自動資料處理 (ADP) 2009 Q3 法說會逐字稿

Good morning.

My name is Christina Harrison and I will be your conference operator.

At this time, I would like to welcome everyone to the Automatic Data Processing Incorporated third quarter fiscal 2009 earnings conference call.

(Operator Instructions)

I would now turn the conference over to Ms.

Elena Charles, Vice President of Investor Relations.

Ms.

Charles, please go ahead.

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 third quarter earnings call and webcast.

A slide presentation accompanies today's call and 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 segments has been posted to the IR section of our website.

These schedules have been updated to include the third 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 risk, and these are discussed on page 2 of the slide presentation and in our periodic filings with the SEC.

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

Thank you, Elena.

Good morning, everyone.

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

This will include the impact we're seeing here at ADP from the current recessionary environment.

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

Then I'll return a little later to provide you with an update to our fiscal 2009 forecast.

Then I'll give some concluding remarks before we take questions at the end.

To begin with, as you obviously know, we are in a a severe economic recession.

As a result, we expected the second half of this fiscal year 2009 to be tougher than the first half.

ADP is continuing to operate quite successfully in this difficult economy.

However, for the third quarter, ADP reported a decline in revenues of 2% and pretax earnings declined 1%, while earnings per share grew 4%.

Our key business metrics have been weakened by the recession.

This is evident in revenue and our core payroll business declining this quarter.

The level of new business sales is down 10% from a year ago for both the third quarter and year to date.

The selling environment remains quite challenging, as companies are reluctant to commit to new decisions to spend.

On a positive note, however, we are seeing an increase in the sales pipeline with larger companies.

However, it is still very difficult to close these transactions at this point, with a lot of new interest.

Client revenue retention was down 1 percentage point on a year to date basis, which is about where we thought we would be for the full year.

The calendar year end period was difficult and as a result, the remainder of the year may be down over 1 percentage point without the businesses and pricing pressure is expected to continue.

As anticipated, the number of employees on our clients' payroll on a same-store basis also declined in the quarter from a year ago.

This decline of 4.2% in the quarter is indicative of unemployment rising to the highest levels reported in decades in the US.

This is the largest year-over-year quarterly decline we've seen in this metric since we've been tracking it.

In addition, this is the most precipitous quarter to quarter drop we've seen in the quarterly metrics.

Dealer services, as you well know, continues to be directly impacted by the recession, and the difficulties of the auto industry.

That being said, I think the results achieved by dealer, albeit down, are actually quite remarkable considering this environment.

While we're on the topic of dealer services, as you know, Chrysler recently declared bankruptcy and GM has publicly announced plans to accelerate the reduction of its number of dealerships.

This does not change the estimated financial impact to ADP that we provided at our March analyst conference in New York of approximately $75 million.

However, the timeframe is now more likely over the next two or so years versus over the next five years that we talked about at the analyst meeting.

The sensitivities that we provided you on page 4 of dealer services March analyst presentation are still valid, should dealership closings exceed the 3000 currently estimated.

While losing revenues near term is not what we would like to see obviously, this is hardly insurmountable, and we still believe that we will emerge healthy, with an overall healthier auto industry, which long-term is good for ADP.

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

Thanks, Gary, and good morning, everyone.

We're on slide 4.

As Gary said earlier, total revenues declined 2% to $2.4 billion.

This decline reflects the impact of the severe economic recession and over 3% negative impact from unfavorable foreign exchange rates due to a stronger US dollar.

Now, as you'll hear a bit later in our presentation as part of our full-year forecast, we expect that FX will continue to work against us in the fourth quarter.

Pretax earnings were also down 1% and net earnings were essentially flat with a year ago.

Earnings per share from continuing operations increased 4% to $0.80 a share on fewer shares outstanding.

We continue to repurchase shares in the quarter, though less than the prior quarters, buying back 3.3 million shares for almost $118 million.

Fiscal year to date, we have repurchased 13.8 million shares for about $550 million.

Now let's turn to slide 5 and we'll look at employer services results for the third quarter.

As you may recall, we anticipated slower revenue growth during the second half of this fiscal year due to the impact of the recession on our business, so 1% revenue growth in employer services is in line with our expectations.

Revenue in our payroll and tax filing business in the United States declined 3% in the quarter.

This decline in revenue growth is due to a number of factors, primarily lower client fund balances from slower sales, lower wage growth, and fewer employees on our clients' payrolls.

Our beyond payroll revenues in the US grew 6%, led by growth in our time and labor management solutions and HR benefits, which is the employees' platform that we acquired early in fiscal 2007.

These increases were partially offset by a decline in retirement services revenues, which have been negatively impacted by the stock market contraction with lower retirement asset values on which a portion of our fees are based.

ES's pretax margin expanded 70 basis points from continued expense control and lower selling expenses from lower new business sales.

As anticipated, pays per control, which is our same-store employment metric, declined 4.2% in the quarter, compared to the third quarter last year and you may recall this metric was about flat throughout first six months.

Now for the nine months, the decline in pays for control was 1.5%.

The number of pays in Europe turned slightly negative compared with a year ago on a same-store sales basis.

You may recall last quarter that we said pays were still positive, but beginning to slow as we were seeing the weakened economy beginning to impact our international business.

The decline in client retention was 1 percentage point fiscal year to date.

This is a revenue retention stat and continues to be impacted by increased data businesses and price sensitivity, both related to the economic pressures.

Having said all of that, retention is still at historically strong levels.

As we expected, the dollar value of new business sold declined 10% on the quarter for ES and PES 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 our incremental recurring revenues to our existing recurring revenue base.

Now, turning to slide 6, the PEO continues to grow with 10% revenue growth, all organic.

Pretax margin expanded 80 basis points from operating leverage and continued expense control, partially offset by higher pass through revenues and expenses.

Year-over-year for the third quarter, average work site employees increased 8% to over 195,000 employees.

Now let's turn to slide 7.

As you know, dealer services results continue to be under pressure due to the incredibly tough market for the automotive industry.

Despite significantly lower car sales, increased dealership closings and implementation delays, the auto services revenue declined just 3% for the quarter with 20 basis points in pretax margin expansion.

Dealers doing a great job controlling expenses and continues to be effective at gaining market share, compared with a year ago, while the overall market is consolidating.

Now let's turn to slide 8.

You'll see we've expanded our disclosure of the client fund extended strategy this quarter by providing the breakdown of the client funds portfolio into the short, extended and long components, which you can see in orange on this slide.

At the top of the slide, you see the breakdown of both the average balances, as well as the average interest yields.

The orange section at the bottom of the slide gives you the corresponding pretax P&L impact, with the total representing the interest on fund sales for clients P&L revenue line item.

The purpose of this slide has not changed.

It provides a clear and succinct view of the overall impact of our extended investment strategy.

The additional data is being provided in response to feedback received after our March financial analyst conference, as there still is a bit of confusion as to how interest rates in the shape of the yield curve factor into the overall strategy.

With the ongoing state of the financial markets, I want to again remind you that the safety and liquidity of our client funds continue to be 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.

Now, getting back to the details for the quarter, near the top right of the slide, you can see that the average client fund balances were down $1.1 billion compared with the year-ago period.

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

In addition, the average yields on a client fund portfolio declined 50 basis points to 3.7% this quarter, resulting in a decline of $34 million in interest on funds held for clients on the P&L.

The impact from lower new purchase rates was most pronounced in the client short portfolio where the average yield earned was 260 basis points lower this quarter compared to last year.

The average corporate extended balances, the purple section on the slide, were up about $500 million compared to last year, reflecting the $500 million increase in average borrowings, the blue section on the slide.

The average yield on the corporate extended declined slightly about 30 basis points.

At the bottom of the slide, you see a $4 million positive impact to the P&L as a result of the increased balance, partially offset by the lower yield.

As I just stated, average borrowings were up in the quarter.

However, the average interest paid on the borrowings dropped significantly, 340 basis points, to a blended average borrowing rate of 0.3%.

The result was a $6 million positive impact for the P&L, as the lower rate was only partially offset by higher borrowings.

When you take into consideration the entire extended strategy presented here, the result was a $24 million P&L decrease before tax.

The bottom line, $175 million of pretax dollars, generated by this strategy in the quarter, resulted in an overall yield of 4% compared with 4.3% from last year's third quarter.

This shows the benefit of the extended laddered strategy in a declining interest rate environment, as the 30 basis point decline in the bottom line yield is not anywhere near as precipitous as the corresponding decline in market rates over the same time period.

Now let's turn to slide 9, where I'll take you through the full year forecast for the extended investment strategy.

This slide gives you the full year view, which is basically unchanged from the forecast we provided on March 25 at our annual analyst conference.

I would focus your attention on the P&L impact on the lower portion of this 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 market rates.

The expected decline in client fund interest income of $75 million to $80 million 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 anticipated decline.

The overall yield of the bottom line impact when calculated is expected to be almost 10 basis points higher than the 2008 overall yield of 4.4%, again reinforcing the benefit of our extended investment strategy.

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

Gary?

Thank you, Chris.

For those of you following along, we're on slide 10.

Our forecast has not changed from the update we gave you back in March at our analyst conference.

This forecast reflects the difficulties present in the economy today and we are assuming no change to the current recessionary environment.

We are confirming our 1 to 2% revenue growth forecast for the year, albeit certainly negatively impacted by about 2 percentage points from unfavorable FX rates resulting from a stronger dollar.

For employer services, we continue to forecast about 4% revenue growth.

PEO services, 12 to 13% growth, and a decline of 2 to 3% for dealer services.

I would like to remind you that the dealer services forecast does include revenues of about $7 million from the recent European acquisition of Auto Master, which we announced in late January.

Again, no change to our pretax margin forecast.

We continue to anticipate about 100 basis points of pretax margin expansion for employer services and up to 30 basis points 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 quite tough and we continue to forecast a decline of up to 13% this year, but we remain on track to add over $1 billion in new annual recurring revenues.

For dealer services, we anticipate the pretax margin, including the acquisition, will be flat compared with a year ago.

I am also confident in our ability to achieve the low end of our earnings per share growth forecast of 10 to 14%.

This is up from last year's $2.18 per share from continuing operations, which excludes the gain on the sale of a building in last year's fourth quarter.

I believe this is quite a solid forecast, despite the extreme economic head winds.

Turning to slide 11, I would like to leave you with some closing remarks before we open it up for your questions.

As I look at the results for the quarter, I want to be clear that we are not satisfied by ADP standards.

Revenue growth is certainly under pressure from the weak economy, and the difficult selling environment.

And there is no doubt that the economy for the remainder of fiscal 2009 will continue to be challenging.

However, I recognize that ADP is doing well relative to the pressures on the global economy.

We remain highly disciplined about controlling expenses and are appropriately aligning our expense structure with our revenue growth.

I am pleased with our prudent and conservative investment strategy for the client funds portfolio, which has served us very well, and I remain committed to returning excess cash to our shareholders.

ADP is a great company and I am especially proud of ADP's AAA credit rating.

We are keenly focused on executing against our five-point strategic growth program, which I believe positions ADP well to leverage an inevitable recovery in the economy.

Now we would be happy to take your questions and we'll turn the call back over to the operator.

Thank you.

(Operator Instructions).

Thank you.

Our first question comes from Jim Kissane of Banc of America.

Hey, Gary.

Just wondering if you have any guess on when and where pays per control might peak out?

My guess, Jim, is we started to see flat to negative growth there in about November of last year.

As you recall, if you go back to the third quarter of 2007, we were actually at a 3% positive and really starting about that time it started tweaking down and over the course of last year, went from 2% to 1.5% to 1%, et cetera.

So assuming the economy doesn't get dramatically worse than where we are today, I would expect that we would anniversary that decline sometime in the late fall as we go into calendar 2010.

But I would expect similar negative comparisons at least for the next quarter or two until we anniversary that date.

But it sounds like the declines should ramp a little bit more from here, just given the trends.

Is that fair to say?

I think it potentially could.

I think you're going to see, in the job report, my guess is a little less of a drop this month than what we've seen in previous months, so I expect it will kind of flatten to maybe get slightly worse.

I'm not expecting another precipitous drop like we saw in the third quarter.

I think what really happened is all the layoffs that started late summer, early fall that were announced last year, a lot of people get some period of time before they actually lose their job.

A lot of people remain on severance for a couple of months.

And then I think there was a pretty dramatic drop-off in retail hiring or retail right-sizing based on the poor holiday season.

And then I think it all started pouring out in January and February, which is what we're seeing.

That's, that's just an informed guess.

I don't have any digital data to back that up.

Jim, having said that, our forecast for the year assumes that it's going to get a little worse in the fourth quarter versus the 4%.

If you remember, back, we had been saying that we had our downside or what we were looking at in terms of stressing our guidance early on was potentially a 3% down for the year.

Given where we are at 1.5% year to date, that would assume like a 6% for the fourth quarter.

So we kind of have built in that it will get a little bit worse in the fourth quarter and as Gary said, carrying into the first half of next year, you know, the first quarter you got a tough compare because we actually grew the first quarter this year.

Second quarter was down about 0.6%, so you still got a tough compare there.

Then it gets a little bit easier as you anniversary that.

Okay.

That's really helpful.

Just on retention, the decline in retention, how much of that is lost market share versus bankruptcies and customers going out of business?

The biggest uptick on the low end out of market was out of business.

The biggest uptick in the middle part of the market was more price concessions, price losses from that standpoint.

So I mean obviously there is some loss in market share to the extent that you have people going out of business or you have, you lose something based on price to a local supplier, but I don't think it's significant at this point.

Okay, great.

Thank you.

Our next question comes from Jim McDonald of First Analysis.

Please state your question.

Good morning, guys.

Could you, going on that theme, talk about the sales impact in this recession, has it started to unthaw at all?

Well, we're -- as we said, we are still forecasting around $1 billion in new sales for fiscal 2009.

This is annual value of new bookings.

That's down from about $1.150 billion last year, so down roughly 13% or so.

I would say it's just kind of still bumping along.

It's not getting worse.

We're seeing some improvement in our prospective business outlook.

It's a high end of the market.

One of the reasons why we're forecasting 13% potentially down versus 10% year to date is in the fourth quarter of last year we had a lot of big deals that occurred in the May-June timeframe.

I'm not as comfortable at this point in time that we can get the new big deals over the transom to the same extent, which is why we're being a little bit more conservative in our full year forecast.

So, again, it looks okay.

It's not getting worse, but, again, we're not seeing any real noticeable improvement either.

Okay.

Thanks very much.

Our next question comes from Julio Quinteros of Goldman Sachs.

Please state your question.

Just to rehash something real quick on Jim Kissane's question about the guidance, what it implies in terms of unemployment, are you guys expecting to see 10% unemployment or not, relative to your fourth quarter expectations?

We don't build our forecast around unemployment numbers, but I would be shocked if we don't see 10% unemployment.

Okay, got it.

Great.

And then just in the margin levers, really nice performance on the operating margin side of the business relative to our expectations.

What can we expect to see in terms of other levers that you would have left into fiscal year 2010?

Any sort of prioritization, if you could sort of stack what would be the most important levers that you would have left at your disposal if the environment stays kind of as challenged as we're seeing right now?

Again, as we've said in earlier calls, one of the beauties of having 90% revenue is you can see a few months down the road.

And so we've been in a quote, unquote, right-sizing our expense structure to revenue forecast for quite sometime.

So, even though revenues are not what we would like to be, our expense structure is in pretty good shape.

Additionally, we've announced that we're not doing merit increases in our fiscal FY 2010, which is a $50 million-plus kind of number that will help the bottom line.

And we will continue to right-size our labor base to the appropriate revenue projections as we look into fiscal 2010.

So I think we're okay, and I'm not expecting any big surprises.

Obviously assuming, there's not another dramatic decline in an already tough situation.

And then we just continue some of the things we've talked about for quite a while, of continued smartshoring, offshoring, telesales, centralization of certain functions.

So just continuing those actually continues to drive margin improvement.

Great.

Thanks, guys.

Good luck.

Our next question comes from Glenn Greene of Oppenheimer.

Please state your question.

Good morning.

Just wanted to drill down a little more on the retention decline, which looked like 240 basis points in the quarter, which as you articulate, was pretty steep.

But my question really relates to the implication on margins and ES and PEO going into fiscal 2010, if there's any sort of lag effect that we should realize related to margins.

Obviously you're doing things to right size the cost base, but it seems like with the commission benefit you've had on the expense side this year, with sales growth being slow this year and retention falling off, there could be a margin disconnect going into next year.

I don't think so.

I think we have taken into account that increase in lost business or lessening of retention, and we're pretty comfortable with our full year forecast.

And in the fourth quarter, those revenues are already out of it in terms of the margin.

But certainly, it's something we don't take lightly, because that's very high margin contribution business, but I think we're out in front of it.

Okay.

That's good to hear.

And then just in pricing, can you drill down a little bit more between what you're seeing for both going after new business and existing business?

It gets into your rate card expectations and the order of magnitude of the price pressure you're seeing going after, competing for new business.

It's pretty much as it's been.

On the low end of the market, there's pressure on getting implementation or setup fees, and it's not uncommon for us to discount those, either in part or in total in order to get new business.

A lot of our business in the low end of the market comes from referrals, from banks and CPAs.

So we tend not to have the same kind of discounting.

In a pure head-to-head new sales, where you can appropriately sell the values of dealing with ADP and the AAA and all the features that we bring to the table, we typically do quite well against local competitors and our other national competition, as a general statement, is pretty rational.

And so there's not crazy stuff going on in new business.

Where we get kind of blind sided sometimes is in existing clients, where somebody comes in and says let me see your ADP invoice and I'll do it for $0.60 on the dollar.

And if we know about it, we can counteract it.

On the low end, that's the problem where we run into those kinds of issues.

So it's okay.

It's tight.

It's not any worse than it's been.

And I expect it's going to remain tough for the next three to six months.

And what is your expectations for the rate cart increase going into fiscal 2010?

We're still having that debate at the moment.

I think it's pretty clear to us that it won't be as much as we've seen historically, but certainly those clients who are under our, quote unquote, book price, would certainly be eligible for price increases.

And in the high end of the market, those price increases are pretty much contractually driven, so they are what they are.

I don't think we'll get the same 1.5 to 2% that we've gotten historically, but we will get some.

That's great.

Thank you very much.

Our next question comes from Rod Bourgeois of Sanford Bernstein.

Please state your question.

Yes, I wonder if there's anything you can comment on in terms of your margin trajectory as you head into fiscal 2010, it seems that pricing is somewhat under pressure and with your payroll business posting growth that was negative, part of that's due to currency, you're not seeing the same volume-based margin leverage that you normally would see.

And so how does that set us up for a margin outlook for fiscal 2010, if you can give any commentary along those lines?

Well, obviously we hesitate in giving any indication on 2010.

We're right in the middle of our operating plan process.

And no different than any other year.

We would give that guidance at the end of July.

What I would say is the biggest driver obviously is, is sales and as sales turns around, that will obviously be a good situation, but would put pressure on our margins and that would be a good thing.

So a lot of variables between now and the end of the year, so we'll hold off in saying any more about that.

That being said, Rod, obviously the more organic internal revenue growth you have, the easier it is to get margin improvement.

And to the extent that we are in a lessened organic revenue growth environment, it will be more difficult, although I expect we will be fine.

Right.

I mean if you look at your current pricing situation and then if you look at the net change in your realized price over the last year, can you give us a sense on how you're tracking there?

I mean, you've been fighting client retention, pretty diligently.

Even though it's down 1%, in the kind of environment we're in, it's still a pretty strong number.

Rod, you're asking us to forecast 2010, which we're not going to do.

So I'm not going to respond to that question.

And the good news is, we are driving 100 basis points of improvement in ES margins this year, which is just an indication of how serious we are in terms of addressing margin issues and balancing to deliver margin growth like that.

So--

Just to clarify--

-- the same.

Just to clarify, I was moving off of the fiscal 2010 question, recognizing you can't give an update on that, but can you just give an update on where you on that, but can you just give an update on where you are with price on a year-over-year basis?

If you look at the net change in your realized price after discounting and so on, where are you tracking right now on a year-over-year basis, just to give us a gauge on how -- where you may be as you enter 2010?

That's not a number that we track on a monthly basis, and, again, our margins were up this quarter, and we're expecting a margin improvement for the full year, which would imply that we're doing okay.

Okay.

All right.

Thanks, guys.

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

Please state your question.

Thanks.

Gary, I think you said you're still expecting a $75 million impact from the dealer closures, but now two years versus over the next I think it was maybe three or four.

How should we think about -- or over the next five years.

How should we think about how that rolls out over the next two years?

Would it be more significant in year two or more significant in year one?

The difficulty right now, David, is that it's unclear because we don't know what GM is going to do and Chrysler has not officially said, nor the bankruptcy courts officially agreed on how many dealerships, you know, will actually close.

Originally GM came out with a plan that was over four years, they were going to reduce a certain amount of dealerships.

They have now changed that plan, and said that they will reduce the number of dealerships over 40% in the next two years.

Now, we do all the Saturn stores, and we think that it's reasonable -- there's about 400 Saturn stores and we think it's a reasonable possibility and have had discussions with GM about that, that another party will potentially buy that distribution channel, in which case we already do all of the systems and infrastructure for those dealerships, so it would be a natural thing for them to go with us.

Secondly, there are only like 30 stand-alone Pontiac stores, so we don't think that's going to affect the outcome one way or the other because most of them are dualed with either GMC or Buick.

So that being said, if they close the 400 -- I mean of the 6000 stores they have, if they close, call it, 2200 of them or something, then, we know about what the average billings are per dealership.

We know what market share we have, and we also believe that it's going to be the bottom half of the dealers, not the top half, obviously, in terms of performance and size.

So I think our estimates are pretty good in terms of when you do that and kind of the industry scuttlebutt is once GM starts down that path, they are going to do like 100 or a couple hundred dealerships per month, as they go through that process and that's really kind of the scenario that we priced out for you and kind of hung that $75 million number over the two years, just to put it in the ballpark for you.

Okay, and if there's any change, since it seems to be somewhat of a dynamic situation, is there enough flexibility in that business to appropriately manage the margins, if in fact it accelerates anymore?

Well, first of all, I mean we're appropriately sizing our expense structure today.

Obviously we wouldn't be flat on margin if we weren't doing that.

We've reduced head count there close to 10% over the last two years, and obviously are very tight on any kind of optional expense.

Most dealers have multiple franchises, so even if some of the GM franchises close, they may still have a Honda or a Toyota store or whatever it may be, in which case they are still going to keep our system.

They may just have fewer seats in terms of licenses, in terms of using it.

So, we think we're in pretty decent shape as we've done that, but that being said, if it indeed is [$75] million and it's more in the first year than the second year, we're going to be moving pretty quick to get expenses out.

Okay, great.

Thanks.

Just one other question, is on the PEO business.

I know you don't break out the sales separately, but is there any reason to think that that business other than being smaller than the core payroll business, that it wouldn't follow pretty much the same patterns?

We've seen fairly dramatic shrinkage in employment in the PEO.

You've got to remember the PEO is a really fully featured service.

It includes healthcare, 401(k), all the other compliance issues, and so when people are looking to downsize the benefits or whatever, so we've seen significant shrinkage there.

Beyond that, I think you're right in assuming that it would follow the normal course of the payroll business, although we continue to sell pretty good ratios of new business as it compares to the revenue in the business.

So we'll still get better growth in the PEO near term than we will in the core ES business just because of the size of new sales versus the trailing revenue base.

Okay, great.

All right.

Thanks a lot, and good luck.

Thank you.

Our next question comes from Gary Bisbee of Barclays Capital.

Please state your question.

Hi, guys.

Good morning.

Someone asked this a little earlier.

I'll try it a little differently, but have you seen any sequential stabilization in the new business sales trends, it sounded like just from a lot of companies I talk to, companies went into a total standstill last fall and maybe there's been some easing.

And then secondly, what's sort of the typical seasonality of new business sales?

Is the lion's share of it done early in the calendar year, or is it, with your business, more spread out over the course of the year?

That's about four questions there.

Let me see if I can find one.

Seasonality wise, it's pretty even across the course of the year.

So you shouldn't really look to see any difference there.

Clearly, the markets went into a virtual freeze almost last October and early November, and we've certainly seen an improvement since that point in time.

It's clearly easier today to sell down market, because you can basically -- you're selling core payroll and tax.

It's clearly more difficult up market because corporate America or global companies just aren't spending money right now.

So our declines on the low end of the market are single digit and our declines at the high end of the market are over 20% in terms of new sales.

So we've seen that trend pretty much kind of at that level for the course of the last four or five months and we're not expecting it to be any different in the three months in front of us.

And so would it be right to assume from that, if there's been maybe some sequential stabilization over a few months that as we look forward to 2010, if things don't change dramatically, it could be sort of a flattish number if we remain in a static economy?

We don't want to get into too much FY 2010 kind of discussions, but obviously I would be disappointed in 2010 if we didn't sell at least as much as what we sold in 2009.

Okay, and then just a quick one, any, any reason or rationale behind the slowdown of buybacks, or is it just sort of timing issues and other things like that?

I think it's a combination of our levels of excess cash are clearly down from where they were a year ago, and we have just been kind of looking at timing and what the market is doing and trying to figure out if the market is kind of stable and what's going to happen there.

But again, as I mentioned earlier, we're still committed long-term, to continue to buy back shares and return excess cash to shareholders.

Great.

Thanks a lot.

Thank you.

Our next question comes from Tien-tsin Huang of JPMorgan, please state your question.

Hi, Gary.

I think in the past you've suggested a bad case scenario for retention would be down 100 basis points year-over-year.

Is that still a good stress case, or could it be worse over the next 12 months?

It's hard to say.

It was more severe in the third quarter than I think I've ever seen in terms of the impact on that.

And that's why you're hearing us talk a little conservatively about it being potentially over 1% for this fiscal year.

That being said, as I look at 2010, I think it's really a little hard to kind of give you too much of an insight there.

Obviously our objective is to improve retention, not see it go down.

And if the economy starts to turn in the fall, I would expect some lessening around the outer business and the pricing pressures as we get into fiscal 2010.

But I think it's too early to really take a firm stand on that.

If you look back historically over sort of a 12-month period, what's the lowest, or what's the biggest rate of decline you've seen in retention?

I think it's probably this year.

Okay.

So we are at sort of the peak?

Yep.

Last question for me, just the new sales environment, just what's sort of selling above plan and what's coming in below plan?

Maybe just give a little sketch on the products.

We're doing absolutely phenomenal selling new COBRA administration.

I kid you not.

It's absolutely going gang busters.

That's the one bright spot we have.

Again, the low end of the market is moving along pretty good.

Again, when you have CPAs and banks referring, and it's a relatively minor investment for small business in terms of the benefit that they get from the services.

We continue to see a slowdown in global view, getting corporate America to make those kind of decisions, although our PBR there and interest levels are as high as I've ever seen them.

We continue to sell things like time systems and benefit systems because they have very demonstratable and return on investment, but the, you know, the softer things like HR systems and some of those kind of things are a little bit tougher right now.

Okay.

The global view implementations are still moving as planned?

Believe it or not, we're on our revenue plan for global view for the year, but obviously, we had very large backlogs and a lot of those are multiyear implementations.

And as we look into next year, think we'll be fine there in the first half of the year, but we are hopeful we'll start picking up new sales as the economy starts to turn.

Great.

Good to know.

Thank you.

Our next question comes from Kelly Flynn of Credit Suisse.

Please state your question.

Hi, this is Gary Christian calling on behalf of Kelly Flynn.

Gary, can you clarify the comment you had made earlier about maybe things stabilizing with large companies and is this maybe different from what you were seeing the prior recession?

I'm not sure when you say stabilizing with larger companies.

Seeing a little bit more in the pipeline.

Yeah, we're just seeing more interest particularly in the global view area and the high end of the market where clients -- when you have economic uncertainty, lot of times it's easy to stop for a while, but over time, clients are continuing to show interest.

And we've got quite a nice increase in our prospective business outlook at the high end of the market.

But again, I'm cautious here because of the difficulty in getting big decisions over the transom and into the boat.

Obviously the sales perspective is kind of a leading indicator of what's -- what we see going on with the economy and it was the first thing, if you go back over a year ago now, we started talking about how we started to see it scale back a little bit and sure enough, that's exactly what happened.

So it is our leading indicator.

As Gary said, the pipeline is a lot more activity, but we haven't yet seen the ability to close at a greater rate.

And so you would expect as our guidance lays out, that our growth in sales is actually going to decline in the fourth quarter more over the fact that it has a hard year-over-year compare to the fourth quarter of last year, but we haven't begun to see the closings of those sales at a greater rate.

As soon as we do, we'll let you know.

We are seeing more in the pipeline and more activity, but nothing at a greater rate of closing yet.

And any differences in trends you're seeing in the pipeline between the US and international?

We're actually seeing a little bit of a slowing internationally because they are dragging us.

They are behind us six to nine months, so we're seeing some improvement here, but some decline particularly as we look at Europe.

Okay, and then last question on dealer services, could you maybe -- I don't know if you covered this earlier, could you help us understand what kind of cost containment steps you are taking in dealer services, and the follow up to that would be how much could you -- how much of a revenue decline could you absorb there before margins start to trend down in dealer services?

Well, that's a hard question, since I really don't know how much revenue is going to come down.

Obviously we have about 7000 associates in dealer services, and clearly as the backlog of new business has contracted, we have been right sizing our implementation there and some other organizational consolidations that we've done.

Again, I think we're in pretty good shape, as the forecast that we've got now.

And until we really kind of right size what happens with GM and Chrysler, I think it's pretty hard for us to make that kind of forecast in terms of what kind of one-time expense we might have versus recurring expense we might have.

So it's a pretty difficult question to answer at this point.

Okay, thank you.

Our next question comes from Franco Turrinelli of William Blair company.

Please state your question.

Good morning, guys.

Good morning.

Chris, could you help us think for a little bit of the changes in average client funds balance?

I mean obviously that's affected by the pace for control.

I'm assuming there's also probably some lower salaries impact offset by new sales.

But can you kind of walk us through what's going on there on a year-over-year basis?

Yeah, it's obviously all of the above.

And we're expecting 2 to 3% decline in total.

You also have an impact of foreign exchange in that, so almost a half of that decline in the 2 to 3% is related to the foreign exchange, and primarily the Canadian dollar, a little bit of the UK pound as well.

In the decline that we saw in this quarter, it wasn't quite half.

It was about a third would relate to foreign exchange, of that 6%.

The rest is just a continued impact of pays for control, lower wage growth, particularly in that quarter is when a lot of bonuses get paid out, and obviously the bonuses were a lot less than they were the last year, so those are the combination of things that impact the, those balances.

On the flip side, it sounds as though you're having good success selling tax pay and other things that generate slow balances?

Yeah, the amount -- we're selling fewer new payroll clients this year than we did last year, which also impacts that growth, but our percentages of tax that are sold as a percent of total sales is really not changed year-over-year.

Excellent.

Thanks for all the help.

Yep.

Our next question comes from Michael Baker of Raymond James.

Please state your question.

Thanks a lot.

I was wondering if you could give us a sense for how the economy is impacting the different client segments, kind of large, medium and small in terms of layoffs.

That's my first question.

Actually, we really can't see layoffs.

We can see, shrinkage and pays for control for clients who were here last year, as well as this year.

The largest decrease is in the midmarket.

Last recession, the largest decrease was more at the high end of the market.

We're seeing less decline at the high end of the market than we are the mid part of the market.

And in the low end of the market, it's less decline than what we're seeing in the midmarket as well.

So down, but not as much as in the core auto pay.

And then you provided some clear color on some detailed areas from a sales perspective.

I was wondering if you could comment just kind of overall on beyond payroll how that's coming along and give us some sense of what your thoughts are on the telesales staffing side of things.

Well, telesales, of the $1 billion this year should approximate around $100 million worth of new sales that come out of telesales.

We continue to staff up in telesales, particularly in our insurance services, workers' comp, and healthcare, and we're continuing to expand the telesales effort, selling 401(k) plans, particularly at the low end of the market.

So those sales are continuing to do quite well and, again, beyond payroll, whether it's time and labor management, seeing a lot of activity in benefits outsourcing right now, and as I mentioned earlier, COBRA sales are great.

And just on the point of COBRA sales, obviously you've seen earlier cycles, and in this cycle, what's different is you have the government subsidy.

Can you give us a degree of magnitude as to how much it's up beyond what you would have normally thought?

Again, it's more anecdotal because the COBRA business is not really that material to the business.

And if you went back and looked at the last time we had this kind of downturn in the economy, the COBRA business was quite small.

But our revenues today in COBRA are 30, 40% over last year, based on participation and also the government regulation that allows you to go back and file for past benefits all the way back to last October.

Thank you, Gary.

You have time for one or two more questions.

Our next question comes from Mark Marcon of Robert W.

Baird.

Please state your question.

Good morning.

Wanted to ask about dealer services from a longer term perspective.

Let's say that Chrysler gets cut back materially.

GM cuts back in line with the current plans that have been articulated.

And there's going to be an adjustment period.

But overtime, if sales of autos normalize, can you talk a little bit about how your revenue stream would work with the dealers that survive, which presumably would all end up being stronger and therefore would ultimately end up needing more seats?

Yeah, the international markets, if you look at the projections on global growth of automotive vehicles, it's a pretty good positive trend around the world.

Obviously that growth is not nearly as dramatic, particularly historical comparison, in Western Europe and the US.

So you'll see us in North America move toward the applications like voice-over IP, our CRM applications, and some of the things that we're doing in internet marketing and BPO activities in the front end of the dealership.

So I think you'll see more of a shift to new applications in the core markets in the US.

I think you'll see us drive a lot of those same kind of applications across Europe as we do that and you'll see us get a lot of new share in Asia-Pacific.

So I think it's going to be a tough year or so, but So I think it's going to be a tough year or so, but I think once we get through it, our relative position to the competition and our relationships with the manufacturers has never been stronger in the 30 years I've been watching this business.

I would also refer you back, Mark, to Steve's presentation back at the March meeting.

Go back to page 6 in that deck and it kind of lays out what's going to drive the five-year growth in dealer.

And I think that all still holds.

As we've said this morning, the impact of GM and Chrysler basically just accelerate the issue that we had in the five-year plan.

And I think if you think about it that way, you'll see higher growth at the tail end of that five years coming off of slower growth in the early years.

But the rest of that presentation still holds pretty well.

I appreciate that.

I was just trying to understand the core service offering in North America, because it seems to me that part of the intent of scaling back the number of dealers is to make the remaining dealers stronger, therefore the volume that goes through those dealers is going to be higher.

So I was just trying to understand to what extent--

Well, you have to also remember that we are disproportionately skewed to the high end of the market.

We've got 70% of the public companies in that marketplace and they are continuing to gain share in the top 100 kind of dealer groups.

So we think our dealers in that segment will be stronger and will buy more applications and more services from ADP.

At the same time, I think there are going to be pressures on the low end of the market for consolidations and closings.

And that's one of the wild cards here, because as they close some of these sites, we don't know if some of the larger dealers will buy those sites or whatever the case may be, because if you already have a Chevy franchise and you get another location available in a geographic area you want to be in, there's no reason why an Auto Nation or a Sonic or one of those folks wouldn't buy one of those sites.

I would also say that our product offerings are broader now and they specifically address the issue you're raising, which is making the remaining dealers stronger in terms of more cost efficient and getting to their customers easier.

So things like digital marketing that we've talked about in the past, which is a redirection of the advertising spend from the print media into the internet, should help do exactly that, as would IP telephony in terms of making them more efficient within their dealership and addressing customer needs and customer service.

So, I think we're well positioned to take advantage of exactly what you just described.

Right.

And can you talk a little bit about just the retention issue as it relates to midmarket on just a core payroll and the comment about pricing?

Are you seeing some of your competitors that are actively just trying to poach some of your clients on price, and how do you respond to that?

Apologize if this was asked earlier, but I hopped between different calls.

In the midmarket, we are away and beyond the largest provider.

And historically that's where a disproportionate amount of our base is, because we've been selling in that environment for a long period of time, and in that area, we're more the pricing umbrella than we are at the high end of the market or the low end of the market.

So when you have 50% outsource and we have 50% of that 50%, we're obviously easy to find in that marketplace.

So again, this is not new, but a lot of competitors, whether they are local or nationals will typically try to unhook our base.

We do find if we know they are there, where we sometimes get surprised is we don't know they are there, and somebody comes along and offers a big discount in the hopes of then raising prices over time on that client.

But I mean you have -- from a processing scale perspective, you've got the scale advantage and you presumably should have the lowest -- you should be the lowest cost provider -- that's not something they can ultimately win at, is there?

Well, clearly we are the low cost provider.

We clearly have the largest scale and the largest share and it's clearly tougher for them today because they can't really earn a lot of interest on the float because they are not a AAA or have ADP's extended ability to invest in the portfolio.

But again when you're desperate for new business, sometimes desperate people do desperate things, and are willing to take very low or no margins just to lock up a client.

And we're seeing some of that today.

Thanks for the color.

Thank you.

And our last question comes from Jason Kupferberg from UBS.

Please state your question.

Thanks for squeezing me in at the end here.

I appreciate it.

I wanted to start with a question on SG&A.

I guess it was down 11% year-over-year on the quarter, which was nice to see the cost execution.

I guess the last time we saw a decline of this magnitude checking back on our model was back during the last recession.

I know you guys have said in the past you don't plan to cut back on OpEx this time around, so how should we reconcile what seems to be pretty significant cuts this time around relative to last time around?

Then maybe if you can parse out sort of the S piece versus the G&A piece of that line item so we can get an idea of where the cuts are coming from and then how sustainable those might be when the economy eventually improves?

Right, Jason.

Couple of things going on there.

And some of it's the geography on the P&L.

If -- you mentioned SG&A is down 11%, but if you notice, operating expenses is about flat.

Operating expenses is where most of our service cost is and service cost is actually up year-over-year.

And so we are very conscious of not focusing on cutting service back and duplicating the issue that we had coming out of the last downturn.

On the SG&A piece, that is down 11%.

Some of that is the -- related to the selling expense on lower sales, which naturally goes down.

But the remainder, and the largest piece of the reduction is cost containment on the general and administrative side, which is in areas that aren't as close to the customer and we feel more comfortable in being able to take out process costs, et cetera.

So continue the aggressiveness and the G&A costs, also see declines in our systems and programming, our R&D costs.

That actually is an interesting story in that it's -- although it's down, we actually have more heads doing it, and we are producing more and that's a direct result of our offshoring to India, which we've done over the last couple of years, and so a significant number of our R&D heads are now in India at a much lower cost.

So we're able to produce more at a lower expense so we're very focused on where we're taking costs out.

Okay, and last question, maybe just to end the call on, when we roll everything together that we've heard with new sales and pricing and all the other leading indicator metrics here at the end of the day, what's your overall confidence level that on an organic constant currency basis, your revenue base in aggregate can grow in fiscal 2010 versus fiscal 2009?

Again, other than talking about the indicators that we've talked about, we're not going to make a forecast for fiscal 2010.

There's still so much unknown in what's going to happen with dealers.

There's a lot of unknown on what's going to happen with employment.

So I think it would be inappropriate for us to comment on fiscal 2010 other than my comments previously around retention and new sales being at current levels or above, I think it would be inappropriate for us to comment beyond that.

Okay.

All right.

I'll follow up then.

Thank you guys.

Thank you.

Well, we appreciate everybody signing in today.

Obviously this is a challenging time for the US economy in general and ADP in particular.

But I feel pretty comfortable with where we are, particularly on the expense side, and we look forward to talking to you at the end of the fourth quarter when we give you our fiscal 2010 forecast.

Thanks for coming.

Thank you.

Thank you.

This does conclude today's teleconference.

We thank you for your participation.

You may disconnect your lines at this time, and have a great day.