自動資料處理 (ADP) 2010 Q2 法說會逐字稿

Good morning.

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

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

I would like to inform you that this conference is being recorded and all lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions).

Thank you.

I will now turn the conference over to Ms.

Elena Charles, Vice President of Investor Relations.

Please go ahead.

Thank you.

Good morning.

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 second quarter fiscal 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 reportable segments has been posted to the IR section of our website.

These schedules have been updated to include the second quarter of fiscal 2010.

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

Thank you, Elena.

Good morning everyone, and thank you for joining us here today.

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

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

After which, I will return to provide you with our updated forecast for fiscal 2010.

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

Let me begin.

ADP's results for the quarter were pretty much in line with our expectations.

The cumulative impact from the difficult economic environment that we've seen over the last 15 months continued to negatively impact our results.

Revenues for the second fiscal quarter of 2010 were flat to a year ago, but included a benefit of nearly 2 percentage points from favorable foreign exchange rates, as the dollar weakened during the quarter.

However, I am pleased that pretax and net earnings both grew 1%, and earnings per share from continuing operations grew 2%, excluding the favorable tax item that we had in the quarter.

I'm also encouraged by our key business metrics.

Employer services new business sales, client retention, client funds balances and number of pays were all somewhat lower compared with a year ago, but the pace of the decline has certainly slowed and in some cases our key metrics in the quarter were actually better than we expected.

We continue to see some indications of stabilization in terms of employment levels in the US, and client retention, while still under pressure, leveled off in the quarter.

However, as you are aware, the key retention period is our third quarter, and until we see those results, we are holding our estimate for the full year of up to a full 1 point decline.

Moving on to sales, although new business sales declined 3% in the second quarter, our sales force is seeing market receptivity from companies once again willing to invest again in their businesses.

However, the selling environment continues to be somewhat mixed across the business units, within employer services.

Similar to what we told you three months ago, sales cycles for larger companies, particularly in the US, remain challenged, and as a result, new business sales in our National Accounts business units were behind our expectations, and declined year-over-year.

That being said, new business sales to mid-size companies in our Major Accounts division were flat to a year ago, but continued to be ahead of our expectation.

And sales in Europe, our largest international market, were down year-over-year but also ahead of our expectations.

New business sales in Small Business Services grew year-over-year, which I'm quite pleased with, given the sales headcount reductions that were made in last year's fourth quarter.

Total source sales, which includes the PEO, were also strong in the quarter, with good growth year-over-year.

As a result of this positive sales momentum in most of our markets, we are now investing for future growth and have begun the acceleration of next year's sales force hiring.

I believe this will position ADP for stronger sales growth over the next 12 to 18 months.

However, we expect this necessary investment will also be a drag on earnings through the same 12 to 18 months period.

Let me emphasize, this is well worth the investment to increase revenues, and in turn, profitability over the longer term.

Everything considered, we are also more confident in our ability to achieve the same dollar amount of new business sales as last year, or perhaps come in slightly higher than last year.

Moving on to Dealer Services.

The automotive marketplace is still quite challenged, but on a positive note, December was the second consecutive month of year to year increases in US car sales volume.

We're not calling it a trend, but it certainly feels a heck of a lot better than the declines over the last couple of years.

The industry is certainly not out of the woods, as dealership closings continued, but Dealer Services win/loss rates in the marketplace continued to be strong and resulted in increased North American market share for ADP, year-over-year.

We continue to estimate that dealership closings will be completed over the next 12 months, with about $50 million in total of annualized lost revenues to Dealer Services.

To date, closed ADP sites represent about $10 million of the $50 million in annualized revenues.

By the end of fiscal 2010, we expect additional dealership closings representing another $20 million of annualized lost revenues.

As these closings will occur throughout this fiscal year, we estimate that the fiscal 2010 impact will be about approximately $15 million of lost revenue.

Additionally, the larger enterprise accounts have witnessed an increase in activity and are exploring options to expand their market share.

We've also seen an increase in the volume of activity with layered applications from the large auto consolidators as they sharpen their operating strategy by I'm improving process and technology.

We believe these indicators are all positive signs regarding the future health of the automotive marketplace.

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

Thanks, Gary and good morning everyone.

We're on slide four.

Total revenues of $2.2 billion in the quarter were flat to a year ago, and continued to be negatively impacted by the cumulative impact from the difficult economy that began towards the end of September 2008.

As Gary mentioned, the quarter was positively impacted 2 percentage points from favorable foreign exchange rate comparisons.

Pretax earnings were up 1%, and net earnings and diluted earnings per share were both up 5%.

As you read in our press release this morning, the current quarter benefited from a favorable tax item.

Excluding this tax item, net earnings grew 1%, and diluted earnings per share increased 2%.

Fiscal year to date, we have spent about $152 million to purchase over 3.5 million ADP shares, in our commitment to returning excess cash to our shareholders.

We are on track to return at least $300 million to $400 million of excess cash to our shareholders through share repurchases.

Now let's turn to slide five.

Employer Services total revenues declined 2% for the quarter.

This was still a tough comparison versus a year ago, when ES grew revenues 6%.

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, fewer employees on our clients' payrolls and lower client retention.

Our beyond payroll revenues in the US continued to grow, with 3% growth in the quarter coming from our ASO COBRA benefits solution, and 401-K, which benefited from an increase in assets from the lift in the Dow.

ES's pretax margin declined 10 basis points.

The impact from lower revenues more than offset the benefits from last year's fourth quarter restructuring and continued expense control.

These lower revenues included a decline in high margin interest passback revenues as a result of the decline in client fund average balances.

Pays per control, our same store sales employment metric, was down 5% year-over-year, which was better than we anticipated.

The pace of decline lessened in our client revenue retention metric, which declined 0.1% compared to last year, but keep in mind that the key retention period is the third fiscal quarter.

Gary took you through the sales results a moment ago, so let's move on to the quarter's results in PEO and turn to slide six.

The PEO reported 9% revenue growth for the quarter.

This growth was due to increased benefits pass-through revenues that resulted from increases in both benefit rates and the number of work site employees.

Pretax margin declined slightly as the benefits from last year's restructuring and continued expense control were offset by higher pass-through revenues.

Year-over-year for the second quarter, average work site employees pay increased 4% to nearly $200,000.

Now let's turn to slide seven.

In Dealer Services, revenues declined as anticipated 5% for the quarter, 8% organic, and continue to be negatively impacted by the cumulative effect of dealership closings and lower transactional revenues year-over-year.

It was also decline in our software license fee revenue, which is recognized upon installation in our international business due to several new business installations in last year's second quarter.

Dealer's pretax margin improved 60 basis points due to lower headcount from the expense actions taken in last year's fourth fiscal quarter, as well as the cost control measures that we have put in place.

Dealer Services competes very well in the markets it serves and continued to increase its share of the consolidating market.

Now let's turn to slide eight.

This schedule shows the overall impact of the Client Funds portfolio Extended Investment Strategy.

At the top of this slide, you see the breakdown of both the average balances and the average interest yields in orange for the short extended and long portfolio component which corresponds to the pretax P&L impact on the bottom of the slide, with the total representing the interest on funds held for client P&L revenue line item.

Before I take you through the quarter's results of the strategy, I'd like to remind everyone that the decline in market interest rates accelerated back in October 2008.

As a result, the year-over-year decline in the P&L from lower rates will increase as the fiscal year progresses.

With that in mind, I'll take you through the quarterly results and then I'll take you through the full year forecast on the next slide.

Near the top right of the slide, you can see that the average client fund balances were down $0.7 billion, compared with the year-ago period.

The cumulative impact of fewer pays, client losses and slower sales compared with the year ago all contributed to the decline in average client fund balances and more than offset the positive impact of Canadian foreign exchange rates during the quarter.

Staying in the orange section, in addition to the decline in average client fund balances, the average yield on the Client Funds portfolio declined 40 basis points, at 3.8% this quarter, resulting in an overall decline of $20 million in interest on funds for clients on the P&L.

The impact from lower new purchase rates was most pronounced in the client short portfolio, with the average yield earned was 170 basis points lower than last year, due to the decline in short-term interest rates.

Looking at the blue section on the slide, average borrowings were down this quarter, and the average interest rate paid on those borrowings dropped about 60 basis points to a blended average borrowing rate of 0.2%.

The result was a $5 million reduction in interest expense.

So when you take into consideration the entire extended strategy presented here, the result was a $21 million pretax decrease or a decline of about 12%.

Now let's turn to slide nine where I'll take you through the Extended Investment Strategy forecast for fiscal 2010.

We anticipate a decline in average client fund balances of 4 to 5%, resulting from pressures on the level of new business sales, continued pressures on wage growth, as well as the cumulative impact of the decline in the number of employees on our clients' payrolls and client losses.

We are seeing lift in balances from SUI tax rate.

However, the level of bonus payments are still unclear and we won't see these results until they are paid out over our third quarter, which is the first calendar quarter.

We are anticipating a yield on the Client Funds portfolio of about 3.7%, down 30 to 40 basis points from fiscal 2009, compared with our prior forecast of down approximately 30 basis points, due to a decline in market interest rates across the yield curve.

It's important to keep in mind about 20% of the extended and long investments are subject to reinvestment risk each year, which is expected to contribute to a decline of about $75 million in Client Funds interest revenues, which is in line with our previous forecast.

We are anticipating that average corporate extended balances will decline about $200 million.

The average yield on the corporate extended investment is expected to be down 10 basis points.

We anticipate average borrowings will decline about $200 million, and the average interest rate paid on those borrowings is expected to be down about 90 basis points to blended average borrowing rate of 0.2%.

Taking into consideration the overall Extended Investment Strategy including lower borrowing cost, we anticipate a $65 million to $70 million decline in pretax earnings for fiscal 2010.

Before I turn it back to Gary, I want to point out that the reserved fund update from this morning's release.

Last week ADP received $14.8 million pretax or $0.02 per share, which will be recorded in the third fiscal quarter.

Including this distribution, ADP has received about 99% of its original investment in the reserve fund, which leaves approximately $3 million of the original investment unrecovered.

As a reminder, last year we recorded an $18 million loss on our investment in the reserve fund.

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

Thank you, Chris.

We're now on slide ten.

We are still a little cautious about the remainder of fiscal 2010.

But with more visibility on our key metrics and easing comparisons expected over the next two quarters, we are slightly improving our fiscal 2010 outlook.

So for fiscal 2010, we now anticipate total ADP revenues will be flat to slightly down, and we anticipate achieving the high end of our diluted EPS from continuing operations forecast of $2.34 to $2.39.

This compares with $2.39 in fiscal 2009, and both years exclude favorable income tax items.

The fiscal 2010 forecast also includes $14.8 million pretax or about $0.02 per share from the sixth distribution of the primary fund of the reserve fund that Chris mentioned earlier we received on January 29th, 2010.

As is our normal practice, no further share buybacks are reflected in the forecast, though it is clearly our intent to continue to return excess cash to our shareholders, again, depending upon market conditions.

For our reportable segments, we anticipate that ES, Employer Services revenues, to decline about 1%, which reflects a decline in pays per control of about 4% on average for the year and flat to down 1 percentage point in client revenue retention.

We continue to anticipate that the year-over-year comparisons for pays per control will ease during the second half of fiscal 2010 compared to the second half of fiscal 2009, when this very important metric declined significantly.

We anticipate high single digit revenue growth in the PEO.

And we continue to expect a decline in Dealer Services revenues of roughly minus 3 to 6%.

As you heard me say earlier, we now anticipate slight to slightly higher ES and PEO worldwide new business sales growth, compared with our previous forecast for sales dollars to be flat with fiscal 2009.

And we continue to anticipate no improvement in our segment pretax margins.

If you turn with me now to slide 11, I'd like to leave you with some closing remarks before we open it up for your questions.

While most economists believe that the US economy has bottomed, we remain cautious, I believe appropriately so, about the near-term outlook.

The remaining six months of 2010 will be challenging.

The economy is recovering.

It is a matter of timing and we are focused on the right things for the long term, including most importantly, accelerating new business sales growth by investing now in our sales team, and in the solutions that our clients want and need to be successful in their businesses.

We are continuing to incrementally invest in client services, which is critical to our continued success, and to maintaining our market leadership position.

Our business model remains solidly intact with highly recurring revenues, client life cycles of just under 10 years, and very strong cash flows.

I remain committed to returning excess cash to our shareholders, including ongoing share repurchases, again, depending on market conditions.

You heard me say previously, and it's worth repeating now, ADP is focused on the future, and as a result, is well-positioned to leverage the inevitable recovery in the economy.

Now, I'll turn it back to the operator, and we'd be delighted to take your questions.

(Operator Instructions).

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

Your first question is from Tim Willi with Wells Fargo.

Thanks.

And good morning.

Good morning, Tim.

Just a couple quick questions, if I could.

You mentioned some of the metrics came across a little bit better than you had expected.

I can't remember if you elaborated and highlighted those specifically in your comments, but if not, could you just talk about the metrics that did seem to surprise you a little bit more?

The couple that surprised us was pays was a little bit better than we expected, and that's reflected in the taking that down from our previous guidance, so it's down now to about a 4% decline over the year.

So we've got a lot of ground to cover in the second half where we would hope to see the year-over-year situation improve, but based on what we've seen in the first half, that was better than we expected.

I think as Gary went into in his remarks, the sales was a little bit better, particularly in certain parts of our business.

He mentioned the small business area, where we had headcount reductions last year and still grew in sales.

So that was a little bit better.

And is reflected on a spring in the guidance of flat to slightly up compared to our previous guidance.

And then just a follow-up on that second point and I'll hop off.

But in the small business and your sales success, macro level there still seems to be a lot of cross-winds about the health of the small business market tied into the availability of credit from the regional and community banks.

I guess I would just be curious your thoughts as to what portion of a better sales environment that you've seen internally you would attribute to execution of your sales force and anything that you've tweaked there.

I would imagine that's part of it.

Just also, any sort of end market shift that you saw during the quarter in terms of small businesses feeling a little bit more confident about where they're at economically or credit availability, if there's anything there that you think also contributed to better results.

This is Gary.

We obviously don't have access to small businesses' credit applications or credit availability.

I would tell you, though, that our small business sales force feels very good right now.

People are buying again, both in terms of new start-ups, as well as existing businesses.

I think it wouldn't surprise me to see more buoyancy on the job reports on the low end of the marketplace for both the BLS and the ADP numbers, which will will come out tomorrow.

But generally, the environment on the small end has been both anecdotally as well as data-wise been much more positive for us over the last number of months.

And in fact, in terms of sales results, they are the most favorable of all of the results we have.

So again, it feels pretty good and we're starting to see an abatement in terms of price concessions out of businesses on the lost business side, which also feels pretty good.

So in general, I'm pretty optimistic that we are at the bottom and starting to see the early stages of a recovery on the small end of the market.

Great.

Thanks very much.

Your next question is from Ashwin Shirvaikar with Citi.

Hi.

Good morning.

Hi.

Good morning and nice quarter.

I wanted to get more details on your comment about investing in future growth.

Could you sort of outline maybe -- try to quantify what you intend to do in various different areas such as adding salespeople, product investments, Europe and so on?

Sure.

Getting the last 18 months to two years, in the traditional ADP model, we would be striving to grow new business bookings by 8, 10, 11% each and every year in order to grow the business long-term.

In order to do that, we would normally be hiring 6 to 7% increases in headcount and then push for new products and productivity improvement to get from 6 to 7% headcount to 8, 9, 10% sales growth.

So in essence, we think it's time to turn back to the traditional model.

So as we look six months out toward fiscal 2011, we're going to basically start hiring now that 6 or 7% headcount growth, so that we've got people in the territory, people in telesales trained, up to speed and hopefully generating new sales straight out of the box as we move into fiscal 2011 as opposed to waiting for 60 days out because, A, we've got better results than planned and we sense an I'm improvement in the economy so we're basically trying to improve our distribution by staffing now.

Okay.

And if I could follow up.

One question on the regulatory front.

Obviously, stimulus to create jobs, that's a good thing, but if it includes changes to payroll taxes, that may not be necessarily great.

So could you provide some thoughts about how you think about that?

Well, tax credits would normally be the way that people would be incented.

If you go back historically it's either R&D type of credits or job tax credits.

There's already existing job tax credits out there and from what I've read, best case is you add a million or 2 million jobs to these tax credits, so you're talking about 1%.

So if I lose a few tax credits on 1% growth in payroll, that would be a good problem to have.

So I'm all for it.

I would love to see them bring it on as fast as they can bring it.

Okay.

Thanks.

Your next question is from Jason Kupferberg with UBS.

Thanks.

Good morning.

Wanted to start with a question on the core payroll business here.

The revenue growth there I guess has been down about 7% year-over-year each of the past two quarters.

How do you see that trending during the second half of this fiscal year and also on a longer term basis, once we're out of the recession?

Well, it certainly becomes an easier compare in the second half of this year.

So we're hoping that that 7% is the bottom and so the compare gets easier.

We're not a position to talk beyond this year in any specificity, but the second half of this year clearly the compare gets better.

I think of a way for you to think about that would be that historically, again, take out the last two years, payroll and payroll tax combined have grown kind of mid single digits and that's driven by like 2% payroll growth.

It's driven by 5 to 6% wage growth and tax growth that comes in that.

It's driven by 8 to 10% sales growth in terms of new business bookings.

It was I guess in fiscal 206 and 207 we were growing that number in the mid single digits.

It was even higher in some quarters.

So it would certainly be our objective to get back to that and with that you need growth in pays, you need growth in balances, both of which will happen in time, and you need growth in new business sales, which is what we're trying to ramp up for now, and you need an abatement of losses, particularly in the low end of the market where we've seen the pressure on payroll and tax sales.

So I think it's going to come and get back to those levels.

It's just going to take a period of time for it to get there.

Okay.

And regarding the key selling season, I know it will continue to play out during the March quarter here, but you've got some period of time under your belt there already.

I mean, anything notable versus prior years that you've seen either in terms of competitor behavior or excesses that maybe you're seeing this year that didn't materialize as much in the past?

Are you talking the third quarter or year-to-date?

Well, I guess I'm thinking sort of the December-January period in general.

First of all, we had a good year end operationally, which always feels good.

It was better than last year.

We had minimal price increases this year, so we had less pressure from those kinds of issues.

It's really too hard to forecast because the losses really occur in January and early February.

Some businesses look better than last year, a couple businesses don't look quite as good, but in the aggregate, we think we're in pretty good shape in terms of our forecast and hope it's even better than what we forecast.

But we think it's appropriate to be conservative at this juncture until we get the real data.

We really won't know particularly on retention, that really is a January and into February kind of thing and we're right in the middle of that now.

So our best assumption is holding that retention number of up to 100 basis points at this point.

Last question from me.

It seems that payroll cards are becoming increasingly popular among employers.

So can you talk a little bit about how ADP's payroll card product is positioned in this market, to what extent are these cards an opportunity or a threat and how do the economics compare for ADP as the payroll processor when card based solutions are used by your customers rather than direct deposit or paper checks.

Pay cards are continuing to grow.

I think to date, I don't know the number exactly, but we have well under 1 million pay cards in total.

Yes, over 800,000 active and another couple hundred thousand at least loaded.

Call it a million give or take.

The economics are actually better on pay cards because unless somebody totally cashes out their payroll check at the first time they get the pay card, which generally isn't the case for people that are active users of pay cards, we actually get the benefit of the float over the course of the time that they spend the entire net payroll.

Plus, we get transaction fees after the initial one or two transactions.

So we would be happy to see growth in pay cards and it's continuing to grow.

It's just not a buoyant kind of growth.

It's a steady kind of growth going forward.

Thanks for the color.

Your next question is from Julio Quinteros with Goldman Sachs.

Good morning.

Can we switch just real quickly to the margin side of the equation and can you just walk us through if there's any way to sort of think about the basis point impact of the incremental investments that you're making and then what other levers would be left I guess in kind of a down side scenario to protect the margins from the current flat scenario that we have?

Sure.

I think, obviously a number of things go into driving the margins and one of them is the impact of the actions we were talking about taking in terms of ramping up sales.

As sales improve, you've got the commissions on the sales, so clearly those are the two pressures that we would expect to see for the next period of time, which is a good pressure to have.

As Gary mentioned.

A lot of the actions that you take have been taken already, with the restructuring that we took last year, with an anticipation of the kind of pressure that we would expect to see.

When you think about retention down 100 basis points, we've given that metric before that that's $50 million of revenue, if it's 100 basis points, and for every percentage of pays, it's $20 million.

And we're talking about down 4% for the year.

So $50 million on the retention, $80 million on the pays, that's a lot of rich revenue that puts pressure on your bottom.

So that's why we took the restructuring charges we took last year, and took the reductions that we did.

We tried to do that in areas that weren't client facing, in the sales area and in service.

We're continuing to invest.

So when you think about the investments for the second half of this year, it's the ramping of sales headcount, it's hopefully improvement in sales, and the impact that has on the sales incentives as well as continued investments in service and implementation as you get ready for those new sales.

So we continue to have very tight expense controls throughout.

We've taken the actions.

And when you put all of that together, that's what we come up with with no improvement in margins and you can see the margin performance to date has been okay, not our normal 50 basis points up year after year, but it's all of those things that we're trying to balance while still invest in the future and be ready for the growth when the economy does turn around.

Thank you.

Your next question is from Rod Bourgeois with Bernstein.

With pays for control better than planned or maybe less bad than planned at this point, this should be a positive for your margin plan for fiscal 2010.

So I'm wondering if the better outlook on pays for control is what's giving you the room to add to your sales force and if that's the case, can you quantify how much you're planning to add to your sales force and what that investment might look like?

In terms of the sales force, you're talking 300 to 400 people is a good way for you to think about it, kind of spread across the different market segments.

We're obviously trying to push growth in the mid and high end as well, not just adding feet on the street in small business, because that's where the bigger productivity gains that we have, and we have longer client life cycles in the mid and high end of the market.

Surely, pays per control is the highest margin that we have, that and balances, so to the extent balances improve and pays for control go down less, because we did budget for pays per control to shrink in the area of 5 to 6%, so to the extent that it's 4, that's certainly a positive benefit and certainly high margin and we would love to see -- it's too early to tell, because we don't know about bonuses and we don't know about exactly what the SUI impacts, state unemployment rates, but certainly with the unemployment levels at the level they are, it's going to drive all the states to ratchet up the state unemployment rate in order to keep people on unemployment, both in higher numbers and for longer periods.

So all of those are good.

At a personal level, I hope they don't raise taxes in Washington, but I think that's a fat chance, so it's probably going to happen and over time, that will certainly help as well.

I would say, Rod, you're thinking about it right.

The only nuance I would have is that I think as you start seeing the performance in the small business area and some positive signs of sales, I'd like to think that we would add sales headcount growth, regardless, even if we didn't have the cover of the pays going down.

Because it's the right thing to do long-term.

But the fact that pays are going down, the two of them net out to have about the same impact on the bottom as we had planned.

Okay.

Great.

So on pricing and discounting activity, this is an important time of the year to sort of look at that topic again.

Are you seeing a better situation with respect to discounting this year than you did last year?

And if there's any sort of numbers you could put to that, that would be very helpful.

Most of my data there is anecdotal, as opposed to reported, so I can't really help you in quantifying it.

But certainly from a sales force standpoint, we are seeing both an abatement in the base of pricing in the base, as well as in new sales.

And as I mentioned in my earlier comment, particularly on the low end of the market where we've seen the most price pressure, that's where our sales results actually at this point are most favorable in the PEO and SBS.

So we're feeling pretty good.

We're kind of through the cycle and back on the way up.

Yes, the timing of this is too early to tell on January just yet, but what we have seen doesn't lead us to anything other than what we had expected, nothing to the real positive, nothing to the real negative.

So it's coming in about where we had expected in our original planning.

All right.

And one final quick one for Gary.

Is there anything important that you're considering from a strategic standpoint, either with respect to taking a harder look at the cost structure or to do something beyond what is normal to drive sales growth?

Is there something we can look forward to hearing from you on at the next Analyst Day or something with respect to strategic decisions?

In terms of the cost side of that, we've been pretty aggressive the last 12 to 15 months, with both our span and level exercise we took out 80, $90 million worth of primarily middle management overhead, and last year, we also deferred merit increases for the year.

So that's a pretty big number as well.

So I don't see as we look at 2011 a lot of big structural kinds of cost reductions as we go into fiscal 2011.

That being said, we're continuing to invest pretty heavily in our new product platform for Run and the SBS environment.

We got it rolled out now to about 80% of the sales force.

The early results from workforce now are pretty darn good in the second quarter, and we're expecting them to get even better and we're working on some new acquisitions that will expand our product portfolio, including the accounts payable acquisition that we just announced in the last 30 days.

So all of those things I think are going to put us in good shape for sales next year and on top of that, you've got the sales force expansion that I talked about.

And we'll take you through a pretty detailed outlook on our product platforms and how that's going to affect us in the future at the February analyst meeting so we're looking forward to sharing those with you.

Thank you, guys.

I would just add on the cost structure, I think it's -- we have to look back at what's happened over the last year and as I mentioned before, the impact of retention and pays as I quantified before of around $130 million, if it hits those ranges, then when you think about it, the chart that I showed on interest on Client Funds down $65 million to $70 million this year and then if you think about the dealer business, for example, and what they're going through and the drag that is on NOIs, another 50 to 60, that's a lot of a hurdle to overcome this year, and that's why we took the actions we did last year with the restructuring, to get us back to the kinds of margins and flattish kind of EPS that we're now guiding to.

So those are big actions.

I think before that, we were doing a lot to take cost out of the cost structure including the off-shoring, and the data center consolidation which is ongoing and continuing.

But, we've been able to do a lot on the cost side, just to get to the point where we are at now and we'll continue to do that.

Nice progress.

Thank you, guys.

Your next question is from James Kissane from Banc of America-Merrill Lynch.

Just to be clear, if it wasn't for the investments here in the back half and I guess going into the first half of fiscal 2011 you would be raising your expectations for fiscal 2010 EPS, right?

We kind of have raised them.

But I mean to go above the $2.39, say.

Well, we've been -- at the $2.34 to $2039, clearly with the pays coming down, that helps us, the reserve fund obviously helps us as well.

But we do see the need and the continued desire to invest, and I don't think we're any different than some of our clients that held back a little bit and we continue to invest in service and the product but we would like to ramp that even more to really prepare ourselves for future growth.

So we continue to expect to do that.

Just seems like everyone's trying to get you to quantify it and you guys are kind of dodging it.

But it seem like your margins would be up instead of flat.

I didn't think we were dodging it, but --

Okay.

And then I always ask this question.

Any update on GlobalView, maybe the demand picture implementations and how they're going and maybe a target for breakeven?

Coincidentally, I just returned from our meeting of the minds, which is our large global clients as well as our global prospects, and I couldn't have been more pleased with, A, the quality of the people there in terms of level and interest, as well as the best selling environment for prospects is to have them talk to clients and in general, our implementation service results are pretty good.

Our results in GlobalView for the first six months were terrific on a percentage uplift in terms of new bookings.

But you've got to remember that that compares to the place practically shut down in terms of new sales for a period of time during the middle of fiscal 2009.

So they're back to the kind of levels that we were tracking towards before all of this started.

I don't think we're going to hit breakeven in 2011.

But I do think we'll do it in 2012.

But we're going to make a lot of progress in 2011, as both the revenue grows and our need for continuing investments in infrastructure abate.

The two of those together will drive us toward a breakeven as we get to 2012.

As we look at it right now, it's at the very end of fiscal year 2011 we start approaching that breakeven so fiscal 2012 is where we would see that happening.

Just one last quick question.

In terms of small business sales, is it like an end market improvement or -- this is kind of going back to Tim's question -- or is it more just market share gains on your part?

I think we're, A, executing well.

when we down-sized the sales force, we obviously kept the good guys, tried not to keep the nonperformers.

So the cadre is more senior and more prepared.

So I think we're executing better.

I think our product platform is terrific right now.

This new Run platform with real-time payroll and all the advantages that it has, demo's terrific, and so our guys are getting a lot of lift from that.

But all that being said, I think the marketplace is back starting to cook again and that wasn't the case six months ago.

You'll see at the February 18th meeting, we'll talk a little bit more about Run and workforce now and those are two exciting products for us that are well-positioned as the market returns.

But both of those are areas that we've invested in in the past and look like they're poised to really capture market growth going forward.

Perfect.

Great job.

Thanks.

Your next question is from Glen Greene with Oppenheimer.

Thank you.

Just a quick question, a couple questions, actually, related to the investment in the sales force.

One, just on the 300 to 400 salespeople, are these all feet on the street, or is part of this composition telesales force?

Trying to get a sense for the composition of the sales force, if there's any meaningful change.

No real meaningful change.

We will uplift our telesales efforts again this year.

A little higher percentage than our feet on the street.

But in general, call it we're going to raise telesales by 10, 15% and we're going to grow feet on the street by 5 or 6 is a good way to think about it.

Okay.

And then in aggregate, I think you said the headcount ramp was 6 to 7% with the goal, I mean, is it reasonable to think -- I know you're not going to give guidance now, but is it reasonable to think about your internal -- you want to get back to high single digit sales growth in fiscal 2011 or is that too aggressive at this point.

I think that's a good way to think about it in terms of an objective.

That would be our long-term objective.

So next year shouldn't be any different than our basic business model.

Because I think we're through it and we're starting to come up the other side of the valley and so the quicker we can -- the most important thing to getting back to growth again is accelerating our sales growth.

So we're just trying to get out in front of it and I think you're going to see improving sales results in the second half and so we're ramping up accordingly to get ready for next year.

Okay.

And then if I sort of read through it, I guess as we went through the quarter you got a little bit more comfortable about the pipeline activity and kind of said this is the time to sort of push the needle, the environment's getting stable and the sales traction seems like it's there.

One of the earlier questions, our forecast on EPS has come up.

So obviously whether it's balances or pays for control or losses abating in the quarter, the financial outlook for the year is improving.

So we don't want to repeat the mistakes of 2002 and 2003 and not invest in our distribution and service capability.

And in fact, we're picking it up in the last six months of the year to get us in the better spot for the long term, as opposed to worrying about having a great fourth quarter as opposed to investing for the five-year view.

Okay.

I think that's great.

Thank you.

Your next question is from Kartik Mehta from Northcoast Research.

A little bit of a bigger picture question for you.

Any thoughts on how you would manage the business going into next year if the recovery is let's say above normal or below normal, would you change anything in terms of either of the businesses?

Well, whether we are flat in terms of employment, which is probably more the case next year as opposed to historically growing 2% in terms of pays for control, or whether pay growth is flat to only up maybe 4% rather than 5 or 6 or 7 in years past, those are all so much better than where we are today, I can't see that we would run the railroad any differently.

That, coupled with some drag in terms of interest income as we go towards the next year, we're going to gate some of our ability to maybe invest as much as we would like to.

But I don't see it fundamentally changing the business model or the way we run the railroad around here.

So you look at new sales that you're anticipating this year, the desire to invest in the sales force because things are getting better, does that mean in fiscal next year it would be difficult to achieve that 50 basis point margin improvement in Employer Services that's the goal of the Company?

I think it's really too early to make that call at this point.

There certainly will be pressures that you wouldn't normally see when you've got organic revenue growth of 8 or 9%, which would not happen next year.

So I think it will be more difficult to do that in the year ahead.

But again, I think we've got to be careful here because I don't want to make forecasts for fiscal 2011.

But it certainly will be better than it is this year, but maybe not as good traditionally as what we've enjoyed.

But as Gary said in his opening remarks, as you're investing in the sales force and ramping, you don't get a lot of productivity out of them right away.

And that will extend into next year and put pressure on the bottom line for next year, and then as sales do ramp, you've got the pressure of the sales incentives, which are short term pressure on your bottom line but long term it's the best thing that can happen.

So I think you're thinking about it right.

And then last question, Chris, the float portfolio obviously where the interest rates are, they're bound to go up or after least it seems that way at some point.

In thoughts on changing how you would manage the portfolio or is this a strategy that you'll continue, regardless of what happens to rates going forward?

Well, a couple of things.

One is that, what you've actually seen us take down our guidance on the performance this year on rates because the yield curve, we tie it to the yield curve and we give you those specifics and I'm going to go through this in more depth in the February 18th meeting and even give you a glimpse as to what we think about for next year.

But the yield curve is staying pretty flat and it's not moving very much and everything you hear from the Fed is that that's going to be the case for a while.

I think that actually shows the benefit of the strategy that we're on.

There will be a drag next year, no doubt about it, based on the strategy and the reinvestment of the 20% of the portfolio.

But no, I think this really -- we're sitting here today with three plus percent, 3.7% kind of interest on Client Funds, compared to what the rate in the market is right now.

That's really pretty good.

And it really takes the volatility out and we think for the long term investor, that's a very good thing and that's what we hear from our longer term investors, that they like the fact that we took that volatility out.

That's not to say that you can't tweak that strategy a little bit going forward when you see rates starting to go up, but only in a small way.

We like the laddered strategy and we like the results it has and I don't see us changing from that.

Thank you very much.

Your next question is from Jim Macdonald with First Analysis.

Good morning.

Most of my questions have been answered but could you talk a little about what it would take to get back to raising prices in the normal fashion, what you'd need to see?

Good question.

I'd like to see retention rates starting to improve and less pressure on the price side, because I think our service levels are in good shape.

Clearly, as you roll out new product, your ability to increase prices also goes up.

But if we get back into an environment of where pays for control is growing as opposed to shrinking, then I think you're back into the realm of being able to look at the 1 to 2% range as opposed to a half to 1% kind of range.

But I don't really ever seeing us pushing the envelope beyond like a 1.5 to 2% price increase in the aggregate.

Obviously, you increase newer clients more because in many cases they may have gotten a slight discount, as part of an incentive to come with ADP.

So I think it's going to be relatively tough next year and more of a return to status quo as we talk about 2012.

And just one more attempt to get something on the year-end.

On the PEO side, do you expect headcount to increase over the year-end period?

Maybe that's a piece of data you might already have.

Headcount for people that we service or sales headcount?

Serviced employees.

Yes, it's -- it was definitely up in the first quarter over the fourth quarter and the second quarter was definitely up over the first quarter.

I think we were up like over 200,000.

I'm talking about like in January over December.

It's too early.

Okay.

Thanks.

I mean, we had a very strong sales result for the first half, so instinctively I'd say yes but I don't have any data to tell you exactly what that is.

Thanks very much.

Your next question is from David Grossman with Thomas Weisel.

Thanks.

Gary, while respecting your comment about not wanting to provide a forecast, I just wanted to clarify a response to a previous question.

Should we be thinking about the investments around perhaps the accelerating new sales growth will outweigh the tailwinds you get from improving retention and pays for control perhaps until the second half of fiscal 2011?

I think that's a little premature, David.

I I mean, that's -- we never give that kind of guidance this early in the -- and we understand your need coming out of this kind of downturn, but we're right in the middle of our -- we're beginning our operating plan process and right in the middle of the strat plan process.

We'll give you some more on February 18th around the impact of interest because that's kind of mechanical to a certain extent, but you're going to have to be patient until later this year as we close the fourth quarter and give the guidance as we close the year.

Okay.

Great.

Thank you.

Your next question is from Adam Frisch with Morgan Stanley.

Hi, it's Glenn Fodor for Adam.

Just trying to think about your business versus the forecast over the next several quarters, and considering some of your portfolio's long lead times, some has short lead times, if we had to think about where we could see upside or down side to the current forecast based on what you're booked and implementing and have in the pipeline, where do you see it possibly coming from?

Well, I think the ones that are the most unclear to us in terms of metric is the client retention which we talked about, so the up to 100 basis points is pretty wide range but it's all going to be third quarter driven and there's nothing we see now that would take us off that and it looks like it's so far consistent with what we expected.

I think client fund balances, same kind of thing.

We've seen through the midpoint this year, our year-to-date better than we expected, but bonuses are going to be very, very -- that will have a big impact in what the actual growth is and right now bonuses might be higher but it may not be in cash.

It might be in options or restrictive stock or that kind of thing.

So between the two of those, that's where the uncertainty is right now.

And I guess you could say it could be where there could be some upside.

But too early to tell right now.

Thanks for that color.

Just one more.

Just want to get a little more granular within Employer Services and what's going into guidance.

I mean, could you provide color on what type of trajectory you're anticipating for each of your customer categories?

So for example, in the large market, you still expect challenges, by contrast, in the small business market, still optimistic and think that's going to continue to do well?

As you know, we don't guide by segment, but your comments are pretty much consistent with what we had said.

We are still seeing the challenges in the National Accounts space.

We've seen evidence of improvement in SBS, small business and majors.

And we have positive indications of pipeline on the GlobalView, as Gary talked about in the meetings that we had just last week internationally.

So I think that's what you would expect to see in the second half of this year.

So fair to say, continuation of current trends going forward?

Yes, I think so.

You would like to see National Accounts starting to come back, and you would hope that our clients are beginning to look at investing, but so far, that hasn't translated into increased sales yet and would hope to see that going forward.

Okay.

Thanks for your time.

Appreciate it.

Your next question is from Gary Krishnan with Credit Suisse.

Hi, guys.

Good morning.

Good morning.

Had a quick question going back to Gary's comments about how spending at the high end was still cautious.

Is that consistent with what you've seen in prior cycles, as the economy begins to recover?

Or are there any differences that you would highlight that's maybe driving that dynamic?

I'm not sure that you can compare this cycle to the last -- any of the cycles before.

I do think the last cycle that National Accounts did turn around quicker.

It certainly was the first one this time to be affected.

If you think back to, must be two years ago now, that's where we first started to see the pressure on the sales show up.

But this is a very different downturn, and both on the finance side, the banking side, as well as on the main street side.

I think that CFOs like myself at national account size businesses are still waiting to see where things are going.

They're beginning to talk about possible investments that you would make an investment to get savings going forward, but it's still very cautious.

Okay.

And then could you comment on your acquisition pipeline and how it compares versus last quarter and as a follow-up to that, are you still actively looking at deals even at Dealer Services, given the industry pressures?

Yes, our acquisition pipeline is more healthy today than it was certainly a year ago.

We made more acquisitions, mostly small acquisitions in the first six months.

Some were not material and weren't announced.

And we're working on a number of other ones, including some in Dealer Services that make sense.

Actually, pricing in Dealer Services, because of pricing in the industry is actually a little bit better, particularly internationally.

So I feel very much encouraged by the acquisition environment.

Again, I don't want to give anybody an impression that we're doing big deals, but in terms of product extensions, both -- and geographic expansion, we're continuing to see good acquisition flow.

Okay.

And then the last question on the guidance and the segment pretax, are you saying that you expect pretax to be flat across each segment or just on a consolidated basis?

No, no, what we said is no improvement.

Okay.

All right.

Thank you.

Your next question is from Tien-Tsin Huang with JPMorgan.

Hi, this is David Cohen for Tien-Tsin.

I wanted to ask about the accounts payable acquisition that you did.

How should we be thinking about that whole space, the tax finance accounting going forward?

I mean, is there an opportunity for this to become sort of more strategic, doing something, whether it's something with SAP like GlobalView, but for FNA or how should we be thinking about that going forward?

Basically, what we're putting into place is what we internally call the CFO Suite.

And it's basically those services that affect the financial decision maker.

So they would include standalone tax, wage garnishment, sales tax, and accounts payable.

And we were missing the accounts payable.

If you go back two years ago, we had an arrangement with a Company called Harbor Payments which was acquired by another entity, which changed their strategic direction and we had to basically retrench.

We still think it's a big category potentially for us, and so we bought a Company that we've been in discussions with for about six to nine months and we're in the process of expanding out the sales force, and so we'll go to market after the CFO, controllers, and tax people in larger organizations to try to sell those four products into the mix.

So accounts payable is a good extension of what we already do.

It involves money movement.

It enjoys check printing.

It enjoys control.

And the kind of things that we do well from a transaction processing standpoint.

And typically it's a decision maker we already have a very strong relationship with.

We think it's a natural extension.

It's not huge at this juncture, but we do think longer term it's got pretty good potential.

The experience we did have with Harbor that Gary mentioned that showed us that we can sell it, that our clients are interested in that suite, so the key going forward is to ramp that up and match it with tax credit services and tax-ware and address that part of the market.

But the good news is we did have the experience where we know that our clients are interested in that product and we saw that we could sell it.

And how are you thinking about sizing the market opportunity for the CFO Suite?

I'm not really prepared today to talk about that, but I mean, if you put those four together, it's obviously multiple hundreds of millions of dollars of opportunity for us over a planning period.

Probably a good idea if we have others interested in it, maybe we make some general comments about it maybe at the analyst meeting in February, to try to size it for you, because with the accounts payable acquisition, we are now in control of our own destiny, so we're in a better position to speak with a clearer direction there.

So we'll try to give you some clarity at the upcoming meeting.

Great.

Thanks very much.

For time constraint purposes, we ask that you please limit your questions to one and one follow-up question.

Your next question is from Gary Bisbee with Barclays.

Good morning, this is [Mack Auty] on behalf of Gary Bisbee.

Just a quick question.

Regarding somewhat of the improvement internationally, can you address whether that's indicative of end market improvement or is that more a sales force execution?

Thank you.

Well, GlobalView is more of a global product.

We're certainly seeing better results in Europe.

Sales internationally or Europe or internationally were slightly down in the second quarter, although they were very positive in the first quarter and year-to-date we're positive.

We're continuing to add headcount there.

We're continuing to expand our China acquisition.

So in general, I think our position is improving there.

Europe is obviously a little bit behind the economic issues that we've seen in the US, but fortunately they're not as deep as what we saw in the US.

So we think we've got -- we're not quite at the bottom there yet, but we should come out of that in fiscal '11.

So in general, it's positive and actually growing at a faster rate than the US business.

Great.

Thank you.

Your next question is from Sasa Zorovic with Janney.

Continuing this last question regarding international, when you're talking about 300 to 400 salespeople to add, what percentage of them would be international to be added?

About 10%.

Thank you.

And also, as kind of going back to some of the questions that we were kind of visiting earlier in this Q&A regarding the margins and growth, so specifically kind of when we look at kind of as you mentioned sort of being at the bottom and kind of going with this recovery, we would obviously like for this to start trickling down to the operating margin line, as we look at the varying items there, what can you tell us in terms of where you see the upside kind of starting to happen and how you thing sort of that trade-off in capturing this growth such as adding salespeople versus letting it flow down, given that we just kind of coming down to this bottom, you've really done a very strong job in protecting these margins?

I think as I said earlier, the key drags that we've experienced are in pays for control, retention, the challenges we're seeing in the dealer business, as well as in the interest on Client Funds.

So those, as they hit us hard this year, you'll hear on interest on Client Funds that that will continue as well into next year, I'll go through that in the February 18th analyst meeting, and you can think about retention and pays yourself, even if pays just levels off, at least you don't have that drag.

The whole key to this business is the scaling that we have in our core payroll business, and the sales, in getting the sales going again.

And if you're adding sales at that kind of rate that we're striving for and they're a rich component of core payroll, that's where you get the margin improvement.

So long-term, we believe this business drives 50 basis points of margin improvement.

But in the short-term, the challenges are growing the business, investing the the business, adding the head count and getting that sales going and when you do that, you've got the sales incentives that are hitting you hard.

So there's a period of challenge before you get back to the normal run rate of the 50 basis points.

Thank you.

Your final question is from Chris Mammone from Deutsche Bank.

Thanks for squeezing me in.

Sounds like the only area you're going to be disappointed with is the National Accounts.

Any sense for timing on when you think we could start to see that start to turn around?

And related to that too on the small business side, I mean, from a macro level are you at least willing to say at this point that you would expect small business to sort of lead the economy out of a recession?

That's typically what's happened historically, and that's exactly what we're seeing today.

So I think that's a good sign of things to come.

Actually, if you looked year-to-date, we have positive sales growth without National Accounts during this, you know, the first six months, and I expect over the next six months that that trend will convert over to National Accounts as well.

National Accounts is also somewhat challenged from a standpoint of you have previously booked business that due to the economic conditions was deferred and so you have some netting, if I could use that term, of business from prior periods that's coming down, which will again start up.

So again, I think that's -- we're going to pass through that point in time sometime over the next six months and as we get, look forward into fiscal 2011, I think we're going to be back on positive growth in all segments.

Okay.

And I guess just a second question, just on dealer.

You frequently mentioned that you're pretty successful in share gains in that business.

I assume, though correct me if I'm wrong, that those share gains are primarily coming at the expense of your major competitor out there.

I guess if you could sort of segment that out, how are you faring against other competitors in the market?

Are you still a net share gainer against some of those other competitors or a net share loser?

If you add everybody in for every dealer we lose, we're adding three.

Clearly, we're winning more in the mid and up market.

Our historical competitor would be.

And for those buyers that are focused more just on price, we are losing slightly more than we're winning in the low end of the market.

Okay.

That's helpful.

Thank you.

Thank you.

I would now like to turn the call back over to Gary for further remarks.

We appreciate everybody joining us together.

I think you can tell by the tone of the conversation today, we're certainly more positive than we were three or six months ago.

I'm particularly pleased to see the lessening on the retention or the 0.1% decline that we saw in the quarter.

I'm particularly pleased with the progress we're making on the sales front.

I'm particularly pleased with the progress we're making on the new product services on our new platforms that are helping us.

So I think that's been reflected in our somewhat improved forecast for the year and I think we're in good shape and we're basically trying to get ready for fiscal 2011 so that we can get the shift back on the normal course as we put this recession behind us.

So thank you for joining us today and we look forward to seeing all of you in February.

Thank you for participating in today's conference call.

This does conclude the call.

You may now disconnect.