自動資料處理 (ADP) 2006 Q1 法說會逐字稿

Good afternoon. My name is Carol and I will be your conference facilitator. At this time I would like to welcome everyone to the Automatic Data Processing, Incorporated first quarter fiscal 2006 earnings conference call.

I would like to inform you, this conference is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [OPERATOR INSTRUCTIONS] Thank you.

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

Good afternoon. I'm Karen Dykstra, Chief Financial Officer for ADP, and I'm here today with Art Weinbach, Chairman and Chief Executive Officer; and Gary Butler, President and Chief Operating Officer for ADP. We're very pleased to have Gary join us for the call today to add his perspective and his thoughts on such a strong quarter.

As you know, we issued our earnings release for the quarter today and we began expensing stock compensation July 2005, and our results are described in our press release, both on an as-reported basis and an adjusted basis to show the comparable data for expensing stock compensation last year.

We posted some of this additional information on our website to give you the last year adjusted numbers by quarter and we've also posted our normal annual foreign currency reallocation to budgeted rates for segments, so we hope that this additional information on our website is helpful to you.

But more importantly our results were strong. We had 10% revenue growth and 31% earnings per share growth. We're continuing to build momentum in our recurring revenue businesses and the sales, retention, pays, interest rate improvements are all showing up in our overall revenue growth and our margin, and particularly we see that in Employer Services.

So based on the strong start, including the interest rate increases, strong first quarter in Employer Services, and the higher volumes in the investor communications business, we raised our earnings per share guidance to 22 to 25% growth from our previous guidance of 15 to 20% growth.

Karen, let me just add a couple of opening comments to the very appropriate comments you've already made.

As you try and understand what's happening here, momentum is really a major factor in our recurring revenue model. When we talk about growth, growth is driven by all the things we normally talk about, things like adding more clients and services, which we call sales, keeping our clients longer, which we call retention, by the growth in our clients and our market, things like more pays per control, more investor communication mailings. What you need to understand in the recurring revenue model, is when we have accelerating growth, the comparisons, the each year prior quarter, becomes a lot easier.

So if you've been listening to some of our comments, we've been talking about momentum for the last few months. We have it. If you take that momentum and you combine that with the fact that we surprised ourselves on the upside this quarter, that's what gives us confidence in our outlook. So, things feel good.

Okay. With those few comments we're ready to go with the call.

During today's conference call we will discuss some forward-looking statements that involve some risks and some of these are discussed in our periodic filings with the SEC. We're ready to start the Q and A and I'll turn it the over to the conference call operator for your questions.

[OPERATOR INSTRUCTIONS] We'll pause for just a moment to compile the Q-and-A roster. Your first question comes from Bryan Keane with Prudential.

Good afternoon. I guess the new sales orders were 10% in the U.S. in overall, 6% worldwide. So obviously international has been a little weaker than expected. I don't know if we have an exact number. Maybe flat sales or slightly down. Can you talk a little bit about what's happening, international, and what the outlook is, going forward?

This is Gary Butler. I think you have to take it in some context. I think we are a little disappointed in the somewhat slow start. You have to also, though, if you consider, we had a very strong first quarter last year in International, up some 27%, and in the fourth quarter of last year we also -- not artificially, but we did pull some business into the fourth quarter and had a very strong fourth quarter, with sales up some 33%.

So you have a difficult comparison. We did have a very strong last quarter, but that being said, we are off to a slower start than normal or that we would like, but we do anticipate returning to normal kind of run rates and growth patterns in the second half of the fiscal year.

Yes, and I'll add that when we talk about pulling some sales into -- as we ended the year, that's more of a push from our sales force as they very much look forward to the annual reward program, so we're able to close and push more to close at the end of the year. And that's why we said the sales happened to fall more in the fourth quarter of last year.

I'd add, on the domestic sales side, that we actually had a very strong month of September and finished -- actually finished the quarter stronger than we had anticipated at the time when we were at our last analyst meeting. So we had a good end to the quarter.

And if you break out, just kind of core payroll versus beyond payroll, Karen, maybe, what are the growth -- organic growth rates there? And then, what are some of the -- I'm sure beyond payroll has grown quite a bit faster. What's driving the growth there?

We talk about this mostly as a United States statistic because there's primarily -- International is primarily all payroll.

For the quarter, our "beyond payroll" growth was in the area of 14% and our payroll was 7%. So we see our payroll statistics gradually increasing. Last year we were averaging 4% traditional payroll growth in the States, so that's really what has picked up. As you know, the growth in the beyond payroll products are driven by some of our more demanded products these days, like the PEO is growing very quickly, expected over 20% in the PEO this year. Time and Attendance products, also growing very strong, also over 20% growth. And then some of the others. But those are the two bigger drivers of the beyond payroll growth.

And then, in "beyond payroll" comprehensive outsourcing, has that continued to be -- how does that business look and does it continue to be profitable, I guess, going forward?

This is Gary Butler. Our first quarter results in COS, our new bookings were ahead of last year and we do plan on making a full-year plan that would be double digits ahead of last year's COS results. So, we've got a lot of interest in the market, a lot of prospects, and we continue to be optimistic about the outlook of that business.

Okay. And I'll turn it over to somebody else. Gary, what's the revenue -- is there an annualized revenue of that business now?

It's in the range -- we'll report somewhere in the range of 65 to $70 million of revenue in fiscal '06. That wouldn't be the annualized value, obviously, it would be higher than that, as we exit the year. But that's growing from somewhere in the 40 to 45 million range last year.

Okay. Thanks.

Your next question comes from David Togut with Morgan Stanley.

Thank you. Karen, in your new earnings guidance for fiscal '06, can you update us on what your margin assumptions are for each of the three main businesses? Then perhaps discuss your interest rate assumptions, particularly for fed funds and the two-year treasury.

Sure. First I'll start with the overall margin guidance for the Company, given our new guidance, that would mean that we'd have a pretty healthy improvement in our pre-tax across our businesses. We had said in the beginning of the year that we'd have at least 100 basis points in each of the segments. I'm now looking at somewhere between -- somewhere in the range, call it, of 200 basis points improvement overall for all of ADP. Obviously interest rates are helping that.

But as you go segment by segment, our guidance in Employer Services, which is still in the, call it 9% revenue growth range, is for a little bit over a 100-basis-point improvement in margin. Somewhere between 100 and 150 basis points. Now, obviously, we were much stronger than that in terms of improved margin in the first quarter, but we are expecting to catch up on some expense levels as we continue to invest in the remainder of the year.

In Brokerage Services, our guidance, which was previously mid-single-digit revenue growth, has increased now to high single-digit revenue growth, based on the first quarter improvements, and our pretax margins will probably be in the 19% range, which is, again, probably closer to a 200 basis point improvement over the prior year.

In Dealer, we are expecting somewhere in the area of over 100 basis point improvement as well, and same for Claims. At this point, pretax margins should be well over 100. But that's sort of a -- last year we had some one-time charges, restructuring still in the Claims unit, so I would fully expect to be able to achieve those margins.

So overall, each business unit, strong improving margins, first quarter probably more so than we'll see the rest of the year, and interest rates helping significantly.

The second part of the question was on fed funds and rates, what our outlook is.

Our outlook, and I don't have the exact numbers of when the next fed hike we forecasted would be, but, David, our forecast always goes in line with the consensus in the Street forecast. So whatever the yield curves show, we go with that forecast and we just superimposed our balances on top of it and the last time we checked -- the last time we updated, it was probably within a week or so ago, so it's fairly current.

Okay. And then on the Brokerage Services business, you saw a nice improvement in profitability. It looks like you're a little more confident in the strength in investor communications mailings. Could you discuss that a bit.

The investor communications mailings in the first quarter were a little bit stronger than we had anticipated, and it's mostly interims and mutual fund mailings that drive some of that incremental activity. So as we came off of last year, where we had had a very strong year, especially in mutual fund activity, we thought it might abate a bit, and actually it continued to be strong into the first quarter. And that's the primary driver.

Okay. Finally, Art, it looks like pays per control were up over 2%, which is better than we've seen recently. Can you flesh that out a little bit? It seems like some of the recent employment data suggests a little softening, given some hurricane impact.

Well, we really haven't seen through September those impacts in our numbers. And so the pays per control were up a little bit more, but you're dealing in [inaudible] from where we've been over the last several quarters. I think what's probably the most interesting part of the data is that if you look at it by segment, even national accounts, which had been relatively slow, is inching up that 1.5 to 2% growth in their pays per control, at this point. So we've always had the highest pays per control growth in the low end, in the small client market, then majors, and National. That's still the same, but National has come up.

Okay. Thank you.

Our next question comes from Brandt Sakakeeny with Deutsche Bank.

Thanks. Two quick questions. Karen, for you, how should we think about the realized losses in the portfolio, in terms of forecasting them out? Is there a period where as the bond portfolio rolls over, we won't see those losses? Or should we expect these levels sort of to continue?

Well, the unrealized loss position of that portfolio as of the end of September rose to about $84 million, which is higher than it's been in quite some time, even higher than a couple of weeks ago, when we had our analyst conference in the middle of September, reflecting the increasing market conditions. So, that doesn't mean there's no gains embedded within the portfolio. It all depends on when we did the original purchase transaction.

How to look at it going forward really depends on a number of things. If we did absolutely nothing, and we did needed no other funds for anything, including acquisitions or share repurchases or so on, then we would have nothing the rest of the year other than traditional rebalancing of some of the portfolio managers. But, likelihood is that we'll continue with share repurchases. We don't generally include acquisitions in our guidance but hopefully we will do some acquisitions, so I'm hopeful that we'll need to do something with our portfolio and move some things around, and so, because the predominance of the investments are at a loss position this year, I would certainly expect to see more losses this year, although it's really hard to project.

The level of the first quarter was not an unusual level for us, for a balance -- given the unrealized losses in the portfolio. Last year if you look at a comparison, we did about 28, $29 million worth of losses in the portfolio last year, and that did not have as big of an unrealized loss position.

So I would expect more overall net losses, I just can't put a number on it at this point.

Okay. Thanks for the color. That's helpful.

Second question for either Gary or Art. Can you just provide some insight on the -- I think it was announced that you hired Jim -- I think it's Aramanda, as head of the brokerage business. And just curious: was that a spot that you were looking to hire for or was that a need that you felt needed some leadership? Can you help provide a little color there?

We've hired Jim as a very senior executive overseeing our Brokerage business, our Dealer business, and our Claims business. He has significant experience, primarily in the financial services arena, and we're looking to add his senior talent. So there's no specific driver in terms of a business issue or a business problem. It's more our ability to add someone with his type of a background to our executive team.

Right. Thank you.

Your next question comes from Greg Gould with Goldman Sachs.

Thanks. I was wondering if you could, on the orders or new sales in Employer Services, can you sort of give us a sense of which areas were strongest on a relative basis, Nationals versus Majors and SMB.

Then in general, Art, where do you see the greatest growth potential over the next fiscal year, let's say, of those major areas, National, Majors, and SMB?

This is Gary Butler. We had good strength in both Majors and National accounts, both double digits. I think Nationals was up a little bit more than Majors, but not a significant amount. Although it was not mentioned in the release, we also had good strong growth in the PEO, with close to 20% kind of sales growth numbers there, and kind of mid single digits growth in Small Business. So, overall, pretty good.

In terms of the potential part of the question, I think we're continuing to be very excited about the PEO arena. In addition to the robust growth that Gary was just referring to and that we've talked about in the past, we have opened up in California and we see that as a very significant potential incremental market for us. So if I were to highlight among those areas, while I think there's a lot of good market activity in each one of the segments, I'd probably single out PEO from where we are right now as the biggest opportunity.

Okay. And Karen, how do you see employee stock option expense trending on an annual basis from here? Should it grow roughly in line with firm-wide revenue?

I don't know that it has necessarily a direct correlation to revenue. I think that we should expect next year, our best estimate at this point is relatively flat with this year, as we look at the different stock compensation programs that we have. So I have no real guidance long term to correlate it to one thing or the other. It more goes with employee growth and revenue growth and comp level and wage inflation and things that you look at, and it depends, as you know, a lot on the volatility of the stock and how the options themselves are valued. There are so many things that go into the model, it would be very difficult to project future impact other than to say our guidance for this year is $0.19 a share.

You'll notice it's -- last time we spoke was 18 to $0.19, so we've narrowed that to $0.19. And it has nothing to do with the expense itself changing. It's the fact that we have lower shares outstanding because we did share repurchases. And I expect that will continue somewhere close to that going into next fiscal year.

I think -- and again, Karen, correct me when I go wrong on this -- but when Karen was saying relatively flat, we're talking about in absolute dollars. When we, a year ago, reduced the number of options that we were issuing, it takes a few years for that to run through our system. Some of that gets offset by growth that we have in the business, but I think that plays off for a couple more years. So I would expect a little bit less than what you would normally assume until that reduction in options that we had works its way fully through the system.

Okay. Sorry. Just want to sneak one last question in. That's on the Microsoft alliance. How is that tracking versus your internal expectations? I know it's early, but what's the early read?

Greg, it's really too early to tell. I hate to use your words to answer your question, but the announcement was back September the 7th, and they are in process with getting all of the packaging and the materials for the over 5,000 locations that will be selling the product, Dell and the other OEMs are ramping up to distribute it. So I don't think they or we have any real expectations around units or tracking until sometime after the Christmas season.

I don't think we'll really know, frankly, until the end of the first quarter, because we don't know when they'll buy it, when they'll actually come live, and when they will actually select the payroll alternative and when they'll actually start. So I don't think we'll really know the success there, although we remain very optimistic with all the publicity we've gotten, all the write-ups in the different PC magazines and the small business magazines and the CPA magazines have been very complimentary and favorable, not only to Microsoft but also to ADP's offering.

So we think it's going to be good. I just can't tell you how good.

Okay. Thank you.

Please try to limit your questions to one or two questions at a time. And our next question will come from Cindy Shaw with Moors & Cabot.

Thanks. A couple questions around the portfolio. If you could update us, Karen, on the duration, the yield, if your yield outlook for the fiscal year has changed with the yield curve having moved up and the float balance obviously bumping that up to take your guidance up today, but guiding below the rate you saw in the current quarter. If you can explain why you weren't looking for better growth for the year, given the strong first quarter.

And then also, on buybacks, sounding pretty bullish in the commentary and the press release. If you could comment if we can expect that pace to continue.

Sure, Cindy. Our yield that we saw in the quarter, which is in the text of the press release, the difference between the client yield and the corporate yield, is quoted in there. Our overall yield for the combined portfolios was about 3.7% compared to3.2%.

Karen, I caught the numbers in the press release. I was looking for your outlook for the fiscal year as well as the duration, currently.

Yes, I'm going to get there.

The overall fiscal '06 forecast for client funds is about 4% and the overall corporate forecast is lower, somewhere around 3.7%. It compares to around 3.5% for client funds last year and a little under 3% for corporate last year. The duration of the portfolio is 2.2% -- 2.2 years as of the end of September.

Our client balance forecast, which is about 10% for the year, is lower than the first quarter growth, which is just under 12%, as we -- the second half of the year we will anniversary some of the higher bonuses and wage growth that we saw from last year as well as the increased SUI rates.. So we are not expecting 12 for the whole year but still a healthy double-digit increase in the client balances for the rest of the year.

And then the buybacks?

I'll take the buyback part of the question.

I think hopefully you can see from the activity that we've had during the quarter, our appetite remains quite high. The total board authorization that we have is currently down to a little under 10 million. Maybe around 9 million shares. But as I've said in the past, I don't really consider that in itself to be a major impediment because in the past as we've gone back to the board and asked for increases, they have elected to do so. And so I can't speak for the board because that is a board decision, but that would be my assumption.

So, I think you could look forward to our continuing an aggressive acquisition program.

Thank you very much.

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

Thanks very much.

Art, just looking at the brokerage business, it looks like volume growth continues to mitigate the decline in revenue per trade, and despite kind of flattish revenues in that segment of the business, you're still pretty positive about the margin trend overall in Brokerage. Could you maybe help us understand, A., what's kind of helping you continue to increase margins despite lack of growth in that segment, and then secondly, is there any visibility on renewed growth in that business over the next 12 months?

Yes, actually on the margin improvement, we've always been focusing on our internal efficiencies and our internal costs. And so you've heard me talk many times about the fact that we believe that we can always get some improvement, really, from two things: Scale, which we don't have if we're not growing, and two is technological improvements, which we're able to embed into our system on a regular basis. Our folks in Brokerage really do an excellent job in terms of embedding those improvements. And so I think that plus very good cost -- very tight cost control are the principal reasons for the margin improvement.

In terms of the outlook for the future, while our outsourcing business is really very, very small at this point, I think we talked about 18 million of revenue in the quarter, we're quite optimistic about the outlook. We have a number of both relatively small companies that we've been able to add. We have a pipeline that looked very robust. We're very excited about adding E*Trade into our -- both clearing and outsourcing markets, so we're feeling positive about that. And I look at that as a primary -- as a primary growth area for the overall back-office brokerage business.

So we should look at the traditional back-office business as remaining relatively flat for the near term?

I really don't believe so. I believe that you'll continue to see trade volume and that there will be an abatement in terms of the decline in revenue per trade, although it won't totally go away because part of it, as we've discussed in the past, is based upon the high volumes, lower rate per high volumes for some of our clients.

I believe that there are opportunities in the market, some of which are significant that we continue to work on and periodically we're going to win some of those.

The only downside I would put on that is the financial consolidation. The industry consolidation has kind of gone against us over the last few years. I would like to think that if the market gets stronger and retail trading improves, that will reverse. But that's a bigger uncertainty.

So absent that, which has been major issue in terms of our relatively flat performance, I would expect to see us grow.

Thank you.

Our next question comes from Pat Burton with Smith Barney.

Hi. Congratulations on the strong quarter.

Karen, one follow up. On your comment about the Street forecast, is it fair to assume 4.25, 4.5, something like that for fed funds?

It was about -- I saw the 4.5. Art and I were talking about the 4.5 that was in the forecast fairly recently, in the last day or two. Our forecast goes back to what it was, call it ten days ago, so it was probably on the lower end of that. I don't remember the exact number. It was 4.25 probably. I don't think we had 4.5 in our numbers.

Okay. And if the yield curve steepens, would you expect to maybe take some more duration on or are you going to keep it at the 2.2 years?

Well, we always look at that and it's a balance. We have a fairly consistent practice of not trying to bet and so on and I think as we look at what our reinvestment opportunities are we have the opportunity maybe to go a little bit longer with some of our extended portfolio, but I wouldn't expect any dramatic changes to our duration, at least as we look at it today. It might inch up a little bit, but I wouldn't expect any big changes.

And then just one last follow-up. The rise in interest expense in the quarter, was that related to portfolio management activity?

Yes, it was related to the borrowing that we do when we -- on days where we're short, so we take our portfolio and invest, some of it extended, even though we have variations in what our daily obligations are. And on those days we have borrowings in the first quarter. In second quarter I think the borrowing is higher than the second half of the year when our client fund balances naturally are a little bit higher. So it directly matches with the borrowing activity related to our leveraging of the portfolio.

Thank you.

Our next question comes from Gary Bisbee with Lehman Brothers.

Hi. Add my congratulations on a real strong quarter.

I guess a couple of questions. In terms of the clearing business, the loss was a bit larger than we've seen in the other quarters since you bought it. Obviously revenues are lower, so I'm guessing it's a largely leveraged item. But, any comment on that?

And then, can you update us on your outlook for both revenues for that business and profitability for that business this year?

Yes, I'll answer that. First, we have a couple of big things going on in the clearing business. One was as we took on the acquisition last year there was a transition period and we had a known loss of our Quick & Reilly revenues, which was a big chunk, which happened towards the end of last year. I think it was finished by the time we ended the fiscal year, so we expected the revenues then to decline with that, then we expected the revenues, we still expect the revenues, to increase as we took on the outsourcing agreement for TD Waterhouse and we also recently signed an agreement with E*Trade. So we do expect the revenues to now grow from this point.

The loss was bigger than we had originally planned, and part of it is the expenses which we had originally intended to reduce more significantly upon the de-installation of Quick & Reilly, we did not take out all the expenses that we expected because we signed TD and now signed E*Trade, so we did not as aggressively as we originally thought go after the expense levels. And now we're holding those expense levels.

As the year progresses I think the loss will diminish. It is expected to diminish. It will not be at a break even by the time we exit the year, which was what we originally thought. I think as we look forward into going beyond fiscal '06 as to what the profitability is, it will greatly depend on the activity that we sign on a new sales basis.

Two different activities going on there. One was signing up with small clients, broker dealers, to the traditional clearing business. And that will happen and some of it will depend on market conditions and margin lending and trade growth. And then the other will be the bigger deals, the outsourcing deals, and should we decide -- should we be able to sign up some more of the larger outsourcing agreements, I think you'll start to see -- we will obviously have to invest to get those up and running, and then we will continue with approximately that level of losses, but probably not the same as the first quarter of this year.

But what I'm trying to say is that it's very much dependent on new sales activity and whether we get some of the big deals and how we manage -- how we're trying to grow that business. It is our strategic objective in the brokerage business to grow this business. So we're not doing the kinds of cost cutting and cost management activities to try to get it down. We're trying to get it up.

Okay. And I guess that leads into the next question, which is can you give us an update on how the sales pipeline there looks or any recent wins?

Yes, I think the sales pipeline is still pretty good. And the big news item is the recent signing of the E*Trade outsourcing agreement. E*Trade was already a client of our back office BPS product, and has signed on to be an outsourcing client and we'll start to see that, additional revenues, I believe in the second half of this fiscal year. So that's probably the biggest item to report on the sales front.

We also added a number, I think there were six relatively small additional clearing clients that we added during the quarter, and so that is good activity during the quarter in addition to the major transactions that Karen was talking about.

Okay. Thanks. Last question. In terms of the acquisition strategy, obviously you've talked about your desire to do that. I guess given the momentum in Employer Services I was wondering if you could give us any sense of the types of businesses within that division that you would be looking to acquire, given the success you're having organically with PEO, I don't know that it would maybe make sense to buy one of those. But could you comment on that and/or anything else you're looking for there?

I think our acquisition appetite, as we've talked about a number of times, remains very there, very constant. And our primary focus, when we talk about acquisitions, remains things that can leverage our strengths in Employer Services. So I would say that the PEO area that you mentioned would certainly be an area that would be of interest to us as we look at ways to expand.

The historical -- our historical ability to find a product that we can leverage over our distribution system is still an excellent way for us to expand. And we're also looking for opportunities that expand our markets beyond just the ones that we're in, similar to what we did when we entered the PEO business, or we entered the Benefits Admin business. So our appetite in all three of those directions is there.

I really don't want to get too specific for obvious reasons, but what you should hear is that is the primary focus that we're looking at.

That's great color. Thank you.

Our next question comes from Mark Marcon with Robert W. Baird.

Good afternoon. Let me add my congratulations.

Wondering if you can give a little bit of comment with regards to what you're seeing in terms of pricing, both in terms of beyond payroll as well as for payroll. And along those lines, on the payroll side you mentioned 7% growth. Can you talk to us a little bit about what you're seeing in terms of client additions on the -- just the traditional payroll side? And I have a follow-up.

I think the -- the answer to the first part of the question is pricing is normal. There's no new news. Same kind of activity. We went out in the beginning of the year with about a 2% price increase and it's been pretty quiet. I think I would categorize it as stable with no real new news on that front.

And -- go ahead, Art.

I would say that relative to the amount of heat that we were carrying a year ago or so, and Gary can probably talk more about this than I could, but compared to the relative degree of heat, I think it's lessened. So I think there is less price pressure in the market than we've had in the past and I think we're actually feeling a little bit better about what the outlook is [inaudible].

I would say, on the traditional payroll products, that's true. I think we still deal with various one-offs as we have a lot of products in the beyond payroll area and we're looking at those. Some might be a little bit more pressure than others, but not anything material in that sense. But it's, certainly on the traditional payroll side, I think it is quiet, as Art said.

I think you had a second part of the question, which is around units. I think one of the positives is that the unit growth is up across our segment, particularly in the small business segment, we're seeing nice unit growth. So call it mid to high single-digit unit growth in the United States in terms of new orders.

That's terrific. And then with regards to the SAP agreement, can you give us any color there?

Well, we remain very enthusiastic about the agreement. We're in the process of building out all of the templates for 25 countries, and, you know, all three of the regional areas where we're going to be offering these services. Our perspective business outlook is very good, but for the most part, these are larger, more complex deals, just by their nature, and the closing cycle is a little bit longer than what we would see in our traditional business. So we remain very enthusiastic and are receiving quite favorable commentary from both clients and prospects.

Gary, when would you expect that to -- the commentary to translate to revenue?

I would expect in the second half of this fiscal year in our international business to see a notable increase in order flow for GlobalView, which is our name for the SAP product.

Perfect. Thank you very much.

Your next question comes from Rod Bourgeois with Sanford Bernstein.

Hey, great, guys. I wanted to talk a little more about the acquisition pipeline, and I guess, Art, my question is, are you considering anything in the acquisition pipeline that you might call sort of a game changing idea, or is the plan at this point sort of business as usual plus pursuing some supplemental acquisitions to extend on the strength that you're currently seeing?

Our appetite for larger transactions than we have historically done is there. At what point in a company our size do you get to ground breaking or game breaking or whatever the term you used was, I'm not sure, but it's -- clearly we're focusing on transactions, including larger transactions than we have historically done.

Okay. And is that because you're seeing opportunities on the larger scale that weren't there before? Are valuation getting more attractive, or you just have more capacity, given the financial health of the company, or is it combination of all of the above that's pushing you towards these larger ideas?

I think we're seeing market opportunity. I think the primary thing that drives us in terms of the way we think about these is market opportunity and abilities for us to, through a combined transaction, accelerate revenue growth. That's basically the drivers. So when we're looking at these things it's much less whether or not we have more cash flow or less cash flow in a quarter or whether our short-term results are higher or lower. It's much more focused on what that opportunity is and what it's going to mean to our growth going forward.

Okay. I got it. And the larger ideas that you're looking at I'm assuming would be in the Employer business, maybe in the Brokerage. Is that the way to sort of prioritize how the larger opportunities would likely fall?

I think the largest opportunities would certainly be related to the Employer Services business. But each of our businesses are very good businesses in their own right, and we look for expansion opportunities, some of which, relative to the size of the individual businesses, could also be considered significant and we'll continue to pursue them.

Okay. Great. And then I'm assuming the guidance excludes any EPS impact that might occur this year from acquisitions. Is that accurate?

That's accurate.

Okay, great. And then, Karen, one final thing just to make sure I've got this straight. On your revenue guidance I think I have the details for Employer and Brokerage. Can you give your revenue outlook on the dealer and claims, and then maybe clarify -- when you say high single digits overall, can you put a little more specificity on that?

The dealer forecast is in the mid single digits, call it 5, 6%. Claims forecast is in the 6 to 8% revenue growth range. And our overall revenue growth guidance is high single digits. We hadn't moved it up with the increase in the overall earnings growth even though we did see some movement obviously in the Brokerage activity and we moved up our Brokerage forecast.

But, no, I think if we wanted to be more specific about exactly what number it is, we would have put it in the range, but I think it's probably in the higher side of high single digits.

Okay, great. Thank you for that.

You're welcome.

Our next question comes from Adam Frisch with UBS.

Thanks. Good afternoon, guys.

You're putting up some pretty impressive numbers this quarter and more aggressive guidance in the face of a macro environment that some would view as maybe a little bit shaky. Should we infer from this that the company-specific initiatives, like prior investment, sales additions, so forth, are stronger than maybe the overall macro trends, and that's why you're increasing your outlook so early in the year?

One, I think we are getting a benefit from some of those investments that we talked about in the past, but the macro environment that we're looking at, we're not yet seeing some of those results that you're kind of reflecting in your comment. You have to recall, we have always talked about our Employer Services business being a lagging indicator. It is on the way up, and it is on the way down, but we're not seeing that, certainly in that business.

Our Brokerage environment, as you heard from our comments, our transaction processing in the back office, was actually up during the quarter and the investor communication mailings were up. If there's pressure anyplace, it's probably in the automotive market, and we're reflecting that in the numbers that Karen has already discussed.

Part of it is good momentum which is in part due to some good investment decisions we made in the past, but part of it is that we're not feeling that negative macro environment yet.

Just to add, the interest rates are certainly moving in the other direction towards upward, so that impact is clearly considered in our upward guidance for this quarter.

The other thing that happened was that we had very strong quarters, fourth quarter, in both our Employer Services business and our Brokerage business, so we entered the year with strong backlogs and good momentum and a recurring revenue business. Any time you get started with a quick start in the first quarter, it's usually a pretty telltale sign for the year. So that's part of the reason for our optimism as well.

You guys have always been pretty conservative with guidance, so increasing it in the first quarter I think is something that is pretty noteworthy. In a model like yours, it's not usually a one quarter phenomenon, both -- I guess, Art, to use your words, on the way up and on the way down.

So what do you think could make you increase guidance again, going forward, or potentially cause you to reverse course and bring it back in a little bit?

I think the biggest thing that happened to us is we just were stronger this quarter. Part of it is the backlog that Gary was talking about, but part of it is the momentum in our clients and the momentum in our business has been somewhat stronger. So if we continue that strong momentum, I assume that that could have a positive impact.

Things that would have a negative impact, probably the most volatile area for us always is the brokerage world. If something were to change dramatically in the brokerage world, I assume that would be the biggest thing that would be likely to have a short-term impact on us. Based on where we are now, we're actually seeing trends reasonably positive. But that is certainly the area where there's volatility.

I would add a couple of things. One, obviously, interest rates swing back and forth and we had a lot of swings since we did our operating plan. Right now, you know, in the last couple of months, they're certainly up. I was asked the question earlier about exactly what that forecast for the Fed funds, and I'm sorry I don't have the exact date in front of us, but that can swing back and forth, and obviously we ride up and down with that, although it's certainly been moving upward and it could continue to. We could be a little bit stronger in our client balances possibly in the second half of the year and that will just compound out with our interest earnings forecast.

The brokerage numbers are the most volatile, and especially in the proxy business at the end of the year is where we really see the big volumes of large issue or proxy communications, and so that number should continue to have bigger than we expect or larger stock record growth than we expect, meaning the number of holders of equity and continuation, as Art said, of these mailings. That is a swing number for us that we wouldn't really have a lot of insight to until much later in the fiscal year.

Okay. Fair enough. Thank you.

Our next question comes from Sunil Dapdardar with Bramwell Capital Management.

No, my question got answered in the process. Thanks.

Our next question comes from Douglas Pratt with Mesa Capital Management.

Thank you. Just a follow-up on a couple of earlier questions on acquisitions. Seems like you're clearly saying you're going to make more acquisitions and potentially larger acquisitions. I think I'm a little frustrated by the lack of transparency that we see in terms of the impact. You've made about 1.7 billion, roughly, 1.5 to 1.7 billion, over the last three years and yet you consistently term them not material. I guess the cynic could say that means there's no contribution, which I don't think is the case.

Could you give us a sense of, for example, what revenues have you added to your core revenue base in each of the last three years and what sort of metrics in terms of price to revs or price to EBITDA, whatever metrics you use when you're analyzing what you're going to pay.

It's hard for me to answer the question quite in the way you look at it. First of all, when we do acquisitions, we basically talk about internal growth. We don't talk about revenue growth with acquisitions. We report it, but we focus on internal growth. Once we've acquired a business, we generally make a sufficient number of changes to it in order to make it part of our overall system. Once it's been there a year, we kind of embed it in the system and we look at it on a year-to-year basis, and we consider that internal growth. So the actual contribution to revenue in the last three years I think is relatively modest. I don't really know what the number is on it, but I think it's a relatively modest number.

In terms of the way we look at acquisitions, it really varies significantly depending upon the market that it's in, the technology that it has, its product, and so the quick and dirty rules of thumb of the X-times revenue or X-times EBITDA, really are less likely to apply in terms of the way we look at it than how are we looking at the strategic opportunities and how are we looking at the growth opportunities from those businesses, what can it do within our environment and how do we make sure we're going to get a return to our shareholders as we go through the process.

Just to follow up on that again, and I'm sure that's all a valid internal way to look at it, but you have grown revenues at about 9% a year for the last two years, having spent 1.7 billion, and it's very difficult for us understand, as shareholders, what are we getting? Have you bought 600 million in revenues? Have you bought 50 million? Again, 1.7 billion is a fair amount of money. It would be helpful to have some sort of metric as to what are you getting for that? We can't analyze our own objective view if you're spending the money wisely if we don't know what you're buying.

Well, I think, when we originally do the transactions, if it's a material impact we do talk about the revenues that we expect to contribute from the acquisition. If you go back to the last couple of years, we bought ProBusiness, which obviously was the largest of those transactions was in the 500 million range of those. The revenues from that was about, what, 1.25?

170.

160, 170.

When we originally acquired ProBusiness, and as Art said, we integrated that into our Payroll business and we don't talk about it now, but it's part of our national accounts operation. So a big chunk of the number you're referring to is ProBusiness. To integrate it into the Employer Services range, I think that the margins that we get and the reason that the price tag was like that, because we obviously know how to leverage the payroll business as a core payroll transaction and we did very well with that transaction.

On the other hand, the second largest in the last couple of years was the Clearing acquisition from the Bank of America. And since that's a separate segment, reported Clearance securities clearing and outsourcing, I think that the revenues and the earnings loss that we are expecting as part of that strategy are clearly portrayed in the income statement.

We've done a number of transactions in Dealer Services. They tend to be product rollups or geographic expansion within Europe and it certainly has helped the Dealer Services, although you're right, I can't specifically call them out in terms of the size, but I think between them, ProBusiness, Bank of America, and certain product acquisitions in each of the other businesses, that makes up the majority of the numbers. If we don't expect to get the return, then -- if we don't expect to get a reasonable return for acquisitions we wouldn't go into the transaction. And I think, you know, as Art said, it depends on the business that we're looking at, the multiples that we'll pay at the given time, but certainly the payroll business acquisitions, Employer Services, we expect to get a good return and we have gotten a good return on those acquisitions.

Clearly -- we assume you expect that. It's just difficult for us to objectively analyze that. Maybe if I call you later you could give me a sense of what these revenues are, because I haven't seen them. You always term them immaterial.

Okay, fair enough.

Okay. Thank you.

Thank you.

Your next question comes from Jeremy Davis with Credit Suisse First Boston.

Hi, guys. Could you give us a little bit more detail? You referenced several minutes ago the opening up into the California market for your PEO offering. Any more detail on kind of how that's going in the first several months and to what extent you've assumed that that's going to contribute to the 20-plus% PEO revenue growth assumption that you mentioned earlier?

The -- California has recently become much more attractive to us from a regulatory standpoint in terms of Workers' Compensation, which is really the primary reason we weren't in California in years past. So over the last six months we have opened up in southern California and are in the process of opening up in northern California, and I think in total we'll add somewhere around 20 sales people.

The result, in terms of this year's revenue, or really this year's sales results, will be very modest from a revenue standpoint, and will only start to affect our growth in the second half of the fiscal year in terms of sales, where I do expect it to give us some lift, although I couldn't tell you the exact number sitting here today. So I think more to follow in fiscal '07 than in fiscal '06.

Okay. That makes sense. And then just, you initiated several service-level initiatives recently, certainly being reflected in your improving retention levels. How much more room do we have to go on that front before you kind of start hitting a ceiling or that starts leveling off a bit, do you think?

I think that's a very good question, and it's one that we struggle with all the time. I know there were times when I used to look at the level we've reached now and I'd say, gee, I didn't know if we could ever go beyond it. But if we look at what we consider uncontrollable, which are just people going out of business or people getting acquired, things that are really uncontrollable type losses, we still have a fair amount of room to go. Needless to say, it gets tougher as your overall retention rates get higher.

But we have continued, over the last couple of years, even as our rates have gotten higher, to show very significant retention improvement. And even this first quarter, it's hard to look at a quarter because it's too short a period, but we were really pleased with seeing what the retention improvement was this first quarter also. So we're not seeing signs of it really slowing, although the question is an appropriate one, and logically you have to start to hit some limitations. But I don't think -- we're certainly not near it within this next couple of years.

Okay. Thanks a lot.

At this time there are no further questions. I will now turn the conference back to Ms. Dykstra.

Okay. We're concluding our call. As we conclude we're now trading, as of about a minute ago, $45.88, and we, as always, thank you for your interest and your questions. Thank you.

This concludes today's Automatic Data Processing, Incorporated, first quarter fiscal 2006 earnings conference call. Thank you for participating. You may now disconnect.