自動資料處理 (ADP) 2009 Q1 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Automated Data Processing Incorporated fiscal analyst webcast and 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).

I will now turn the conference over to Ms.

Elena Charles, Vice President of Investor Relations.

Please go ahead, ma'am.

Thank you, and good afternoon.

I am here today with Gary Butler, ADP's President and CEO, and Chris Reidy, ADP's Chief Financial Officer.

Thank you for joining us this afternoon for our fiscal 2009 first quarter earnings call and webcast.

A slide presentation accompanies today's webcast, and it 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 pretax earnings for our reportable segment has been posted to the IRS section of our website.

The sections include the first quarter of fiscal 2009, and all prior periods have been updated to reflect fiscal 2009 budgeted foreign exchange rates.

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.

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

Thank you, Elena.

Good afternoon, everyone.

I will begin today's call with some opening remarks about our first quarter, and the current economic environment that we find ourselves in.

Then I will turn the call over to Chris to take you through the detailed results, and I will return a little later to provide you with an update on our guidance for fiscal 2009.

Then I will give a few concluding remarks before we take your questions.

Overall ADP posted good results for the first quarter of fiscal 2009.

Pretty much in-line with our expectations, with the exception of our new business sales results, which I will circle back to in a moment.

Revenues grew 9.5% for the quarter.

Pretax earnings were strong at 16% growth.

And earnings per share from continuing operations grew 20%.

All-in very solid results for the quarter, despite the challenging economic headwind.

That being said, the economic situation became much more challenging during the quarter, than we last spoke with you at the earnings call in late July.

Most notably impacted was the selling environment.

As you read in our press release, new business sales did slow, declining some 8% from last year's first quarter.

We indicated on our earnings call in July that comparisons for sales growth would be tougher in the first half, and particularly the first quarter, and they were.

However, the volatile financial markets during the quarter, led to a further slowdown on the part of businesses around the world making outsourcing decisions.

We are seeing companies across all market segments taking more time with outsourcing decisions, and in some cases, deferring the decisions in this challenging economic environment.

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

We are currently estimating that new business sales will be approximately 10% lower than the $1.15 billion in new, annual revenue that we sold in fiscal 2008.

As you read in the earnings release, employer services client retention declined slightly by 0.3 percentage points from the record levels a year ago.

The number of employees on our client's payrolls are pays for control metrics, continue to show growth from the first quarter at 0.4% improvement, but slower than the 0.8% we saw in the fourth quarter of fiscal 2008.

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

The first quarter growth and pays for control, for both small business and national accounts, has slowed as well.

But they both continue to be slightly stronger than in our major account segment.

Dealer services was significantly impacted by the slowing economy, where new car sales had drastically declined, resulting in increased dealership consolidations and closing.

This is putting pressure on dealers to reduce costs, which is having a direct impact on our results, and is reflected in our revised revenue guidance for dealer.

I am pleased that we continue to take market share nonetheless, but at the same time, we are seeing considerable pricing pressure during the selling process.

So despite the stronger than anticipated economic headwinds, we achieved a solid first quarter, but we are cautious regarding the selling environment, as we look out over the remainder of fiscal 2009.

Now let me make a few comments on the turmoil in the financial market, and the impacts through various financial institutions that have been in the media over the recent weeks.

I think it is worthwhile spending a minute or two on that subject, and how it relates to ADP.

With respect to revenues, ADP does have a concentration of clients in specific industries, but no one client or industry group is material to ADP's overall revenues.

Revenues from Financial Services clients, broadly defined to include banks, brokers, insurance companies, credit unions and investment advisors, make up approximately 3% of ADP's total revenues.

From another perspective, the Top 20 Financial Services account for only about 0.5% of ADP's total revenues.

While we certainly don't want to see any more failings of financial institutions, for the far-reaching market implications that we might see, ADP's client base is broad, so as not to be significantly impacted.

With respect to the investment portfolio, you will hear in a few moments from Chris Reidy, that there were no material write-offs of investments in our portfolio.

No one in any economic environment is immune to investment risks, but I want to remind all of you, that safety of the investment portfolio and liquidity, are the primary goals of the client funds investment strategy, and we continue to scrub the portfolio on a daily basis, as is our normal prudent business practice.

With that, I will turn it over to Chris Reidy, our CFO, to provide the details on our first quarter results.

Thanks, Gary.

Good afternoon, everyone.

We are on Slide 4.

As Gary said earlier, total revenues grew 9.5% to $2.18 billion, assisted by favorable foreign exchange rates, due to the weak dollar at that time.

For example, at September 30th, Euro was trading at $1.41, whereas today it is around $1.28.

So at current rates, FX will work against us the rest of the year.

Pretax and net earnings grew nearly 16%.

And earnings per share from continuing operations increased 20% to $0.54 a share, driven largely by revenue growth and margin expansion, as well as from lower average shares outstanding.

We continue to repurchase shares buying back nearly 6.6 million shares fiscal year-to-date for over $280 million, reflecting our long-term optimism regarding ADP, and consistent with our ongoing commitment to return excess cash to shareholders.

Now let's turn to Slide 5.

This slide is now a standard part of our earnings presentation, as it provides a succinct view of the overall impact of our extended investment strategy for the client funds portfolio.

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

I think it is important with the current state of the financial markets, to remind you as Gary stated a few moments ago, that the safety and liquidity of our clients funds, are the foremost objectives of our investment strategy.

Client funds are invested in Fixed Income securities in accordance with ADP's prudent and conservative investment guidelines.

Our strategy is to ladder and extend the maturities of our client funds.

On days when inflows of cash from clients and maturing investments are lower than the day's cash obligations, we may choose to borrow short term to satisfy client fund obligations.

This extended investment strategy allows us to temper the effects of interest rate fluctuations, and average our way through an interest rate cycle.

Since our last earnings call July 31st, we have had full and uninterrupted access to the US commercial paper market to fund client fund obligations.

Remember there is a seasonality to our client balances, with our first fiscal quarter being our lowest average balance quarter, thus our highest borrowing quarter.

Our second fiscal quarter ending December 31st is our second highest borrowing quarter.

Our commercial paper borrowings during the quarter averaged $2.4 billion, compared to $1.8 billion in the first quarter last year.

Average client fund balances grew 4.2% for the quarter to $14 billion, and the yield on the client fund portfolio was 4.3%, down 25 basis points from last year's first quarter.

But when you take into consideration the entire extended strategy, which also includes the lower borrowing costs, and the interest income on the corporate extended, the result was a $16 million P&L increase before tax, or an 11% increase over last year.

$167 million of pretax dollars generate by the strategy in the quarter, resulted in an overall yield of 4.8%, compared with 4.5% in last year's first quarter.

This shows the benefit of the extended ladder strategy and declining interest rate environment, that the fed funds rate was 5.25% for most of last year's first quarter, and was 2.0% for the full quarter this year, yet the net impact of the P&L was positive.

Now let's move to Slide 6 where I will take you through the segment results.

Employer services revenues grew 8%, organic revenue growth was also 8%.

Revenue growth in our traditional payroll and tax filing business in the United States grew 5% in the quarter.

This is slower than a year ago, due to slower balance growth and lower pay growth.

However we are pleased with this 5% growth despite the tough economy.

Our beyond payroll revenues in the US grew 13%.

ES's pretax margin expanded 150 basis points due to operating leverage, continued expense control, and lower selling expenses from lower than anticipated new business sales.

As Gary mentioned earlier, pays for control showed growth in the quarter up 0.4%, but at a slower rate than the 0.8% growth in the last quarter of fiscal 2008.

Growth in the number of pays in Europe continued to be positive.

Client retention did decline 0.3 percentage points in the quarter but remained at excellent levels.

New business sales growth declined 8% in th quarter for ES and PEO Services on the weaker than anticipated economy.

To remind you, new business sales represents the expected annual recurring dollar value of these sales, and our incremental recurring revenues to our existing recurring revenue base.

When Gary takes you through our updated guidance, he will take you through our employer services and PEO Services revenue waterfall chart, which will show you the relation to sales to revenues, as well as the contribution of our other revenue drivers.

For now, let's continue with the quarter's results.

Turning to Slide 7, the PEO continues to grow with over 18% revenue growth, all organic, pretax margin decreased about 40 basis points, as a result of higher pass-through costs.

Average work site employees increased 15.5% to approximately 190,000 in the quarter.

Now let's turn to Slide 8, moving on to deal with services, total revenues grew 2%, with 1% organic revenue growth.

Dealer Services pretax margin increased nearly 10 basis points in the quarter.

The recession and credit crisis are negatively impacting the automobile industry, and the manufacturers and dealers are feeling a pressure of a slowdown in car sales.

As you heard Gary state earlier, Dealer Services is gaining market share, however with considerable pressures on pricing.

Now, I will turn it back to Gary, to take you through the updated forecast for fiscal 2009.

Thank you, Chris.

For those of you following along, we are on Slide 9.

Before I get into the numbers, I want to let you know that this forecast reflects the difficulties present in the economy today, and we are assuming no change or improvement or degradation in the current economic environment in this forecast.

This environment is obviously significantly more challenging from a sales perspective, than when we first provided our fiscal 2009 forecast at the end of July.

As you read in the press release, we are reducing our revenue growth forecast for the year, to 2% to 3% growth, from the 7% to 8% previously forecasted for overall ADP.

Over 2 percentage points of the reduced forecast is due to unfavorable FX rates, as the dollar strengthens.

The benefit we enjoyed during the first quarter and all of last year as the dollar weakened, will turn around and work against us for the remainder of fiscal '09, based on current exchange rates.

Additionally, we are forecasting lower revenue growth for Employer Services, we are forecasting about 5% revenue growth, PEO Services 14% to 16% revenue growth, and flat revenues for Dealer Services.

We anticipate continued pretax margin expansion across all segments.

We continue to anticipate 10% to 14% earnings per share growth, up from $2.18 per share from continuing operations in fiscal 2008.

This excludes the gain on the sale of a building in last year's fourth quarter.

Consistent with our practice, there are no additional share buybacks contemplated in the fiscal '09 guidance, so it is our intent to continue to buy back shares depending on market conditions.

Chris will also discuss the '09 extended portfolio forecast, in a later slide after my remarks.

Now let's move on to Slide 10, where I will take you through our Employer Services and PEO Services revenue forecasts with a waterfall chart view.

I am on page ten.

At ADP, the term sales and revenue are not synonymous.

Sales is the dollar value of the 12-month annualized value of the recurring revenue portion of new bookings, whether it be a new client, or an additional offering sold to an existing client.

A sale turns into revenue in either the current fiscal year, or the next fiscal year, depending on when it is sold, and how quickly we get the client implemented.

For smaller clients in SBS and the PEO, clients can be implemented in a matter of days or weeks.

With larger clients and national accounts, it could be 6 to 12 months, and even longer for GlobalView.

Major accounts falls in between SBS and national.

Revenue is P&L revenue generated during the fiscal period, and includes both recurring, what we refer to internally as processing revenue, and nonrecurring revenue, what we refer to internally as set-up, or one-time revenue.

Sales start to become recurring revenue once a client is installed.

With that as background, the drivers of Employer Services and PEO Services revenue growth are best depicted in a waterfall chart, as shown on this slide again on page 10.

If you start on the left side of the chart, you will see our '08 revenues.

$7.4 billion when you add ES and PEO Services together.

The second column represents new annual recurring sales.

About 50% to 60% of fiscal '08 annual sales value will become incremental revenue in fiscal 2009.

And about 40% to 50% of fiscal 2009 sales, will become revenue in the current '09 year.

These percentages are not digitally accurate, so we use 50% on this slide as a proxy for both years, to give you an idea of how sales become incremental revenue, over the course of the two fiscal years.

Just as an example for clarification purposes, if we sold a new COS, which is our BPO offering in national accounts, for $100,000 a month for a seven-year contract, we would report that as a $1.2 million sale.

This is the 12-month, annual value of the $100,000 of monthly recurring revenue.

We do not report or include in any of these numbers, the total contract value of $8.4 million as a sale, like some other companies in the BPO business do.

As a percent of fiscal '08 revenues, new sales from both '08 and those sold in '09, are expected to equate to roughly 15% to 16% revenue growth over '08 revenue.

So if we were able to retain all of our clients, we would generate recurring revenue from new sales of approximately 1.1 to $1.2 billion during fiscal '09.

I mean $1.1 to $1.2 billion on a denominator of $7.4 billion, is 15% to 16% as I mentioned, being driven by sales and sales alone.

In addition, we have excellent retention levels, about 90% on average across Employer Services and the PEO.

When we quote retention, it is a revenue retention metric.

So if we retain 90% of our revenues, that means we lose about 10% a year, as depicted by the red bar on the chart.

Other revenue drivers include our annual price increase, which went into effect on July 1st at about 1.5%.

And growth in our client fund balances and other revenues, are expected to contribute somewhere under 1% to revenue growth in fiscal 2009.

Other revenue categories typically include acquisitions, employment growth, wage growth, and changes in one-time revenue up or down.

When you add it all up, you get 6% to 7% forecasted revenue growth for ES and PEO combined.

This is the sum of the guidance of about 5% revenue growth for ES, and 14% to 16% for the PEO.

While this chart depicts our fiscal '09 forecast, it is really how we think about our business model, by adding to our recurring revenue base by growing sales, reducing losses, modest price increases, and the normal intrinsic growth in pays and balances from our base.

In more normal times, the sales growth bar would show something around 10% sales growth, which would drive 16% to 17% revenue growth, and also growth in client balances, pays, acquisitions, and other revenues, driving an additional 3% to 5% revenue growth.

Now Chris will take you through our forecast for the client funds extended investment strategy, then I will come back with some concluding remarks, and then we will be happy to take your questions.

Thanks, Gary.

We are on slide 11.

You have seen this information on Slide 5 for the quarter, but this slide gives you a full-year view.

I would focus your attention on the P&L impact on the lower portion of the slide.

When you take into consideration the overall extended investment strategy which also includes lower borrowings cost in our short-term financing and corporate extended interest income, the impact on P&L for fiscal 2009 is not significant, and the overall yield of 4.4% is flat with the '08 overall yield.

With that, I will turn it over to Gary for some concluding remarks.

Thank you, Chris.

Let me just give you some general overviews from my perspective.

This challenging economic environment is the toughest that I have seen in my 30 plus years of business career at ADP.

I look at ADP's first quarter results and updated forecast for the year, and I am certainly not satisfied by ADP's standards, but ADP is doing pretty darn well relative to the pressures on the global economy today.

I believe our fiscal '09 forecast reflects solid growth in a very difficult economy.

As you can see from this forecast, our near-term revenue growth outlook is clearly being impacted by the weakened economy.

And we are anticipating, as I mentioned earlier, that it remains challenging for the rest of fiscal '09.

ADP's business model has tremendous scale.

We have further tightened our cost containment measures, but we are also continuing to invest in client facing resources, and all-in we remain on-track to deliver at least 50 basis points of pretax margin expansion across the board, and we remain confident in obtaining our forecasted 10% to 14% earnings per share growth for the fiscal year.

Additionally you have seen that we remain committed to returning excess cash to our shareholders, as clearly evidenced by continued share repurchases, and our 30 plus year history of raising the dividend to our shareholders.

I would also like to remind you that ADP is a great company, with a great business model.

We have about 90% recurring revenues in our businesses, client life cycles of ten years, excellent margins, with strong and consistent cash flows.

Very low capital requirement, a true AAA credit rating, and the markets we serve remain underpenetrated and growing.

So despite the strong economic headwinds we are facing today, I remain optimistic about ADP's long-term opportunities for growth.

Now I will turn it back over to the operator, and we will be happy to take your questions.

(OPERATOR INSTRUCTIONS).

Our first question will come from the line of James Kissane with Banc of America Securities.

Thanks.

Gary, just a quick question.

How would you characterize your guidance right now?

Particularly around new sales?

(laughter)

I am trying to think, is this the first time you will see a full year decline in new sales?

No, we actually had a decline, I think it was '03, either '02 or '03, I can't remember.

It was about I think, minus 5%, or something along that order.

We have seen this kind of bumping along, starting in the end of our third fiscal quarter.

But it dropped off pretty dramatically in the last 60 days or so.

So we are trying to be realistic, and we are trying to be conservative, because obviously it wouldn't be my desire to have to come back and change that forecast.

So I certainly think we are going to make this plan, this forecast.

This forecast is more conservative than what our business unit would be telling me on a collective basis.

But I have never seen anything like what happened in October and late September either.

So if we return to some kind of normalcy in the markets, then I would characterize it as one that I feel pretty comfortable we can make.

Now not to get into the quarterly detail, but it sounds like the December quarter will be worse than the September quarter, in terms of new sales.

Are you look at maybe a positive new sales before you exit the year?

I wouldn't agree necessarily with your first comment.

You have got to remember that this quarter was the most difficult comparison.

We actually were up 11% in the first quarter of last year, with a full year average I think around 8%.

And the second quarter was around 8%.

So this quarter is by far the toughest quarterly comparison, and the comparisons get significantly easier in the second half of the year.

So I mean, there are about 14 scenarios that you can paint on what is happening in the economy and the sales force, but our folks in the field remain pretty optimistic.

I am just trying to not overcommit, in terms of new bookings, as we look over the next nine months.

I can definitely appreciate that.

One last question, as you look at the cost structure, where do you see the most opportunity to cut back to help you make the bottom line?

A couple of things, Jim.

One thing is, I have used this statement with you guys in the past, this is my third time to this movie.

And the plot is a little longer and a little deeper in this movie, than it was the last movie in '02 and '03.

But fortunately, I think we kind of saw this coming back in April and May.

So I really started ratcheting back on optional expense back in the fourth quarter.

So as a result, we started off in real good shape from an expense standpoint in the first quarter, and I have further tightened it since then.

As a general statement, we are continuing at close to planned levels and sales head count.

We are still expanding head count in places where we have new products.

We are certainly making sure we have enough, appropriate levels of people.

We are not cutting back in terms of service.

And in areas where we have got a back log, we are going to have enough implementation, people get the business installed.

But there are a lot of other areas where you can hold back head count and optional spending, which is exactly what we are doing.

Great.

Good job, Gary.

Thanks.

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

Hi, good afternoon.

This is Jason Kupferberg for Adam.

Wanted to touch on the EPS outlook a bit, and trying to understand the moving parts here, that would enable you to make the sustained EPS forecast that you previously had, but obviously with a much lower revenue growth, because presumably there would be a significant amount of operating profit dollars to make up here.

Can you walk through some of the shortfall there, and maybe that just builds on some of the question with more detail on how much cost can you really cut, considering that you are still staying committed to the sales effort?

Sure, Jason.

I would lay it out this way.

First, you have got the impact of foreign exchange on the revenue which doesn't drop to the bottom line.

So you have got over 2 percentage points of dropping the revenue that doesn't impact your bottom line.

So that is a big piece.

Then you have got the slight decline in the PEO, and the pass-through cost, so you have got them coming out.

That helps your bottom line growth.

Then as you look at the sales impact on revenue and ES, you have got the selling expenses coming out.

Combine all of those things with what Gary was talking about, in terms of cutting back on discretionary expenses, and that is what makes us confident that we can still meet the 10% to 14% bottom line EPS guidance.

We also had considered some issues in terms of FX decline as we built the plan.

Not anywhere near the level that it actually occurred, but we certainly did have some of that kind of in our thinking.

Okay.

That is helpful.

And can you talk a little bit about buying habits among your customers as it relates to the add-on ancillaries, I guess some think those might be a little more discretionary in this kind of economy, since employee retention might be a little bit easier in these sorts of employment markets?

Are you seeing anymore hesitancy in terms of the add-on?

No.

In fact, if anything, first of all, we are seeing hesitancy across the board, not just in large accounts.

Whereas before this last quarter, it was pretty much of an up market phenomenon.

Typically, in these kind of tighter environments, we actually in some ways do better with add-on products, because if you think things like benefits outsourcing, or time and labor management, they actually drive efficiencies and cost savings for our clients.

And since the client is already using the service, there is an immediate benefit to get him up and going.

So I wouldn't expect any, in fact if anything, I would think it would be easier for us to sell add-on services, than it would to unhook someone from either an in-house solution, or whatever.

At this point in the cycle, I think what you have got is a lot of other companies including a lot of our clients, that are reacting the same way we are, which is cutting all discretionary costs, so are freezing in place, so at this point in the cycle, we are not seeing that directly.

As Gary said, as we progress through this economic downturn, you would expect to be able to see more, in terms of the beyond payroll sales.

Just last question on Dealer.

Some media reports obviously suggesting that Chrysler and GM could merge, and presumably, that would mean more dealership consolidation.

Can you give us any sense of how much of your dealer revenue come from Chrysler and GM dealerships, and any way to frame the potential impact on growth and margin if this were to happen?

I think the way for you to think about it is we have about 10,000 or 11,000 dealership sites for ADP in the US market place.

About 1,500 of the 4,500 Chrysler sites are ADP clients.

Those Chrysler dealers tent to be smaller, and in many cases more rural, as is GM, in terms of some of these.

So it depends on what happens.

If they consolidated, there are a couple of things you have to consider.

One is the dealers have franchised rights and GM or Chrysler just can't arbitrary change it without making them whole.

On top of that, all of those dealers, if they are using ADP services, have long-term contracts, and if they own hardware, they have lease obligations that they have to satisfy, in terms of those things.

All of that being said, if they ended up closing 20% of the dealerships, mostly smaller dealerships over a multiyear period, it could make up a difference of 20 or $30 million, in terms of recurring revenue to ADP.

Manageable, but certainly not desirable.

Thanks for the color.

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

Gary, I just wanted to better understand the statement you made where you said this could be one of the toughest economic times you have seen in your career, but you have been able to maintain your revenue and EPS guidance.

I heard Chris explain why the EPS guidance.

I was wondering if any of the other part was just the fact of what you've said in the past that ADP is a little bit different today, than what it was in the last recession, or if there are other changes, which gives you the confidence that you have, at least for overall revenue and EPS?

There are a couple of things.

One is clearly, our product positioning today is much stronger, wider, deeper, more global than it was the last time around.

Secondly, we don't have the brokerage business which was really a drag during that period of 2002 and 2003.

That being said, we are pretty challenged and the dealer environment right now, but not to the tune that we were challenged in the brokerage industry back after the Internet bubble collapsed, and the consolidation of the mid-tier trading organizations.

I guess the thing that I have seen in previous periods is a slowdown in sales, tougher to get people to make decisions.

I have never had that coupled with a credit freeze, and the inability for people to operate, invest their cash, and borrow money to run businesses, or start up businesses.

So I think the combination of what to me appears to be a recession, again the lowest interest rate that we saw since that last time, the dramatic drop-off in people's willingness to make decisions, coupled with the credit freeze, is why I think it is tougher this time than what we saw before.

That being said, when you have 90% recurring revenue, and you go back and look at the waterfall chart that we talked about, we have got fairly large backlogs that will continue to be installed, and even though we may not sell as much as we did last year, we will still sell well over $1 billion in new revenue.

So it is still pretty good revenue growth, and our scale models are so good, and particularly if we are focused on margin, we continue to bring down pretty high incremental margins on those recurring revenues.

So that being said, along with the things that we have enjoyed with moving more and more employees now to off-site locations, in India and near shore locations in El Paso and Augusta, and places like that, we are in pretty good shape from controlling our costs.

So I remain pretty comfortable that we can achieve these levels of EPS growth.

I think the other point that I would make, is unlike the last economic downturn, the laddering strategy that we have in the portfolio, is making a significant difference from the last time.

As you saw in the forecast chart that I gave, it really is basically neutral to the bottom line.

I can assure you that wasn't the case the last time we went through an economic downturn.

And we are completely impacted by the decline in rate.

So I think that is a significant difference from the last time.

Are you going to make any changes to your investment strategy or philosophy, just because of the type of environment we are in?

No.

I think the good news is that we have always had the safety and the liquidity of the portfolio in mind.

I don't see us changing.

And the thing is that we invest quite a bit in government sponsored entities, like Fannie Mae, Freddie Mac.

They are yielding significant yields right now around 4%, and corporate bonds are higher than that.

Significantly higher than that if you check the recent yields over the latest offerings.

So investing a little bit more in corporates than we did the last time I went through the detail at the March Analyst meeting, the only really difference is a little bit more in corporate, but other than that, it is pretty much the same.

And in addition, as Gary mentioned, and we have talked about on our prepared remarks, even during this environment, we have had no material write-downs in the investment portfolio at all.

So it is pretty much the same strategy and a continuation of the strategy of where we invest.

Great.

Thank you very much.

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

Hi, this is actually Drew Tennenbaum in for Charlie Murphy.

Had a question for you about margin expansion with relation to ES.

Just wanted to see I think historically, you have said you should get about 50 basis points of margin expansion just for showing up.

We wanted to see, to what level of revenue growth is necessary, to gain the scale necessary to have that 50 basis points?

Well, the 50 basis point comment would be normally, when we would have slightly higher organic revenue growth than we are experiencing today, but it would also include higher investment levels, or higher spending levels than what I would call optional items, which I am not doing today.

So I don't know if there is a floor, because it is not just the amount of revenue growth, it is how much you want to invest in sales.

It is how much you want to invest in acquisitions.

And how much intangible expense you want to cover up.

How much R&D expansion you want to do.

There are a host of expenses that you can control which will have no short-term negative effect.

You might not want to do them over a three-year period, but I don't know that there is some magic number, because there are other levers that you can pull, but you just can't do it for three years in a row.

Got it.

Thank you.

And one other additional question.

Can you comment on dealer growth in the US versus International?

Is there any reason that growth Internationally should be materially different than in the United States?

There are a couple of things.

We are obviously dealer is much higher in terms of International revenues, so they are more impacted from an FX standpoint short term.

That being said though, our opportunities to grow, particularly in the Pacific Rim, China, Thailand, and Europe, have been very, very strong.

Our new sales rates have been much stronger internationally, even though they have been good in the U.S., they have been much stronger, and you will still, even with our forecast, that we put out for flat, there will still be a delta, between international growth over domestic growth in the combined dealer services unit.

Okay.

Thank you very much.

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

Hey, guys, I just want to be completely clear on the guidance outlook factors here.

Your revenue guidance is down understandably.

And your stated margin guidance appears essentially unchanged.

So how is the EPS outlook unchanged?

I am assuming your implied margin guidance is higher, although we are not necessarily seeing it in the stated numbers.

Is that the way to think about it?

No, I think you really have to go back to what I said before, Rod, is that you have to peel back the onion a bit, and look at what is driving the revenue down, and take it piece by piece.

Because mix has a lot to do with it.

Over 2 percentage points of revenue decline being FX, that has no material impact on the EPS is a big driver.

Then you have got the PEO going down slightly to 14% to 16% growth, down from our previous guidance.

That is all pass-through cost that helps us on the bottom line.

And then you have got on the ES, for example, you have got the impact of the lower selling, which comes with it, is the lower showing expense.

So when you take all of those things into consideration, we see the ability to hold the 10% to 14%.

I would also mention that we have had some share repurchases on the first quarter, that is giving us about a lift of about 1 percentage growth for the full year.

So that is arguably in there as well.

But having said all of that, you still need a better margin outlook to keep earnings growth intact, versus where you were three months ago, right?

I don't follow your logic there, because the revenues come down, the margin is holding.

Okay.

Well, I mean the share count, the share count coming down versus your assumption helps, but seems like you still need a little better on the margin outlook.

Let me ask a different question on the sales force, on the selling side.

Can you talk about the feedback you are getting from the sales force in terms of the factors that are hurting the booking situation?

Is it primarily credit issues, uncertainty about solvency, are clients sort of moving over to cheaper payroll solutions?

Can you categorize the main factors at work, in terms of what is hurting your bookings outlook?

I think it is just a lot of people have been on the sidelines.

I mean, if you go to ADP today,and people underneath us want to make investments or spending decisions, we are going a lot slower internally, in terms of any kind of optional investment.

And I think that is happening basically, particularly in the US but around the world, people are waiting to see where this thing is going to settle out, before they jump into a new process, new application, whatever the case may be.

Other people are having difficulty getting credit to finance things or implementations, or spending those monies in other places, and people are just kind of down in the bunker.

If you go and talk to our sales force, they would tell you the prospective business outlook, in terms of the number of prospects, is as high or higher than they have ever seen.

They are just having trouble getting them into the boat.

And hopefully as the economy kind of settles out here, we will be able to do a better job of more efficiently moving those into the decisions.

You have got to be careful to give them too much incentive, in terms of either cheaper prices or lower set-up, or things like that, because that is not a sustainable strategy.

It just comes back and bites you a quarter or two down the road.

There is more pricing pressure particularly in the US services, around renewals and add-on applications.

So it is tougher to get a dealer to sign up for new applications.

But it is just --

slower new business formations at the smaller company end in SBS.

Right.

But in the employer services business, you are not seeing discounting activity go up in any meaningful way?

It is up.

It is up.

Is it up similar to what it was in the last cycle?

That was your main issue in the last cycle on the pricing front.

I couldn't answer that question digitally.

It feels like it is about the same, or maybe a little worse.

Right.

But is there a way to quantify, you normally get a 1.5 point price increase.

How much did the increase discount offset that?

Well, we put the 1.5% increase in July, so that is already in the number.

And we won't do any kind of a significant price increase again until the beginning of next fiscal year.

But you have people who call up and say I want to discontinue this service, because I can't afford it.

So you may give them a discount on maybe the benefits and the payroll, in order to get them to stay, in order to help them with the issues.

So you see those kinds of things, and we also see from a competitive standpoint, particularly with the small regional competitors, who are typically underpriced to ADP's pricing umbrella, they are willing to go in and take big discounts, to try to unhook an ADP client, so in some cases, we may match it, we may come down part way.

We may try to give them a different add-on product at a discounted price.

So it really is no one universal answer, and it is pretty much is across the board.

But in a normal year, your normal price increase net of the discount is around 1.5%.

What are you thinking that will be this year?

I am assuming it will be less than 1.5%.

You are combining an apple and an orange.

When we do the 1.5% which we put in this year, just for conversation purposes, we put out like 1.75, because we know we will have to deal with some clients, but we still get the 1.5.

That is over and done and it really doesn't impact our current pricing going forward, because most of the time we are bringing older clients up to the new book, and if you have got a discount that is 10%, I may give you a 4% increase, but if someone else is at book, I may only give you a 1% increase.

So that is really the existing book of business, going forward you are reacting to whatever the competition is, how many services they are buying, and trying to get as close to book price as you can going forward.

Right.

There is a challenge in looking at the blended pricing on new and existing deals.

So I see the point there.

It is tougher for us too today, because in both SBS and majors, we are selling bundles much more so today, than we used to be just selling payroll.

Because if you buy our employees, our benefit solution, and the TLM product, and the payroll product, we will give you a consolidated discount, over what you would have bought if you bought all three of them independently.

Okay, great.

Thanks, Gary.

Our next question comes from the line of Julio Quinteros with Goldman Sachs.

Hi, this is [Hill Leal] sitting in for Julio.

On the dealer side, you said that you have seen pricing compression.

Can you give us a sense of what the amount is?

Well, obviously there are really three things that are affecting dealers' revenue.

One is the pricing on renewals.

So if a client is at the end of term, and they want to upgrade, or they want to add applications, or they want to just renew and try to cut their bill, we have got pressures in that environment.

Additionally when we are trying to unhook client competition, we are certainly having to get fairly aggressive on pricing.

The other thing that is reflecting in the Dealer Services revenue is we are certainly seeing a higher number of out-of-business and consolidations, significantly higher than what we saw last year.

And then thirdly, you are seeing a dramatic drop-off in transaction volumes.

So there are fewer credit checks, fewer vehicle registrations taking place, fewer laser printing and closing documents that would get printed, that we get paid per each, that are happening in dealers.

So, it is really a combination of all of those three, and I don't think I would feel comfortable giving you digital accuracy around each one of those three individually.

Got it.

Thank you.

And then lastly, on the margin side on dealer, I think in the last quarter's press release, the language was around at least 50 basis points, and this quarter, it is up to 50 basis points.

With the flat revenue growth, how comfortable are you with increasing margins in dealers?

Is there a possibility to have flat margins in dealer this year?

I think it is going to be someplace in between without giving you a forecast.

That is the reason why we wrote it up to.

They are obviously being more aggressive on cost containment, because of the status of the industry, and the pressures that flat revenue growth does.

But that being said, they are still doing a good job of keeping costs, got a good backlog which they are installing, and I think they are going to have margin improvement.

I don't think it is going to be over 50, but I don't think it is going to be flat either.

Got it.

Thank you very much.

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

Thanks.

Chris, I am wondering if you could just briefly remind us of the process that you follow, once a security goes below investment grade, and you would be I guess based on your investment policies, be forced to liquidate.

And then secondly, as you mentioned, the realized losses were fairly modest in the September quarter, given everything that was going on.

That was followed obviously by an even more difficult October.

So given how difficult October was, can you just give us a quick snapshot, of kind of how those things trended in the month of October as well?

Okay.

David, this is Elena.

We are not done with October since it is November 3rd, so he might be able to give you some preliminary direction, but we are not done with October.

Actually to that point, if we did have any realized losses that were material, we would have to disclose that in our Q, which will be coming out and we don't have any.

So that is good news as well.

To your original point, if it falls below our investment guidelines, we would be forced to sell and take a realized gain or loss on that transaction.

So that automatically forces your hand.

And that is something that is a Board-imposed kind of thing.

So we are very proud of the fact that we had only the $1.9 million realized loss in the quarter.

What I would mention is that we did have some money in the reserve fund.

And that was the money market fund, obviously that you all know about.

We took a $3 million loss on that, that shows up in Other income.

You will read about that in the 10-Q coming up.

That is really the full disclosure of what we had.

And nothing, you are right, October was dramatic in terms of the financial stress, but nothing additional in our portfolio.

And that would have to be disclosed in the 10-Q, and there was nothing.

And I guess just in terms of, just back to dealer for a minute, I know there have about been several questions about this.

But in terms of your visibility on that business compared to the ES business, is the waterfall chart, if you did one for the dealer business, are the characteristics similar to what was outlined in your presentation, as it relates to the ES and beyond payroll?

I mean the business model is similar.

Dealer has more one-time revenues in it, because of the sale of hardware revenue that goes with some clients.

There are a minimum amount of software licenses, more so Internationally than the US that do get recorded.

So I would say, it is not as predictable as the ES model, but it is still pretty darn close to that in terms of the reliability.

We again, there is just so much stress in the dealer industry, and again we are trying to be conservative here, and get our expenses in line, with what could potentially be a further drag of what happens in the industry, and you do that in some ways by putting pressure on the revenue growth line, to try to get the expenses out.

So we have chosen to take that approach to how we come up with the forecast, and how we get our expenses in line.

Okay, great.

Thanks.

And just two other really quick questions.

Just in terms of your guidance, in FX, do you assume current spot rates, or spot rates at the end of the quarter, or do you make some projections?

We don't make any projections on FX.

It is the current rate.

Great.

Then last, you did mention the dividend increase, Gary.

What are the parameters again that we use to gauge what that increases, is it last year's earnings growth, or this year's earnings growth that we use, as kind of a benchmark for where that dividend may go?

The answer is really both.

I mean we really focus on payout ratio, which would kind of argue that you take into consideration this year's EPS growth.

But it is a combination of both.

I mean, we would consistently and have historically tried to increase the dividend, equal to or better than kind of the run rate EPS growth.

And it is not my authority to make that prediction, but I would be surprised if the Board of Directors didn't conclude that something in that order was appropriate, despite the challenges we see in the economy today.

Great.

Thanks very much.

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

Thanks.

I was wondering if you could give us an update on the underlying pays for control assumption?

Chris?

Yes, I will do that.

I think as Gary had mentioned, being conservative in our guidance, or being prudent in terms of what might happen with the economy, you saw that pays for control was still growing in the first quarter.

We don't expect that to be the case.

We would expect that pays for control may become 1% to 2% down, and we have actually taken into consideration a worse case than that, in setting our guidance range.

So I think you would expect for the year that it would be between 1% and 2% down.

You have got to also remember that we were conservative when we built our plan this year, we assumed flat, our zero growth anyway.

So we were in pretty good shape, and we actually had positive growth in the first quarter, so even if it goes down, we are in pretty good shape for the full year.

That is helpful.

I had another question regarding, as you look at an employer's services, the performance of the business units, can you give us a sense as to the impact on the economy on a relative basis?

In other words, which size employers seem to be feeling it the most now?

I think it really kind of goes all over the map.

I mean certainly, we have seen an increase in out-of-business and those kind of things, kind of across the board.

National accounts on the high end of the market continues to enjoy despite that, a very positive retention rate.

We are seeing a little more pressure in the mid market on the low end, than we would in national accounts.

But again, I think it is in this particular environment, it is pretty much across the board, although slightly better up market.

Also, recall that in our European operations and with GlobalView, as we have extremely high retention, because it tends to be larger clients in general, and people there for that and other reasons, just don't seem to change as easily as they do in the US market.

Thanks for the update.

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

Thank you, good afternoon.

Just a couple of questions.

I was wondering if we could just dive into the retention rate a little bit.

The second quarter in a row where it is down.

I was wondering if you could just sort of qualitatively talk about what the drivers are there?

Has it been impacted by bankruptcies, or is it just kind of the environment.

A little color on retention rates and where you think it is going?

I think there is a little bit of an uptick in terms of out-of-businesses.

I think Gary mentioned earlier as well, that we have seen a little bit more pricing pressure from some of the regional competitors.

That are coming in at very, very low prices to try to take share.

So it was down 30 basis points in the quarter.

It is hard to extrapolate that across the whole year, because the third quarter of our fiscal year is really our biggest retention period.

So it is hard to say but really it depends on what, how deep you expect the economic downturn to be.

But we kind of said flat to slightly up at the beginning of the year.

Our guidance now contemplates that being negative, down could be as much as 30 or more.

And we have that contemplated in our guidance range.

You have got to remember that one quarter doesn't make retention.

If you look at last year's results, we actually had a negative retention statistic in the second fiscal quarter of last year, and then bounced back, had a very nice third quarter.

That being said, with the anecdotal things that I hear in the market place and the pricing pressures, I think it would be very difficult for us to hold the current levels at the levels that we enjoyed last year.

So I expect it will be 30 basis points or slightly higher than that over the course of the year, and we will continue to give you our best judgment on that as each quarter unfolds.

Then just one more.

It is similar to the last question.

But it relates to the sales activity across the major segments in ES.

Is it qualitatively any different?

It sounded like national might have been relatively stronger overall.

Is that what you saw in terms of sales activity as well?

If you sort of thought about the --

We have had pressure at the high end of the market for both GlobalView and national for like the last six months.

And what was different this time is we saw pretty much the pressure all the way across the board.

In majors, SBS, and the PEO, just getting people to make decisions.

So it is pretty much universal today.

I mean there is a point here and 2 points there, some up and some down.

But as a general statement, the malaise or whatever you want to call it, is pretty universal across the business units, with Europe probably being a little bit stronger, and some of the Asia Pacific things being a little bit stronger, because they haven't had some of the negatives that we have had here.

Okay.

Thank you.

Our next question comes from the line of Gary Bisbee with Barclays Capital.

Hi, guys, good afternoon.

I guess the first question, SG&A was actually down in dollar in percentage terms slightly year-over-year.

Can you just give us some flavor how much of that is the lower sales commissions from the down year-over-year sales, versus cost reduction efforts on the G&A side?

Truly a combination of both the G&A being down.

It is lower commissions due to lower business sales.

But we are also cutting back on the non-clients facing costs.

So I wouldn't feel comfortable giving you a lot of detail between the two of those.

You can take from that it is a combination of the two.

So given what you are trying to do on the cost side, and the guidance calling for down sales for the full year, is it realistic to assume that SG&A could in this lower revenue growth environment, actually be slightly negative throughout the remainder of '09?

I think you could come to that conclusion.

I think you have to be a little careful when you do that, because the sales expense part of that, in SBS for example, the low end of the market, probably 70% to 80% of our sales expense is fixed costs around FTEs.

As opposed to the high end of the market, 60% or 70% of the sales expense is commission dollars.

It is a little bit different as you go further down market.

And you have to be careful with the sales force in that you just can't dial their commission earnings back long-term, because they will go someplace else to work, which is not what we want to have happen.

So there is a fine line of something in between, doing constructive retention tactics, while at the same time, putting some kind of filter where those sales happen in GlobalView versus SBS.

But certainly, it will be lower than what we would have contemplated otherwise.

Okay.

And then just a similar question on depreciation and amortization.

That really hasn't grown in five quarter, I wonder is part of what's going on there, that there are savings from the data center consolidations, and other things you have done, and would it be reasonable to assume a D&A number somewhere in-line with what you did this quarter through the rest of the year?

Well, you wouldn't see any additional D&A from capital outlays, there is nothing significant there.

But we haven't really had any acquisitions either.

And we do hope to, every year we look to do 300 to $400 million of acquisitions.

We did more than that two years ago, less than that last year.

But we do like to do that amount, and if we were, then that would significantly swing D&A going forward.

Absent that, I think your assumption is a fair one.

Okay.

And on GlobalView, obviously you have been talking about a tougher time selling new business, are there any instances, or a number of instances where customers have signed contracts, are now deferring them or telling you to delay implementation, or is it pretty much just the new ones?

You talked about the million employees that had been signed up, but not all brought on yet.

Is most of that business still going forward?

Yes.

I think we have about 1 million signed up, and I think installed, actually, we were looking at that number the other day.

I think it is 500,000 or 600,000 of those employees are up and running, and there are another 400,000 and something thousand in the backlog.

Chris has got --

450, thereabouts processing already.

450 processing and another 550 or so in the backlog.

We have had a few fits and starts where somebody may may defer something a quarter or two.

I think of the 80 accounts we have had sign up or thereabouts, we have had one or two that have canceled.

But we would have that anyway despite the environment.

I mean you have, we call them no starts.

And it is not uncommon even in the high end of the market to have, a 5% to 10% no start rate.

We have actually seen less than that in GlobalView.

Okay.

And then just a big picture question I guess on dealer.

When you spun off the brokerage business, a lot of us asked why not, why not dealer as well, and you talked about, your confidence in their ability to be double-digit growers over time.

Obviously sort of unfair to ask the question now, given the economic pressures.

I agree it is unfair.

But if you assume the US is going to be challenged for a while, are you still positive enough, and I am talking over several years, the outlook in the International, in Asia and eastern Europe and what not, growth opportunity that you still think is an opportunity that you want to be involved with?

I am probably even more optimistic about the International opportunity, not just Asia Pacific, but the Middle East and Russia, and what is going on in Europe.

We have got a number of really good things going on there.

I think the real issue is the US market, and in a normal credit and in a normal economy, I still have the same degree of confidence in dealer that I had before.

That being said, I couldn't sit here and accurately predict how long this slowdown is going to take place in the US.

If past is prologue, it may last a year to 18 months, but then it will come back, and when it comes back, it comes back pretty dramatically, and I think we are very well-positioned, and continue to take share, and can probably live through the vagaries of the industry, better than most anybody else in the industry.

So my thesis still remains intact, albeit in for a difficult sled ride over the next 12 to 18 months.

I think it is important to point out domestically that our dealership offerings, our dealer offerings are really positioned to help dealers improve their processes, improve their cost structure.

That doesn't help when they are not selling any cars, because they are not going to spend money on anything.

But it is a displacement of costs in some of our offerings, that will help them operate more efficiently, and that will position us well when a rebound does occur.

Great.

Thanks a lot.

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

Baird.

Good afternoon.

You have mentioned there are a number of reasons why your incremental margins have improved on the ES side, and one thing I am wondering, is just how far along are you with regards to your nearshoring, offshoring efforts?

How much more do we have to go there, and how much more do we have to go, in terms of COS transitioning from being a drag, to ultimately being profitable?

Things of that nature, aside from just what you are doing in terms of managing the expenses?

COS just for your edification Mark, is profitable today.

We actually turned the corner in the fourth quarter of last year.

Today we have about 5,700 people who are in some kind of a low-cost location.

There are about 3,000 in India.

There are about 900 or thereabouts, in low-cost international locations like Tunisia, or Dresden in Germany, and we have an additional 1,800 people in smart shore locations in El Paso, Augusta, Jackson, Allentown, places like that.

Our current forecast would be to add another 1,000 or so in '09.

I suspect it may be a little less than that depending upon what happens with revenue growth, but we are continuing to move to those smart shore locations, and plus, all of what we have this year, we are up from the first quarter of '08, we are up almost 2,000 people in terms of smart shore locations from first quarter of '08 to first quarter of '09, and we will get part of that benefit in '09, and we will get more benefit in '10, in addition to what else we do in '09.

So I think we have done a pretty good job here.

Yes, it certainly looks that way and can you talk a little bit about what percentage of your servicing is now done from these lower cost locations, and what sort of feedback you have gotten from a client perspective, in terms of satisfaction and retention?

Most of the US smart shore are both client call centers, as well as participant call centers, so a lot of the folks in Augusta are COS participant call center people, and we have had no issue with any of the US smart shore offices.

I mean you always have a few start up problems when you move something out, et cetera, but we have got no intrinsic core issues.

In India, most of what we do in India, is these are R&D or processed outsourcing.

We do very little client or participant call centers, unless it is specifically required by the client in order to hit a price point, in which case they know they are going to have some issues around accents, and those kind of things.

But again, we have enjoyed mid-teens kind of turnover in India, and the quality of the talent that we have there is excellent.

In places like Tunisia, we are there because they speak French, and we aren't adding people in Paris.

The same way with some of our outsourcing centers that we have in Czechoslovakia, because of the German and the English expertise, so we are pretty pleased with the outcome there.

And it sounds like you still have a ways to go.

Yes, we have got lots of room to move.

I mean I don't think we will double it in the next three years, but I think you will continue to see 10 to 15% kind of increases in headcount, transferred to those places over the next several years.

Great.

Can you talk a little bit about why the smaller regional competitors are more price competitive during this downturn than during the last one?

Is it because of the severity of the downturn, or is there something from a technology, or something from a financial stability perspective, that is causing them to be more competitive?

Well we generally are the price umbrella in most of the markets.

That being said, we are not that different in terms of pricing parity with the Paychex of the world, or the Ceridians of the world for that matter, and so A) I think everybody is more price sensitive from a company the size of ADP, or to Joe's Bar & Grill, so I think it is a lot easier to get somebody to listen to you today in tight times, and these local regional competitors are very hungry, and to the extent they are in the float business, they don't have five year extended portfolios.

They have got pretty lousy rates that they are getting on overnight funds, so they are a lot more desperate for clients, than they maybe normally would have been, but I mean, I would say it is worse than.

It is not crazy worse, but it is definitely worse.

Do you foresee any of those folks exiting any time soon, and potentially the opportunity for you to gain share?

I mean, we don't talk about it in the call, Mark, but we probably buy 30 to 40 of these guys every year.

You know, a 100,000 here, 200,000 there, a CPA practice here, a CPA practice there.

Okay, great.

And then just last question, just to confirm.

You did say that you were basically looking at something that could be on the order of pays per control being potentially worse than 2%, and still getting towards your EPS guidance?

Yes, we stressed all of the metrics and want to make sure that the guidance we give contemplates that so yes, you are right.

Pays per control, we stressed that was 2%.

What I think the good news Mark is that fortunately for us, we had a little luck, and a little foresight, and started ratcheting down some of these expenses ahead of time, and we didn't wait until the last minute, so our step off rates in the first quarter were very strong.

We had an excellent first quarter in terms of EPS growth, in terms of margin improvement, and we think that is going to help us carry over for the remainder of the fiscal year.

Excellent job, thank you.

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

Hi, thanks.

Gary, a couple of questions.

You have said that ADP's clients generally don't look like the broader US economy, but how should we think about ES growth, if unemployment levels get worse to say 9 to 10%?

Well, unemployment rates certainly affect us, but they affect us in terms of less pay growth, so they affect us clearly in the float balances that we get, the per pay charge that we charge, the bonuses that they don't get, so if we went from 6.5 to 9.5 from where we are today, that gets you down to the kind of 3% level, assuming all of those people were working with us today.

I think the thing that does happen is we have got a fairly large concentration in the service industry, which is growing the best.

We have got good concentration on the low end of the market.

Our clients on the high end have got excellent retention.

We really don't have a lot of payroll revenue in the high end manufacturing, like the auto sector, and the industries that feed it.

And even in the Financial Services areas, we do business with a lot of those folks, but we are seeing some pay decline, but as a general statement, most of them are still around, or being acquired by somebody else who might be an ADP client already.

So I think it will hurt us to the tune of active participants in terms of the decline.

The interesting thing that happens though, is that unemployment goes up, unemployment taxes have to rise, and unemployment taxes in FY'10 for example, would go up dramatically if that continues to happen.

Right.

But it is not something we talk about frequently but unemployment taxes, are the taxes that we hold for the longest period of time, and have a significant effect on the earnings in our client funds portfolio, so it is kind of funny how one hand washes the other.

It just takes a year for it to take effect.

Sure, a little bit of a hedge, and then you mentioned fiscal '10.

I know you gave a lot of color about new sales.What kind of implications will the current new sales trend have for fiscal '10?

Is there a rule of thumb that we should consider, and also related to the new sales, can you just distinguish with us how new sales are performing, versus the new clients, and what you are seeing in terms of the selling of existing clients?

I would say it is a little easier today to sell to an existing client.

That being said we are still selling to both, so I would say it is a little more positive on selling of the Beyond Payroll products.

I think your assumptions as you look beyond this year, even if our sales were to stay flat, and we were to get no balance growth in '10, we would still see 5, 6, 7% kind of revenue growth in Employer Services in FY '10.

If sales went up 10%, and we got some balance growth, we might see another point or two of growth on top of that in FY '10 and beyond.

I think you can go back and work that waterfall chart pretty easily.

Will do.

Appreciate it.

Thank you.

We have time for one or two more questions.

And our next question will come from the line of Pat Burton with Citi.

Hi, this is Nathan Rozof in for Pat Burton.

Just wanted to continue the logic as it pertained to the waterfall chart.

For the new sales growth, in order to make sure we understand the implications correctly, in order to have a flat sales starts metric for FY '10, new sales would have to grow 15% next year.

Is that growth achievable?

Well, because you have got half of last year which if our forecast is correct is 10% higher, so you would have to equal '08 roughly in '10, in order for it to be flat.

Do you follow me?

Yes.

And now is that growth back to the '08 level achievable, do you think in FY '10?

If the economy settles down, it would certainly be our aspiration to grow new sales by 8, 10, 12% every year.

If the economy stays really bad, and we are not seeing momentum in the sales force, we would be reluctant to try to drive that too much in FY '10, if the economy is starting to bounce back, we would be much more aggressive on investment and sales.

Yes, we are by no means trying to imply any guidance for fiscal year '10, but at the same time we have provided that waterfall chart with a way to think about things, so that you can kind of plug in a set of assumptions that you can come to yourself, as to each of those columns, and use that as something that you can come to your own conclusions around '10.

Got it.

I appreciate the color there.

Two quick modeling questions and I will let you go.

The first SKU provide any indication of what the share count is, that is assumed in the FY '09 guidance, and the last is was there any change to your underlying tax rate assumptions?

Thank you.

I will take the last one first, which is the tax rate.

We would assume that the projected effective tax rate excluding the one-time items, is basically flat to slightly down from the prior year, excluding the one-time benefit we got in California last year.

I would remind you that it was down significantly in '08 versus '07, whereas '07 on an apples-to-apples basis was about a 37.8% effective tax rate, so it continued coming down.

In terms of what was the other question?

Share count.

The share count.

This is Elena.

I don't have the diluted share count with me.

It will obviously be in the 10-Q, so when we had given the guidance in July we said to use about we said there was about a 10 million share impact at that time, anticipated from dilution for the benefit plans, and that because of the lower share price, I would say look at what we gave, what we assume in the Q, and then assume maybe about 5 million for the year.

Got it.

Thank you.

Our final question will come from the line of Franco Turrinelli with William Blair.

Thank you, my questions have been asked.

And sir, I will now turn the call back over to you, Mr.

Butler.

Thank you, Carol.

We appreciate everybody attending the call.

Obviously, it is an unusual time for us, but I think ADP has responded appropriately.

We feel very good about being able to meet our full year EPS target that we had forecasted earlier, and despite some of the pressures that we see in the economy, we think we are still well-positioned to continue with very good strong long term growth for the future.

So thank you very much for coming.

This concludes today's Automatic Data Processing Incorporated financial analyst webcast and conference call.

Thank you for participating.

You may now disconnect.