自動資料處理 (ADP) 2009 Q2 法說會逐字稿

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  • Operator

  • Good morning.

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

  • At this time I would like to welcome everyone to the Automatic Data Processing Incorporated second quarter fiscal 2009 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 remark there will be a question-and-answer session.

  • (Operator Instructions).

  • Thank you.

  • I will now turn the conference over to Ms.

  • Elena Charles, Vice President of Investor Relations.

  • Ms.

  • Charles, please go ahead.

  • Elena Charles - VP, IR

  • Thank you.

  • Good morning, everyone.

  • I'm here today 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 2009 second quarter earnings call and webcast.

  • A slide presentation accompanies today's call and webcast and is available for you to print from the investor relations home page of our web site at ADP.com.

  • Just to remind you, the quarterly history of revenue and pretax earnings for our reportable segment has been posted to the IR section of our web site and the schedules have been updated to include the second quarter of fiscal 2009.

  • During today's conference call, we will make some forward-looking statements that refer to future events and as such involve some risks.

  • These are discussed on page two 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.

  • Gary Butler - President, CEO

  • Thank you, Elena.

  • Good morning, everyone.

  • I would like to begin today's call with some opening remarks about our second quarter, obviously including the current economic environment and address how we see this affecting ADP as we look ahead.

  • Then I will turn the call over to Chris Reidy our CFO to take you through the detailed results and I will return a little later to provide you with an update to our fiscal '09 forecast.

  • Then I will give you some concluding remarks before we take your questions as usual.

  • Overall, ADP posted good results for the second quarter of fiscal '09.

  • However, new business sales continue to be weaker than a year ago.

  • I will come back in a few minutes to talk more about sales with some more detailed commentary.

  • Our revenues grew 2.5% for the quarter, pretax earnings were up 7%.

  • Earnings per share grew a strong 11%, excluding last year's favorable state tax settlement of about $0.02.

  • All in, very solid results for the quarter, despite the economic headwinds.

  • That being said, the economic situation continues to be very challenging and we don't see that changing much for the remainder of fiscal '09.

  • Over the recent days and weeks, the media has been reporting lay offs of thousands of employees at a number of companies across the US.

  • I think it is worth while at this time to spend a minute or two on that subject and how it relates to ADP.

  • You saw in our press release this morning that our pays per control same-stores sale metric and Employer Services turned negative in our second quarter, down 0.6%.

  • I am sure many of you are surprised by that slight of a decline given the rise in unemployment levels and announced lay offs.

  • Our pays per control metric does not decline as sharply as unemployment may rise for a couple of reasons you may have heard me state before.

  • But I think they are worth repeating.

  • First of all, companies that out source generally tend to be growing, healthier companies overall.

  • Also, ADP's client base does not in any significant way include large scale heavy manufacturing, which has been particularly impacted of late.

  • And there is usually also a period of on going severance payments, post separation that is reflected in our pays per control metric that we report every quarter.

  • I also want to remind you that ADP's sensitivity to a 1% change is about $15 million to $20 million in annual revenue.

  • Certainly higher margin revenues, but the impact is not something a $9 billion plus Company like ADP can't manage through.

  • It also may be helpful for you to look back at our revenue waterfall chart from our last earnings call, to see the impact relative to other revenue drivers in our overall growth.

  • Having said that, any period of sustained high employment does not signify a healthy economy.

  • In a challenged economy is where we see an impact as do all other companies.

  • Most notably impacted at ADP is the selling environment.

  • As you read in our press release, the dollar volume of new business declined 13% from last year's second quarter.

  • And we are now down 11% year-to-date.

  • Despite this challenging environment, we are holding our forecast for the year to be down about 10%, which means we are still selling over $1 billion in new annual recurring revenue this year versus the $1.15 billion that we sold last year in fiscal '08.

  • As you read in the earnings release, Employer Services, client retention declined 0.5 percentage points year-to-date from record levels a year ago.

  • Still, extremely strong retention at well over 90% as of December 31st.

  • But we did see an increase in out of business losses in the second quarter and we are appropriately cautious in our forecast about the impact for the full year.

  • As you know, January is a very critical retention period for ADP and early indications for the month indicate retention was better than our expectations, but did decline compared with a year ago as out of businesses continue to increase over last year.

  • Let me move now to dealer services which as you well know is certainly being impacted by the slowing economy and the difficulties of the auto sector.

  • New car sales have declined significantly and consumer credit remains quite tight for new car loans, resulting in increased dealership consolidations and closings.

  • This is putting continual pressure on dealers to reduce costs which is obviously having a direct impact on our results.

  • Despite the very onerous challenges I believe that the results achieved by dealer services in this environment are actually quite remarkable considering the state of the economy.

  • You may also have seen in our press release a few days ago the dealer services announced the acquisition of Auto Master a leading DMS provider in Finland.

  • With Auto Master's established footprint in in markets including the Nordic region, Central and Eastern Europe and Russia is clearly an acquisition that compliments our strategy for international expansion.

  • So to summarize my opening comments despite the stronger than anticipated economic head winds, we achieved very solid results in the quarter across ADP.

  • With that I will turn it over to Chris to provide you the details on our results.

  • Chris Reidy - CFO

  • Thanks, Gary.

  • Good morning, everyone.

  • We are on Slide four, and as you just hear, total revenues grew 2.5% to $2.2 billion.

  • Unlike to first quarter where revenue growth was assisted by favorable foreign exchange rates, the US dollar strengthened and negatively impacted revenue growth by nearly 3% in the second quarter as we had anticipated.

  • And as you will hear a bit later in our presentation as part of our full-year forecast, we expect that FX will work against us the rest of the year as well.

  • Pretax earnings grew 7% and net earnings grew 3%, while earnings per share from continuing operations increased 7% to $0.59 a share.

  • Both net earnings and earnings per share growth were impacted by a favorable income tax settlement in last year's second quarter.

  • Excluding this amount from a year ago, net earnings grew 8% and earnings per share grew 11%.

  • We continue to repurchase shares buying back 5.1 million shares for just over $190 million in the quarter and 11.1 million shares fiscal year-to-date for over $450 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 five.

  • This slide should be now familiar to you.

  • And I particularly like this slide because it provides a clear and sufficient sing view of the overall impact of our extend investment strategy, the client funds portfolio.

  • As shown on the slide this strategy includes interest on funds held for clients, 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 that the safety and liquidity of our client funds continue to be the foremost objects 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 are lower than the days 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.

  • You can see that the yield incorporate extended balances at 4.2% and 4.3% respectively, held well compared with the year ago period.

  • This chart also showed very clearly the significant favorable impact from lower borrowing cost, most notably 0.7% on our average commercial paper borrowings compared to 4.6% in the second quarter last year.

  • Average client fund balances declined in the quarter due to lower wage growth, fewer pays, lower bonus payments and the negative translation impact of Canadian foreign exchange rates compared with the year ago.

  • When you take into consideration the entire extended strategy, which includes the lower borrowing cost and the interest income on the corporate extended, the results was a $14 million P&L increase before tax or a 9% increase over last year.

  • The $175 million of pretax dollars generated by this strategy in the quarter resulted in an overall yield of 4.9% compared with 4.5% in last year's second quarter.

  • This shows the benefit of the extended strategy in a declining interest rate environment with the positive net impact of the P&L.

  • Before we leave this slide you may have noticed that the corporate extended balance in the commercial paper borrowings were higher in the '09 second quarter when compared to a year ago, while total client fund balances were lower.

  • You will also see this for the full year when we get to slide 10 for the full year forecast.

  • Toward the end of fiscal '07 and early fiscal '08 we delayed increasing the size of the extended portfolio, temporarily because of the inverted yield curve, present at the time.

  • We again started to build the extended portfolio toward the end of the first quarter of fiscal '08 and continued to build through the first half of fiscal '09 making the year-over-year comparables as you see them here.

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

  • Employer Services grew 6% all organic.

  • Revenue growth in our payroll and tax filing business in the United States grew 3% in the quarter.

  • This is slower growth than a year ago due to slower balance growth, lower pay growth and slower sales, however we are still growing despite the difficult economy.

  • Our beyond payroll revenues in the US grew 10%, led by growth in our time and labor management solutions and HR benefits, which is is the employees platform that we acquired early in fiscal 2007.

  • ES's pretax margin expanded 160 basis points due to operating leverage, continued expense control, and lower selling expenses from lower than anticipated new business sales.

  • As you heard earlier pays per control, which is our same-store sales employment metric declined 0.6% in the quarter compared to the second quarter last year.

  • And it is indicative of the rising unemployment levels in the US.

  • Growth in the number of pays in Europe continued to be positive though it is beginning to slow.

  • Client retention declined 0.5 percentage points, fiscal year-to-date but it is still at excellent levels over 90%.

  • The dollar value of new business sold declined 13% in the quarter for ES and PEO services on the continued weak economy and its impact on the sales cycle.

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

  • Now turning to Slide seven, the PEO continues to grow with 14% growth all organic, pretax margin was flat in the quarter as a result of higher pass through costs, average work side employees increased 13% to approximately 193,000 in the quarter.

  • Now let's turn to slide eight.

  • Moving on to dealer services, revenues declined just 1% in the quarter despite the incredibly tough market for the automotive industry creating tremendous pricing pressures for the manufacturers and dealers.

  • Dealer services pretax margin increased 30 basis points in the quarter while dealerships continue to close and the overall market is consolidating, dealer services has been effective at gaining market share.

  • Dealer recently acquired Auto Master a leading DMS provider based in Finland and as Gary stated earlier this acquisition supports Dealer strategy for geographic expansion.

  • Before we leave dealer services, you may be wondering how Dealers results are holding up as well as they are considering the significant challenges facing the automotive industry particularly in the US with the big three auto makers in the news of dealership closing.

  • Dealer also has a recurring revenue model not as high as ES's, but most revenues are recurring in nature.

  • Transactional revenues such as credit checks and vehicle registration are down as they are most impacted by the slowdown in new car sales.

  • But they only make up about 10% of total Dealer revenue.

  • Our international business which is about 30% of total Dealer Services revenues continues to grow.

  • There is a softening in auto sales in western Europe, but many of the developing markets such as China are still growing which helps us to continue to grow.

  • The market is challenged but Dealer Services sales were very strong last year so we came into fiscal '09 with a solid backlog that we are implementing this year.

  • And in the North American marketplace, Dealer has successfully increased sales of solutions such as CRM, IP-telephony, and digital marketing and advertising that help dealers find and retail customers and increase efficiencies.

  • We are not minimizing what is going on in the auto industry, but Dealer Services is gaining share in the challenged North American marketplace.

  • We believe it will be well positioned when the markets become more favorable.

  • Now I'll turn it back to Gary to take you through the updated forecast for fiscal '09.

  • Gary Butler - President, CEO

  • Thank you, Chris.

  • We are on Slide nine for those of you that are following along.

  • Before I get into the numbers, I want to let you know that this forecast reflects the difficulties present in the economy today.

  • And with we are assuming no change positive or negative in the current economic environment in this forecast.

  • As you know, this is an incredibly challenging environment and I am pleased that ADP continues to grow despite these significant head winds.

  • Our forecast is for the most part unchanged from our update to you last quarter.

  • We are confirming our 2% to 3% revenue growth forecast for the year, albeit as Chris mentioned earlier negatively impacted by two percentage points from unfavorable foreign exchange rates as the dollar strengthens.

  • For Employer Services we continue to forecast about 5% revenue growth, POE services 14% to 15% growth and flat to slightly down revenues for Dealer Services.

  • I would like to point out that the Dealer Services forecast does include revenues of about $7 million from the European acquisition of Auto Master that we announced in late January.

  • We have also updated our pretax margin forecast.

  • For Employer Services, we anticipate about 100 basis points of pretax margin expansion, and we continue to anticipate up to 50 basis points of margin expansion for the PEO.

  • We are confirming our sales forecast for Employer Services and PEO services combined.

  • As I stated earlier, the sales environment continues to be tough and we continue to forecast about a 10% decline this year.

  • But again to remind you we remain on track to add over $1 billion in new annual recurring revenues.

  • For Dealer Services, we anticipate the pretax margin including the announced acquisition will be flat compared with a year ago versus our previous forecast of up to 50 basis points of margin expansion.

  • I am pleased to confirm our earnings per share of 10% to 14% up from $2.18 per share from continuing operations in fiscal 2008.

  • Which again to remind you excludes the gain on the sale of a building in last year's fourth quarter.

  • Consistent with our practice, there are no additional share buy backs contemplated in the fiscal '09 guidance, though it is our intent to continue to repurchase ADP stock depending on market conditions.

  • So a solid forecast despite the head winds from the tough economy.

  • Moving to the next slide, Chris will now discuss the '09 client portfolio forecast and then I will come back with some concluding remarks and we will be happy to take your questions.

  • Chris Reidy - CFO

  • Thanks, Gary.

  • We are on Slide 10 now.

  • This slide gives you the full year view which is basically unchanged from the forecast we provided on last quarters earnings call.

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

  • When you take into consideration the overall extended investment strategy, which is shown on the last row of this chart, the anticipated year-over-year P&L impact is less than one might have assumed given the precipitous decline in rates.

  • The decline in client funds interest income is partially offset by the increase in the client extended interest income and significantly lower borrowing cost.

  • The net result is a $5 million to $15 million year-over-year decline or $0.01 to $0.02 per share and the change from our last forecast is less than $0.01.

  • The overall yield when calculated at 4.4% is flat with the '08 overall yield.

  • With that I will turn it back to Gary for some concluding remarks before we go to Q&A.

  • Gary Butler - President, CEO

  • As I look at the results ADP has achieved through the first half of fiscal '09.

  • I'm pleased that ADP continues to grow both revenues and earnings, despite a very difficult economy.

  • As I said to you last quarter, I am not satisfied by ADP historical standards, but ADP is actually doing well relative to the pressures on the global economy today.

  • And while we are anticipating the rest of fiscal '09 will remain challenging our fiscal '09 forecast reflects very solid growth.

  • This business has tremendous scale and as you know we have undertaken cost containment measures, while we continue to invest in client facing resources and in new product and services.

  • Several recent examples are our new health and welfare service engine, which offers realtime integration to enterprise payroll for large clients.

  • The early results of this new product are quite encouraging with 83 live client and most importantly 118 in the backlog.

  • Our new major accounts portal, which will be released in the near future, features a highly improved client experience which includes universal access, unified navigation and integrated employee and manager self service.

  • We continue our investments in scaling global view for our large multinational clients and prospects.

  • I am particularly pleased with our prudent and conservative investment strategy for the client funds portfolio, which obviously has served us quite well and we remain committed to returning excess cash to our shareholders as clearly evidences by a continued share repurchases.

  • Additionally as I am sure most of you know, ADP did increase its dividend 14% effective January 1st, 2009.

  • And to remind you this represents the 34th consecutive year of dividend increases at ADP.

  • I know most of you are familiar with ADP's highly successful business model, but I think it is worth repeating.

  • As I close, I would remind you that our model has tremendous scale advantage.

  • Our revenues are 90% recurring in nature.

  • Our average client stays with us for 10 years or more on average.

  • We have excellent margins with strong and consistent cash flows, and our capital requirements are very low.

  • ADP is one of only six nonfinancial US companies rated AAA by both major credit rating agencies and the markets we serve are under penetrated and still growing.

  • ADP is a great Company with a strong franchise and as we continue to execute successfully against our five point strategic growth program, I remain optimistic about ADP's long-term opportunities for growth.

  • With that I will conclude and turn it back to the operator and we will be happy to take your questions.

  • Operator

  • (Operator Instructions).

  • We will pause just a moment to compile the Q&A roster.

  • Our first question will from the line of Jason Kupferberg from UBS.

  • Jason Kupferberg - Analyst

  • Thanks, good morning guys.

  • Chris Reidy - CFO

  • Morning, Jason.

  • Gary Butler - President, CEO

  • Morning.

  • Elena Charles - VP, IR

  • Hi, Jason.

  • Jason Kupferberg - Analyst

  • So, now that the fiscal '09 is essentially half way over and understandably most investors focus is starting to turn to fiscal '10 I know it is too soon for you guys to provide official fiscal '10 guidance but can you give us some kind of frame work to think about how the top line growth trends might look directionally next year versus this year?

  • Just as we look at some of the new sales trends, obviously the pays per control weakening, client retention getting softer.

  • I know you provided the waterfall chart last quarter, but if you can help us think through some of the directional changes you expect to observe in the business, as these leading indicators play out that would be helpful.

  • Gary Butler - President, CEO

  • I think here's a couple of things you need to think about.

  • Obviously, we are not in any position to give forecast for fiscal '10.

  • But I think that there are some things that are obvious.

  • One is the environment continues to be tough.

  • I don't think that is going to change in the next four or five months as we go into fiscal '10.

  • I think we have been, our execution has been terrific in terms of new business sales with over $1 billion despite the environment.

  • So as I look into fiscal '10 I would be surprised if we went below that low water mark as we think about growing the business for next year.

  • I think we are still going to be able to get price increases particularly for accounts that we discount, to get them started as we look ahead.

  • Clearly our retention rate is north of 90% as we make the turn.

  • And although I expect some continued pressure, I don't think we are going to see a big step back in retention either this year or next year, even though I think it will be down from last year's rates.

  • So when you look at that all together, I think clearly it will be a challenging environment but still one that has growth and absolute performance that is pretty darn good.

  • Jason Kupferberg - Analyst

  • And just a quick follow up on that as you mention the year-to-date new ESL's are down about 11%.

  • You are looking for down about 10% for full year.

  • So I guess you are actually looking for a little bit of improvement if the math is right there for the back half of year.

  • I know that your year-over-year comparisons are easier but aside from that, can you talk about what is in your, your pipeline or your close rates or anything to help us understand the --

  • Gary Butler - President, CEO

  • Sure.

  • Jason Kupferberg - Analyst

  • Visibility that you might have on achieving the down 10% for the full year?

  • Gary Butler - President, CEO

  • Sure.

  • First of all you are absolutely correct.

  • The compares in the first half are much more difficult than they were in the second half.

  • Secondly, is our perspective business tracking in terms of potential clients and prospects is absolutely the highest levels I have ever seen them despite the economy.

  • I think thirdly we are not going to be faced with basically the crisis environment hopefully that we saw in October and early November that basically just froze decision making around the globe.

  • So the absolute kind of head count, where we are.

  • We can sale in a tough environment.

  • It is just difficult to get decisions like we had in October and November when literally the world is in almost a crisis mode and everybody is spending all of their time everyday watching CNBC rather than running the business.

  • So I think the environment even though tough is actually a little better than it was in the second quarter.

  • We do have an easier compare, and the product set is still very fresh and I have pretty good confidence level we will be at or around that number what we forecast.

  • Jason Kupferberg - Analyst

  • Last question.

  • The ES margin guidance coming up 50 basis points for the full fiscal year can you parse out for us individual drivers?

  • I know you mentioned some is of the factors in the press release that drove year-over-year increase in Q2 specifically.

  • But I wanted to get a sense of what the specific sources on a relative basis are in terms of the full year picture.

  • Gary Butler - President, CEO

  • Probably the two or three single biggest things are I think ADP was fortunate that we saw this happening back in the March-April time frame and we began to tamp down our expenses in the fourth quarter of '08.

  • So consequently we stepped off into the first quarter of '09 with a very solid expense structure and we have been very conservative in how we add to that expense structure since that time.

  • Secondly, our revenues despite the FX challenges have held up very well and so as a result the incremental margin contribution from the revenues holding up is great.

  • And regrettably our selling expense is less than planned because I would sure like for it to be back at plan.

  • So as you think about that, I don't know Chris you may --

  • Chris Reidy - CFO

  • I would just like to add that you would have to go back Jason to the fact that we were at the end of the first quarter when we said it was at least 50 basis points.

  • I don't want to imply that it went from 50 to 100 in the quarter.

  • It is really more where we are in the year and what our visibility for the rest of the year is.

  • With that, everything that Gary said is the drivers of it.

  • The only other point I would make is back to your sales in the second half.

  • We do although not completely close we do have good visibility to January as well and we were pleased with the January sales results which is a big selling month for us.

  • Jason Kupferberg - Analyst

  • Right.

  • Okay.

  • Thanks for the comments.

  • Operator

  • Our next question will come from the line of Kartik Mehta with FTN Equity Capital Management.

  • Kartik Mehta - Analyst

  • Good morning.

  • Gary I wanted to get your thoughts on the Dealer business and maybe as you look forward, what could happen to margins?

  • You talked about the tough environment we are in at least in North America.

  • So I guess two part question, one I wanted to get your outlook for what you anticipate in that business from a growth or contraction standpoint and two the impact of that on margins as we move forward?

  • Gary Butler - President, CEO

  • Well you've obviously heard our margin forecast for the full year, some of that is tamps down by the acquisition expense.

  • Secondly we have been very judicious in terms of head count in Dealer getting out in front of the curve in terms of what is having -- what's happening there.

  • In a tight revenue environment like they're in, in a slight declining environment which may continue for some period of time, very difficult to improve margins in that environment.

  • That being said, we are continuing to sell internationally, continuing to sell in the US at a reasonable rate.

  • So I expect status quo that margins won't be materially impacted either way.

  • Now caveat in all of that is depending on what happens with GM, Chrysler and their plans and what the federal Government does in terms of their loans.

  • If the decide to do major closings short term versus over some extended period of time.

  • That's kind of the wild card that we really can't project.

  • I have kind of put that, put a ring around that basically kind of saying that if GM were down 20% in Dealers or Saturn were to close, it could cost us $20 million to $30 million in revenue, but my guess is that is going to be over a multiyear period.

  • And there are commitments and franchise laws and contracts with us that have to be dealt with as you go through that.

  • So, I am sure that won't be a whole lot of fun, but it is certainly not going to be something that is going to cause us a, a significant downward pressure other than the kind of numbers that I talked about.

  • Kartik Mehta - Analyst

  • So Gary would it be fair to say based on kind of what you are seeing now even if there is a decline, the decline will be a little slower not just kind of falling off of a cliff that some times is anticipated?

  • Gary Butler - President, CEO

  • You have to remember that Chris talked about recurring revenue model in Dealer.

  • A good way to think about it is 80% plus kind of recurring revenues.

  • Only 10% of those revenues are driven by transaction businesses like vehicle registration or credit checks.

  • But believe it or not things like credit check are only down like 10% year to year because people are doing everything they can to get somebody qualified.

  • So they're running multiple credit checks with multiple sources to try to get people through the system.

  • And we are continuing to sell new business.

  • Our international business is still growing.

  • North America is down slightly.

  • So all of that being said it is going to be tough but I think we will get through it.

  • Kartik Mehta - Analyst

  • Chris, a question on the [float] portfolio, do you think there's any reason to change the matter in which you ,manage this at least in the near term because of current conditions?

  • Or the way you have it structured now with stand what's kind of happening in the marketplace?

  • Chris Reidy - CFO

  • Yes, we are very comfortable with the float portfolio and the way we are managing it.

  • We think this [slatted] strategy takes the volatility of interest rates.

  • We used to talk about that hypothetically and now we have been through a period where you can see it in actuality to be able to increase the impact of P&L in the second quarter when short term rates went from four plus down below one.

  • It is absolutely terrific.

  • We are actually seeing on the short term borrowing rates we've had absolutely no problems with access to the commercial paper market at a time when arguably it was as stressed as it is ever going to be.

  • I think that's a credit to our AAA and the fact that we do overnight type of commercial paper borrowings.

  • And the rates that we are getting this commercial paper are terrific.

  • You saw the average for the quarter was 70 basis points.

  • That in fact believe it or not is a little misleading because it was higher in October than it was in November and December.

  • And in January it is less than 20 basis points.

  • So that, that has been terrific.

  • So, we are very happy with the slatted strategy, it is really taken a lot of that volatility out, couldn't be more pleased.

  • Kartik Mehta - Analyst

  • And one last question, Gary, you talked about an increase of businesses going out of business and that has had an impact on retention rate.

  • I was just wondering if you can compare today what is happening to percentage of business going out of business, the impact of that to retention versus six months ago if there has been a change?

  • Gary Butler - President, CEO

  • Yes, there's an increase but again nothing is falling off the cliff.

  • We are still over 90% retention through the first half.

  • It is just we are seeing a little bit more this last quarter than we have seen if previous quarters.

  • Again you shouldn't interpret that as a falling off a cliff.

  • People have to -- companies have to pay their employees, and we are usually the last thing to go if there's a problem there.

  • But that being said, there, there is more than what we have seen historically.

  • It is probably a bigger issue in the Dealer business because you have a good bit more of them going out of business.

  • Again we are out in front of that curve in terms of reserving and making sure that we are appropriately covered there.

  • But again, it is, it is not good, but it is again not falling off a cliff.

  • Kartik Mehta - Analyst

  • Thank you very much.

  • Operator

  • Our next question will come from the line of James Kissane with Banc of America.

  • James Kissane - Analyst

  • Thanks, and good job, guys.

  • In the release you talked about pricing sensitivity impacting your retention rates, but then Gary you said that you would be able to push through price increases this year.

  • Can you talk about the pricing environment generally?

  • Gary Butler - President, CEO

  • Pricing environment probably is as tough as I have ever seen it.

  • In the Dealer world, one of our biggest factor is in terms of losses is dropped applications.

  • Because the dealer is using us for 12 applications he is looking to cut costs and he is willing to give up some things in order to cut that cost.

  • So the biggest pricing sensitivity we are seen at Dealer is not necessarily against the competition, but against just the cost burden that the dealer has every month.

  • In the ES environment, we are not the only one that is affected by this difficult economy.

  • So all of the major competitors as well as the local competitors are being what I would call frisky around pricing.

  • So a lot of folks to get a dealer give it away, set up, or implementation costs or they're given a couple of months free to get people up and going.

  • But again it is not anything that is precipitous, it is just down from what I have seen in previous periods.

  • James Kissane - Analyst

  • But on continuing customers -- so the recurring customers you would be raising prices in line with where you have done historically?

  • Gary Butler - President, CEO

  • I think it is going to be tougher to do that, Jim, than we have seen in past periods.

  • But it is not uncommon for us to give somebody a 10% or 15% discount to get started versus our quoted price or if we are trying to unhook them from a competitor.

  • So to go back to somebody that you gave a 15% discount to to get started and raise their price 5% is not unreasonable.

  • James Kissane - Analyst

  • Got you.

  • And Gary can you give us an update on global view, the sales progress there, the implementation progress and when you think you will get to break even?

  • Gary Butler - President, CEO

  • Well, I think the good news in global view is that the backlogs are quite large and we have lots to do for this year.

  • I think the bad news in global view is that it is probably the place that has been most impacted by the freeze in corporate decisions around the world not just in the US.

  • So, their new bookings are down significantly.

  • We still have a good backlog, we are still getting business, but it will certainly delay the profitability of global view for probably another year than what our previous estimates were.

  • James Kissane - Analyst

  • So is that contributing to the bigger swings in our new sales, declines or growth?

  • Gary Butler - President, CEO

  • No, I think the way to think about it, Jim is that in the middle and low end of the market, you can kind of -- I call it slugging your way through the process.

  • It is tougher to get a deal.

  • It may be a little less price, but you can get it done.

  • When you get to the high end of national accounts in North America or at global view, if you are one of the global technology companies or financial services companies, or global manufacturing companies, there's just a freeze on spending.

  • And so, we are seeing kind of call it 5% to 10% drag in the low and the mid size market but we are seeing 10% to 20% drag in the high end of the market because guys like me or guys like Chris are just saying no.

  • James Kissane - Analyst

  • All right.

  • Excellent.

  • Thanks, guys.

  • Operator

  • Our next question will come from the line of Julio Quinteros with Goldman Sachs.

  • Julio Quinteros - Analyst

  • Great.

  • Just wanted to go back to some of those comments you just made about sort of the state of the world as far as enterprise spending is concerned.

  • And I guess specifically are clients at this point done with the sort of the normal paralysis or delays in freezes on the more discretionary projects or any IT development initiatives that might have been focused to?

  • And have they moved more toward out sourcing?

  • In other words, are you seeing sort of that shift away from kind of the normal paralysis into some real decision making at this point or is it still a bit early to sort of assume that?

  • Gary Butler - President, CEO

  • There's a lot of receptivity to out sourcing.

  • So that is a positive for us.

  • But the return on the investment for the conversion is being worked to a -- fairly well.

  • So their really tight on pricing and returns, but the appetite to out source is clearly still there because a lot of these big companies particularly as they have expanded internationally, have got real cost cost challenges themselves.

  • Chris Reidy - CFO

  • I would agree with you Julio, that there is a paralysis that goes on and then you go into a stage of more appetite for out sourcing.

  • And I think you, I could fairly say that the paralysis is still there.

  • I don't think we have begun to see us come out of that yet.

  • But you would expect to as you start getting a little bit more confident.

  • So we are not there yet, but I think when that begins to happen you will begin to see the dynamics of the move to out sourcing.

  • Julio Quinteros - Analyst

  • Got it.

  • And then just real quickly on the margins front and I think you talked a little bit about some of the drivers for the current quarter and for the rest of the fiscal year '09.

  • But again as we think about fiscal year '010, what are the sort of normal drivers that we should think about and is there anything incremental that you guys will plan on doing into fiscal year '010 potentially to help continue to drive margins or is this just more of the sam natural scale in the business?

  • Gary Butler - President, CEO

  • Well, I think there's a lot of natural scale in the business, but I can asure you that we will be very tight on head count.

  • We will get revenue growth and the question is obviously how much but that revenue growth will be highly incremental because head count and variable costs are either staying flat or going down.

  • We're being very tight in terms of merit increases and those kind of issues.

  • We are working on a lot of other productivity improvements.

  • Hopefully our sales expense next year goes up which would obviously be the intention.

  • But again, I think it is more of the same with the kind of things that I just mentioned.

  • Chris Reidy - CFO

  • And I think we would also continue some of the programs that you have heard us talking about before just in a bigger way, some of the smart shoring and offshoring that we do, the data center consolidation will continue in pockets.

  • And well see that kind of stuff, telesales will continue to be a growing way of doing business.

  • So you will continue to see those things which are things we put in place years ago that are paying dividends now and will continue to pay dividends particularly as we grow in the future.

  • One point around next year that Gary alluded to earlier is obviously as sales begin to pick up, sales commission starts picking up and that puts pressure on your margins as well.

  • But we'd be thrilled to see that happen.

  • Julio Quinteros - Analyst

  • Got it.

  • Great.

  • Thanks, guys.

  • Operator

  • Our next question will come from the line of Kelly Flynn with Credit Suisse.

  • Kelly Flynn - Analyst

  • Thanks.

  • Just wanted to ask you to elaborate on what you said in the Q&A about thinking things maybe thing versus gotten a bit better versus the frozen state they were in a quarter or so ago.

  • Can we infer some optimism about the direction of the economy from here or maybe could you just give us a little more color on then I have a few follow ups?

  • Gary Butler - President, CEO

  • Yes, Kelly, what I was referring to there was I have never seen a sales environment as frozen as it was in October when the markets went free fall and a lot of conjecture around the financial services industry et cetera.

  • And that continued through the first parts of November.

  • We had an improved result in January as an example over our year-to-date remarks.

  • Because we know how to sale in a tough environment.

  • But again when you have a market in free fall and people are just frozen, watching CNBC it is hard to get anything done.

  • That's really what I was alluding to.

  • Chris Reidy - CFO

  • You should not take from anything that we have said thus far that there's any high level of optimism.

  • I mean we are in a tough economy and we see that continuing for the rest of the year.

  • Kelly Flynn - Analyst

  • Okay.

  • Great.

  • And then a follow up to that, can you talk about maybe market share gains you might be seeing relative to some of the smaller players and any dynamics on that front that might be relevant?

  • Gary Butler - President, CEO

  • I don't think there's anything that is material there versus where we have been.

  • We are clearly gaining market share in the Dealer world both internationally and domestically.

  • And I think we are continuing to do kind of business as usual in the North American segments.

  • Kelly Flynn - Analyst

  • Okay.

  • Great.

  • And then the last one on pays per control, can you help us with any forward guidance on where that might trend?

  • And specifically addressing the point you made at the beginning about severance kind of still being reflected in those numbers.

  • Does that imply that as severance rolls off you should see a significant deterioration in that figure?

  • Chris Reidy - CFO

  • Well, let me take a stab at that.

  • What we have year-to-date it is about flat and we would expect it to go to about 1% negative for the year, which implies a 3% average decrease over the second half of this year.

  • Now we have looked at and stretched our guidance up to a 3% for the full year level.

  • And that would imply a 5% decrease in the second half of the year, this year.

  • So our guidance contemplates both of those.

  • Kelly Flynn - Analyst

  • Okay.

  • Thank you very much.

  • Operator

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

  • Rod Bourgeois - Analyst

  • Got a set of questions for Gary and then a question for Chris.

  • Gary, on the pricing front, can you characterize how widespread the pricing challenges are?

  • I mean I'm assuming it is mostly on new deals.

  • Is that true and is it across all segments or mostly at the low end of the market?

  • Gary Butler - President, CEO

  • In the -- let's talk about existing clients for the moment.

  • In the high end of majors and the high end of national account internationally, almost all of the contracts, all of the clients have contracts.

  • So there's really not a pricing negotiation that goes on there except when those contracts are renewed but that's kind of business as usual.

  • In the low end of the market and in majors where we don't have contracts, we are constantly and again this is not new news our client base is constantly attacked by regional competitors as well as the major competitors.

  • So, I'd say the environment is higher than normal but again not precipitous and our client services people and our general managers who run our local regions are fully empowered to do what's appropriate to retain a client including lower his price.

  • So, as long as we know about it we can can generally deal with it.

  • Occasionally we have clients who just leave without bringing it to our attention.

  • Those are usually over a pricing environment.

  • In the new deals I would say we are seeing probably the highest level I have seen in term of discounting, in terms of set up and a few months free to get things up and going.

  • I would say that environment is pretty widespread with both the national folks as well as regional folks And I expect it is going to continue for a while.

  • Chris Reidy - CFO

  • When Gary mentions the few months free I would want to point out that typically what we do is require a couple of months paid, then a couple of months free and then a couple of months paid.

  • We like that model because it gets the customer use to paying us, we have a track record, no turn over, and then we give them a couple of months free.

  • Gary Butler - President, CEO

  • But again, Rod, this has been going on for a while.

  • This is not something that just happened last month.

  • Rod Bourgeois - Analyst

  • Yes.

  • I mean I noticed that you're offering a six months for free plan for certain groups of clients.

  • I mean is that fairly new, and when you book a deal under a six months for free plan, what do you do with the bookings?

  • Do you book bookings for that or do you wait until the first six months are over.

  • Gary Butler - President, CEO

  • First of all, that was a one off anomaly that you somehow stumbled upon.

  • And so that is not any kind of a national program that we have regardless.

  • It wouldn't be surprising to me if we had larger clients that were signing up for five or six year contracts that we gave them the first number of months free in exchange for a five year contract.

  • I would probably do that all day long, in this kind of environment.

  • I don't know what the second part of your question was.

  • Would you repeat it?

  • Chris Reidy - CFO

  • I think it was just how do you book that.

  • Again what I would point to, Rod in that specific instance is it is not six months free.

  • It is three months on, three months free, six months on, three months free.

  • And we would accrue revenue ratable, we wouldn't do that all in one shot.

  • So,.

  • Rod Bourgeois - Analyst

  • Right.

  • Chris Reidy - CFO

  • Obviously accounting for that correctly.

  • But again I would

  • Gary Butler - President, CEO

  • Just be billing it as it would bill.

  • Chris Reidy - CFO

  • So therefore the biggest point is that is not a significant program.

  • Very, very rarely used and it is not anything that I think you can take to indicate our getting more aggressive in pricing.

  • And there's a lot of other come competitors out there that have very similar programs but also again, one offs, not typically used and not very significant in terms of how many deals close under a scenario like.

  • Rod Bourgeois - Analyst

  • All right.

  • I guess the main thing on this, is the pricing challenges you are seeing right now which would seem somewhat above normal, do you believe, Gary that this is mostly cyclical issues, or are there some secular issues here with competition just getting generally more aggressive or is it a combination?

  • Gary Butler - President, CEO

  • I think competition is more aggressive because if it is tough for us it is tough for them.

  • Let me tell you.

  • SO they're being more aggressive than normal.

  • I think that will abate in normal times, but from a product set standpoint, which would be the thing that would most concern me, I am very, very comfortable with how we line up from a competitive standpoint.

  • We are not losing for feature function, if somebody wants to give the store away and they want the deal bad enough, then they may get it.

  • Rod Bourgeois - Analyst

  • Got it.

  • All right.

  • Chris, real quickly on the float.

  • I noticed that your yield on your client funds that your assumption for fiscal '09 is at 4%.

  • I think that was the same assumption you had in place three months ago.

  • But the yields in the overall market have dropped meaningfully in the last three months, so I am just trying to make sure I understand the math on how the guidance for the yield for fiscal '09 is flat with where it was three months ago despite the drop in yields across the market?

  • Chris Reidy - CFO

  • Yes, well a couple of things that you would have to look at and it is difficult for you to model this because you don't how much is coming due and how much is maturing.

  • So that's one factor.

  • Most of what we had maturing, the majority of what we had matured in the first half of this year particularly in the second quarter and the reinvestment rates in the second quarter were particularly high.

  • That's one factor.

  • In terms of the short portfolio, we were also achieving good returns in the first half of this year.

  • We do see a market drop off in that, and I think we gave them in our guidance that we would average around 50 basis points in the second half though year.

  • We achieved much higher than that in the first half of this year.

  • So when you put all of those things together we yield the, the 4% despite rates in the short coming down.

  • Because again most of it our portfolio is locked in for the three, five year kind of time frames and those haven't moved and we have an embedded basis.

  • So that's really the beauty of the model.

  • Rod Bourgeois - Analyst

  • Does that -- just to make sure I understand.

  • So the things that you had maturing in Q2, you were able to reinvest at higher rates than --

  • Chris Reidy - CFO

  • In the second quarter you had the 3.5 and 5-year agencies over 4% or in the neighborhood of 4%.

  • So that has come down significantly since then.

  • But fortunately we don't have a lot of maturities.

  • Gary Butler - President, CEO

  • And you had high quality corporates paying 5.5% and 6%.

  • Chris Reidy - CFO

  • That's right.

  • Rod Bourgeois - Analyst

  • Okay.

  • Right.

  • Okay.

  • So, are you doing anything in recent quarters or even today to sort of make your portfolio more conservative in light of the credit crisis or do you think you are past the need to do any of that?

  • Chris Reidy - CFO

  • We are very comfortable with the portfolio and we feel that it is appropriately conservative.

  • One of the things I would specifically point to is commercial mortgage backs and people are concerned about those.

  • Obviously a lot of press about those.

  • And clearly that is a big part of your unrealized loss in the portfolio which by the way the overall portfolio is a net unrealized gain, but the commercial mortgage back piece is a drag on that.

  • Now, we have talked about the fact that the commercial mortgage back that we told are super senior AAA tranches.

  • It is easy to say that and I am not sure if people really understand what all of that means.

  • So let me just give you a little color on that.

  • Really the principle and interest from the underlying commercial mortgages go first to that class and if there are any defaults, it goes to that class first.

  • So it is actually somewhat beneficial in the return of principle.

  • It is a payment priority.

  • So we have the first call on any income coming in even before other AAA tranches.

  • So it is a super senior AAA.

  • Basically, one insight I can give you is that on a weighted average basis across our entire portfolio, cumulative defaults would have to be in excess of 65% for the remaining life of the portfolio to negatively impact our position.

  • And currently the default percent on underlying collateralization is in our portfolio 0.25%.

  • So with an average remaining life of three years the annual default rates would need to be extremely high for us to realize any loss on that portfolio.

  • So we feel that's very solid despite the concerns around commercial back.

  • So, that is an indication of and it may sound like it is not ultra conservative but we were ultra conservative in the tranches that we with invested in.

  • And I think that's indicative of our investment philosophy, while still earning good return.

  • So we are can comfortable with the consecutive nature of the portfolio.

  • Rod Bourgeois - Analyst

  • Okay.

  • Great.

  • Thank you guys.

  • Operator

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

  • Glenn Greene - Analyst

  • Thank you.

  • Good morning.

  • I will be quick given the time at this point.

  • Similar to your commentary on pays per control and your expectations embedded in our guidance, can you talk similarly about retention, what are you assuming for the pack half of year and how does, what is your early view on how that may play out in '010?

  • Gary Butler - President, CEO

  • We are basically covered up to a full point loss in retention.

  • So, I think at this point our kind of best view is 50 basis points for the year, going back wards and worse case is kind of 100.

  • But we are covered up to that 100 level.

  • Glenn Greene - Analyst

  • And how do you sort of see things playing this for fiscal '10.

  • Obviously it is early but sort of given the bankruptcy trends you've seen, maybe some impact from pricing, what is your view, does it get worse in '10 or better?

  • Gary Butler - President, CEO

  • I am sure there will be pressure, but again I wouldn't feel comfortable making a forecast there anyway.

  • But again I don't see any significant difference that would really impact your model as you think about fiscal '10.

  • Glenn Greene - Analyst

  • Okay and then quickly on Dealer, similarly, is there -- trying to get a sense if there's any kind of lag effect here given that '09 is benefiting from the good backlog you had entering the year?

  • Gary Butler - President, CEO

  • We are continuing to sell at Dealer at pretty descent rates.

  • The fortunate thing for us is our, competitive unhooked level is very strong, and although we are losing clients to out of business as a general rule, we are still maintaining a neutral position in terms of market share.

  • And so I don't think that will materially change as we go into fiscal '10.

  • I think the wild card for fiscal '10 is what's the time line on what GM and Chrysler do if anything.

  • Glenn Greene - Analyst

  • Okay.

  • Very helpful.

  • I'm good.

  • Thank you.

  • Gary Butler - President, CEO

  • Thanks.

  • Operator

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

  • Michael Baker - Analyst

  • Thanks a lot.

  • Gary, I was wondering if you can provide some color across your employer services segments, that being small, medium, large size employers in terms of lay offs and out of business dynamics given the economy?

  • Are you seeing any meaningful differences there?

  • Gary Butler - President, CEO

  • It is pretty similar across the tranches.

  • I would say the one thing that has been a pleasant surprise in this environment is that if you went back historically, our losses based on lay offs and those kind of thing was very high, at the high end of the market.

  • This time, because of the fact that we have got much broader market options in terms of the products we sale and the high quality companies that we are selling that we are seeing less lay off effect at the high end of the market than we have historically seen like we saw in 2002 and 2003.

  • So the lay off factors are about the same across the board.

  • And we typically are going to see higher out of business in the low end of the market than you do in the high end of the market for obvious reasons.

  • Michael Baker - Analyst

  • Thanks and I just had another question in terms of the changes being contemplated to Cobra as part of the stimulus package, should we anticipate any meaningful impact to your business given that is one of your service lines?

  • Gary Butler - President, CEO

  • Well, it will certainly help new business sales there, because the coverage is longer.

  • But again, Cobra is a relatively small part of our revenue stream and so even if it were up 10% or 15% or 20%, it wouldn't materially impact the numbers at the EF level.

  • Michael Baker - Analyst

  • Thanks a lot.

  • Operator

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

  • David Grossman - Analyst

  • Great.

  • Thanks just one really quick question.

  • Gary if I heard you right you said you could get some growth in fiscal '10.

  • If for some reason that didn't happen and the segment was flattish or even modestly down, is the expense structure configured in a way that you could still get margin expansion next year?

  • Gary Butler - President, CEO

  • Well let me first say I don't expect your scenario to be anything that we are talking about.

  • Obviously.

  • Elena Charles - VP, IR

  • That's not a forecast.

  • Gary Butler - President, CEO

  • That's not a forecast.

  • But it is like I said earlier, our facilities, our head count, are equal to or less than last year.

  • And if for whatever reason, bizarre reason we actually went negative, we certainly would be looking at reducing those variable costs.

  • All that being said, there is still some fixed costs that don't go away.

  • But as long as we got positive revenue growth, our ability to increment margins in the scalable model we have is very high.

  • Chris Reidy - CFO

  • I would just have to reiterate too, something that we have said in the past which is, we don't intend in this downturn to cut into the bone because we really are very happy with the long term growth prospects.

  • And so we learned a lesson in the last turn where we cut into sales, service, implementation too deeply and it took a while to grow out of that.

  • And so despite this environment I think you can assume that that is still our position.

  • David Grossman - Analyst

  • And just one quick follow up to that, just in terms of the, you mentioned selling expenses, obviously fluctuate with new sales growth.

  • How significant are those?

  • I don't know if you have ever disclosed that as a percentage of revenue but can you give us frame work to think about?

  • Gary Butler - President, CEO

  • I think a good way for you to think about it is $1 of revenue costs us about $1 of sales in implementation expense.

  • David Grossman - Analyst

  • Great.

  • Okay, guys, thanks very much.

  • Operator

  • Our next question comes from the line of Franco Turrinelli with William Blair & Company.

  • Franco Turrinelli - Analyst

  • Good morning, all.

  • Gary Butler - President, CEO

  • Good morning, Franco.

  • Franco Turrinelli - Analyst

  • Congratulations on navigating through these tough times.

  • Quick one for Chris if I may.

  • Chris could you remind me in the segment disclosure, what goes into other on both the revenues and pretax line?

  • And maybe just comment on why it would be pretty significant year-over-year and sequential change there?

  • Chris Reidy - CFO

  • Sure, I can.

  • In other you would find things like one is the client offset.

  • Don't forget we have -- we give the units, the segments 4.5% interest.

  • So to the extent that we earn 4% you would have a change there and that's where it goes into the other.

  • So in terms of other segment revenues, they're down about $66 million in the quarter, essentially that was due to the FX because we budget, we assign the units standard budgeted rates and the offset goes into other.

  • So that was the biggest driver and then the second biggest driver was the client fund interest offset with the field getting 4.5 and the difference down in the second quarter down to 4.2.

  • So those are the biggest drivers of the other segment.

  • Some of the other things that typically go in there are interest expense, corporate interest, I'm sorry.

  • Where's other revenue?

  • Sorry.

  • Credit Corp.

  • is in there.

  • We have some eliminations, but that is about it.

  • Franco Turrinelli - Analyst

  • That is helpful.

  • Thank you.

  • So we can look at those growth rates on both revenue and pretax and essentially a constant currency, constant interest rate?

  • Chris Reidy - CFO

  • That's right.

  • Gary Butler - President, CEO

  • Good way to think about it, Franco.

  • Franco Turrinelli - Analyst

  • Great.

  • Thank you very much.

  • Chris Reidy - CFO

  • You're welcome.

  • Operator

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

  • Gary Bisbee - Analyst

  • Hi guys, I guess two questions.

  • If we were to assume or were using personally to view that interest rates are going to stay at the current levels for the next two years, how quickly would yield on the client flow portfolio decline or ramp down over the next, over the next two years sort of fiscal 2010 and '11?

  • Obviously you have done a great job of increasing the duration to push out that, but clearly, you are going to at some point if rates don't start going up get hurt by the fact that rates are substantially lower.

  • So are we looking at 50 basis points, next year?

  • Chris Reidy - CFO

  • As a way to think about it, Gary, we have said in the past that about 20% of our portfolio turns in a year.

  • So it doesn't happen quickly, but obviously if it was five years of sustained then it would come down to the current rate.

  • But in the interim, we're projecting the 4% for this year, I don't think it is going to, it is going to take a while before short term rates get back up to that 4%.

  • So, while we won't have the volatility of going from very low interest income to high, we are very happy with the ROE impact of the interest income that we get at that 4% level.

  • Gary Bisbee - Analyst

  • Okay.

  • But it wouldn't be unreasonable though then if you, if you did use the two year no change scenario that the number is going to notch down probably at least as much as it is doing this year next year and the year after?

  • Chris Reidy - CFO

  • That's a pretty good way to think about it.

  • Gary Bisbee - Analyst

  • Okay.

  • Great.

  • And then Chris, following up on a comment you made a couple of minutes ago that if sales starts growing again commissions will grow and could hurt the margin.

  • Is that a big piece of the margin gain this year?

  • I am trying to gauge how substantial that could be.

  • Is that --

  • Chris Reidy - CFO

  • It is just one of the many pieces.

  • We articulated all of the piece that is drive margins.

  • It is just one of the pieces that goes into it.

  • But I don't, I don't think you can see that's an overwhelming factor in the 100 basis point for example that we are predicting for the year.

  • It is just one of the many.

  • Gary Butler - President, CEO

  • The other thing that gives you some leverage Gary just to help you think about it is that we obviously planned sales growth and we are obviously, negative 11% through the first six months.

  • So it is not just the delta to last year, we also had made room to absorb growth.

  • So it does give us more leverage.

  • But again it is not geometric in terms of the things that we were talking about.

  • Because a lot of sales is I fixed and it does come down ratably on the part that is variable.

  • But it is not going to be purely ratable over the numbers we were talking about.

  • Gary Bisbee - Analyst

  • Okay and then just one last one, the PEO business hanging in there in terms of the growth.

  • Every indication I get is that small businesses are really starting to get hurt -- they can't borrow money because of the credit crunch.

  • And according to your survey, I guess we will see what tomorrow shows but really started to fall off dramatically in December.

  • How do you get confident that PEO continues to do mid teens growth?

  • Is it just that you continue to have real success up selling existing customers or how should we this think about that?

  • Gary Butler - President, CEO

  • It is all a function of new sales.

  • Their comparisons to last year, are a little better than the rest of the group.

  • So they're continuing to focus.

  • The competitive scenario there is pretty good with the people that we compete against.

  • So we think our product set is pretty strong.

  • But all of that being said, the points that you make are absolutely valid.

  • Chris Reidy - CFO

  • Yes, and I think our guidance if you look at it over the year reflects that as we have moved down and now most recently to the low end of our previous range and now at the 14 and 15 level.

  • Gary Bisbee - Analyst

  • Okay.

  • And I will just tell you as an anecdote both my sister and one of my cousins work for small business that have switched from Administaff to you guys in last three months.

  • I don't know if you given them something on the pricing.

  • Gary Butler - President, CEO

  • Saved a lot of money, got a better product.

  • Gary Bisbee - Analyst

  • Yes.

  • They both said they enjoy the product actually better in the first few months they have been on it.

  • Gary Butler - President, CEO

  • Thanks for the testimonial.

  • Operator

  • We have time for one or two more questions.

  • Our next question will come from the line of Tien-tsin Huang with JPMorgan.

  • Tien-tsin Huang - Analyst

  • Thanks.

  • Good morning.

  • I will be real quick, first on Dealer I didn't -- I don't know if you gave this or not, Gary but new sales performance and attrition and how that changed I guess within the quarter and relative to the prior quarter?

  • Gary Butler - President, CEO

  • Well we have, we don't release or quote sales performance per se or retention in Dealer like we do in ES.

  • I would say to you that Dealer retention however is noticeably down from last year.

  • And it is all driven by out of business and dropped applications which I talked about the last time.

  • And it is, I mean it is fairly significant, I mean just to throw a number out.

  • It is probably4% or 5% loss in retention because of those factors.

  • That being said, we are still selling a lot of unhooks from the competition and are offsetting, that entire loss.

  • In terms of new bookings, it is down from last year, but better than the comparison in ES, believe it or not.

  • Tien-tsin Huang - Analyst

  • Okay.

  • That's good to know.

  • Is that, is the attrition comment more isolated to the US or --

  • Gary Butler - President, CEO

  • Yes, it's clearly a US statistic.

  • I mean we are seeing pressure in Europe and the other places, but it is clearly a US centric statistic.

  • Tien-tsin Huang - Analyst

  • Okay.

  • Last quick one, just in ES new sales are you seeing any delays in implementations or cancellations in your bookings?

  • Gary Butler - President, CEO

  • Odds and ends but again nothing precipitous.

  • You have to remember that most of your sales, SBS, Majors and PES are all implemented in a matter of weeks or months.

  • Tien-tsin Huang - Analyst

  • Right.

  • Gary Butler - President, CEO

  • And the only real place we are seeing some anecdotal odds and ends are at the high end of the market.

  • But again at your level of analysis, it is anecdotal and not directional.

  • Tien-tsin Huang - Analyst

  • Got it.

  • Very helpful.

  • Thanks so much.

  • Operator

  • Our final question will come from the line of Mark Marcon with R.

  • W.

  • Baird.

  • Mark Marcon - Analyst

  • Good morning.

  • Two questions, first question can you just talk a little bit about historically, what is the worst impact that you've seen from bankruptcies in terms of client retention rates?

  • And can you also mention when we talk about client retention, how much of that is due to bankruptcies as opposed to various other issues?

  • So that we can gauge the level of sensitivity that could occur if the economy continues to falter through the rest of the year.

  • Gary Butler - President, CEO

  • I think a way for you to think about that, Mark.

  • If we have got 90% retention, of the 10% we lose is about half of what we can control and about half of what we can't.

  • And of the half of what we can't, about half of that is out of business is a way to think about it.

  • Mark Marcon - Analyst

  • Okay.

  • Gary Butler - President, CEO

  • The other is mergers, those kinds of things, people get bought which is a form of out of business and the other issues are typically pricing, service or product.

  • Mark Marcon - Analyst

  • So basically 2.5% loss due to --

  • Gary Butler - President, CEO

  • I didn't say that, but it is something about the way to think about it.

  • Mark Marcon - Analyst

  • Okay.

  • And but -- what is the worst you have ever seen?

  • Gary Butler - President, CEO

  • About the levels we have got.

  • Mark Marcon - Analyst

  • This is as bad as you have ever seen it?

  • Gary Butler - President, CEO

  • Pretty much.

  • Mark Marcon - Analyst

  • Okay.

  • Great.

  • And then can can you talk a little bit about how much -- obviously you have put in place a number of cost efficiencies initiatives that have been bearing fruit throughout this year.

  • How much further do you have to go in terms of those -- without cutting into muscle but just the initiatives that you've had in place in terms of moving toward India, moving toward smart shore locations, things of that nature as we start thinking about next year, how should we think about at that?

  • Chris Reidy - CFO

  • I think you should be thinking about it that it continues particularly for example when we talk about offshore and smart shore particularly as we grow in areas like COS and the like.

  • We take advantage of smart shore and off shore and that helps to continue.

  • So it is not something that it is a, a once and done.

  • It continues particularly as we grow.

  • Data center consolidation, particularly hosting center consolidations at this point because we are, as you know done most of the big data centers, but hosting centers that kind of thing helps.

  • Tele sales continue growing as long as it is successful and it is successful.

  • So those continue and you wouldn't expect them falling off, off a cliff at any point.

  • Mark Marcon - Analyst

  • Great.

  • Is there anyway to quantify out of the margin improvement that you will see in ES this year how much of the improvement may be due to those factor?

  • Chris Reidy - CFO

  • No, we don't want to be that specific.

  • But, again just bare in mind that there is a, a normal leverage in the business.

  • Mark Marcon - Analyst

  • Sure.

  • Chris Reidy - CFO

  • And that, that continues obviously.

  • And then layered on top of that is these programs we have put in place and you have heard us talking about for years.

  • The only point I would make there is you can't pull a trigger and make those things happen if you haven't laid the ground work like we have done over the last years.

  • And as Gary said we saw this coming and tightened some discretionary spending as well.

  • You put all of those things together and it is yielding the kind of margins that we, we are executing on.

  • Mark Marcon - Analyst

  • Terrific.

  • Thank you.

  • Gary Butler - President, CEO

  • Again, let me close the commentary, we appreciate all of the great questions.

  • Again, we are pleased with the quarter.

  • We are pleased with the forecast for the year.

  • I think all of you should take some comfort that we are on top of the expense issues in terms of making sure they are appropriate with our revenue, both in terms of '09 and fiscal '10.

  • I am particularly pleased with the performance of the portfolio.

  • And I think when you look at all things considered in this environment, we are doing a pretty darn good job and I think the strength of the franchise is very obvious in the results.

  • So, again we appreciate all of the great questions and we look forward to talking to you in the next quarter.

  • Thanks.

  • Chris Reidy - CFO

  • Thanks.

  • Operator

  • This concludes today's Automatic Data Processing Incorporated second quarter fiscal 2009 earnings conference call.

  • Thank you for participating.

  • You may now disconnect.