自動資料處理 (ADP) 2010 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to ADP's third quarter fiscal 2010 earnings webcast.

(Operator Instructions).

Thank you, I would now like to turn the conference over to Elena Charles, Vice President of Investor Relations.

Please begin.

Good morning.

Thank you.

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 first quarter 2010 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 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 first quarter of fiscal 2010, and all prior periods have been updated to reflect fiscal 2010 budgeted foreign exchange rates.

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

And 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.

Thank you, Elena.

Good morning, everybody, and thank you for joining us.

Let me begin today's call with opening remarks about our first quarter results.

I will then turn the call over the Chris Reidy who take you through the detailed results, and then I will return a little bit later to give you an updated forecast for fiscal 2010.

And before we take your questions, I will provide some concluding remarks.

To begin, ADP's first quarter results were against very tough comparisons a year ago, when we posted 9.5% revenue growth, pretax margin expansion of 100 basis points, and 20% EPS growth.

As you recall, it was toward the end of the first quarter in fiscal '09 that the financial market volatility led to the most difficult economy in decades.

So considering the cumulative economic impact on ADP's business metrics in the quarter, which include lower new business sales, lower client retention, lower client fund balances, fewer number of pays, and continued dealership closings, I am encouraged by what we achieved this quarter.

Revenues for the first quarter declined 4% year-over-year, but were slightly ahead of our expectations.

Foreign exchange rates gave us a revenue benefit of 1% in last year '09's first quarter, but had been working against us throughout fiscal 2010 in the first quarter.

The current quarter's revenues were negatively impacted about 2 percentage points from unfavorable exchange rates.

However, I am pleased that ADP posted positive growth in both pretax and net earnings of 1 and 2%, respectively.

Earnings per share from continuing operations grew 4% on fewer shares outstanding.

New business sales declined 2% in the first quarter, which is an improvement over the declines posted throughout fiscal 2009.

These results were ahead of our expectations, but were mixed by business unit within Employer Services.

Sales in our National Accounts division declined year-over-year as the sales cycle for larger companies remained challenging with continued delays in outsourcing decisions.

Sales to mid-size companies in our Major Accounts division grew compared with last year's first fiscal quarter.

Our International division also grew sales, with particular strength in GlobalView.

Sales in our Small Business Services division were down year-over-year.

However, we view the quarter's results as quite solid, considering the sales headcount reductions that were made in last year's fourth quarter.

TotalSource sales, which includes our PEO, were also strong in the quarter.

Client retention continues to be under pressure, but is still at historically high levels, even though down 1 percentage point in the quarter in Employer Services.

As you know, January is the critical retention period in our ES business, so we are appropriately cautious about the full year retention metric.

The number of employees on our client's payroll on a same-store basis also declined in the quarter from a year ago, down 6.5%, which is slightly better than we anticipated.

This decline is against a compare of an increase of .4% in last year's first fiscal quarter.

Let me leave ES and talk for a moment about Dealer Services.

As you may know, General Motors will be discontinuing the Saturn brand and closing those dealerships, as the plan to sale the brand fell through just some few weeks ago.

As Chris will tell you in a few minutes, Dealer Services did record an intangible asset impairment charge in the quarter due to this expected closure of the Saturn dealerships.

The annualized loss of revenues from the Saturn relationship is about $12 million to ADP, and we anticipate the full-year impact of this revenue loss won't actually occur until fiscal 2011.

To help you with your perspective on this, we had previously estimated that the impact to Dealer Services for industry-wide dealership closings over the next 12 to 18 months was at the low end of our original 50 to $75 million estimate.

This is still the case, including Saturn, because we have done much better than previously forecasted with other manufacturers' dealerships closing.

Additionally, many of the closed dealerships were much smaller with low car sales volumes, so they have impacted us far less than our average dealer client.

Some of these dealerships are also becoming used car dealerships or are staying in business as service centers.

I also want to point out decide the continued tough economic market, Dealer Services is continuing to do very well on the competitive front.

With that, let me turn it over to Chris to provide you the details on our results.

Thanks, Gary, and good morning, everyone.

We are on Slide 4.

Total revenues declined 4% to 2.1 billion in the quarter.

This decline reflects the cumulative impact of the difficult economy that begins toward the end of last year's first quarter.

The quarter was also negatively impacted 2 percentage points from unfavorable foreign exchange rates due to a strongest US dollar.

Pretax earnings were up 1% and net earnings were up 2%.

The quarter's earnings benefited from lower headcount resulting from last year's fourth quarter restructuring.

Before I continue with the results, I want to allay any concerns about our lower headcount.

We have not cut too deeply into critical client facing areas.

As you have heard us say numerous times, we learned our lesson from the early 2000s where we did cut too deeply and it took us longer to hire up and to grow our sales engine.

With the exception of sales headcount for the small business market, we have pretty much held our sales headcount levels ahead of an economic recovery.

As a result, we believe we are better positioned than we were five or six years ago to emerge from this economic downturn.

We are also investing in our service organization, FTEs or full time equivalents, are up year-over-year, primarily in (inaudible) locations.

We anticipate growing service headcount throughout fiscal 2010 in this area.

Additionally we continue to invest in products such as Run for the small business market, and Workforce Now for the mid-market.

Earnings per share from continuing operations increased 4% to $0.56 a share on fewer shares outstanding.

As you saw in this morning's press release, we spent about $13.7 million to purchase over 360,000 ADP shares.

This may be lower than many of you anticipated, so I want to reiterate our commitment to returning excess cash to shareholders.

We continue to anticipate strong operating cash flows in the $1.5 billion range for fiscal 2010.

As such, our full-year target to repurchase 300 to 400 million worth of ADP shares during fiscal 2010 remains intact.

Assuming the landscape doesn't change significantly from where we are today, you can expect a steadier level of share repurchase for the balance of fiscal 2010.

Now let's turn to Slide 5.

Employer Services total revenues declined 3% for the quarter.

This was a very tough comparison versus a year ago, when ES revenues grew 8%.

Revenue in our payroll and tax filing business in the United States declined 7% in the quarter, from lower new business sales during fiscal 2009 compared with the year earlier, lower client fund balances from slower sales, lower wage growth, (inaudible) employers on our clients' payrolls and lower client retention.

Our beyond payroll revenues in the US continue to grow, with 3% growth in the quarter.

ES's pretax margin expanded 70 basis points, benefiting primarily from lower headcount levels due to expense actions taken in last year's fourth quarter.

You can read the rest of the stats on the slide, as Gary took you through these key metrics in his opening comments.

Now let's continue with the quarter's results and turn to Slide 6.

The PEO reported 6% revenue growth for the quarter.

This growth was entirely due to increased benefit pass through revenues that resulted from increases in both benefit rates, as well as the number of work site employees.

Pretax earnings included a 9 million benefit from the settlement in the state unemployment tax matter.

Pretax margins declined 125 basis points, excluding the $9 million benefit.

Lower headcount and continued expense control was offset by higher pass through revenues, as well as increased promotional activities to drive new sales.

Year-over-year for the first quarter, average work site employees increased 3% to over 195,000.

Now let's turn to Slide 7.

Moving on to Dealer Services, revenues continue to be negatively impacted by the cumulative effect of dealership closings and consolidations.

Revenue for Dealer Services was slightly ahead of our expectations, declining 4% in the quarter.

Transactional revenues, although lower than a year ago, were higher than anticipated on higher volumes from the Cash for Clunkers program which pulled the car sales volumes, and thus transactional revenues, into our first fiscal quarter.

As you know, GM's deal to keep the Saturn brand alive fell through a few weeks ago.

As a result, Dealer Services recorded a $7 million impairment charge relating to an intangible asset from our fiscal 2004 acquisition of a business that provided DMS solutions to Saturn.

Dealer's pretax margin declined 130 basis points, but increased 90 basis points excluding this charge, primarily as a result of the expense actions taken in last year's fourth fiscal quarter.

Dealer Services has also continued to be very successful with increasing its share, despite the market consolidation.

Now let's turn to Slide 8.

We're continuing to use this schedule that you're all quite familiar with by now, because it shows a clear (inaudible) view of the overall impact of the Client Funds portfolio Extended Investment Strategy.

Our disclosure of the Client Funds' Extended Investment Strategy includes the break down 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 break down 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, the total representing the interest on funds held for Clients' P&L revenue line item.

And near the top of the slide, you can see that the average Client Funds balances were down 1.4 billion compared with the year ago period.

Lower wage growth, fewer pays, slower sales, and the negative impact of the Canadian foreign exchange rates compared with a year ago all contributed to the decline in average Client Funds balances.

In addition to the decline in average Client Funds balances, the average yield on the Client Funds declined 30 basis points to 4% this quarter, resulting in an overall decline of 24 million in interest on funds held for clients on the P&L.

The impact from the lower new purchase rates were most pronounced in the Client's short portfolio, where the average yield earned was 240 basis points lower than last year, due to the decline in the fed funds rate.

Average borrowings were up this year; however, the average interest rate paid on these borrowings dropped significantly, 210 basis points, to a blended average borrowing rate of .2%, the result of a $15 million reduction in interest expense and positive impact to the P&L, since the lower rate was more than offset by the higher borrowings.

So when you take into consideration the entire extended strategy presented here, the result was an $8 million pretax decrease, or a decline of only about 5%.

I would like to remind everyone that the decline in interest rates accelerated in October 2008, making this quarter the easiest comparison to fiscal 2009.

The estimated P&L decline increases as the year progresses, as you will see the full year forecast on the next slide.

Now let's turn to Slide 9 where I'll take you through the extended investment strategy forecast for fiscal 2010.

Before I get into discussing the detailed forecast, I would like to update you on the credit quality of the portfolio.

I want to again state that the safety and liquidity of our clien'ts funds continue to be the foremost objectives of our investment strategy.

Client funds are invested primarily in fixed income securities in accordance with ADP's prudent and conservative investment guidelines.

Over 80% of the portfolio remains AAA or AA rated.

Net unrealized gains as of the end of last week totaled 665 million, which is up slightly from the net gain as of September 30th reported in this morning's earnings release.

I would also like to point out that no asset class is in a net unrealized loss position within the 665 million net unrealized gain amount.

While the level of unrealized gains will change as the interest rate environment changes.

The way to think about this is that the unrealized gains indicate we are holding securities yielding higher rates than current market rates.

As part of our extended investment strategy, our intent is to hold these securities to maturity and earn these higher than current market yields.

Now to the fiscal 2010 forecast.

This slide summarizes the anticipated pretax earnings impact of the extended investment strategy of the Client Funds investment portfolio for fiscal 2010.

We are anticipating a decline in average Client Funds balances of 5 to 6%, which represents pressure on the level of new business sales, continued pressures on wage growth, as well as the number of employees on our Client's payrolls.

We are anticipating a yield on the Client Funds portfolio of about 3.7%, down about 30 basis points from fiscal 2009.

It is important to keep in mind, about 20% of the extended and long investments are subject to reinvestment risk each year, all of which result in a decline of 70 to 80 million in Client Funds interest.

We are anticipating that average corporate extended balances will decline about 300 to 400 million, in line with the expected decline in average borrowings.

The average yield on the corporate extended is expected to be about flat.

We anticipate average borrowings will decline about 300 to 400 million, and the average interest rate paid on these borrowings is forecasted to be down again in fiscal 2010 about 80 basis points, so a blended average borrowing rate of .3%.

Taking into consideration the overall extended investment strategy, including lower borrowing costs, we anticipate a 65 to 80 million decline to pretax earnings to fiscal 2010, which is about a 10 million higher decline than our initial forecast.

Now I will turn it back to Gary to take you through the remainder of the forecast for fiscal 2010.

Thank you, Chris.

For those of you following along, we are now on Slide 10.

We are assuming in our fiscal '10 outlook no change in the current economic environment, and we continue to anticipate tough year-over-year comparisons for the second quarter, but easing comparisons in the second half of the fiscal year.

Having said that, we are narrowing our forecast range.

We now anticipate a decline of 1 to 2% for total revenues, and diluted EPS from continuing operations of $2.34 to $2.39 which represents flat to a 2% decline from the $2.39 in fiscal '09 which did exclude favorable income tax settlements in the fourth quarter of last year.

As is our normal practice, no further share buy backs are reflected in this forecast, so it is clearly our intent to continue to return excess cash to our shareholders, obviously depending on market conditions.

For our reportable segments, we anticipate Employer Services revenues declining 1 to 2%, which reflects a decline in pays per control of 4 to 5%, and flat to down 1 percentage point in client revenue retention.

We anticipate that the year-over-year comparison for pays per control will begin to ease during the second half of fiscal 2010 as compared to the second half of fiscal '09 when this important metric declines significantly.

We do anticipate PEO Services revenues will be up 4 to 6%, and we do expect a decline in Dealer Services revenues of minus 3 to minus 6%.

We anticipate the annual dollar value of ES and PEO worldwide new business sales will be about flat compared with last year's fiscal '09, and we continue to anticipate no improvement in pretax margins.

As you turn to Slide 9, I would like to leave you with some closing remarks before we open it up for your questions.

Clearly, ADP's near-term growth has been under pressure from the difficult economic landscape.

We have appropriately reduced our expense structure to align the forecasted near-term lower revenue growth, while continuing to invest in new products and client facing resources that will help drive our strategic growth initiatives.

We are more positive on fiscal '10's full-year outlook than we were just some three months ago, as it appears the US economy is at the bottom of the downturn.

We continue to expect strong operating cash flows of about 1.5 billion, and we do anticipate another year of 20% plus ROE in fiscal 2010, which I believe is quite strong relative to the economy.

Our prudent and conservative Client Funds Extended Investment Strategy, coupled with the strength of our AAA credit rating, continue to serve us quite well, and we remain committed to returning excess cash to our shareholders, including ongoing share repurchases; again, obviously depending on market conditions.

Our business model is solid, and remains intact, with highly recurring revenues and client life cycles of just under ten years.

I continue to be confident that once organic revenue growth returns, we will again be able to achieve consistent pretax margin expansion.

The questions now as I see them are how long the economy remains in this trough, and when will we begin to see some evidence of economic growth?

I'm certainly not an economist, so I don't know all of the answers, but what I can tell you is that ADP is extremely well positioned to leverage the inevitable recovery in the economy.

That concludes my comments, and I'll turn it back over to the operator to take your questions.

(Operator Instructions).

Your first question comes from the line of James Kissane with Bank of America-Merrill Lynch.

Guys.

Morning, James.

Do you have a sense of the magnitude of the decline in the sales in the small business arena?

Maybe give us your sense of the tone in small business, as well as the pricing environment there?

Thanks.

Actually, the tone is -- it is really pretty positive.

Our productivity per sales person is up, and our sales are down less than the amount of headcount, obviously, that we reduced.

We are still seeing some price pressure there.

It seems to be abating somewhat, but it is still there, so I don't want to give anybody the impression that it is gone away.

But it is certainly not getting worse, and it is abating.

So actually, we are pretty encouraged with the sales seen on the small end of the business.

Okay.

I know you don't give out paced control by segment, but just kind of a sense of how small business is doing relative to the other areas within Employer Services?

It is actually down a little bit less, than with the rest of the world.

Okay.

Got you.

Okay.

And then on the other end of the spectrum, maybe a little more on GlobalView.

I mean, it sounds like demand has picked up there.

Any update on when you will achieve breakeven there and how the implementations are going for GlobalView?

Thanks, and good job.

We had a really strong first quarter in global view sales.

We had a number of big deals that had been in the pipeline that came to fruition.

I think we are still a year or two away from breakeven on GlobalView.

But the loss continues to come down, and we are committed to this product and this whole program over the long term, and we are going to continue to do what it takes to drive the top line.

Great.

Thanks, Gary.

Your next question comes from the line of Ashwin Shrivaikar with Citigroup.

Hi.

Good morning, guys.

Morning.

As you look at the recovery, are there certain parts of your business that you sort of expect to come back quicker or slower than others?

And I know you are not clearly talking 2010 yet -- maybe 2011.

But could you talk about that?

I think the thing that will come back first is new business sales, because as the mood of the country and world changes, people are more comfortable making decisions for the long-term about infrastructure and how they deal things.

I would expect some of the balance growth to come back before the pay growth comes back, because people will start working over time, getting some stock option profits back into the equation, and hopefully you will stop reducing the number of pay.

So I would expect some balances to come back.

With the strength of our product line across the board, I don't see any place in particular coming back faster than somewhere else.

So I think it will be kind of the same across the board.

Thanks, that's useful.

So this is less related to (inaudible) than your own investment in various product, but can you also talk about the -- going forward, the expected revenue margin profile in areas like BPO?

When you say the margin -- well, obviously the margin in BPO, where you are doing employee centers, you have a much larger labor component, they will be less than they are in, say, traditional payroll.

But again, they're very acceptable margins, and we are going to continue to grow there.

We've added a lot of BPO services over the last three or four years, and if you followed us, our margins have improved every year during that same time, with what we have been expanding in BPO.

So I don't expect it to be any significant impact on ADP.

Certainly not against the average margin on ADP.

So it might be less than pure payroll in certain instances, but not against the overall market.

Great, then that's the clarification I was looking for.

Thank you.

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

Thank you.

Good morning.

I guess the first question, I just want to drill down a little bit on the sales activity and get a sense for how it progressed during the quarter.

And my point here is that, Gary, your tone seems markedly different than it was in July.

Am I reading too much into that?

And maybe a little bit of contrast across segments.

I'm -- don't be confused, I'm definitely encouraged.

I kind of think we are in the trough and starting to come up the other side.

There are always puts and takes when you deal across as wide of a spectrum as ADP, but in general, the tone of the sales group and our results is certainly encouraging.

Don't read into that that I am buoyant, but I am certainly encouraged.

Okay.

Any contrast across the segments, or maybe a little bit more granularity opposed to just directionally ups and downs?

The only place where we were discouraged or weren't encouraged was in the high end in the North American marketplaces.

We are still seeing corporate America not as willing to make fairly big decisions.

It is a little bit in contrast to the fact that actually our International sales results and our GlobalView sales results were strong.

They weren't even just good, they were strong.

And so the global countries -- and Europe certainly didn't universally go into the trough as deeply as the US markets.

And so we've continued to see pretty good sales results in Europe, and it was refreshing to see GlobalView bounce back and kind of reaffirm the value equation that we thought was represented in GlobalView.

So with the one exception of the high end of the market in the US, we were pretty encouraged.

Any way to put some metrics on this?

I mean, was national down double digits?

Was International up double digits?

Any way to frame it directionally?

I don't think we want to go there.

I mean, we typically don't report those kind of things.

I mean, none of them were off the charts in either direction.

Okay.

So I would really like to leave it where it is.

Okay.

And then just finally, how are you feeling about where your cost structure is at this point?

Have you kind of taken the major initiatives and efforts sort of going into this year that you needed to?

And given the sort of sense of stability and improving sales tone, do you feel like you are at a place where you are comfortable?

Yes, I do.

Okay.

Thank you.

Your next question comes from the line of John Williams with Goldman Sachs.

Good morning, guys.

This is John in for Julio Quinteros.

I was hoping you could possibly give a little bit more color on your FX expectations for the next year?

Sure.

It is moving all over the place, that's for sure.

What we do is we look at the last three months average when we provide our forecast, and so that's the basis of the forecast.

Then we obviously look at the spot rate, and we use that to stress the upside, downside.

So obviously the dollar has gotten a little bit weaker more recently, and so we take that into consideration on the upside.

But that has moved around quite a bit.

And as you know, this is the -- the first quarter was impacted by two full basis points of revenue growth because of the compare against the first quarter of last year where, for example, the dollar against the Euro was about $1.52.

Last year in the second quarter, that dropped significantly -- into the $1.20s, actually.

So we would expect the compare to be a little bit better going forward, and actually be getting a lift in revenue from the compares.

So the way to think about that is we use the average, but then we look at the spot, and our revenue guidance takes that into consideration both on the high end and the low end.

Okay.

The other thing I just wanted to quickly ask you about was on the margin improvement, you guys said you don't really expect any pretax margin improvement, but it seems as though your commentary is a little bit more positive than it has been, and you certainly got expenses under control.

And just wondering, is that related to our other comments about how long we are going to sit in the trough, or is it just the fact that you guys haven't changed your other economic assumptions that is really leading you to say you are not going see margins expand this year?

It is really a factor of the fact that it is too early to tell at this point.

It is too early to call it.

The first quarter really isn't indicative of the full year.

If you went back to last year, for example, the first quarter only represented about 20% of full year's NOI, and margins in the first quarter, in the 24% versus the 27% that they ended for the full year '09.

Our guidance is down 1 to 2% in ES revenues.

That one percentage point makes a big difference in $65 million worth of revenue.

So it is hard to get a clear picture depending on where it is in the range.

We are continuing to invest in service, so we will continue to do that throughout the rest of this year.

So overall, it is just too early to call, so our best view right now is no increase in margins.

Okay, thank you, guys.

Appreciate it.

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

Morning, Rod.

Hey, good morning to you guys.

Nice to hear the better tone.

I wanted to inquire about that.

Can you specify, what are the main economic trends that are causing you to site stabilization, and to indicate that US economic may have troughed at this point?

I mean, can you -- is it mostly in some of the employment metrics that you guys have unique visibility into, or is it just the general GDP trends that we're seeing in the world?

I think it is general trends, but the thing that I find most encouraging is the sales team, and people's willingness to invest in infrastructure kinds of services like we provide.

Clearly, the pays per control is leveling off in terms of the client, and we think it will start to go the other way.

And as you look at the National Employment Report that came out, it is certainly getting less worse is, I guess, the way they described it on CNBC this morning.

And I do believe that the decline in balances is going to -- is kind of at the bottom and it is going have to come back up as the economy turns.

Yes, I mean, six months ago you accurately predicted where your pays per control would go to this point in the year, and now you're indicating that maybe it is going to go the other way.

So I mean, you have easier comparisons, so that is probably part of the reason why you think pays per control will get better.

But beyond the easing comparisons, it sound like you may be seeing things in the market that makes you more encouraged on the pays per control employment growth front.

Is that accurate?

That's not really -- when you say the market, the sales scene, again, is more positive than it has been.

But from a standpoint of pure market, we are not seeing anything different than what you read in the paper and the same stuff I read.

I think it is more when we gave guidance back in late July, I think the economists were predicting anywhere from 10.5 up to 11.5% ultimate unemployment.

I think since then you have seen a lessening of the decline, as Gary put it, and so there's more settling around that 10.5 to 11 kind of range.

And I think we have seen that in the first quarter where pays were a little bit better.

It is still pretty bad at 6.5%, but better than we had forecasted, and so we see that continuing.

We see it in the NER report today in terms of the decline, certainly less of a decline than there was in prior months.

So I think it is that combination that point us to a slight improvement -- still pretty bad, but a slight slight improvement for our full year forecast on pays.

Just as an extension of that, your commentary on the small business segment, you cited you are more encouraged in that segment.

And I guess I'm wondering, is that due to share gains, or is there something happening with small business formation that is more encouraging there?

I don't have any hard statistics that I could share with you, Rod, other than our productivity at the individual sales person level is up this year versus last year.

But again, that is on a reduced headcount.

So we are not seeing, per se -- we don't track sales and where it comes from in terms of new business formation versus somebody that's already been in business for some period of years.

So most of my evidence is anecdotal as opposed to imperical, and that's really about the best I can provide for you.

All right.

One final quick one, has pricing and discounting activity become less bad or sort of more encouraging on that front?

It seems to have calmed down.

It is still there, but it's not at the heightened level that we saw, say, six months ago.

Great.

Thank you, guys.

Thank you.

Your next question comes from the line of Jason Kupferberg with UBS.

Thanks.

Good morning.

Wanted to start with a question on core payroll here.

I know it was down about 7%, and wanted to get a sense of where you guys think that can go in a more normal economy, if you will?

And maybe as part of that answer, if you can talk a little bit about how you guys view current market penetration in core payroll across the small, medium and large segments, and to what extent those penetration figures have changed in recent years?

I think a number of years ago you guys used to call out some of that data at analysts meeting and so forth.

I don't know that I have seen any of that recently, so I would love to get an update if you have it.

Thanks.

The -- in terms of core payroll and tax, which is the way we look at it, I guess this time last year, that number was, I think, plus 7 or 8%.

So I think that will give you a pretty good idea of where we think it can go once we return to a normal kind of environment.

Clearly, the balances are affected by pays, they're affected by new sales, they're affected by bonuses which have been down 30 to 40%; they're affected by merit increases, which generally you get 3 to 4% on, which we think you have gotten very little of over the past 12 months.

So those kind of things will clearly help us propel that.

But again, new business sales are the single biggest thing that help all of our businesses.

But in the case of balances, we think we will get some natural lift across that.

I don't have any updated numbers on market share to share with you this morning.

Typically, our SBU presidents go through that at our analysts meeting, which we will do again in February.

But I don't think there's any real significant change to where it was the last time we shared it with you in March.

Okay.

And just turning to the ancillaries, the beyond payroll service offerings in ES, can you talk about the specific offerings that you guys think have the most significant near-term and long-term potential in terms of actual financial impact for ADP?

Well, I think the single biggest area is our HR BPO activities, which would include the PEO as well as the new ASO offering, and the mid-markets, as well as our COS offering at the high end.

So you put those three coupled with GlobalView and they're probably the biggest things that will drive long-term internal revenue growth.

And our results in all those categories are quite strong, and we expect they're going to be an even bigger portion of go-forward sales than they have been historically.

Okay, and if I can just squeeze one more in, I know you have got the key year-end selling season coming up here in the next couple of months or so.

Do you expect any material difference in the competitive dynamics this time around?

I mean, are you guys planning to operate in any different fashion this time around, as we hopefully are coming out of this downturn?

Maybe an opportunity to pick up some more market share?

Well, the -- I wouldn't say there's going to be any material difference than what our traditional activities have been.

The year-end is -- in national accounts, pretty much the year-end is not a big thing, because if you haven't sold it by November, you are not going to sale it for a January 1 start.

So --

Right.

The real key activity is in SBS and the PEO, and to a lesser degree at the low end of major accounts.

We have typical promotional kind of activities going on there.

We are very excited about what's happening with our new Run platform on the low end of the market.

It is getting really great traction in the marketplace.

And we just introduced for general release our Workforce Now product in the middle market, and it is basically a new product that has a single user interface for time and labor management, payroll, and HR benefits.

And so it is really getting great traction, and so we think the strength of the product is going to help our major accounts marketplace a lot.

Okay.

Good luck.

Thanks, guys.

Thank you.

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

Hi guys, good morning.

You've cited for a while, even outside of the recent improvement in GlobalView, I think somewhat stronger International performance, at least on a relative basis to the US.

Can you give us a sense of what's going on there, what your product portfolio looks like right now outside the US, "x" GlobalView?

And are there real long-term growth opportunities, or is it much more that you're focused on GlobalView?

GlobalView is certainly doing extremely well.

We have another product called Streamline which we haven't talked about a lot.

But for example, there are a lot of companies, including some of our GlobalView clients, who have small, employee populations in a lot of countries, and it doesn't pay to put in a fully burdened SAP implementation.

And we have developed a software layer that allows for integration with our best-of-breed products, where you have smaller populations into the GlobalView data base and single feed into our global customers.

It is getting a tremendous amount of traction, and it has certainly been one of the things that has done well for us.

We have expanded our headcount in Europe over the last three years, and some of that headcount is now maturing in terms of productivity, and so we are getting real good benefits there.

We are also pleased with our acquisition in China, the small payroll service bureau based in Shanghai, and we are starting to get good results there as well.

And we have got some other kinds of HR products and self-service product that we've release across Europe that are also helping us drive core payroll.

So in general, the scene in International, and Europe specifically ,is actually quite good.

I would just add that we are also doing well on the money movement side in International as well, particularly in the UK, but we have started that up in the Netherlands and we've already made some progress, although the early stages in France as well.

So that is something that we are particularly encouraged by.

Okay.

Gary, last quarter, I think you said you were spending a fair amount of your time actually out selling.

What are you hearing from customers?

I understand the large company North American market hasn't really turned yet.

Do you get the sense that maybe when we get into January in a new budget year that maybe the purse strings will loosen up a bit, or is it -- are companies still so tight on expenses that maybe that takes a while longer?

I -- what I am hearing as I go around, particularly at the high end of the market, which is where obviously I'm focused on, because it is the bigger dollar amount, is that guys that are sitting in my chair or Chris' chair now are kind of feeling the same bottom that we are feeling, and so therefore they're kind of moving back to business as usual of "How do I move my company forward?" And I would contrast that to 6 to 9 months ago when the economy was in free fall and the people were kind of hanging from the rafters, and nobody wants to make decisions when you don't know where the bottom is.

And so that's my general sense as I talk to people in my chair across the country, and the anecdotal evidence that I hear from the salesforce is that people are starting to make decisions again.

And we don't want to be too optimistic, but again, I think the word "encouraged" is the way to describe it.

Okay.

I know in the last year or so the focus on the government, or maybe state and local governments or whatnot, has increased a bit.

Are you seeing any increased willingness to outsource just due to the pretty massive financial pressure most of the state and local governments are facing?

Yes, we actually have created a sales unit within our national accounts business that is focused on selling benefits, outsourcing, and payroll -- HR outsourcing into governmental units.

It is not a big effort, but it is enough to -- for us to watch, and the results are pretty encouraging.

So it's hard to spend money on big software purchases in state and local government today with the budget pressures that they have, and we are certainly a good solution for them without a lot of upfront capital required to get started.

So again, I think it's good news.

Okay, and then just lastly, any update on the acquisition plans?

Has the market having gone up so much raised the multiple expectations of people, or do you still think 300 to 400 million is a reasonable target for this year?

I think that's still a reasonable target.

Our pipeline is pretty good, but mostly it's smaller, 10, 20, $30 million kind of acquisitions, not 200, $300 million kind of acquisitions.

But again, we're looking for product extensions that we can leverage across our distribution capability, and those kinds of acquisitions still are not inexpensive to buy, particularly in the Employer Services area.

We are seeing, again, continued good activity in dealer, because obviously in that environment, if you don't have ADP's balance sheet, it's been a difficult place to operate over the last couple of years.

So again, I think that $300 million kind of target is a reasonable expectation.

Okay, great.

Thanks a lot.

Your next question comes from the line of Jim McDonald with First Analysis.

Good morning.

Thanks for taking my question.

On -- beyond payroll, it's held in really well with the rest of business decline.

Do you think we have reach a bottom in beyond payroll for growth?

Yes.

I think that's a fair assessment.

And how -- do you see that being able to come back to the double digit growth?

How would that look?

Yes, I think as we get the core payroll and tax business back in a positive direction, I think it is not unreasonable to expect that beyond payroll is going to grow 5 points faster than the core payroll.

I don't think that ratio should change based on any kind of history.

Okay, and just one more.

Can you tell us what the price impact was for ES in the quarter?

I mean, we don't really publish that number.

We typically talk about that as of the beginning of the year.

Yes.

The full year, and I think -- Oh, you are talking about price increase as opposed to concessions or?

Price increase -- I think you put it in your Q, I'm just --

Yes.

Yes, that's an annual increase.

(Speakers overlapping) -- you threw us with the quarter question.

We do that at the beginning of July, and we did increase, although less than we had in the past.

You have heard us talk about 2% on average in the past, and most of that is sticking -- I think it was certainly less than that this year.

Most of it is stuck, interestingly, but think about a net of one or thereabouts.

Okay.

Thanks very much.

Your next question comes from Kelli Flynn with Credit Suisse.

Thank you.

I want to revisit the small, mid-size client versus large company issue.

I know a lot of people have asked about this, but I just wanted to clarify, are the comps getting easier earlier on the small business side, or are you actually seeing pick up in activity that are on a sequential basis?

Are you talking sales or --

Yes, I am just sort of talking about sales.

When you talk about your feeling better, I just want to make sure it's not an issue about easier comps as opposed to actually more activity versus the prior sequential quarter.

Our productivity per sales person is up, so that is good.

But we have pretty much held headcount steady across the board in ES last year, with the exception of small business, because it is easier to ramp back up there because it is a simpler, more straightforward sale, and we will continue to add headcount there over the course of the year.

But the activity there is good, and so because you're comparing headcount levels this year that are lower than last year, it is difficult to give you a metric because the headcounts are different.

But again, it feels pretty good in term of productivity.

Yes, and I would say in terms of easier compares, you don't start seeing really easier compares until the fourth quarter, because last year's fourth quarter was down significantly from the prior year.

But the rest of the quarters are all pretty equivalent.

Okay.

And then, I know you are not economists, but I mean, do you have any qualitative theories on this issue of the small business versus the larger business that -- based on what you are hearing from your clients or how you are interpreting economic data?

Do you actually think there's reason to believe that small businesses will recover faster than larger on the employment front?

I don't have any empirical data that I could share with you.

The only anecdotal data that we hear is from the sales leaders in that part of the marketplace, and they feel pretty good about the activity that's coming from our banking partners, our CPA partners, and just in general.

If I were to describe the economic situation for small, medium and large, I would say, at least for us, it appears slightly more positive on the small end it does in the middle or the large.

Okay.

Thank you very much.

Helpful.

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

Thank you.

I'm wondering if I could just ask another question on a -- or elaborate on a question that was asked earlier about the margins.

I guess, Chris, it's understandable that you are thinking flat margins, with some revenue declines this year.

If the economy just kind of bumps along and we kind of migrate into a more flattish environment, can we -- do you think we can see margin expansion in a flattish revenue environment?

I think it is fair to say that if we're more flattish than down 1 to 2%, that with that comes the opportunity to drive more margins.

Certainly selling expense, driven by what's happening in sales, impacts that.

And as you have heard us jokingly say in the past, we would love to be able to explain that margins were flat to down because we were driving so much in the way of sales.

So you do have to watch that a little bit, but there's a number of thing that affect you in the second half of the year that didn't really catch up to you in the first half.

Certainly health care benefit increases year-over-year, and that catches up more in the rest of the year.

I think everybody would like to get back down to the point where merit increases come back.

We would certainly like to see our clients do that.

And so if we do that as well, that will put pressure in the rest of the year, in the fourth quarter particularly.

And the big issue that we have, when I talked about in opening remarks, is the impact of interest rates.

And we lose that favorable compare, and so the impact of the interest on our Client Funds is getting worse than what we originally said in the beginning of the year, and that will have a dramatic impact.

And you saw the 780 million year-over-year impact which is up from the 60 or 70 million that we had said at the beginning of the year.

So that's what has us cautious and, really, in a mode of too early to call that one.

So "x" rates, is there anything happening this year that gives us a tail wind into the following year?

Again, excluding the impact of our rates?

On interest or --

No, on -- excuse me -- on operating expenses year-over-year in fiscal '11.

Are there things still being done this year that give you a tail wind into fiscal '11?

Well, I think we have done a huge amount in the fourth quarter of last year that you can see reflected in the expense structure in the first quarter, and the ultimate increase in EPS.

So I think that will continue to help us.

That's --

The biggest thing that helps you, is you return to organic revenue growth, that's the highest margin contributor you can get.

And so whatever your assumptions are around our organic revenue growth for next year, it certainly gives us the leverage to drive margin improvement as compared to the environment we are in.

Yes, so certainly on the sales side, that will have ramifications going toward.

Also on Client Fund balances, when everything is going in a negative direction with the economy, that drives Client Fund balances down in a lot of different ways.

Certainly the pays component of that is the most obvious, but the contrary is also true.

So when people start giving merit increase, bonuses come back to normal, people start hiring again -- which has all sorts of implications in terms of (inaudible) deductions and (inaudible)deductions and FICO deductions -- all of those things, as you have the wind at your back, there's a number of factors that increase on a Client Fund balance there, nature.

So --

Okay.

Great.

Thank you very much.

Your next question comes from the line of Tim Willi with Wells Fargo.

Thank you.

Two questions.

The first one -- and I apologize if these have been asked.

I got distracted for a second.

But the first one was just around the M&A environment, and thinking about if there's any changes in the probability that you see of doing some M&A if the market is easing or in grid lock, just as how you look at that, any changes in your thoughts or the environment over the last handful of months?

Yes, as I discussed a little bit earlier in the call, our backlog of M&A transactions is pretty good right now.

Our internal expectations are still around spinning somewhere around $300 million in terms of M&A activity.

I don't want to give you the impress that there are a lot of really big deals, but there are a number of product extensions that we think are going to happen.

And in the market is kind of what it has been.

In our kind of space, particularly in ES, if you are looking for good product extensions, the multiples are not low, and we haven't seen any real change in those kind of activities.

But again, I think we are pretty optimistic at this point.

Okay.

And then my other question was around hiring in the service organization, around -- I think you said the small business operation.

Is that something where you are being proactive around an expectation for the growth trajectory of that business where you find something competitively, where adding a little bit more to the service organization and small business might help you with market share in this environment?

Or were you reacting to something that you were seeing just internally around that business that you wanted to correct?

Yes, just from a clarification, we didn't call out small business.

We are increasing service in a number of different areas, but not necessarily focused on small business.

and the increase this year, in the first quarter for example, is up about 3.5% FPE.

It really is the fact that service is the foundation of our business, and as the differentiator, it certainly is a competitive advantage.

So making sure that we continue to be solid in the service foundation, particularly as we look at growth in some of the beyond payroll kinds of areas that need a service component to that, as well as just in core payroll.

And so kind of preparing ourselves for the inevitable recovery in the economy to make sure that our services is solid.

Okay.

Thank you.

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

Baird.

Good morning, and wanted to add my congratulations.

I was wondering if you could talk a little bit about client retention?

You mentioned that that was down a little bit.

Can you distinguish between whether you think that was just the economic impact or if there's anything occuring from a service level perspective?

And how are you going -- this is obviously the critical period -- how are you going to approach client retention here in the late part of the year as we go into next year?

Well, the most important thing, Mark, is at that we really didn't cut service, despite some of the pressures that we've had across the business.

And so our average client loads, for example, in service are about the same as they have been.

So the important thing in service, particularly as you go through year-end, is that you have got people who can answer the phones fairly quickly, and if they have a problem, you resolve it on the first call or shortly thereafter.

So most of our increases in retention have been around price and added business; and obviously, if you have any kind of a service issue and you have a full price, it certainly escalates a client's willingness to leave.

But again, I think we see that kind of escalation moderating and declining, and we expect to have a good year end and no real departure from business as usual.

Great.

And so it sounds like that -- I mean, basically what you've been seeing is essentially primarily due to the economic environment from your perspective, and to extent that the economic environment is improving that should help your retention statistics, should it not?

Yes, it absolutely should, and the fact that we were very conservative on our price increase this year.

So all of those things should help.

But again, the proof is in the eating, and we don't want to make that call until we get through the year end.

Okay, and I don't want to be premature about this, but to the extent that we are starting to see an economic recovery, as we look at your excess capacity within your system, how should we think about incremental margins, once -- let's say a year from now or six months from now we start seeing employment actually grow in the United States, start seeing new business development pick up, how should we think about the longer-term trajectory for margins, and your able to leverage your current infrastructure?

It is always a trade off, Mark, because obviously as you're growing the business and generating incremental margins, you also have areas that you want to invest in.

And we always try to balance margin improvement with increased investment.

And obviously, if your sales growth is accelerating -- which we hope it will over the next couple of years -- then clearly, you're spending more money on sales that obviously drag down margins, at least for the near-term.

So I think the way we've historically talked about a 50 basis point improvement on a business as usual basis, once we return to positive internal revenue growth, should kind of be the same way you think about it going forward.

Okay.

And that would also be inclusive of the time period when your sales could potentially start spiking up, but before the revenue starts getting -- really gets layered in?

Yes, but we are in pretty good shape right now, and -- from an expense side.

And as balances start to go up or interest rates turn, that clearly gives us more flexibility in terms of margin improvement, and we try to balance it, so we increase margins; but at the same time, we want to make investments in our long-term future growth around distribution in products.

So it is always a trade off and there's no magic formula, depending on what's happening at a particular point in time.

Yes, and that 50 that we referred to wasn't 50 every quarter in and out.

You just can't manage it that way.

Sure.

But it is 50 over a longer period of time on average.

Understood.

And then, HR BPO is clearly the area that you think is going to be the best growth opportunity from a longer-term perspective, which would include PEO, ASO, COS, and then maybe throwing in GlobalView, and we --

Well, GlobalView has a BPO option beyond just pure service.

Right.

And so when we look at that on a combined basis, can you give us a feel for, on a combined basis, how big that is, and how we should think about it in terms of its margins relative to its ultimate potential?

Our posture there has always been until we entered this economic blip that we have been enjoying for the last 12 to 15 months, is that COS is a $.5 billion business over the planning period, and GlobalView is clearly a potential of $.5 billion business.

And both the -- the PEO is already a billion dollar business, so we think it's clearly got potential over the planning period to grow at double digit kind of rate, and the ASO offering at the low end and the middle are clearly multiple hundred million dollar kind of growth opportunities as we look forward.

The key is to make sure we continue to do what we do with all of the other products while we are focused on growing those businesses faster than our historical services.

Which would imply we are going to continue to see -- I mean, ultimately the margin should improve --maybe they won't get to where the core payroll is, just because of different types of business, but --

The -- when you look at just a pure ASO kind of service, a pure COS kind of service, the margin there actually will be quite good over time.

The place where you have the margin pressure is when you are talking to employees, and you're operating fairly large call centers the margin then in that, because of the labor component, will never be as high as a pure service bureau.

So you just have to manage that component of it.

The worst period is the year that you make that initial investment, because even margin drains as they get better year-over-year are helping your margins.

So balancing that as you are looking out is critical.

Right, and then ast question, you gave overall margin guidance for the year.

Can you break that down by segment, if possible?

No, not ready to do that yet.

Thought I'd try.

Thanks.

At this time, we have time for one to two more questions.

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

Hi, this is David calling for Tien-Tsin.

Just a couple of follow-ups.

The new sales you said were down 2% year-over-year.

What was the change sequentially?

I've got that.

If you have another question, I will come back to that.

Sure.

With -- following on the new sale, what was the mix between new clients and then new products to existing clients within the new sales number?

We don't really publish that number.

Generally, it is around 50/50, and there's no real difference now versus say historically.

Okay.

And then can you remind us what historically the contribution to the full year the new sales number is from the first quarter?

Generally, sales for the quarter -- the first quarter is usually our smallest quarter.

So it would be in the low 20% kind of range.

It is pretty even.

I mean, the -- it is -- the difference between the split of sales by quarter is within 23 to 25% -- 23 to 26 kind of percent.

And we typically don't disclose the quarter-over-quarter, because it is so different in terms of the cyclicality in the business.

But the fourth quarter of last year was the low point last year, and that certainly increased in the first quarter, quarter-over-quarter.

I would remind you that as we said on the last call, sometimes that can have be impacted by a restart of the sales incentive periods for those sales people that are out of the hunt that flows into the Q1, and I am sure there was a little bit of that in the first quarter of this year.

But still up.

Okay.

And then I'm sorry if I missed it, but did you quantify how much you think the Cash for Clunkers program contributed to Dealer?

No, we didn't quantify it.

It is tough to quantify something like that.

It is anybody's guess as to how much you would have gotten, anyway.

But just like the automotive market is saying that there was some pull forward, we clearly did experience some of that.

And then lastly, I know you gave the change in the retention, but where is retention currently tracking?

We are still tracking for the full year to be down about 100 basis points -- flat to down, we said.

So when you think of overall, we said we were just under 90%.

That is where we are tracking that guidance.

Okay.

Thanks very much.

Your last question comes from the line of Chris Mammone with Deutsche Bank.

Thanks.

I guess just a follow up on that -- I guess two of those last questions.

It sounds like your -- much of your encouragement on the sales front is related to the new sales environment, I guess.

How are you feeling about the ancillary reserves into existing clients?

I mean, has it gotten -- has the rate of decline of those cuts gotten any better over the past three months?

Can you just give us some color on that part of the sales environment?

We don't track on say a monthly basis sales versus sales of new.

But in general, I think the environment is kind of the same with both.

We are seeing an uplift in both selling into the base as well as selling into new clients.

And clearly on small business, you have less to sale to the base because they typically don't buy some of the services that our large clients buy.

So you see a -- much more new business in the low end than you do, say in the high end, with the large components of beyond payroll.

So it is -- I wouldn't read anything into that if I were you.

Okay.

And I guess finally, just back to Cash for Clunkers, I mean, is there any measurement -- I mean, how many -- I guess how many months of car buying demand do you think was pulled forward by that program?

Do you have any sense for that?

No, we really don't.

It is not that material.

I think the thing you should focus on is that we have slightly improved our guidance for Dealer from the 4 to 8% down to 3 to 6% down.

That takes everything into consideration, including the Cash for Clunkers.

And don't forget, we also have the Saturn issue which we talked about.

We will have one-time charge in the first quarter, but it also has a bit of a revenue drag for the remainder of this year.

The full year impact of that 12 million hits you in fiscal year '11, or the bulk of that would.

So you have got that consideration as well.

Okay.

That's helpful.

Thanks.

I would now like to the turn the conference over to Gary Butler for closing remarks.

Again, thanks, everybody, for coming to the conference today.

Again, I think you should read from your comments that we are encouraged.

But again, I want to caution everybody that we are not buoyant, and that we still have a number of issues that we have to deal with.

We think we are at the trough in terms of the pays per control decline, and should start to see some improvement.

But again, we will face some negative pressures on the interest rate environment, particularly in the second half of the year.

So again, pleased with the results, and think we are in good shape in terms of our forecast for the full year.

So thanks again for signing in.

Thanks, everyone.

Thank you.

This concludes today's conference call.

You may now disconnect.