自動資料處理 (ADP) 2011 Q4 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to ADP's fiscal 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 Chief Executive Officer; and Chris Reidy ADP's Chief Financial Officer.

Thank you for joining us for our 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.

If you are having any issues accessing the webcast, click the icon to the right of the volume, and select Flash or Window Media Player, as appropriate.

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 fourth 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 such -- some risks, and these are discussed on page 2 of the slide presentation and in our periodic filings with the SEC.

With that, I will 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 fourth quarter and our fiscal year results.

Then I will turn the call over to our CFO, Chris Reidy, to take you through the detailed results, after which I will return to provide you with our fiscal 2012 forecast.

And before you take your questions, I will provide a few concluding remarks.

Let's now turn to slide four to begin.

Overall I am quite pleased with ADP's results for fiscal 2011.

I would like to point out that while the results we discussed today are inclusive of our fiscal 2011 acquisitions, it is important to note that we also achieved our forecast for revenues, earnings, and earnings-per-share, excluding the acquisition impact.

Our key business metrics continued to trend positively and were the strongest that they have been in three years.

Let's start with Employer services and PEO services new business sales, which to remind you, is the single biggest contributor the long-term organic revenue growth.

Our investments through the downturn and product innovation, sales force expansion, and Client services are also having a positive impact on new business sales.

On our call last quarter, I reminded you that we began to see new business sales rebound toward the end of fiscal 2010, with sales growth of 25% in last year's fourth quarter.

With that kind of growth, we obviously anticipated a tougher comparison for this year's fourth quarter.

But I am happy to report we had 8% growth in new business sales for the quarter.

We achieved our full-year target with 9% sales growth for the year, adding nearly $1.1 billion in expected annualized recurring revenues.

It is worth noting that sales growth in the small business marketplace continue to be strong, and we achieved double-digit growth for the year in this market.

Sales in our national account space were also double-digit for the year.

This was against a fairly easy comparison in fiscal 2010, but nonetheless we are still pleased and encouraged that larger companies in the U.S are once again investing in their businesses.

We believe that our new vantage HCM solution, that we will roll out in the Fall, will also contribute to further growth in this space in fiscal 2012.

Our Employer Services international business posted double-digit new sales growth for the year, as a result of a particularly strong fourth-quarter sales, and specifically in Canada and in Europe.

I am also pleased to report that we closed several significant transactions in GlobalView in the fourth quarter.

I am especially delighted that our client revenue retention and Employer services, which improved over one full point this year, reaching a new record level of just over 91% retention.

As you may recall from our May analyst conference, we still believe there is opportunity for further improvement in revenue retention even from these lofty levels.

Growth in our US pays per control same-store sales employment metric was also strong at 2.6% in the quarter, giving us 2.4% up for the year.

Average work site employees paid in PEO grew 14% in the quarter, and 12% for the year.

Our client fund balance growth exceeded our expectations all year, growing 13% for the fourth quarter, and 11% for the full fiscal.

Moving on to do Dealer Services, the automotive landscape in North America continued to improve, although the recent annual selling rate for US autos for calendar 2011 was regionally revised downward, to be flat with calendar 2010 at approximately 12.6 million new vehicles sold in the US market.

Despite this revision, Dealer Services' new business sales were strong in the fourth quarter, and strong for the full fiscal year.

Dealers' worldwide revenue and client-site retention increased for the year, led by improvements in North America nearly 4 percentage points in revenue retention, and 3 percentage points in client site retention.

Dealers' competitive win-loss ratio also continued to be favorable, resulting in continued market share gains.

Before I turn the call over to Chris, I want to add that I am very pleased with our execution against our M&A strategy this year.

During fiscal 2011, we closed multiple transactions with about $450 million in annualized revenues.

These transactions are a great compliments to our existing solutions that -- and should increase our organic revenue growth in the future.

With those opening remarks, I will now turn it over to Chris Reidy to provide the financial highlights and the full-year forecast for our client funds investment strategy for Fiscal '12.

Thanks, Gary.

And we are now on slide five.

We are pleased the total revenues increased 11%, to $9.9 billion for the year.

I would like to point out that while we had 2 points of growth from favorable foreign exchange rates in the fourth quarter, there was no impact on a full-year basis, as the fourth-quarter benefit merely offset the drag we experienced in the first half of the year.

Employer Services grew total revenues 8%, and Dealer grew 24%, both including acquisitions, and the PEO grew 17%.

Total organic revenue growth was over 6% for the year.

When you look at it by reportable segment, Employer Services organic revenue growth was 5%, the PEO was 17%, and Dealers was 3% for the year.

Employer Services payroll and tax filing revenues in the United States grew 3% for the year.

Acquisition activity in adjacent markets also drove growth and beyond payroll revenues.

In the US, growth was 13% for the year, with nearly 3% growth coming from the Workscape acquisition earlier this fiscal year.

Tax Credit Services ASO -- our BPO offering at the low-end of the market, HR Services in major accounts, and Time and Labor Management all grew nicely during the year.

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

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

Pays per control services in the US increased 2.4%.

And PEO average work site employees paid increased 12%.

Additionally we continue to see the positive impact of new business sales growth.

Growth in average client fund balances were also once again higher than anticipated, increasing 11% for the year, driven by new client growth in small business services, higher wage growth, increased pays per control, and increased State Unemployment Insurance.

Now, let's turn to slide 6, and continue with the highlights for the year.

Pre-tax earnings were up 4%, but as anticipated ADP margins declined 130 basis points from a year ago.

There are a couple things going on here, and I would like to take you through them.

We have done a great job in executing on our M&A strategy, and in fact, the fiscal 2011 acquisitions positively contributed to pre-tax earnings.

However, as you know, the impact of pre-tax margin in the first year is negative, because of the cost of integration, as well as acquisition-related costs.

This resulted in about 70 basis points of pre-tax margin decline.

Additionally, there was a drag on ADP's pre-tax margin from client funds, where higher average balances were offset by lower average yields.

The client in the net impact from the client funds investment strategy resulted in a drag of 60 basis points on ADP's pre-tax margin.

Finally, the full-year effect of the investments we made towards the end of late -- of last fiscal year negatively impacted ADP's pre-tax margin this year.

I also want to point out that ADP's effective tax rate of 35.1% was lower than anticipated, due to some small, favorable tax items recorded in the fourth quarter.

Diluted earnings-per-share from continuing operations increased 6%, to $2.52 on fewer shares outstanding, from $2.37 last year, excluding a large one-time favorable tax item in fiscal 2010.

Fiscal 2011 operating cash flows of about $1.7 billion allowed us to repurchase 14.2 million ADP shares in fiscal 2011, for a total cost of about $730 million.

Existing fiscal 2011, our year-end cash position remained strong, at $1.5 billion.

You notice in the press release that diluted weighted shares outstanding for the fourth quarter were slightly above last year's fourth quarter.

This was due to the impact of a higher ADP stock price in the dilution calculations, compared with the prior year.

For the full year, as is always our intention, we offset the impact of issuance's and dilution with share repurchases.

In addition, we opportunistically repurchased additional shares, resulting in a year-over-year decline in weighted shares outstanding for the full year.

We noted -- we always get this question on the year-end call, so for your year-end models, basic shares outstanding at June 30 are 490 million shares.

Now turning to slide seven.

We are pleased that total revenues increased 14%, to $2.5 billion, 9% organically in the quarter, assisted 2 percentage points, from favorable foreign exchange rates.

Employer services (inaudible) grew total revenues 9%, and dealer grew 30%, both including acquisitions, and the PEO grew 20%.

When you look at organic growth by reportable segment, employer services organic revenue growth was 6%, PEO was 20%, and dealer was 4% on the quarter.

We are pleased that employer services payroll and tax filing revenues in the United States grew 4% in the quarter.

Our acquisition activity into adjacent markets was 3 points of the 13% growth, beyond payroll revenues in the US for the quarter.

I am briefly note the positive trend in several of our key business metrics that contributed to revenue growth in the fourth quarter.

As was the case all year, client revenue retention once again showed strong increases in the quarter for TS, PEO, in dealer services.

Pays per control in Employer Services in the US increased 2.6%.

All geographies across the US, again, showed increases, led this quarter by the Central region in the Northeast regions, as well as Northern California and the Texas-Oklahoma areas.

Our clients represent a wide variety of industries, and the pay growth in most continue to be positive, with the exception, once again, of public administration and accommodation of food services.

It is also noteworthy that the client and pays across Europe slowed to about 1% decline in the quarter, compared with 2% down in the first three quarters of the year.

In our PEO business, average work site employees paid increased 14%.

The impact of new business sales growth continue to be a significant positive.

Growth in average client fund balances were also, once again, higher than anticipated, increasing 13% in the quarter, driven by the same items I mentioned for the full year.

New client growth, higher wage growth, increased pays per control, and increased State Unemployment Insurance.

Additionally one point of growth in the quarter was from favorable foreign exchange rates.

Now let's turn to slide eight, and I will continue with the highlights in the quarter.

Pre-tax earnings were up 17%, and included 2 points of growth from favorable foreign exchange rates.

ADP's total pre-tax margin improved 40 basis points.

There are a few items that I would like to take you through here as well.

As I stated for the full year a few moments ago, the impact of margin for M&A in the first year is negative, and was a drag of about 90 basis points in the quarter.

Once again, in the fourth quarter, there was a drag on ADP's pre-tax margin from client funds, where higher-average balances were more than offset by lower-average yields.

The decline in the net impact from the client funds investment strategy resulted in a drag about 80 basis points on ADP's pre-tax margin.

Additionally, we fully anniversaried investments spent in sales and service headcount in the fourth quarter.

So when you put all this together, as anticipated, ADP's pre-tax margin expanded nicely in the fourth quarter, unleveraged from increasing organic revenues.

Also want to point out that ADP's effective tax rate of 32.6% was slightly lower than anticipated, due to some small favorable tax items, was above last year's effective tax rate, which also benefited from small, favorable tax items.

Diluted earnings-per-share from continuing operations increased to 14% to $0.48.

Let's turn to slide 9, and I will take you through the updated forecast from a client fund into the estimates strategy, in support of the overall ADP forecast that Gary will take you through in a few moments.

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

At June 30, over 85% of our fixed income portfolio is invested in AAA-, AA-rated securities, consistent with the past 5 quarters.

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

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

Duration of portfolio increased slightly to 3.0 years, at the end of the fourth quarter.

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

However, 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.

Now to the fiscal 2012 forecast.

This slide summarizes the anticipated pre-tax earnings impact of the extended investment strategy, of the client funds investment portfolio for fiscal 2012.

And it is important to keep in mind that 15% to 20% of the investments are subject to reinvestment risk each year.

We anticipate growth in average client fund balances of 7% to 8%.We anticipate that growth in fiscal 2012 will come from the same places we grew in fiscal 2011.

Wages, State Unemployment Insurance, net pay, but at a more moderate level.

We do, however, anticipate higher growth from new business sales and improved retention.

We anticipate a yield on the client funds portfolio of 2.8% to 2.9%, down 30 to 40 basis points from fiscal 2011.

We anticipate year-to-year decline of $25 million to $35 million in client fund interest, as the anticipated growth in balances is expected to be offset by the lower interest field.

Looking now at the lower right of the chart, we anticipate a decline in pre-tax earnings of $30 million to $40 million for fiscal 2012, as a benefit of growing average balances expected to be outweighed by lower interest rates.

For fiscal 2012, we anticipate a decline of 40 to 50 basis points, from fiscal 2011's overall yield of 3.6%, from the net impact of this strategy.

Now, I will turn it back to Gary, to take you through the remainder of the forecast for fiscal 2012.

Thank you, Chris.

We're now on slide 10, just to be sure we are all in synch.

In our fiscal 2012 outlook, we are assuming no change in the current economic landscape.

We do anticipate total revenue growth of 7% to 9%, and 8% to 10% growth in diluted earnings-per-share, compared to this year's $2.52.

As you heard at our Analyst conference in May, when Chris took you through our 5-year strategic view, we are clearly looking to drive EPS growth in excess of revenue growth.

And this fiscal '12 forecast shows ADP getting back on a solid growth track, with increased leverage in the business model, from higher organic revenue growth.

However, as Chris indicated, we expect pressure, once again, in fiscal 2012, from the continued low interest rate environment.

As you heard from Chris a few moments ago, the anticipated decline in the yield on the client funds investment portfolio is expected to more than offset the favorable impact of the forecasted growth in client funds balances.

As is our normal practice, no further share buybacks are contemplated in the forecast, beyond anticipated dilution, related to employee benefit plans.

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

Let's now turn to slide 11, for the segment update.

For employer services, we anticipate revenue growth of 6% to 7%, with pre-tax margin expansion of at least 50 basis points.

We also anticipate an increase in our pays per control metric in the US of 1% to 2%.

And we anticipate 15% to 17% revenue growth for PEO services, with a pre-tax margin about flat with fiscal 2011.

We anticipate 8% to 10% growth in the annual dollar value of the EES and PEO worldwide new business sales, up from that nearly $1.1 billion sold in fiscal 2011.

And for dealer services, we anticipate 8% to 10% revenue growth, with pre-tax margin expansion of about 50 basis points.

About two points of that revenue growth is anticipated to come from a full-year up Cobalt, compared to last year's 10.5 months.

Turning now to slide 12, I would like to leave you with a few closing remarks, before we open it up to you for your questions.

So we are quite pleased with ADP's results for fiscal 2011.

Organic revenue growth was a healthy 6% for fiscal 2011.

The trends in our key business metrics continue to be positive, and were the strongest that they have been in over three years.

Our investments in product innovation, service infrastructure, and in sales force distribution, are paying off, as we have excellent momentum in both sales and client retention.

Our product breadth has never been better.

We also achieved a return on equity of 21.8% this year.

ADP's cash position is strong, and we remain committed to returning excess cash to our shareholders through dividends and share buybacks.

We continue to successfully execute against our 5 point strategic growth program.

Our core businesses are strong and growing.

Growth of our HR BPO solutions for all 5 Companies is accelerating.

We have tremendous opportunity in our international business, and I am particularly pleased with this year's growth in our Employer Services international business.

We were highly acquisitive this year, closing 9 strategic acquisitions with $450 million in annualized revenues.

And we remain focused on driving pre-tax margin expansion.

I believe we continue to do the right things to grow the business, and I am optimistic about our growth opportunities -- not just in the year ahead of fiscal '12, but for many years to come.

Now let me turn it over to the operator, to take your questions.

(Operator Instructions) Jim Kissane, BofA Merrill Lynch.

Good job, guys.

Chris, can you give us a sense when you think the margin pressure from some of the recent acquisitions will peak and the drag will moderate?

And then, Gary, your appetite for acquisitions as you look into F '12.

Yes.

Starting with the margins, the pressure abates significantly next year, Jim.

I think there is about 20 basis points of margin pressure in '12, thereabouts.

Does that turn into -- is it more than that in the first half, and then you start to get some accretion in the back half?

Yes, absolutely.

In terms of the appetite for acquisitions, I don't think anything has realistically changed.

We target 2 to 3 percentage points of acquisition growth every year.

Sometimes it is a little less; sometimes it is a little more, like it was last year.

It was more like 4.5%.

So our acquisition pipeline is still reasonably strong, and I would expect to have some reasonable growth in new acquisitions in the year ahead.

So, not to put you on the spot, Gary, but is there some risk if you have the same level of acquisitions in fiscal '12, that you could see similar margin pressure, that we are not currently contemplating?

I mean, there is always that risk, Jim.

But -- because, if it were strategically important enough, I would certainly make that kind of a trade-off.

Although typically we don't have a huge appetite for real dilutive kind of acquisitions.

It might be problematic over the long-term.

So, I think that if we are successful, there will be some drag, but certainly from a strategic standpoint, it wouldn't be something that I would hold back doing, if it were the right thing for the business.

But I think we will continue to be opportunistic, but it is more likely that our acquisition spending next year will be back in line with our normal targets of $300 million to $400 million, and as you know, that has been lumpy over the last 4 or 5 years.

Yes.

If you went back a couple of years, Jim, I think we had made them closer to 1%, or $100 million.

This year, is a little stronger than normal.

But to expect a $200 million in acquisitions is kind of business as usual.

Yes, I think that's right.

And Gary, the retention is outstanding, and you said you move it up a bit.

But are you starting to push up against a natural upper limit, and maybe, can you comment on --?

I mean, we are certainly ascentotic to 100%, Jim.

I'd love to be having that problem.

The statistic around retention is probably the one that I am most pleased with about -- across all of ADP.

It is just really outstanding to rebound back as fast as we did, and to the record levels that we are at.

And it is really across the board, in all segments of ES, as well as in Dealer Services.

So, as you get higher up, obviously it becomes more difficult to improve that, but I still think there is a lot of room to grow.

I mean, in our international business and national accounts, we are right around 95%.

So depending upon the weight of our business, by size, it also has some impact.

But I am still pretty optimistic.

If you remember, Jim, back to our May 5 meeting, where we laid out the 5-year strategy, we mentioned that we think we can get, on average, 30 basis points a year, for the next 5 years.

And sort of take that 91% up over 92%.

So there is still some more headroom there.

That's excellent.

Thanks.

Nathan Rozof, Morgan Stanley.

Hi, thanks for taking my question.

Gary, just given all the investments in product innovation you've made recently, I was hoping you could give us some more insight into which of your products or services are driving the strength in the forward-looking metrics that we've seen recently.

Are there any areas that stand out, or where these investments are really paying off?

I think the one that really is kind of first and foremost is our progress with RUN, on the low end of the market.

It is a real-time, in-the-cloud product, with full mobile capability.

And we now have over 120,000 clients up on the RUN platform.

The service levels -- the product is much more intuitive, and so the service levels are higher, clients are calling less because they are doing it real-time on the web.

So, I clearly think along with investments in infrastructure, it has helped us drive a 2- or 3-point improvement in retention in SBS, over the course of the last year.

We are seeing similar, but not quite as dramatic, results from Workforce Now in major accounts, and I expect the Vantage, albeit our retention in national accounts is 94% or 95% already, I would expect Vantage will make that even better, in the future.

And then, just since you mentioned RUN, and given your leadership in rolling out cloud-based offerings, are you seeing any divergence in demand trends, between your newer SAS-based products or more traditional full-service products?

Well, the beauty in the offering is that we give you both.

We give it to you in a SAS-model, but with a full-service complement, if you need it, which is very different than some of our competition.

So, I don't think you will ever see ADP move away from not offering full service.

But continuing to try to drive efficiency through a more intuitive product, delivered through the cloud, that will drive retention and margins for us long term.

Great.

Thank you very much.

Ladies and gentlemen, we ask that you please limit your questions to 1 question and 1 follow-up.

David Grossman, Stifel Nicolaus.

Thanks.

You know, Gary and Chris, if you look out over the next 12 months, what do you think are the most likely variables, other than rates and perhaps share repurchases, that could put the fiscal '12 outcome either above or below the range that you have guided to?

I would start with a couple of our basic metrics, certainly pays per control at the 1% to 2% level, is subject to where employment levels go, et cetera.

So that is a pretty wide range, and it is coming off 2.5%.

Balance growth -- you know, we have been surprised by balance growth for the last year now, and we think that the [7% to 8%] is very reasonable, and it is a moderating of some of the increases we have seen.

But it wouldn't shock me to see that continuing to grow, and that could -- we have considered some of that in the range, on the upside.

FX is all over the map, so your guess is as good as mine, and when we do our range, we try to range that as much as we can on FX.

And then clearly, the biggest metric that impacts us is sales, and we like what we're seeing.

The trend is really good.

The 8% to 10% is a good solid sales growth.

So, I don't expect to see much change in that, but obviously that is a big lever as well.

Gary?

The thing that could probably affect that the most would be over-performance on sales, particularly if it was in the first half of the year, David, because it would give us revenue lift toward the end of the year.

So I would echo Chris's comments, with that added filler.

And how would you characterize -- it looks like you came in how you thought you would come in on sales in the fourth quarter, but given all of the noise in the background economically, do have any high-level thoughts as you enter fiscal '12 on the new sales environment, vis-a-vis what we are hearing every day in the paper?

Well, I mean, there is always that risk, but that foolishness in Washington has been going on for a while.

And we had a pretty good fourth quarter in sales, and had a pretty strong June.

So I think, generally speaking, people running businesses have to do exactly that, and if they need payroll and HR services, they pretty much have to get them.

So, as long as we are not in some kind of a precipitous fall, which hopefully we won't get into with the folks in Washington, then I would expect the business to continue trucking along at a pretty reasonable pace.

Okay, good.

And then, just one last question.

Chris, on the tax rate, it looks like -- and maybe I had it down wrong -- it came in a little bit low for the fourth quarter.

What are your thoughts underlying the guidance for next year, in terms of tax rate?

Yes.

The fourth quarter is an unusual quarter, as you can see this past year and the year before, because when you file the return late March, then you kind of true it up, and then you've got a better sense of the international revenues, where they fall, et cetera.

So traditionally, we've had some true-ups in the fourth quarter, and this year was no different.

So as you look forward, one of the things that I would say about our tax rate is, if you look back, we have driven a lot of improvement in taxes and the effective tax rate over the last few years.

And so, we are really proud of that.

One of the things that goes unnoticed is we closed out 13 years of open tax returns just in the last 30 months, and so that has been a significant progress and the effective tax rate's been stepping down.

I think that will continue to happen over the next few years.

I think our guidance for fiscal year '12, we are assuming a rate of around 35 basis points, which was the full year effective tax rate in fiscal year '11.

So, I expect good continued progress, and use about 35 flat for your model.

Is that 35%, or down 35 basis points year-over-year?

I'm sorry.

35%.

Thank you.

Gary thought I said the same thing.

(laughter).

No, I didn't think you did.

(laughter).

35.0% effective tax rate, David.

Okay, very good.

Thank you.

Jason Kupferberg, Jefferies.

Hi, this is [Ramsey El-Assal] for Jason Kupferberg.

Back in May, you raised your long-term revenue growth guidance by about 2 points, versus where it had been set in the previous year.

Can you talk about the -- remind us again about the specific factors in your business?

You saw change over the course of that year, which gave you confidence to boost this 5-year topline growth target, which seemed like a fairly bold move in a macro environment that is pretty unsettled, or a bit unsettled, at least.

Well, I think if I'm understanding you correctly, we're talking about the May 5, where we talked to 8% to 10% over the next 5 years.

And that is traditionally our range.

I think if you looked at the 6%, it was burdened by the early years of rebounding from the downturn in the recession, was the biggest thing.

But clearly, we have had increased metrics.

Our metrics are rebounding nicely across-the-board, so the retention, pays, and everything else.

And that's certainly contributed to it as well.

As well as the fact that we have had great success with the tuck-in acquisitions, so our product portfolio is better than ever.

And so that all contributes.

Okay.

And then 1 follow-up.

How much pricing lift is assumed in the F '12 guidance, and does that vary by the various segments?

It does vary by the various segments.

Obviously, we're contractual in the national account space, and not so in small business and majors, or certainly to a lesser extent in majors.

And so when we gave guidance -- the pricing, it is still pretty early, because it just went out July 1, so there's always some settling down.

But it was just about 1% price increase this year.

Thanks a lot, guys.

Rod Bourgeois, Bernstein.

Okay, great.

Can you guys comment on what is driving the better commentary in the international business?

It would be very helpful to get some specifics on that.

And in answering that, could you also give us an update on GlobalView and the prospects for that business to turn the corner on positive profitability?

In terms of international business, the main reason is new sales.

I mean, we have considerably increased our headcount, in terms of new sales.

In Europe we have added a number of additional products through acquisition and other relationships around self-service, HR, administration, time and labor management, which are giving us both impetus in the base, as well as in new business.

In China, our business, albeit small, had a very strong sales year, in terms of what is happening there.

So, it is really growth in sales.

Retention is still strong.

Retention in International is roughly 95%, and so it is been kind of -- I think it was 95% last year and around 95% the year before.

So it is really all-around new sales and new products.

And we have made a few acquisitions, on top of that, which will continue to help us.

GlobalView is still somewhat eclectic in the sense you have big deals that you get in a quarter, and you have big deals that you don't get the next quarter.

So -- but as a general statement, our pipelines are better than they have been over the last couple of years, and we are rolling out some new iterations of the product.

That will help us.

And I think our current forecast for profitability for GlobalView, I think is, what -- 2013?

Yes.

2013, for breakeven.

And what I would also add to that, Rod, is that we are building nicely on -- we continued to implement business during the downturn, when sales is certainly under pressure.

So we are up to about $100 million of recurring revenue in fiscal year '11.

And we're well on the way towards that $500 million of revenue in backlog -- the --.

We have over 1 million employees being paid on GlobalView today.

And counting the backlog, we are at 1.5 million employees around the world, and now -- you know, operating in 50-plus countries, particularly with our streamlined offerings.

It's going well, you know it's like anything in life, it could always be better, but it is going pretty good.

Okay, and then just real quickly on the pays per control outlook, you've given an outlook for pays per control growth of 1% to 2% for fiscal '12, and that is compared to, I think, 2.6% in the June quarter.

Can you talk about the reasoning behind setting the bar at 1% to 2% for fiscal '12?

And if there is any insight you can provide given your better-than-everyone-else's visibility into what is happening with payroll growth?

As to what you hear from the BLS or from the national employment report, we monitor pays per control on this year versus last year versus month to month, which is what you look at in the BLS.

If you were to look at a 2% kind of growth rate on 140 million people in the private sector, it would mean you would be adding 200,000 jobs a month over the course of the next 12 months.

And if you were to look at 1%, it would be like 100,000 jobs a month, which is not that different than what the ADP national employment report has been forecasting.

Obviously, we have momentum, and we can project forward based on our strong fourth-quarter pays per control, which we'll benefit from all next year over the trailing base.

We are pretty -- feeling pretty good about that statistic, but again, with what is going on in the economy and what is going on in Washington, we don't want to be too aggressive.

So Rod, another thing that I would add is, some of it is pure math grow over.

So if you look at the fourth quarter of '10, it was -- that was when it started going slightly positive.

I think it was up 0.3%.

In the first quarter of '11, it was up 1.7%.

So now, the 2.6% that we grew in the fourth quarter was compared to a kind of relatively flat-ish quarter the prior year.

Now we start having a more difficult compare against 1.7%, growing at 2.7%, I think, in the second quarter.

So it just becomes a more difficult compare.

That is more of what drives the 1% to 2% mechanically than anything else.

That's helpful, thanks.

David Togut, Evercore Partners.

Thank you.

Gary, can you quantify competitive win rates versus your last largest national competitor in the small business market?

And then if you could do that also with the high-end of the market in employer services?

We don't publish that on a regular basis, David, as you know.

We continue to feel like we are doing well against our largest national competitor on the low-end of the market.

Our loss rates to competition, particularly the national competitors, are less this year than they were in fiscal '10.

So in every case, our losses are less, and so we're feeling pretty good.

But it is a highly competitive market, but I think we are coming out fine.

As a quick follow-up, Gary, in the small business market, do you believe that your principal competitor has an effective counter-solution for RUN?

And then if you take that analysis up to the high-end of the market, is there another product out there that will have similar functionality to Vantage HCM.

I think you'd have to ask my other competitor that question, rather than me answering for them.

Obviously, we think the RUN platform is doing extremely well competitively.

But I would remind you, as we've discussed previously, our biggest source of loss on the low end of the market are to the regional competitors, who are purely price plays in most cases.

So they actually would give us more day-to-day frustration than our national competitors.

We think that Vantage with its consolidated database for both benefits, payroll, HR, and time, and the new software as a service platform, as well as the new user interface, is going to make us much more competitive up-market.

But again, I would remind you that our largest competitor up-market are the software providers, not the other service players.

Certainly some of them are doing better than others.

But again, I think Vantage is going to help us, particularly as it relates to insulating our base.

Julio Quinteros, Goldman Sachs.

Good morning.

One quick question, on just the revenue exposure, we kind of think about it by vertical, obviously.

Knowing what's going on in government side and the financial services vertical.

Can you sort of frame your relative exposure to both of those verticals as end markets for you guys?

Give that to me again?

Financial services exposure, and what was the other one?

Public services or government.

Yes, we don't do an awful lot of that.

That is not a huge part of our business, so --.

We have a lot of small cities and counties, and those kind of things, and we have a number of larger cities.

We do just a few states -- work with a few states.

And we do virtually no business with the Federal government.

I would say the exposure there is small.

Certainly in financial services, particularly for the global players, we do a good bit of business with them on our GlobalView platform, as well as our best-of-breed platforms in both the US and in Europe.

Interestingly enough, our business there is actually growing quite healthily, because it went down so precipitously when you came out of '08 going into '09.

So, I don't think it is a real issue for us on the financial services side.

Yes, actually, when we look at the pays per control by industry, you are right that the public administration is down in the fourth quarter.

For example, it is down about 1.5%.

The financial insurance banking and mortgage is up over 1%.

So that is -- part of that is because it suffered so much when it went down, that it is just coming back to more normal levels.

But what I'm looking at, our exposure to public administration is a very insignificant part of our base -- less than 2%.

And just on that same basis, the financial services.

Where would you sort of frame the percentage exposure there?

Over -- you know, about 2.5%, thereabouts.

Great; thanks, guys.

Good luck.

Tien-Tsin Huang, JPMorgan.

Hi, thanks, good morning.

Sorry if I missed this, but the operating expenses, relative to our model, that seemed to be biggest delta; that came in a little bit higher as a percent of revenues.

And looks like D&A and SG&A was pretty consistent, so I'm curious what drove some of the pick-up in the OpEx line?

Well, the OpEx line was significantly impacted by the acquisitions, and then on top of that, you had the growth in the PEO, so the pass-through costs.

So those were the biggest drivers of that change.

And we obviously made investments that grew throughout the year, as you know, so comparatively year-over-year that is in there as well.

Understood, yes.

And I think probably the PEO piece is probably what made the difference for us, but that is good to know.

My follow-on question, I guess for Chris, or Gary, just the implications obviously of the debt situation in the US, in the event of a default or downgrade, or what have you, how should we consider that impact, should it happen, to your laddering strategy, particularly I guess on the funding side.

Have you stressed that at all?

Well, we have certainly had ample time to talk about it, and the reality is -- those investments today that we have in agencies and other kind of securities, I don't think it would be our intent to liquidate those or try to get rid of those.

Because frankly, I don't know where you would put them that would be any better with any kind of a decent yield.

So we haven't spent a great deal of time looking at plan B.

I think, obviously, we will have to change some of our guidelines and so forth with the Board, if indeed that downgrade did occur.

But the actual outcome to our portfolio distribution, and what it would do to our earnings, I think is pretty minimal.

I would add, Tien-Tsin, you know you talked about the overall laddering strategy, and obviously I think you are talking too about our access to commercial paper market.

We don't anticipate any issue with access to commercial paper.

If anything, our overnight CP is even more attractive these days.

Recently we have been paying less than 10 basis points in the overnight CP market.

So that is something to keep in mind.

I would also say that if you are talking too to our AAA rating, and the impact it might have -- within the last few weeks, both Moody's and S&P reaffirmed our AAA rating with stable outlook, in light of the negative outlook on the US rating as well.

So, from that perspective, we don't anticipate any impact.

And then as Gary said, in terms of the investment side, we are comfortable, and we'll continue to monitor, but we don't expect downgrades beyond AA, so it is clearly still very high investment grade, and so we wouldn't expect too much of a change.

Who knows?

Maybe it will drive the rates up a little bit, over time, so that wouldn't be a bad thing.

But we don't expect it to be a significant impact.

Great.

That is good to know.

Hopefully it doesn't come to plan B, but if it does, I guess you guys will be rated higher than the government.

(laughter).

I'm not sure that makes me feel all that good.

(laughter).

Right.

All right, I appreciate it, guys, thanks so much.

Kartik Mehta, Northcoast Research.

Curious -- I wanted to ask you a little bit, you talked a lot about product innovation and the RUN product.

And I'm wondering, has the acquisition of your clients in the small business segment -- has that changed over the past couple of years as these new products have come in, or are you selling differently?

Well, I think our product is something that our salesforce is excited about.

Where as if you were to go back 4 or 5 years ago, we had a 10-year-plus-old product, and I think they were selling more on name and reputation than they were maybe on product.

So, when you get double-digit sales growth and improved retention rates, mobile platforms, real-time payroll calculations, as many as you want to do, sales force is just excited about it, and CPA's like it, and our bank partners are also enthused.

Well, I guess, Gary, I meant more about distribution channel.

Are you getting your clients through -- more through the Internet distribution channel versus CPAs, or versus just direct sales, not that it's because the product's changed?

It hasn't dramatically changed.

It is a little bit more from the Internet side, because we are more active in terms of search engine marketing and that kind of thing.

But the basic distribution hasn't changed all that much.

And then, Chris, impact on revenue and margins, if you start seeing an improvement on pays per control out of Europe.

I know you've talked about that pays per control improvement in the US, and what that could do to revenue and margins, but I am wondering what the international business or the European business would do to your revenue and margins?

If 1% change in pays per control in the US is worth $20 million, it is going to be a lot less than that.

So, $3 million or $4 million.

So it is not going to be huge to our total revenues.

It is more -- I think it probably talks more to the confidence of the companies and their buying patterns, and it probably helps sales more than anything else.

Thank you very much.

Mark Marcon, R.

W.

Baird.

Good morning.

I was wondering if you could talk about the growth projection for ES for this coming year, in the 6% to 7% range.

How much of that is due to acquisitions that haven't annualized as yet?

Less than 1 point or so, Mark.

It will be the acquisition carry over.

Great.

And then in anticipation of future acquisitions, would you say the higher priority is going to be still on ES, or could -- the $300 million to $400 million that you could end up doing this year.

Could that be evenly split between Dealer, or potentially even to the new area that you have just made the recent toe-dip into?

Well, the realities are, is that ES is 4 times the size of Dealer, and so the opportunities in terms of adding to the ES base are certainly larger than it is in Dealer.

That being said, if Dealer finds something that is strategic or is a good roll-up, we're not going to hesitate to do it, because we think Dealer is a great business with a lot of great growth prospects, good margins, and all the other kinds of things.

But historically, it would still be probably 75% or 80% Dealer -- I mean ES, as a way to think about it, albeit it wasn't this year because Cobalt was a good bit larger.

Great.

And then, can you remind us what the split now is between Beyond Payroll versus core in ES, from a revenue perspective?

From a revenue perspective, it's about two-thirds versus one-third payroll to Beyond Payroll.

And I imagine you are seeing part of the improvement with regards to retention is increased cross-selling with regards to the Beyond Payroll because you become more sticky.

Can you talk a little bit to that?

And how are the new sales trends going in terms of the mix where you are selling more than just core?

Well, the new sales trend part of that is just a little bit over 50/50 towards payroll, so it's like 52/48 kind of payroll/Beyond Payroll.

And you're right, the impact of that does drive up retention.

It is hard to isolate the impact of that.

So the retention growth is a combination of that, service improvements, et cetera.

You know, it is all of the above.

Great, thank you.

Michael Baker, Raymond James.

As it relates to the new offerings that you put to market, you certainly have given us a sense of how that has helped you out from a competitive dynamic.

How about in terms of actually opening up new opportunities, so getting a shift from previously in-house to outsourced?

It certainly helps us, and probably a good example is WorkforceNow.

WorkforceNow includes time, benefits, HR, and payroll, all in 1 database.

And literally once you sell it, even if you only buy payroll, you can basically really just turn a switch and add the other modules.

Plus, we do incent new prospects.

They get a better deal by buying a bundle, than they would buying individually, so certainly we are trying to push for larger bundles.

But probably the most important thing is -- the product really runs as a cloud platform.

It is a real-time, delivered through the Internet, through the cloud kind of application.

And really, from a client's perspective, it looks and feels the same way a software package would, if you were running it on your in-house machine.

So, I think it will continue to help us in that view.

And then, another question I had was, can you give us a sense of kind of where you are in terms of your negotiations with your health insurance carriers, as it relates to the PEO.

And give us some sense as to the drag, if you will, in terms of the pass-through, or how that is influencing that line item, and how that is kind of expected to change, if you are nearing another negotiation?

Well, we are really not nearing another negotiation.

Our carrier agreements are the same as our fiscal year anniversaries.

So we just went through open enrollment in the April-May-June time period.

So we're pretty much good to go for the next 9 to 10 months.

And how did that rate compare to the previous year's rate?

It was certainly up.

I'm trying to -- I don't know the exact number, but I think it is more in like the 10% kind of range.

But to your point, Michael, on the margin pressures, if you look at the margins, excluding the big 1-time item that we had -- the $9 million gain last year, fourth-quarter '10 margins were 8.9%, fourth-quarter '11 margins were 8.9%, actually up about 10 basis points.

Fiscal-year '11, excluding the $9 million gain, 8.9%, about flat with the prior year.

So they are stabilizing somewhat at the 8.9%.

We said about flat in fiscal-year '12, which is another stabilizing comment.

The pressure on the margin is due to the pass-through.

We are continuing to try to offset those through improvements in processing margins, and so far we've been fairly successful.

Thank you, Gary and Chris.

Giri Krishnan, Credit Suisse.

I had a question for Gary.

I think you referenced, maybe a reduction in the annual auto sales forecast, which I think you have seen some of the auto companies reduce their annual sales forecast just a touch.

And looking at your Dealer Services guidance for the year, would suggest faster organic growth versus last year.

Could you maybe frame what sort of scenario you are sort of anticipating.

Is that anticipating a slight slowdown, or maybe give us some more perspective on that.

Well, you have to remember that in Dealer, we have very good visibility on the first 6 months of next fiscal year, because we have -- we know exactly what our backlog is, and the average install takes 4 to 6 months to get installed.

So we know what our backlog is, and we know what the forecast is, so we feel pretty good from that.

You also have to remember that new car volume for an auto dealer is only a -- not small, but it is not the only component that determines how they run their business.

In many cases, they will sell more used than they will new, and parts and service, and the margins they make there are really how they carry the business on a day-to-day basis, and are somewhat insulated from the vagaries of new car sales month-to-month.

So, we had a strong sales finish in Dealer.

June was one of the strongest months we have ever had at Dealers, so, strong finish.

The other thing that is really helping us a lot there is our retention rates continue to improve.

There's very little out of business anymore.

We are getting good results and selling add-on applications.

And we are just continuing to see upticks in credit transactions and vehicle registrations.

So I would say it is just a slight negative, but won't really change significantly our forecast for next year.

Okay.

And I think last quarter, you had referenced margins in Cobalt being maybe a little bit below where you think they should have been.

And what is your expectation for 2012, with respect to Cobalt?

They come back.

If you look at the fourth quarter, on Dealer for example, the fourth quarter was up 19 basis points, including acquisitions.

So that will give you some sense of the margin improvement over time with Cobalt.

So next year we get back to more normal compare, and it starts to blend with the rest of the business.

And then last question.

Was there a forecast for sales headcount provided -- not a forecast -- I don't know if you referenced what your expectation was for sales headcount growth?

I mean, our typical business model is -- we would be pushing for 10% growth, on the top line.

And we would do that through a combination of additional headcount, call it 6% to 7%.

And then striving for productivity improvements, to get the balance.

Okay.

All right.

Thank you.

At this time, we do have time for 1 or 2 more questions.

Jim MacDonald, First Analysis.

The payroll and Beyond Payroll ticked down sequentially just a little bit.

Can you talk to that, and the growth rates, and why -- those do not include 4X, right?

Correct.

That's right.

Well, they are actually -- have been building pretty nicely.

I think in Beyond Payroll, the first half of fiscal '10 was about 3%.

It was back up to 9% in Q4.

And 6% for fiscal-year '10.

It is building nicely in fiscal-year '11.

I think we started at 10%, 8% excluding acquisition.

We got 10% to 12%, excluding acquisition, growth in the Q2 to Q4.

What you saw -- and 1 of the quarters was slightly higher.

You had a little bit of tax credit services stuff, like the higher credit, so, it can be a little bit lumpy.

But still, we are very, very pleased with the direction Beyond Payroll has been going.

And it is really across the board, and we highlighted Tax Credit Services, ASO, the HR, and majors TLM, but we also had good strong growth in retirement services and insurance in the other HR areas, across the rest of the Company.

They all grew nicely as well.

So we are happy with what we are seeing in Beyond Payroll.

And that just leads to my follow-up.

Can you give us an update on your health brokerage and your thoughts on that, outside of the PEO?

It is growing nicely -- insurance services.

Gary, do you want to talk to that?

I mean, it's very nice --.

It is very strong, double-digits.

We are opening up some new states.

Workers Comp is getting up to, I think, 15% to 20% of the base is buying workers comp from us, in the small end of the market.

And healthcare is going gangbusters.

So we think it is going to continue to go down that path for at least the next 2 to 3 years.

Thanks.

Ashwin Shirvaikar, Citigroup.

This is Phil Stiller on for Ashwin.

Chris, I was just wondering -- you guys had a relatively high level of realized gains in the portfolio this year.

Can you comment on why that was, and just confirm that there is no expectation for gains in the fiscal '12 guidance?

You are always going to get some -- the interesting thing is, the unrealized gain this year is, what, $571 million?

So any activity in the portfolio would be a gain.

Earlier in the year, we had a small holding in BP that we sold at a gain in the first quarter, just to reduce our exposure to that.

You remember what was going on at the time, so we got out of that at the right point.

So that contributed gain -- was a 1-time thing.

In the fourth quarter we had another gain on one of the investments, which happened to be kind of a non-strategic investment that we had, and so we had that.

So we are not contemplating anything in our guidance in 2012, but we monitor that as we go forward, and take appropriate actions.

And then my follow-up.

I just wanted to ask about the new Align payroll card that you guys introduced.

Seemingly, this is an area where you guys really haven't been too bullish on in the past.

Is this something that you guys will push for aggressively to your clients going forward?

And what is the financial impact to ADP for someone switching to a payroll card versus physical checks?

I think today we have around 0.5 million people, or something like that, on the pay card.

It is growing nicely, double digits -- not off the charts, but nice double digits.

And we are going to continue to drive more features into the pay card.

And we think it is a great vehicle for us to -- particularly around cash ability, and driving float volume, and fees with the pay card.

So no big change in strategy there, just kind of continued success, and I think we're in good shape for the future.

And I'd just quantify that that 0.5 million that Gary referred to, is the actual active cards that are loading, there's actually more than that out, but those are actually active and loaded.

Great.

Thank you.

At this time, I will turn the call back over to Gary Butler for closing remarks.

Thank you very much.

So, to close briefly, very pleased with the excellent performance we had in fiscal-year '11.

As all of you may recall, we raised our forecast each quarter, across the year.

What that says to me is that the momentum in the business is accelerating.

Our metrics were strong across the board.

I think the real take-away is the 2 things that affect growth most at ADP are new bookings and sales, and keeping the clients that we have, both of which had very strong performances in fiscal year '11.

I was, again, to reiterate, especially pleased with our M&A activity.

I think it sets the stage, along with the accelerating momentum we have in the business, to continue the progress that we made in fiscal year '11 into fiscal year '12.

So, I think the stage is set for on track fiscal year '12, that is very consistent with our long-term growth prospects we shared with you back at the May analyst meeting.

I think we're in great shape.

Thank you for listening, and we will talk to you next quarter.

Thanks, everyone.

This concludes ADP's fiscal 2011 earnings webcast.

You may now disconnect.