自動資料處理 (ADP) 2008 Q3 法說會逐字稿

Good afternoon.

My name is Cara, 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 2008 earnings call.

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

After the speakers' remarks there will be a question-and-answer session.

(OPERATOR INSTRUCTIONS) Thank you.

I will now turn the conference over to Ms.

Elena Charles, Vice President Investor Relations.

Please go ahead, ma'am.

Thank you, everyone, for joining us this afternoon.

I am here 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 home page of our Web site at adp.com.

Just to remind you, the quarterly or history of revenue and pretax earnings for our reportable segments has been updated for the third quarter of fiscal 2008 and has been posted to the IR section of our Web site.

During today's conference call we will discuss some forward-looking statements that involve some risks and these are discussed on Page 2 of the slide presentation and in our periodic filings with the SEC.

I'll now turn the call over to Gary for his opening remarks.

Thank you, Elena.

Good afternoon, everybody.

I'll begin today's call with some opening comments about our third quarter.

Then I'll turn the call back over to Chris Reidy, our CFO, to take you through the detailed results.

And then I'll return toward the end to provide you with an update of our guidance for fiscal 2008 and give some concluding remarks before we take your questions.

First of all, ADP posted very solid third quarter results and I'm quite pleased with the 12% revenue growth for the quarter and earnings per share growth was again strong at over 18%.

Importantly, Employer Services client retention improved 90 basis points which is absolutely terrific in this key quarter following the critical calendar year-end period.

Now let me make a few comments on where we saw some slower growth in the third quarter.

The number of employees on our clients' payrolls, our pays per control metric, grew 1.1% for the third quarter and is sitting at 1.4% year-to-date.

As a reminder, this same store sales type metric is a measure of employment across our major accounts AutoPay client base.

Additionally, year-to-date growth in pays per controls similar kind of measure for SBS, our low end and national accounts, continue to be stronger than the major accounts metric of 1.4%.

New business sales growth of 4% for the quarter was lower than we anticipated.

There are several items affecting that number.

First, we had anticipated closing some transactions in March that slipped to April.

These deals could be a couple of points of growth plus or minus in any given quarter.

Additionally, we are seeing a lengthening of the sales cycle where large prospects are taking more time with large outsourcing decisions.

As a result, we are slightly lowering our full-year sales forecast to high single-digit sales growth from high single digits to low double digits growth that we had previously forecasted.

This forecast is still very respectable growth particularly in light of this challenging economic environment that we find ourselves in.

And despite these economic challenges ADP will deliver strong revenue growth for the year and excellent earnings per share growth in fiscal 2008.

So with that backdrop I'll now turn it over to Chris Reidy to provide you the details of our quarterly results.

Thanks, Gary, and good afternoon, everyone.

As Gary said earlier, total revenues grew 12% to over $2.4 billion, assisted on the quarter by favorable foreign exchange rates due to the weak dollar.

Pretax earnings grew 11% with margin expansion across all segments.

Earnings per share from continuing operations increased 18% to $0.70 a share driven largely by revenue growth and margin expansion in all of the segments and lower average shares outstanding.

Now turning to Slide 5 we'll talk about share repurchases.

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

We repurchased over 24 million shares fiscal year-to-date for about $1.1 billion.

The share buybacks to date are anticipated to be nearly $0.04 accretive for the full fiscal year 2008, or almost $0.01additional accretion from shares purchased subsequent to the second quarter.

We remain committed to return excess cash to our shareholders.

Now let's turn to Slide 6.

Employer Services revenues grew 9% and we've now lapped last year's acquisition so the growth in the third quarter reflects that.

Revenues in our traditional payroll and tax filing business in the U.S.

continued to be strong with 8% growth and our beyond payroll revenues grew 13% in the U.S.

And to remind you, this exclusive PEO services revenue which we'll discuss in a moment.

Employease, acquired last year as well as comprehensive outsourcing services and time and attendance, continue to grow at strong double-digit rates.

ES's pretax margin expanded 90 basis on increasing operating leverage primarily from scale in the business.

As Gary mentioned earlier, pays per control growth same store sales metric was up 1.1% in the quarter and 1.4% year-to-date.

And growth in the number of pays in Europe is increasingly positive.

We are very pleased with our excellent retention rates during this critical year-end period which improved 90 basis points from a year ago.

As Gary stated earlier, new business sales growth of 4% in the quarter was slower than anticipated for ES and PEO services partially due to sales that lapsed to early April.

Sales represents the annual recurring dollar value of new bookings and become future recurring revenues that are incremental to our existing recurring revenue base.

We are now forecasting high single-digit sales growth.

Last year we sold one billion, 60 million dollars of new sales and will grow that high single digits in fiscal 2008.

This sales performance coupled with improved retention will continue to drive solid revenue growth going forward.

Now let's turn to Slide 7.

PEO continues to grow with 20% revenue growth, average work site employees increased 17% in the quarter and pretax margin increased 70 basis points.

Moving on to Dealer Services on Slide 8.

Total revenues grew 8% and Dealer Services pretax margin expanded 40 basis points from operating leverage partially offset by costs relating to the acquisition of three autoline distributors made earlier this year.

Slower growth in the core DMS new business sales was offset by beyond the core DMS sales which were quite strong.

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

Thank you, Chris.

We're now on Slide 9 and I'd like to take this time to update you on our fiscal 2008 revenue guidance.

We remain confident in achieving our revenue growth forecast of 12 to 13% which includes approximately 2% benefit from foreign exchange rates.

We are forecasting nearly 10% revenue growth for Employer Services, 19 to 20% revenue growth for the PEO, and nearly 9% for Dealer Services.

We do anticipate 3 to 4% growth in client funds interest revenues for the year.

This is based on a 6 to 7% increase in client funds balances, and an average interest yield of nearly 4.4% compared with last year's 4.5%.

As a reminder, this forecast today does include yesterday's fed action and fed funds future contracts and forward yield curves at April 30, which call for no further reductions in the fed funds rate over the remainder of ADP's fiscal year.

Now let's go to Slide 10.

Let me speak to margins across the business.

For Employer Services we are narrowing our forecasted pretax margin expansion to 80 to 100 basis points improvement.

For PEO services we continue to anticipate 50 to 90 basis points of improvement.

And for Dealer Services we anticipate about 70 basis points of improvement and, as you heard me say earlier and in my opening comments, we are anticipating high single-digit sales growth for the combined ES and PEO on a worldwide basis.

We remain highly confident in our ability to achieve the high end of our 18 to 21% growth for EPS for fiscal '08.

There are no further share buybacks contemplated in this fiscal 2008 guidance, though it is clearly our intention to continue to buy back shares at higher than our historical pace depending upon market conditions.

Now switching to Slide 11 where I would like to leave you with some concluding remarks before we take your questions.

First of all, I am very pleased with where we are for the first nine months of fiscal 2008 as ADP is growing nicely despite the challenging economy.

Anticipated revenue for the growth remains solid double-digit with pretax margins improving in each of our business segments and our EPS growth forecast is quite strong.

Our commitment to return excess cash to our shareholders continues and is clearly evidenced by higher than historical share repurchases as well as the 26% increase in the dividend for calendar 2008.

We are and will continue to invest in the business as we focus on executing against our five-point strategic growth program that we discussed in detail with you at our annual Analyst Conference in New York in March.

ADP has a wonderful business model, 90% recurring revenues, client life cycles of 10 plus years, excellent margins with enviable strong cash flows and the markets we serve are under penetrated and growing.

So despite the challenging economic environment that we find ourselves in, I remain highly optimistic regarding ADP's ability to deliver strong results for the future.

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

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Liz Grausam with Goldman Sachs.

Thank you.

Just wanted to dig in a little bit more on the sales in the quarter, new sales in the quarter up 4% and what exactly happened over the course of the last few weeks of March and (inaudible) particularly in the GlobalView product where your average sales price may be a lot higher and therefore bringing a little bit more volatility in the quarter performance.

A couple things, Liz, as I mentioned in the opening comment.

Anecdotally I just here from our people in the high end of the market that corporate America and some of the large global companies with everything they read in the newspapers, like you and I do, are just a little bit more cautious today than they have been for the last six to nine months.

So we're seeing some of that in terms of deals just taking longer to get to the table.

In addition to that, our March results were a little softer than we had anticipated because, clearly, we indicated at the analyst meeting that we had had a strong January and February.

On top of that we had a deal or two that were fairly substantive in size that were deferred out of March but that we closed in the first couple of weeks of April.

So I guess the message I would leave you with is, yes, I would like for it to have been better.

But we certainly are not panicked in any way and continue to think that high single-digit growth for the year is pretty darn good.

And balancing the effects of the new sales growth being a little bit slower but your retention was up the most significantly I can recall in the last several years, how does that affect the outlook as you look into 2009 for your visibility on the top line?

As you think about '09 I think there's three things that you ought to think about.

First of all, the primary slowness in the sales results for the quarter were up market and they were larger kinds of transactions.

Those kind of transactions won't affect '09 in any significant way because they're big deals that take anywhere from a year to two years to get installed.

The good news in the quarter was that the low end of the marketplace in terms of like SBS and majors, where the payroll starts are immediate at SBS and within three to four months in majors, were quite strong double digits in both cases.

So if anything it'll have no impact there in terms of revenue.

So when you think about the fact that Chris and I were talking about this earlier, I think last year we sold somewhere like $1.60 billion for the year, and when you think about high single digits growth off of that number and then drop in a point or two potentially, you know, you're talking 15, $20 million in revenue, it's kind of the impact that we're talking about.

Yet if you took our year-to-date loss improvement of 30 basis points, 40 basis points, excuse me, I stand corrected, and you multiply that times recurring revenue of $6 billion plus, it more than offsets the half of what we would have lost on the sales because it'd be installed ratably over the year and improved retention we get for the full year.

So if anything we're ahead of the curve with the excellent retention than what we are for the 10 to $20 million that we may have gotten pushed off further in the cycle.

I would also relate that back to the metric we've given before on retention that a 1% change in retention is worth about $50 million of revenue.

So as Gary said, a 40 basis point improvement year-to-date you can do the math and that's offsetting the impact of the tick down in the sales.

Thank you.

You know, Liz, just as a further clarification, the last down cycle the first place we saw any slowness was corporate America just starts pulling capital spending in a little closer to the vest.

And, frankly, I think that's what's happening here in terms of slowing down on some of these larger transactions.

Great.

Thanks.

Your next question comes from the line of James Kissane with Bear Stearns.

Mr.

Kissane, your line is open.

He's unavailable for questions.

We will move to the next questioner.

Your next question comes from the line of Brandt Sakakeeny with Deutsche Bank.

Great.

Thanks.

Is there any risk that what you saw sort of early signs what you saw in the larger clients starts to show up in smaller client in terms of fewer small business creations and do you think that the guidance sort of affords for a slight deceleration in that segment of the payroll business?

We have not seen any evidence of slowdown in small business at all.

I think part of that is small business is highly affected by the service sector and, as you know, if you follow the BLS or ADP's National Employment Report, the service sector and particularly the low end of the service sector is the area that still has rather decent growth in terms of employment and, I guess, the new business formation.

That being said, over my 30 years at ADP, there have been cycles where we've had strong recessions where we have seen some lessening of new business formation which certainly could have an impact.

But to date we've seen no evidence.

Okay.

Great.

Thanks.

And just to comment quickly on the PEO business, any sort of changes in the Workers' Comp rates or in other rates that are affecting profitability there?

It sounds like that business put in another very good quarter.

You know, most of the softening in Workers' Compensation rates are pretty much state specific.

And even though manual rates in some states can drop that's not necessary reflected in our pricing to our PEO clients.

So, yes, I would say we've seen it but it's nickels and dimes and it's mostly state specific and has had no material impact on the financials of the business.

Great.

Thank you very much.

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

Hi, guys, it's Jason Kupferberg for Adam.

Gary, I just wanted to pick up on a point you made in response to one of the other questions that during the last downturn this is how you saw thing start where the larger corporates began to act in a more hesitant fashion.

And maybe just to pick up on that thought, understanding that you were running the business much differently this time around than last time because you're continuing to invest in growth rather than pulling back, but are there other differences that you think might play out in this economic cycle versus the last one that make you feel comfortable that you won't see the same kind of degradation in your business that we saw during the last recession?

If I had that crystal ball I'd be making a lot more money than I'm making today.

You and me both.

Yes, I know.

I mean, typically in any kind of a recessionary cycle, corporate America, including yours truly, starts, they slowdown on capital spending, which is pretty typical in terms of what's happening.

I think in this particular circumstance versus prior one, the recession is much more industry focused than financial services.

And we've got offsetting growth internationally for a lot of corporate America that we haven't had before.

And so I think there's still some exposure there but I think it's less and I think if the recession is not overly prolonged most of what we do saves money for clients, it's not like they're investing or spending at a higher level.

So we think generally our value equation plays out pretty well.

So, again, the other things that you can see that in prior recessions we've, if we couldn't get newer clients to sign up, we'd focus on selling additional services like time and labor management saves money buy reducing overtime and taking fraud out of the business, same way with things like benefits outsourcing.

So there are lots of ways to counteract it but nothing in particular.

We've seen no increase in losses, which I did see at certain points in past recessions, in fact if anything ours is better than it's been.

So I think only time will tell.

Okay.

Which verticals were the delayed deals observed in?

One of them, believe it or not, was in oil and gas, which you'd think they'd be spending money like crazy.

Right.

We saw some delays in some other deals, in some of the large banks and financial services, but these were deals that were going to close in January that we did get closed in February, so they didn't affect the quarter but.

So we have seen lengthening of sales cycles particularly in financial services, but this particular one, ironically, was in an oil and gas arena.

Okay.

Just a last question.

To the high single-digit sales growth outlook for the full-year, I think implies, if my math is right, about 12% or so for the June quarter, you do have a much easier year-over-year comparison in that quarter so that should help.

But if you can give us some kind of a sense on what your level of visibility is on this fourth quarter target given that these longer sales cycle.

(overlapping speakers)

First of all, I'm impressed that you've done the work and you can see that.

Thank you.

We're running about 8% year-to-date so our visibility is pretty good particularly as it relates to major accounts, PEO and small business.

National accounts and GlobalView we're still subject to the large deals but we're pretty comfortable with our forecast in terms of that and to your earlier point, we do have a little bit of easier compare in the fourth quarter than we did in the third.

Okay.

I'll leave it there.

Thanks, guys.

Your next question is a follow-up from the line of James Kissane with Bear Stearns.

Sorry about that.

Will the slowdown in the GlobalView signings impact the timing of the breakeven?

No, because I don't think that, we're not basically sensing that GlobalView is, we're really looking at being breakeven as we exit '09 and go into '10.

And most of GlobalView is because of up front investments as we build out the infrastructure which we're continuing to do it.

But I really haven't done the work, Jim, to be candidate.

But even if it did it'd be a quarter or two, it wouldn't be anything that would be significant.

And I always ask just generally the progress on the GlobalView implementations?

No big, any kind of big deal is problematic by definition.

And, you know, we've sold 70 of these kinds of accounts and we've always got four or five that are problematic.

But nothing has escalated that was different than I would have been sitting here telling you a quarter ago.

But you still think it fits in with the transaction based model that ADP's real strong with?

Absolutely no question.

And this might be a silly question but I think your previous guidance was based on 1.5% pays per control, I think first nine months you were running at 1.4 with 1.1 in the most recent quarter.

Yes.

Are you sticking with the 1.5?

A slight tick down from that.

Okay.

That's fine.

I think it was representative is year-to-date 1.4.

I think as it's come down and, you know, you heard [our] and National Employment Report was flat for the quarter and the BLS consensus is negative 75, as you know, so I think clearly employment is softening, continues to soften.

So I think it would be foolish of us to think that we would hold at 1.5.

So I think it's going to erode slightly.

Okay.

Great job, guys.

Thanks.

Your next question comes from the line of Rod Bourgeois with Bernstein.

Yes, Rod Bourgeois here with Bernstein.

It sounds look bookings in the month of March in the large client segment was particularly weak.

Did you see that trend continuing into the month of April or can you give us an update that far?

You know, one in particular very large GlobalView transaction that we thought was going to close in the second or third week in March actually did close in the second week of April.

So we've seen no evidence anecdotal or otherwise that that's going to continue into the fourth quarter.

But again, back to my earlier comments, I think the large global corporate America kind of account are just being a little more cautious based on where we are in the economy.

Okay.

Is it realistic that Employer Services organic revenue growth as you look over the next year could actually be higher than the current organic growth rate that you're experiencing?

I mean, what you're dealing with right now is that the bookings have softened, the pays per control you just admitted would probably soften but your retention is better.

When you net all that out, is it realistic that your organic growth would be better over the next year than it is today?

Probably not.

Okay.

And so are you putting in place a strategy for the next year that's more margin expansion focused or does that alter your strategy in any way given that some of the key metrics have softened a bit?

I don't think, first of all, we're committed to our five strategic growth prospects which have been very clear and, clearly, have demonstrated that we can grow the business.

We're continuing to invest in sales implementation and service and we're adding sales folks now, for example, to expand, to get ready for our '09 plan.

But when you do have the lowering of balances we expect the average daily balances next year will not be as high as they are this year.

The sales that we've just talked about, you know, we're not talking about big numbers, you're talking about $20 million that might affect $10 million of revenue next year as it gets installed ratably over the period.

It's offset by improved retention which will give us a higher revenue step off rate.

So I don't think it's going to be materially different than where we've been, but that being said, it's going to be pressured by fewer pays in the start of the year, a little bit softer in terms of sales and certainly lower balances in terms of where we are.

And that being said, we continue to expect our business units to improve margins by 50 basis points or more each and every year and I don't think that will change in '09 as we look into the future.

Okay.

Just to clarify when you say lower balances, are you referring to lower balance growth or lower balance --

Lower balance growth Thank you for catching that.

All right.

That's perfect.

So it's, yes, much better to have lower growth.

Lower balances than I would have liked, how's that?

Perfect.

Yes, the one other thing there so you're going to now be targeting as you've always done 50 basis points of margin expansion.

There'll be less sort of scale leverage if the growth is a little lower than you were expecting.

Are you instituting --

You're really talking nickels and dimes here.

You know, I mean, you're not, whether we grow 7% or 12%, the incremental margins that you can drive on the incremental growth are not going to change that much.

Certainly it's easier if you're growing faster but it's nothing dramatic.

Because your growth in the core business where you get the most scale isn't going to move that much?

Yes, so I'm going to get high incremental margins on that big payroll machine regardless of whether it grows 8%, 9% or 11%.

Okay.

And pricing is fine, there's nothing changed there?

We are not anticipating any change there.

Assuming the economy stays about where it is we fully expect to be able to put in our normal type price increase.

All right.

Thanks, guys.

Your next question comes from the line of Pat Burton with Citi.

Congratulations on the numbers and the environment.

Gary, in the 50 basis points margin expansion in each of the units will that come primarily from cost cutting or scale or both or is it too early to tell?

Well, it's a whole bunch of things.

Let me just pick off some of the obvious ones.

First of all, scale particularly in our core payroll is highly incremental margin.

On top of that our beyond payroll businesses whether it's 401(k), time and labor management, benefits, where we may have had lower than payroll margins, as those businesses grow you get incremental margins as well.

Third piece is we fully expect, as we outlined at the Analyst Conference in March, to pick up substantial savings in the consolidation of our ES group function with corporate ADP as we eliminate a layer.

We've made a lot of progress.

We're getting benefit this year and I forget what the actual number we shared at the March forecast but I think it was a $20 million plus kind of number that we'll continue to get from that removal of that layer and that consolidation.

On top of that in '09 we will get our first full year of the data center consolidation savings which will add $20 million plus kind of savings into the overall structure.

And we fully expect to increase our head count and our offshore locations and our near shore where we have very significant labor arbitrage as we move into next year.

So that coupled with moving a lot of our, some not a lot, but I'd say a good bit of our sales growth into telesales also gives us a much more efficient return on our sales investment.

So all of those things together give me pretty good confidence that we can drive the kind of margins we're talking about.

One follow-up.

In terms of dealer, which we haven't spent a lot of time on, I guess, the auto units produced or sold are slipping.

Is there any impact on dealer or the outlook you see there in '09 and your strategic commitment to that business?

Thanks.

There's no change in terms of our strategic commitment to the business.

You guys read the same newspapers I do.

Domestic auto sales continue to erode for both the domestics as well as the imports and, clearly, we're seeing some evidence of dealers wanting to make capital investments to spend for new systems.

That being said, there's a lot more push around getting more efficient in new vehicle sales so we're seeing an expansion of our beyond core DMS products like in our BZ results and our front end sales and lead management portion of it.

And auto sales across the rest of the world are doing quite well.

But we don't see anything to materially change and we think dealer will continue to improve margins as we go into '09 as well.

Thank you.

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

Thanks.

Gary, I just want to follow-up on the data center consolidation.

Are those $20 million of savings in '09 incremental savings?

In other words, costs that are in the business in '08?

Yes, but, yes, you really have to put it in the context of the way Gary put it from the standpoint of it's a number of things that go into the 50 basis points of improvement.

So, you know, it's hard to pick out any one and say in your models add $20 million.

I would think of that as just one of the elements that go into an incremental 50 basis point improvement.

Charlie, let me kind of take you back in time.

Probably two and a half years ago we told you folks that we were going to consolidate the data centers and that it would be approximately $70 million worth of savings to ADP.

About 15 to $20 million of that was in tax savings to ADP corporate because of different incentives and other kinds of arrangements that we worked out with the states where the data centers are operating.

On top of that, those savings included our brokerage business at the time.

So roughly of the $50 million about half of that went to brokerage and about half of that went to ES.

So post the spend they're still getting their half of the 50 and we're getting everything else.

But it's been a phased implementation over two years and we just concluded the last data center within the last 30 days.

So as we've eliminated those last remaining data centers we'll get the full impact of all those that were eliminated over the course of '08 and we'll get the full impact of the savings in '09.

Okay.

Great.

And then on the $1.60 billion of new sales is it fair to say that the break out is similar to how revenue lines up so national is around 30% of ES revenue, is it fair to say that it's 30% of sales?

No.

Could you describe a little bit more on how that breaks out?

We don't talk to the individual detail around the absolute sales amounts in all the different SBUs but let me see if I can help you at least think about it.

Obviously, by far our largest revenue business is in major accounts, whereas, where it's $2 billion plus is the way to kind of think about it.

Whereas you get to national accounts, it's over $1 billion yet the sales numbers for those two are roughly the same.

And so you would have smaller numbers than the PEO, a little smaller numbers in SBS and smaller numbers in international with the two largest components being majors and national account but, clearly, not in the same proportion as the revenue.

Thank you.

That's helpful.

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

Hi, guys.

Good afternoon.

I guess a couple questions.

Can you give us a little more color on what drove the sequential deceleration in Employer Services organic revenue growth?

Obviously the pay's easing off a bit is part of it Was there any other big material thing you can point to or is it just the softening in general?

There was also some, we had the retirement services where we earn commissions on that and that's tied to the Dow so that had an impact as well.

We get 12b-1s off of the balances, Gary.

Okay.

One question I don't think I've ever asked on GlobalView, what are the up front costs -- (overlapping speakers)

Gary, there are two things.

Obviously, you have fewer payroll, pays on the payroll, the balances are coming down as we talked about in terms of the growth, which is certainly affecting it, we've the Dow effect on the 401(k) business and we've anniversaried all those acquisitions that we made before where we did have organic growth on top of the flat.

But when you're growing something off a very small base and it gets to be larger, it's, the percentages are not as big.

I don't know, Chris.

The only other thing compared to last year is we had some Katrina related credits and tax credit services that were in last year's numbers that we obviously didn't replicate this year.

Okay.

Great.

And the second question on GlobalView in the COS product or the other big managed payroll deals, what's the up front cost from the customer perspective?

Is part of the reason that maybe the sales cycle's lengthening is that there's a big cost to them or are you handling most of that?

Well, there is an up front cost.

It certainly pales in comparison to what you would have to spend if you were buying an up front license from one of the ERP providers.

But to put it in some order of magnitude, if you've got a $2 million kind of GlobalView account, as an example, probably the up front cost could be $0.5 million in the first year.

A lot of that depends on how many countries are involved.

So if you've got 10,000 people over six countries, it costs you more up front than if you've 10,000 people over two countries.

So, but I think that's away to think about it kind of 50% of the first year's annual revenue.

Okay.

Great.

And then just maybe the same answer to the first question but the beyond payroll number slowed a couple of quarters in a row.

Is there any products within that that were particularly weak or is it stuff like the retirement services and some of the other things (inaudible)?

Actually big thing on the beyond payroll, a couple of things let me remind you that PEO's not in that anymore, so if you're thinking about number including PEO before we broke that out as a separate segment, you have to adjust for that.

And then when you look for the fact that we lapped the acquisitions we did last year, all of which were beyond payroll kind of acquisitions, so (inaudible) those kinds of transactions, min tax, so the fact that we lapped those would naturally bring down the -- (overlapping speakers)

And, Gary, those came in kind of ratably across the year.

We had some in October of last year, some in the second quarter, and then several in the third and fourth quarter.

Okay.

If I could sneak one last one in.

Just any update on further M&A?

It's been now, I guess, more than a year since did you a rash of those little deals.

Are there some other things that you're looking at, any other areas you'd like to strengthen the product?

I guess just any color.

Thanks a lot.

Well, we continue to look to buy share in core payroll so we're always looking for those kinds of transactions, but there aren't many of those available today, they're mostly smaller regional or local kind of acquisitions.

We're continuing to look to expand particularly additional offerings for our COS offering.

A couple of areas that we talked about are areas like performance management and recruiting, BPO kinds of activities.

So we're looking for those kind of product extensions to augment where we are.

The activity is, I would say fairly, small at this point although there are a number of things that we're working on.

Right.

Thanks a lot.

Your next question comes from the line of Mark Marcon with R.

W.

Baird.

Good afternoon and congratulations on the terrific year thus far.

I was wondering can you talk a little bit about if you're seeing any changes at all in the competitive environment as relates to ES?

As compared to, say, the beginning of the fiscal year or?

Yes, six months ago, nine months ago, three months ago.

We aren't seeing any changes in the competitive environment as it relates to pricing.

We don't see the competition doing irrational things.

So I would say pricing behavior is rational and consistent with where we've been.

Our primary competitors in the low end and the mid part of the market are pretty much behaving as they have been for the last year.

So I wouldn't see any real difference there.

And you probably know as much as about the ERP players as I do.

I wouldn't say, I mean, there are a few odds and end but nothing substantive or trim like.

Any change in, aside from hesitancy are you seeing any change in terms of buyer behavior in terms of trying to use the current environment to try to get better deals?

You know, again, we don't track that in any kind of organized way but anecdotally I'm hearing nothing about price.

In fact, in GlobalView price is usually one of the first things that gets resolved and it's coming up with the service level agreements and the liability agreements or them just getting it through their legal side that are the biggest roadblocks to getting deals signed.

And then can you talk a little bit, SAP had a fairly well publicized call this week and it seems like their SAP by design is having some issues.

Is that impacting GlobalView at all in any way shape or form?

No, that product is their new product for the mid part of the market.

It's a global product that they, I believe, they plan to (inaudible) the same, I don't want to speak to them, certainly, but they were planning to launch that here in the U.S.

It is a totally separate code base from the GlobalView R3 base.

And actually, ADP is working with them to be in essence ADP inside that environment.

That's a fairly well known partnership that we have with them.

So it really will have no effect on GlobalView at all.

The key is that it actually, when by design eventually gets launched, that'll actual will be another kicker to your sales.

If it's successful, which we certainly hope it is, we built Web services kind of product to be their payroll and money movement engine inside of that product, so we're certainly cheering for them.

Great.

And then lastly, are you seeing any change in terms of retention of your own people in terms of salespeople?

Is turnover slowing down as the economic environment is becoming a little bit less certain and obviously you're a great place to be?

Overall turnover at ADP is actually almost a point better this year than it was last year.

It's down from around 12 to 11%.

So we're pretty good, feel pretty good of that.

If you took the turnover in our sales groups at the very low end of the market, the turnover would actual will be below 10% as a company.

And, in fact, even generally across all of the sales functions I think turnover percentages are all lower across the board.

There may be one exception to that but generally speaking sales as a category is better this year than it was last year.

So all other things being equal you're going to have more trained sales reps going into next year's selling season?

I would agree with that.

Okay.

Terrific.

Thank you.

Ladies and gentlemen, we do have time for one or two more questions.

Your next question comes from Franco Turrinelli with William Blair & Company.

Thank you.

My questions have been asked.

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

Hi.

Thanks.

Good afternoon.

A couple of questions.

First Dealer Services, I'm curious how much are the revenues there discretionary or non-recurring, Gary, and also, maybe you can just comment on pricing in Dealer in general, are there any new trends there?

Help me with what you mean by discretionary, Tien-tsin?

I know you guys don't sell software typically but I guess how much of those sales are incremental sales on top of DMS to get pushed out to the extent that -- (overlapping speakers)

To get pushed out or cancelled, is that what you mean, cancelled?

Yes, pushed out or cancelled from the dealers.

Well, in Dealer Services we sell up to like 30 different applications that a dealer can use.

The larger the dealer the more applications he uses.

At the low end of the market it's low to middle end, it's pretty hard because you've got to have parts, you've got to have service, you've got to have S&I to sell vehicles, you've got to have accounting applications to do it and you've got to communicate with the manufacturers.

So it's difficult in the mid and low end of the market to do that.

On the high end of the market where you have multiple dealerships and a lot more sophistication in the way they run the dealerships, they tend to kind of stay the course because there's pay back in certain of those kinds of activities.

And the bigger problem for the dealer is once you train everyone on how to use something and then you install that process in your dealership, it's kind of difficult to back up.

The biggest place where we have usually price issues with dealerships is if we're upgrading them from platform A to platform B, they tend to want to negotiate the monthly rate they were paying for the old to offset some of the newer rates that we're charging them for the more sophisticated applications that they're adding.

So there is some ability to push it back.

It's never been a real big problem historically and we're not seeing anything that's abnormal for this kind of cycle right now.

Nothing abnormal.

Then on Employer Services, quickly, just we heard the comments on GlobalView.

How about outside of GlobalView overseas, how are the trends there?

Actually, our sales of best-of-breed products domestically was very strong double digits for the quarter.

Okay.

Tracking well there.

Lastly then, bankruptcies, I jumped on a little bit late, bankruptcies, did you comment on bankruptcies across your client base?

No, we didn't comment on it.

I mean it's up marginally but nothing dramatic.

Got it.

Very good.

Thank you.

Thank you.

I appreciate everybody joining us today.

That concludes our Q&A and thank you for joining us.

This concludes today's Automatic Data Processing Incorporated third quarter fiscal 2008 earnings conference call.

Thank you for participating.

You may now disconnect.