自動資料處理 (ADP) 2011 Q1 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 first quarter 2011 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 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 first quarter fiscal 2011 earnings call and webcast.

Our slide presentation for today's call and webcast is available for you to print from the investor relations home page of our website at adp.com.

As a reminder, the quarterly history of revenue and pre-tax earnings for our reportable segment has been posted to the IR section of our website.

These schedules have been updated to include the first quarter of fiscal 2011 and all prior periods have been updated to reflect 2011 budgeted foreign exchange rates.

During today's conference call, we will make some forward-looking statements that refer to future events and as such involve some risks, and these are discussed on Page Two of the slide presentation and in our periodic filings with the SEC.

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

Thank you, Elena.

Good morning, everyone and thank you for joining us.

I will begin today's call with some opening comments about our first quarter results and then I will 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 an updated forecast for fiscal '11 and before we take your questions, I'll also provide some concluding remarks.

Overall, I am quite pleased with ADP's first quarter results for fiscal 2011 which as you can see from the release were better than anticipated.

You recall that existing -- as we exited last fiscal year, we did reach positive inflection points in our key business metrics.

I'm pleased to report for the most part that those positive trends continued into this first quarter of 2011.

Let's start with new business sales, which as you saw in this morning's release were flat to last year.

However, results were different by market segment.

In the small business marketplace including the PEO, we posted strong double-digit growth year-over-year.

I believe our investments in our new run product and in our sales force has had a very positive impact in this market.

Having said that, we are somewhat cautious as we move up market.

The pipeline for new business sales is good.

But the sales cycles remain relatively long and new business sales in the mid-and large company markets were slightly below last year.

New business sales in our international business were up nicely, excluding GlobalView sales which declined year-over-year.

We closed three quite large GlobalView transactions in the first quarter of last year which impacted the total sales comparison from last year by a couple of points.

All in all we are still comfortable with our full forecast for high single-digit new business sales growth for the year.

As we look at retention, I believe that the improved economy coupled with the technology investments we have made in our service solutions and the significant increases in client service associates helped drive this notable improvement in client revenue retention during the quarter.

This increase of 1.7 percentage points clearly exceeded our expectations and for the record is the largest quarterly increase we have seen in this metric in about five years.

Employment levels in the US have stabilized and our pace for control same-store-sales employment metric was actually up 1.7% in the quarter and also ahead of our expectations.

Average client funds balances increased 9% and were higher than anticipated driven by higher wage growth, growth in pace for control and increased SUI tax.

It is also noteworthy that the number of worksite employees paid in our PEO grew 9.5% in the quarter.

I am very pleased with the acquisitions we closed in the first quarter and the pipeline on the potential transactions is also quite good.

To remind you our M&A strategy is primarily focused on entering adjacent markets that leverage our core franchise as well as competitive roll-ups within our existing product portfolio.

We are currently in the process of integrating the two largest transactions we completed this quarter-- Workscape in employer services and Cobalt in dealer services and continue to be quite pleased as we go deeper with each business.

Moving on to dealer services, the automotive landscape is relatively stable and dealership closings have greatly subsided.

Revenues in dealer however continue to be negatively impacted by the carry-forward effect of dealership closings over the past year.

But fewer current closings bodes well for continued improvement in the year ahead.

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

Thanks, Gary.

Turning to Slide Four.

We're very pleased that total revenues increased 6% to $2.2 billion in the quarter, including acquisitions.

Revenues were negatively impacted nearly 1% from unfavorable foreign exchange rates as the dollar strengthened during the quarter compared with last year.

However, our forecast assumes that foreign exchange impacts will turn favorable during the second half of the year and have no impact on the full year as compared to a year ago.

Excluding acquisitions, revenues grew 4% in the quarter.

Pre-tax and net earnings were down 2% and as anticipated, first-quarter earnings and margins were lower from the investments we made over the second half of fiscal 2010 to drive growth.

I'd also like to remind you that we had frozen merit increases until the fourth quarter of last year which also resulted in negative year-to-year grow-over comparisons.

Earnings per share from continuing operations at $0.56 per share were flat with the year ago on fewer shares outstanding.

Before we leave this slide, I would also like to speak briefly about ADP's cash balance.

As you know our intent is to target the cash balance toward the $1 billion level at a minimum.

We moved closer to this level during the first quarter by closing three strategic acquisitions for $475 million in net cash when we bought back 1.2 million shares for about $50 million.

As a result, our cash and marketable securities balance was $1.3 billion at the end of the quarter compared with $1.8 billion in June 30.

Let's turn to Slide Five and go through the business unit results for the quarter.

Employer services total revenues grew 6% or 5% organically for the quarter.

We were pleased that revenues in our payroll and tax filing business in the United States grew 2% during the quarter as we continue to see strong demand for our payroll solutions, particularly in the small business marketplace.

Our beyond payroll revenues in the US continued to grow with 9% growth in the quarter, including about 2% growth from the Workscape acquisition closed early in the quarter.

ASO, our BPO offering at low end of the market, retirement services and other beyond payroll solutions, such as tax credit services, also grew nicely during the quarter.

ES's pre-tax margin declined 80 basis points as leverage from increased revenues was more than offset by the incremental hiring of sales and service over the second half of fiscal 2010 as well as higher compensation expense.

Pace for control which is our same store sales employment metric increased 1.7% on the quarter compared to the first quarter last year, which was higher than we anticipated.

Number of pays in Europe declined on the quarter compared to a year ago in the same-store-sales basis though the trends improved during the quarter.

Client revenue retention continued to improve with a notable increase of 1.7 percentage points for the quarter.

Gary took you through the new business sales so I will just repeat that sales are in line with our expectations for the quarter and also remind you that new business sales represents the expected new annual recurring dollar value of the sales in our incremental recurring revenues to our existing recurring revenue base.

Let's continue with the quarter's results.

Turning to Slide Six in the PEO.

The PEO reported 15% revenue growth for the quarter, all organic, primarily from increased pass-through revenues and an increase in the number of worksite employees paid.

Pre-tax margin declined 370 basis points primarily due to a tough compare with last year's first quarter, which included a $9 million favorable settlement on a state unemployment tax matter causing 310 basis points of the degradation.

Additionally, compression from price sensitivity related to higher pass-through costs as well as increased compensation expense pressured the pre-tax margin.

Excluding last year's settlement, pre-tax earnings grew 8%.

Year-over-year for the first quarter average worksite employees increased 9.5% to nearly 214,000.

Moving on to dealer services on Slide Seven, dealer services revenues grew 12% for the quarter including revenues from Cobalt.

Organic revenue growth was 1% including about one point of grow-over challenge from last year's revenue from the Cash-for-Clunkers program.

Dealers pre-tax margin improved 25 basis points.

The current quarter was negatively impacted about 225 basis points from the Cobalt transaction.

And was offset by a 225-basis-point benefit from the $7 million intangible asset impairment charge in last year's first quarter relating to General Motors announced closure of the Saturn brand.

Dealer services continue to gain market share with strong competitive win rates.

Now let's turn to Slide Eight.

Before we get into the results of our investment strategy for client funds, I want to remind everyone that safety, liquidity and diversification of our client funds continue to be the foremost objectives of our strategy.

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

To give you a quick understanding of how to read the schedule as most have previously seen, the schedule shows the overall impact of our client funds portfolio extended investment strategy with average balances and interest shields shown in the top half of the slide and corresponding pre-tax P&L impact shown in the lower half; all color-coded to help you transition from the top half to the bottom half of the slide.

Getting into the details for the quarter, results were slightly better than anticipated primarily due to the client fund balance growth offset by lower than anticipated yield.

For the quarter, average client fund balances were up $1.1 billion or 9% compared with the year-ago period.

The average yield on the client funds portfolio declined 40 basis points to 3.7% resulting in a slight decline of $1.1 million in interest on funds held for clients on the P&L.

You can see that lower new purchase rates impacted the extended and long portfolios where the average yields earned 20 to 40 basis points lower than last year.

Average borrowings were down in the quarter and the average interest rate paid on these borrowings increased to a blended average borrowing rate of 0.3% from 0.2% last year, Results with a negligible impact to the P&L.

So focusing your attention on the net P&L impact on the lower portion of the slide, take into consideration the entire extended strategy presented here, the results were the $7 million P&L-decrease before tax or a decline of 4%.

The overall yield of the bottom-line impact when calculated is 4.4% compared to 5.0% last year.

Now let's turn to Slide Nine where I will take you through the extended investment strategy updated forecast for fiscal 2011.

Before I get into discussing the detailed forecast, I would like update you on the credit quality of the portfolio and what we are seeing in the marketplace regarding the current fixed-income investment landscape.

As was the case when we last showed you the details of our February analyst conference, currently about 85% of the portfolio remains AAA or AA rated.

As you observed in the marketplace, the recent decline in US Treasury yields and the narrow credit spreads have led many corporations to issue new debt.

Fully consistent with our client funds portfolio objectives of safety, liquidity, and diversification; we are able to take advantage of greatest supply of new investment grade corporate fixed-income securities and add more corporate bonds to our portfolio.

In addition, the steep yield curve presented greater opportunities at the longer end of the maturity curve in both the extended and long portfolios.

As a result, the duration lengthens slightly to 2.8 years at the end of the first quarter compared to 2.7 years at June 30 and 2.4 years at end of last year's first quarter.

I want to be clear that we have not taken more risk in the portfolio by going out further along the yield curve.

There's been no change to our Board-approved investment guidelines or our intent to hold the securities to maturity.

Since we do not believe it's possible to accurately predict future interest rates, the shape of the yield curve or the new security issuance behavior of corporations, we continue to base our interest assumptions in our forecast on Fed funds future contracts and the forward yield curves of the 3.5 and five-year US government agencies.

In the current forecast ranges we have provided, we have also taken into consideration the potential investments we may make in corporate fixed income securities as well as investing further out on the yield curve.

Net unrealized gains as of last week were about the same as the net gain of $853 million as of September 30, reported in this morning's earning release.

While the level of unrealized gains will change as the interest rate environment changes, the way to think about this is that the unrealized gains indicate we are holding securities yielding higher rates than current market rates.

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

I'd also like to point out that this $850 million plus of net unrealized gain includes gross unrealized losses of just $1 million.

Now to the fiscal 2011 forecast.

The slide summarizes anticipated pre-tax earnings impact of the extended investment strategy for the client to have funds investment portfolio fiscal 2011.

It's important to keep in mind that 15% to 20% of the investments are subject to reinvestment risk each year.

We have updated our forecast for growth and average client funds balances to 5% to 7% growth, which is up from our prior forecast of 2% to 3% growth.

The increase is driven by better-than-anticipated wage growth and pace for control.

You recall that the first quarter average client balances grew 9%.

I want to provide a few comments to help you frame why we're not expecting that level of growth in balances for the full year.

We saw higher wage growth in the second half of fiscal 2010 influenced by over 30% growth in bonuses, a return-to-merit increases and a higher SUI rate.

Therefore, we anticipate tougher compares for the second half of 2011.

We are anticipating a yield on the client funds portfolio of 3.2% to 3.3%, down 30 to 40 basis points from fiscal 2010.

We are anticipating a decline of $20 million to $25 million in client funds interest as the lower anticipated interest yield offset the expected growth in balances.

Average new purchase rates are expected to be about 300 basis points lower than the embedded rates on maturing investments.

We are anticipating that average corporate extended balances will be flat to up $100 million, and the average yield on the corporate extended will be down 30 to 40 basis points.

We are anticipating average borrowings will also be flat to up $100 million and average interest rate paid on those borrowings will be slightly -- will be up slightly in fiscal 2011, 10 to 20 basis points to a blended average borrowing rate of 0.3 to 0.4%.

Looking now at the lower right of the chart, you see that the continued anticipated decline in interest rates is expected to outweigh the benefit of growing average balances resulting in a decline in pre-tax earnings of $30 million to $35 million for fiscal 2011.

For fiscal 2011, we anticipated a decline of about 40 basis points to fiscal 2010 overall yield of 4.1% from the net impact of this strategy.

Now I'll turn it back to Gary to take you through the remainder of the forecast for 2011.

Thank you, Chris.

We are now on Slide 10.

In our fiscal 2011 outlook, we are assuming no change in the current economic landscape.

We have also updated our forecast for you to include the impact of the acquisitions that closed during the first quarter of fiscal 2011.

We still anticipate that the Cobalt transaction will be slightly accretive to ADP.

However, as I will discuss in a moment, cost relating to the acquisition will be diluted to dealer services pre-tax margin.

We continue to anticipate year-over-year earnings pressures from the impact of merit increases in the last year's fourth quarter as well as from the sales force and service hirings that took place over the second half of fiscal 2010.

Now let me take you through the forecast you see here on the slide.

For total ADP revenues we anticipate growth of 7% to 8%, which reflects the recent acquisition activity mentioned a few moments ago.

Excluding revenues from the acquisitions closed in the first quarter as they were not contemplated in our prior forecast, we anticipate 3% to 5% revenue growth.

This is up from our prior forecast of 1% to 3% growth due to better-than-anticipated results in the first quarter.

We do anticipate 3% to 5% growth in diluted EPS from continuing operations compared to $2.37 from last year, which excluded favorable tax items in fiscal 2010.

This compares to our prior forecast of 1% to 3% growth.

We anticipate no impact to diluted earnings per share from the acquisitions closed during the first quarter of fiscal 2011.

As is our normal practice, no further sharebacks are contemplated in the forecast.

Although it is clearly our intent to continue to return excess cash to our shareholders obviously depending upon market conditions.

Now let's turn to Slide 11 for the segment update.

For our ES business, excluding revenues from the acquisitions closed in the first quarter as again they were not contemplated in our prior forecast, we anticipate revenue growth of about 4%, which is up from our prior forecast from 1% to 3% revenue growth.

Including acquisitions, we anticipate about 5% growth.

We continue to expect for the full year to be up some 50 basis points of pre-tax margin improvement including the first-quarter acquisition activity.

Our forecast for both pays for control and client revenue retention have been updated to reflect the better-than-anticipated results in our first quarter.

We anticipate an increase in our pays per control metric in the US of at least 1% with more favorable pays per control comparables expected early in fiscal 2011 due to the significant declines in this metric that we saw early in fiscal 2010.

We do anticipate a slight decline in pays for control in our international markets of about 0.5% for the year, and we anticipate client revenue retention will improve about 50 basis points for the year.

We anticipate 13% to 15% revenue growth for PEO services with a decline in pre-tax margins due to higher benefits pass-through revenues and grow-over impact of last year's $9 million favorable tax settlement as we had mentioned earlier.

We continue to anticipate high single-digit growth in the annual dollar value of ES and PEO worldwide new business sales from the $1 billion in this same metric sold in fiscal 2010.

And for dealer services excluding Cobalt, we anticipate up to 2% revenue growth and a slight improvement in pre-tax margins.

Including Cobalt, we anticipate over 20% revenue growth and a decline in pre-tax margin up to 200 basis points.

Turning to Slide 12, I would like to leave you with some closing remarks before we open it up for your questions.

As you can hopefully summarize from my comment, I am quite pleased with ADP's results for the first quarter of fiscal 2011 and I hope that came through to you on this call.

The economy is stable, but does remain challenging with interest rates stuck at record lows and millions of people still out of work.

However, I believe ADP entered fiscal 2011 from a position of considerable strength.

The positive inflection points reached on most of our key business metrics exiting last fiscal continued into our first quarter of fiscal 2011 resulting in ADP achieving better-than-anticipated results for the first quarter.

Our updated forecast for the year reflects these positive results as well as the impact from the strategic acquisitions closed during the quarter.

I can assure you that ADP's business model remains solidly intact.

ADP's highly recurring revenues with strong and consistent cash flow generation enabled us to continue incremental investments in our client facing associates and in our market leading solutions during the economic downturn.

A good example is the investment we have made to roll out our initial mobile application for run payroll for small business, and we are further investing in mobile applications across our entire solution set.

ADP has been performing exceptionally well on the acquisition front.

During the first quarter we spent near $500 million on strategic acquisitions that we believe will help fuel ADP's future growth, and there is more to come.

We continue to execute against our five point strategic growth program and I remain very optimistic about ADP's long-term growth opportunities.

Now let me turn it back to the operator and we will be happy to take your questions.

Thank you.

(Operator Instructions).

Your first question is from the line of Adam Frisch with Morgan Stanley.

Thanks.

Good morning, guys.

Nice quarter.

Thank you.

Can you talk about sales in the quarter and how the important upcoming selling season is shaping up?

I know May and June is important for national counts, but January is probably the bigger test.

Anything you can point to in terms of size or recent retention figures of your sales force, new products or pricing terms or anything you think that can be incrementally positive?

Well, I think we were only a few percentage points under our plan for the first quarter even though we would love to have seen it as stronger than it was.

It still was very close to our plan and with a strong fourth quarter we had and what potentially was pulled out of the first quarter, we certainly are quite comfortable with our forecast for the rest of the year.

I actually talked to most of my senior sales leaders yesterday in preparation for the call and they all remain very optimistic about being at our above their plans for the full year.

Most of them would say to you that their backlog prospective clients was actually stronger at this point versus last year, which I think bodes well for the selling season.

Our product position particularly on the low end of the market with our new run platform and the new mobile applications that we have launched, our people there are actually quite bullish and we actually had strong double digit growth there in the quarter -- first quarter.

Work force now continues to do well in the mid-market and we got a very strong pipeline of GlobalView prospects.

I'm pretty comfortable we are going to have a good second quarter and a solid finish for the year.

Great.

If I could just focus my follow-up then on M&A.

You guys close in acquisition for the quarter.

Can you talk about your strategy in terms of maybe expanding the footprint a little bit in tangential businesses to the core.

I know PayChecks mentioned merchant processing on their calls wondering what your view was on expanding the footprint a little bit.

We were always looking for expanding geographic footprint.

Regrettably, there's not as many service oriented companies once you leave Western Europe in the US to acquire.

We are continuing to push the envelope in terms of expanding our HR and benefits and performance planning kind of products.

So we are trying to build a wider array in the portfolio of the products that we take into the marketplace.

We are also doing some analysis which is no secret in the marketplace around health care kind of solutions that we can offer to our base or to the market in general as it has a pretty good go forward growth outlook so we are looking at those kind of things as well.

I think it is going to be pretty much business as usual.

But you are seeing us move into the accounts payable market with the acquisition we made last year we are looking at health care and down the path to continued to expand the portfolio.

Okay, great.

Thank you, guys.

Good luck.

Your next question is from Ashwin Shirvaikar from Citi.

Thank you.

Congratulations on the good quarter.

Thank you.

My first question is with regard to paper control, can you comment on how the international part of this is trending?

I believe last quarter that was a negative impact.

I think last year, and they will correct me if I'm wrong, I think we were down around 2% to 3%, around 3% and that gradually has improved over the quarters and our forecast that I think as I mentioned in my forecast was for it still to be slightly negative.

I think like a half a point down for the go forward year.

Okay.

With regards to sort of balance growth, are you assuming anything specific with regard to suey increase, higher bonuses, et cetera, that shared help or hurt in early 2011?

We had experiences we said in the comments 30% growth in bonuses last year.

So not expecting too much in the way of incremental bonus growth although we will likely see some companies that did not give bonuses last year add.

So there is a little bit there.

And the bulk of the suey increases also with experienced ready although there are some states that we anticipate having suey increases going forward.

Not as much as we experienced last year, but a little bit of growth on both of those metrics.

Just a couple of other general comments.

One is that I was noticing as I was listening to Chris' comment, the other thing that is helping our balances is our strong sales growth.

We were winning market share which is obviously driving more balance growth at the same thing -- at the same time.

We are seeing increases in net pay because I think the economy is a little better and people are working more hours and they are hiring to some degree from that standpoint.

The suey increases were quite significant this past year because they generally follow by year the steepest declines in employment.

But they will likely continue at these higher levels for at least this year and next if not beyond because the state coffers are basically empty in terms of that regard.

We are also very cautious on this metric because the income that is earned off that is very high margin and so we want to make sure that we don't put the cart out in front of the horse even though we are very pleased with the results we saw in the fourth quarter in the first quarter.

Understood.

Thank you, guys.

Your next question is from Jim McDonald with First Analysis.

Good morning.

Good quarters.

Could you correlate the strong results you are seeing in small business with the drop in clients that you reported that presumably were mostly in the small business area?

Actually, no, that's not the case, Jim.

If you go back to the 10K that we issued and the 10Q that is about to come out, we actually experienced growth in the small business area and what had happened was I think I talked about this on an earlier call.

The counting the number of clients is not the easiest thing to do because clients go by different names and they have different divisions, et cetera, so we went back and rescrubbed the way we analyzed clients about six months ago before the 10K and we went back and restated previous numbers.

So if you look at it on a restated basis from 10K to 10K, and you will see it in the Q coming out, we were actually up in the SBS area.

We are about flat overall and the increases in SBS were primarily offset in the mid-market where we did and have talked about having some losses in terms of regional competitors during the last couple of years.

But we are actually looking to growth or we had growth in the SBS area.

I think there is a couple of other things that you are seeing there.

One is as you may recall in fiscal 2010, SBS, small business was the one place where we did reduce head count in the sales force.

Over the fiscal 2009 and 2010.

Over the second half of fiscal 10, we did restore most of that head count that we reduced so we are seeing the rebound there, additionally our product positioning and the strength of our product offering has never been stronger than it is today with our run platform, our new moble applications, our ASO offering, what we are doing with the PEO.

So, we are winning in the marketplace both through increased head count but more importantly longer term through better product positioning, which leads to less discounting and a more healthy environment.

Just a follow up to be clear, I think you reported 20,000 drop in clients so that you are saying, was in the mid-market not in small business or is that scrubbing issue?

Well, we restated in the 10K so we showed the comparable so you have to look at the restatement but we were up in the -- we're up in small business and we were down in majors and in total we were about flat.

Okay.

Thanks very much.

Your next question is from Julio Quinteros from Goldman Sachs.

Hey guys.

Just real quickly, can you go through the competitive dynamics in that SMB segment?

Obviously trying to understand where your momentum is coming from.

Is it all zero sum or are you penetrating more in-house accounts?

Any color you can provide there would be helpful.

I think it's all the above.

As I said, we added back significant head count that we had cut in prior periods.

And we were fortunate to get that earlier in last year so the people are out in the territories selling deals.

Secondly, our product position today is superior in our view to anything else in the marketplace.

Again, the dynamic has not changed in terms of the competition except in the sense that we continue to see discount providers from the regional service companies.

And that still has not changed and we are changing our offerings depending upon the local market conditions to better meet those kind of challenges.

In general the economy is better and there is not as much pressure on price and we just are doing well there.

As a quick follow-up.

Thinking about your head count additions as you go forward, anyway to characterize where into fiscal 2011 the focus is in terms of in terms of new head count additions for sales or other employees.

Should we be thinking about more growth in majors head count side or more on the small business side?

Typically, we try to concentrate -- if we are looking to grow sales 10% which is kind of our general target each and every year and you're not in a severe down cycle or a buoyant up cycle, then we traditionally would add 6% to 7% head count growth and strive to get 2 to 3 points of productivity or price improvement or new products into the mix to drive that 10-plus kind of percent.

As we return to what I call more historical norms in the business, I would expect we will continue to expand there.

I mean, there are some areas particularly in the mid-and up market where our benefits offerings are getting much more robust and complete across the product line where we may add more on percentage basis on head count to pursue benefits which we think particularly as health care rolls out is going to be an ever more important growth area for us.

I think we will continue to see that but the way for you to think about it I think is more around 7%, 8%--6%, 7%, 8% in head count and 2%, 3%, 4% in productivity.

Great thanks, guys, good luck.

Your next question is from Kelly Flynn with Credit Suisse.

Thanks.

I just wanted to drill down a little bit more into the increase in the organic growth guidance at employer services.

Is it more the Q1 upside that's driving the guidance change?

Or are you increasing your expectations for the out quarters and then I have a couple follow-ups related to that.

I think it's both, Kelly, because what you -- what we have seen is increasing metrics so if you look at the client retention metric was tremendous growth in the first quarter and pays per control increased as well.

And so as you look at that continuing in the year, it's what you grew in the first quarter but that flows into the whole year.

Those are the biggest drivers as well as sales.

And the fourth quarter we were up 25% in sales in the fourth quarter and so we fortunately were able to convert a large part of that into revenue, which we are now should get the residual impact of that for the full year aided by balanced growth, pay growth and much stronger retention.

So if all that happens and we make our sales plan as we are forecasting, then it's certainly bodes well for the rest of the year.

Okay, great.

Then just a follow-up.

When you referred to the economy as stable but as you pointed out you are underlying metrics are improving.

Could you talk a little bit about what you're hearing from your clients as far as business confidence?

Have you seen a positive inflection point there over the last quarter?

If you park all the banter about the elections in Washington and you just go to a more straightforward kind of view, when I talk to clients or I talk to other CEOs and other industries I think everybody is kind of back to business as usual to some degree because you have to get back to growing your business and I think it's quit going the wrong way and it's now a debate about how fast it's going to come back.

So in that kind of environment people are still careful about their decisions but they are investing in infrastructure which will include payroll and HR and time and labor systems.

And I think generally the environment is pretty good.

And at the low end of the market you got to do your payroll.

And so the easier it is to do it, the better your product is, the easier it is for people to switch over to you.

And as far as being business as usual, is that a change versus last quarter or would you say it's pretty consistent with the -- ?

I think it was getting better over the second half of last year and it's about like it's been for the last three to six months.

I'm not seeing -- if you look at the BRT surveys and those kind of things there is still a lot of hesitancy on employment.

But most of the BRT CEOs say they expect to spend more capital this year than last year and they expect their revenues to go up and not down.

Keep in mind that stable does not mean we are buoyant and excited.

It's just more that the decline that we had experienced over the last couple of years seems to have stabilized.

I mean, what's happening if you go talk to the economists is that the GDP slowdown that occurred in the second calendar quarter that dropped down to like 1.7%, forecasting only 1.3% this quarter, and when you look at the productivity gains that we have seen across the US, it basically doesn't give you a real reason to go do a lot of employment which is why the Fed is trying to do this easing, this quantitative easing and the forecast called for as you get into calendar 2011 a return to more 3% to 4% GDP growth which then should be sufficiently higher than the productivity increases which should then drive an acceleration of employment.

Great.

Thank you very much.

Your next question is from Rod Bourgeois with Bernstein.

Hey, guys.

Very good to see the retention up.

I guess I'm assuming that was the biggest upside surprise in a quarter.

But I wanted to inquire on what the specific drivers in the improved retention are?

In other words, what client facing activities have you ratcheted up and how is that having impact?

And then on the same note, to what extent did the lessened bankruptcy trends help the retention?

If you can give specifics on that, that would be great.

I think on retention there are a number of things that I think Gary referred to some of them in his remarks this morning and I think those were the primary drivers.

We have invested in service throughout the business and I think that in our technology investments the combination of those have driven the bulk of the retention.

There has been some abatement in the bankruptcies on the low end.

Kind of back to normal levels.

But I think that was less of a driver than our proactive investments in the service area.

And much less drop services, pricing concessions, those kinds of issues dropped reports.

We're kind of through that and is back to business as usual.

I think that's two consecutive quarters now and if you go back to a year and a half ago we were predicting up to 100 basis point decline last year and the second half of the year turn that around so we are actually up 40 basis points.

And what we are seeing is that's just continued and improved even more.

So absolutely a great experience in the quarter for that metric.

It seems that the area of the business where competitive takes have been a problem has been in the mid-market.

It sounds like that losses to competitors in the mid-market have subsided and then I guess also the discounting and pricing issues that have been more pronounced in that market.

Those have subsided as well.

Is that an accurate interpretation?

Yes, Rod, it is.

Obviously we still see some pressure from regional competitors in the mid-market but that has abated from the height of the year and a half ago.

And I think our work force now product in the mid-market has certainly helped as well.

Our sales people are excited about that and it sells well and it demos well and everything else.

I think a combination of those things but I think you are accurate.

Yes, Rod.

There are two areas in that mid-market, we made big investments in our designated reps.

The actual call center people that you call in plus we are doing a much higher level of proactive outreach into our client base to make sure that we are ahead of the curve as opposed to behind the curve in trying to catch up with prices at the last minute when somebody given us a notification.

So those investments in client services and proactive outreach are clearly making a difference as well.

Okay.

Great.

On the bookings front, your bookings growth has to accelerate as the year progresses.

Are you expecting that acceleration at the high end of the market?

Or are there other specific areas where you think the growth trend on bookings will improve?

Well, our GlobalView backlog of business is quite good.

We did have a very strong quarter last year and we had a decent finish first quarter last year and had a pretty good finish in GlobalView last year.

Their backlog and confidence around their plan is pretty positive.

SBS -- excuse me, majors and nationals were down slightly in the quarter.

Call it mid-single digits just to give you a frame around that.

But if you go talk to those guys their PDRs are much stronger today than they were a year ago and based on my anecdotal feedback and I have been doing this for a long time and have a pretty good nose for it, I think we are in decent shape and both of those for the rest of the year.

I would also say that the flat sales in the first quarter that we mentioned the GlobalView grow over that was worth a couple of points because we had a couple of big GlobalView sales in the first quarter of last year.

So that put pressure on the first quarter that if you normalize for that it would have given you another 2%.

And then we haven't mentioned it but clearly when you have 24% blowout fourth quarter you probably pulled up a little bit from the first quarter and so it wasn't as we said it was in line with our expectations and I think as Gary said the growth is expected to occur --

And just to give you some flavor for that, we had a pretty soft July after a great June which is no surprise.

And we had a pretty strong September in terms of growth.

I'm expecting that to continue.

We had good growth in October.

We are not really into that.

It's too early to say.

But we had good growth in October.

Our confidence level here is pretty good.

As you know what drives this business is the sales engine going and retention and making sure that your keeping as much of that revenue and that's really what drives future revenue growth and we are very happy with seeing the retention improve and sales picking up.

Good stuff.

Thanks, guys.

Your next question is from Glenn Greene with Oppenheimer.

Thank you.

Good morning.

I guess the first question I wanted to talk a little bit about the SMB market competitively and sort of in the context of your national competitor Paycheck had a recent management changed alluded to maybe making some pricing tactical changes.

It's obviously early but any sense for if you seen anything new or different out in the marketplace, competitively in the S&P market?

Paycheck have been a rational competitor and I guess from at least my 40,000 foot view they remain that way.

If you read the high level things that you hear basically they are just lowering their kind of book price to more of a what it was after discounting and greatly encouraging no further discounting from that.

The actual price point that the services are being sold is not dramatically different than where we have been.

It's really around the skill set of the sales folks and the references from the CPAs and the banks and the product.

And so we are not noticing any big swing in direction in the marketplace in general.

Again, we still continue to see more difficulty around pricing with the local competitors.

The half a dozen of them around the country that are just focused on mostly single locations discounted payroll sales and not really chasing value as opposed to price.

And again our emphasis in that part of the market has been in the improvements in the product and during the downturn we continue to improve and invest in run.

We released it last year and it's gotten a lot of traction.

I think the sales people are excited about it and they are even more excited now that we have the mobile applications which are pretty cool.

That's been the thrust in that part of the market for us.

This is going to help us even more because shortly after year end we will be releasing the Blackberry platform and the Android platform which will open up the entire market for us as opposed to just the iPhone and iPad market.

And then different direction, the high single digit sales growth goal for the year, that's in the context of what you have seen in the first quarter sort of the pipeline and backlog that you know going forward for the back three quarters.

The small market obviously did well.

Mid-/large I think you suggested down mid-single digits and GlobalView may have had somewhat of a grow over this quarter.

Directionally, qualitatively how should we think about the sales growth across the sub segments for the year?

That's a good question and we typically don't go there for those kinds of reasons.

But if we are budgeting, just to give you a way to think about it, if we were budgeting at the end of one fiscal year for the following year, we were trying to drive 8% to 12% growth almost across every business, in terms of new sales bookings.

Now, if one unit has an exceptionally strong fourth quarter, then that growth over for the following year instead of being 10% may be 6% or 7% because they had a strong fourth quarter.

So I think within the context of what we are talking about here generally speaking we are pushing towards 8% to 10% growth in terms of new sales in every one of our businesses in terms of the planning process.

To the extent that a majors or a nationals was down mid-single digits, then we are still looking for them to grow 8% to 10% for the year majors had a very strong finish last year so it may be a little bit lower than that number in terms of their four year forecast.

Nothing remarkable to note in terms of the composition of that growth.

Alright, that's helpful.

One quick one for Chris, just any seasonality we should be thinking about on Cobalt?

On Cobalt?

No, I think that's not a particularly seasonal business.

It's pretty consistent throughout the year.

I mean, most of their pricing is on a per dealer, per service offering as opposed to number of vehicles sold.

They provide a lot of business analytics back on helping dealers understand that.

But it's more driven whether it's an OEM program in terms of an offering that they are rolling out or a requirement that they have for their dealers as opposed to vehicle sales.

Great.

Thanks a lot.

(Operator Instructions).

Your next question is from the line of Jason Kupferberg from UBS.

Thanks, good morning guys.

I wanted to start with a question going back to the last quarter you had that nice waterfall chart to walk us from fiscal 2010 to fiscal 2011.

If I recall, you showed a price increase there for fiscal 2011, I think of less than 1%.

Do you consider that kind of range to be the new normal if you will beyond this current fiscal year?

Or do you expect to regain some more pricing power when employment markets improve?

Because sounds like broadly speaking clearly the worse of the major discounting is over.

Just trying to gauge the new normal going forward.

The way I would think about it is that our focus was more around improving retention than it was in optimizing price.

So as we were going through last year and as we were preparing for this year the focus was on sales and retention as opposed to driving margin expansion through higher price increase.

And if the economy stays in the shape that it's in, then I would suspect that will continue more in the future as opposed to going back up to the 1.5% to 2% level.

If the economy gets back to where they are adding 2% to 3% growth in the work force, and people are more buoyant about buying our products and services, than I would expect the appetite to more optimize that price would increase in time.

Okay.

That's fair.

Any updated view on how we should think about your dividend conceptually?

The current payout ratio I think is increasing gradually over the last few years, are you at a point of equilibrium or do you see room for it to increase?

Yes, I think what we said, you are absolutely right.

It has increased over the last several years.

We do -- we are comfortable with it in that 50%, 55% kind of payout ratio.

And so I think as we go forward you would expect to see that increasing with earnings per share.

Obviously subject to Board approval and clearly as you know we normally announce our dividends in the November time frame and that will be a discussion at the November Board meeting.

Okay.

Thanks for the comments.

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

Great job, guys.

Thanks.

The GlobalView implementations, Gary, how are those going and an update on GlobalView break even?

Thanks.

The implementation on globalview in the backlog are proceeding pretty much as planned.

The big challenge we have in GlobalView is finding the SAP talent around the world to do some of these implementations.

And to that extent, we have to use consultants more than frankly we would like to which does put pressure on the bottom line.

GlobalView continues to be a drag in 2011 and I think our current forecast is to get through the break even in one of the second half quarters.

I don't remember which one.

We were looking at 2012.

And Chris, just quick follow-up, did you lower your desired cash level from $1.3 billion to $1 billion and I'm trying to reconcile that with extending the duration out a little bit.

I'm sorry, Jim.

What we did was we said at one point we were saying that we wanted to hold at about $1.5 billion through the downturn.

And I think the last two quarters I said that's going to float begin to float down more towards $1 billion.

This particular quarter we went down from $1.8 billion at the end of June to $1.3 billion level primarily driven by the $500 million of acquisitions that we had.

Cash flow can bring that up and obviously future acquisitions and share repurchase et cetera will tamp that down.

The minimum level that we see is $1 billion.

And Jim, the duration that Chris spoke about is on the clients funds in his opening comment not the corporate funds.

Those are still short.

And just quick follow-up.

The increase in the client fund yield that was due to extending the duration?

Is that right?

We did pick up some from extending because what we saw historically we were getting more spread than you normally see between 3 years and 5 years and 5 years and 7 years.

So we will take advantage of that.

And there were some nice increases in corporate yields as well.

Very high quality.

As a matter of public record companies like Microsoft and Wal-Mart with very high quality are issuing debt in ten year debt kind of maturities.

So we did take advantage of that surely.

Great.

Good job.

Thanks.

Your next question is from David Togut from Evercore Partners.

Thank you, good morning, Gary and Chris.

Good morning, David.

What specific features does the run product have in small business that can't be found either in your direct national competitors offering or that of local regionals.

Well, the most obvious one is the mobile applications are very complete.

And you can actually do a real kind of payroll on those apps including all of the banking information, all of the reporting access, all of the registers that access the employee records, standard reporting, et cetera.

So the breadth of the offering versus just being able to at some of the other regional competitors have inquiry kind of capability where you can see things or do some basic things.

The moble application is much more complete.

That being said, the run platform is exceptionally, forgetting Mobile for a moment, exceptionally user friendly.

Very easy to navigate.

It's a literally realtime payroll.

You run your payroll and have the entire thing back.

You can preview everything.

You can then release the payroll.

You can do all of your direct deposits, everything through that.

So it's a very complete offering.

But if you just go down and check a box, well, can I calculate a check?

Hold this record or whatever, I tell you it's more the presentation in realtime nature and ease of use as it is to opposed to a purely functional can you calculate a check or print a report.

Okay.

Great.

If you ever looked at them side by side, it would be very apparent to you.

Okay.

And then just a quick follow-up on dealer, you mentioned significant market share gains there.

Is that coming in the core DMS business or from your strategy to expand share of wallet and other applications?

We continue to do quite well against our national competitor there.

We continue to have some drag from dealer track in Arkona where we quantified as cheap but cheerful.

On the low end of the market we were doing very well in mid-and high end of the market where the revenue is as opposed to the dealer count.

And we are getting good expansion particularly in our voice over IP and lead management and the other kind of things that are going to flow out of Cobalt and our BZ results.

Okay.

Thank you very much.

Alright, take care.

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

Hi, thanks.

Good morning.

Good morning.

I wanted to ask about retention as well.

Glad to see that was up 1.3 points.

You are expecting it to be up it looks like half a point for the year?

I'm trying to understand what that means.

Do you expect it to pick up in attrition for the rest of the year or is this just a comparison issue?

No, just a comparison issue.

You have to look -- when you look quarterly it's not the same as looking at the full year retention number.

So the retention we expect to be up in the year brings us up to about the highest level of retention that we have experienced ever.

And Tien-Tsin, we had a very strong retention quarter in the fourth quarter.

I think it was about 1.3 Allen?

Yes.

1.6 not 1.3, so we have 1.6, 1.7.

So you are going to have a difficult compare in the fourth quarter and retention is a little bit--just like balances and you don't want to put the cart out in front of the horse even though we were optimistic I'm not sure I want to forecast purely based on it feels good right now.

And so we are being appropriately cautious there to make sure that we don't put the cart in front of the horse.

Yes.

That's prudent.

I ask because it's obviously an important driver for revenue and earnings.

We get it.

I guess for my follow-up, kind of along the same lines, it's just Gary you were pretty cautious about the first half of the year last quarter.

Especially on the investment side.

So I'm curious what drove the over performance this quarter?

I heard all of the details and we saw the guidance raised.

But I guess what I'm trying to get at is how much of the improvement here is real versus perhaps ADP being too conservative in the outlook before?

I think it's all of the above.

I mean we like to make the forecast that we make.

So I'm going to be appropriately cautious.

You wouldn't want me to be otherwise, I don't think.

Our step off rates and improved retentions certainly help.

Strong sales in the fourth quarter helped as well.

And the retention results again to re-iterate were really big in terms of that piece.

And typically in our business as goes the first quarter goes the year so we are appropriately more optimistic now than we would have been three months ago.

I would say in addition the trend as proud as we were of the inflection points in the fourth quarter, one quarter doesn't make a trend.

Now we have seen those metrics continue to improve into the first quarter.

I would say in addition when you are planning, we plan for certain level of revenue growth and the revenue growth in the first quarter exceeded our expectations so the revenue showed up and that influences our thinking as we go forward.

So I think it's combination of all those things.

Okay.

That's good stuff.

I appreciate it.

Your next question is from David Grossman with Stifel Nicolaus.

Thanks and good morning as well.

When we talk about the international growth care, Gary, will GlobalView be the primary driver of growth internationally?

Or if there other data points we should focus on what are those data points?

GlobalView is our platform of choice for multinational companies.

We will continue with the best of breed products where you are selling country specific implementations.

GlobalView won't be the domestic payroll product for China or the domestic payroll product for France.

And so that's really where we are focused on the difficulty with GlobalView is that this is big deals.

You get big [deal-itis] with the ups and downs, when you close them and in tight times those decisions tend to get retracted.

The good news about GlobalView we virtually have no losses and the clients in my view are going to stay 15 years to 20 years because of the size of the investment that we made and that they have made.

Clearly, it's our multinational platform of choice.

We do see good growth in the best of breed as we call it or the in country payrolls and on the GlobalView side the only thing I would add is that it's GlobalView in my mind is kind of morphed to being the payroll provider for multinational worldwide whether they have 50 people in a country, 3,000 people in a country, or a combination thereof.

So there is different solution sets to being that single provider and quite frankly a multinational doesn't necessarily care what platform that you are supporting them on.

It's the ubiquitous information and getting them information using our template.

So you can have best of breed performing the function in one country and GlobalView in another.

As long as we are able to knit that together and provide the information in total worldwide, that's what they are looking for.

GlobalView is more than just a product serving the couple of thousand employees in a country.

It's kind of an overall solution to a multinational.

Great, thank you.

And as a follow-up to switching gears to the margins, what assumptions underlie the positive margin comparisons in the second half of the year?

Is it contingent upon growth or do you have pretty good visibilities that on expansion once we get into the second -- or the last two quarters of the fiscal year?

If you remember the way we invested last year, we began investing in some areas in the January time frame, so our third quarter.

If you think about our fourth quarter is where we ramped up some additional investments as well.

And so the compare is a lot easier for us in the second half of the year because of that grow over issue.

And on top of that, you have the merit increase issue that occurred in the fourth quarter of last year.

So the head count increases.

The Merit increases.

The Benefit cost increases.

All of those things on a compare versus the first quarter or the second quarter last year were -- are difficult and it become easier compare in the second half of the year.

Got it.

Great.

Thank you.

We do have time for one or two more questions.

Your next question is from Mark Marcon with R.W.

Baird.

Good morning and congratulations.

I was wondering with regards to can you talk a bit about beyond payroll broadly speaking.

What percentage of total ES does beyond payroll now compose and what percentage of the new sales is that comprising?

I think it's just about half and half is with a we have said in the past.

In terms of the sales.

Little more than half is on the payroll side.

On the revenue mix it's about 70/30.

70% being the payroll.

Yes.

Great.

And then within beyond payroll, what would the growth have been if we had stripped out Workscape?

I think it was 2% of that growth was Workscape.

2%.

Great.

So it sounds like beyond pay roll continues to do extremely well.

GlobalView is doing well.

Can you talk about some of the other areas?

And also what are your expectations with regards to-- with the new health care legislation coming along your benefits platform?

How big can that become?

How important?

Are there any threats from the health care legislation?

Anyway that could be a negative?

Let me take the first part of that question which is I think asking where else we start growth and beyond payroll and we did see obviously growth in the payroll portion.

But in the beyond payroll area the other areas of note were the ASO are HR BPO offering in the smaller businesses significant growth in that area, retirement services was up as well.

Tax credit services was up as well.

As was insurance off a small base.

Nice growth in all of those areas.

You want to take --

In terms of health care, the regs are still being written and we are involved along with some other folks in trying to be sure that they get drafted in such a way that we can do a good job of complying with them.

I think the health care legislation as is written is going to be a benefit to ADP over time because; A it's going to be more complex.

Reporting is going to be much more detailed.

And enforcement by the IRS and others is going to be much more than what it is today.

And the heart and soul of that database is all in payroll and HR kind of record keeping.

So I think it's going to be good for the PEO.

I think it will be good for ASO.

And good for the general employer services business across the industry.

We think our acquisition of Employease that we made a few years back coupled with the acquisition of Workscape and the bundling in of Employease into our work force now product which is at the 1,000 to call it 3,000 person level is going to clearly drive an acceleration in our benefits business.

And we clearly see that the benefits business can be well beyond a $0.5 billion business for us in the planning horizon.

We were pretty excited about what's happening in benefits and the complexity that is rolling out of Washington.

I hated it at a personal level.

But from the business level it's pretty good.

Great.

Nice to hear that there are benefits out there.

Can you talk on two separate topics.

One would be just how should we think about the PEO margins long term?

Obviously there are some pass throughs that we were going through right now.

Longer term how should we think about that scaling and then last question would be on the float yield.

How should we think about that as we go beyond this current year?

How much is going to be coming off per year?

Chris, you have done some great updates on that.

What's the latest thinking there in terms of where we are rolling off and where it would be currently reinvested given current futures curves?

Let me take the portfolio item first and I'm not sure I remember what the first question was.

The portfolio is a little bit early to tell because how we are impacted next year.

We will obviously give you some insights on that as we go forward in the year.

But a lot of it has to do with the balanced growth this year and what you expect to see balanced growth next year.

It has a lot to do with the interest rate expectations whether the forward yield curve plays out or whether interest rates stay exactly where they are.

I think we will know more about that as we progress through the year.

And so it's a little premature to guess that far into the future.

So more to come on that.

But as you can see we have been able to overcome some of that, Greg, this year and so we will continue to focus on that.

First question was around the PEO I guess.

And the PEO obviously the margins are under pressure as you grow benefit pass throughs significantly like we have.

And it's also under some pressure from the stand-point that our normal increases in that area when benefits are going up significantly, it's kind of a total cost and so you don't want to hurt your retention by increasing the pricing.

So it's not a competitive pricing issue per se.

It's just they are experiencing significant increases in their benefits --

Paid unemployment?

Unemployment and everything else.

What is helpful in that business is that our pricing tends to be around the total payroll so it -- as pay per control come back and start adding employees as you start getting merit increases there is a natural lift in that business that should help margins going forward.

I know that I talked about this in the past but if you strip out those pass throughs and look at how much we make on the bottom line versus the processing revenue excluding those benefit pass throughs, those margins are very, very healthy margins.

And they are certainly underpressure from the stand-point of the increased in the benefit pass throughs.

So the underlying margins continue -- the underlying incremental margins on the pure processing side continue to trend in the positive direction so we should longer term continue to see some improvement there, right?

Yes, but to the extent that, Mark, health care cost outstrip health care costs increases outstrip just our normal price increase.

You will see permanent drag on the margins in the PEO.

But the real way to think about it is to take that out and look at the repetitive processing revenues.

Right.

That's key.

Thank you very much.

We have time for one more quick question.

Your next question is from Michael Baker with Raymond James.

Thanks a lot.

First, was wondering if you could give some color in terms of what you are seeing on the hiring front within the different segments that being small business, mid-and large?

I know you commented on international so no need to repeat that.

When you say hiring, you mean --

Kind of like a pays type figure broken down a little bit, just a little bit more in terms of like size and rough sense some of the dynamics so at least on a relative basis we could get a sense for how those companies might be responding given the economy.

The metrics that we report on is from our auto pay product which is kind of in the middle.

There is some overlap below 50 as well as on the high end of the market.

But that's kind of the core metric that we look at.

We did see some positive uplift in our national accounts business.

This quarter as well which was also negative in the fourth quarter.

So there was some movement in there as well and small business just continues to kind of bump along with a slight positive as I recall.

And then just finally the one thing I didn't hear you talk about in health care that could be platform for growth and was wondering if you would be willing to comment on it specifically is are there plans to leverage your processing capabilities to provide some of the exchange dynamics that are needed in the marketplace?

That market is still developing to some degree.

And our main thrust there is to make sure that we are included as an option on the exchange.

But we don't have a major thrust to become the exchange, if that's your question.

Yes, that is.

I saw one of your competitors win some business as it related to the exchange and I was wondering whether or not you plan to become the exchange, so to speak.

No, no current plans to do that.

Thank you.

That's helpful.

Okay.

Thanks Michael.

Let me kind of close this up.

We appreciate everybody attending today.

I think you can tell by the tone that of the conversation that we are much more optimistic than we were three months ago.

I think my comments around as goes the first quarter goes the year is a great way to think about it.

Our product position remains quite strong and the sales force is in good shape and we are optimistic about the future.

So we appreciate you coming today and we look forward to talking to you next quarter.

Thanks everyone.

This concludes today's conference call.

You may now disconnect your line.