自動資料處理 (ADP) 2008 Q4 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Automatic Data Processing Incorporated 2008 earnings conference 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 call over to Ms.

Elena Charles, Vice President of Investor Relations.

Please go ahead, ma'am.

Thank you, and good morning, everyone.

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

Thank you for joining us this morning for our fiscal 2008 earnings call and webcast.

A slide presentation accompanies today's call and webcast is available for you to print from the investor relations home page 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 fourth 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 risk, and these are discussed on page two of the slide presentation and in our periodic filings with the SEC.

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

Thank you, Elena, and good morning, everyone.

I'll begin today's call with some opening remarks about the fiscal year and our fourth quarter.

Then I'll turn the call over to Chris to take you through the detailed results, then I'll return to provide you are our guidance for fiscal 2009.

We have also included this morning in Chris's comments a way for you to think about client funds investment strategy, not just in fiscal '09, but for 2010 as well.

Then I'll give some concluding remarks before we take your questions in the normal manner.

Let me begin, ADP posted strong results for fiscal 2008, double-digit growth in revenue, pre-tax earnings, and earnings per share with 12.5% revenue growth for the year, pre-tax grew 13%, and earnings per share grew 21%.

All in, very strong results for the year, and across the board.

I am also very pleased with our solid fourth quarter results.

The 10% revenue growth and 20% earnings per share growth, which does not included -- which does exclude and does not include the gain on the sale of a building in that quarter.

Some brief highlights for the year include Employer Services client retention improved 20 basis points, and despite the current economic environment that we're in, I'm quite pleased with our execution on new business sales growth in both Employer Services and Dealer Services.

ES including the PEO grew sales 7% for the quarter and 8% for the year.

Additionally, Dealer Services' new business sales growth was strong double-digit in the quarter and for the full year.

It's quite remarkable when you consider what is happening in the auto sector today.

Now I would like to comment on where growth metrics slowed.

As you may recall, we had indicated some softness in certain metrics for the quarter and the full year on our third quarter call on May 1st.

The number of employees on our clients' payrolls, our pays per control metric, grew 1.3% for the year, but growth for the fourth quarter was 0.8%, still growth but slower.

The last time we saw less than 1% growth in this metric was when it started to decline back at the end of fiscal 2001, and we saw it again on the return to positive growth after the first half of fiscal 2004.

As a reminder, the same-store sales metric is a measure of employment across our major accounts Auto Pay client base.

Both the fourth quarter and year-to-date growth in pays per control for small business and national accounts has slowed as well, but both metrics continue to be stronger than the ones I just quoted to you regarding our major account segment.

We are continuing to see large prospects taking more time with outsourcing decisions, and in some cases, deferring the decision.

As a result, we'll being more conservative with our sales forecast for fiscal 2009.

The forecast is for mid single digits growth.

We'll provide more on the forecast later in the presentation, so despite the economic head winds, we achieved very strong results in fiscal 2008, and we are looking forward to a very solid 2009.

With that backdrop, I'll turn it over the Chris to provide more details on our results.

Thanks, Gary, and good morning, everyone.

As Gary said earlier, total revenues grew 12.5% to $8.8 billion assisted by favorable foreign exchange rates due to the weak dollar.

I would like to highlight for you that we had a gain on the sale of the building in this year's fourth quarter and remind you that we had gain in last year's first quarter from the sale of a non-core Dealer Services business.

So on the slide, which shown both the reported results, as well as the results excluding the gain.

Excluding these gains, pre-tax earnings grew 13% and earnings per share from continuing operations increased 21% to $2.18 a share, driven largely by revenue growth and margin expansion in all of the segments and lower average shares outstanding.

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

We repurchased 33 million shares during the fiscal year for almost $1.5 billion.

We remain committed to return excess cash to our shareholders.

Now let's turn to slide five.

You may recall seeing this information at our March analysts conference.

Here we show the impact of the extended investment strategy for the client funds portfolio.

As shown on the slide, this includes interest on funds held for client, corporate extended interest income, and corporate interest expense on our short-term financing.

The lower borrowing costs are an important part of this strategy.

We borrow short-term on lower balance days to satisfy client obligations and in a declining interest rate environment, ADP benefits immediately from lower rates on these borrowings.

Average client fund balances grew 6.6 % for the year to $15.7 billion and the yield on the client fund portfolio was nearly 4.4%, down less than 10 basis points from last year.

But when you take in to consideration the entire extended strategy, which includes the lower borrowing cost, the result was a $55 billion P&L increase before tax or a 9% increase over last year.

I want to take a minute to point out that the $691 million generated from this strategy resulted in an overall yield of 4.4% for fiscal 2008 compared with 4.3% last year.

This yield is calculated by taking the $691 million and dividing it by the $15.7 billion of average client funds.

Bottom line is we earned 10 basis points more than last year, which is terrific in a declining interest rate environment, where the Fed funds rate dropped from 5.25% to 2% as we exited fiscal 2008.

And if you recall from this slide from the March analysts conference, we had projected a $45 million increase in fiscal 2008 over 2007.

We ended up beating this by $10 million due to more favorable rates in the fourth quarter.

Let's move to the next slide where I'll take you through the segment results.

Employer Services had a strong fiscal 2008.

Revenues grew 9%, organic revenue growth was 8%.

Revenues on our traditional payroll and tax filing business in the United States grew 7%, and our beyond-payroll revenues grew 16% in the US, and to remind you, this excludes the PEO services revenue, which we'll discuss in a moment.

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

ES's pre-tax margin expanded 90 basis points on increased operating leverage, primarily from scaling the business as well as from this margin expansion initiatives which we have spoken about with you these last several quarters.

As Gary mentioned earlier, pays per control growth, the same-store sales metric, was up 1.3% for the year, and growth on number of pays in Europe remains positive.

We continue to be pleased with our excellent retention rates which improved 20 basis points from a year ago to a new record level.

We achieved new business sales growth of 8% for the year from Employer Services and PEO services combined.

Just to remind you, new business sales represents the annual reoccurring dollar value of new bookings that become future recurring revenues that are incremental to our existing recurring revenue base.

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

All in all, a good year for Employer Services.

Now let's turn to slide seven.

The PEO had a terrific year, with 20% revenue growth, all organic, pre-tax margin increased 80 basis points, and average work site employees increased 18% in the quarter.

Now let's turn to slide eight.

Dealer Services has a strong year as well, total revenues grew 8.5% with 6% organic revenue growth.

This 6% organic revenue growth represents an increase of about 0.5 percentage point from a year ago.

Dealer Services pre-tax margin expanded 75 basis points from operating leverage, including the benefits from smart shoring activities, partially offset by costs relating to the acquisition of three auto line distributors made earlier in the year.

As Gary said earlier, Dealer achieved double-digit new business sales growth for the year, which is terrific in this economy.

Now let's turn to slide eight, where I'll take you through the fourth quarter results.

You see we are showing the fourth quarter in the same format as we did earlier for the full year on a reported basis with the building sales gain as well as on an apples-to-apples basis excluding the gain.

In the fourth quarter, total revenues grew 10% to $2.2 billion, assisted in the quarter by favor foreign exchange rates due to the weak dollar.

Excluding the gain, pre-tax earnings grew 10% and the pre-tax margin was flat to a year ago, due to a lower contribution from the extended investment strategy.

I'll take you through the impact of the investment strategy for the quarter on the next slide.

Earnings per share from continuing operations increased 20% to $0.42 a share.

Now turning to slide ten.

For the quarter, we're showing the same information that you saw just a few moments ago for the full year.

Remember there is a seasonality to our client balances and that our forth fiscal quarter is the second highest balance quarter following our third fiscal quarter.

Average client fund balances grew 4.2% for the quarter to $16.1 billion.

As expected this growth was slower due to lower wage growth, driven by lower bonuses and a decline in the growth of the number of employees on our clients payrolls.

The yield for the quarter on the client funds portfolio was 4.2%, down just $8 million or less than 40 basis points from last year, again showing the benefit of our laddering strategy in a declining interest rate environment.

Considering the entire extended strategy, including the lower borrowing costs, resulted in a $6 million increase through P&L before tax or 4% growth and the yield for the overall strategy in the quarter was 4.5%, which was flat to last year, which again is terrific in the current interest rate environment.

Let's move to the next slide where I'll take you through the segment results for the quarter.

Employer Services revenues grew 7% all organic with -- last year's acquisitions for the growth in the fourth quarter reflects that.

Revenues in our traditional payroll and tax filing business in the United States did slow a bit compared with earlier in the year, growing 4% due to slower balance growth and lower pay growth and our beyond payroll revenues grew 12% in the U.S.

ES's pre-tax margin expanded 150 basis points on increasing operating leverage, primarily from scale in the business as well as the benefits from margin expansion initiatives compared with a year ago.

As Gary mentioned earlier, pays per control growth also slowed in the quarter, up 0.8%, and growth in the number of pays in Europe remained positive.

Client retention rates did decline 40 basis points in the quarter, but remains at excellent levels and, as I stated a few moments ago, was up 20 basis points for the year.

Additionally we are forecasting further improvements in retention for fiscal 2009.

New business sales growth was solid at 7% in the quarter for ES and PEO services.

Now let's turn to slide 12.

The PEO continues to grow with 16.5% revenue growth all organic, pre-tax margin increased 30 basis points, and average work site employees increased 17% in the quarter.

Let's turn to slide 13.

Moving on to Dealer Services, total revenues grew 9%, 6% organically.

Dealer Services pre-tax margin expanded 100 basis points from operating leverage, partially offset by costs relating to the acquisition of the three auto line distributors made earlier in the year.

And as you heard earlier, new business sales growth was strong double-digit in the quarter.

Now I'll turn it back to Gary to take you through the forecast for fiscal 2009.

Thank you, Chris.

We're on slide 14 where I'll take you through our fiscal 2009 forecast.

Before I get in to the numbers, I would -- I want to let you know that we are assuming no change in the current economic environment in this forecast.

So no better or no worse.

We expect that fiscal 2009 will be challenging and have forecasted accordingly.

Now let me give you some more details.

We anticipate 7 to 8% revenue growth for overall ADP next year in '09.

For segment revenue growth we are forecasting 6 to 7% growth for Employer Services, 16 to 17% growth for PEO services, and 6 to 8% for Dealer Services.

This total revenue growth forecast also includes an anticipated decline of $25 million to $30 million or about 4% in client funds interest revenues.

Chris will discuss this in a little more detail in a moment within the total content of the extended investment strategy that you'll see on the next slide.

We do anticipate continued pre-tax margin expansion across all segments and are forecasting at least 50 basis points of improvement in each segment next year.

Our earnings per share forecast is for 10 to 14%, up from this year's $2.18 per share from continuing operations.

This, again, reminding you, excluding the gain on the sale of a building in the fourth quarter.

There are no share buybacks contemplated in the fiscal '09 guidance, though it is clearly our intent to continue to buy back shares at higher than our historical pace, obviously depending on market conditions.

In order to frame the weighted average shares for fiscal '09, we are providing you with a June 30, '08 share count and the estimated additional share dilution for fiscal 2009.

We ended the year with 509.5 million shares outstanding and we estimate approximately 10 million additional shares, which is based on estimated impact of option dilution and the timing of when shares are issued during the year for stock compensation plan.

Now I would like Christ to take you through 2009 first, and then review with you a way to think about the impact of the client funds investment strategy on fiscal 2010 as well, before I come back with some concluding remarks and then we'll take your questions as normal.

Thanks, Gary.

Once again this slide summarizes the anticipated pre-tax earnings impact of the extended investment strategy for the client funds investment portfolio for fiscal 2009.

And to remind you, this includes interest on funds held for clients, corporate extended interest income, and corporate interest expense on our short-term financing.

Again, you can see that the lower borrowing costs are an important part of this strategy.

With average borrowings of about $2 billion in a declining interest rate environment, the benefit from lower lower borrowing costs is immediate.

At the same time, no more than 20% of the investments are subject to reinvestment risk each year.

We are anticipating average client fund balance growth of 1 to 2%, which represents continued pressure on wage growth predominantly from lower bonuses, as well as no increase in the number of employees on our clients' payrolls.

We are forecasting pays per control to be flat for the year, compared with 1.3% growth in fiscal 2008.

We're anticipating a yield on the client funds portfolio of 4.2%, down about 20 basis points from fiscal 2008.

As Gary just mentioned, we are anticipating a decline of about $25 million to $30 million in client funds interest.

But when you take in to consideration the overall extended investment strategy, including lower borrowing costs, we anticipate a $5 million to $10 million increase to the P&L for fiscal 2009.

In addition, we expect to maintain fiscal 2008's overall yield of 4.4% for fiscal 2009.

Now let's move to the next slide to walk through a scenario on fiscal 2010.

We've included this slide to give you a way to think about fiscal 2010 as it relates to the extended investment strategy.

What we've shown here assumes that the anticipated fiscal 2009 exit rates hold for fiscal 2010, suggesting a higher interest rate environment than fiscal 2010.

As interest rates move up, the corporate interest expense on short-term borrowings is immediately impacted as it was when rates were on the way down.

What you see here is an increase in interest expense at fiscal 2010.

With no more than 20% of the portfolio subject to reinvestment risk each year as a result of the laddering of maturities, interest income increases just not as fast as -- as interest expense.

Taking in to account, the overall extended investment strategy with higher borrowing costs, we will anticipate a $5 million increase to the P&L for fiscal 2010.

Under this scenario, we again maintain a 4.4% yield.

For purposes of the calculation, so you can see the impact purely from rates, we have assumed no growth in client fund balances, keeping them flat with the estimated fiscal 2009 balances, and we provided a sensitivity for a 1% change.

Remember, the purpose of the extended strategy is to enable us to average our way through an interest rate cycle.

What you'll find is that for each fiscal year from 2007 and 2008, through what we anticipate for 2009 and 2010 where interest rates have fluctuated significantly, the yield from the overall extended strategy is a tight range from 4.3 to 4.5%.

So the strategy is working.

Now I'll turn it back to Gary for some concluding remarks.

So in summary, I am pleased with ADP's results for fiscal 2008.

ADP is doing quite well, despite the challenging economy.

Our fiscal 2009 forecast calls for very solid growth and is appropriately conservative given the current economic environment.

As -- as you have also heard me say many times before, we are continuing to invest in the business as we focus on executing against our 5-point strategic growth program, and we are not in any way cutting sales or other client-facing aspects of the business to quote, unquote make the numbers.

Additionally, you have seen that we remain committed to returning excess cash to our shareholders, as clearly evidenced by the significant level of share repurchases, as well as the 26% increase in the dividend for calendar 2008.

As matter of record, we have repurchased nearly 18% of outstanding shares since the start of fiscal '06 at a cost of $4.7 billion.

And although our forecast excludes future share repurchases, it is our intent, depending on market conditions to continue repurchasing shares at these higher than historical levels.

I would also like to remind you before I close, that ADP is a great company with a great business model, 90% recurring revenues, client life cycles of 10 plus years, excellent margins with strong and consistent cash flows, very low capital requirement, a true AAA credit, and the markets we participate in are underpenetrated and growing.

My belief in ADP's ability to generate at least 10% revenue growth and 15% earnings per share growth on average long-term over various economic cycles is unchanged.

So despite the challenging economic environment, I remain highly optimistic regarding ADP's ability to deliver continued strong results in '09 and for many years to come.

Now let's turn it back over to the operator to take your questions.

(OPERATOR INSTRUCTIONS).

We'll pause for just a moment to compile the Q&A roster.

Our first question will come from the line of Charles Murphy with Morgan Stanley.

Thanks very much.

Gary and Chris, I was wondering if you could discuss your level of confidence in the at least 50 basis point improvement forecast in margins in Employer and Dealer, particularly if the US economy does get worse from current levels?

I was say it's very high.

We've very consistently over a number of years delivered what we've forecasted in terms of margin improvement.

I don't expect that to change.

We do have levers that we can pull to reduce spending if -- if we need to.

So I would be -- very optimistic that we can deliver.

And I would add that we're optimistic that we can deliver that improvement while still continuing to invest in sales, service, and implementation.

Okay.

And as a quick follow-up, could you help us understand what might drive an acceleration in organic growth in Dealer in fiscal '09?

A couple of things.

First of all, we're doing quite well in terms of taking market share in North America regardless of the economy.

It certainly doesn't help in the auto sector these days, but we're continuing to take share, and I would expect us to continue to take share in '09.

We got a lot of good traction in our voice-over-IP integration products, our front end BZ Results, which is internet marketing and lead-gathering optimization.

These are really money savers and cost savers of a different type and efficiency ways for dealers to get more productive.

So we get good traction even in tight times with those kind of endeavors.

And we continue to do great internationally.

We're looking at expanding into some new big markets and pretty optimistic about the outlook for international.

Thanks very much, much appreciated.

Thanks.

Our next question will come from the line of Liz Grausam with Goldman Sachs.

Great.

Wanted to ask a question on the Employer Services new sales growth.

You made some comments that larger deals with taking a lit longer to sign.

Can you give us a little perspective on how you look into a mid single-digit new sales growth number in 2009, what you are hearing from our clients and how much sales cycles are really extending at this point?

As we exited the first quarter, we had a very soft margin which caused us to undeliver on the sales equation in the third quarter, which was one of the reasons why we became more cautious in our comments at the end of the third quarter.

I was actually quite pleased at the results of the fourth quarter, not just in the 7%, but we also saw great execution on our sales force part in both GlobalView as well as the high-end of national accounts.

So despite the tough environment, because of the strength of our product line and kind of the uniqueness of the global view offering, we were still able to get a lot of big clients over the goal line before the year concluded.

So I don't think the environment has changed a lot.

But I have a lot of confidence in our ability to execute, and so we're just kind of building plans that we have high confidence in that we can execute against as opposed to trying to stretch the envelope a little bit until the economy gets a little bit more positive.

And how much of your new sales pipeline, Gary, in the GlobalView product is international and not U.S.

based?

Is that giving you a little bit more of a lift than you might normally --

Yes, the majority of it so international.

Okay.

We have signed some other large deals that include big pieces of north America.

We just signed one of the major manufacturing companies out of Europe, we just signed up all of their North American operations on global view, and it just so happens they are going in North America first before they go in other places around the world.

But again, it's still predominantly international in nature.

Thank you.

Our next question will come from the line of [James Cassant] with Banc of America.

Thanks and good job.

Are you seeing any change in the pricing environment as sales and pays per control have softened?

Nothing that's material or I would deem worthy of reporting.

Obviously, you listen to the competitors' calls as well, and we have got pressure in certain sectors, but in general, we're going along pretty much business as usual as it relates to pricing.

We put out our normal levels of price increase this year.

We were able to get a little lift on increasing prices and delivery.

Obviously that affects us with the price of gas just like anybody else, but it's a going along pretty much as usual.

We put out our price increases July the 1st, and kind of the feedback is pretty much the same.

Great.

And Gary what portion of your new sales today are national accounts in Global View, and how would that compare with, say, three or four years ago?

It's certainly larger.

We have been very fortunate in international to grow sales double digits, I think three or four years in a row now.

And the great thing about international is it's not just GlobalView it's also our best of breed products, particularly in Europe.

We're doing quite well in Australia.

And national accounts has grown double digits, pretty much over the same period of time.

So it -- it is growing faster at the high end of the market than it is the low and the middle.

Okay.

But PEO on the low end, as contrasted to that, has been growing 15 to 20% three or four years in a row.

But small and majors are still growing positive, right?

Yes.

Thank you.

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

Hi, congratulations on the quarter.

I guess one macro question to start with.

I'm just struggling to understand how the pays per control metric remains positive after six months of employment declines.

And any sense on what -- how your customer base is different from the overall --

If you talk to [Joel Pratkin] with the NER, which I do at least on a monthly basis because of the NER outlook, he would tell you that ADP's clients grow faster than the economy at large.

So basically, people who are outsourcing are trying to address other issues in their -- in their company and leave payroll and HR to us.

So he would tell you that we grow faster.

Plus in the high end of the market, in national accounts, COS, and GlobalView, these are people that are expanding internationally and growing, which is why they are having issues in their payroll department or whatever to outsource it to us.

So I don't expect that to change, plus in the NER, which we put out on Wednesday, small business and services sectors were both up again, even though you saw still continued declines in manufacturing and housing.

So I think that's probably it more than anything else.

We probably have a larger proportion of services than the population at large.

And we have a much lower high-end big heavy manufacturing as a percent of our business, so it's the skewing of outsourcing, and the skewing of the distribution by industry that would be my view aided by international expansion.

Okay.

Thanks.

And then on -- can you give us an update where you are in terms of the move to profitability in Global View and comprehensive outsourcing.

I think you say COS may have broken even or started to turn a profit?

And is GlobalView still likely to do that at the end of '09.

COS made a profit in the fourth quarter and will continue to make good margins as we go into '09.

I suspect it's going to be further in to '10 before we actually turn the corner in GlobalView.

Which is consistent with --

Yes, which is what we've been saying.

But the numbers are coming down, so if you go from a $25 million to $30 million loss to a $10 million to $15 million loss, you still make a lot of progress, but we got a ways to go, because we've got still heavy implementation sales expense, which I'm happy to spend if I getting the organic growth rate on the top line.

Okay.

But both of them will either be profitable and or have a declining year-over-year losses and that may be one reason for your confidence around the margins.

Yes, without question.

That's right.

And in terms of --

The other thing that's happening there is, regrettably I would have like to have made a few more acquisitions in '08 than we did, and so you're not going to have any increases in the annual expense until we do other acquisitions, which will certainly help margins as well.

Okay.

Not to mention all of the other programs that we have been pushing.

Can you give us any sense what you are expecting for sales headcount growth in '09 and where will that be focused on, which product areas?

Sure.

We clearly are growing headcount.

I think the plan for this year is actually higher than it was for '08.

We're forecasting 6 to 7% headcount kind of growth.

It's probably 5 or 6% in traditional areas.

It's over 20% in our telesales place where we have more cost efficiency and we can sell our add-on products more effectively.

So again, prior -- consistent with everything we have been telling you, we're continuing to invest in growing the business.

We're being more conservative this year because of the economic environment is not relying on productivity improvements in these tight times as opposed to a more predictable headcount growth.

Okay.

And just one follow-up to clarify.

You said the share count was 509.5 million at June 30.

Is that the basic share count, or does that include dilution from existing options?

That's the basic.

That's the basic.

So then the 10 million on top of that, how much is just outstanding options today versus options that you are expect willing be new options issued in '09?

Thanks.

Mostly the options existing with a little bit new issuances planned for next year.

Okay.

Thanks a lot.

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

Hi.

I know in your fiscal '09 guidance, you are assuming that the sort of economic outlook stays unchanged, but I wanted to probe and see if you could give us some more specificity on the specific assumptions that are supporting your fiscal '09 guidance range.

And I guess the list of things that I would ask for a little more detail on would be what are you assuming about pays per control, your payroll and tax revenue growth rate, your beyond payroll revenue growth rate, your retention, and also your base client growth, if that list can be addressed in any way to give us some more specificity that would be very helpful.

Yes, the one we did that mention in our remarks was pays per control which we're assuming is flat.

Flat means zero or does that mean 0.8%.

Zero.

No flat.

Zero.

Okay.

In terms of the split between payroll and beyond payroll, we don't typically give that as guidance, but I think you can -- given what we're seeing around the growth, it's probably consistent with what you are seeing in the fourth quarter.

Okay.

And the run rate that we're seeing in the fourth quarter.

Okay.

Retention we're actually anticipating to be up a tick, as we planned last year, and we delivered the 20 basis points.

We would expect that to be up slightly in -- in '09, and I'm sorry, what was the rest of your --

Yes, base client growth?

Can you keep that in a sort of a 3% range?

We don't really give that level of detail, because of a lot of that depends on where you are deploying your resources.

So if you are growing a lot faster in GlobalView and COS and National Accounts, the client growth count really is not material in the way you think about the business.

Okay.

And then the only other one that we didn't mention, Rod, was the growth in client fund balances, which as I went through in my remarks, are projected to be 1 to 2% growth.

Got it, yes.

That's helpful.

And on the client retention, you are assuming that improves, and that's a huge assumption because I know that's also probably enhancing your margins with retention is going up.

Is there -- I guess the question is, how secure is your forecast that client retention will go up?

I mean, are you highly confident that that will play out?

I think the answer to that question is yes.

We're not in the practice of planning things we don't expect to execute on.

Okay.

But that being said, if the economy really went in the toilet or we had some bigger problems, that might not hold true, but I expect that we'll be pretty -- in the range of where we are this year or slightly up and even if we're down, it would be a tick, a 0.1 or a 0.2.

It's not going to be 3 points of retention.

Again, I think if I were you building the models, I would be using the same kind of results that we've this year.

We're see nothing no major differences in out of businesses in terms of our losses.

Our receivables over 60 are in line with traditional kind of metrics, and we're pretty much poking along business as usual.

Got it.

And then --

Rod, if I could just interrupt, just to remember, back in the '01, '02, '03 time frame in to '04, during that tough economic time then we were continuing to pick up retention each and every year during that period.

Yes.

That's right.

And then finally, I guess, Chris, on the flowed outlook side, you are assuming the futures market in forecasting your flowed earnings.

I guess the question I would have is -- if you were to assume that the Fed's funds rate stays unchanged -- in other words you forget about the futures market and the fact that it's forecasting an uptick in the short-term interest rate, if you were to keep short-term rates flat, how big of a difference does that create in your flowed earnings outlook?

Can you quantify that in any way for us?

Yes, I can give you some ways to think about that, Rod.

First of all, you should see that because of that interplay of the interest on flowed offset by the interest expense, you see we're able to keep that in a very tight range.

That's the first thing I would say.

Then I would take you back to overall sensitivities that we have given you in the past, which if we update that, a 25 basis point in the Fed funds rate is about $3 million of sensitivity and if the entire spectrum changed by 25 basis points across all rates, it is about $7 million, so it's not a huge sensitivity to flat to what we have been expecting.

I think we've have found that to give you our guidance based on the futures and the forward contracts, adds some value in showing you what we're considering, and giving that kind of guidance will give you a better sense of what we're looking at.

Rod, a different way to think about that is, prior to this past year, we have either had a flat or inverted yield curve before the Fed started dropping Fed fund rate.

Now sitting at 2%, you have got a traditional yield curve, where we're investing most of our extended portfolio, which is $15 billion, $16 billion out in the 3, 4, 5, 6-year range.

Therefore, we're investing almost at the same rates as the current yield because of where we're investing in the shape of the yield curve.

Right.

The increased disclosure on the flowed earnings has been really helpful.

Thanks for that.

Great.

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

Good morning.

It's Jason Kupferberg for Adam.

How are you?

Good morning, Jason.

So taking a look at the fiscal '09 guidance and understanding that it assumes not change in the economy and 75 basis points of the Fed funds rate increase, it is fair to say on a relative basis that there would be more risk to the revenue component of the guidance in the EPS, given that you probably have better visibility on the margin drivers than you do on the top line?

I think we take in to consideration risks on a number of different drivers.

Clearly -- I'd say it's about equal.

I mean, as we look at it, retention certainly is a driver, pays per control, which would equally impact revenue and NOI, dally balances -- the swing in average daily balances would impact both.

So no, I would say it's equal risk for the sensitivities to the drivers that we track.

Okay.

And so would it also be fair to say, then, that there's some interrelationship obviously between the two.

If you were to come out a little light, let's say in our revenue outlook, it would be harder for you to achieve the 50 basis points of margin improvement for each segment, because I know there are also some pure cost basin initiatives that might be somewhat independent of revenue growth.

Well, the one thing you have to -- there is a lot that goes in to that, and certainly the way we report the impact on the units, which drives the margin growth by units, is at the flat 4.5%.

So margins isn't directly impacted as much by that metric and I think the bottom line is that we are comfortable with the ranges that we have.

So if you wanted to say, if we're at the low end of the revenue guidance range at 7%, would that translate to the low end of our EPS guidance?

Probably.

That's probably a good way of thinking about it.

But we're pretty comfortable with the ranges on both that we get.

Okay.

That color is helpful.

And then one of your competitors mentioned on their last earnings call about a month ago that there was a sharper than expected increase in client bankruptcies among small businesses.

Have you guys experienced any of that in your small business segment?

I think if you were to look at the metrics coming out of the federal bankruptcy courts, they are talking about out of businesses at a rate of around 9 to 10%.

I think that's what we're seeing.

That's not -- that's up a tick from what we have seen in the past.

But not significantly.

Okay.

And then last question, have you assumed any FX impact in your fiscal '09 revenue growth guidance.

No.

So that's a constant currency growth.

Yes.

Okay.

Thanks.

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

Hi, good morning.

Gary, I wanted to get your thoughts on -- you said in 2001, I believe you said that pays per control for the first time went below one.

And I was just trying to figure out, in your past experience, what's happened to pays per control, do they gradually go down in the business, or is there a steep decline once the economy really takes a bad return.

In '01, post 9/11, we started to see a decline and it did go below 1% as we exited '01.

In '02, we saw the sharpness decrease that we've seen, and it went down to 2.8% negative, came back to 0.7% negative in '03, and became 1% positive as we exited '04.

So, that's -- '02 would have been the sharpest decrease that we have ever seen, but again, it was a different kind of time.

Yes, and I think Gary you talked about this in the past.

What is a good way to think about if there's a 1% change in pays per control, what kind -- what type of impact it might have on operating margins for ES?

Well, what we typically discuss is that 1% growth is worth around $15 million to $20 million in revenue.

It's certainly in most cases higher-margin revenue than the trailing revenue.

So I think you ought to think about $10 million to $15 million worth of bottom line impact.

And then just a question on the Employer Services, is there a minimum amount of revenue you would need to generate that 50 basis points in margin improvement?

And I realize the revenue mix could be different and that might have an pact, but is there a general way you could say you need X amount of revenue so you can achieve at least 50 basis points?

No, there's not a minimum.

Obviously the more revenue you have organic, the easier it is to grow.

So if organic revenue is up 12 rather than 8, it's easier.

But we still very much expect margin improvement off of 7 to 8% organic growth rate in the range that we put in the forecast.

And just one last question on the Dealer Services business, what has been the impact on the business because of what has happened in the automobile industry?

Has it given you an opportunity to gain even more market share than you would have thought of, or has there been other potential impacts that you have seen on the business?

Well, clearly, the issues for us are dealers' willingness to invest in new capital expenses.

I think what has helped us there is that our product set is very strong.

The consolidation of the two other major players there has certainly given us an opportunity in some dealers where we didn't used to be.

And clearly, a lot of things like I mentioned earlier in my commentary was that things like the internet optimization around leads in marketing as well as voice-over IP savings and integration are efficiency measures for the dealers.

So we're seeing some downtick obviously in things that are related to pure volume, like our vehicle registration efforts, or some of our credit check revenues, but those are a very small percentage of the total revenue even though we're seeing some decline.

And today --

Decline in the growth rate.

Decline in the growth rate.

Sorry.

But the other thing that's helping us is that over 50% -- well over 50% of our new sales are delivered in an ASP model, where you don't have to come up with a big capital expense.

So this is helping us as well.

Thank you very much.

Our next question comes from the line of Glenn Greene with Oppenheimer.

Thank you, good morning.

Just a couple of quick questions remaining.

One, I just want to go back to the retention in the quarter, why it downticked a little bit, and triangulate that with your confidence that it will uptick a little bit for fiscal '09.

Did anything unusual happen in the quarter?

Or just some color around that.

Yes, a quarter is more helpful than month, but even quarters vary.

So if you went back and looked at our second fiscal quarter, we actually had down retention in the second fiscal quarter, but we had great improvement retention in the third quarter.

So I think you really need to look at the year as a whole and two or three -- 20 or 30 basis points give or take on a quarter, shouldn't get you alarmed as opposed to a year-to-date metric as it gets multiple quarters included.

But did it have anything to do with the macroenvironment, the economy, or just sort of normal sort of quarterly noise?

It was kind of quarterly noise.

It was a little worse in the small business.

It was a little better in national and major accounts, so it just kind of depends, and there's -- you can have a big deal loss in one particular month or one particular quarter which can affect it.

But in general, I think the way I would say you, is it's kind of business as usual.

Okay.

And just an update on GlobalView.

Any way you could size the backlog to install?

Give me just a second here.

We've -- let's see we have closed over -- almost 80 clients for 1 million employees in 46 different countries.

The total contract to date, which are multiple years, is well over $700 million or around $700 million now, and we expect the reoccurring revenue in '09 to be over $100 million, so we still have got a pretty darn big backlog.

I'm just not sure it's something I want to get in to the habit of talking about every quarter.

What is your sort of break-even revenue level.

I think when you think about these kind of businesses -- the issue is not the operating margins in the business, it's the sales expense, and it's the sales and implementation and building out all of the different support structures for the different countries.

So the operating margins are pretty decent today.

I'm just -- it's just being offset by a lot of sales cost and implementation expense, so if I stopped selling, I could give you profit tomorrow, but that's not the reason we're in this business.

We're in this business to grow revenue as fast as we can over a longer period of time.

So I'm happy to spend this kind of sales and implementation.

It is a good return on our investment.

And it's the right thing to do to grow the business long-term.

I agree.

Thank you very much.

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

Thanks.

You know, perhaps this is an extension of some of the questions asked earlier, but there are several elements that go in to your '09 guidance.

Can you give us a sense or some insights into at least those elements you have the most confidence and visibility on versus those that you have less visibility and confidence?

Well, again, I -- I can't control what happens with interest rates, so we have tried to be very conservative.

I think the extended strategy that Chris has taken you through is -- certainly is designed to insulate us from things that we don't control.

Obviously, if pays per control dropped to the '03 levels of minus 2%, that's $30 million or $40 million of revenue I wish I would have had that I wouldn't have, but again, it's not going to break the bank, so to speak in terms of the forecast.

I have pretty high confidence in the retention rate.

I have got 90% recurring revenue, so it's -- we feel pretty good as we go into that year, so I think the things I can't control are the things that keep me up at night, and those things I can control, I think we're doing a pretty good job of managing them.

Great.

And just one other question.

I think it maybe comes out in the K, but do you happen to have the actual dollar bookings for fiscal '08?

Dollar bookings?

I'm not sure .

Perhaps I'm misremembering, but I thought on an annual basis you actually disclose the dollar bookings.

You mean in terms of new sales.

Yes.

Yes, about $1.150 billion in recurring revenue.

So we -- we recognize sales -- so if we sell a client today $100 a month, we recognize that sale as $1,200 when we book it.

So we -- we will book this year about $1.150 billion in new 12-month forward recurring revenue.

Great.

Thank you.

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

Hi, this is David Cohen for Tien-tsin.

Good morning, David.

I wanted to ask about the PEO business.

It looks like you are expecting the growth to slow.

Any thoughts?

Is that just macro?

What are the dynamics that are going none that segment?

Well, the business is doing great.

The business is growing very strong, and is growing quite strong again in '09.

We had the benefit of, A, the law of small numbers versus big numbers in a few years past.

We also were very aggressively expanding into new states such as California where we were literally adding 50, 100 sales folks at a time year-to-year.

So we are more mature in terms of our deployment at this point in time, but I don't want to in any way tell you that I think we're close to being penetrated.

Because that market is highly unpenetrated.

And we think there's a lot of double-digit growth in front of us.

So I think it's a combination of big numbers and the fact that we had some really big new markets that helped us over the last two or three years.

I just said that it's -- the dollar amount of the new business is still growing year-over-year, which points to the fact that it is a bit of the law of large numbers.

Okay and then one of your competitors in the PEO space yesterday announced that they'd received some expressions of interest, and I was wondering what your appetite is for -- for acquisitions in the PEO space?

I think the particular acquisition or the particular company that you talked to has some things that are not necessarily a positive for ADP.

We're certainly not interested in a new platform over time, and clearly, they've struggled with new business sales growth in terms of driving that growth.

So in the case of someone like that, it's strictly a margin play as opposed to a growth play over a two or three-year period, which certainly is less appealing to ADP, as opposed to a growth play like we have with Employease or we have with GlobalView or some other type initiatives.

So again, depending upon price and everything else, it's always worthy of a discussion, but I wouldn't want to encourage you too much that that's a high likelihood for ADP.

And then what about more broadly in the PEO space as far as in organic growth?

I'm not sure I understand the question.

In organic growth?

Inorganic, so would you -- not the specific opportunity, but would you look to do acquisitions in the PEO space or is it really more acquisitions are going to come --

Less so in the PEO space than other spaces.

We have worked very, very hard at building a book of business that has very tight underwriting and is much more white collar as opposed to blue collar, which insulates us from particularly the worker's comp arbitrage and the risk when you have got overcapacity in the marketplace.

Regrettably, most of the acquisition candidates, whether they are small or large, do not have that same approach to underwriting and the portfolio.

And so it's very difficult for us to integrate into our product platforms and ADP's conservative underwriting practices, when they are selling high worker's comp kind of premium company.

So it's much tougher for us to do, because that's not the strategy here in terms of the long-term growth of the business.

I think a big part of the growth in the future, would just reiterate is the upselling of existing ADP clients in our small business area.

Okay.

And within employer, would you talk a little bit of what you're seeing in terms of both the sales and implementation cycles by the different parts of the business?

Well, we don't disclose actual growth rates in terms of sales in all of our different businesses.

In all of the major segments, we had good positive growth in last year.

Some areas were better than others, like I mentioned early, that Globalview in the PEO were good strong double-digit growth.

And international was strong double-digit growth, whereas the others were single-digit obviously because we grew 8% in total.

So I think by implication, you can kind of figure out where it is a little bit slower as contrast to where it's a little bit faster.

Implementation cycles really haven't changed.

In fact, if anything, our install rates -- I think actually in the year we're in, we installed more than we sold.

So that's always a good thing because backlogs are coming down.

Okay.

And then last question on Dealer, can you remind us the mix of U.S.

or North America versus the outside?

I guess the forecast for this year, Dealer is what --

$1.360 billion and about $350 million of that is international.

Great.

Thank you very much.

And we have time for one or two more questions.

Our next question will come from the line of Mark Marcon with Robert W.

Baird.

Good morning.

Congratulations on a greet year.

Wanted to ask first, just on potential areas of positive swings on the ES side, when we take a -- you mentioned what your expectations are in Global View.

In terms of COS, for the full year you ended up having a loss this year, right?

It was pretty close to a push.

Okay.

And then, but --

But we had actually pretty good margins in the fourth quarter.

So what does that imply for -- for full year fiscal '09 in terms of --

Much better.

I'm just trying to get a sense for the delta.

We're not going to be given bottom lines by product.

It was break even.

It's going to better, but -- and we do give you kind of where we are in revenue growth, but we're not going to --

Yes.

There's so much, Mark, as you know that goes --

A lot goes in to that.

Yes.

A lot goes in to the margin growth and the profitability of any one particular part of the business is just one factor in our overall thought process around margin growth.

But I mean --

But as you think about that, Mark, though, the biggest unknown for us is sales.

So if we oversell in that capacity, we book that sales expense and implementation expense against that P&L.

Sure.

So the bad news is, if we don't sell anything, margins will go up a lot.

Right.

But that's not the reason why you ended up hitting profitability in the fourth quarter, is it?

No, we had a very strong year and it's scaling very nicely.

It's strictly scale and we have done some things to get our house in order around servicing and how much we have to grow the variable direct labor that supports those accounts.

So we have kind of figured out how to optimize the service equation now, and that's beginning to pay dividends in terms of the operating margins, and they are going up very nicely.

So, it's not in the 10s of millions, but it's a in the $5 million, $10 million, $15 million kind of number is a way for you to think about it.

Okay.

I was just trying to get -- obviously there's some concern about the economy, and it seems to me that there's some underlying dynamics that are going to lead to margin improvement regardless.

The thing that is really kind of interesting this year -- if you go back and look at what happened in '01 and '02, national accounts lead the way down on shrinkage in terms of pays per control.

Yes.

This time they are the highest, because a lot of it is the mix of new business that we're selling in COS and the high end of the market -- the companies we're serving to my earlier comments are growing, not shrinking, and we have very little high-end manufacturing automotive based or Midwest kind of high-end manufacturers in that mix of business.

So it's doing pretty well, which feels pretty good.

Great.

It seems like you also would benefit from your continuing efforts on the near-shoring and offshoring in fiscal '09 to fiscal '08?

Is that a correct -- ?

Yes.

Absolutely.

We continue to do more in that by adding more people in the off-shore sites.

We're doing more smart shoring in the U.S.

and El Paso and Augusta and in Jackson, and so all of those things do have a positive impact on margin growth.

Mark, as you think about that, we entered '09 -- entered '08 a little over 2,000 people in India.

We'll exit '08 with almost 3,000.

We entered '08 with about -- I think 1,000 people in El Paso and really nobody in Augusta.

We'll exit this next year at about 1,300 in Augusta and around 400 or 500 in -- I mean in El Paso, and 400 or 500 in Augusta.

So we're making some big commitments here in terms of moving to lower cost labor, lower taxes, lower building costs, et cetera, and it's paying off.

And the service quality has remained constant?

Absolutely.

I mean, you always have a few blips in the beginning when you are staffing up, but our service quality out of India as well as El Paso is terrific.

Great.

And then can you talk a little bit about what your expectations are for D&A and CapEx?

And what I'm trying to get towards is what sort of free cash flow we should -- based on your expectations for revenues and earnings growth, what does that imply for free cash flow?

And then what level of cash do you feel you need to maintain, so that we can get a sense of what is going to get invested in the business and how much is probably going to also be used for future buybacks.

Okay.

Give you a couple of things.

First of all on CapEx, you would expect to see CapEx perhaps up a little bit next year from this year as we do more smart shoring, but just a tick as opposed to be a tick under 200, it will be a tick over 200.

So CapEx isn't driving too much of a variance in '09.

Same with D&A.

So in terms of operating cash flow for '09, we would be in the $1.7 billion kind of plus range.

As we said, we would continue to buy back shares at a rate higher than historical averages when you pull out the Broadridge and claims cash infusions.

So I think that gives you a sense.

Now, in terms of the ultimate cash balance, we should be -- the ultimate goal over the next year or so is to begin to move that -- that cash balance down.

I think we can operate at the $1 billion level between working capital requirements, between restricted cash, as well as the international cash we have.

We have done a good job of getting a lot of that international cash back and repatriating it in a very tax efficient manner.

We're through the bulk of that and still have a little bit more to go in '09.

So that kind of gives you a sense of the cash flow equation.

Perfect.

Thank you very much.

At this time, there are no further questions.

I will now turn the conference back to Mr.

Butler.

Thank you.

We appreciate everyone attending.

Lot of -- lot of great questions, and again, to reiterate, we're very pleased with '08.

And we're very optimistic about a good, solid strong '09.

So we appreciate your attendance.

Have a good day.

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

Thank you for participating.

You may now disconnect.