for a number of years now versus the rest of the business.

Yes, I think when we only look at this number, when we look at it on a report, because we actually run the business of -- of -- of a much more detailed set of metrics, and what I can tell you is as we look at our operating productivity, whether it's scale or other tools that -- that we're doing to improve productivity, we are showing appropriate productivity improvements in each area.

So the only thing that can cause this is mix.

Because there is --

-- thank you for the clarification.

Okay.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers.

Ms. Dykstra, are there any closing remarks?

I just wanted to thank everybody for participating in the call today.

As we're exiting, our stock is trading at $43.79 and as usual, Art and I thank you for joining us today.

This concludes today's Automatic Data Processing incorporated fiscal 2005 earnings conference call.

Thank you for participating.

You may now disconnect.