自動資料處理 (ADP) 2006 Q4 法說會逐字稿

Good morning.

My name is Carol and I will be your conference operator.

At this time, I would like to welcome everyone to the Automatic Data Processing Inc. fiscal 2006 earnings conference call.

I would now like to inform you that 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 Ms. Elena Charles, Vice President of Investor Relations.

Please go ahead.

Thank you.

Good morning everyone.

I'm Elena Charles, ADP's Vice President of Investor Relations.

I'm here with Art Weinbach, our Chairman and CEO, and Gary Butler, our President and Chief Operating Officer and CEO-elect.

Our call today is structured a bit differently than usual.

A slide presentation accompanies today's earnings call and webcast, and after Art makes his opening remarks, Gary will spend the next 30 minutes or so taking you through the presentation of our fiscal 2006 results, our fiscal 2007 guidance, and the spin-off of Brokerage Services Group.

I would like to take just a moment, though, to be sure that you can all view the slide presentation.

If you're a member of the investment community listening to the earnings call on the telephone, to view the slide presentation, you may either log onto the webcast or you may download the slides from our investor information homepage.

If you're listening to the telephone and choose to log onto the webcast to view the slide presentation, please select the telephone icon link rather than Windows Media Player or Real Player in order to keep the slide presentation in sync with the telephone audio.

Okay.

Now we will move on from there.

During today's conference call, we will discuss some forward-looking statements that involve some risks, and some these are discussed in our periodic filings with the SEC.

The next slide references the use of materials contained in this presentation.

And I think now we are ready to -- I will turn the call over to Art and he will share his opening comments with you.

Thanks, Elena.

I really just wanted to make some very brief opening remarks.

I think as everyone is aware, or at least as I hope everyone is aware, I'm retiring as CEO effective August 31.

And Gary Butler, who has been ADP's President and Chief Operating Officer for many years, is succeeding me.

I am really pleased that we just completed a terrific year in the fiscal year 2006 that just ended, and we had especially good fourth quarter.

You'll hear a lot more about 2006 during this call.

But really, more important, today's announcement and this call is really all about the future.

And with that, I'm going to turn the call over to Gary, who will lead ADP in that future and he'll tell you about it.

Gary?

Thank you, Art.

Today is a very exciting day at ADP.

I am not only pleased to share with you our very strong '06 results, but I am also pleased to share with you and give you more detail on our expectations for fiscal 2007.

We're also going to share with you, as Elena already alluded to do, the results of a very important internal strategic review and the resulting plan that we have established which we believe will add significant value to ADP's shareholders, clients, and ADP associates, and is clearly in the best interest of each of those businesses.

Elena also alluded to a little bit of a different format.

I will cover with you that strategic review that we did before we go into the actual numbers and then the Q & A session.

Also, an important item of note.

I'm particularly pleased that as you've seen in the press release, that Art will become Chairman of the brokerage unit once we spin-off the unit, which I think will be a tremendous asset to that business.

Art, as also part of this presentation, will share with you an overview of what brokerage will look like as a stand-alone company.

And finally, I'll conclude with a more detailed breakdown of our '06 results and guidance for '07.

I am now moving to page 5 in the presentation.

Revenue growth for the year was -- I mean revenue growth for the quarter was 14%, which was very strong; 11% for the year.

We had margin improvement of 180 basis points for the year, and 19% EPS growth for the quarter and 25% for the year on an apples to apples basis, assuming stock option compensation is expensed appropriately in '05 and '06.

I want to be clear up front in the call that we are very, very pleased with the $1.85 per share, which is a very strong result when you consider the fact that we took down $0.02 per share in tax expense from the repatriation of the claims divestiture proceeds, and the very strong sales results that we had in Employer Services, 28% sales growth for the quarter; also caused us to book more selling expense in the quarter than we had forecasted.

This is a great problem to have.

We expense, as we should, that selling expense up front, but obviously we don't recognize the revenue until that revenue is installed over the course of the year in front of us.

So please be clear that we are very pleased with the $1.85 and where we ended up in light of those two very important areas.

We finished the year in Employer Services with 13% sales growth.

Again, this compares very favorably with 6% growth in '04 and 13% growth in '05.

The 28% growth in Employer Services in the fourth quarter I think clearly shows strong results, even though did results in the accelerated sales expense of over 1% per share which I have already shared with you.

Dealer is executing well on its U.S. and international strategies, particularly with the Kerridge acquisition and the international expansion.

Brokerage also had a very strong year, 10% revenue growth and very strong new sales across the unit.

I'll expand a little bit later on our '07 guidance, but I'm pleased to tell you that we expect another strong year.

We're forecasting approximately 10% revenue growth, which translates to 17 to 20% EPS growth.

Finally, I will begin on the next slide to discuss our strategic repositioning and the spin-off of the brokerage unit.

This is clearly being done from a position of strength, as you can see in our results for the fourth quarter and the year.

And it's all about maximizing value for shareholders and clients while also benefiting each of our businesses.

So I will now move to page 6 if you would follow along.

About a year ago, we started a very important strategic review of our business portfolio.

And as you might expect, we looked not only at the characteristics and opportunities of our business units, but also how they perform together in an overall portfolio.

Historically, diversification was a strength of ADP, but over the last number of recent years, it's harder today to make the case versus five years ago that brokerage and ES are countercyclical.

We also have reviewed in quite some detail our capital structure, to make sure we can best execute our growth objectives while also maximizing value for shareholders.

Now, the result of all these reviews was to first create a new ADP focus on Employer and Dealer Services.

Both of these units have the highest growth potential and highest predictability of revenue and pre-tax earnings.

We believe this new unit positions us well for long-term growth through various economic cycles, which obviously change year to year, to meet the objectives of the new ADP of growing 10% plus in revenue and 15% plus in earnings per share.

I also, just as a side note, feel that the consensus that we read or some of the analyst reports that we read reflect a much lower growth number in the 8 to 9% revenue growth and 12 to 13% EPS growth.

We clearly feel these estimates are too conservative relative to what we can achieve with the new ADP.

As part of this strategy, we also exited the claims business with the sale completed in April of 2006, and we're announcing today the separation and the tax-free spin-off of our Brokerage and Securities Clearing unit at this point.

We're also committed to returning excess cash to shareholders as a result of that review.

We will lower our cash balance over time, and we will use our strong cash flow to increase dividends and buybacks, depending again upon market conditions and funding requirements for our acquisitions that we may make that are close to the core in our -- primarily in our Employer Services business.

I am switching now to page 7.

First of all, we think this is beneficial for new ADP shareholders.

It clearly enhances the management focus to execute on the existing opportunities we see in Employer and Dealer, and the separation increases our growth look as we -- outlook as we have referenced earlier and the predictability of earnings for the new ADP.

Second, it provides the Brokerage management team the flexibility to pursue their strategies.

More autonomy is a good thing for Brokerage to pursue initiatives that may be inconsistent with ADP's preferred historical business model, which is more driven by our traditional Employer Services business thinking.

Also, this is an opportunity to right size the Brokerage capital structure.

On the spin, Brokerage will borrow proceeds of somewhere between $500 million to $700 million and dividend those proceeds to ADP.

The ADP dividend is consistent with ADP's tax basis in the Brokerage unit.

The new ADP will then use those proceeds from Brokerage along with its existing strong cash flow to continue returning excess cash to shareholders, again depending upon market conditions.

I'm now moving to page 8 if you're following along.

The spin-off itself will be tax-free to shareholders and ADP.

ADP shareholders as of the distribution date, which we believe will happen late in the third quarter or sometime during early parts of the fourth quarter, will receive Brokerage shares through a onetime dividend.

The spin-off of Brokerage does include our Securities Clearing and Outsourcing business, and ADP will not retain an ownership stake in the new Brokerage unit.

We believe the $500 million to $700 million of debt that Brokerage will incur as part of the spin-off will allow Brokerage to achieve an investment-grade rating from the rating agencies, which we think is important for the unit on a go forward basis.

It is our clear objective to strive to ensure that the spin-off will not inflate the overall expense base of the combined entity, and we intend to offset the public company costs that will be associated with the new Brokerage unit by a smaller infrastructure at the new ADP.

The spin-off is also obviously subject to regulatory approvals and receipt of a favorable ruling by the IRS and tax [opinions] from counsel.

I am now turning to page 7 -- excuse me, to page 9 to talk about the timetable.

I'm not going to take you through chapter and verse of the chart, because I think it is pretty self-evident.

But between the IRS, SEC and the auditors, there is a lot to do which will take us through Q3 or Q4 in our current fiscal year.

In addition, we plan on having a full Brokerage roadshow when we get closer to the spin date.

Now, I'd like to change gears.

And before Art talks to you in more depth about Brokerage, I'd like to share with you my enthusiasm about what the new ADP will look like after the spin-off is complete.

On page 10, there are three areas I would like to stress.

First of all, separation of Brokerage and claims away from the new ADP sets clearly the right focus for me and my management team.

All of us including experience with Mike Martone and myself and all of our staff functions had a lot of experience in running ES and Dealer.

We're also clearly not pursuing any new legs.

We will continue to pursue close to home our tuck-in acquisitions which leverage our existing capability.

Secondly, ES has been and will be even more so the future and the key for ADP.

We have significant opportunities in what we think is a very good market which also has lots of room to grow, as outsourcing penetration rates are low in North America as well as across the globe.

We also believe we can continue to improve the organic growth in ES.

In the last three years we've gone from 5% organic growth in '04 to 10% in '06.

And we're forecasting in the North American unit or in the U.S. unit, 11% internal growth for '07.

I also want to take a minute to remind you that this is before the benefit of any interest rate increases which we capture in the other reporting segment of our financial package.

Sometimes this is not obvious to everyone who follows us, and I think it's a very important underpinning of how we think about the opportunities and the growth prospects for the new ES.

I'm also very optimistic and excited about Dealer's opportunities.

I've had the privilege, along with Mike Martone in Employer Services, to work in that unit twice.

I ran sales in that unit in the '80s, and was President of the SBU through the middle of the '90s.

So I have a lot of confidence in my enthusiasm about Dealer's opportunities.

The business model characteristics are very similar to Employer Services, quite frankly because the people who were running Employer Services have been running Dealer over the last 20 years.

Dealer also cross sells ES products into its base, and I think there is a terrific opportunity to leverage the international growth prospects that have been enhanced with our acquisition of Kerridge for both Asia-Pac and Europe.

In the U.S., we also have tremendous opportunities on the front end of the dealership to provide new and substantive growth legs to our existing core dealer management system opportunities that we have in the U.S.

And we believe that over time, we're targeting double-digit revenue growth over the planning horizon given the strong organic opportunities and strong business development pipeline that we see in Dealer Services.

I'm now going to go to page 11 to talk about ADP's strategic growth program.

As you may recall, for those of you that were at our March analyst meeting, I covered the five initiatives in quite some deal -- detail.

We plan on discussing this again with you in September to give you more detail on how we plan to grow the business.

But the overall strategic objective here is clearly increasing shareholder value by accelerating revenue growth in conjunction with margin expansion.

There are five key components, as you can see on the chart.

We're clearly committed to our HRBPO offering.

I also want to clarify that these offerings go across all markets from our PEO to our comprehensive outsourcing for National Account.

These are clearly what I call in-the-box.

They're are using ADP existing applications where we have scale and good margins, and can offer strong repetitive client service and make money for ADP at the same time.

Please do not confuse this in how some of you think about HRO or HRBPO that may be offered by some other people in the industry.

We are clearly driving new distribution opportunities like our recently announced First Data alliance.

We are clearly focused on international expansion as we give you more detail on the international sales.

Our GlobalView product is really the key to our future and expanding ES internationally.

And we are looking at a number of adjacent markets, including worksite marketing to the 25 million people we pay on payday, as well as insurance offerings for health-care and workers compensation and other to the employers that we serve.

And we're very committed to continuing to focus our efforts on cost structure improvements.

Probably the clearest examples would be our near shoring and offshoring efforts which we shared with you, as well as the consolidation of our data centers across Employer Services and Dealer.

I'm now leaving page 11 and going to page 12 to comment on our commitment to return excess cash to shareholders.

The FY 2006 results reflect ADP's strong cash generation capacity.

We had operating cash flows of over $1.8 billion, and over 1.4 billion if you exclude Brokerage and Claims.

The net cash proceeds from our Claims divestiture is about 760 million, and that's not included in the operating cash flow number referenced before.

Year-end cash balances are around $2.7 billion, and we did return over 1.7 billion to shareholders through dividends and share repurchases.

We increased the dividend last November by 19% to 18.5% per share per quarter.

Additionally, we are reviewing the dividend levels and these will be communicated to you in the normal fashion and timing after our November board meeting.

The quarterly dividend increase will be effective before the spin-off, and we fully expect the increase to be in line with or higher than the 19% increase that we announced for 2006.

After the spin-off, the dividend for the new ADP, ES and Dealer will be the same dollar per share value as before the spin-off.

Art will give you more detail later, but the Brokerage Services unit is also expected to pay a dividend which will be determined by the new management team and the Brokerage Services' new Board of Directors, and it will be clearly incremental to the ADP dividend increase that we will announce in November.

Share repurchase continues to be a very important means of returning excess cash to our shareholders.

We will continue in 2007, obviously subject to market conditions and acquisition funding requirements, to be focused on share repurchase.

And depending upon the IRS review, 500 to 700 million of the proceeds from Brokerage may also be used to repurchase new ADP shares after the spin-off is complete.

And for those of you who haven't had the time yet to reconcile what happened in the fourth quarter, in the fourth quarter, we spent approximately $800 million buying back over 17 million shares.

And my personal appetite to buyback shares is high, but like everything else, it is subject to market conditions and our need to fund acquisitions as we previously discussed.

We also announced this morning along with the release and the spin release that our Board, last night, has increased the repurchase authorization levels by another 50 million shares.

This would bring our current authorization up to somewhere north of 82 million shares in total.

So with that, I'll exit the discussion around the strategic review and turn it over to Art to talk about the new Brokerage Services unit.

Art?

Thank you, Gary.

For those of you who are following along on the Web with the presentation, I'm on page 13 or I am picking up on page 13.

I really want to start off by telling you I'm really excited and enthused about the Brokerage business once the spin-off is completed.

Because if you really look at it, this is a great business.

Brokerage is really strong.

It finished the year -- the 2006 year with 1.9 billion in revenue.

It made over $300 million in pre-tax profit.

We have very long-standing associates.

We have over 4000 dedicated associates in the Brokerage business.

We have a strong global presence.

It's really a terrific business.

As Gary alluded to earlier, as we look over the long run, we expect single digit organic revenue growth.

And even as we forecast 2007, something that Gary will cover a little bit more on in a few minutes, we're forecasting mid single digit growth in 2007 for the Brokerage business.

We expect to be able to capitalize on long-term market-driven growth, giving us the organic revenue growth we were talking about.

There is intrinsic growth in each of our businesses.

We'll also be able to increment that organic growth by driving new sales, by leveraging the breadth of our relationships.

We have grown our sales staff and have really done very well in increasing our sales, especially over the last couple of years.

We also made a meaningful investment in the Clearing business in 2004, and it will be our intention to continue to pursue increasing share within that business.

So we have a strong cash flow generation, and with that, we ought to be able to both invest in the business while also returning cash to our shareholders.

As Gary just alluded to, we expect Brokerage will pay a dividend, although again, this decision will have to be reviewed and formalized as we get closer to the spin date.

I'm moving on now to page 14.

I've been involved in Brokerage really for many years.

It reported to me in my days as an Executive Vice President, and of course as a President before it moved to Gary when he became COO.

But a lot more important than my involvement are Rich Daly and John Hogan, who will be leading this Company with me.

They are currently the co-presidents of Brokerage.

Rich Daly founded and heads our investor communications business.

This is really a business he created from the start, and it has grown to the $1.4 billion of revenue that we have today.

John Hogan heads our transaction processing business, really got us involved in our Clearing and Outsourcing business.

And before that, before he moved into that role, he ran our operations for the investor communications business.

With Rich and John as co-presidents, they have taken Brokerage from about $800 million of revenue in 1996 to the $1.9 billion revenue in the year that we just completed.

It is, as I said earlier, this is a great business.

And with Rich and John, we really have excellent, experienced leadership and I feel very good about how we head into the spun-off business.

Moving forward to page 15, this is -- the chart's a little busy, but it really demonstrates why I think we all believe that Brokerage is well positioned.

Our brokerage business touches investors across the investment lifecycle.

First, we provide invest information to investors at the decision-making stage.

After that, we execute.

We process trades.

And then we help our clients service the investors after the trade is made.

Now, we do all of this through two businesses; first, our investor communications business which I alluded to before with $1.4 billion in revenue.

In the year we just finished, in fiscal 2006, we processed over 1 billion -- think of that number -- over 1 billion investor communications, and that includes statements, trade [confirms], tax reports, proxy packages.

We also supported every annual meeting in the United States as an industry clearing house for proxy voting.

Our other business, our trade processing, Clearing and Outsourcing has about $550 million in revenues.

It's primarily back office outsourcing solutions for broker-dealers.

But different components or different products within our trade processing solution are used by nine of the top 10 broker-dealers.

In our fixed income area, our trade processing solutions are used by seven of the top 10 Fortune 500 banks.

So we really are well positioned in this market.

If we go on to page 16, this is an interesting way to look at what the results have been from a top-down view over the last five years.

And if you look at the numbers, the results in fiscal year 2002, five years ago, still benefited from the dot-com cycle and the strong retail trading that went with it.

Clearly, we felt the impact in 2003 as the markets adjusted -- adjusted is a euphemism.

We got hammered along with a lot of other people in the other market.

And with the fixed cost elements a part of our business, it takes a while for us to adjust when you have a rapid change in the market.

But we rebuilt in 2004, and we feel very good about the growth in margins over the last couple of years, especially holding our margins in 2005 and 2006 as we made the investments that we did in the Clearing business, is really -- it really talks about a very strong margin performance.

Clearing is an investment we made during fiscal 2005.

We had very good sales growth in 2006, and what we're looking for in 2007 is another good increase in revenues and less loss as we go forward.

So we're clearly moving in the right direction.

Moving to page 17, Gary spent a few moments talking about a dividend of 500 and 700 million that Brokerage would borrow and then dividend over to ADP.

The idea really is to set an appropriate capital structure for Brokerage.

And for us, targeting an investment-grade rating for whatever we end up naming this new brokerage entity, that's really what the objective is.

The rating agency process for Brokerage will be undertaken in the fall and in the winter as we get closer to the time of the spin.

And as Gary also mentioned, we're reviewing the use of the proceeds at ADP once the dividend is back to ADP.

So again, I am going to turn the floor back over to Gary, but I really do want to reiterate and hopefully I've conveyed my enthusiasm.

I'm really looking forward to Brokerage and its spun-off mode.

And with that, Gary?

Thank you, Art.

I am now on page 18.

I'd like to spend just a few moments giving you some more detail on what happened in fiscal '06 at the business unit level.

Employer Services had a strong growth year, 10%.

The pre-tax NOI margin was up, improved 90 basis points.

Again, some of the same conversation around the $1.85 and the booking of the sales expense ties directly to the earlier conversations we had around 100 basis point improvement.

Again, an outstanding quarter with 28% in new bookings, and new business bookings for the year up 13%. [Pays for control], the way we look at our same-store sales kind of analysis was up 2%.

And the growth in our average client balances during the year stayed strong at 11%.

Overall retention was good.

I guess better than good, it was great.

It was a record level and clearly up 0.2 over last year, with strong results in the fourth quarter.

Dealer had a good revenue growth at 14%, 4% of which is internal and the rest based on the Kerridge acquisition.

Their margins would have been up 130 basis points before the impact of the integration expense that we had based on the Kerridge acquisition.

Again, I want to reiterate some of my previous comments.

We have a very strong opportunity for international expansion in Asia Pacific, and the Kerridge acquisition already gives us a number of opportunities and a footprint in a number of places where we can take advantage of this very strong market.

We also over the course of this year sold Group 1, which now gives us seven of the top 10 auto consolidators using ADP DMS exclusively across their base.

Brokerage had a terrific growth year around 10%.

Investor communications clearly led the way with 13% growth.

Shareholder communications' pieces were up 8% and we had stock record growth of around 4%.

We also had a very strong finish throughout -- for the fourth quarter in new bookings for our Brokerage unit, and the sales performance has been very consistent all year with a very strong performance.

Again, to remind you, the fourth-quarter sales growth that we had, we do book those incremental expenses in Employer Services, or Brokerage for that matter as well, at the time we book the business not when we install the business.

And that really translates to more recurring revenues over time, particularly since a lot of the uplift, which we'll get to later, came in Employer Services and our National Accounts arena, and particularly in our GlobalView product in our international business unit.

I am now leaving 18 going to page 19.

This talks about a comparison between our '07 guidance and the FY 2006 results I just covered with you.

These numbers, again, to reemphasize, are for all of ADP and include Brokerage.

The guidance is before any one-times or deal expenses that we anticipate having in connection with the Brokerage spin-off.

And I believe the best way for you to continue to look at us in 2007 is as a combined entity, and then make adjustments by each unit as we come back to you later with more detail closer to the actual spin date.

Again, in '06, revenues were up 11, 25% in earnings per share growth, and excellent sales and margin improvement of 180 basis points.

We feel very good about our guidance for '07, again, double-digit revenue growth at approximately 10% and a strong EPS performance in the 17 to 20% range.

This does assume an interest rate of 4.5%, which is up from the 4.1 average rate in '06, and a 37.7% tax rate for 2007, which is down from the '06 tax rate due to the repatriation tax that we paid after the Claims divestiture.

Again, our EPS growth, another good reference point in 2006.

Before the benefit of these same improved interest rates I already alluded to, the EPS growth would have been 19% versus 25 if you took out just the increase in interest rates.

And again, that would translate to 13 to 16% EPS growth in '07 if we took out the benefits just from interest rate alone.

As you go to page 20, you'll see a further breakout by segment.

Obviously, we see continued revenue momentum and healthy margin expansion in 2007.

We expect Employer in total to be up about 10% with improved margins, around 100 basis points.

Again, Dealer will grow over 10%, aided in part by the Kerridge acquisition, and we expect margins to improve at least 100 basis points there as well.

Brokerage will grow in the mid single digits while also improving its margin.

Clearing is a relatively small revenue number in the grand scheme of things, but we do expect 20% revenue growth, which we think is an important indicator for the long-term growth of the new brokerage unit.

But before I turn it over to the operator, and to Art first for the question and answers, I do also want to spend a moment to announce the fact that Chris Reidy has joined ADP as our Chief Financial Officer.

I couldn't be happier in having Chris on our team.

He's had over 25 years of varied financial function experience.

He is a Harvard Business School graduate, and most recently was the Controller and Chief Accounting Officer at the AT&T Corporation prior to their merger with SBC.

So we're delighted to have him.

He had eleven years as a partner -- or in public accounting and was a partner in [DNT] and will be an excellent member of the ADP senior team.

So with that, I am going to pass the baton back to Art for some concluding remarks.

Thanks, Gary.

I really just want to reiterate what Gary said.

I want also add my welcome to Chris.

He is going to be a very important addition to what's already a very strong team, and I think we're all delighted to have him.

I did want conclude on a little bit of a personal note.

This will be my last conference call and meeting with you as ADP's CEO.

I guess I've been communicating to the Street for ADP for over 25 years in one capacity or another, and I guess I have been on every conference call since we started them many years ago.

I've learned a lot from dealing with you and your predecessors, and I am really appreciative of your questions, or at least most of your questions, your interest and your knowledge of the Company.

They have really helped shape our thinking and our strategies.

I have -- I leave ADP really confident in the strengths of our Company.

ADP is a powerful Company.

We have a very strong culture, we have very strong markets.

Our abilities in sales and service are terrific, and especially we have terrific people.

But most important, we have a great management team led by Gary.

So I'll conclude on that note -- with a note of thank you to you all.

It's been fun.

And with that I will turn it back to Elena.

Thank you, Art.

We have a very large attendance on our call today, so we'll get right to the Q&A.

We'll turn it over to the operator to take your questions.

(OPERATOR INSTRUCTIONS).

Rod Bourgeois, Bernstein.

Can you just talk about what drove the thinking on the Brokerage spin-off?

I know we published in April a piece encouraging some shareholder friendly moves related to spin-off, etc.

And at the time, I think the indication was ADP wasn't heading in that direction.

And it would just be helpful to know kind of where the thinking might have turned in the minds of the leadership team and the board on the Brokerage spin-off front.

As Gary commented earlier, we started looking at this issue really years ago when we looked at the overall components of our -- that made up ADP.

And so long before this became an "in" thing to do, we have been looking at it.

As Gary also alluded to, both the Claims action, which we started many months ago, and this Brokerage spin were part of that overall strategic review.

Ultimately, we concluded that the fit and focus argument is really a primary reason for doing this.

The growth aspects of the Dealer and Employer Services business are stronger than the mid single digit growth that we are currently looking for in Brokerage, but also they have different business models, and they have different opportunities and they have different capital structure needs.

So all those things drove us to the conclusion I think we presented today and that we're very comfortable with.

Great.

And you've talked about targeting a lower cash balance, but you haven't really quantified how much lower the cash balance target would be.

Can you give us some specificity on that?

I don't think at this point we want to go to that level of detail.

But I think you can see by the level of activity in the fourth quarter, as well as our history over the last three years, that we will continue to be fairly aggressive here.

I have a strong appetite for buybacks, but again, depending upon price and the need for cash for other purposes or increasing the dividend, we really don't want to provide any more specifics at this point.

Great, well thanks for the shareholder friendly moves and also the good fundamentals here.

Thank you.

James Kissane, Bear Stearns.

Congratulations, guys.

In my humble opinion, I think you're doing all the right things.

In terms of the sales, you blew away the numbers in the fourth quarter.

Do you think your sales numbers will be more volatile in the future, more lumpy given that GlobalView is becoming a bigger portion?

And just follow on to that, the margins on GlobalView compared to the average for Employer Services.

Thanks.

That's a big question.

First of all, we were delighted with the actual sales results that we had in the fourth quarter.

The sales results were strongest in our National Accounts unit, our global unit driven by the GlobalView sales as well as in the PEO.

But we also had a very strong performance, double-digit sales growth for Majors in the fourth quarter, which is our oldest historic unit.

So we think this is a real momentum kind of event for us.

I think it also speaks well to all of the investments we made over the last year and a half to drive the sales capability further, as well as the investments we made in GlobalView and our COS product, as well as in the PEO expansion.

So I think we're seeing the results of that, and we added a lot of staffing.

We -- from this time a year ago, we probably have over 300 more ES sales associates than we did at this point in time a year ago.

And we're now operating GlobalView in 30 countries rather than a handful in Asia-Pac.

So big investments and -- but I think it's going to be a big return.

There is more volatility in big units because you can't predict them as easy as you can a three-man CPA referral in our small business unit.

So I think there will be some more volatility, but I think this is a good thing.

And secondly, to answer your question, the whole fundamentals of the GlobalView product were to over time drive comparable margins that we see in our other business unit.

In fact, if anything, by the time we build scale versus having in three places around the globe rather than having an operation in every country, as we build volume, our margins should be even better than we see in some of our international units.

Thank you very much.

Best of luck, Art.

Yes, we're not at scale yet --

Yes, over time.

Right.

So over time we'll get there, which really goes back to what Gary was talking about before of opportunity because margins should improve as we get scale.

And as sales are coming in right now in GlobalView, that will help create that scale.

Thank you.

Cindy Shaw, Moors & Cabot.

Thanks.

I was hoping you could give us some more color on your thinking behind the Brokerage spin out, whether you considered an IPO or private equity sale, and if you did, why not?

And also, Dealer Services, really the growth in that has not been that good.

It sounds like you're expecting that to pick up.

Acquisitions have typically been dilutive in the near-term; really questioning whether it makes sense to keep that.

If you could give us a little more thinking, I know you talked to that already, but it doesn't seem to fit that well with the focus theme.

Let me take the Brokerage part of it and I will let Gary comment on the Dealer part of it.

We considered all of the alternatives that you would presume that we would consider at -- prior to making this decision to spin Brokerage.

We've been involved in the brokerage business for many, many years -- over 40 years.

And our tax basis in the business is very low because so much of it has been through internal growth.

And as we looked at how do we maximize the return for our shareholders, while we did evaluate a number of alternatives, we concluded that this was by far the best way to go.

Let me try to answer the Dealer Services question.

Again, to remind you, I spent six or seven years running that unit and previously ran sales.

And I was also the executive at that point in time who took Dealer Services internationally.

And obviously, the U.S. marketplace is relatively penetrated from core DMS.

But there are absolutely huge opportunities on international expansion.

If you were to go look at new vehicle sales over the next five years by major geographies, you would find that the major area of the world where all that growth is going to occur is in Asia Pacific.

And there is no equivalent Dealer Services throughout the entire region, so just like with GlobalView, as the world becomes more flat, we have a tremendous opportunity just like we're achieving in GlobalView, in our Dealer Services business.

And we also think there are some terrific opportunities in the front end of the dealership as Dealers move from traditional advertising to their own websites and lead management and effective communication of sales processes that are different than the historical way.

So we're actually pretty excited about the growth opportunities there.

And the proof will be in the eating, but we think we've got a pretty good path laid out for us to follow.

And you think -- it sounds like as you pursue those growth opportunities, any margin pressures on that?

Or can you expand margins and take advantage of those opportunities at the same time?

Well, I think clearly Cindy, as you go into places like Asia-Pac, just like GlobalView, we're clearly not making money today in GlobalView because we had to buildout 30 countries.

So as we do those kind of things in Asia Pacific, sure there will be margin pressure there, but we got great scale in our U.S. markets.

And our margins are also improving and our European arena.

And the acquisition of Kerridge will actually help us drive margin improvement internationally where we haven't been doing particularly well from a margin standpoint.

So I think the way to think about it is the way we talked about for next year, we're looking at 100 basis point improvement even with some of those investments, and we would continue to plan to improve margins over the planning horizon.

Great.

Thanks very much.

Adam Frisch, UBS.

Thanks.

And to Art, congratulations and good luck, although it sounds like someone needs to explain the finer points of what retirement means to you.

I would also like to compliment your team.

I have been one of your most outspoken critics recently about shareholder value and we wrote a big note on that, but I've got to complement you on your willingness to listen to your shareholders and act on their suggestions.

I think presentation you gave was probably the best I've seen since I started covering you guys.

So I just wanted to even out my commentary over the past few months.

In terms of your -- the questions I had about your businesses, can you give us your early thoughts on what kind of accretion or dilution you think the move will have on your EPS in '07 in terms of the divestiture?

In terms of the spin-off?

Yes.

Not sure I understand the question.

Sorry.

Once it's spun off, what do you -- the spin-off obviously will be dilutive, but obviously if you buy back stock, it will mitigate some of that dilution.

So is there a target you have for '07 EPS in terms of what the spin-off will do post a share buyback?

It's really way premature for us to be focusing on that.

We still have a series of reviews we need to do, allocations that we need to do, intercompany relationships that we need to put in place.

So it's really premature for us to be talking with any specificity at all about those numbers now.

I think the underlying, or the inherent question which says assuming that we get this $500 million to $700 million dividend back from Brokerage, will we be utilizing it for the benefit of shareholders?

I think Gary has answered that question and said yes.

It's our intention to return that to shareholders, subject of course to acquisitions, market conditions, and other things.

Adam, just to be clear, there will certainly be onetime deal expenses which will be reported in a separate line in the financials.

We haven't quantified those digitally, but they're not off the charts, but they -- it's obviously a material amount of money.

But we believe and we're working very diligently to contain costs so that the consolidated costs will equal the split costs at the end of the day, trying to offset also the public company cost of dealing with the new entity.

But we think we have opportunities to do that.

We're working very hard to do it, and we're not contemplating a change in guidance based upon that as we move forward beyond the onetime aspects.

Okay.

Thanks for that color.

Just on a share buyback authorization, could you tell us how much in terms of the buyback is factored into your '07 guidance?

And kind of follow-up by answering if all of the -- is it possible that all of 82 million shares that are left on the authorization could be repurchased in the upcoming fiscal year?

Adam, there's nothing in the forecast for further share buybacks than what we reported and that I covered with you for the fourth quarter.

Obviously, if things stay the same in terms of market conditions and the accretive nature of the share buyback, we will continue to purchase shares as we go through next year.

At this point, we also lose the interest income when we do that to use those monies, but it is accretive at this point to continue doing that, and we think it is a good use of the excess cash that we have.

Whether or not we would use up all of the excess cash we have today and a very strong cash flow forecast in '07 has not been determined, and I don't think that it would be appropriate for us to even go there at this point in the year.

Okay.

Final question related to that.

Does the proposed spin-off preclude you at all from buying back stock aggressively in the open market or is that -- are those two things completely separate?

Completely separate.

Okay great.

Thank you.

David Grossman, Thomas Weisel Partners.

Thanks.

I wondered if I could just ask a couple of questions about the margins.

And I may have missed this on the ES side, but Gary, you talked about EPS ex the impact of float and the growth.

Can you give us a sense for what kind of margin expansion you assume in the ES unit, ex float, in '07?

First of all, let me clarify for you.

It's not float.

Because anytime we sell a new client or they add more people to their payroll, we get the float because that's the way we've chosen to price the service rather than charging fees for tax filing and money movement.

So we consider the accretion of float as part of our standard business model, and that's why we pass back to the ES unit any interest at a fixed rate of 4.5%, and why we report any divergence from the 4.5% below the line, so to speak, in Other so that you can see the true impact of interest rate swings.

So the numbers that I showed you or shared with you would be including the float we acquired, but at a steady-state interest.

To the 100 basis points -- just in sum, that is ex rates.

That's ex rate, but includes float.

Yes, I understand.

Includes the balance.

Right.

And I guess maybe the same thing or a related question for you, Art, on the Brokerage business.

If you segregate, and I don't know if you can do this, but segregate the investor communications business from the processing business, is the margin trend that was outlined in the slides, can you give us an idea of how that would look like if you segmented the business?

Well, again, I think it's premature for us to do that right now.

In the slide they're -- I kind of lumped everything together.

I put the security clearing business and the back office processing business and the multiple parts of the investor communication business into a single one.

As we get -- as we go forward and over the next few months, as we prepare the Form 10 for the spin, we will get into a lot more detail on the specifics of the margins within each of those businesses and how they play out.

But I don't want to jump the gun on that at this point in time, because we really have to work through the analyses in a little bit different way than we've done up until now in order to provide all that information accurately.

Okay.

I guess maybe asked another way, where would the biggest opportunity be on the margin side for the Brokerage business going forward?

I think if you look at the Clearing business, clearly we have made a significant investment in Clearing.

Part of the success of that business, similar to the way Gary was talking before in our other business, is scale.

And with scale will come incremental margin, and so I think from a margin viewpoint, that place has the single greatest opportunity.

The back office processing piece of Brokerage is a relatively fixed cost structure, and therefore, varies more based upon volume changes.

So significant ups and downs in volume are going to have more of an impact on margin in that business.

And then the investor communication business, we're working diligently all the time in order to be improving our margins.

And we've been able to accomplish that relatively consistently, not every year, but virtually every year.

So that's really a way to think about it.

Okay.

And just one last question I guess on the buyback and the share count.

If I understood you right, Gary, you assumed no incremental share buybacks in your guidance versus where you are right now.

What was the fully diluted share count at the end of the quarter?

Not the average for the quarter, but at the end of the quarter given that you bought back a lot of stock during the quarter?

I believe it was 562 million.

And that is quarter end?

Year-end.

David Grossman Great.

Thanks very much.

Brandt Sakakeeny, Deutsche Bank.

I just wanted to follow up on that Brokerage question again, just in terms of the margins.

Is it your expectation that the Clearing business will always dilute the margins going forward?

Or is that -- as in, that's simply the cost of doing business and that it expands other opportunities in Brokerage or do you think that business can be profitable?

I think that business can definitely be profitable.

And I think that business will be profitable.

I'm not ready to predict when it will be profitable, because part of it will depend upon the degree of expansion that we go through in that business.

But clearly, that business with scale will be a profitable business.

As I mentioned also earlier, our recent sales activity in adding new clients, although not necessarily the largest clients, but adding new clients in that business has been good.

So we're moving in the right direction.

But clearly, we're not in that as a loss leader.

That business we clearly expect will be a profitable business for us.

Okay.

And again, just one more question there too.

From '04 to '05, it looks like sequentially you saw 200 basis points of growth, sort of apples to apples pre-Clearing.

Is it your expectation that business can get to pre-Clearing, a 20% type margin, which would be below the sort of bubble peaks of '02?

But is there anything secular or structural that would prevent that business from getting to at least 20% margin pre-Clearing?

I think it really depends upon two things.

One is the amount of retail involvement in the back office processing piece of the industry.

Obviously, the higher the retail involvement, the better that is for us.

And the second thing that inhibited us from getting to those margins in the last few years has been the consolidation in the financial services industry.

Absent those two things, I think the answer is yes.

But again, I -- it's probably more precise than I ought to be at this point.

Sure.

Thanks for that color.

And finally, I guess, the 4% record growth, that's sort of below the traditional sort of double-digit type record breaker growth we expect.

Is that -- do you expect that to continue going forward?

Well, I think the organic growth is -- if you don't do anything in addition to that, I expect us always to be doing things in addition.

But one of the major reasons for that growth for next year is we have previously announced the fact that we'll probably lose TD Waterhouse as part of the Ameritrade acquisition of TD Waterhouse.

That will probably occur in the third quarter of '07, and that will impact our results in '07 from a revenue growth point of view.

Okay.

And it also includes the divestiture of Cunningham, is that right?

Yes.

Okay.

Got it.

Great.

Thanks and good luck in your next endeavors.

Greg Cappelli, Credit Suisse.

Couple of quick questions.

I wonder if I might first just ask, the client retention which continues to improve, are we sort of topping out there?

Can that -- how much better do you think that can get realistically?

We're approaching 90% retention across Employer Services, which by ten-year historical standards is terrific.

We also find that the more services a client buys, so someone who might buy three or four services rather than just payroll, also have higher retention rates.

And so since we plan to target further penetration of our Beyond Payroll products, we would expect retention to continue based upon the fact, plus our continued investments to improve our service levels.

So I think it -- I guess it eventually becomes asymptotic to some number, but I still think we have multiple points to go as we look over a multiyear horizon.

Okay.

And then Gary, just -- you talked about adjusting infrastructure at the new ADP.

Can you be a little bit more specific about the costs you'll be able to pull out from Brokerage going forward?

Well, first of all we're in the process of formulating those plans, and obviously you can't do too much work when you haven't put out an announcement that you are actually going to do this.

So I appreciate the question, but I would also appreciate some understanding that we have been thinking about this but have not been widely circulating the fact that we're going to do this.

But clearly, there will be incremental costs at the public entity within Brokerage.

But between our corporate unit and our Employer Services unit, being closer together rather than having a separate layer, we think there is opportunity to improve our cost position in the new ADP going forward.

And obviously, there's overlap in multiple areas, and it's our intention to have all of that structure at least directionally set in the next 30 to 60 days, so that we can move forward with implementation.

Okay.

That is helpful.

Just finally, obviously, I guess we can assume from your comments there's not much likelihood you will be doing anything with Dealer Services because of the cross sell opportunities.

You also mentioned you're not planning a new leg to the stool, but could we see perhaps an appetite for larger deals within Dealer?

Sorry, within the ES segment and perhaps even in HRBPO space?

I think there's a potential for that certainly if they are close to the core, either in products we already sell or in markets where we are already operating.

Our kind of internal mantra is those kind of acquisitions are fine, but they need to be close to the core and they need to be managed in such a way they don't have multi-year dilution.

And I'm certainly not interested in purchasing other companies who have business model problems, whether they are big small or in between.

So I think there clearly is room for some good sized acquisitions, but they've got to meet that profile, or frankly we're not interested.

Okay.

Thanks a lot and best of luck to you, Art, going forward.

Thanks again.

Appreciate it.

Bryan Keane, Prudential.

Good morning.

I guess I continue to notice some strong international sales for Employee Services.

Can you just remind us what percentage of ES is international and how fast that's growing?

The ES international business is, I guess, around $800 million -- somewhere -- give or take.

It's about $850 million this year.

$850 million.

The business unit itself is growing mid to high single digits and will continue to grow at that rate next year.

Most of the acceleration will be from expanding our GlobalView, as well as moving down market in the major accounts across that unit.

We fully expect in that in the near-term, being the next year or two, as we exit '07, that we will start seeing double-digit growth out of international based upon the investments and the strong sales results we've seen on GlobalView.

And the profits in that segment are closer to break even, but you expect them to improve quite a bit going forward?

Our ES international has very good profit levels.

You have to remember a large part of net revenues in Canada where we have comparable operating models and scale as we do in the U.S.

Our margins in France, where when we acquired GSI back in '95, are excellent.

But the margins are break even or lower in some of the other countries where we have smaller amounts of scale and have to spend the money to have platforms in every one of those markets.

And you also have to remember that at least today, we have no profits from money movement or float in any of our international business.

So that, by definition, would make the margins 20 to 25% lower than they would be in our U.S. model.

Okay great.

And just finally, Dealer Services, it looks like organic growth is expected to be in the mid single digits.

Is that a business that can get up to double-digits organic growth?

And just -- I know you touched on it, but can you help us get there?

Obviously, I clearly believe it can, or the obvious question would be why are you keeping it if you don't.

And clearly, I believe that with the right amount of investment and the right amount of focus in the two areas that I talked about, I think Dealer can get very close to organic double-digit growth.

And they have just done an outstanding job on the business development side and the acquisition side, and there is nothing wrong with growing through acquisitions as long as they don't dilute you over long periods of time.

And Dealer has done excellent job of doing just that.

Okay great.

And congratulations, Art.

Thank you.

Charley Murphy, Morgan Stanley.

Thank you very much, and thanks very much for the detail.

It's very clear.

Could we talk about the other business?

What type of pre-tax NOI would you expect in fiscal '07 in that business?

You talk about in the PowerPoint some incremental investments there.

And you took a penny of gains in the quarter.

How much is built into your guidance in fiscal '07?

We're not sure what the other piece that you're asking about is.

I think we have other revenue and other income, so he's assuming that's a business, but it's really not a business.

It's other.

Right.

So I imagine corporate expenses and other things are in there.

Right.

I'll let Elena answer that.

Tell me what the question was again.

So there is a business called other -- that's not Employer, not Dealer, not Broker, not Clearing.

Sure.

The other segment.

Okay.

Yes, so that posted $36 million of pre-tax NOI loss in '06.

I am wondering what you expect for '07?

No, you know, that one is tough to forecast in terms of giving guidance on that one.

There are -- we have a couple of very small businesses in there.

We have got, as you said, the corporate overhead.

There is a lot of in and outs.

If you look how that trails on our website schedule from quarter to quarter, just various in and outs there, so it's really difficult to give you a good number for '07.

I would say look at those schedules that we put out.

There is a little bit of seasonality in there, but I wouldn't expect anything significantly different than you see over that history we give you, and nothing unusual at this point I can tell you about.

Okay great, thanks.

And you took a penny of gain this quarter.

Do you expect to take any in '07?

No, we don't build in any substantial level of gains or losses in the portfolio.

There is nothing that's anticipated in the forecast that we made.

It's generally a function of liquidity and needs for cash at given points in time.

It's much more that than it is anything else, so it's really not a predictable thing.

Great.

Terrific.

Thanks very much everyone.

Craig Peckham, Jefferies.

Good morning.

I guess a question for Gary.

I wonder if you could just give us a sense for how important the AAA rating will be for new ADP, and how that feeds into your go forward thoughts on capital allocation?

Well, we view the AAA as a good thing, not a bad thing.

That being said, if we needed to borrow money because we wanted to do some kind of major return of capital to the shareholders or a major acquisition that we couldn't fund day-to-day, we would consider changing our capital structure that might cause us to lose the AAA.

But as you probably saw, also in the announcements, S&P did reaffirm our AAA rating this morning, and Moody's will come out with -- Moody's -- Art's just telling me Moody's came out with it as we were coming down here as well.

So they obviously see that the go forward business is a AAA Company, and to our clients whose money we move into our banks, whose pay instruments and accounts that we use to move over $1 trillion to the money market system, AAA is important both to our salespeople, our clients, and to our partners in the banking community.

That being said, there is nothing that says we couldn't go forward as a AA rather than a AAA if it was for a good strategic purpose.

So hopefully I answered the question.

I try not to avoid it, but again, we look at the AAA as an okay thing unless there's a more important strategy that we want to execute.

That's fair.

And it's hard to see this by looking at the very strong performance in orders and underlying activity in ES during the quarter, but against the backdrop of some emerging concerns about economic slowdown, I wonder if you could take a step back, look at your business, the activity of your clients, and give us a sense for what you're seeing in terms of underlying health of their businesses.

Well, as I mentioned earlier in the call, our balances, our funds that we hold for our clients was up 11% this year.

That's driven by new sales as well as merit increases, as well as additional employees they answered -- that they've hired.

For the quarter, actually, same-store sales or employee growth was up I believe 2.4% --

2.5.

Excuse me, 2.5% for the quarter which, again, was another strong result.

And obviously, sales results are always easier to come by if your clients are feeling good about what they're doing and the services that you're offering.

So we're seeing no degradation per se in the economy based upon any of the metrics that we would report on a periodic basis.

Yes, I would just want to add also that the -- when we talk about that paper control increase, that -- we're actually talking, just to remind everyone, about the major account auto pay that is across a very wide base, wide different size of clients.

But just to add to that, we do see improvement as well when we look at our small SBS business separately; very, very strong growth continues there in the [pays] as well as in National Accounts at the high-end.

Actually, the small business segment is growing over 0.5% more than the statistically we quoted to you, and the National Accounts base is also around 2% kind of growth.

So that's a big improvement, particularly over the trends we saw three years ago.

So we're seeing no evidence of a degradation in the health of our clients.

I just want to reiterate that since -- we've always talked about payroll as a lagging indicator.

Probably of all those things, the most important piece is sales.

Usually, when -- the price we'll see at first will be a weakness in sales when people really starting to -- stop buying and stopping making commitments, and so the strong sales component really would say we're looking at still a pretty good market out there.

That's great.

The last thing I wanted to ask you about was if you had initial sense for what the relative tax rates may look like for new ADP and for Brokerage.

I imagine the composition of revenue is going to create some differences there.

I don't think we should try and split it between the two.

I think the -- when we look at an overall effective rate of, I think it's 37.7 or --

37.7.

For next year.

If you factored out what Gary was talking about before, which was the 10 million repatriation, we're probably going to be down a couple tenths from where we were this year, and that's based mostly on state taxes and allocations on that.

Yes.

Yes, the tax basis for '07 was on the presentation for our forecast for '07.

Yes, okay.

So it's slightly below, but actually, the split between Brokerage and ADP, we're not close -- (multiple speakers) we're not there yet.

We're not even close to it at this point.

Can't answer it.

Okay.

Thanks a lot and congrats.

Mark Marcon, Robert W. Baird.

Good morning.

And first of all, Art, congratulations.

It's been a pleasure dealing with you over the years.

And Gary, couldn't get off to a better start.

I think all the moves that you've announced today are terrific.

Was wondering with regards to just the corporate overhead, if we think about that as a percentage of sales in terms of new ADP, can we take your comments to mean roughly speaking that those corporate -- that corporate overhead as a percentage of sales probably won't change too much, given that you're going to take some costs out for new ADP?

Or is that premature to come to that conclusion?

I think it's a little premature, but as I mentioned earlier, it's clearly our objective for the sum of the pieces to not be any more than the whole is before we start, if you take the onetime expenses out.

So we think as you -- and I think that would translate to comparable ratios going forward when you do the math.

Terrific.

And with regards to the new sales, obviously terrific performance in the fourth quarter, sounded like a lot of it was driven by GlobalView.

What changed in terms of GlobalView?

You have had that for a little while now.

What really spurred the strong growth this fourth quarter and were there any sort of like really big deals that were onetime in nature?

And then you also mentioned that in Majors you saw a ramp up.

I'm wondering what was driving that.

Let me first of all kind of set you straight a little bit on something.

Our smallest sales quota is our international business unit.

So the strong performance we saw in Majors, National Accounts and the PEO were really the lead indicators that drove that 28% growth.

The PEO new sales growth is well beyond 20% and just nothing short of terrific.

In terms of GlobalView, we announced a number of good sized deals and we also have a number of good sized deals in the pipeline.

But, too, of note, would be IKEA where we signed up IKEA's 70,000 employees across -- I think it's 20 countries.

We also signed up Microsoft across Asia-Pac and all of Europe.

And we have a number of other ones which I won't go into detail, but our backlog of potential prospects is also very strong.

But these kind of deals, when you start thinking about signing 70,000 employees in 20 countries and the contractual arrangements and service level agreements, and global pricing and all of the things that you have to deal with by country, the biggest process is usually just getting the deals structured and approved at the right level.

But again, we -- adding a lot of resource there, and clearly GlobalView will be the leading product as we strive to grow our international revenues even faster.

Terrific.

And then domestically, Majors, you mentioned that accelerated.

What's driving that?

I think it's a combination of we finally -- we started off last year below staffing level.

So we made a conscious effort to really get our staffing up there.

We've got a couple of new products in the benefits area that are really driving new payroll sales as well as sales to the base.

Our time and labor management sales continue to be quite strong.

And we've got a pretty concerted effort to move our 401(k) product up into that area where they have pretty strong balances, since most of the Major accounts already have 401(k) plans, and they -- the new sales bring balances with them, which we look at as a good thing.

So I think it's better execution, better staffing, and some new products and just strong execution.

Great.

And any comments with regards to pricing?

We -- if the question is competitive pricing, we don't see anything different other than business as usual.

Obviously, there are a lot of people that provide payroll in lots of cities and places across the U.S., but we've seen no real degradation in competitive pricing other than normal competitive activity which we would expect to see.

So year-over-year we should still see the normal sort of price increases.

Yes.

Terrific.

Congratulations on everything.

Thank you.

Gary Bisbee, Lehman Brothers.

I'll add my congratulations on a good year and I think the right decisions strategically you are making here.

A couple of questions.

First of all, given the high-level of buyback activity in the quarter and what sounds like pretty bullish outlook both in terms of revenue growth in margin, it seems to me like the guidance you're giving for fiscal '07 is ultraconservative.

And I'm wondering if there are any costs or investments or anything that you're thinking of that's included within that guidance that may help me understand how you get to only 17 to 20% EPS growth, given all the other things you said.

Obviously we will continue to make investments that will fuel our growth long-term, to the extent we have the wherewithal to do that.

You also have to remember that as interest rates rise, the accretion near term of those shares become much less than it would be in -- over the last couple of years.

And we are pretty happy, obviously, with a 17 to 21% EPS growth, particularly when it reflects a core EPS improvement of, call it 13 to 17, or 14 to 16 or whatever the number comes out to.

So we're not uncomfortable with where we are today.

It would certainly be our objective to do better, but we're not uncomfortable at the level where we are forecasting.

By core, Gary is referring to the comment he made earlier during his presentation about the impact purely of the rise in interest rates that was forecasted.

Yes.

Okay.

Also, you've got remember that the near-term effect of buyback is much less than you might originally think because -- particularly if you factor it in over the course of the year as opposed to one fell swoop in the first month.

So it really will help more for '08 and beyond than it will for '07.

Okay.

Can you help us understand in any given year, or say after a strong year of new sales like this 13%, what percentage of the next year's revenue growth do those new contracts sign?

And obviously, the angle I am trying to get at here is the new sales are very strong.

It sounds like you're expecting another strong year of new sales if things keep as they are now.

When does that mean that we go from 10% revenue growth to 12 or 13 or whatever the number?

The complicating factor here is, the answer to your question varies over every business unit we have.

In the case of small business payroll, if you sell $1 in '07, you're going to get $0.50 worth of revenue.

If you sell $1 worth of comprehensive outsourcing in National Accounts or you sell $1 of GlobalView, you're likely to get very little revenue in the current year.

So there is no magic formula to help you with your models.

But traditionally, it's very -- it's challenging in a service business when you have lagged implementation from when you recognize the sale.

It usually takes a year or so to start seeing the impacts of that.

But I think as you think about it, our objective would be to ramp up internal growth rate at half a point to a point per year from an objective standpoint.

I wouldn't want to give you digital accuracy there, but that's clearly a way for you to think about it.

Okay that's helpful.

And then on the Dealer business, the margins came down a lot in fiscal '06.

I realize part of that was the Kerridge acquisition and costs around that, but what gives you confidence that given that and giving you still are lapping six months in fiscal '07 since you bought that, that the margin is going to turn around and go up 100 basis points?

Well first of all, the margins in '06 without the acquisition did improve over the year before.

Secondly, all of the integration expense for Kerridge has basically been completed by the end of the fiscal year end '06.

So we will benefit from all of the increased scale and other reductions that we have taken last year as we go into '07.

So barring any other new acquisitions, we are very confident in that margin assumption for Dealer going forward.

Okay great.

Just last one, can you give us a sense where we are ballpark in terms of revenue run rate for the Comprehensive Outsourcing Solutions business and what the loss level either was in '06 or a run rate [as to] what the loss level is on that now?

Thanks a lot.

The '07 forecast for COS for '07 is in the $95 million to $100 million range.

I would say we're losing somewhere between zero and $10 million, depending on how you want to count it as we build out the infrastructure.

The business will clearly be profitable as we exit '07, unless we have a good fortune to sell even more new business than we had planned to, in which case, in line with my earlier comments, that's a good thing.

And the business should grow around 30% plus in the year ahead.

Pat Burton, Citigroup.

Congratulations on the quarter and the announcements.

One clarification, Gary.

In terms of a buyback, you can be in the market buying and not paint the tax-free spin-off ability?

I just want to verify that.

Correct.

And the second question is Art, who would you view the main competitors to Brokerage to be?

In the investor communications business, because of the size of involvement that we have and there really are not any competitive competitors of any size.

In our back office brokerage business, I think we looked at companies like Data and [Phase 3] as companies in the past who would be competing with us.

And then the Clearing space, you have large players like Bear Stearns and the Pershing part of Bank of New York and Fidelity, and a large number of smaller players.

So those are the major competitors.

T. C. Robillard, Banc of America Securities.

Thank you.

Two quick questions.

How much of your new business growth comes from cross selling abilities out of the Dealer Services?

I know you mentioned that as one of the reasons you want to keep Dealer Services in kind of the new ADP going forward.

I am trying to get a sense as to how significant that cross selling opportunity is.

I don't know if I can give -- you are talking about for payroll and HR?

Yes, exactly.

You made the comment that one of the strategic regions that Dealer makes sense keeping alongside Employer Services is the cross selling ability.

But a few questions earlier when you are talking about a lot of the new service growth, it didn't seem that it was coming from cross selling out of areas like Dealer.

And so I'm just trying -- I guess the crux of this question, where I am going with it is I'm still trying to reconcile why Dealer makes sense in ADP post the spin-out of Brokerage.

It's an excellent question and certainly one that we have pondered and talked about for quite some length, but at the core, I have a lot of confidence that we can grow the business double digits, and on the top and mid single double digits -- excuse me, mid-teens kind of double digits on the bottom.

So I see it as complementary, not detracting.

There is a large opportunity in the Employer Services area of - -I think 25 or 30% of the base uses the core ADP products.

The other 75% do not.

They do not use money movement capability or tax filing capability.

And there's a big opportunity in the benefits area, the PEO and all of our other time and labor and HR products.

So it's tens of millions.

I don't have a number off the top of my head, but it's more than pocket change.

But it's not $200 million.

So I don't mean to avoid the question, I just don't have that number at the tip of my tongue.

Actually, it's really helpful.

In terms of sizing the opportunity that actually answers I question better than I was hoping.

And then, just one final quick question.

I know it's very difficult at this stage to try to size out the Brokerage unit because you are obviously going to have to do several audits, but is there the ability for you guys to give us a ballpark of how much cash may transition off your balance sheet to set up the Brokerage unit once it's spun out?

No, we're still reviewing some of those issues.

Obviously, we're going to need enough cash in order to be able to operate.

We don't believe given the relatively steady cash flow nature of the business that it needs to be a very large number.

One of the things that we're exploring is the seasonality around the investor communications business, where an awful lot of the -- an awful lot happens around when companies have their year-end annual meetings.

And therefore, the meetings and our investor communications flow falls into the -- really the April, May period primarily.

During those periods, the cash requirements are higher.

So we need to work through some of the seasonality issues also.

So again, I don't mean to duck it.

It's just a little premature for us right now to know exactly how that is going to shake itself out.

Understood.

Thanks so much.

Elizabeth Grausam, Goldman Sachs.

In considering your Brokerage outlook for 4 to 5% growth in 2007, can you update us in two fronts?

One, on regulatory changes in electronic proxy mailing and how that is progressing, and how you've encapsulated that in your guidance?

And then also, any potential deconversions or uptake of business due to M&A in your customer base?

Yes, in terms of the proxy changes, there's been a lot of communications that's gone through a lot of responses to the SEC's request for information.

And all of those things are in, and I actually think things have slowed a little bit in terms of moving towards a -- anything with fruition, so the probability of anything affecting our '07 year is relatively low at this point in time.

And therefore, we have not factored anything into it.

In the either the merger or the deconversion area, other than the -- what I alluded to before which is the Ameritrade acquisition of TD Waterhouse, which will impact us with the loss of TD Waterhouse probably during the third quarter of the fiscal year, we really aren't in a position to anticipate some of the other acquisitions or consolidations that might exist within the industry.

We also can't anticipate whether some of our clients will be the acquirers in some of those situations.

So there is really nothing in there that assumes that something is going to be happening that we really have no insight into at this point.

Great.

And then just one question on Employer Services.

Can you give us an update on what your sales force gross is expected to be into '07, and also any update on your sales force retention metric over the course of '06 and into the back of the year?

If you look at our traditional way we think about growing the sales force, we would typically try to grow headcount 5 to 7% every year, and we would plan to grow productivity through additional products, better retention, other measures at the sales force level targeting a 10 to 15% kind of sales growth when you combine the two.

So that is the way I think you should think about us going forward.

We added a lot more to that -- yes, 5% in '07, but as it relates to '06, we added more than that because we started the year behind plan and we accelerated the investment for '07 to get them in place prior to the beginning of fiscal year.

But we will plan on adding another 150 or so, 5% plus, as we go into '07 to prepare for '08.

So that is the way you ought to think about the model.

Our retention rates in our International unit, our National Accounts unit, our PEO business and Major Accounts all are stable and improved over the last year.

We continue to try to improve, however, our turnover in the small business area, where we continue to run in the 35 to 40% turnover per year.

Great, thank you.

We have time for just a few more questions.

Lloyd Zeitman, Bernstein.

Lloyd Zeitman at Bernstein.

A question concerning GlobalView.

Gary, I believe you mentioned earlier in the call that you would expect the margin to be better than that of International with scale.

And would you be willing to say anything about when you would expect to reach that point?

Where the margins are better or where they're profitable?

Okay, how about both?

Somehow I knew you were going to ask that.

You have to remember, and this is maybe not a number that we publicly put out, but we've invested in the tune of $20 million a year in building out the GlobalView infrastructure over the last several years, and we are pretty much to being complete.

We'll have three data centers operating, one in Asia-Pac, one in Europe, and one in North America headquartered up in Canada.

So we're moving all of that new business to one of those three data centers.

So the investment dollars, we're not going to have to spend as much in the future as we have been for the last two years, and we'll continue to build out this year.

And in a steady-state, I would expect us to get into a profitable mode in the fiscal '08 kind of timeframe.

Now, the good problem may be that we sell the heck of this and we have to build out more infrastructure and pay more sales expense, which yours truly will be very happy with.

So I think it's hard to predict when we'll get to scale in terms of comparable margins, the rest of Europe.

But it's certainly two to three years out.

Okay.

And let's see -- also, could you tell us how many PEO worksite employees you had at the end of the fourth quarter?

Lloyd, I'd actually be happy to.

And also, to let you know, that is one stat that we added to our press release, so you'll be able to and everyone else see that each quarter.

It's 139,000 at the end of the year, which is, you know, a nice, sizable increase from where we were last June.

Okay.

My fault for not seeing that.

That's all right, it's new.

Thank you very much and best of luck to you.

Tsin-Tien Huang, J.P. Morgan.

Thanks.

I will be brief here, and thanks for all the disclosure.

Quickly, has your appetite to do acquisitions changed overall given the spin, and how does the pipeline look in general?

Our acquisition appetite is really no different than it was before.

I just think we want to be sure that we communicate that we want to be more selective going forward.

So we're not pursuing any additional third leg, fourth leg, depending on which leg you want to count at what point in time.

And we're clearly not pursuing dilutive large acquisitions that we can't integrate effectively in a twelve-month or so timeframe.

But my appetite to do close to the core acquisitions and products that we can leverage across our 3000 plus sales associates in ES remains very high.

We have a number of prospects for acquisitions in the product category in the mix, and I'm very much trying to push both units towards business development that will bring those kind of opportunities forward.

So again, the proof will be in actually what we're able to pull off, but the appetite remains strong.

Got you.

That is helpful.

And then, just to make sure, your guidance excludes any acquisitions, right?

On the revenue side?

Absolutely.

It would include Kerridge, obviously, because it is already there or anything that we closed on prior to the end of June.

Thank you.

We have reached our allotted time for questions and answers.

I will now turn the conference back to Ms. Charles.

Thank you very much.

We would like to thank everyone for participating on the call with us this morning.

As we conclude our call, we're trading at $45.09 and we appreciate all of your time and interest.

This concludes today's Automatic Data Processing Inc. fiscal 2006 earnings conference call.

Thank you for participating.

You may now disconnect.