自動資料處理 (ADP) 2008 Q2 法說會逐字稿

Good morning.

I will be your conference Operator today.

At this time, I would like to welcome everyone to the Automatic Data Processing second quarter fiscal 2008 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers remarks, there will be a question an answer session.

(OPERATOR INSTRUCTIONS)

I will now turn the call over to Elena Charles, Vice President of Investor Relations.

Ms.

Charles, you may begin.

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 it is available for you to print from the Investor Relations homepage of our website at ADP.Com.

Just to remind you, the quarterly history of revenue and pre-tax earnings for our reportable segments has been updated for the second quarter of fiscal 2008 and has been posted to the IR section of our website.

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

With that introduction I'll turn the call over to Gary for his opening remarks.

Good morning.

I'll begin today's call with some opening comments about our second quarter, and before I turn it over to Chris Reidy, our CFO, to take you through the detailed results, I'd like to comment on the softness in the economy and how we see that affecting ADP.

Then, I'll return towards the end to provide you with an update on our guidance for fiscal '08 and give some concluding remarks before we take your questions.

As you know, from our earnings release this morning, we did post strong results for the second quarter and are still forecasting another strong year for fiscal 2008, despite the obvious headwinds from lower interest rates.

We continue to execute well against our growth strategies and as you can see, that we are achieving the desired results of double digit revenue growth with pre-tax margin expansion across-the-board.

Overall, I am very pleased with our results for the second quarter.

Revenue growth for the quarter was a strong 15% with organic revenue growth of around 13%.

We are tracking well to our full year ES sales growth forecast which does include the PEO and I continue to be very pleased with dealer strong new business sales growth.

Client retention remains at excellent levels for the quarter and Employer Services, the PEO, and Dealer Services.

As you know, we did raise our dividend 26% effective January 1, and we are maintaining our strategy of returning excess cash to our shareholders through continued share repurchases and our cash balances as of the end of the second quarter are now down to $1.4 billion.

Now, let's talk about the economy for a few minutes.

We are certainly very aware of the uncertainty surrounding the economy.

In addition, short-term interest rates are currently forecasted to be 275 basis points lower by June 30, than when we begin fiscal 2008 just some short seven months ago.

Our investment strategy of laddering maturities by design partially mitigates the downside to ADP as interest rates decline.

As a result, the quarterly portfolio yield was actually 20 basis points higher in this years second quarter than last year.

With the drop in interest rates, our yield will go down slightly as the year progresses but because of this laddering strategy, the decline will certainly not be as steep as indicated by current market-rates.

It is also important to note that we began to extend our portfolio duration by feathering in this laddering strategy in fiscal 2001 as the economy entered the last economic downturn.

However, we did not reap the full benefit of averaging our way through that period of interest rate decline due to a then shorter portfolio duration.

Today, we are much better positioned as we have been able to more than double the duration of the portfolio since 2001, which obviously provides a better natural hedge against interest rate fluctuations.

I also want to reiterate a position that I've shared with a number of folks.

We have no plans to cut back on our investments for growth.

We will continue expanding the salesforce, adding about 5 to 6% headcount on average this fiscal year.

We will also invest in implementation and client service resources needed to support our continued organic revenue growth.

Our business model and cash flows are strong.

We have 90% recurring revenues and the markets we participate in are under penetrated and growing.

With that backdrop and opening comments I'll now turn it over to Chris to provide the details on our quarterly results.

Thanks, Gary, and good morning, everyone.

As Gary said earlier, results for the second quarter were strong.

Total revenues grew nearly 15% to over $2.1 billion.

Client funds interest revenues grew 14% from client balance growth of 8.9% and a 20 basis point improvement in the average interest yield to 4.5%.

The 8.9% growth in client fund balances includes about 1.5 points of strong Canadian dollar growth on top of solid balance growth in the U.S.

As Gary indicated a moment ago this 20 basis point improvement in average interest yield compared with a year ago speaks to our portfolio investment strategy of laderring maturities to mitigate the exposure to change in interest rates.

Let me also reiterate some of the comments we made on last quarter's earnings call regarding those investments.

ADP continues to invest only in highly liquid investment grade fixed income securities with an overall quality of AAA, AA.

We have no exposure to asset backed securities with underlying collateral of subprime mortgages and no exposure to collateralized debt or collateralized loan obligations.

Our ability to issue commercial paper has not been adversely impacted by the continued turmoil in the credit markets.

So what I want to be sure you're hearing is that we are not achieving the higher yield of the portfolio by investing in more risky securities.

Quite the contrary, our investment guidelines remain very prudent and our overall strategy is to average our way through the highs and lows in interest rates by laddering maturities which is enabling ADP to partially mitigate the impact of declining interest rates.

It's also important to note that as interest rates have declined there are currently unrealized gains in the investment portfolio of approximately 350 million to $400 million.

We're not looking to realize any of these gains to "Make the numbers" but what this means is that the embedded yield in the portfolio is significantly higher than current market-rates.

Now, back to the results.

Pre-tax earnings grew nearly 17% excluding last year's second quarter net realized gain and on that same basis, pre-tax margin expanded 35 basis points.

Earnings per share from continuing operations increased 22% to $0.55 a share and included approximately $0.02 per share from tax settlements in the quarter.

Now, let's turn to slide five.

I'll talk about share repurchases and our cash balance at December 31.

Consistent with what we've said in the past, we have continued to repurchase shares at a higher than our historical pace excluding the one-time infusions of cash from the sale of claims and spinoff of Broadridge.

We repurchased over 18 million shares fiscal year to date for about $842 million.

The share buybacks to date are anticipated to have nearly $0.03 accretive for the full fiscal year 2008 or over $0.01 additional accretion since the last time we updated our guidance back in October.

As we continue to return excess cash to our shareholders we have reduced our cash balances to $1.4 billion at December 31.

Now let's turn to slide six.

Employer Services had another strong quarter.

11% revenue growth with 10% organic growth, and over 8% growth in our traditional payroll and tax filing business in the United States.

Our Beyond Payroll revenues grew 16% in the U.S.

and to remind you, this excludes the PEO revenues which we'll discuss in a moment.

Employees acquired last year as well as comprehensive outsourcing services and time and attendance contributed to the strong Beyond Payroll growth.

ES's pre-tax margin expanded nearly 70 basis points on increasing operating leverage primarily from the scale in the business but also from the Smart Shore and North Shore initiatives, the consolidation as well as lower losses in growth businesses such as GlobalView and POS.

There is still some drag in the quarter from last year's acquisitions that closed during last year's second and third quarters.

Pays percControl growth of same-store sales metric was up 1.7% in the quarter, while this is still lower than the 2% growth we've seen over the last three plus years, the growth is holding with 1.6% growth year-to-date.

The growth in the number of pays in Europe is the strongest we've seen in the past few years.

We head into the critical year-end period with year-to-date client retention of excellent levels of over 90%.

New business sales growth which includes both ES and PES services was 8%.

Now let's turn to slide seven.

PEO also achieved strong results for the second quarter.

Revenues grew a strong 22% and average work side employees increasing 20% on the quarter.

Pre-tax margin increased about 50 basis points when you exclude the costs related to a state unemployment tax matter in the quarter of almost $2 million.

Now the PEO services reported as a separate segment from Employer Services I'd like to point out that because of its smaller size relative to ES, you should expect to see quarter to quarter fluctuations in the PEO's reported results; however we are on track to deliver the forecasted margin expansion of 50 to 90 basis points which Gary will go into in a few moments.

Now let's turn to slide eight.

Moving on to Dealer Services, the second quarter results were also very strong.

Total revenues grew 9.5%.

Organic revenue growth continues to improve with 7% growth in the quarter compared with 5% in the last year's second quarter.

Dealer Services pre-tax margin expanded nearly 90 basis points driven by operating leverage.

Partially offset by a drag from the first quarters acquisitions of three distributors of our Autoline product and new business sales were quite strong in both the North American and international markets.

Now, I'll turn it back to Gary for an update on our full year forecast.

Thank you, Chris.

We're now on slide nine where I'll update our fiscal 2008 revenue guidance.

We are affirming our revenue growth forecast of 12 to 13%.

You've just heard from Chris that organic revenue growth in the businesses is strong and we have also benefited from favorable foreign exchange rates.

As you know, interest rates have declined since we last provided our forecast to you on October 30.

As a result, we are lowering the anticipated growth in client funds interest.

We are forecasting a full year fiscal increase of about 3 to 4% which is an additional decline of around $25 million since our previous forecast on October the 30th.

This revision is based on Fed funds futures contracts and forward yield curves as of yesterday, January the 31st.

The Fed funds futures contracts do anticipate two further declines of 25 basis points each in the Fed funds rate over the remainder of the fiscal year, exiting ADP's fiscal year with a Fed funds rate of 2.5%.

This reflects a 275 basis point reduction since our original forecast in July.

The forward contracts also indicate a decline in fixed income rates of over 100 basis points since our last guidance update at the end of October.

We are now forecasting a reduction of less than 20 points versus last year in the average yield on the client funds portfolio.

Of over 4.3%, which compares with last years nearly 4.5%.

This calculation also gives us a fourth quarter exit rate of approximately 4.1% yield on the portfolio.

We're also anticipating about 7% growth in client fund balances which is slightly lower than our previous forecast of 7 to 8%.

As Chris indicated earlier, we have seen lower wage growth this year as a result of lower year-end bonuses and we are forecasting further declines and bonus payouts over the next several months.

We continue to forecast about 1.5% growth in our same-store pays percControl metric for the fiscal year.

I'm now going to slide 10 for those of you who are following along.

We remain confident in our ability to achieve the high end of our 18 to 21% EPS growth forecast.

This forecast does include the following items that were not reflected in our October 30, guidance to you.

It includes $0.02 benefit from tax settlements in the second quarter which Chris touched on.

Also, it includes about $0.01 additional accretion from share repurchases subsequent to the first quarter, and it does include an additional $0.01 from the current estimated favorable foreign exchange rate.

This 0.04 or $0.04 of additional earnings per share is, however, par partially offset by about $0.03 from lower client funds interest revenues based on the Fed funds future contracts and forward yield curves as of January the 31st, 2008, as well as the lower anticipated client fund balances that I referenced earlier.

There are also no further share buybacks contemplated in this fiscal 2008 guidance, so it is our intent to continue to buyback shares at higher than our historic pace, depending upon obviously market conditions.

Now, let's go to slide 11 to review the guidance by business segment.

On slide 11, you'll see our guidance for the segments.

We've continued with the table format to clearly depict the current forecast and how they had been updated or differed throughout the year.

Let's talk first about Employer Services, which excludes the PEO.

For ES, we anticipate about 10% revenue growth, slightly down from our previous forecast of about 10.5% partially due to the anticipated lower client funds balances growth that I mentioned earlier.

And to remind you, ES is credited with revenue at a constant 4.5% interest rate on client fund balances, and it is therefore not impacted by the changing interest rate environment.

And as we move into the second half of the year, we are slightly narrowing our forecast for pre-tax margin expansion to 70 to 110 basis points.

Let's go to the PEO.

We are affirming our PEO revenue growth forecast of 19 to 20% and our pre-tax margin expansion forecast of 50 to 90 basis points.

In terms of sales growth, we continue to confirm our forecast for new business sales growth of high single digit to low double digit for the full year.

And to remind you this number includes both Employer Services and the PEO new business sales.

In Dealer, there is no change to our Dealer Services forecast.

We continue to anticipate revenue growth of about 10% and pre-tax margin improvement of 70 to 90 basis points.

Now, turning to slide 12, I'd like to summarize where I think we are.

As we move forward from a strong first half of fiscal '08, we are facing headwinds from a lower interest rate environment.

That being said, I remain optimistic about the longer term strategic direction for the businesses and I don't want anyone to lose sight of what ADP has accomplished over the last couple of years.

We are a new, focused ADP, having recently divested slower growing businesses.

Additionally, we are much better positioned today to compete worldwide with our global view and Autoline products than we were certainly some short three to five years ago, and as I think about our results thus far in fiscal '08, I am certainly pleased with the strong growth in each of our business segments.

You've also heard me speak previously about measures we've undertaken to increase operating efficiencies and to remind you we are proceeding nicely with the data center consolidation, our Smart Shore and Offshore facilities and investments in telesales.

Anticipated revenue growth for the year remains double digits with pre-tax margins improving in each of our business segments and our EPS growth forecast is strong.

We are the global market leader and have a strong broad based portfolio of products and services.

I want to also be clear that we intend to continue to invest in new products, salesforce expansion, and implementation in client services resources in order to drive this important organic revenue growth while at the same time, sustaining our discipline around pre-tax margin expansion.

We remain keenly focused on our five point strategic growth program and remain confident in our ability to deliver both strong revenue growth and margin improvement over our planning horizon.

The ADP business model is strong and we anticipate another year of excellent cash flows and our committment to return excess cash to our shareholders is clearly evidenced by our higher than historic share repurchases as well as the 26% increase in the dividend that we announced last November.

With that, I'll conclude my comments and turn it over to the Operator to take your questions.

(OPERATOR INSTRUCTIONS) Our first question will come from the line of Liz Grausam, with Goldman Sachs.

Good morning, Liz.

--diversification, can you just remind us, what is your revenue--?

Liz, sorry, we missed the first part of what you said, Liz.

We just picked it up halfway through your comments.

I'm sorry.

I just wanted to hit on your global diversification and also your reinvestment rates currently.

First, on the global side could you remind us how much of your revenue right now is out of the U.S.

and how that might have compared to 2000 to 2001 as you entered the last cycle and how you're seeing growth outside of the U.S.

compared to what you're seeing internally here?

Yes.

Liz, the international revenue growth is not that much different than it was back then because we did have our claims business which was primarily international revenues but looking at ES now, for example, right now it's less than 15% of the total revenue for international.

Okay, and then on your reinvestment rates in your portfolio, I know what your average yield is and where you expect average yields to go but it takes time to reinvest your portfolio so the interest rate implications might be greater for 2009 than they are necessarily for 2008.

Chris, could you give us some perspective as to what your average reinvestment rate is?

Where you're investing currently, your incremental funds along the yield curve?

In fact, that is why we mentioned, Liz, that we exit this year at 4.1% rate so that's a good indication and clearly, the reinvestment rates, the new purchase rates are lower than that.

The reinvestment rates, the new purchase rates are lower than that they're running around 3.4 but again, that speaks to the fact that we've laddered the maturity so we're really only exposed to those investments that are becoming more mature, and we've continuously moved the duration up.

We're currently now at about 2.5, just to insulate ourselves as much as we can, against just this very situation of declining interest rates.

Liz, also in terms of the international piece, if you went back in time and looked at ES and Dealer from an international perspective, in the early years of 2001 and 2002, we were growing very little in those businesses internationally and our rates today in both businesses are around double digits and are up dramatically from last year and up significantly from the years before that.

And can you give any update on GlobalView around that point, Gary?

GlobaLView is continuing to do very well.

I think we have somewhere around 800,000 employees signed up for GlobalView.

About a third of those are live at this point.

Most of that is in backlog or implementation cycle.

I think that represents around 70 clients now at this point in time on a global basis.

Great.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question will come from the line of Greg Smith with Merrill Lynch.

Hi, Greg.

First question, can you just remind us of the pays percControl sensitivity, just so we all have it straight?

Sure, our pays percControl sensitivity, a full percentage change in pays percControl is worth about $15 million directly and then we say it could be as much as 20 because typically, you're in an environment where that affects other items as well.

So, I think 15 to 20.

That's revenue, Greg.

Revenue.

Yes, and then the incremental margins though, relatively high on that?

Yes.

And then actually, in the Dealer business, what, you called out U.S.

growth being actually pretty darn good.

It just seems to not fit with some of the macro environment out there.

What's really driving the U.S.

side of Dealer and how does the outlook look for now?

Dealer is growing very strong internationally, in addition, it's doing quite well domestically.

What's really driving that domestic growth is the success in our -- continued success in our ASP outsourcing, secondarily.

We're selling in both loads the Voice over IP services that go with that ASP model and we've just recently introduced a new multi-tenant Voice over IP technology that we're selling which enables us to go after the middle and lower end of the market.

On top of that, our front office sales with BZ Results around optimizing the Internet, lead flow and the follow-up systems for Dealer is just going gangbusters, and we're taking share as well against the competition in the range at 2 to 3 to 1.

And then just one last question.

Just given the volatility we've had in the Fed funds rate over the past seven years or so, have you considered at all changing your strategy of managing the portfolio, possibly hedging or doing anything significantly different?

We talk about that from time to time.

Obviously, hedging is not free.

If you're using outside sources, and we continue to believe that extending the portfolio is a better alternative.

As we talked earlier, or as I commented earlier our portfolio back in 2001 and 2002 was around 1.1 to 1.2 years with 40 to 50% of the funds in short-term money.

Today, our portfolio is 2.5 years with less, around 20% in short-term funds, so I think our portfolio feathering strategy is working well.

You obviously can't 100% insulate yourself from it but certainly, we are in a far better position today than we were five or six years ago.

I'd add one thing to that and that is part of the laddering strategy means that we're out in the commercial paper market on 200 days a year, because we're investing long term but we have the short-term maturities of the debt obligations, so the obligations that we have.

Therefore, we're actually borrowing in the commercial paper market and that's kind of a natural hedge because interest rates and commercial paper market are going down as interest rates decline as well, so you get the benefit of that as well.

Thank you.

And Greg, this is Elena.

One thing too, when we're talking about how much is short in the portfolio, that's the client portfolio we're talking about.

I just want to make sure you got that.

Corporate is naturally shorter so those are the client portfolios we're talking about.

Yes, thank you.

You're welcome.

Our next question will come from the line of James Kissane with Bear Stearns.

Good morning, Jim.

I guess you were a little bit better in December but you're still guiding for 1.5% pays percControl for the year and it looked like on Wednesday your macro data was very strong but now the BLS numbers look pretty weak so can you reconcile all this?

Jim we missed the first part of your question, I don't know, there's something wrong.

I was asking about all the cross currents and the jobs data.

I mean getting so many different readings the BLS numbers were pretty weak this morning, but your numbers the other day, the macro data was very strong, trying to get a sense of your current read in terms of January because I think in December, you had 1.7% pays percControl growth for the quarter, but you're still guiding for 1.5% for the year so are you seeing a dip here, as we sit here?

I mean, what you see, what we see through the end of December is what we reported.

We don't attempt to try to do monthly reporting because there's too many cutoff issues and five week versus four week kind of periods month to month, so we don't try to do that except quarterly.

We're seeing obviously with the strong revenue growth that we have, we're seeing no drop off in recurring revenues which is partially driven by pays percControl and typically, the ADP data has been pretty accurate to the revised BLS data, once they catch up over a period of time.

So I don't know exactly how to react to the BLS data, but it is what it is.

I hear you.

I guess client retention dipped slightly, still excellent, but it dipped slightly.

Where do clients go when they leave ADP?

Because it seems like your competitive situation is extremely strong right now.

Yes, there's a number of things going on there.

Don't forget you have bankruptcy, out of business kind of stuff that gets in there as well particularly on the low end, so we haven't seen dramatic changes, in fact in was down quarter-over-quarter or year-over-year but it was right where we expected it to be and no change in our guidance for the year.

Jim.

we're still actually up year-to-date by about 10 basis points over last year.

We've seen a slight moving up of out of business in the small business and mid markets, but our retention rate internationally and I mean particularly in the national accounts and the U.S.

has never been better.

Right if I could get one last question in.

It looks like PEO margins dipped slightly year-over-year after improving nicely in the first quarter.

What was behind that and I see you're sticking with the margin objective for the full year.

Yes, we mentioned in the slide that there was a one-time item that was only, it was actually less than $2 million for state unemployment issue or matter that we adjusted and that's going to be the situation with PEO being a separate segment is you're going to see that 1 million to $2 million item can swing their margins significantly.

If you didn't have that $2 million, I think the difference was about another 70 basis points so it would have been up, so really that's a noise in the challenge.

With the PEO, you're going to have to look at the full year and we're very comfortable with 50to 90 for the full year.

Perfect, thank you.

Our next question will come from the line of Kartik Mehta with FTN Midwest.

Good morning.

Gary, I think you just said that you did see a little bit of move up in out of business for small businesses and I was wondering, has that been reflected in pays pays percControl or are you seeing difference in pays percControl in any of the business segments?

It wouldn't be included in our pays percControl metric.

First of all, that pays percControl metric that we've shared historically is more in our major accounts segment around our auto pay product.

On the small end, that's a different payroll product and typically out of businesses that's where you see it first is in small accounts, so it would have no measure on either our historic or current reported pays percControl.

Yes, and Kartik, even if we had, because there would would be bankruptcies of course in the low end of majors which is where that broad pay percControl metric comes from and since that's a same-store sale, if there's a bankruptcy they wouldn't be in that same-store sales report because we wouldn't have them to compare to last year.

Right, and what about from a pricing standpoint, Gary?

If you compare last recession or maybe last time the economy slowed, was there a change at all in how much pricing power ADP had on the Employer Services side?

I would say slightly.

It wasn't to the point where we weren't getting close to our historical 1.5 to 2% kind of thing.

What happens is you have more concessions after a price increase, typically people are more troubled and you increase their price by 3 or 4%, they tend to push back harder and we certainly tend to try to meet somewhere in between because we certainly don't want to lose the client but, yes, there was some degradation but it wasn't significant in terms of the overall business.

Thank you very much.

You're welcome.

Our next question comes from the line of Adam Frisch with UBS.

Yes, hi, good morning, guys, it's Jason Kupferberg for Adam.

How are you?

Good morning, Jason.

Just want to pick up a little bit on one of Jim's questions regarding the BLS data for example.

Obviously understanding it was weak this morning, could get revised next month, who knows, but it kind of begs a bigger picture question of maybe you could rank order for us as best you could, the impact of key macro-economic variables on your business so whether it's the payroll numbers, wage growth, bankruptcies, unemployment rates, a lot of moving parts out there, how should we think about the ones that are really most relevant to your business and your growth potential?

I think the, I mean, we've already outlined and clearly shared with you metrics around what happens for every 25 basis points in Fed funds rate how that affects us.

We've certainly just outlined again this morning the 15 million to $20 million which is what 1% of pays percControl does plus or minus, but clearly, beyond that, the most important thing for us is the rate of new sales and our ability to continue to grow that number and continued high retention rates because that is, when you are selling $1 billion plus or close to $1.2 billion in new, annual revenues each year, and regrettably you lose somewhere around 8 to 10% of the recurring revenues, that's really where the action is in terms of the net benefit from those two items.

And clearly, balances affect us.

As balances grow, we obviously earn interest rates on those balances.

New sales and retention would be the two most important things.

Right, and so are there any figures provided by the government that tends to be the best leading indicators for those ADP specific metrics?

Not really.

In the way you have to look at the BLS, is you have to really look at their revised data, not their current data, because they've had a lot of movement between their revisions over the last couple of years.

You also have to look at the private number on the BLS, which was about flat, not in total which was down.

Yes, I mean example in December, the BLS was revised to 82,000 jobs which was previously 18 when they initially released it, so they added 74,000 jobs, one month later.

Right.

Fair enough, that color is helpful, and switching gears a little bit you've been talking a bit more the last few quarters about the Smart Shoring and Offshoring initiatives can you give us some numbers around that?

What percentage of your employees are now either Smart Shored or Offshored?

And where might that percentage head over time?

We have about 45,000 associates worldwide.

We have today around 2,500 associates in India on the way to 3,000 plus.

Today, we also have around 1,000 employees in El Paso on the way to 1,500, and we have 200 to 300 employees in Augusta on the way to 1,000 over the course of the next year to 18 months, and we are in process of opening up a third near shore facility in Jackson, Mississippi where we have an initial plan to get up to 200 to 300 people.

So you add all of that together and you've got somewhere approaching 5,000 jobs either near shore or offshore against a total employment of 45,000.

I would add to that internationally, we're doing the international version of Smart Shoring and we're in, for example, Canada we're in Halifax we're in Pilson, so we have locations internationally as well that's close to 1,000 more employees.

And we, the arbitrage is not just arbitrage because of the service levels that we get from those locations.

It's nothing short of fabulous.

And when you look at India, you get a 3 to 1 play basically, it varies by job title in terms of FTE's and in the near shore, you get about a 30 to 40% lift on labor and taxes and buildings and that kind of thing.

Okay, that's helpful and if I can just squeeze one last one in, on the HRBPO business, can you give us a little bit more detail on the profile of deals that you're going after?

Are you going after any of the real big ones, tends to be multi-process and sometimes they're up in the $1 billion range?

Just any incremental color there in terms of how you're approaching that business and what type of competitor you want to be in that fairly broad landscape?

Sure.

As I've iterated many times before, we are not interested any way, shape, or form in what I'd call the lift and shift strategy that some of our competition pursues where you take over someone else's system, facilities, people, and you transport it over to ADP and try to rationalize it over time.

All of our efforts in HRBPO are on ADP platforms, and when you think about COS, which today is on around 140 million to $150 million run rate, by the way that will exit the year making money as opposed to investing and building the business so we will go into '09 in a profit situation.

Most of that revenue is around 70% about what we would call managed payroll where we take over the payroll department and then the other 30% includes where we're managing benefits and other HR kind of focus functions.

Our largest account there is Sodexho, we actually put out a news release, I think it went out yesterday and it talked about Sodexho starting the first of this year which would be our largest COS account with over 100,000 associates.

Great, thank you for the color.

You're welcome.

Our next question will come from the line of Rod Bourgeois with Bernstein.

Yes, Rod Bourgeois here.

With the stock at this level and your fundamentals remaining solid, does it make you give more consideration to a much more aggressive share buyback or perhaps even the idea of levering up to repurchase your stock?

Obviously, that's something that we've considered all along.

We've been talking to a lot of you along the way.

We still think the best strategy for ADP, there were a lot of folks that thought we should borrow a lot of money and lever up when we were at 49.

We continue to think that the best strategy is aggressive share repurchases over time without taking a risk at any one point in time, and you'll continue as we commented both Chris and I commented, you'll continue to see us in the market at higher than our historic rates over the course of the next year or so.

So it's probably not in the cards to lever up any time soon?

It would not be our current plan.

Okay, and then in terms of Dealer, I mean the business has shown very good progress and is there a consideration if you continue to make your improvements and hit your targets there that you'd ultimately divest that unit?

We've been very public in our comments there, as long as we believe that Dealer can grow at equal to or better than Employer Services, we tend to believe that it's a compliment to the portfolio as opposed to a detriment, so to the extent it ever gets to the point where Dealer Services is not able to sustain double digit or close to double digit rates, then certainly that would be a consideration but we have no plans to do that in the near term.

Okay, that makes sense.

And Gary, I was very encouraged to hear your comments that you will continue your investments in growth despite the interest rate pressures you're experiencing right now.

Can you speak to whether you pulled back at all on investments and more color on how you're evaluating that situation, particularly relative to what happened in the last downturn?

Sure, Rob.

I appreciate the question.

I think, I guess the good news and the bad news is regrettably I'm six or seven years older and maybe a little wiser than we were six or seven years ago, and I think we made a mistake by trying to cut investments and cut spending in order to maintain our 160 plus quarters of double digit earnings per share growth and as a result, we really, it took us probably two years longer than it should have to pull out of it because we cut for a period of almost two years and then we had to ramp up spending in a recurring revenue business that takes you two years to get, to really see the benefit of those ramp up and expenses.

I think both Art, at the time and myself at the time thought the dip would be much shorter and so we thought we could kind of notch up the belt and make it through it, but at this point since we get a little credit for interest rate increases and do get credit for organic revenue growth, we're going to stay the course and continue to invest in building out the infrastructure, adding to the salesforce, expanding globally.

I think we will be a little more hesitant on what I would call new kind of incremental kind of investment but our strategies in the HRBPO, which includes the PEO, our ASO, our insurance products initiatives, our global expansion, we've got so much room to grow in all of those areas that to cut back on the infrastructure and the sales accretion there, I think would be penny wise and pound foolish for the business on a 5to 10 year view.

Okay that's very clear and thanks for that and then final question here.

January is clearly a key time to address the client churn that tends to happen at this time of the year, so can you give any comments on how you're doing with bookings and the churn situation in January and how you feel that that is progressing so far in the calendar year?

Well, first of all, we don't give monthly results as you probably know.

A lot of what happens in January is a result of what happens in the first and second and third quarters as we go into that period of time.

Haven't really closed the books yet.

Yes, we haven't really closed the books so I don't think there's anything anecdotally that would be plus or minus that we could share with you but I think it's pretty much business as usual.

Our call volumes at year-end have been about normal.

It's pretty much business as usual.

With a strong sales first half our starts at year-end should be up accordingly with those strong sales growth.

All right, great.

Thank you guys, very much.

Our next question comes from the line of David Grossman, Thomas Weisel Partners.

Hi, thank you.

I may have missed this in the prepared remarks but could you talk about what the sales growth was in the U.S.

versus other geographies?

We don't disclose the difference between what we sell in the U.S.

versus domestically.

I think in the quarter, we're up 8% worldwide, which is really where the rubber meets the road.

A lot of our sales like global view include sales across the world not just one or the other and it's a key component of our growth strategy there.

This difference would not be meaningful.

Yes, it's not significant, and I think year-to-date, we're still up around 10%, which is really the important number on a worldwide basis.

And I think you may have given this in the past but can you update us on how we should view sensitivity and revenue growth to fluctuations in the new sales growth number, Gary?

Yes, I can do that for you, David.

1% sales growth we talk about as being just close to 10 million in annual revenue, and I think the way to think about that is because when you look at the sales across such a broad spectrum of the market, you see of course the -- at the low end SBS and total floors low end of majors will turn to revenue fairly quickly where on the higher end and internationally, you will have more of a lag in terms of when it actually hits revenue.

Okay, great.

Thank you.

And just we've been talking I guess about execution against your plan to cut out costs this year with the Near Shoring, the Offshore and the data center consolidation.

Can you help us understand how much of that effort and the savings from that effort on a year-over-year basis extends beyond fiscal '08 and what type of things you're thinking about as kind of we get towards the end of the year in terms of other initiatives that may kind of continue to reduce cost as we go into fiscal '09?

Yes, the game plan as Gary said would be to not to cut the customer facing costs so what we're talking about is non-customer facing kinds of things for the most part, and there's still a lot of opportunity on the offshoring, the Smart Shoring, near shoring and frankly, we're looking at shore shoring which is very beneficial as well for certain pockets of the employee base.

So I would say that this is not something that you do over the course of a year.

It's something that you continue to do, and continue to grow on.

The numbers that we've disclosed in terms of the number of employees is still a small percentage of our overall population, so there's still a lot of opportunity extending beyond '08 and that's our approach.

We're very focused on, and we have a strong discipline around our margins and that's important to us.

An example of that is the data center consolidation as well because now there are other pockets of hosting and such that will now move into the data center so that will continue over the next year to year and a half.

Just to help you with the data center piece, last year, we exited saving around $20 million per year, this year we'll exit saving around $50 million a year counting the tax savings which we'll certainly carry forward into '09 and in cases like EMEA, again for IT resources, the fully loaded cost is one-third of what it is in the U.S.

So you've got 1,000 IT associates in India, you're saving 75,000 to $100,000 a year per individual on those costs, so it's significant.

Can I ask you maybe another way, is there as much opportunity entering fiscal '09 as there was entering fiscal '08?

I think the first thing you should think about is we get business as usual, no acquisitions, no degradation of the business, we get 0.5 point of margin improvement based on scale.

Obviously, the next payroll check that we print has a much higher margin than the first payroll we printed before we got to the size that we are, so we manage the business and have been communicating to the Street that if we're growing in the double digit range, you should fully expect 0.5 point of margin improvement just based on scale economy.

On top of that, we're trying to continue to be more efficient in the business with offshoring and near shoring, the data center, and as we previously discussed with you, we have a number of efforts under way to integrate the Corporate layer that we had when we had four businesses into a same group of people that were managing Employer Services because as we exit this year and go through '09, our objective is to totally remove that layer and to have one ADP as opposed to Corporate and four separate businesses that we had historically.

Got it.

And just one last question.

I may have misunderstood this.

Is the current reinvestment rate 4.1% or is that the rate you expect to exit the year?

That's the yield of the portfolio, exiting the year.

And I think I mentioned that the term reinvestment rate is--?

About 3.4.

3.4%.

Great.

Thanks very much.

Our next question comes from the line of Gary Bisbee with Lehman Brothers.

Hi, good morning, guys.

Hi, good morning, Gary.

I guess can you give us a sense historically how new sales activity correlated with economic activity, so last cycle, was it more difficult to close new business or have you seen that in a sense you offer some cost savings potentially that it actually was not that impacted and the second part of the question is, now that you've got a lot broader product portfolio, how does that play into how we should think about new sales trends in a weaker economy?

Basically, during the economy, if you look back at '02 and '03, our sales growth basically flattened plus or minus the quarterly basis, or whatever, basically flattened but there are several things that are very different today than were in place then.

First of all, as I mentioned earlier and the question I think was from Adam is we cut back on our investments in salesforce expansion and implementation.

We are not going to do that this year.

Secondly, our competitive position and where we operate today is so different than six or seven years ago that I don't expect to see the same kind of pressure that we did last time.

We have a whole new set of global products in both Dealer and in GlobalView and Employer Services.

We've got all of our insurance initiatives.

We really didn't even, the PEO was nascent at that point, it's continuing to grow at 20% kind of rates today.

We're introducing the ASO and the COS platforms up market.

We're introducing the new CPA and wholesale distribution model on the low end with small business, so it is really an apple and an orange and I'm sure we'll have some pressure but I don't think it will be similar to the extreme pressure that we had in '02 and '03.

Just a follow-up to that.

Can you give us a sense maybe which or how many of the new products that you have or the product portfolio overall is a key part of the sales pitch, the potential for you to save money for the client?

Is that a lot of the products?

Or is it much more better service that you're, better offerings that you're selling?

It's really kind of all of the above.

I think there are a couple of good news things that are happening right now.

One of the great statistics that again we reported this quarter is the strong growth in our core payroll and tax filing business which is our highest incremental margin business.

We continue to grow I think 8% Elena or 9?

8% plus in the quarter.

Clearly, our time and labor products are labor savings because they eliminate overtime and buddy checking and allow people to schedule their time much more accurately, so those kind of things clearly save money.

The COS products that we're selling in the bigger bundles are not only better in compliance but in many cases, they save the clients money, so I think it's our product position is very broad and much better than it was before, in addition we've got products that bring in clients even in hard times.

Okay.

I know it's really early in the product but you had a release out a few weeks ago about the sales tax offering.

Can you give us a sense as to how quickly, how that's going first of all and second of all, how quickly we should realistically, expect--?

Realistically, you won't see any significant revenue from the sales tax or significant revenue growth for at least a year to 18 months.

We just acquired it last year.

We've spent the last 12 months taking the product, putting it in an ASP mode and then building all the connections in our money movement so that's now just in pilot where we're out starting to sell live clients to test all of that.

We'll get more aggressive with that in '09 but it won't significantly impact revenue until we get to '010.

Okay, and then just one last question, on the PEO, can you give us a sense how much of that is in Florida and what you're expecting the decrease in manual premium rates there is going to do?

Is the revenue guidance you've given clearly assumes somewhat slower growth in the back half because of that?

Is that the right the way to think about it?

Thank you.

When you look at the PEO, our highest growth areas are in California and on the West Coast and actually, in the Northeast where we have our largest client base, because close to 50% of the PEO sales are leads either from the client base or from our salesforce, so the growth in Florida is slower than it is in the rest of the world.

We have seen some pricing pressure around Workers Comp renewal in Florida, but that's been going on for the last 6 to 12 months, so there's nothing new here and we're not obligated to price at those levels and as long as we're doing a good job for the client, we usually are able to kind of work our way through it.

Okay, thank you.

I think the biggest indicator there is our client retention and the PEO is equal to or better than it was last year.

So that's really where the rubber meets the road.

Our next question comes from the line of Charlie Murphy with Morgan Stanley.

Thanks.

Could you please discuss how lower interest rates affect interest expense and the commercial paper program and based on current futures where would you expect FY '08 interest expense to be?

Well, it clearly does impact it and as I said, we're at 200 days in the market, so that as we go into the market, the interest expense is down.

We'll take a look to see if we have the actual exit rate here in the information we have.

Yes, we think over the second half of the year, that the borrowing cost is probably going to decline to about 3.5% down to probably even under 3% by the time we exit the year.

Okay, thanks.

Yes.

Our next question comes from the line of Michael Baker with Raymond James.

Yes, thanks a lot about your commentary in terms of your committment to continue to grow the salesforce.

I was wondering if you could provide a little bit more color in terms of allocation by business unit, if you're not willing to do that yet, maybe some sense of how that mix might shift as you look towards that at a business unit level.

Clearly, we're adding headcount across-the-board.

Obviously, with the great growth that we're getting in the PEO, a lot of that headcount is skewed toward the PEO.

We'll also will be adding a good bit of dedicated headcount to the ASO platform which is our PEO without co-employment, that kind of goes in the low end and the mid markets.

We're clearly expanding our international headcount growth in both ES and Dealer, and we'll continue to grow the in continent kind of -- in the continent headcount for our ES international business.

Majors and small business will continue to add headcount but it will be more in the 3 to 4 to 5% range as opposed to in the PEO where we might be adding double digit headcount.

That's helpful, thank you.

Our next question comes from the line of Tien-tsin Huang with JPMorgan.

Thanks, good morning.

Good morning.

Just had a quick question about margins, looking at -- would like to look at EBIT margins ignoring the float.

It looks like it was up nicely but not as much as the past couple of quarters.

I heard you talk about the PEO issue and anniversarying some acquisitions.

Anything else to read into on that?

Yes, if you look back in the second quarter of last year we had a gain on sale of securities of $18 million which we have no impact, no gain or loss on sale of securities to speak of this quarter.

So that will drive a significant year-over-year compare.

Right, but I was looking at EBIT.

I think before the gain.

Well, you have the acquisitions, know, we mentioned that in terms of the ES would impact the overall.

We're still -- haven't a fully anniversaried those acquisitions as well as Dealer Services, we have the impact this year of the three acquisitions we did in the first quarter that are also for this quarter pulling it down.

Also in the quarter, in the second quarter you see a bit of a spike in our implementation spending and operating expense, getting ready for new starts for the beginning of the next calendar year, so that's something that you'll see every, you'll see a little bit more spike as we begin to grow, so there's a little bit of that as well.

It doesn't sound like anything unusual.

No.

And then I saw that you exited the Accounts Payable offering.

Can you elaborate on that?

I believe your partner got acquired if I remember correctly.

That would be correct.

American Express did acquire Harbor Payments, and they made a strategic decision to basically reengineer the entire platform which obviously put us in a little bit of a tight spot, so we basically decided to exit the relationship with them at least for now.

Is it something you look to get back into, Gary?

Yes, we had pretty good initial sales success when we did it and we're in the market talking to other folks that are in that business, although we've made no commitments at this point.

Okay, very good.

Thanks for the details.

You're welcome.

Our next question comes from Brandt Sakakeeny, Deutsche Bank.

Hi, this is Sue sitting in for Brandt.

Could you give us some color on why the client flow balances were so strong this quarter?

I believe they were up 9% year on year and 6% quarter on quarter?

Yes.

I think in my opening remarks, I had also alluded to the fact that there is basically two stories there.

One is we had strong growth in the U.S.

But on top of that, we got about 1.5 point lift from the strong Canadian dollar and we obviously moved money in Canada in Canadian dollars and when we translate that, we're getting a lift of about 1.5 point.

So the combination of the two of those.

Okay, thank you.

Our next question comes from David Togut with First Manhattan.

Good morning, David.

Been significant changes in ownership structure at Reynolds and Reynolds and Ceridian in the last couple of years and I'm wondering if you could give us some granular insights into recent head-to-head sales experience with both competitors?

In terms of Reynolds and Reynolds and the UCS combination, obviously, they don't publish their results at this point being private.

As I think I mentioned in one of the questions, we continue to take share to the tune of, I can't remember the exact number but it's 2 or 3 to 1 against them in the Dealer markets, so I think we're doing very well.

Obviously, their focus is a little different than ours around global expansion and other areas and they're much more focused on getting cost out of the system, et cetera in the U.S.

marketplaces but again, I can't speak with a lot of accuracy there because obviously, they aren't a public company in terms of that result.

Ceridian, it's pretty much business as usual.

We're seeing no dramatic difference in their behavior in the marketplace.

And I think time will tell how they, how this all plays out for them.

Okay, thank you.

You're welcome, David.

We have time for one or two more questions.

And our next question will come from the line of Mark Marcon with Baird.

Good morning.

Just wondering, a couple of quick questions.

First of all when does your annual price increase go through?

Beginning of the fiscal year.

Okay and then the second one is what service areas as we look out over the course of this coming year, what services are you most excited about in terms of new sales potential, and I listened with interest when you mentioned that you might ramp up the ASO offering to medium sized clients.

I'm wondering if you can talk a little bit about the potential there and how that could potentially increase your revenue per client on that side?

Well, first of all, beyond our business as usual, organic growth rate because selling new payroll accounts is obviously the most profitable thing we can can do, but our second most important growth initiative is in the what we would call the HRBPO arena and for us, that includes the PEO on the low end, the ASO in the low end and the middle, and our COS platform up market, so we're just launching the ASO platform.

I think we have maybe 40 plus salespeople in the mid market, major accounts starting to sell that platform now.

We have another 30 or 40 that are dedicated in the low end of the market, below 50 pays and we're going to continue to expand those businesses quite aggressively.

As you know, the PEO is $1 billion dollar business today.

If you continue to grow revenue and new sales at a 205 plus rate you get to $2 billion in a pretty big hurry, we think our COS platform is certainly $0.5 billion business over the next four years or so, and we certainly think GlobalView over that same four year period is $0.5 billion opportunity as well.

So in terms of pure organic revenue growth, those are the areas that I think have the largest potential.

Perfect, and then with regards to just the economic sensitivity, can you give us a feel for if your average client, if we go through a hard recession just from a sensitivity analysis perspective and we see a decline of say 1% in terms of employees per existing clients, can you tell us a little bit about how to think about the marginal impact with regards to profitability?

Well, as Chris mentioned earlier, 1% decline in same-store sales of pays percControl is worth around 15 million to $20 million.

Obviously, that incremental pay growth is higher margin than our existing margins in the business.

I don't think it would be appropriate for me to just throw out a number on what that's worth because it would be different in our small business platforms versus COS versus Auto Pay, and it's really not a metric that we would track across the enterprise.

Okay, thanks for the feel.

You're welcome.

Our next question will come from the line of TC Robillard with Banc of America Securities.

Hi, guys, this is (inaudible) for TC.

Just wanted to ask you guys for a little granularity on the Dealer segment, as the U.S.

economy slows, that business is doing really well obviously still, but just wanted to understand how sensitive that business is to the auto market and how bad things would have to get to see a real slowdown or even downturn in that business?

Well, the North American or the, particularly the U.S.

market has been tough for the last couple, three years so it's nothing new going on there.

Slightly softer than it was, so we've been dealing with that issue for quite some time and don't really expect the current situation to dramatically affect anything there.

In fact in some ways lower interest rates and incentives by the domestics will kind of add some fuel to that fire.

Internationally, it's business as usual and it's gangbusters in the Far East in terms of what's happening in new car sales.

So I don't expect it to really affect our Dealer business today any more than it already currently is.

Great, thanks.

I'll now turn the call over to Mr.

Butler for closing remarks.

First of all, thank you for attending today.

As you can tell by our comments I think we have been very forthright in what's going on in the business, both in terms of interest rates as well as in our core business.

I would remind you, I think the important thing for you to consider is ADP today is far different animal than it was six or seven years ago.

Our portfolio has twice the duration that it did back in the '01 and '02 days.

Our product portfolio has never been stronger, and we're going to continue to stay the course and drive the organic growth across the enterprise.

So with that I'll conclude and thank you for attending.

Thank you for participating in today's teleconference.

You may now disconnect.