自動資料處理 (ADP) 2011 Q3 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to ADP's third-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)

I will now turn the conference over to Ms.

Elena Charles, Vice President Investor Relations.

Please go ahead.

Thank you.

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

Thank you for joining us for our third-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 www.adp.com.

As a reminder, the quarterly history of revenue and pretax earnings for our reportable segments has been posted to the IR section of our website.

These schedules have been updated to include the third quarter of fiscal 2011.

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 2 of the slide presentation and in our periodic filings with the SEC.

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

Thank you, Elena, and thanks to all of you for joining us on this Monday evening.

Before we get into the third-quarter discussion, however, I wanted to take a few moments and this opportunity to say a few words about Henry Taub, ADP's Founder who regrettably recently passed away.

Henry was a true entrepreneur, and it was his vision back in 1949 when ADP began, and that vision created the industry of processing other companies' payrolls.

Henry recognized from the beginning that helping companies to outsource this important function to an expert would allow those companies, which at that time were small and mid-size businesses, more time to focus on what matters, and that's growing their business.

Henry also recognized the importance of delivering excellence in client service, which is the essence of the culture that defines ADP to this very day.

We're all especially grateful for Henry's vision, support, and counsel over these many years of his involvement at ADP.

Henry's passing is truly a loss to the ADP family, and we will miss him deeply.

Now let me turn to the discussion for the third quarter.

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

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

After which, I'll return to provide you with our updated forecast for fiscal 2011, and before we take your questions, I'll provide some concluding remarks.

I'm now turning to slide 4.

Overall, I'm quite pleased with ADP's third-quarter results for fiscal 2011.

Particularly noteworthy is that the investments ADP continued to make over the last several years are having the desired impact, which is accelerating the growth in the business.

Starting with Employer Services, the investments in our solutions and in our sales force have translated into strong, new business sales growth of 13% worldwide in the quarter, which was led by strong double-digit growth in the small business marketplace.

Sales in our international businesses were also up double digits led by strength in Canada and in GlobalView.

To remind you, we started to see new business sales rebound toward the end of last fiscal year, resulting in a strong year-over-year growth of 25% in last year's fourth quarter.

This will obviously put some pressure on the growth comparisons in this upcoming year's fourth quarter, or next quarter.

Having said that, we remain highly confident that we are on track to achieve our full-year forecast of high single-digit new business sales growth.

We're also getting excellent returns on our investments in client service.

We have completed this critical calendar year-end retention period with strong retention results in Employer Services.

The quarter's increase of almost 200 basis points puts us on track this fiscal year to actually exceed the record retention levels that we achieved in fiscal 2008.

Growth in our US pays per control same-store sales employment metric was once again ahead of our expectations.

The increase of 2.7% in the quarter represents the largest quarterly year-over-year increase in 4 years.

In Europe, however, the employment levels have been slower to recover than in the US.

Pays per control in Europe are still down about 2% compared with a year ago.

As many of you know, client fund balances are seasonally high during our third fiscal quarter and on into April.

It's noteworthy that we reached a new record-high level of client balances in mid-April at $35.4 billion.

And then just last week, we surpassed that number with another new record balance of nearly $37 billion in one day.

Prior to those 2 tremendous balance days in April, you'd have to go back to March of 2008 for the last record-setting client-balance day where we reached $33.8 billion; so big gains in balances.

Acquisition activity was again good during the quarter, and we closed 2 additional transactions.

As we move on to Dealer Services, the automotive landscape in North America is clearly continuing to improve, and the annual selling rate for US autos are projected calendar 2011 also increased.

Sales in installations of both the core Dealer Management systems and beyond the core were strong, and transaction revenues also increased in the quarter.

Dealer Services revenue retention increased 3% in North America, and client site retentions was up over 5% year over year for the third quarter.

Dealership closings continued to trend down, and ADP's market share is growing.

ADP is especially strong at delivering quality solutions and service to larger dealerships and the consolidators, and we are confident that ADP will continue to compete very effectively in the emerging healthier automotive industry.

With that, let me turn it over to Chris to provide the highlights for the quarter, and the updated full-year forecast for our client funds investment strategies.

Thanks, Gary, and good evening, everyone.

We're now on slide 5.

We're pleased that total revenues increased 12% to $2.7 billion in the quarter.

Employer Services grew total revenues 9%, and Dealer grew 29%, both including acquisitions.

And the PEO grew 18%, all organic.

Excluding acquisitions, total revenues grew 7% in the quarter, and we are very pleased with this level of revenue growth.

When you look at it by reportable segment, Employer Services' organic revenue growth was 7%, the PEO was 18%, and Dealer was 3% in the quarter.

I'd like to focus you on the growth in Employer Services' payroll and tax filing revenues in the United States, which grew 5% in the quarter.

To remind you of what I indicated last quarter, nearly 2 points of this growth was from the timing of certain revenues related to calendar year-end activities that spilled over from the second quarter into the third quarter.

Without the timing impact, Q2 growth would have been 2%, and Q3 growth would have been 3%.

Additionally, our acquisition activity into adjacent markets is fueling growth of beyond payroll revenues.

In the US, growth was 15% in the quarter, with nearly 4% growth primarily coming from the acquisition of Workscape earlier this fiscal year.

Tax credit services, time and labor management, ASO, our BPO offerings to small and mid-size businesses, and HR Services in major accounts all grew nicely during the quarter.

The continued positive trending of several of our key business metrics, as Gary mentioned earlier, contributed to revenue growth.

Very importantly, client revenue retention showed strong increases for ES, for PEO, and Dealer Services.

Pays per control in Employer Services in the US increased 2.7%.

All geographies across the US showed increases, led by the Northeast and Central regions, as well as Northern California.

Our clients represent a wide variety of industries, and the pays in most have turned positive, with the exception of public administration, and accommodation and food services.

Additionally, PEO average work site employees paid increased 13%.

As Gary mentioned earlier, we continued to see the positive impact of new business sales growth.

And growth in average client fund balances were also once again higher than anticipated, increasing 12% in the quarter driven by new client growth in small business services; higher wage growth across-the-board, including higher bonus payments of about 15%; increased pays per control; and increased levels of state unemployment insurance, all quite positive in terms of revenue growth momentum.

Now let's turn to slide 6, and continue with the highlights of the quarter.

Pretax earnings were up 3%, but as anticipated, third-quarter margins were lower than a year ago.

There are a few things going on here that I'd like to take you through.

We've done a great job in executing on our M&A strategy, but as you know the impact to margin in the first year is negative because of the cost of integration, as well as acquisition-related costs.

This was about 40% of the pretax margin decline in the third quarter; however we believe these are the right transactions to fuel future growth.

About half of the remainder of the pretax margin decline is due to interest on funds held for clients, which as you read in the earnings release, was about flat with last year.

Higher average balances were offset by lower average yield in the quarter.

As you know, this revenue is highly profitable, and was therefore a drag on the pretax margin compared to fiscal 2010.

The other half is from the grow-over impact from a $14.8 million distribution from the reserve funds received in last year's third quarter.

I'd also like to point out that ADP's effective tax rate of 35.1% was lower than anticipated due to some small favorable tax items.

As a result, our year-to-date effective tax rate is about 35.7% which is about where we expect it to be for the full year.

Diluted earnings per share for continuing operations increased 8% to $0.85 on fewer shares outstanding.

Our cash position is strong at $1.7 billion at March 31, 2011.

Fiscal year to date, we repurchased 3.8 million ADP shares for a total cost of approximately $175 million.

You may have noted that this is lower than in recent years, however, our spend of approximately $800 million in fiscal 2011 to date on acquisitions in support of our 5-point strategic growth program has well surpassed acquisition spend in recent years.

Now let's turn to slide 7, and I'll take you through the updated forecast on the client funds investment strategy in support of the overall ADP forecast that Gary will take you through in a few moments.

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

At March 31, over 85% of our fixed income portfolio is invested in AAA or AA rated securities, consistent with the past 4 quarters.

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

In addition, as was also the case last quarter, the steep yield curve continued to present greater opportunities at the longer end of the maturity curve in both the extended and long portfolios.

The duration remained at 2.9 years at the end of the third quarter.

Since we do not believe it is possible to accurately predict future interest rates, the shape of the yield curve, or the new bond issuance behavior of corporations, we continue to base our interest assumptions in our forecast on Fed funds future contracts and the forward yield curves for the 3.5- and 5-year US government agencies.

Now to the fiscal 2011 forecast.

This slide summarizes the anticipated pretax earnings impact of the extended investment strategy for the client funds investment portfolio for fiscal 2011.

And 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 in average client fund balances to 9% to 10% growth, which is up from our prior forecast of 7% to 8% growth.

The increase is driven by better than anticipated wage growth, including bonuses, higher net pay and pays per control, and higher state unemployment insurance than anticipated.

We continue to anticipate 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 slight year-to-year decline of about $5 million in client funds interest, as we anticipate that the expected growth in balances will be offset by the lower interest yield.

Average new purchase rates for the remainder of the fiscal year are expected to be over 260 basis points lower than the embedded rates on maturing investments based on 3.5- and 5-year agencies.

Looking now at the lower right of the chart, we anticipate a decline in pretax earnings of $15 million to $20 million for fiscal 2011, as the benefit of growing average balances is expected to be outweighed by low interest rates.

This compares to our prior forecast of a $25 million to $30 million decline in pretax earnings.

For fiscal 2011 we anticipate a decline of 40 to 50 basis points from 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 fiscal 2011.

Thank you, Chris.

We're now on slide 8.

In our fiscal-2011 outlook, we are assuming no change in the current economic landscape, and we have updated our forecast to include the impact of the acquisitions that closed during the third quarter of fiscal 2011, as well as the impact of key metrics that were ahead of our expectations during the third quarter.

Overall, we anticipate no dilution to earnings per share from the acquisitions closed to date during fiscal 2011.

But as a reminder, the acquisition-related costs will be dilutive to segment pretax margins for both Employer Services and Dealer.

As disclosed in our public filings and on our website schedules, the reportable segment results include a cost of capital charge related to the funding of the acquisitions.

This charge is then eliminated at the total ADP level.

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

For total ADP revenues, we anticipate growth of about 10%.

Excluding revenues from the acquisitions closed to date during fiscal 2011, we anticipate about 6% revenue growth.

We also anticipate 6% to 7% growth in diluted EPS from continuing operations compared to last year's $2.37 excluding favorable one-time tax items in fiscal 2010.

As you know, we normally look to drive EPS growth in excess of revenue growth, however, there are certain items to note this year and to consider when you look at margins.

In fiscal 2011, the pretax margin decline is driven by the impact from anticipated lower client funds interest revenues.

While we have returned to healthy client funds balance growth, the lower market interest rate environment is offsetting this growth, causing a negative drag as you heard from Chris earlier.

Additionally, the full-year impact of the investments we made in sales, service, and implementation that we began in the second half of fiscal 2010, as well as some additional R&D investments, also impact the year-over-year pretax margin grow-over.

As is our normal practice, no further share buybacks are contemplated in the forecast, albeit it is clearly our intent to continue to return excess cash to our shareholders, obviously depending on market conditions.

Let's now turn to slide 9 for the segment update.

For our ES business, excluding revenues from the acquisitions closed to date during fiscal 2011, we anticipate revenue growth of 5% to 6%.

Including acquisitions, we expect about 7% revenue growth.

Excluding acquisitions closed to date during fiscal 2011, we continue to expect up to 50 basis points of pretax margin improvement for the full year.

Including acquisitions, we expect the pretax margins will be about flat from last year.

This is slightly lower than our prior forecast of up to 20 basis points improvement, due to the acquisitions that we closed in the third quarter.

We do anticipate an increase in our pays per control metric in the US for the full year of about 2.5%, and we also expect client revenue retention to now improve about 100 basis points for the year.

We anticipate about 16% revenue growth for PEO services, with a decline in pretax margin due to higher benefits pass-through revenues and the grow-over impact of last year's first quarter $9 million favorable state unemployment tax settlement.

We expect high single-digit growth in the annual dollar value of ES and PEO worldwide new business sales from last year's $1 billion.

And for Dealer Services, excluding fiscal-year 2011 acquisitions, we anticipate about 3% revenue growth and at least 50 basis points of pretax margin improvement.

Including acquisition activity, notably Cobalt, we continue to anticipate well over 20% revenue growth, and a decline in pretax margins of 100 to 150 basis points.

Turning to slide 10, I'd like to leave you with a few closing remarks before we open it up for your questions.

And now on slide 10, I hope you can tell from my remarks that we are quite pleased with ADP's results for the third quarter of fiscal 2011.

I am more than delighted that organic revenue growth is accelerating, and reached 7% in the current quarter.

Our investments in our products and in the sales force are clearly paying off, and we have excellent momentum in both sales and client retention.

Our product breadth has never been better, and trends in our key business metrics continue to be positive, and I believe we are doing the right things to grow the business.

And while margins may be somewhat pressured to a degree short term, I am optimistic about ADP's top and bottom line growth opportunities longer term.

And in closing, we are looking forward to hosting you at our annual Analyst Financial Conference later this week in New York.

So I'll now turn it over to the operator to take your questions.

(Operator Instructions) Rod Bourgeois with Bernstein.

Yes, Gary, 2 quick questions.

First, on the client retention.

It's very encouraging to see that number coming through so strong, can you talk about what's created the upside in that number and whether you see further upside in client retention as you move into fiscal 2012?

I mean it's great that we're at record levels but can there be a new record level as you move over the next year?

Well first, you have to consider, Rod, that that trend line has been getting better consistently quarter over quarter.

I mean obviously they're adjusted seasonally so certainly as we think about next year, we're not going to be satisfied with the status quo.

That'll vary by business unit et cetera, but we're quite pleased.

If you'd asked me that question back in 2008 when we reached our previous high, I would have probably given you a similar answer and now as we come out of this deep recession it's particularly encouraging to me to see it rebound as strong as it has.

I'm delighted with the fact that for example, our losses to service and price are down 20% to 25% across-the-board and our losses to competition are down similarly across-the-board.

So I clearly think we have room to grow and we'll see.

We're particularly pleased with the increase in client retention.

On the low end of the market we've maintained our retention rates at the high end and actually slightly improved them, so I'm pretty optimistic long term here.

All right and then to build on that, we've been waiting for more of a normal, quote-unquote, environment since the financial crisis.

Do you view fiscal 2012 as more of a normal year in terms of your growth prospects particularly with the sales momentum that you're talking about?

And if that's the case, I mean, what type of growth targets can you achieve in a more normal environment which we may be in now?

Yes, you know I can't talk about that, but it's good of you to ask.

I would say 2012 is clearly a more normal, I don't know whether normal is the right word.

Our historic pattern in normal times, whatever that means today, is to try to drive sales growth of 10% plus and to try to drive client retention growth of 30 to 50 basis points and to work on margin improvement across-the-board.

So I would expect we'll continue to see improvement in employment and improvement in balances in the year ahead and I think the auto sector is going to continue to improve over the next couple years as well.

What we'll also do Rod is on Thursday I planned on kind of giving a glimpse of the next 5 years and what we see over that 5-year period, so I think that'll help address your question as well.

I look forward to that and Gary, just one-- you mentioned momentum in the small business segment.

We didn't necessarily hear that from your biggest competitor in the small business segment, we heard struggles with new business starts.

You're seeing a different trend there it seems.

What would you attribute that difference to?

I mean is the run product and internal things that you're doing at ADP allowing you to pick up share or is there really a rising tide in the overall market or is it both?

All of the above.

Okay.

We couldn't be more delighted with the progress of our product.

Our realtime cloud-based run product we reached 100,000 clients this quarter The retention rates are noticeably higher, the number of reruns is noticeably lower, so the overall quality is driving significant increase in retention in the low end of the market.

We've also taken this opportunity to rehire and actually expand our distribution capability on the low end of the market and when you look at run coupled with our PEO offering and our ASO offering collectively, we've got the waterfront well covered and it's working.

Great.

Thank you, guys.

Thanks.

Adam Frisch with Morgan Stanley.

Thanks, good afternoon and nice job on execution in the quarter.

Just want to get a better feel for your increased appetite for strategic M&A and in investment going forward.

Is this something that will continue at its current pace into next year or do you feel you're well positioned after the activity in the last few quarters?

We classically would like to acquire 1% to 3% kind of revenue each and every year.

We're not looking for a large potentially problematic kind of acquisition but as we demonstrated with both our acquisition of Workscape and earlier in the year with Cobalt, if it makes sense strategically, we have an appetite to continue making those kind of acquisitions.

So assuming the flow of business development and flow of outside deals are there, we clearly have the appetite to stay the course.

Okay.

I want to go outside the box a little bit here and ask something that kind of usually doesn't get asked on these calls but one of the acquisitions you did was particularly interesting to me and it was the Advanced acquisition particularly because of its health care focus.

What's the rationale there and is that kind of the strategy or the road map that we should look for going forward in terms of vertical expertise, additional offerings, things of that nature?

Well, there's a couple things.

One is I'm not going to get too deep either at this call or on Thursday with those efforts around AdvancedMD.

It's a relatively small acquisition, call it $40 million give or take.

They clearly -- they support about 13,000 or 14,000 physicians as part of their offering.

We also in small business and the PEO have payrolls that we do for some 25,000 give or take doctors and doctors' practices across the lower end of our market.

So there's a lot of good synergy between the two and it clearly is a business model that is very close to what we do in Dealer on a smaller scale but in a market that potentially has very strong growth prospects.

So we made an opening round bid so to speak to learn more and over time, we'll expand our thinking and share that with you.

I think that's interesting.

Thanks guys, appreciate it.

Thanks, Adam.

David Togut with Evercore Partners.

Thank you, Gary and Chris.

Quick question for you on Employer Services.

You've been in a substantial investment mode over the past year both in terms of acquisition expenses, sales force expansion and obviously the hit on interest rates, yet all of your leading indicators are very strong.

So question is when do you see meaningful and sustainable margin expansion in Employer Services?

Well we're going to continue a little bit of investment for example in sales over hires, that kind of thing for the fourth quarter, which we normally do to get ready for the next year.

So you're absolutely right, we did make an investment in service, sales, R&D but we do feel that those are all paid off.

You can see what's happening to the sales engine and the sales growth.

You can see the retention going up significantly, and if you join us on Thursday, you'll actually see some live demos of some of the new products that we have and I think you'll be interested in that.

So we really think that's paying off.

We really-- structurally the model hasn't changed.

We still believe we can drive the 50 basis points of margin improvement and I think you'll begin to see that in the fourth quarter in the ES margins and I think you'll see that again going forward, so.

David, if you remember my opening comments, in Employer Services if you take the acquisitions off, we are actually delivering or are forecasting to deliver 50 basis points of margin improvement.

So in terms of cash flows of pretax before you make those acquisitions, we are delivering improved margins and improved cash flows based on last year's revenue so to speak.

And those acquisitions should be a vehicle that will help us grow organically in the future or they are rationalizing a market share which is clearly a margin play when you do it.

So at the end of the day, at least in my book, we are delivering on margin improvement for this year and will continue to do so in the future.

Dealer itself also has, I forget the exact number, but it's 50 basis points of pretax margin improvement as well if you take Cobalt out, so I think we are doing that.

Okay, and just finally, you referenced improved, or I should say lower client losses due to pricing, can you give us a sense of what the year-over-year unit pricing trends were both in ES and Dealer?

Well we're coming up to the new pricing going forward and I think last year, we said it was just under 1%.

So the decision as to what we do going forward is still--

Are you talking about price increase or market pricing?

Well, year-over-year unit pricing trends so taking into consideration-- maybe a net price change, if you look at your price increase balanced against any discounts you might be giving in the marketplace.

That's the--

Yes, discounting is certainly under less pressure today than it was last year and we increased prices last year, I think about 0.6 of 1%, 0.6% and I would expect it'll be in the 1 percentage kind of range in the year ahead.

Thank you very much.

Thanks, David.

Kartik Mehta with Northcoast Research.

Good evening.

Gary and Chris, are your acquisitions a result of just seeing more opportunities or is this just a culmination of that you've had a lot of acquisitions in the pipeline and they're just finally coming to fruition?

I think it's a combination of both.

I think we're doing a better job on business development, so analyzing where we have holes in the portfolio or want to augment our product platforms, we're targeting certain companies of certain acquisitions.

And I think because the pricing around M&A activity has kind of returned to not normal but near normal kind of levels, I think we're seeing more deal flow to boot, so I think it's really both.

Gary, I think you talked about margin degradation from the Cobalt acquisition and I'm wondering, as this acquisition has been integrated, how long you think that might last or when do you think Cobalt might get to similar margins, the corporate margins in the Dealer business?

We've had Cobalt, Kartik, for the better part of this year, so what is it about 2011 months or thereabouts, and it really is just a margin issue, not a bottom line issue.

And so when you bring in that much revenue with the drag and everything, so we should start lapping that and we'll get back to normal year-over-year compares with Cobalt next year.

But over time, it should get to look more dealer like without the intangibles because you've got a big intangible charge that's reported in those margins, so you have to look at that and take it out and then compare apples to apples.

And then one final question, just Gary, you guys have had excellent success on the Beyond Payroll side of the business and I'm just wondering, any particular product that's helping you really drive that?

I know you looked at some in your prepared remarks but I'm wondering if there's anything specific that's really helping you drive that revenue in that business?

Yes, no it's-- you notice that list in prepared remarks was long because it really is across the board we're seeing the growth and the emphasis.

Well it's our HR BPO products, the ASO offering and the PEO are clearly continuing to grow at faster than the other Beyond Payroll rates.

The other thing that's helping us is Workforce Now in our recent, which is for the mid market, and our recently announced Vantage which is Workforce Now for larger clients if I want to put it that way, it comes with the ability to have 4 products running on 1 database with 1 user interface.

So we're naturally getting more lift in selling bigger bundles, and as we upgrade existing clients to these new platforms, we're seeing a high propensity for them to go Beyond Payroll and sign up for benefits or time or HR when they do it.

Thank you very much.

(Operator Instructions) Jim Kissane with Banc of America Merrill Lynch.

Gary, can you give a little more color on sales by maybe client size and also international?

Thanks.

As I mentioned in the opening remarks, we've seen very strong sales in SBS, the PEO, and ASO, so that's probably the place that it's most consistently the healthiest.

In the high end of the market, we saw good sales in both national accounts and GlobalView in terms of growth percentage but when you compare them to the disappointing results we had a year ago, we're just not beating our chest about it so to speak.

Our core domestic best of breed products in international are doing fine, call it double digit kind of numbers, and we were about even in major accounts because we had a pretty strong growth year last year.

I think major accounts was up low double digits last year, so we're seeing kind of a flattish kind of comparison, albeit we're expecting a positive growth rate for the year.

Okay, great.

And Chris, the slightly lower pretax margin guidance for F 2011, is that entirely due to M&A or are you using this as an opportunity to step up and invest in a little bit as you have pretty strong wind building at your back?

No, it was the M&A.

It was all the transactions we did in that third quarter which was primarily the AdvancedMD acquisition but it's all entirely due to that.

And it's all in the third quarter it sounds like, so on a go forward basis?

Yes.

Okay, perfect, thanks.

Gary Bisbee with Barclays Capital.

Hi guys.

In the past year or so, I think you frequently talked to us about it taking several years to get back to the longer term revenue growth targets, just as sales flows through but it feels like things have picked up a bit now.

Is that still the right way to think about this, the sales acceleration will take a couple of years to fully find its way to revenue?

No I think we are back much sooner than we were the last time.

We never really cut the sales force headcount with the exception of small business during the downturn because it was the easiest place to replace.

We have since replaced what we cut and added in the small end of the market and we're adding, we started adding back in the third quarter, early third quarter in the rest of the segments pretty much across-the-board.

So we've seen a much faster bounce back this time.

We went from the depths of being slightly negative.

I think we were down 10% to last year I think we were up about 4% and this year, we're forecasting at this juncture high single digits.

So it's come back pretty nicely to the standard kind of methodology around 10% growth that we would normally look for on a normalized year to use that term.

Okay, and then just I guess a follow up.

Can you give us anymore color on GlobalView?

It sounds like it had a better quarter but not yet quite where you'd like to see it.

Is the pipeline still doing well or is it just the sales cycle?

The pipeline is still good.

I mean we're seeing the same kind of issues in GlobalView that we're also seeing in national accounts.

National accounts domestically here in North America had a great growth quarter but we're still-- it's still too much big deal-itis and it's still a struggle to get some of these larger accounts both in GlobalView and national accounts off the finish line.

And you see it even in some of the employment metrics.

Employment growth is not returning as fast at the high end of the market as it is to the mid and low end of the market.

So I think it's just guys sitting in my chair and Chris' chair are still a little cautious.

Okay, thank you.

Julio Quinteros with Goldman Sachs.

Great.

So just wanted to just circle back up on your comment about new sales being in the 10% plus range.

What would it take to get that new sales number up above kind of the current levels in terms of where we are right now the-- sort of the high single-digit targets?

Is it a function of pricing, is it a function of the economy?

Any just way to sort of triangulate around what you guys would be thinking about there in terms of getting that metric up higher?

It's really driven by 2 things, one is obviously headcount, second is productivity in the existing headcount.

The other thing that's difficult in our business, and I'm assuming it's true in most any other business, headcount is the most predictable, reliable way of bringing in new sales.

You put money into product and innovation to try to pull new business, but at the end of the day, particularly in the mid and up market, you have to have feet on the street to actually culminate the sale.

And what happens is if you try to ramp the 15% or 20% sales growth, the amount in new heads you have to hire coupled with all of the people you have to promote to manage them, the return kind of starts to become asymptotic, if you're not careful.

So typically we tried to hire 7% to 8% headcount growth and shoot to grow 10% to 12%, 13%, 14% in the good year if things are going well, for that very reason.

And what about the effect of market share gains?

How do you guys think about that as it relates to new sales opportunities?

I'm not sure I follow your question.

Do you expect a factor of your new sales improvements beyond the sort of targets that you're sort of setting up to be driven at all by market share gains or is this still not really a sort of a metric that you would sort of factor in there as well?

Well a lot of that depends on where you're losing on the back side of market share.

But clearly we take competitors, we take business from competitors, we take business from in-house software and on the low end of the market, we take it from manual.

So we're clearly picking up share on the low end of the market but it's not that directionally positive when you look at the mid size because of the large scale that we already have there.

We're picking up a lot of share domestically and with GlobalView, but again sure we're always focused on market share gains.

Got it.

Great.

Thanks guys, good luck.

Sure, thanks.

Jim MacDonald, First Analysis.

With all the products you have in Beyond Payroll now, what do you think that growth level could get to in a good economy?

The growth level in Beyond Payroll?

Right.

I mean you're at 15% now, how high could that go?

Well the best way to look at that is history and I think the best we've ever done is like 8% to 9% payroll and tax growth, in recent history put it that way, and Beyond Payroll growth in the 15% to 20% range.

It was up by 20% a couple years ago.

Yes.

So with all those new products you're still limited out at those kind of levels, you think?

Well, you never say never but if we do some new things like some of the businesses that we bought like Workscape in the high end of the benefits market, it's relatively small business, $60 million, $70 million, so you could very easily grow that business much faster than 15% a year.

But when you look at all of the Beyond Payroll revenue we already have which is approaching $2 billion, it gets to be pretty challenging to grow that number 20%, 25%.

Okay, thanks very much.

Tien-Tsin Huang with JPMorgan.

Hi, thanks so much.

Good afternoon.

I wanted to ask about retention.

With retention coming in ahead of plan, I guess pays per control as well, I'm a little surprised that you didn't raise your organic ES margin outlook.

Is that just conservatism or am I way off base in my thinking?

You said organic though?

Yes.

It does have a lot of pressure and don't forget we are going to do a little bit of headcount increases in the fourth quarter that offset that.

So I think it'll be healthy in the fourth quarter, you'll see that but it's still in the same ballpark that we had--

Yes, we've made substantial investments in sales and service and R&D this year which are offsetting some of those because you're right, to the extent that you get pure organic revenue growth, particularly when it's of the high margin like pays per control or balances, it would certainly help in doing that, but again we're offsetting that.

Part of that is because of the lower -- you got to remember ES gets credited 4.5% and we take the other end of it at the ADP level, so you have to look at the total as well as the segment.

Yes, no fair enough.

I mean I'm sure we'll get some of it back next year as well.

I think I understand.

Just my second question is just the EPS outlook you raised it 1 to 2 points; that makes sense.

Just want to make sure I've got the components of that, about half of that looks like it's coming from higher interest rates and then it sounds -- it looks like the rest is from revenue growth.

Am I missing anything else?

It sounds like the tax outlook is the same, Chris?

Well a couple of things there.

So the tax -- effective tax rate you saw was adjusted somewhat from what you probably had in your models.

The interest came down about $10 million or so and you have a little bit of a lift from the pays coming up, so -- but then you do have a little bit of the revenue growth coming from the FX, the dollar has certainly weakened and that doesn't drop too much to the bottom line, so you get a little bit of offset there.

So as we looked at it, that's -- those are the different factors that went into the raise in the guidance on EPS.

All right, great.

I think I got what I needed.

See you guys on Thursday.

Great thanks.

David Grossman with Stifel Nicolaus.

Thanks.

So we saw a really nice organic acceleration of revenue growth in ES, and I'm wondering if you could help us understand how much of that is from the core business rebounding cyclically versus growth from some of the investments that you articulated, particularly your ability to now withhold payroll taxes in Europe and the bundling of services that you referenced across the product line?

And I guess--

Go ahead.

No, that's just another way of asking, have you started to see revenue growth benefit from these investments or is that still on the horizon, if you will?

Really, you've got to remember the 2 things that are the biggest impact on our growth are new sales and improved retention.

So and if you look at any of the waterfall charts that we've shared with you in prior periods, it is by far the biggest growth impact.

And clearly, sales accelerating in this quarter at 13% is a big plus in terms of the organic growth rate.

And when you improve your retention by a full 100 basis points in a year, not only is the improved lifetime profitability noticeable but it clearly helps your growth rate the following year by at least 1%, not to mention those clients continue to buy other products, et cetera.

1% in terms of pays per control is worth call it $20 million give or take.

And so when you look at the grand scheme of a Company approaching $10 billion in revenue, it's not material when you look at us selling $1.1 billion in new bookings.

And just to be specific on your comment about money movement, it's still very small internationally.

That's not going to move the needle that much yet.

Yes, I was thinking more in terms of growth and getting new companies to outsource now that you do offer money movement as opposed to the contribution to float.

Most of what we're selling in money movement today is for best of breed platforms in Europe and most of that is being sold into the base, although we are getting a reasonably high percentage, I think call it 40%, 50% of new clients signing up, also buying it.

But it's a long way to get it to the point that it's the kind of major contributor that we have here in the US, although I believe one day we will be there.

Okay, and just one other question was on the front interest and I may have missed this, Chris, in your prepared remarks but would we expect the comparisons going forward in a flat rate environment to be positive now on a year-over-year basis?

No.

We'll talk more about that on Thursday and we'll go into more detail but no.

The -- it all depends on what your assumptions around balance growth going forward but the year-over-year drag, as you know, from the new purchase rates versus the embedded rates is still there, interest rates haven't moved.

So we've benefited from the balanced growth particularly in the quarter.

It's still down year over year and I'll go through more details in that on Thursday.

I mean the one thing we do know at this point about next year is that the embedded rate will be lower, based on where we are in the yield curve.

So the $64,000 question is how much will the balances grow and when will rates turn so that we can start moving the other way to get back to over time having a positive increase in rates rather than a negative in rate.

Very good.

Thank you.

Ashwin Shirvaikar with Citi.

Hello, Chris.

I just wanted to ask a follow up to a previous question, you've obviously gone through significant investments all through the downturn, seem to be benefiting here, but do these investments-- I mean is the expectation that they tail off at some point in fiscal 2012 or 2013 or do they just get replaced with new kinds of investments and the bigger play is just better scale and growth?

It's a little of both but when you make investments around service and sales force headcount, in our model you would typically go backwards unless you were in a severe economic downturn.

Clearly, when things are going well, and you have the ability to accelerate or make some one-time investments in product and innovation, you do take the opportunity to do that.

But our core investments in R&D, I've never really seen them go backwards because innovation, the competition and technology just keeps moving forward and if you're not out in front of that, you may get a couple of years of happy contribution at the bottom line but at the end of the day in the long term scheme of things, you're going to be sorry.

Understood.

I do think that's the right approach.

With the pretax margin decline, due to acquisitions I just want to focus on that, have you broken out, maybe I missed this, how much of that is due to integration and how much goes away by next year?

No, we haven't gone through that level of detail.

Are you going to?

But your year-over-year compare is going to get a little bit easier except for as Gary mentioned earlier, you are going to always have that amortization going forward.

So year over year, it'll be a better compare but you'll still have a little bit of a drag overall because of the amortization.

And we don't normally expose that kind of granularity at the deal level for the number of acquisitions that we've done.

That's just-- we historically just don't disclose that.

Okay, got it.

See you guys on Thursday.

Okay, Ashwin, thanks.

Thanks.

Giri Krishnan with Credit Suisse.

Hi, I had a question around Europe.

Gary, in your prepared remarks I think you had said pace declined in Europe by 2%.

Is there an expectation for when we might see that turn positive and is this lag sort of normal versus the last cycle?

Yes, they go down much slower and they come back much slower, because of the way people-- the cost of having any kind of a downsizing as well as the heavy social expense of hiring people in Europe, you'll see them flex plus and minus using temporary staffing long before they start hiring permanent employees, but what's happening is we're reaching the bottom there and so that decline is lessening and I would expect over the next 6 to 9 months it's going to flatten out.

Okay, and when you talk about retention, was retention in Europe comparable to your overall or was it slightly below the US?

Yes, retention in Europe has always been notably higher than the US.

So if we would run 89% to 90% retention in the US, in Europe, we would run call it 94%, 95% and have historically.

It's actually up a little bit I think this year, Chris, I don't remember exactly but I think it's within half a basis point or something, 50 basis points of the other rate and it's very comparable to the retention rate we get in national accounts here in the US.

European business tends to be much more focused on the high end and mid side of the market and so that's not that unusual.

And if you look at GlobalView, we're running 97%, 98% retention because if you go through that much expense and the pain of a conversion, you're not going to just change willy nilly.

Okay, yes, thanks for the explanations.

Tim McHugh with William Blair & Company.

Yes, most of my questions have actually been asked.

One quick one I guess was if you could elaborate a little more on-- I was going to ask about bridging the gap between the talking about the strength in the international sales and yet pays per control declining over there, if you could talk a little more on the growth rates by maybe even just particular markets or services, more so internationally that make it better than the pays per control turns?

Part of it is Beyond Payroll.

We've made a number of important acquisitions and we're now marketing some product platforms that allow us to sell HR kind of software as well as time and labor, and employee self-service management self-service, so that's helping us drive increased gains in terms of sales force.

Other than that-- yes and the streamline sales, which is our ability to sell to US-based companies, smaller processing opportunities in different countries, we've done very well with doing that so that's helped driving their sales.

But there's nothing that just jumps off the page at you other than Beyond Payroll and it's pretty much the same across-the-board.

I mean, we don't really have much of a presence in some of the places like Spain and Portugal and Greece that are under the most pressure, and it's kind of business as usual but with a little bit of tightness in the rest of the core western European and UK marketplace.

Okay, thank you.

We do have time for 1 or 2 more questions.

Mark Marcon with R.

W.

Baird.

Just wondering if you could comment with regards to the implied guidance for the full year, it basically implies that year-over-year revenue growth for Employer Services slows down a little bit from the strong pace that you posted in Q3.

I'm assuming that that's basically because we're annualizing some of the acquisitions and that's why part of the reason why we're seeing as we lap those, we start seeing the improvement in terms of the margins.

Is that correct?

(Inaudible) question but Elena seems to--

Yes, are you talking about the revenue growth implied for ES for Q4 versus Q3?

Exactly.

Well, Q3 is seasonally high with the year-end W2.

I'm talking about year over year, so that would typically go through every year, wouldn't it?

Yes, yes.

So your total year over year, not Q3?

But also, Mark, you got to remember the payroll and tax revenues that Chris, where we had the timing difference between the second quarter and the third quarter--

Yes, that contributes to it.

That went from zero in the second quarter to 5% in the third quarter, and when you normalize it, it went to 2% and 3%, which would then pull down the aggregate to some degree.

I haven't done the exact math but I think that's probably what happened there.

And then you look at the seasonality and I think it hangs together.

So in essence, I mean there's no implication or no reason aside from some of those timing differences why we should see a slow down in terms of year-over-year growth relative to what we experienced in Q3?

I think that's right.

We certainly hope not.

Great, and then can you talk a little bit more about just the markets internationally where you're seeing the strongest growth and that you have the greatest opportunity in?

Well, clearly, GlobalView in terms of Asia-Pac is a big opportunity for us.

We're actually quite pleased with the sales growth in the UK.

We're the number 2 supplier in the UK market but with our new Freedom platform augmented by a recent acquisition that we made that has HR and benefits and Internet software as a service kind of delivery on the front end of Freedom, is really driving some great opportunities in the UK market.

And the German and French markets are doing pretty much as they have been.

The same with the Netherlands and those 4 really--

Good growth

Constitute-- they've got decent kind of 10% plus or minus kind of growth rates across Western Europe.

And when we think longer term, we're running roughly around 21% give or take a few percent in terms of percent from international.

If we think 5, 10 years out how big could international become?

Well I think the real $64,000 question there Mark is I hope the North American business grows as fast if not faster in which case it would make a percentage of the whole the same or are only growing up slightly and that's really what happened.

International is doing fine, it's actually growing faster than North America but we think longer term that North America still has a lot of run room in the growth rate.

And as long as it's growing even though international may be growing at a faster rate, it takes a long time to really move the needle in the mix between international and US.

Sure, appreciate the color.

Thanks.

We have time for 1 more question.

Michael Baker with Raymond James.

Just wondering on the new sales front whether or not you're seeing a change in mix between competitive takeaways versus moving someone from in-house to one of your solutions?

I don't think there's any significant change.

Obviously sales are better but they're better in both categories so I don't think there's any big marketplace shift there.

In the lower end of the market we're probably doing better in the CTA level and against some of our competition, not only our national competitors but I think also the regionals.

Thanks a lot.

Thanks, Michael.

Ladies and gentlemen, we have no more time for questions.

I will turn the floor back to Mr.

Butler for closing remarks.

Thanks, again, everybody, for coming on a late afternoon on Monday.

Hopefully you can tell we're quite pleased with the results.

I think it really sets the stage for continued growth in the future and we're looking forward to giving you a lot more breadth and depth in all these categories by marketplace at the coming analyst meeting.

I think you'll be particularly pleased when you see all of the progress in terms of innovation in our products and the new product platforms that we have.

So thanks again for listening and we'll see you on Thursday we hope.

Thanks, everyone.

Thank you for joining today's conference call.

You may now disconnect.