自動資料處理 (ADP) 2007 Q3 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, Incorporated, third-quarter fiscal 2007 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).

I will now turn the conference over to Ms.

Elena Charles, Vice President of Investor Relations.

Please go ahead, ma'am.

Thank you.

Good morning.

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

I'm here this morning with Gary Butler, ADP's President and CEO, and Chris Reidy, ADP's Chief Financial Officer.

A slide presentation accompanies today's earnings call and webcast and is available for you to print from the Investor Relations home page of our Web site at ADP.com.

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

With that introduction, now I will turn the call over to Gary for his opening remarks.

Thank you, Elena.

Good morning, everybody.

I'm going to kick off today's call with some opening remarks about our third quarter, and then I will turn it over to Chris Reidy, our CFO, who will take you through the more detailed results of the quarter.

Then I will come back at the end to update you on the outlook for the full year.

Let me begin by telling you that I'm extremely pleased with our results for the third quarter.

We continue to maintain the course that we've outlined for you over the last year.

We have great momentum in our businesses and the investments that we've made over the last several years are clearly paying off.

I think one of the best indicators of that is our revenue growth is strong at 14% for the quarter.

So, as we've communicated all year, we do still have some drag on pretax margin comps in Employer Services, primarily due to the strategic tuck-in acquisitions we completed this fiscal year.

I want to reiterate to all of you that margin improvement is a top priority at ADP, and we remain confident we will achieve the fourth-quarter margin improvement in Employer Services and the full-year improvement of 20 basis points that we've communicated to you over the last several quarters.

Sales were strong at both Employer Services and at Dealer Services, and Chris will give you some more detail in his commentary.

We continue to anticipate double-digit sales growth in ES for the entire '07, though I want to remind you we do anticipate a very tough fourth-quarter comparison, in terms of percentage growth, due to last year's particularly strong fourth-quarter sales growth of 28%.

In terms of dollars, even at a single-digit growth percentage that we anticipate in the fourth quarter, the sales dollars generating from that growth are still very strong in absolute dollar amounts.

We obviously are very pleased to have completed the tax-free Brokerage spin off on March 30, resulting in a much more focused ADP.

You've seen, from the release, that our cash balances are up again to $2.8 billion from the December level, due to the cash dividend we received from Brokerage and obviously from our own third-quarter cash flows.

I want to reiterate upfront my intent to return excess cash to our shareholders, and again, depending on market conditions, we will resume aggressive share buybacks near-term.

I would also like to remind you that our acquisition strategy does not include large, multi-year dilutive transactions.

Rather, we're focused on close-to-the-core transactions like the ones we've completed this year in Employer Services.

So with that, I will turn it over to Chris for some more detailed updates on the quarter, and then I will come back, once he concludes, with the outlook for the remaining part of '07.

Chris?

Thanks, Gary.

Good morning, everyone.

As Gary said earlier, our third-quarter results were terrific.

Revenues reached $2.2 billion for the quarter, growing 14%, and our internal growth rate continued at a very strong 12% in the quarter.

ADP's pretax margin of 26.4% improved 30 basis points over last year's third quarter.

The margin performance for both ES and Dealer were as anticipated with ES declining 50 basis points and Dealer improving 340 basis points.

I will provide more details on pretax margins in a few moments, but I'd like to point out that we're confident in our fourth-quarter and full-year forecast for margin expansion.

EPS from continuing operations grew 20% or $0.11 from $0.54 to $0.65.

About $0.02 is from lower share counts in the quarter versus a year ago.

Now, turning to the next slide, 5, I will go through more highlights in the quarter.

As you know, we completed the tax-free spin off of our Brokerage Service business on March 30.

Therefore, the results of operations and related separation costs are reported within discontinued operations in the third quarter.

ADP's quarterly P&Ls have been restated to report the Brokerage business in disc ops for each quarter in fiscal 2006 and the first two quarters of fiscal 2007.

These restated P&Ls were posted to our Web site this morning.

As Gary mentioned in his opening remarks, our cash and marketable securities were $2.8 billion at March 31.

This is up from our December balance of $1.7 billion due to cash flows in the quarter and the $690 million cash dividend from Broadridge.

Our intent is to resume aggressive share buybacks as an important part of our commitment to return excess cash to our shareholders.

I'd like to take you through how we think about our cash balances.

ADP's normal working capital requirements, restricted cash, and international cash balances total about $1.3 billion, so when we speak with you about returning excess cash to our shareholders, think about balances above that amount.

Fiscal year-to-date we've spent about $945 million repurchasing 20.1 million ADP shares.

Now, turning to the next slide, 6, we will go through ES results for the quarter.

Internal revenue growth for ES was solid at 11%.

As you know, Employer Services is held to a constant 4.5% interest rate, so this strong revenue growth does not include any impact from higher interest rates compared with a year ago.

Revenue growth from our traditional payroll and payroll tax filing business was 8%.

This is our most profitable business, and it creates additional opportunities to cross-sell our Beyond Payroll products.

This healthy 8% growth in revenue reflects continued double-digit new business sales growth, which is the single most-important contributor to revenue growth, as well as from growth in client fund balances, price increases, and higher pays per control.

Beyond Payroll revenues grew a strong 23%.

PEO, COS, time and attendance, and HR Administration Services all posted strong growth in the quarter.

We anticipated a decline in pretax margin of 50 basis points.

Acquisitions completed this fiscal year reduced pretax margin 60 basis points, and the higher step-off expense level from fiscal '06 continued to impact the third-quarter comparisons.

Excluding the impact of acquisitions, ES' pretax margin was 30.5% and improved from leveraging the growth of the business.

As Gary mentioned in his opening comments, we're confident in our forecast for full-year margin expansion of 20 basis points.

New business sales growth continued at double-digit rates with 12% growth worldwide and 13% growth in the quarter in the U.S.

Pays per control, a same-store sales metric, was quite strong, up 3% in the quarter.

We continue to see growth in the number of pays in Europe.

Overall, with 2.4% year-to-date pays per control increases, we anticipate better than 2% growth in pays per control for the full year.

We continue to see growth in client fund balances and retention continues at excellent levels.

Now, let's turn to Slide 7 and I will take you through Dealer's results.

Dealer Services' revenue growth of 8% was strong, and internal revenue growth was 6% for the quarter.

Overall, pretax margins improved 340 basis points compared with the year ago.

About half of the improvement was driven by cost synergies, which we achieved as we integrated Kerridge, and the other half was the result of restructuring charges relating to the Kerridge acquisition taken in the third quarter of last year.

We are on track to achieve over 100 basis points of margin expansion for this fiscal year, and we're pleased with the new business sales growth in Dealer, both in the core North American business and in the international business.

Now, as we move on to Slide 8, I will turn it back to Gary to review our full-year forecast.

Thank you, Chris.

Now, let me take you through our forecast for the full year.

I'm sure you recall we had reset our guidance back at the March analyst meeting to reflect pushing Brokerage within discontinued operations and providing '07 guidance for the new ADP at 12 to 13% revenue growth.

I am now highly confident that we will achieve over 13% revenue growth for the full year.

This increase from our previous 12 to 13% revenue growth forecast is primarily due to our current estimate of the benefits from foreign exchange rates.

The intrinsic momentum, however, in our business is quite strong, and the strategic acquisitions we've completed this year in Employer Services are also contributing to this excellent growth.

Our forecast for client funds includes growth in interest revenues of approximately 18%, driven primarily by an average pretax interest yield improvement of 40 basis points to about 4.5%, and obviously higher client funds balances of about 8%.

Now let's turn to Slide 9 to review the full-year EPS from our continuing operations.

As you will recall, at our March analyst meeting, we also provided our forecast of EPS from continuing operations for the new ADP of between $1.79 to $1.83, or 20 to 23% growth.

We are highly confident in our ability to attain the high end of that EPS forecast.

This is up from the $1.49 from continuing operations restated to reflect the Brokerage business within discontinued operations that we again provided for you back in March.

Just to be clear on what's in and what's out, this forecast includes an estimated $0.02 per share dilution from the acquisitions we've announced to date, and it excludes the net one-time items from the first quarter that increased earnings per share by $0.04, up from the $0.03 per share previously reported to you after the first quarter.

The $0.01 increase from the previously reported $0.03 per share for the net one-time items is due to a Brokerage-related restructuring charge that is now being classified within discontinued operations.

As you know, the continuing operations forecast excludes all Brokerage spin-related costs of about $40 million.

This is down from our previous forecasted estimate of $45 million to $50 million that we communicated to you earlier in the fiscal year.

As is normal process for ADP, this forecast also does not contemplate further share buybacks but does include interest income on our current cash balances.

I want to add that, as you have heard us say, our intention is to resume near-term aggressive share buyback, depending obviously on market conditions.

So, let's turn to Slide 10 to review the forecasts for each segment.

Employer Services -- we continue to forecast 12% revenue growth with strong internal revenue growth of around 11%.

Our key business metrics are terrific, and we are confident that we will achieve 20 basis points of margin expansion for the year, driven by a strong fourth-quarter improvement.

Also with the momentum in new business sales, we continue to anticipate another year of double-digit sales growth.

As I again said earlier and I want to remind you again right now, we do anticipate a very strong fourth-quarter comparison due to last year's particularly strong fourth-quarter sales growth of 28%, which was the strongest quarterly growth quarter in about nine years.

Let me switch to Dealer.

We continue to anticipate revenue growth for '07 of around 14%.

Remind you that the total revenue growth is assisted particularly in the first half or in the first half of the year by the Kerridge acquisition.

We anniversaried that acquisition in December.

The internal revenue growth is anticipated to be nearly 6% for the year, which is up from about 4% last year.

We continue to anticipate full-year pretax margin improvement of over 100 basis points.

Before we go to the Q&A, let's turn to Slide 11 and I will make a few closing comments.

So, obviously, as you can tell by the tone of the call, we are very pleased with our progress to date and for the quarter.

Our third-quarter results were very solid with 14% revenue growth and 20% EPS from continuing operations growth.

Our key metrics are strong.

We are continuing on a clear path to increase shareholder value by executing on the strategic initiatives you've heard me speak about over the last year.

The new ADP is clearly a more focused company with the completion of the Brokerage spin.

Secondly, the business metrics across the board are strong.

Thirdly, ADP remains committed to returning excess cash to shareholders.

We've demonstrated this clearly by buying, over the last 12 months, 37.6 million shares for over $1.7 billion, which includes last year's fourth quarter, fiscal quarter where we received cash from the sale of the Claims business.

In conjunction with these share buybacks, we've also increased our dividend 24%, which we held, post the spin-off, effective March 30.

This also raises the payout ratio for the new ADP to over 45% and a dividend yield of about 2% at the current stock price.

So, in closing, as we move towards fiscal year-end, I am highly confident in attaining our full-year revenue and EPS growth forecast.

So, with that, we will turn it over to the operator to take your questions.

Thank you.

(OPERATOR INSTRUCTIONS).

Rod Bourgeois, Sanford Bernstein.

Gary, I just wanted to ask you about the economy.

I get a lot of questions from investors about the impact the U.S.

economy is having on your business.

Your results suggest that the answer is not really that much.

But can you give us some more color on where the economy could be having a positive effect and/or a negative effect, and then how that positions you, from what you can tell right now, heading into fiscal '08?

My general comment would be, you know, I read the same publications you read and I read all the concerns that you read.

I don't see any reflection of those concerns in what I see in the numbers at ADP, or what I hear anecdotally at ADP.

Obviously, the 3% same-store sales is a very positive metric in terms of growth in our base.

The slight fall-off we've seen in client fund balances is really driven by more positive things called lower unemployment claims.

Therefore, they are reducing their SUI taxes.

Generally, in terms of sales results, obviously in a tougher economy, you see some more pressure on sales.

Obviously, by our results, we aren't seeing that, and anecdotally, what I hear is it's kind of business as usual and more of the same, although I read the same things you read every day when I pick up the Journal.

Okay.

Now, you've beaten consensus by $0.02 for the March quarter, and you've kept your guidance essentially the same for the year.

Does that suggest that the sort of outlook for the June quarter is on the conservative side and you have room for upside to that heading into '08, or should we not read that far into the results and guidance pattern here?

Well, I think our communication here is clearly more at the high end of the full year and our confidence level there is very strong.

Obviously, the consensus for the quarter, I think there was -- I don't want to use the word "confusion" but I think consensus is trying to find its way to where it should be, based upon the numbers, post the spin.

But again, I think the momentum is good, the fourth quarter will be what the fourth quarter is, and we remain highly confident in the high end of the range.

Okay, one quick numerical question on that, and I think, by the way, the word "confusion" was probably appropriate.

But one of the things that I think is important is you've had step-up investments in recent quarters; you've talked about step-up investments in the HRO business and also investments in your sales force and so on.

Those step-up investments seemingly are coming down some.

Can you give us any way to quantify what the benefit of that to margins will be as we move from the March quarter to the June quarter, or was that benefit already exhausted in March?

Well, I think, if you do the math, we do get a big pick-up in benefit in the fourth quarter.

If you go back and look at what we've said, we're going to be 20 basis points for the full year.

That would kind of imply a very large increase of about 250 basis points for the fourth quarter.

So as we look back at the impact of a number of things, selling expense in the fourth quarter of last year, as you might recall, was extremely high; we don't see that reoccurring at the same rate.

There were some other minor one-time investments in implementation and R&D and that kind of thing last year.

So as we look back and normalize for those items, we are comfortable with that kind of growth in the ES margin in the fourth quarter, which brings us in at the 20 basis points.

I got it.

Thank you, guys.

Adam Frisch, UBS.

Nice job here on the quarter.

The results obviously bode well for the last couple of months of the year, but I was wondering.

Given that there were some any one-time things going in and out this year, more so -- certainly more so than usual, if you could give us kind of a vague idea of what you are expecting in '08, whether we can expect double-digit revenue growth and some more modest margin expansion going forward.

Adam, this is Chris.

We are right in the middle of our operating plan right now, so it's well premature for us to give any sense of '08 guidance.

That's consistent with what we've done in past years.

But we are comfortable with the momentum and the strength of the business, so more to come in our next earnings call.

Okay, maybe looking at it this way -- I thought that's what you were going to say, Chris, but I figured I would try.

I knew you would.

It's too predictable these days, I guess.

The timing and the lag of your investments made last year, obviously they are reaping a lot of benefits.

Your sales growth is up; your retention is still good; everything is going well.

Are we kind of in maintenance mode right now for investments, or are there others that might be a little bit larger than what we would call normal heading into next year?

Adam, this is Gary.

Clearly, we're not in maintenance mode but we are through what I would call the step-rate mode.

You've probably heard me in the past talk to getting the bow of the ship up from our slower growth period in '02 through '04.

The bow of the ship is up, and so we are focused on continuing to keep the bow of the ship up while we focus on margin improvement at the same time.

But do not read that we are not investing in the business.

We will continue to add resources to the sales force, for example.

But instead of adding 10 to 12% headcount growth, we will probably be adding more like 5% as we go in this and focus on productivity improvement, being more efficient in our use of sales investment.

We've made the big investments in GlobalView and a lot of our BPO and PEO initiatives.

We will continue to expand those investments because it's paying off great for us and we want to continue the momentum.

So I think the correct way to answer it is more historic, keep the bow of the ship up as opposed to get it up from the situation we had back in '03 and '04.

I got it.

So based on that commentary, it seems like you are to pretty positive on how your sales force is positioned for fiscal '08.

I am extremely pleased with where we are from a sales standpoint.

Our products are lining up well.

Our productivity at the sales-force level is increasing; I expect it to continue to increase.

And we are winning in the marketplace, so that always feels good.

Okay, good to hear that kind of color.

Then the last question is for Chris here.

Buybacks are obviously big.

The market likes to see it but it does take a lot to move the EPS needle in terms of how much money you need to spend on the stock.

Dividends are up.

I'm glad to see you keep the dividend rate where it is.

But how should we think about how you're going to balance the return of cash to shareholders between those two initiatives going forward?

Could we see the dividend come up even more from where it currently is, around 2%?

I guess it depends on how you measure that.

I think the 2% is about right, and the effective return of about 45% -- you know, you're going to hold that, so obviously that requires an increase going forward.

But you know, we are constantly looking at the blend of how to do that, whether it's through buybacks and dividends.

I think what you can take from that is we've demonstrated a significant commitment to return excess cash, both through buybacks and through dividends.

Okay, thank you.

Kartik Mehta, FTN Midwest.

Gary, I wanted to find out if you could provide some color on how to think of new sales turning into revenue.

I know, at one point, I think you had tried to describe maybe how to look at sales growth and the timing of how that relates into revenue growth.

Sure, I will give you a little color.

It's more of an art than it is a science, particularly from the outside looking in.

First of all, you have to look at how long it takes for new business to start.

So sales that occur, for example, in our small-business literally start within a week of when the order is placed, in some cases even less than that.

If you are a GlobalView client, like IKEA, and you signed up to put on 90,000 employees in 20 countries, it's a 2.5 to 3-year implementation that takes 6 to 9 months for it even to get started.

So it depends on where it is and the complexity of the implementation.

But typically, if we sell $1 in a current fiscal year, we would expect somewhere between 40 to 45% of that $1 to actually appear in revenue in the current fiscal year.

Obviously, you then have the 55% from the previous year overlaying in the forward year.

I mean, we could spend the next hour of the call talking about how we do that, but that's the most simplistic way to think about it.

Gary, I think, in your opening remarks, you talked a little about acquisitions and I think you implied that there weren't any large acquisitions.

Is that a result of you just don't see any large acquisition opportunities that could help ADP?

Or is that that right now the core business is going so well you would rather focus on that, and it makes more sense to do smaller acquisitions that add product and services that you can provide clients?

Well, first of all, I think your depiction is accurate in the sense of the current business is going terrific and we are very focused on the acquisitions that we've made, trying to get them through and into our distribution channel.

We are very pleased with the results of our expansion in the BPO arena in terms of the PEO, our ASO business and our COS and GlobalView businesses.

In terms of large acquisitions, there aren't a lot that are available at good prices that are really a net add to our current platform.

So just to buy revenue for revenue's sake I don't find overly attractive, but we are clearly on a path to drive margin improvement.

So my desire to pay big prices for acquisitions that don't bring large strategic benefit and that potentially could be problematic and drag on our margin, it just isn't very -- something we want to do.

Just one final question -- if you look at pays per control at 3%, that seems to be I think a historical high and fairly good.

What would be the impact to maybe revenue and earnings if there was a decline in pays per control?

I don't think it's that much but I just wanted to make sure that I understood it.

Yes, there's a bunch of different ranges as we talk about that.

It's kind of a broad question because, if we have growth in pays per control, generally it's because things are a little bit better in the economy and we will get higher client fund balances, perhaps participation in 401(k) plans and the like.

On payroll-only, a 1% change in pays per control across the entire client base is about $15 million.

If you add some of the other items, say $20 million.

Kartik, just to add one thing for you, the 3% actually is not a high for us.

That's six years ago; it was over 3%.

I think, if you go back six, seven, eight, ten years, I think we showed some periods of 4% pay growth.

Let me just add a little bit of a caveat here because most of you will recall, in the second quarter, I believe our pays per control was 1.7, and so we are up to 3.

The overlap from the holidays and as things happen in that payroll cycle, you know, we don't pay a lot of attention to what happens month-to-month, but we do look at quarterly.

But I think you have to look at the blending that we are experiencing in the 2 to 2.5 range and not either be disappointed overly at the 1.7% last quarter or be overly optimistic on the 3%.

But we are feeling pretty good that the blended average is at 2.4 or something for the nine months, which I think bodes well for where we are.

Chris, just one clarification -- you had said 15 to $20 million.

I'm assuming that's revenue, correct?

Yes, it is, yes.

Thank you very much.

Tien-tsin Huang, JPMorgan.

Thanks and good morning.

A question on I guess payroll and tax filing.

8% growth there is pretty solid, I guess consistent with recent history.

Should we think of this level as being sustainable in the mid term?

I mean, clearly, Tien-tsin, that would be our intention, because if you can get internal growth rate to the levels that we are getting and you are adding new payroll revenue into that mix, that would certainly be our plan going forward.

So, to whatever extent you have comfort in our current metrics around organic revenue growth, which I have a good bit of comfort in, it would certainly lead to those kinds of results if we execute on the strategy.

Very good.

Any notable change in the competitive landscape on the ES side?

Specifically, any notable change in behavior from Ceridian?

I mean, our business with Ceridian is pretty much as it has been for the last nine months.

Most of the competitors in this space are pretty rational people, and there's nothing notable here on the competitive landscape that I think would be needed to be talked about.

Good.

If I can get just one more I guess, a question on GlobalView sales did they -- did they meet expectations in the quarter?

Also, Gary, if you can maybe talk about Harbor Payments, given its new tie-up with American Express, how does that change the Accounts Payable market going forward for you?

In terms of GlobalView, we expect to make our plan for the full year.

The quarter results were good, about where we expected them to be.

We remain very enthusiastic about that product and what it can do for us in a global context.

We are still in pilot mode with Harbor Payments.

We've seen no notable difference in behavior from them since being acquired by American Express.

We are continuing with the pilot and I'm sure, as we get into the next fiscal year, we will make decisions to either get more aggressive or go another way.

But so far, so good.

Great, thanks.

Nice results.

Gary Bisbee, Lehman Brothers.

Congratulations on the strong numbers.

I guess the first question, the Beyond Payroll revenue growth has really accelerated pretty dramatically over the last four to six quarters.

I guess, can you give us any sense how much of that improvement is some of these add-on acquisitions you've done this year versus just gaining traction on all the products you discussed at the recent investor day?

I don't have the individual breakdowns by all the different products, but I would say it's both, Gary.

We are continuing to see very nice growth in our time and labor management.

We expect very strong growth in our benefits area.

We've added some new products there.

And we are going gangbusters with some of our acquisitions, most notably VirtualEdge and Employease, which are doing terrific in their respective spaces.

So I would say it's both.

It's up nicely but both of them are contributing, not just the new stuff or not just the stuff we've had for a while.

Yes, and if I could also mention, don't forget the biggest part of our Beyond Payroll offerings is the PEO, which is continuing to -- it has posted very, very strong results.

Okay.

The second question is on the PEO.

Can you give us an update on exactly where you are today in terms of the non co-employed model?

If you are successful growing that over the next 12 to 18 months, do you expect that the revenue growth rate in PEO would decelerate due to lower average pricing there?

Or is it too early to tell?

Well, I think that's the $64,000 question, in terms of some of the issues there.

We are in pilot now with our new -- we call it ASO, Administrative Services Offering.

We are primarily targeted below 100 pays, which the PEO is more below 50, although we do sell some above that.

Whereas the ASO will clearly go up into the 200, 300 person, but for now, we are under 100 pays.

Based on our results so far, the PEO is continuing to have very robust sales results.

We now have a little over 300 clients in the ASO area, and we plan to expand that rapidly next year in '08 without any real significant lessening in the PEO pays.

So I think we can manage it, because one of the challenges that we have in the PEO is underwriting.

So it takes us a lot of prospects to achieve a PEO client, because we are very stringent in underwriting characteristics for both workers' comp and healthcare.

So in a lot of ways we are going to be able to convert more prospects where we don't have to underwrite our insurance products as opposed to what we do in the PEO.

So, at the end of the day, the plan is to end up with the best of both worlds, with more clients and different configuration.

Okay.

In that last point, which I think is an important one, are you going to help in terms of sourcing insurance for the people in the ASO who might not meet your underwriting standards for the PEO, or are they basically on their own?

Yes.

Yes.

Yes, sure.

Then just the last question -- the Dealer margin is obviously doing terrific now that you've lapped the Kerridge.

Can you give us a sense, as you look out over the next few years, what's sort of the margin potential of this business?

Does it remain substantially above the levels you've been reporting in the last couple of quarters?

Yes.

Again, the business model there is no different than Employer Services.

Again, sans acquisitions or significant investments, we would expect the core Dealer business to improve its margins 0.5 point a year as a way to think about it.

So there are clearly 2 or 3 more points of margin improvement available in the Dealer market over a planning horizon.

Okay, great, thanks a lot.

Mark Marcon, R.

W.

Baird.

Good morning and congratulations on all the progress that you've made over the entire year.

It's been fantastic.

With regards to the core payroll business, in terms of the 8% growth, can you give us a little bit of color just in terms of SBS versus majors versus nationals?

What percentage of the growth is coming from price increase versus an increase in terms of the total number of clients?

Just a little more color there, just in terms of the core business?

Well, price increase -- you have to also think about, you know, our U.S.-based price increases are around 1.5% to 2% max, depending upon the client and the industry, and the size segment and what their contractual terms, etc., are.

So I think that's a good way to think about it.

In our international business, it's less focused on price increases, so the numbers I'm quoting you there are more around a U.S.-based issue.

Most of the rest of it obviously comes from increases in employment or float balances, which we get, but that increase in float balances also comes from adding new clients.

So you know, I think the majority of it is still going to come from adding new clients, whether they bring balances or pays or more revenues for payroll and other things.

I think that's the best way to think about it.

So when we think about that 8% growth that you've had, how much of that was just client growth, roughly speaking?

I would say half or better.

Okay, great.

That's terrific.

With regards to the margin guidance as it relates to the -- for the full year, which implies that we're going to see a big step-up here the fourth quarter, is it because we're going to annualize all the investments?

Or is there anything that is -- aside from the leveraging of the investments that you've made in the past, and maybe a continuation of investments but not at the stepped-up rates that you've made previously -- is there anything else that would be contributing to the strong margin improvement which it appears you are forecasting for the fiscal fourth quarter in ES?

Yes, I think, Mark, the way to think about that is, for the first three quarters, we were suffering in terms of difficult compares because of the stepped-up level of investment that we made in the first three quarters of last year.

That is lapping, so to a certain extent, we will have an easier compare, which is kind of just math.

On the other hand, the fourth quarter last year, as we said on the sales growth, that 28% sales growth and with that came a stepped-up amount of selling expense and so that makes it an easier compare as well.

So, it's basically the momentum that we have in the first three quarters of this year.

For example, we mentioned we were down 50 basis points in the quarter, but if you backed out the acquisitions, that would have been growth despite the fact that we had that grow-over issue.

So as we look at that, we are very comfortable that the fourth-quarter margin increase will yield the 20 basis points for the full year.

Mark, that sales expense is not a trivial number, because ADP in its own conservative way -- we book the full sales expense at the time we write the order and report it.

So, even though it may not be installed for a number of months to come.

So the good news is sales are up 28%.

But what goes along with that is a much higher sales expense than we had planned or built into the operating model in the '06 year.

There were a few odds and ends, one-time expenses that were incurred in last year's fourth quarter, but it's mostly the things that Chris alluded to.

Great.

Thanks for the clarification.

Charlie Murphy, Morgan Stanley.

Thanks.

Could you tell us what the North American Dealer revenues were in the quarter?

Could you talk a little bit about what you think the sustainable growth rate of North America and international Dealer are?

Then could you remind us what the profitability of each of those segments are now versus last year?

It's Elena.

For the North American, you know, I don't have the exact dollar amounts of the revenue for that by quarter, but the growth was strong because we generally don't speak about the segments separately.

We just talk about Dealer as a whole.

So the growth was strong.

Certainly, we talked about the internal growth reaching actually 6% in the quarter this year, versus under 4% a year ago.

That came really both from growth in North America; we've talked about the add-on products we have got there (inaudible) the results you heard about at our March analyst conference; as well as an international force with the Kerridge acquisition and gaining some traction there.

What was the other part of your question?

I was trying to figure out what the pretax margin was for the North America Dealer business versus the international business.

You know, again, we really don't separate (multiple speakers).

We have not broken that out, but obviously North American is more profitable than the international would be.

Yes, in the international, you know, and we can talk -- certainly give me a call after and we can go through some of it if we go back to where Steve presented at the March conference, talking about the path on Dealer to double-digit.

We did talk about some of the products there and the North America with international.

Great.

Thanks.

Bryan Keane, Prudential.

Good morning.

I just wanted to go back.

I know it was the key client selling season, and it seemed like you guys were happy with the growth in clients.

Can you talk about -- did you hit your goals of adding new clients and do you think ADP is taking any market share in the marketplace?

Well, clearly, we are on our internal plan in terms of sales.

Obviously, there are pluses and minuses across the very broad spectrum of all the segments where we operate.

So in terms of our plan and how we are executing against new client accretion, obviously we are pleased with the overall result.

As we I think noted in the release, we were particularly pleased with what's happening in the high end of the market, in national accounts, and in GlobalView with what's happening there.

But we were very pleased with the results in our Major Accounts, which did well also.

We are clearly taking share in the PEO, but again, these are small, very underpenetrated markets with a lot of room to grow.

So, I think we're doing fine across the board, both in terms of share and against the plan.

Do you guys have a way to measure market share gains, I guess in core payroll, sales throughout the year versus some of the traditional competitors like Paychex and Ceridian?

Sure.

I mean, we do outside, third-party analysis where we call large segments of businesses to determine their methodology.

Plus, we clearly track wins and losses by competitor.

Okay.

Market-share gains seem to be up, down or sideways compared to years past?

Again, that goes all over the map.

If you have small competitors who are trying to go after a very large ADP base, you know, wins and losses against a small, $10 million competitor in the Southeast is not a valid comparison.

But clearly, in terms of Paychex and the other major kind of competitors, I think we're doing fine.

Okay.

Then I just had question on client retention.

I know it fell just below record levels of Q3 '06.

Do you think we're at peak levels there for retention?

What are some of the things you are doing maybe I guess to improve that?

Well, you shouldn't read anything into a particular quarter.

You know our service levels remain very strong, and our retention rates remain very strong.

We would continue to plan on improving our retention 0.2 to 0.5 point every year, depending upon circumstances.

One of the things you have to remember is the bigger the bundle a client buys from ADP, the better retention.

Larger clients tend to stay with ADP much longer periods of time than smaller clients stay with ADP.

So, our growth in the multifaceted, multiple-product line is extremely strong; and our growth up-market between GlobalView, our BPO offering, National Accounts and Major Accounts, is also very strong.

So the mix of new business and the product breadth is also going to drive retention beyond just service level.

Okay, great.

Thanks for the color.

Jim Kissane, Bear Stearns.

Gary, can you give us an update on the progress with your GlobalView implementations?

Any challenges with the big implementations?

Thanks.

No, Jim, we continue to be very pleased, both with the overall results and the pace of implementation.

We are right on top, not ahead, not behind, of our internal plan on revenue and implementation for GlobalView.

We expect to meet or beat our GlobalView plan for the full year.

You know, the biggest challenge for us is getting the resources in place to deal with the volume.

We've done a pretty good job so far.

It was a little bit of a slow start last year but we've caught up, and I expect GlobalView to continue to be a very strong grower for us as we go into '08 and beyond.

Okay, great.

Is there any way you can reconcile your strong pays numbers with the relatively weak macro data that you've been putting out?

I know it's not your firm that puts out the data, but there is a big disconnect.

I don't think there's a huge disconnect.

I mean, if you look at the growth that's come from the NER and the BLS, it's been very positive.

It isn't buoyant, I guess, when you looked at a few years back where it was 200,000 to 300,000 net new jobs, as opposed to, over the last couple of quarters and last number of months, being more like 100,000 to 150,000.

So I would say it is more positive than the macro, but you have to remember also that, statistically, our clients grow faster than the general population.

People that outsource typically are more challenged by growth and other complexities.

And statistically, the people that do the compilation of the NER would tell you that ADP's client base grows statistically faster than the population of business as a whole.

Okay, thanks.

Great quarter.

T.C.

Robillard, Banc of America Securities.

Thank you.

Gary, or even Chris, if we look at Employer Services margins, and historically, you've said, on a steady-state, the business should improve margins each year 50 basis points just on leverage.

If we were to take fiscal fourth-quarter cost levels, so down from the step-up level but certainly higher than just maintenance level, what type of revenue growth do you need to maintain for that type of margin improvement going forward?

The way I think about that, if you are growing organically in the double-digit area, call it 9, 10, 11, 12%, achieving 0.5 point of margin improvement should be expected, business as usual.

You know, you have to park acquisitions or any other kind of step-up things that you might be doing on top of that.

Obviously, if your revenue growth is much lower, you don't get the improvements in leveraging the infrastructure, the computing things that we have.

Plus on top of that, we are getting big savings from our data center consolidation; we are getting big savings from our offshoring of both R&D and some of the customer service kind of functions and technical support that we have in India.

I mean, we are approaching well over 2000 people in India today.

So there's a lot of moving parts to that equation, but in aggregate, if organic revenue growth is good, margin improvement is much easier than if it's not.

The only thing I would add, T.C., is, as we look at it, obviously, if you are growing the core payroll business, which is a higher-margin business, that helps significantly.

But as you grow the Beyond Payroll, it does put some pressure on margins just from a math standpoint.

In addition, as you look at our acquisitions, we talk about the acquisitions we made this year being basically nondilutive to EPS next year.

That doesn't necessarily mean they are nondilutive to margins.

If you're adding $150 million of revenue that's breakeven, that's going to put pressure on your margins.

So the combination of those two factors that are pressing the margin require you to do some cost-cutting and some things like we're doing with the data center consolidation and with the offshoring and other initiatives we have, basically because we are very focused on margin improvement.

But it's not a lay-up and there are some forces that put pressure on those margins.

As a result, we have to do some cost improvement to get there.

Okay, great.

Then just quickly on the share buyback, can you tell us if you bought any shares back since the close of the acquisitions, so basically in the month of April?

Also, are you still planning for returning the $690 million dividend from Broadridge in terms of share buybacks within a 12-month period?

Yes.

You know, you'll actually see it when you do the math.

We bought 20.1 million shares year-to-date, and I think we showed somewhere that it was about 18.1 --

That was the last update.

-- through the end of the quarter, through the second quarter.

So we did buy some shares early in the fourth quarter after the Brokerage spin; we were aggressive there.

But again, there's not many days there in terms of before we go into a blackout where we can't.

We do fully intend to return that $690 million.

We have 12 months, as prescribed by the IRS, but we intend to be more aggressive than that in terms of returning that, market positions obviously permitting.

Great.

Thank you.

Liz Grausam, Goldman Sachs.

Thanks.

Just following upon on T.C.'s question on the ES margin, we are certainly exiting this year with very strong year-over-year margin improvements.

Despite those kind of 50 basis points of annualized margin improvement you expect in ES, can we expect fiscal '08, just due to easy comps, to be an above-trend year for margin expansion in ES?

I think, again, you have to go back to my comments regarding the acquisitions that we had this year which put pressure, 23% growth in Beyond Payroll, which pressures margins.

I wouldn't use the 250 basis points growth in the fourth quarter, because that was against an easy fourth-quarter compare.

So in thinking through that, we will have more to say, obviously, as we give guidance at the next earnings call, but those are a couple of factors that you have to take into consideration.

Okay, great.

Then just back onto the employment numbers, is there anything outside?

I know you said the propensity to outsource certainly makes your clients generally a little bit faster growth, but there have been certain points in time where your pays per control have decoupled from the non-farm payroll growth.

Particularly in the last downturn in '01 and early '02, you were more negative than the non-farm payroll growth, and now you are more positive.

In terms of industry exposure, are you particularly underweight or overweight in certain parts of the economy, certainly looking at construction currently, that would lead to above-trend numbers continuing for you on a year-over-year basis relative to non-farms?

Well, just in terms of thinking about the ADP base, the strongest portions of our base are the service economy and manufacturing, particularly medium and small manufacturing as opposed to very large manufacturing.

We have very little concentration in the building trade just because that part of the industry requires a very tight coupling of labor costs with building costs so that they can do proper costing as they build out homes or whatever the case may be.

So we are not at all tied to what happens in the construction area but are more tied to manufacturing and the service economy.

David Grossman, Thomas Weisel Partners.

My questions have been answered.

Thank you.

Pat Burton, Citigroup.

Good morning and congratulations on the quarter.

My question relates to the funds held from clients.

Where do you stand right now in terms of the structure of the portfolio and duration and the outlook for yield as we move forward?

Thanks.

Well, the duration obviously doesn't move all that quickly, but you would see a slight tick-down in duration for the quarter, primarily because we had $690 million of cash come in on the last day of the quarter, which brings it down.

Just prior to that, it was consistent with the 2.3 that we had.

But obviously, it's an inverted curve, which doesn't help us as much, but we still do weight the portfolio in order to hedge against interest rates fluctuation.

We do still invest longer-term.

Without getting into '08 comments, at what point would you expect the yield on the portfolio to flatten out if the curve remains inverted?

Let's see if I can understand that.

Well, the yield -- as we reinvest as investments mature, we are still seeing an investment at higher rates, and we still have a ways to go on that.

So, I don't see any flattening right away.

Yes, our current investments are more in the 5% kind of range.

So when you look at a full-year return of 4.5%, obviously as these other dollars mature and as we generate new cash, we are investing it at 5% or thereabouts.

So, you should continue to see an improvement as we go into '08 with the overall interest income.

Thank you.

That's helpful.

Tim Willi, A.G.

Edwards.

Thank you.

I wanted to ask a question about just on the topic, again, of the Employment Services margins.

If you think about core versus the Beyond Payroll, looking out multiple years going forward, as you look at those sort of Beyond Payroll businesses and the bigger ones, if you think about where those margins might eventually move to at a much more mature run rate, would those margins approach the core payroll and tax filing?

Or is it truly a situation where those will be margins even at a mature level that are lower, or low enough that there would be sort of an ongoing sort of margin burn, if you would, even looking out three, four, five years?

A couple of things on that -- on the Beyond Payroll, certainly there are some in there that are growing margins that are early in their stages, so that's why they have lower margins.

We have the PEO business.

Obviously, that has a lot of pass-throughs that when you take those pass-throughs out, tend to be lower margins.

They are good margins, they are growing margins, but they are not as equal to the core.

If you looked on average for the Beyond Payroll, they will approach the average kinds of margins that we have as a business.

Obviously, our core payroll bread-and-butter kind of business is even higher margins than that.

So, on average, we would expect those Beyond Payroll, excluding the PEO business, to get up to the normal average kind of margins we experience.

There are a lot of moving pieces here, Tim.

Nothing will ever have the margins, I don't think, of our core AutoPay.

We pay 25 million people in the United States or thereabouts, and call it 20 million or so of them are paid on one engine running in one data center ultimately.

So that kind of scale margin would be difficult to replicate anywhere for ADP.

That being said, as our Beyond Payroll businesses get scale, and scale can mean $100 million in revenue or $200 million in revenues, the margin improvement is quite large there and very attractive, but never at the level of the core AutoPay.

Obviously, as we expand globally, we have infrastructure costs, particularly in GlobalView, as we build up.

But as that business gets scale over the next couple of years, we would expect significant margin improvement from there as well.

To Chris' point, the PEO, because 60-plus% of it is pass-through, will never have the margins of the other businesses in the aggregate.

Great.

That's very helpful.

Thank you.

I will now turn the conference back to Ms.

Charles.

Thank you, and I will actually turn it to Gary for a couple closing remarks.

Yes, I appreciate all of your calls -- very constructive and very helpful for us as a way to think about it.

As I concluded earlier, we think we had a terrific quarter; we think we're going to have an even stronger fourth quarter, in terms of where we are, particularly in margin improvement.

I remain very confident that the business is strategically in the right place for a continuation of the great results that we've had over the last 12 months.

So, thank you for joining us today.

I look forward to talking with you again at the end of the fourth quarter when we give our '08 forecast as well.

Have a good day.

This concludes today's Automatic Data Processing, Incorporated, third-quarter fiscal 2007 earnings conference call.

Thank you for participating.

You may now disconnect.