自動資料處理 (ADP) 2010 Q3 法說會逐字稿

Good morning.

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

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

I would like to inform you 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.

Ms.

Charles, please go ahead.

Thank you.

Good morning.

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

Thank you for joining us this morning for our third 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 a reportable segment has been posted to the IR section of our website.

These scheduled have been updated to include the third quarter of fiscal 2010 as well as the restatement of the dealer services commercial business to discontinued operations since the business was sold during the quarter.

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 comments about our third quarter results.

Then I will turn the call over to Chris Reidy as normal to take you through the detailed results after which I will return to provide you with our updated forecast for fiscal 2010.

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

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

You have already read in our press release this morning that year-over-year comparisons in our key metrics did begin to ease in the second half of this fiscal year as we had anticipated.

Having said that, our results continue to be below ADP historical standards and still being negatively impacted but to a lesser degree by the cumulative impact of the difficult economic environment over the last year-and-a-half.

Let me now point out to you what I believe are the note worthy items in the quarter.

In Employer Services, we did continue to see increased market receptivity from companies willing to invest again in their business infrastructure.

New business sales growth flattened in the quarter after six consecutive quarters of year-over-year decline.

Having said that, sales were again mixed across the business units within Employer Services.

Sales to larger companies in the US are still lagging somewhat from a year ago, but sales to small and mid-size companies are increasing, and new business sales in both Europe and Global View are also increasing.

I am becoming more encouraged.

However, I would like to remind everyone that there is a lag in the high-end of the market between reported new sales and when those bookings actually turn into revenues due to the implementation period required as you move up market to larger, more complex clients.

Additionally, as you may recall, last quarter we did begin accelerating next year's salesforce hirings to better position ADP for stronger sales growth, but this is also expected to be somewhat of a drag on earnings over the near term.

So directionally we'll take a period of time for revenues and in turn profits to increase, but I am pleased that new business sales are moving in the right direction and that the growth of our sales team is meeting the increasing demands in the marketplace.

Let me move onto retention.

You have heard from us about declining client retention levels dating back to the last quarter of fiscal '08 and continuing throughout the full year of fiscal 2009.

So I am especially pleased that during this year's critical calendar year end period client retention levels improved 1.4 percentage points.

ADP's revenues are still being negatively impacted by the losses of the last several quarters prior to this quarter, and we are still not yet quite back to the retention levels from several years ago.

Again, the current quarter's increased retention is directionally a very positive sign.

Our pace for control metric did decline 2.5% during the quarter, but the pace of the decline has certainly slowed.

We continue to see some indications of stabilization in terms of employment levels across the US and believe that the Hire Act recently passed by Congress may provide a needed catalyst to employers that are on the cusp of making hiring decisions, and of course ADP will assist its clients to enable them to realize the benefits from the provisions of the Hire Act.

We also reported growth of nearly 5% in client fund balances during the quarter after reporting declines the last five consecutive quarters.

This growth is primarily the result of higher bonus payments than we anticipated, an increase in state and employment insurance rates, and we also got a small lift from favorable Canadian foreign exchange rate.

Let me move on now to Dealer Services.

The automotive market is obviously still under pressure but continues its comeback with increases in US car sales volume.

Consumers have responded well to recent manufacturing incentives which also believe is a positive indicator that the outlook is strengthening.

Dealer Services continued to improve its North American share with increased new business sales and strong competitive win-loss rate.

As you may already know, GM and Chrysler have previously announced plans to reinstate a portion of the announced closed dealerships, and of course some of those are ADP clients.

We remain very comfortable that our earlier estimate of the revenue impact from these closings that we had previously shared with you will be no more than the $50 million of annualized loss revenues to Dealer Services and will most likely be less than our estimate.

Additionally, increased consumer credit availability and pent up demand appears to be positively impacting this marketplace.

As a result, we are encouraged by the up swing in market indicators which I believe bodes well for the future growth of the automotive marketplace.

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

Thanks, Gary, and good morning, everyone.

We're on slide four.

Revenue growth turned positive in the quarter increasing 3% including a benefit of nearly 2 percentage points from favorable foreign exchange rates.

Increased PEO pass through revenues also contributed 2 percentage points of growth but lower client fund interest reduced growth by nearly 1 percentage point.

Pretax earnings grew 1%, also assisted nearly 2 percentage points by favorable FX rate.

There were a lot of swings in the quarter, and I would like to take you through the larger, more impactful items.

As you can see in the detail of other income net in the press release, we received the distribution from the reserve fund compared with the charge we recorded in last year's third quarter.

The current quarter comparison also benefited from lower severance costs and favorable foreign exchange rates.

Negatively impacting the year-over-year comparisons was lower interest on client funds and increased investments in service and technology platforms.

Net earnings declined slightly as a result of the higher effective tax rate in the current quarter due to a favorable IRS audit adjustment in last year a third quarter.

Earnings per share from continuing operations declined 1% in the quarter.

Fiscal year to daylight we have spent nearly $280 million to purchase over 6.5 million shares of ADP stock.

You saw in our press release this morning our cash balance was $2.1 billion at March 31st, and I want to assure you that we are committed to returning excess cash to our shareholders.

We are on track to return at least $400 million of excess cash to our shareholders through share repurchases for the full fiscal year, and this amount may be higher depending on market conditions as well as M&A activity.

I don't want to you interpret that to mean we're changing our M&A strategy because we're not.

We continue to look for small, close to the core acquisitions, not large acquisitions that will be dilutive over multiple years.

Before I leave this slide, I would like to review some of the expense categories with you.

You saw in this morning's release that operating expenses increased about $100 million during the quarter.

More than half of this increase is from higher PEO pass throughs and increased expense from the FX impact that I already mentioned.

Additionally, bonus payouts are expected to be higher this year.

We also spent more in systems development and programming during the quarter primarily from the investments spoken with you about in our newest solutions, Run and Workforce Now.

Increased expenses from FX rates had an impact here as well.

Now let's turn to slide five.

In Employer Services, total revenues grew 1% for the quarter, all organic.

Revenue in our payroll and tax filing business in the United States declined 3% in the quarter and are beyond payroll revenues in the US continued to grow with 8% growth in the quarter.

The pretax margin was flat with a year ago.

We're seeing the benefit from last year's fourth quarter restructuring and continued expense control, and the quarter also benefited from higher client fund balances.

However, the continued investments in newer solutions and the recent acquisitions that we shared with you in February at our annual analyst conference pressured the pretax margin.

Additionally, fewer W 2s were processed.

The client and control are same-store sales employment metric lessened this quarter at down 2.5% year-over-year.

Losses also eased as evidence by an increase of 1.4 percentage points in our client revenue retention metric.

Gary spoke with you about the sales results a moment ago, so let's move onto the quarter's results for PEO and turn to slide six.

The PEO reported 15% revenue growth for the quarter, all organic.

This growth was due to increased pass through revenues and an increase in the number of work site employees.

Pretax margins declined as the benefits from last year's restructuring and continued expense control were offset by the year-over-year impact of one-time items in both the current and last year's third quarters and higher pass throughs.

Year-over-year for the third quarter average worksite employees paid increase 5% to nearly 206,000.

Let's turn to slide seven.

Dealer Services revenue declined as anticipated 3% for the quarter, 4% organic, and continued to be negatively impacted by the cumulative effect of dealership closings, lower transactional revenues year-over-year, and a decline in our software license fee revenue which is recognized upon installation in our international business.

Dealers pretax margin improved 140 basis points due to lower head count from the expense actions taken in last year's fourth fiscal quarter as well as the excellent cost control measures that we have put in place.

Dealer Services continued to increase its share of the consolidated market.

Now let's turn to slide eight.

This schedule shows the overall impact of the the client funds portfolio extended investment strategy.

At the top of the slide in orange you see the breakdown of both the average balances and the average interest yields for the short, extended, and long portfolio components which corresponds to the orange portion of the pretax P&L impact on the bottom of the slide.

The total pretax P&L impact to this section represents the P&L revenue line item, interest on funds held for clients.

Let's take a look at the quarterly results.

Near the top right of the slide you can see that average client fund balances were up $0.8 billion compared with a year ago period.

The cumulative impact of fewer pays, client losses, and slower sales was more than offset by a combination of wage growth, particularly bonuses, increased state unemployment insurance rates, and the positive impact of Canadian foreign exchange rates during the quarter.

Seeing this orange section the average yield on the client funds portfolio declined 50 basis points to 3.2% this quarter due to the seasonally high level of client funds that were invested over night at about 15 basis points.

The decrease in the average yield more than offset the growth in client balances resulting in a decline of $16 million in interest on funds held for clients on the P&L that you you see near the bottom right of the slide.

The impact from lower new purchase rates was most pronounced in the client portfolio due to the seasonally high level of client funds invested over night at rates which were 70 basis points lower than last year as a decline in market interest rates has continued since last year's third quarter.

Moving onto the blue section of the slide, average borrowings were down this quarter, and the average interest rate paid on those borrowings dropped about 10 basis points to a blended average borrowing rate of 0.2%.

Our third quarter is seasonally our highest client fund balance quarter which makes it our lowest borrowing quarter.

As a result the impact interest expense that you see near the bottom right of the slide was negligible.

When you take into consideration the entire extended strategy which also includes the corporate extended interest income shown in purple on the slide, the results was $20 million pretax decrease or a decline of about 12%.

Now let's turn to slide nine where I will take you through the extended investment strategy forecast of fiscal 2010.

We anticipated decline in average planned fund balances of 1% to 2% which is an improvement from our previous forecast of a decline of 4% to 5% as a result of increased balances related to wage growth and state unemployment tax rate.

We are anticipating a yield on the client funds portfolio of about 3.6%, down about 40 basis points from fiscal 2009 and down slightly from our prior forecast.

Client fund interest revenues are expected to decline about $70 million which is an improvement of about $5 million compared with our previous forecast.

We continue to anticipate that average corporate extended balances will decline about $200 million.

The average yield on the corporate extended investments is expected to be down 20 basis points, a slight decrease in yield from our prior forecast which partially offsets the benefit of the client fund interest revenue line.

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

Taking into consideration the pretax earnings impact of the overall extended investment strategy, including lower borrowing costs, we anticipate the decline of about $65 million in fiscal 2010 as you see at the bottom right of the slide.

Now I will 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 10.

For fiscal 2010, we do anticipate total ADP revenues will be about flat with last year, and we anticipate achieving diluted EPS from continuing operations from around $2.36 to $2.38 compared with $2.38 in fiscal 2009 excluding favorable income tax items and the divested commercial business for both fiscal years.

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

For our reportable segments we anticipate Employer Services revenues declining up to 1% which reflects a decline in pays per control of about 4% on average for the full year and about flat client revenue retention.

We anticipate 8% to 10% revenue growth in the PEO services driven by higher pass through revenues, and we do anticipate slightly higher combined Employer Services and PEO sales worldwide for new business.

We expect a decline in Dealer Services revenues of minus 3% to 4%, and we continue to anticipate no improvement in our segment pretax margins.

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

We have seen certainly some easing in the US economic landscape and the economy appears to be on its way to recovery.

Our key business metrics are improving, and we are focused on the right things for the long-term.

We continue to invest in our direct sales teams, fundamentally adding new hires to accelerate new business sales growth.

As we spoke with you at our annual analyst event back in February, we are also investing in newer technology platforms and solutions such as run for our low end markets, workforce now, our ASO offerings, Global View, and streamline for our international and global clients.

These are all designed to meet the needs of our clients and prospects, and we are continuing to invest incrementally in client service which is critical to our continued success and to maintaining our market leadership position.

These investments will to some degree pressure ADP's near term outlook, but are necessary for growth over the long-term.

Our business model remains solidly in tact with highly recurring revenues, client life cycles of just under 10 years, and excellent cash flows.

Our cash position as Chris mentioned earlier is strong as $2.1 billion, and our capital requirements are very low.

I remain committed to returning excess cash to our shareholders including ongoing share repurchases obviously depending upon market conditions.

ADP is a great company, and we continue to execute successfully against our five point strategic growth program we reviewed again with you back in February at our analyst conference.

I said previously that ADP is well-positioned to leverage the inevitable recovery in the economy, and it feels like the recovery is upon us.

I remain optimistic about ADP's long term opportunities for growth.

Let me know turn it over to the operator to take your questions.

(Operator Instructions).

Your first question is from Julio Quinteros of Goldman Sachs.

Great, guys, good morning.

Good morning, Julio.

Just real quickly on the SMB tied in terms of your performance there, can you characterize the growth of the SMB?

Is it market share gains versus sort of a recovery of the SMB segment in terms of employee growth?

Any way to characterize what you guys are seeing there?

I think it's a series of things.

One is I think we're executing extremely well in both of those segments.

Secondly, I think the economy, and you see it in the National Employment Report in terms of the return of the service sector as well as small business in terms of employment, and thirdly, I think that our new product platforms that particularly the run platform and our workforce now are somewhat making hay in the marketplace, and it feels real good.

Great.

And then just lastly, when you look at the longer term impact of things like healthcare reform and you kind of balance that against new payroll additions, can you just give us a sense on when you think that that actually begins to manifest itself in some impact to your business or I guess alternatively is it holding back people from hiring at this point?

Is there any way to triangulate around health care reform specifically?

I think there were people that were apprehensive and still are.

In fact, we're involved in some of the discussions in Washington today in terms of trying to figure out exactly how the compliance and regulation works for the new healthcare reform.

Obviously as the biggest mover of funds through the IRS and the biggest person in the client business across the US, ADP will certainly play a significant role there.

It is still not 100% clear on healthcare reform, but clearly payroll and HR systems have to be the system of record for all healthcare reform, and any kind of compliant, money movement, penalties, enforcement is going to have to be administered by companies like ADP, and some of the reforms will clearly require regulatory compliance and reporting both to employees and employers and to the IRS and in some cases even on W-2's.

We're also selling healthcare as you know, and particularly in the PEO where we're qualified to sell healthcare in multiple states and could be properly positioned as an insurance pool because we provide healthcare to multiple companies in multiple states, I think it generally will be a positive for us, and I think it is going to take a period of really twelve months to have that kind of come to fruition in the regulations get published, et cetera.

On top of that I think the Hire Act is helping us across the board, probably more up market and then the midmarkets and down market but in general regulation compliance, penalties, and higher taxes although we may not like them personally, generally help ADP the Company.

Thank you, guys.

Your next question is from Rod Bourgeois with Sanford Bernstien.

Yes, guys, I wanted to inquire about the selling environment.

It appears that you have a pretty easy comparison in the June quarter for your sales or bookings growth.

Do you anticipate your sales growth will turn substantially positive in the June quarter based on the easy comparison and some of the progress that you have noted in the sales environment?

Yes.

Great.

Is there an explanation?

Is there an explanation point behind that yes?

We'll see.

Okay.

Gary, can you comment on fiscal 2011, what a realistic sales growth goal would be?

Can you get into the sort of upper single single-digit it or low double-digit sales growth range in fiscal 2011 particularly as you get the salesforce prime before fiscal year 2011 has started?

Rod, we have said many times, you know, over time the ADP model is really focused on driving sales growth and driving retention, the two things that affect our organic growth the most, and historically we have always strived for upper single-digit approaching double-digit kind of sales growth across the enterprise, and as we return to more normal times, I don't expect that to change from our historical perspective.

I think the two are related, Rod.

How we do in the fourth quarter will set a foundation for what we would expect to happen fiscal year 2011, so the two are interdependent and to expand a little bit on your question, we are hopeful the year-over-year compare in the fourth quarter is an easy compare.

However, having said that, in national accounts you tend to have in our bigger clients a bigger portion of the sales in May and June traditionally, so as we have said, we haven't seen that to begin to turn around in that part of the market, so that's an open question of just even though with the easy compare it is traditionally a higher seasonal selling time in May and June, so still a lot of water to come under the bridge before we can talk too much about fiscal year 2011.

Okay.

Great.

And I guess on the margin front, it seems key for the payroll and tax business to resume positive growth so that you can get some scale leverage benefit on the margin front.

Do you think it is feasible in fiscal 2011 to get at least some scale leverage benefit given the improving economy and the possibility that payroll and tax business can resume positive growth again?

Do you see that potentially playing out or is it just way too early to call that at this point?

Again, it is too early to call any at this point and call next year.

A lot will depend on how we finish.

As we said in our remarks, we do expect there to be significant pressure on our margins next year and on our earnings for some good reasons.

If sales do begin to ramp, that's a good thing, and we want to go with that.

We want to continue investing in the business.

We're investing in IT technology with what you saw with run and workforce now and others, so all those things we're going to continue to invest.

We're going to continue to ramp sales as quickly as possible, and then you have the issue of the client fund balance interest over hang which I went through at the February meeting, and all of those things put pressure on the bottom, but they're all designed to get the payroll growth back growing again, so it is the right thing to do for the long-term.

Thank you, guys.

Your next question is from Jason Kupferberg with UBS.

Thanks.

Good morning, guys.

I wanted to pick up on some of that forward-looking commentary if I could and go back to the analyst meeting in February when you did make comments on the longer term growth trajectory of the business and I think at the time you suggested the fiscal 2011 revenue growth without being specific would be below the 6% to 8% [CAGR] you're targeting through fiscal 2015 and any margin expansion next year would be less than the typical 50 base point target which sounds like what you're reinforcing here.

So, I guess any other EPS leverage for next year would really need to come from either interest income on your corporate cash or share buybacks?

Is that the right read there?

That's an accurate assessment.

Okay.

So all of that still holds.

What kind of price lift is baked into those figures when you think about the revenue growth rate south of 6% to 8% next year?

Is it more like flat to up 1% we have been seeing or more like the 1% to 2% you were more accustomed to prior to the downturn?

I think we're going to be cautious on pricing next year.

It is more important to us long-term as a Company to drive increased retention than it is to drive price increases in the near term, so I think we will get more price next year than we have for the last year or two, but that being said, I think it is a time for conservatism as opposed to aggressiveness in the marketplace.

Okay.

That makes sense.

Can you just talk about your comfort level with the dividend payout ratio?

I mean, obviously earnings growth should be better over the next couple of years.

Should investors expect dividends to just keep pace with the earnings growth or is there a possibility for the payout ratio to increase?

Obviously you've got other cash deployment priorities with potential M&A.

You have to remember that dividend payouts are Board decisions, not CEO and CFO decisions, so it is real easy for us to be comfortable since we don't make the decisions, but in terms of the recommendations, I don't see any real changes to our go-forward policy as contrasted to our more recent policies of the past.

We've said that we're happy with the dividend payout ratio where it is and that would imply that the dividends would go up with earnings growth, but again that is subject to Board approval, and that position hasn't changed.

Last one for me on the ASO market, the mid market HR BPO stuff.

How big of a business is that for you guys today?

I know you have been highlighting it in the past as a key potential longer term growth opportunities, but can you help us size it a bit currently and how fast it is growing?

The COS business which is just a different name for ASO up market is $150 million kind of business with very nice growth estimates.

The low end of the market in the SBS space, the ASO we have there is today certainty less than a $50 million business, and we just really launched the ASO business in the mid-market last fiscal, so it is relatively nascent with great growth rates off of a small number.

Right.

But these businesses, all three are multi-$100 million businesses for ADP in the planning horizon, so we have great plans and great expectations for all three segments with the ASO model.

Okay.

Thanks, guys.

Your next question is from Jim MacDonald, First Analysis.

Good morning, guys.

Beyond payroll took a nice tick up this quarter.

Can you talk a little bit more what caused that?

I don't think there was anything specifically.

You have to remember that particularly in mid-market where we have our highest penetration of beyond payroll, that Workforce Now which includes our benefits offerings, our time and labor modules, and our HR benefits kind of businesses, all of those are doing very well because majors is doing extremely well both in terms of the product with Workforce Now but as a business unit in terms of new sales, so my guess would be it would be primarily there plus we're doing very well particularly selling worker's comp and 401(k) into the base on the small end which would drive that.

Our worker's comp penetration is way up year to year, and so I suspect that is doing it well.

It is.

It is pretty much across the board, no one particular item driving it, but it extends COBRA and tax ware and virtual edge which we have screening and selection business, all of the HR kind of business that is Gary mentioned, so it is pretty much across the board.

Do you expect - - where can that growth rate get to in beyond payroll, do you think?

Well, certainly if we're striving to grow sales as I described earlier, historically we have always been able to grow sales for our beyond payroll at a faster pace than pure payroll, so the blended average, you pick the number in terms of going forward growth, it is going to be a little lower for payroll and a little higher for beyond payroll, so certainly it is capable of getting back to the double-digits.

Which is true if you look back over the last couple years.

It was double-digits comparison.

Great.

One last quick one.

You had four small acquisitions.

Anything strategic you want to talk about there?

Well, we mentioned earlier our accounts payable business which we're pretty excited about.

We bought a new internet HR platform for primarily the UK market although we think it has legs beyond the UK market, and we had a couple of other kind of rollup kinds of acquisitions, but those would be the two that come first to mind.

Those are the main ones, and if you look back at our February analyst meeting, we went through most of those.

Thanks very much.

Your next question is from David Grossman with Thomas Weisel.

Thanks.

Gary and Chris, you have done a great job of laying out at least near term the impact of a lot of different things that you're doing, and in terms of what impact that will have on profitability.

Can you help us understand how much of this is just you reminding us of a typical ADP cycle, coming out of a downturn with depressed revenue and the need to continue to reinvest in the business and how much of this may be things that have changed in the market place that you want to either take advantage of or you need to respond to?

I think there is a little bit of that.

You want to make sure that you're still investing at the throughout because the business model is a great business model, so you don't want to do some of what we talked about in the past having come at the last downturn which was tightening the belt a little bit too much, and you will recall Gary talking about several years ago getting the you about of bow of the ship up.

We want to make sure the bow of the ship stays up so we continue to do that.

Having said that, we have great opportunities in the market with Run introduction and Workforce Now introduction which I think captures an opportunity in the market, so we to want make sure we continue to invest in that area.

I mean, I think it is basically the three things you really have to take into consideration as you think about your modeling for next year.

One is for sure interest income is going to go down next year, and we tried to lay that out for you as much as we can without getting into the forecasting game.

Secondly, we are investing in the business and particularly in sales and new technology and for the future of the business I want to continue to do that because it is the right thing to do long-term.

Even as we recover in the new sales category, it does take some period of time for sales to turn to revenue, and ultimately that's what drives organic growth and scale margin contribution.

It is a little about timing.

I think what you have seen in previous down cycles like we saw in 2002 and 2003, it probably won't be all that different this time as we come out of the valley and start going back up and out on the other side.

As we said when we go through the waterfall chart, the key to growth in this business is that differential between the revenue driven by sales and what you lose on the retention and the revenues you don't retain.

It is much less impacted as you know by the pace for control and the client fund balance and everything.

All of that is nice, but the real differential is getting that sales engine moving again and generating the revenue and then doing everything you can to stop-losses and to improve retention, and that's where you get the bulk of the growth going forward.

And if you just look at the new sales as a stand alone and that commission downward impact to commissions does it typically take a full twelve month period to kind of get out of that downward pressure from the commissions?

Is that a good way to think about that head wind in particular?

I think that's fair.

Okay.

And just one last thing on the balances.

I think you said that you got a pseudo benefit or unemployment benefit during the period.

Is that something that is sustained?

Is that an ongoing benefit that goes on for the next --

Yes, it is recurring, but you don't get the growth again.

You've kind of got to grow over that next year, so it will be there, but you won't be growing at the same amounts from that item.

You got to remember there are three or four things that affect balances.

The primary thing is adding new clients which we're highly focused on.

Secondly is higher wages to employees.

You're seeing that now in the form of bonuses, and I think even though we don't see the data, what's happening in the general economy would indicate that people are working more hours.

People are starting to be hired, so we are seeing wage growth as well as internal employee growth in certain of our companies.

On top of that unemployment taxes are going to be up for a while because they typically lag a year on the way down, and they will continue to lag a year beyond on the way up because the states have to fill the coffers to pay for all of the 10% unemployment tax.

Then, on top of that you're going to see higher taxes that will come out beyond that, so again the one thing that we can control as a company is selling more payroll accounts as well as making sure that most of them use our tax filing and direct deposit services, so we're highly focused on that, but I think the trends are certainly at our back we would hope add opposed to in our face at this point in time.

Great.

Thank you.

Your next question is from Michael Baker are Raymond James.

Thanks a lot.

Gary, gave a good color in terms of what was going on from a sales perspective in terms of large, mid-size and small employers.

I was wondering if you can do a similar dynamic around pays or hiring just kind of what you're seeing are your senses as it stacks up on a relative basis?

Well, we have seen our pays for control really start to flatten, but you have to remember even though we're down 2.5% pays for control this quarter, that's on top I think in the same quarter last year of around down 3.5% or 4%, so we're still down on a two-year basis almost 6% in pays per control.

So that is starting to flatten.

We'll still take another call it two, three, maybe even four quarters before we get through that and get to a real flat to positive growth kind of area.

Another statistic is not something that we really publish is we have a screening and selection business which has I think around 10,000 to 15,000 clients, mostly in the mid and up market.

We're seeing the selection, the screening process is up in recent months 20% to 30% over prior periods, so that's a pretty good indication that within our base although not statistically fully accurate, it is more anecdotal but clearly people are starting to hire again.

I think you see the balance increases are indicative around increased hiring and bonuses, and certainly the National Employment Report is getting close to a push in terms of pay growth with positives in the service sector and the low end of the market, so again I think all of the signs are good but it is pretty easy to be good compared to how bad it has been for a period of time, so I think this thing is through the bottom and going to start to ease up, but I think we have to be cautious and not get rampant enthusiasm as we go through this cycle because it is going to be a gradual up swing and if pass is prologue, it will take some period of time before we really start to see the benefit.

As you look at what we said in our guidance that we would be around 4% down for the full year, just to put that in perspective as Gary began to -- it is 4.6% year-to-date.

That was 6.5% down in the first quarter, 5% down in the second quarter, and now 2.5%, so it is going in the right direction, but 4% for the year would imply very close to zero in the fourth quarter, so you can kind of see that it is leveling off.

Look forward to the days where that's going positive, but it will take awhile to get there and it is a gradual kind of thing.

Our guidance for this year would be about 4% down when all said and done.

Just to help you guys think about it a little bit is that last down cycle as we came through the recession of 2001, 2002, and pulled out in 2003 and 2004, it actually took ten quarters before we went from negative or near flat kind of growth to a positive pace for control growth because of just the way the cycle works because people will go to more hours and more hours of overtime and more temporary staff before they start putting permanent people on the payroll.

So we just have to gate our expectations here a little bit as we think about that.

It is also worth putting that in perspective because going through a period where it is down 6% a quarter, 5% a quarter, pays per control becomes very prominent, but now that unemployment rates have reached a very high level, any improvement from that 1% I will remind you is only worth about $20 million of revenue to us, so there is a lot of focus on that metric, but the reality going forward is it is driving sales in excess of the losses from retention, and if we get flat employment levels for a while, you're basically foregoing a traditional 1% to 2% or $20 million to $40 million.

It is not that big a deal now that the bulk of the decline in pays is behind us, and I think that's sometimes misunderstood that that's more important going forward, and it really isn't as impactful as the differential in sales and retention.

Just to follow up, which employer segment would you anticipate improving the quickest, large, mid- or small?

We have seen it in the past that it is led by small, but it is not clear that that's evidence that that's the way it will recover this time, but that's where it did last time.

The shrinkage that we have seen in pays for control is not dramatically different by segment.

I mean, it is different, but not anything that I would run my PC and change my model on, and the previous recession we saw a much deeper dive at the high-end of the market which we didn't see this time, so I think it is pretty much back to Chris' comment, it is all about selling new clients and keeping the ones we have and growing the business.

I just had one different question.

I appreciate those comments.

If you look at the small business segment and you take a look at PEO, obviously we have a pretty good sense how that's growing with what you provide.

I was wondering how the ASO plus agency option is shaping up.

Is it opening up a new market for you of those that would not really consider PEO or are you seeing maybe a little bit of cannibalization on the PEO side?

That was obviously one of our strategic concerns because we have been highly successful in the PEO, arguably the best in the industry, and so we clearly see the need for the ASO platform but we're also concerned about left pocket and right pocket in terms of the sales scene.

So far we haven't seen any degradation in PEO sales based upon move to ASO, but we have been kind of careful about how we do that.

We're pretty stringent on our underwriting criteria in the PEO more towards a white collar, gray collar kind of environment, and the ASO clearly opens up the category for people who don't meet our underwriting requirements in the PEO as a natural candidate for the ASO operation or product set, so I think we've got it pretty in which hand, and I don't expect any significant drag on the PEO at least near term.

Very helpful.

Thank you.

Ladies and gentlemen, we do request you limit yourself to one question and one follow-up and then reenter the queue for any further questions.

Your next question is from Adam with Morgan Stanley.

Good morning.

This is Nathan Rozof for Adam Frisch.

I wanted to turn briefly to changes you're seeing coming out of Washington, specifically can you provide us any insight into your strategy to capture some of the opportunity from the recent Healthcare Reform Bill?

Well, you have to wait until the regulations are finalized.

As I mentioned previously, the system of record for all of these kinds of compliance and money movement and penalties and enforcement has to be either the payroll system or the HR benefits system, both of which arguably we are market leaders in both categories, so as the largest mover of funds and compliance through the IRS, kind of by default we think they've got to -- we've got to be one of the go-to guys here so to speak in terms of enforcement.

We also sell healthcare, and it clearly will drive more employers and employees to healthcare options, so we think it is clearly going to help us there.

Secondly, the PEO is already a qualified health provider as a co-employer in 30 states and whatever the number is, something like that, so we think we're going to be well-positioned in terms of leads to the PEO for people who now want to offer healthcare, and in terms of reporting, a lot of it in the early reviews or going to have to be done either through employer reporting or W-2 reporting in terms of the individual compliance and what happens to be there.

You have also seen us respond very aggressively on the opportunity on the Hire Act in the media as well as in some of our advertising, and I certainly think that's helping us in the marketplace, so clearly we've got more definitive strategies to work on as these regs get finalized, and we'll try to be a little bit clearer on that as we go into fiscal 2011 to kind of help you plan for the years ahead.

I appreciate the color there.

For my follow-up I wanted to turn just briefly over to the Dealer Services segment.

Can you provide any additional color on what's driving the improvement in new sales, where is demand improving, where does it remain soft, and how does the pricing environment look specific to dealer?

Thank you.

First of all, I think we made tremendous strides as a Company to being the global provider for the OEMs, and so our partnership with the manufacturers has never been better both in terms of the US as well as Europe and the far East, so I think that's number one.

Number two is I think we have done an excellent job in expanding the breadth of our product offering and keeping it current from a technology standpoint.

A good example of that would be at the recent NADA we released all the mobile platforms for all of our applications where service writers can write up service orders and do inquiries straight from a PDA or any of the mobile platforms that we may have, and pricing wise it is certainly more competitive than it has been, but the bigger bundle of applications is also helping us from that standpoint, and we have seen a lessening of losses of dropped applications and out of businesses over the last number of months, so I would expect our market share gains to continue along the same pace as they have been for the last year as we look for the year ahead.

Thanks.

I appreciate the color.

Your next question is from Kelly Flynn with Credit Suisse.

Hi.

This is Gary for Kelly.

Good morning.

Good morning.

Just had a couple of quick questions.

One, not sure if you updated us before.

Can you tell us about national accounts and what you're seeing this quarter versus what you saw just last quarter and if you see things changing noticeably there?

We did say in our prepared comments that's the one area in sales we still haven't seen the bounceback, and that remains challenged.

And any thoughts on Europe and what you're seeing in Europe and the US in terms of trends?

The environment in Europe is certainly tougher than say it was a year, year-and-a-half ago although our sales results are still positive in Europe, and the shrinkage is not nearly as dramatic because the social laws and the regulations are much more stringent in Europe than they are in the US, and we're continuing to have great success with our Global View and streamline offerings in Europe and I expect that to continue.

Thank you.

Thank you.

Your next question is from Gary Bisbee with Barclays Capital.

Good morning.

I understand you're not giving guidance for next year, but you made the comment a bunch of times there is a certain period of time it takes sales to turn into revenue?

Can you help me think about that?

I understand Global View it could be up to a year to on board a new customer, but if one of the areas of strength is small and mid-sized businesses, I was under the assumption you actually brought those on fairly quickly.

Is that accurate?

Let me help you with that.

When we report a sales number in the PEO or in SBS, that means that they have actually started processing with ADP.

When we report a sales number in major accounts, depending upon how many applications it typically takes four to six months, maybe as long as eight months in our major accounts or our ASO offerings in that space to actually start processing, and national accounts you should be think being more like nine months as an average, so business we're selling today in national accounts won't turn to revenue in best case until the first of October and kind of worst case a year from now.

Okay.

So on a blended basis, though, we should start -- it sounds like it is about six months until we really start to see some and if you do really well with the large accounts, it could take a little longer?

Yes, and Europe and Global View are much more like the national accounts kind of space in the six to nine months plus kind of category.

And bear in mind that year-to-date was still down 1%, and we were flat in the quarter, but we're encouraged but it hasn't happened yet, and so the timing into next year rolls out --

Gary, it is pretty straight forward.

We're obviously more encouraged than we have been.

A lot of things are turning positive, and we're just trying to make sure the folks on the other end of the phone call don't get revenues too far out in front of themselves as they start thinking about converting sales to actual revenue and what implications that has to the bottom line.

When you couple that with the interest income drag we're going to have for next year, we just are trying to be as helpful as possible without getting too far out in front of ourselves.

Totally understood.

I guess let me take that one step further.

Chris, you said earlier due to the rates falling and some of the sales investments, there would be significant pressure on margins.

Was that on an absolute basis or were you just saying significant pressure from those items?

Should we think that margins might be down in fiscal 2011 quite a bit or is it just pressure relative to the long-term goal of 50 to 75 basis points?

Pressure to the relative goal of 50 basis points year in and year out.

That's an average over a five-year period.

Next year is the investment period, and the period where you are ramping in the sales model, so it is relative to that 50 basis points.

It is not necessarily negative, but it is still too early.

Yes, and you have to remember, Gary, too, that interest income is very high margin.

As you think about that, when you get through the ramifications and the in's and outs of ADP's P&L, you have to remember in prior year we didn't do any merit increase, and our bonus payouts were modest based upon our performance, and we want to continue to invest in the business in terms of platforms and sales growth and service for the long-term while at the same time trying to deliver the best results our shareholders that we can with keeping long-term objectives in mind, but you shouldn't read any great surprises in terms of our historic business model because you couple those things with some acquisition activity which we're pleased about.

It just puts some pressures on the business, particularly as we go into '11 that would normally be quite as much of a contrast and more normal times.

Okay.

Thanks.

If I could just sneak one more question in, why wouldn't you given how strong a balance sheet and cash flow are consider accelerating the buybacks?

When you throttle back a bit three or four quarters ago, I think the thought process or one of the things you said was just challenged markets, want to make sure you're liquid, et cetera.

Seems like we have seen an awful lot of improve.

Credit markets and whatnot and would seem like the right time from my perspective to buy your stock prior to rates start going up and job growth get being a lot better.

I think that's a fair comment.

The $2 billion of cash we have is higher than we have said we wanted it to be.

We said $1.5 billion was the target even as things turn around we've always said that $1 billion is the more appropriate place, so I think you don't do it all right away.

You kind of time diversify share repurchases, but as I said, you could see that going forward, you could see us accelerating that to get that cash balance down.

Great.

Thank you.

Your next question is from James Kissane with Bank of America.

Thanks.

Most of my questions have been answered, but just on client retention can you provide a little more color?

It was up nicely year-on-year.

Was it strong across the different Employer Services segments?

Yes.

It was strong across the board, Jim.

We national accounts and Europe has really weren't really effective to the same degree as the mid-market in the low end of the market, but in the mid-and low end, it certainly improved in both categories.

Okay.

Great.

And just clarification.

In the release you said that the acquisitions that you have done this year would be dilutive this year.

I assume they will be a drag on margins for FY 2011 but will they also be dilutive in fiscal 2011?

Small dilution going into next year from what we see so far.

And one last question.

Update on Global View, Gary, in terms of how the implementations are going and the break even target?

Implementations are going fine.

Our quality and speed around implementation continues to improve.

Sales activity is up dramatically from last year, but again that was off of a very low number because it kind of fell off a Cliff last year as you recall.

I believe our internal projections around break even or fiscal 2012, am I right there, Elena?

Yes.

Exiting 2012, yes.

Thank you, great job.

Your next question is from Mark Marcon with Robert W Baird.

Good morning.

I have two questions.

The first one relates to run and workforce snow.

I was wondering if you could talk a little bit about a little more color in terms of what you're seeing there in terms of the takeup in the market and also how that's impacting margins and how we should think about that from a margin perspective and to your earlier comment, Gary, in terms of left pocket, right pocket, is there any impact from that perspective particularly with regards to run?

We are in process with completing the rollout across all regions in Run, and the product is a real current state of technology in terms of look and feel.

It is a realtime payroll.

It has some nice reporting attributes to it, and it is just doing well in the marketplace with clients as well as prospects and CPA's and the banking community, so it just really shows well where as the Easy Pay was a much older product.

We're talking about decades older, and didn't demo that well, and so it is just salesforce has a lot of confidence in the product now.

It is running extremely well, the CPAs and the bankers like it.

We're getting a lot of traction in the wholesale market with our CPA's as we're starting to roll that out, so we're just feeling real good about the product in general and the service people and the sales people are really enthused about it.

Is there a margin difference between that relative to Easy Pay?

There is certainly a margin difference in the beginning because it is a smaller scale.

Right, but I meant on an incremental basis.

No, as you think about it over time, we're not expecting any real significant margin pressure as we go from the left pocket to the right pocket because there is enough volume and enough units that it is -- you get to scale fairly quickly.

Great.

And then when we think about workforce now, that's more complimentary but can you talk a little about the margin impact there?

Again, you have to remember that Workforce Now is an integrated new user interface for our employees platform, HRB we call it.

Right.

Pay expert and our easy labor manager, and it has brought the modules modules together so it has a common user interface for both the employee as well as for the administrator and the employer who does that and the data integration and transparency is dramatically better than our historical perspective, so again the sales guys are excited about it.

It's priced much more simpler than our historical model on a pays per control basis and include this is module or all three modules, so I think it is just right on the mark for what the market wants and the sales guys are turned on about it.

When we talk about investments in those two products, we're not talking investments vis-a-vis lower margins necessarily, it is the IT investment to build those products out and continue to put bells and whistles on them as appropriate, so that's the investments we're talking about.

Got it.

I was wondering if I could switch over to the interest income on the float, really appreciate the color as it relates to next year.

As we look out a little further, obviously the whole yield curve is moving up recently and there is lots of projections that the long end of the curve is going to move up and certainly the short end should ultimately we should end up with some version to the mean and some flattening.

How should we think about interest income from a longer term perspective?

Should we think about the basically the same dynamic in terms of how long it took for the effective yield to go down?

There this be in reverse?

It is gradual, but the effective yield coming down obviously rates even on a short-term rates one from 5.25% down 25 basis points in a very short period of time.

Right.

That doesn't necessarily mean it will be the same on the way up.

The forward yield curves do show some growth, but if you notice, that's been extending out further and further, both on the over night Fed funds rate as well as the longer part of the yield curve, so it is anybody's guess.

It is hard to predict what's going to happen to interest rates.

We're not in that business, but the strategy we have kind of mitigates gates the downside of that rate volatility, and we'll participate on the upside.

The good news is the bulk of the portfolio is still earning 3.6% or thereabouts in the extended and the long are up in the 4's, and that's real return on equity, so we don't have the volatility, but it is going to take awhile before interest rates get back to that 3.5% to 4% level, and in the meantime our portfolio is earning those kind of rates, so from an ROE standpoint it is much better this model.

Great.

Appreciate the color.

Your next question is from Jennifer [Duigan] with Lazard Capital.

Thanks.

I had a question on the salesforce additions as you guys have been talking about you're reversing some of the prior cutbacks.

What portion of the add backs did you complete in the current quarter?

As we had mentioned in previous I think in the last quarterly call we're scheduled to add around 350, 400 head count in the sales arena.

We are well on target to achieve that by the June period, and I am hopeful we'll even get there before then, but you have to remember you have some turn over as you go, so we don't want to sacrifice quality of hiring just to put fill slots, so we're well over halfway through that, and on target to be thereby the May/June timeframe.

Any way to quantify what the drag on margins was this quarter and obviously as you add more and there are working towards productivity, I would imagine that the drag from that actually increases a little with it in the fourth quarter versus the third quarter?

Jenny, we haven't gotten into the specifics because it is cherry picking in terms of the overall impacts, so many levers that impact margins, so we don't go into each one of those in detail, but clearly there is incremental pressure as we do that, and more in the fourth quarter than what we've seen to date, and as you start to ramp those hires, and as they start coming on board, it is more in the fourth quarter and going forward.

Yes.

And I know it depends a lot on how the sales environment plays out, but when would you imagine that they're productive to the point that they're no longer a drag, they're at least kind of break even?

You have to remember that sales costs are a drag even with productive people in the first year.

Okay.

So we kind of target getting our costs of sales back in about a year on average across the enterprise.

It takes a little longer in that and in SBS a little longer than that up market because you have to get the margins, so that will be a drag all of next year, won't really start to be a positive until the next year, but again we'll start to ramp up again the following year and it kind of gets back to business as normal.

Okay.

It is just that looking back historically we were flat in major accounts up and we actually went down in head count in small business, so we're again adding back across the board.

Okay.

Great.

Thanks so much.

We do have time for two more questions.

Your next question is from Tim McHugh with William Blair and Company.

Yes, thanks.

I will just have one question here and just wondering if you could elaborate a little more on the reasons are at least best you can tell why you think the national accounts remained weaker than improvement you're seeing in the small and medium-sized businesses and Global View, if there is anything you want put your finger on?

Well, there is a couple of areas.

One is I don't want to be too negative here because we have seen a pickup in terms of our perspective business forecast as we look out, but really there were two factors.

One is in terms of the economic impact, the high-end of the US market was the one that was affected the most and most people in Chris' chair or my chair have been very reticent on any kind of capital spending or out lays of cash or internal effort until there is more crispness and clarity around is the recession really behind us and is it back to business as usual?

So I think it is not surprising that the US sub market would be the slowest to recover.

That being said, we also had some additional drag because over the last few quarters we have had some previously booked business in our backlog that is either been deferred or canceled outright that we have taken down so you have a slowing of new sales and a little bit accelerated rate of unwind in the previously backlog because a lot of these accounts take a year to implement, so now as you -- as gross sales start to increase and the backlog becomes I don't want to use the term clean, but more current, then I think it will go back to the normal pattern which should occur in the next quarter or two.

Is there anything consistent trend of in terms of the reasoning or the reasons for the cancelations other than just economic weakness and hesitancy?

Just pure economic weakness or companies are downsizing, the last thing they want to do is be putting in a new HR system.

Or time and labor because we have people focused on doing other things.

As people start preparing for growth once again it really brings out the need for more accurate payroll, HR benefits kinds of systems and clearly we start to see that in our perspective business outlook

Okay, thank you.

That's it for me.

Your final question comes from Tien-Tsin Huang of JPMorgan.

Hi, thanks so much.

I'll make it quick, Gary and Chris.

Just on the new sales front, are you seeing any signs of new business starts picking up for the small business unit?

I'm sorry if I missed that if you talked about it.

Well, ass you know in the National Employment Report we have seen increases particularly in the service sector and more so in small business and anywhere else.

So even though we don't track new business versus existing business statistics, the anecdotal evidence would tell you we are seeing somewhat of an up swing, so I would like to help you more, but we just don't track that data any kind of digital way.

Some anecdotal evidence a little bit less out of business as well.

A little less out of business.

Anecdotal is helpful.

That's where I was going next, the retention side of small business, so business failures and bankruptcies down a touch it sounds like based on what you're hearing?

Absolutely.

Okay.

Got it.

Thanks.

Thank you.

That does conclude the Q&A session.

I will turn the call back over to management for further remarks.

Let me conclude by just thanking everyone for being here this morning.

I am sure as all of you gathered from the tone of the call we are encouraged, but at the same time we're just trying to make sure that people are appropriately conservative as they think about our encouragement turning to actual revenue and bottom line, but you shouldn't hear anything negative from that perspective.

It is just the way the business model works and we definitely feel that the wins are beginning to be at our back rather than our front, and the results will play out accordingly, so again we remain very pleased with how we're positioned, and we expect improving results as the future unfolds.

Thank you for attending.

Thank you for participating in today's conference call.

This concludes the call.

You may now disconnect and have a great day.