自動資料處理 (ADP) 2012 Q1 法說會逐字稿

Good morning, my name is Brandy, and I will be your conference operator today.

At this time, I would like to welcome everyone to ADP's first quarter fiscal 2012 earnings webcast.

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

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

(Operator Instructions).

Thank you.

I will now turn the conference over to Ms.

Elena Charles, Vice President, Investor Relations.

Please go ahead.

Thank you.

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 first quarter fiscal 2012 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 is available for at 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 first quarter of fiscal 2012, and all prior periods have been updated to reflect 2012 budgeted foreign exchange rates.

During today's conference call, we will make some Forward-looking Statements that refer to future events and as such, involve some risk, and these are discussed on page 2 of the slide presentation and in our periodic filings with the SEC.

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

Thank you, Elena.

Good morning, everybody, and thank you for joining us.

Let me begin today's call with some opening remarks about our first quarter results.

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

After which I will return to provide you with our detailed fiscal 2012 forecast.

And before you take your questions, I will provide some brief concluding remarks.

Let's turn to start at slide 4.

As you read in this morning's press release, ADP reported very solid results for the first quarter of fiscal 2012.

I am quite pleased with the strong revenue growth during the quarter, which resulted from both strong new business sales and recent acquisitions.

Additionally, all of our key business metrics continued to trend positively.

New business sales, client revenue retention, the number of employees on our clients payrolls, and client balances all increased during the quarter.

Let me start with sales.

Employer services and PEO services, new business sales grew 8% year-over-year.

We also continued to invest in additional product innovation and expansion of the sales force, and in expanding our client service capability, all of which are having a very positive impact on new business sales resulting in driving good organic revenue growth.

Small business services, the PEO major accounts services, and our added value services as well as GlobalView, all achieved double-digit sales growth in the quarter.

Sales in national accounts were bit soft this quarter, which was not entirely unexpected given the economic uncertainty of recent months since we made our original forecast.

On the positive side, for the large national accounts marketplace, we launched our new very impressive Vantage HCM solution on schedule earlier this month at the HR Tech Conference in Las Vegas.

The response from our clients, our prospects, and our industry analysts have been quite positive, and we expect that this new cloud-based full HR solution will contribute nicely to future growth in this market.

Sales in our employer services international business were bit below our expectation.

We believe that this was in part due to a particularly strong fourth quarter sales growth, specifically in Canada and Europe, but also from the less than robust global economic outlook, especially in the Euro zone.

Moving next retention, our client revenue retention improved once again in the quarter, after improving over 1 full point for fiscal 2011.

Growth in our US pays per control, which is our same-store sales employment metric, were quite healthy at 2.7% up in the quarter.

Average work site employees paid in the PEO grew an impressive 13% in the quarter, and our client funds balance growth continued to exceed our expectation, growing 10% for the first quarter.

Moving onto dealer, the automotive landscape in North America appears to be quite stable at this point.

And a recent estimate of the annual selling rate for US autos for calendar 2011 is showing modest growth above calendar 2010.

Dealer services, new business bookings were a strong double digit in the first quarter, and dealer services world-wide revenue and client site retention increased for the quarter, also after very strong improvement last fiscal year.

Before I turn the call over to Chris, I also want to say that we are quite pleased to have acquired a new company called the RightThing earlier this month.

The RightThing is the market leader in what is called the RPO space or recruitment process outsourcing solution, based in and targeted at large companies with over 15,000 employees, and considerably expands our HR BPO solutions set or COS here in national accounts in the US for large enterprise accounts.

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

Thanks, Gary, and good morning, everyone.

Let's turn to slide 5.

We are pleased that total revenues increased 13% to $2.5 billion, 10% organically in the quarter assisted 2 percentage points from favorable foreign exchange rates.

Employer services grew total revenues 9% and dealer grew 18%, both including acquisitions, and the PEO grew 17%.

When you look at organic growth by reportable segment, employer services organic revenue growth was 7%, PEO was 17%, and dealer was 6% in the quarter.

I want to take a moment and point out, that we are no longer providing the payroll beyond payroll split for employer services revenue growth in the US.

As we have been communicating with you, our bundled solutions include both payroll and beyond payroll.

As sales of the bundled solution continue to grow, which is a good thing, the split between payroll and beyond payroll becomes more difficult to track.

Instead, we believe it's more meaningful to update you on the drivers of the growth.

Here in the US, HR services in major accounts, tax credit services, time and labor management, RUN and ASO, our BPO offering at the low end of the market, all contributed to revenue growth during the first quarter.

Our international businesses and employer services also contributed to revenue growth in the quarter.

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

Very importantly, after strong increases last fiscal year, our client revenue retention once again increased for ES, PEO and dealer services.

Pays per control and employer services in the US increased 2.7%.

All geographies across the US again showed increases, led this quarter by the central region as well 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 of public administration.

It's also noteworthy that same-store-sales -- the same store pays across Europe are not declining, but have flattened out for the first time in about 3 years, and PEO average work site employees paid increased 13%.

We continue to see a positive impact on revenues from solid new business sales growth.

Growth in average client fund balances increased 10% for the quarter, driven by new client growth especially in small business services, growth in stand-alone tax filing, increased pays per control, higher wage growth and increased state unemployment insurance tax.

Now let's turn to slide 6, and continue with the highlight for the quarter.

Pretax earnings were up 5%, and included 1 point of growth from favorable foreign exchange rates.

ADP's total pretax margin declined 140 basis points in the quarter, primarily resulting from a decline in high margin client interest revenues due to a lower yield on the balances.

The decline in the net impact from the client funds investment strategy resulted in a drag of 85 basis points on ADP's pretax margin.

Additionally, there was a drag of about 40 basis points from last year's acquisition.

As we closed several transactions throughout last fiscal year, the year-over-year impact declines as we progressed in fiscal 2012.

It's also worth noting that these acquisitions are positive contributors to pretax earnings.

I also want to point out that ADP's effective tax rate of 34.1% was lower than a year ago, due to the expiration of certain statutes of limitations, final resolution of certain tax matters, and a favorable mix of earnings between jurisdictions.

We don't anticipate that the tax rate will continue at this lower rate for the full-year.

Diluted earnings per share from continuing operations increased 9% to $0.61 a share.

We repurchased 5.9 million ADP shares fiscal year-to-date for a total cost of about $280 million.

Our cash and marketable securities position was strong at $1.4 billion at the end of the first quarter.

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

Before I get into discussing the detailed forecast, I would 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 September 30, over 85% of our fixed income portfolio is invested in AAA/AA rated securities, consistent with past 6 quarters.

Fully consistent with our clients 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 yield curve continued to present greater opportunities at the longer end of the maturity curve, both the extended and long portfolios.

The duration of the portfolio increased slightly, to 3.1 years at the end of the first quarter.

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

Now to the fiscal 2012 forecast.

This slide summarizes the anticipated pretax earnings impact of the extended investment strategy for 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 more moderate levels.

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

It's also important to keep in mind that average client balances growth was very strong in last year's third and fourth quarters, in large part due to the January 1, 2011 increases in state unemployment tax rates which we do not expect to recur at the same extent this year.

Therefore, we anticipate tougher balance growth comparisons, as we progress through this fiscal year.

We anticipate a yield on the client funds portfolio of 2.7% to 2.8%, down 40 to 50 basis points from fiscal 2011.

We anticipate a year-to-year decline of $40 million to $50 million of client interest, as the anticipated growth in balances is expected to be more than offset by the lower interest yield.

Looking now at the right -- the lower right of the chart, anticipated decline in pretax earnings of $45 million to $55 million for fiscal 2012, as the benefit of growing average balances is expected to be outweighed by lower interest rates.

For fiscal 2012, we anticipate a decline of about 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.

I am now on slide 8 titled FY 2012 guidance.

Thank you, Chris.

Since we provided our initial fiscal 2012 forecast back in July, interest rates have obviously declined, and the economic environment has certainly become more uncertain.

However, we are confirming our total ADP fiscal 2012 revenues and earnings per share forecast.

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

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

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

As I mentioned a month ago, interest rates have declined since we provided our initial forecast.

And we do anticipate a decline of $45 million to $55 million, as Chris mentioned in pretax earnings for a drag of about 80 to 100 basis points related to the client funds investment strategy that Chris just took you through.

Before we move onto the business segment forecast, I want to spend a moment on foreign exchange.

We do not anticipate that the first quarter's favorable foreign exchange rate will continue beyond this quarter, but rather we anticipate it ending up about neutral for the full-year.

Just to remind all of you, the Euro today is just under $1.40, but was well under $1.30 early in fiscal 2011, and increased to over $1.40 for the end of the year.

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

For employer services, we anticipate revenue growth of about 7%.

This is compared with our prior forecast for 6% to 7% growth.

Mainly, the uptick is as a result of acquisitions closed this fiscal year.

We are currently forecasting pretax margin expansion of about 50 basis points.

This is slightly lower than our prior forecast of at least 50 basis points, also due to the impact of acquisitions made this fiscal year.

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

This is compared with our prior estimate of a 1% to 2% increase.

We do anticipate about 17% revenue growth for PEO services.

Our prior forecast was 15% to 17% revenue growth.

We do continue to anticipate that the pretax margin in the PEO will be about flat for fiscal 2011.

We do continue to anticipate 8% to 10% growth in the annual dollar sales value of [ES] and PEO worldwide.

This is up from a nearly $1.1 billion sold in fiscal 2011.

And for dealer services, we anticipate no change to our prior forecast for 8% to 9% revenue growth, with pretax margin expansion of about 50 basis points.

So as we turn to slide 10, I would like to leave you with a few closing remarks, before we open it up to your questions.

Obviously, with the strong results for the quarter, we are very pleased with the outcome.

Revenues are growing nicely, from not only good execution and growing new business sales and improved retention, but also from the acquisitions that complement our core solutions.

Trends in our key business metrics continue to be positive across the board.

Our product breadth has never been better, with RUN for small business, Workforce Now for midsize companies, and the newly launched Vantage HCM for larger companies here in the US.

We obviously continue to be quite pleased with GlobalView and Streamline internationally.

Our Drive solution here in the US is doing great for our dealer services clients, and our mobile solutions across all of our applications are having a big impact on the market.

The strategic acquisitions we made during the last year in both ES and dealer have positively impacted our revenue growth, and will continue to enhance future organic revenue.

The acquisition environment today is quite good, and we will continue to pursue tuck-in acquisitions that broaden our solution set, underscoring ADP's commitment as a leading provider in the markets we serve.

Our cash position is strong, and we remain committed to returning excess cash to our shareholders through increased dividends and share buybacks.

ADP's AAA credit rating also reflects the strength of our balance sheet, and the financial stability of the business model.

Make no mistake, we are focused on growing the business, and I remain optimistic about our growth opportunities.

Now, I will be pleased to turn it back over to the operator, and we will take your questions.

(Operator Instructions).

Your first question comes from the line of Julio Quinteros with Goldman Sachs.

Great.

Thanks, guys.

Good morning.

So the resiliency of the business, I mean obviously, really shines through here, as far as current environment and macro backdrop is concerned.

So can't complain about any part of that, but as always, I think, we would like to see more.

So I am just wondering as we go through fiscal 2012, what could be the key drivers that could result in acceleration from current expectations, as you think about the employer services business in particular?

Where would be the biggest puts and takes, to drive acceleration relative to the current growth forecast if you will?

Well, the two basic things that what we talk about the most, which are -- would clearly be over performance in sales beyond our plan.

And today, we are running a little bit of a ahead of our plan on the retention side.

So things are doing quite well.

Clearly, interest rates are not helping us a lot.

Right.

And in fact, have become a larger drag this year than what we anticipated early in the year.

So as we look at maintaining our forecast, which we just did in upping it in a number of places, we feel pretty good about the core sales and retention execution, and our new products overcoming the drag that we did not anticipate some 4 or 5 months ago.

Got it.

Just lastly, on the international side, could you go back to your expectations for international as you think about that in context of your overall performance right now?

Well, the international business is growing double digits, in terms of revenue.

Their margins and bottom line are up double digits as well.

We had a very strong fourth quarter and international.

Despite seeing a little bit of softness this year, their retention rate was up for the first quarter, I think maybe a 0.5 point or 0.3 of a point or something like that.

So despite what is going on in Europe, the business continues to clock along at a pretty good pace.

I think as we mentioned as well, the pace went flat for the first time in 3 years, which is counterintuitive to what you see going on in Europe.

But that's what we are seeing in the pace area.

Great.

Thanks guys, good luck.

Your next question comes from David Togut with Evercore Partners.

Thank you.

Good morning, Gary and Chris.

Good morning, David.

Hi, David.

Gary, when do you expect Vantage HCM to become material to orders for ES?

Well, I mean we just launched it, and we just brought in the entire sales force for a full week's worth of, not only training on the new product, but further training them on HR, and benefits and performance and the other things that are included into that release.

So our prospective backlog is in the early stages, but is growing fairly well.

It's too early to declare victory, but I would hope that it would make a difference, particularly as we go into the third and certainly the fourth quarter of this fiscal year.

And looking at the target markets for the product and the size of the product, what is the anticipated time to convert Vantage HCM order into revenue?

It's about nine months.

I think the beauty of Vantage -- I mean if you are really in a hurry, you can get it done in 6 months, if you're not too big and too complex.

But I think typically, you think about if you are selling it in the first or second quarter of next calendar, you would be thinking about a January 2013 kind of start.

The beauty of HCM, or Vantage, is that we expect the number of applications per new booking to expand, because it is a fully bundled one database, one user interface product that includes payroll, HR, benefits, time and labor and our new performance and succession modules.

So should be a bigger bundle, even though it will be priced at a little bit lower than our old stand-alone products.

But we do expect the revenue per client to be bigger.

So we are actually quite excited about it.

It's getting great reviews from the analyst community, and we think it's going to do great.

Just finally, looking at the forward yield curve, Chris, and your principal maturities, what is your anticipated tax filing float income for fiscal 2013?

Since we are in fiscal 2012, that's not a good idea, but it was a good try, David.

(Laughter).

It was a great try.

If you go back to what I showed in May, David, you'll see that it's a combination of a number of things.

One is, what you expect interest rates to do, and secondly what do you expect balance growth to be.

And so, go back to that schedule -- I think we gave you enough to play with there.

I will be updating that later this year, as I always do, but it's still a little premature.

As we have seen over the last quarter, or even over the last six months, the volatility of interest has been very high.

From the last time we gave guidance, as Gary said, interest rates have changed.

But then in the last month, they have bounced back a little bit.

So it's a little too early to call that one.

Thank you very much.

All right.

Your next question comes from the line of Brian Keane with Deutsche Bank.

Hi, guys.

Hello.

Hi.

I wanted to ask about, Gary, your comments in the press release about seeing some economic weakness over in recent months.

I guess, what exactly are you referring to in the last couple of months that you have seen that has been a little bit softer?

I think it's just the uncertainty around the economy in the US and the Eurozone, and the uncertainty in the political environment in Washington.

I think the good news for us, is that particularly in the low-end of the market in the middle part of the market, it's kind of business as usual, and people are just continuing to buy systems and move ahead.

On the high end of the market, because of the global uncertainty, we are seeing more reluctance to commit to long-term solutions at the high-end of the market, even though we have a pretty reasonable fourth quarter in sales in the high-end of the market.

But there was a lot of foolishness going on in Washington and in Europe, particularly in July and August, it seems to have abated a little bit over the last 30 days.

It's really kind of interesting for us, because it's funny, because Chris and I were having this conversation earlier.

Our pays per control are up 2.7%, were up over 2% last year, despite all of this.

And Europe actually is flattening out in terms of pays per control after shrinking for the last couple of years.

So it kind of says, businesses are continuing to go forward.

And actually, if you look at our pays per control in the US, almost every sector, including manufacturing, construction, with the exception of public administrations, state, local government, in our pays per control were up 1.5%, 2.5%, depending on the category.

So it's a little bit of an enigma, and I certainly think that the new product launch in national accounts is going to help offset some of that in the remaining 3 quarters.

Yes, I wanted to ask about national cost.

It was soft.

Was it actually negative in the quarter?

And then what does that pipeline look like for national sales?

Does it look like that will rebound, starting in this second quarter?

It was down slightly.

It wasn't a huge thing.

They had a pretty good fourth quarter.

And sometimes when you have big deals, particularly national accounts in GlobalView, those things can swing quarter-to-quarter.

But clearly, for the last year or year and a half, our national account sales have been less robust than our other sales across the entire category.

So we are thinking that Vantage HCM is going to be a big help.

And obviously, the compares to a little easier as we go forward.

Okay.

And just last question Chris, on pretax margins, they were down 140 basis points.

A lot of that was lower yield on balances and the acquisitions.

Anything else in there to think about, that dragged down pretax margin, because margins would have still been down slightly, even given those 2 factors.

Yes, it's -- when you look at it quarterly, and if you look at the trend in the business over the last couple of years, as we make investments throughout last year, which we talked about throughout the year.

Then the first quarter becomes the -- the grow-over becomes a little bit bigger.

What I would focus you on is our guidance for the full-year at the ADP level, 7% to 9% on the top, and 8% to 10% on the bottom implies a flattish ADP margins given the tax rate is relatively flat, and there's only a small lift from share repurchase.

So that's flattish, despite 80 to 100 basis points of interest rate drag, and some drag from acquisitions.

So that's the real thing to focus on, in terms of the margin.

The first quarter is a bit of an anomaly because of the grow-over from investment last year.

Okay.

Thanks, and congratulations on solid results.

Appreciate it.

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

Your next question comes from the line of Kartik Mehta with Northcoast Research.

Good morning, Gary and Chris.

Good morning.

You said in your opening remarks that the environment is very good for acquisition.

I'm wondering, if that translate to very good -- meaning you have a lot of choices right now, a lot of companies for sale, or does that also mean that the prices have come down, and that will result in maybe more acquisition closures for you?

Well, I think -- I wouldn't use the term, prices have come down.

I would really say that the prices are reasonable where you can make them work, when you put on a business case, and when you put together a business case, and you look for 15% return on your investment.

So the pricing is reasonable.

And I think a lot of people think the current environment is going to be this way for a little while and so they are not holding out for the big blue sky kind of thing.

And plus, our scope of product, particularly in the high end of the market, and as we move into other areas like Advanced MD and international, we just have more choices and more candidates, both that we find ourselves as well as surface through other processes.

And then Gary, you guys have done an excellent job rolling out some new products.

And I wanted to kind of focus on the small business market.

And your thoughts on where you can get the biggest competitive advantages product-wise on the small business market?

Well, one is really -- I would put into 2 or 3 different categories.

First of all, it's a real-time payroll engine, fully in the cloud.

So, anytime, anywhere, a second or two, to run the whole payroll.

The whole user interface is very intuitive.

And I think I mentioned in one of our earlier calls, is historically with our Easy Pay product, 70% of our clients call the payroll in.

With RUN, which is now approaching 100,000 live clients, only 30% feel the need to call it in.

It's so intuitive they would rather just input it, and get the feedback.

It's also making us -- eliminating a lot of errors because when you can run the payroll over as many times as you like, at the same price and it's easy to do, and gives you all of your tax and impound information, it just takes a lot of errors out of the process, and almost totally eliminates reruns for that kind of category.

We've also been very pleased with the CPA acceptance of this product.

We're also offering it on a wholesale model, where the CPA can actually install their own clients, and provide first level support to their client.

And it's got the security, and the automatic feeds the general ledger for write-up, and allows the CPA to do everything for 20, 30, 40 accounts in this category.

So we're actually quite excited about it.

Our sales guys love it, and the new mobile application on the iPad, and now with all the Android devices is just doing terrific.

It's really easy to download that.

I would encourage all of you to take a few minutes to do it, because once you download it, there's a demo on there that (inaudible), and it really shows you how simple it is to use.

I joke that it -- at some of the conferences or whatever, I will actually demo it for you.

So that shows you how easy it is to use.

One of the beauties of the mobile, which is true on the low end of the market, but we've also released the full mobile application for the mid market.

But when an employee has one device, the beauty of ADP is, that they can not only see their payroll, they can not only update their own personal advice, personal information, but they can look at the benefits plan.

They can look at their 401(k) balances.

They can look at their pay card information, so on one device you've got literally every application that any employer would want to provide his employees.

I think it's going to continue to be even better for us in the future.

Thank you very much.

I appreciate it.

Your next question comes from the line of Jason Kupferberg with Jefferies.

Thanks, guys.

I wanted to probe into new sales a little bit more, the 8% percent number in the quarter.

I know that's about in line with where you're guiding the full fiscal year, but I believe this was, by far your easiest year-over-year compare that you will see in fiscal 2012.

So, just wanted to get a sense from your perspective, obviously understanding this metric can be ready lumpy on a quarterly basis.

But do you see any incremental risk to the full-year forecast, just as we think about some of the comments you had made around macro uncertainty?

If you've got a little bit of a tougher macro, and some tougher comps ahead, is there any incremental caution in there?

And then if you can comment also in that context, in terms of how you see the 8% to 10% breaking down among small, medium, and large segments based on how Q1 shaked out, has there been any recalibration of the composition of the 8% to 10% based on the client size?

I think, a couple of things that I want to point out.

Number one, that 8% growth in the first quarter was right in line with what we're planning.

So wasn't a surprise.

So the 8% to 10% for the year, is solid from that standpoint.

I think -- then you start going into what is going to go on with the economy from here, and that gives some variability.

But we are still confident in the 8% to 10% for the year.

We traditionally haven't gone through the details of the growth rates by the different operations, SBS, majors and national accounts, but as we've talked about earlier, national accounts is the one that has been more challenging in the first quarter, after a relatively good fourth quarter.

And so, that's the one that's the biggest watch.

We are confident, particularly with the Vantage offering, but right now I think we are pretty comfortable at the 8% to 10% to 10% for the year.

Okay.

That's helpful And just as a follow-up on the competitive front, I think it was a couple of days ago, Intuit had an announcement of a full-service payroll solution for small businesses, partnering up with B of A there.

Do you view that, as any kind of incremental threat?

I mean, I know the Intuits of the world in the past, have been viewed more as kind of for the do-it-yourself community.

It appears this is a little bit more of a full-service solution, perhaps designed to go little bit more, head-to-head against you guys and Paychecks.

Any initial thoughts?

I know it just got announced, but we would just be curious if you have a reaction there?

Well, you have to remember that Intuit was the embedded payroll application at the B of A site, that was in full-service.

And so -- their desire at B of A was to have basically one solution for clients who wanted more outsourcing, versus those who just wanted to do-it-yourself, so through the B of A site.

So it clearly made sense for them, to kind of coalesce around one application.

We do similar things with JPMorgan Chase, with BB&T, Bank of the West and a number of other banks throughout the US.

And bank referrals are about -- I don't know -- 10% of our sales, 8% to 10% of our new business bookings in the low end of the market.

Obviously, the low end of the market is going gangbusters for us right now.

So we don't see that as a huge problem, or a big downside with Intuit.

I would also remind you that Intuit entered the full-service business once before, and about 18 months later they sold it to us.

So we will see, but we are doing fine in that category.

Okay.

Sounds good, guys.

Thanks for the comments.

Thank you.

Your next question comes from the line of Rod Bourgeois with Sanford Bernstein.

Okay, great.

Hi, Gary, could --

Good morning, Rod.

Hi, good morning.

It sounds like you're competitive position is somewhat separating itself from the pack, due to the product innovations that you put in place in recent history and some more, obviously coming down the pike.

If you agree that you're competitive position has improved itself relative to the pack, is there anything you can do to help us quantify this competitive edge, in terms of an improved win rate or market share?

Or is there a portion of your bookings even, that you could quantify as coming from the uptick that you are getting from these product innovations?

Well, if you look at SBS, clearly our product position and the performance of the business, on everything from organic revenue growth to retention, hasn't been better in well over a decade.

So we are doing great on the low-end of the market.

Our ASO offering, coupled with the PEO, we are doing extremely well against the competition in the PEO space.

You monitor, I'm sure the other people that are in that space.

So not only our product position, but our delivery and workers comp underwriting capability, and our full bundle are certainly making a big difference there.

We have just come out with the third iteration version of Workforce Now, that even more tightly bundles and put more capability, including some performance measures in the Workforce Now platform.

So I think it's going to continue to do well, particularly against our traditional competitors in that space.

On the high end of the market, the competition is probably a little bit more severe, between Workday and Ultimate, and the software suppliers who were very aggressive, in terms of pursuing that space.

So I think Vantage HCM, for all the reasons that Workforce Now is working in the midmarket, is going to work extremely well for us at the high end of the market.

And we really don't have -- when you look at GlobalView and Streamline, we are really much better positioned from a functionality and a coverage standpoint than anybody on a global basis.

So hopefully, it's going to push us for sales results that start to go north of 10%.

But when we get there, we will certainly let you know.

But I think our position is about as good as I can remember it being, particularly with the launch of Vantage.

Is a win rate overall, up in the last year because of these innovations?

Yes.

Okay.

Can you put a number on that?

No.

(Laughter).

It really comes down to is, everything market, win rates, et cetera, it all comes out to sales and retention.

And those are 2 key metrics that drive our business.

So if your win rate is up, if you're taking market share, if you've got the right products, it's going to show up in the sales number, and you keep clients longer so.

You have to remember there, Rod, particularly in major accounts with Workforce Now, we've got tens of thousands of older platform Windows based client/server applications out there.

So our retention rate at 91% and our new sales into that base as well as in the new marketplace, to Chris's point, it is not just one or the other, win losses and new deals, it's also migrating our base to a more permanent up-to-speed applications.

Makes sense.

All right.

Chris, just a quick follow-up on the margin.

You achieved 20 basis points of year-over-year margin expansion in employer services excluding the acquisition impact.

Can you talk about the path and the levers involved in getting employer services margin expansion back to that 50 basis point level?

And if you can specifically comment on whether -- now that the revenue growth is back to a healthy level, are you actually seeing the normal operating leverage benefit in that employer services business?

Yes.

So on top of what I have mentioned before, Rod, the 20 basis points in the first quarter also has the year-over-year compare issue, because a lot the investments we made in service and implementation and sales headcount show up in the ES margins.

So that 20 basis points is -- still has a little bit of that drag.

To get to the full-year of around 50 basis point, don't forget that, that also has a drag in it of the acquisitions that we did in fiscal year 2011.

There is still a little bit there.

And the new acquisitions we did, had about a 25 basis points drag to the year.

So that's why we brought it back down from at least 50, to about 50 with that drag.

So when you look at it from that perspective, ES margin for the year and even for the first quarter are very healthy and continue to reflect that revenue growth of we are seeing.

All right.

Thanks, guys.

Your next question comes from the line of Gary Bisbee with Barclays Capital.

Hi, guys.

Good morning.

I understand why it's getting more difficult to break out payroll versus beyond payroll.

But can you just give us a sense of, when you look at the total base of clients today, how many or what percent or directionally, how many customers use you only for payroll versus more than one offering?

Is that percentage very different, on the total base of business today, versus new business that you're been selling over the last year?

Certainly, in terms of new business, we are selling a more bundled solution.

So on -- for example, in SBS with RUN our penetration right now for workers comp and healthcare, and 401(k) kind of retirement services is a lot higher.

And we've got 60,000 or 70,000 customers on workers comp products today, against the base of about 400,000.

So there's a lot to grow, but we are selling 15%, 20% kind of additional products, even at the low end of the market.

With Workforce Now and Vantage, the vast majority of our new bookings, new to ADP will have more than one application.

Almost by definition, they are going to have payroll and HR.

And in the high end of the market, 50% of our base already has time and labor.

So, when you sell new accounts, we're selling at that rate, or higher.

So certainly, it will continue to grow.

I think this quarter, even though we are not officially publishing it, our payroll is up something like 3%, and our beyond payroll is about 14%.

So, but as we get bigger and bigger bundles, you have to get in there and start playing an allocation game, and how do you allocate to give somebody a 10% discount, which product do you put it on?

So I don't want to get into a game of trying to make the numbers say, what we think they ought to be, as opposed to reporting in a little bit more of a pure way, which I think is the right thing to do.

Which is why, we made the decision to stop doing that, as we go forward.

No reason other than that for the change, because if you look at ES US, it was 8%, and that split is about 13.5, 14.5%.

So that's consistent, with what it's been.

We been wanting to move away from that for a while.

We thought now with Vantage being announced, and more movement to the bundles that now is the time to do it.

And so that's the real driver of them.

Understood.

And then the follow-up, the RPO acquisition seems a little curious to me.

I guess, at this point, can you give any comments on how that fits in with the other offerings?

And specifically, do think that the purchasing manager for that, the person who is in charge of doing hiring, is the same person that your sales people are talking to, at these large customers when they are trying to sell the HR and payroll products?

Thanks.

The primary buyer for RPO services is the HR executive.

The HR executive is also the primary buyer for benefits administration, or succession, for performance planning for HR, and more and more, is a full partner with the CFO on the payroll decision.

So clearly, it's the same buyer.

We have a number of stand-alone services like our job tax credit services, and other kind of print and distribution products, Cobra FSA that we sell into that basis.

But more and more of our business is becoming BPO like, and this is a natural extension for COS, where we are the HR department, or we are the payroll department which includes recruiting in every large company.

We also bring a lot of good capability for them, because they have a lot of their customers who want to go internationally.

They are a US-based firm today.

And we think there is also, particularly as we get the recruiting bundle in the box, we think we can take it downmarket into major accounts space for the CEO and the ASO, and some of our HR services that we carry in that market.

But to be determined.

We are pretty excited about it.

They been growing, even despite the downturn in the economy, in 2009 and 2010.

And they are clearly the market leader, as you would see, if you go look at any of the press.

We are happy to have them as part of the ADP family.

Thank you.

Your next question comes from the line David Grossman with Stifel Nicolaus.

Thanks.

Good morning.

I wonder if I could ask a couple of quick follow-ups to what has already been asked.

The first is on Workforce Now.

Can you give us a quick sense of what you're seeing in the marketplace?

I think at last count you have about 10,000 users.

And I -- can you give us an update perhaps on that number, and give us a sense of how much is -- of that number is competitive displacements versus existing ADP customers or new users for that matter?

I think that number today is more like 16,000 or 17,000, in terms of people actually using Workforce Now.

And it is the product we sell to all new clients in major accounts.

So any the win losses we have, would by definition defaults to Workforce Now.

We are migrating the client base, because that's typically where our competition tries to target.

And so we want to get them to a cloud-based solution that is fully bundled, sooner rather than later.

But obviously, particularly in the mid market, we're the 1,000 pound gorilla in that space.

So we've got a lot of accounts, which is good news to move over to the platform.

But Workforce Now competes very successfully against our traditional competitors, and I am very pleased with what is going on there.

I'm sorry Gary, the 16,000 to 17,000, all of those are new users or just the new sales?

It's a combination of both -- well, for example, in major accounts this year, we will sell $200 million, $250 million in new bookings, pick the number, and half of that will be call it, payroll related.

And all those will be delivered and installed on Workforce Now.

And the beauty of Workforce Now is, even if you only by payroll, the whole bundle is there.

And you can literally turn a switch to bring on benefits or HR or performance.

But they're also some migrations in there as well, David.

I don't know that number off the top of my head.

Okay, good enough.

I think I got it.

And then, I think this was asked, perhaps in a different context earlier.

Obviously, the comparisons get more difficult in new sales throughout the year.

But given the introduction of new products to offset that, how should we think about the flow of comparisons in new sales as the year progresses?

I'm not sure I'm following your question, David.

As I look at it, I think the comparisons for new sales get more challenging as the year progresses, but as you've mentioned, you also have these new products that perhaps mitigate that.

Should we think of that kind of 8% to 10% as more or less an even flow throughout the year, or do you think it will be more lumpy, given the more difficult comparisons?

I think that's a good way to think about it, plus or minus, 3% to 5%, because it could be -- depending upon the previous year, we had some quarters last year that were well into the double digit growth.

And even though the fourth quarter of last year was only up 8%, that was on top of like a 26% growth, in fiscal 2010 as we turned that corner.

So you're going to get some of those swings, particularly in the fourth calendar quarter, or when we land big deals in GlobalView or COS.

So but I think that's a good way to think about it.

I don't think you're going to see anything dramatic.

And you're not going to see 0% and 20% in 2 different quarters going forward.

It's going to be relatively consistent.

I don't think it will be remarkable.

Okay, good.

And just one last question.

Could you just share with us or update us if you will, on both the pricing assumptions and your tax rate for the year that are embedded in your guidance?

Sure.

On the pricing, we were just about under 1%, which is I think, what I said on the last call, and with that played out, given net pricing.

And that's fairly consistent with what we are seeing over the past 2 years.

The -- f you go back to my 5year plan presentation in May, we said that the first couple of years would be closer to 1%, and the last couple of years would be back up to 2%.

We still believe that, that 1% to 2% was achievable going forward.

But given this economy, we think 1% is appropriate.

And as you know, the interplay with retention is something that you watch very closely, and we have been very pleased with the way the retention number is moving.

So it feels about right to us.

In terms of the effective tax rate, I would say that the effective tax rate there would still be in the area of 35%, maybe a tick below that.

But that still what I would use in modeling going forward.

Okay, very good.

Thank you very much.

Your next question comes from the line Joseph Foresi with Janney Montgomery Scott.

I wonder if you could talk a little bit about the shift in client behavior.

As we've run through this economic cycle, I think it would seem intuitive that maybe the HRO offering might gain steam in some of the other offerings that are more software-based, just because in this particular environment, people may not want those extra costs.

Maybe could talk a little bit about that, and what you're doing within the sales force to address it.

Well, it's not -- it's only just cost, it is also compliance and dealing with Washington.

I mean, the ultimate HRO or BPO for us is the BEO.

And our sales, from multi-years now have been strong double digits, and we expect them to continue to be very strong going forward.

But a lot of that is compliance driven, a lot of that is healthcare and workers comp, driven in terms of the cost of healthcare and that kind of thing.

But clearly, a larger percent of our new sales in both national accounts and in major accounts, include an HR services kind of offering.

And we expect that trend to continue, but part of it is compliance, and part of it is just cost and ease of use, and just getting rid of the whole thing.

Okay.

And then my second question is on a national account level, are you've - I know you talked about it a couple different ways.

But I wonder if you could talk a little bit about any potential changes in the competitive environment on that -- at that level, and how you see that playing out, and what you are doing to address it, if there are any?

Well, I think it's clearly, going to make us more competitive against our traditional suppliers.

That market has also moved a lot closer to things, like performance and succession planning which is what is driving some of the success of some of the other competitors in that space.

So our model now, Vantage, has a full performance and succession modules to it.

It has full benefits.

You can buy it as a service.

You can buy it as a fully outsourced.

So I think it's clearly going to make us more competitive, because that market has moved to the performance and succession kind of issues than what it historically was in that space.

And just one last one, if I could sneak it in.

As you look at the software compared to the services component, how do you see both of those trending going forward?

And what could that potentially due to the sort of overall profile of business?

You think that consumers are going to lean more towards the software, or away from the services, or how do you see that balance playing out over time?

Thank you.

I don't see any big shift in what has been happening, the last five or six years.

I think the big shift that we saw early on -- and you have to go back 7, 8 years or 9 years, and was when Oracle bought PeopleSoft, and there was a lot of uncertainty on where the platform was going.

But between [Lawson] and Oracle or PeopleSoft -- which is one and the same -- and SAP which is also our partner, I don't see a lot of big changes today, versus what was there before.

Some of them are leaning towards offering software-as-a-service, as opposed to just software.

But all of our products are delivered in the cloud, software-as-a-service too.

So it's kind of one and the same.

Okay.

Thank you.

Your next question comes from the line of Nathan Rozof with Morgan Stanley.

Hi, guys.

Thanks for taking my question.

Gary, I wanted to follow up with you real quickly on the comment you made earlier about some reluctance to commit at the high end of the market.

In particular, how we should think about that, in the context of the 2012 budgeting cycle.

So my question then for you is, are clients giving you any indication that they may be more willing to spend in 2012?

Or any milestones that they are pointing towards, in terms of when they think they will be more comfortable moving forward with longer-term deals, so that we can continue to see some acceleration in the -- your organic growth rate?

Well, we are not seeing reluctance to spend in majors -- and in --certainly not SBS or the PEO.

The multi-nationals and the national accounts environment, because of the uncertainty in Europe, some of the uncertainty here, are expanding less in terms of pay.

If you look at our pays per control, the slowest --the least amount of growth is at the high-end of the market, and the most amount of the growth is at the middle and low end of the market.

And I think it's indicative of what their spending patterns are.

And I think there is still a lot of reluctance today.

If you think -- just think about GlobalView for a minute.

The upfront investment on GlobalView is, in terms of the conversion is generally equal to at least a years revenue worth of recurring revenue going out.

So people like Chris Reidy, don't want to pony up to multi-million dollar kind of investments with the uncertainty that is going on around the globe.

So I think that's part of the reluctance.

I think there is some pent-up demand in our space waiting on the Vantage release, which hopefully will open up as we go forward.

And that's pretty much the way I see it.

Okay.

And --

When you look at the overall cycle, looking at it from my chair, the downturn that we went through over the last few years, you've gotten all the costs you can out of the business, sans investing to take further reduction and efficiency.

So at some point, in that cycle, that changes and you've got to invest to get further efficiencies.

It's just that with the economy today being questionable as to where it's going, I think there is a confidence level, and we track a lot of the surveys, either at the CEO level or CFO level, of their confidence of in where the economy is going.

And I think there's still a lot of lack of confidence, and that certainly, comes into the equation.

So, over the cycle, I think that turns around, but it hasn't turned around yet.

Thank you, that's very helpful.

And then just for my follow-up, guys mention GlobalView.

You've clearly been making a lot of investments in moving towards fully bundled and SaaS-based solutions, which seems to be paying off.

I was curious whether or not, we should expect to see GlobalView moving towards more of that type of a model.

Also if there's any other products left where you are, going to be continuing to make investments or moving in that direction?

We are moving -- we have moved GlobalView to the most current version of SAP's HCM today, which is delivered through a hosted solution in the cloud.

It is not a real-time payroll like RUN, because you're talking about very large accounts here, in multiple countries around the world.

We're also releasing a new portal that will be put on the front end of our GlobalView module, which will make it a little bit more user-friendly, and also consistent with our UI guidelines that we have across all of our other products, including vantage and Workforce Now.

So we are clearly making those kind of investments.

We're doing payroll now in over 40 locations on GlobalView, and our Streamline network really opens it up, where we have the capability for smaller payrolls in over 50 countries around the world.

So we are making progress, we just wish we would sell even more than we are selling.

Got it.

Thanks, guys.

Your next question comes from the line of Ashwin Shirvaikar with Citi.

Hi Chris.

First of all, good execution on the quarter, congratulations.

So my question is in general, as ADP transitions over time from selling single products to selling product suites or bundles, how do you think that will effect such things as your historical pricing power that you had, or the way your sales force is structured?

It clearly it seems better for retention to have more hooks into the client.

But could you comment on those two factors?

Excellent question.

Two things, that other than great service, which we always focus on, larger clients who buy more products stay the longest at ADP.

So in Europe, we are approaching 96% retention in national accounts.

We are at like 95% retention.

If you go to dealer, they are at 94%, 95% retention.

The one exception to that, even though it's a lot better than (inaudible), is the PEO where you are in call it, 83%, 84% kind of retention levels.

But the big swings in healthcare cost and benefits can really drive what happens in that space, and you can clearly see that in our competition.

One of the big challenges that we have as a Company, as we sell bigger bundles, is making sure that our sales force and our service force is capable of servicing HR needs, benefit needs, and performance planning kind of needs, in addition to this, just being payroll experts.

So one of the things we really focused on is the rollout of Vantage, is training up the sales force, and becoming more HR-centric as opposed to being just payroll-centric.

But clearly, it's a change for ADP's ecosystem.

But I would remind you also, of our 550,000 clients, 400,000 of them are still SBS clients, and is still primarily a payroll service, with some HR help in compliance, even though a lot of them do by a 401(k) or an IRA, or workers comp from us.

Okay.

Got it.

Understood.

And on the [RightNow] acquisition, how big is it?

Is it material to next year's growth?

The RightThing is a $70 million, $75 million, in terms of revenue this calendar year.

Right now, they've got good double digit revenue growth in the business, so we think that's going to continue, at least for a while.

And I think that should give you what you need.

And as we said, Ashwin, that's why we adjusted the guidance for ES revenue up a tick, was for that acquisition.

Right.

Great, thank you, guys.

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

Your next question comes from the line of Tien-Tsin Huang from JPMorgan.

Good morning.

Good morning.

I'll try and be quick.

Just a follow-up on Ashwin's question on the RightThing.

In the RP space, I guess, is this is the beginning of more investment in the RPO space, and also what is the margin profile of that business in general?

I always thought it was a little bit lower margin.

It is a little bit lower, Tien, because we obviously are not going to give full margin history for those banks.

But clearly, there is a larger manpower component in that section.

But it's still pretty strong double-digit kind of bottom line margin.

It's not as great as pure payroll, but it's still pretty good.

And as I think Chris mentioned, it still will be accretive to earnings this year, despite the intangibles and the loss of interesting come.

So it is decent.

Should we expect more in the RPO space, in terms of acquisitions, Gary?

I don't think -- (Multiple Speakers).

Is this platform enough to go forward with what you want to achieve there?

I think we're really more focused on making them more successful in the ADP client base and internationally, and trying to figure out how we take the product set that further down market in the box, because we've got huge growth in our BPO offerings in major accounts and the PEO.

In addition, we've got great market share at the high end of the market.

We think having ADP AAA and our payroll expertise, coupled with our COS capability and our international reach is going to be a real help for these guys as they try to grow the business faster.

Understood.

Makes sense.

And just to follow-up to some of the discussion earlier on innovation.

I'm curious, are new competitors -- like you mentioned Workday, Gary.

I guess, Ultimate had pretty strong bookings last night, are those competitors really pushing you to invest more in some of these new products?

Or are you just responding to what you're seeing on the ground, in terms of what your customers want?

Tien-Tsin, competition is good, because it keeps you on your toes.

So I think certainly, if you take things like Workday, I mean, we partner with Workday, we compete against Workday.

Right.

So depending on what the client has.

Certainly, Ultimate's success is certainly, put even more focus for us on things like Workforce Now and Vantage.

But what we are really trying to do more than just respond to a competitive situation, because the 35 years I've been here, there's always been competition, and they continue to cycle through.

And the one constant has been ADP's success.

But what we really trying to do and real kudos to [Mike Capone] and his IT organization for us, is we are trying to create more pull for our sales force, as opposed to raw push by putting more feet on the street.

And the way you do that is by having market-leading products that pulls our clients to ADP.

So whether it's the new UI, the mobile solution, the software-as-a-service -- you get 5 applications as opposed to 1 at one place, so we are really try to push innovation to drive marketplace pull for ADP.

And we've got the distribution system, we've got the history of service -- you put (inaudible) products in the hands of our salespeople, that's a great commendation.

No, that's good color.

Can I ask a dealer question?

Sure.

Okay, I have a dealer question.

This is for you Gary, obviously still growing double digits bookings there.

You guys are executing real well.

I know you have some exposure to Europe, and some of these other regions.

Any risk of some of the bookings slowing there on a dealer side, or is it the products driving the demand there?

Thank you.

I think there is certainly some risk in the European side.

But we did find there last year, that risk was there last year, we've got a new release of our auto line products, being rolled out now.

There's a number of OEMs that are making system-wide decisions that are fairly significant decisions there.

And we really focus on the high end of that space, in terms of large deal or groups, they're continuing to move forward.

Most of the difficulties are around the small European-based dealers.

So I think it's certainly going to be pressure, but I think we are okay.

It's not new pressure versus what we have seen the last 12 months.

Understood.

Thanks for much.

Good stuff guys.

Your final question comes from the line of Mark Marcon with Robert W.

Baird.

Thanks for squeezing me in.

I was wondering if you could --

I was wondering where you were, Mark.

(Laughter).

I was wondering if you could talk a little bit about what the margin implications are, as you broaden out the suite.

The RPO offerings certainly makes a lot of sense, with Virtual Edge and [Avert], but the margins are lower.

So are you broaden out a little more in there, or how should we think about the long-term margin profile in ES?

I think what you've got to look at is, the combination of things.

One is clearly, the more we sell the established products -- as long as you've got good growth in payroll and HR, that have established good margins, that's going to be the biggest driver.

And then, once you have a product in your portfolio, it's driving them to improve their margins.

And as they do that, it keeps the overall margin good.

I mean, our payroll and HR margins are well above our average margins in ES, and across ADP for that matter.

So as long as you got good growth there, you're fine with the mix.

And as long as you are taking products like GlobalView up the margin chain, that helps as well.

Obviously, you want to continue to invest and invest more, which puts a little bit pressure on the margin.

That's why we do things like more smart shoring and offshoring and facilities consolidation, and that kind of thing.

So there's a lot of different levers in that space.

Clearly, mix of something we focus a lot on, but if you can drive good growth in your established core business, that gives you a lot of flexibility on margins.

Great.

And then, can you just talk a little bit more about the rollout plan for Vantage?

The demo at HR Tech looks really good.

But how quickly could we expect the sales force to actively engage, thinking about sales cycles, and when you should start actually seeing wins?

Well, now.

We have one client that is live.

We did this on a pilot basis, obviously.

And we have a handful of other clients --

implementation.

In implementation.

And we have quite a few prospects as well.

We are all ready seeing the traction, and so we are encouraged by that.

The other thing Mark, is that we have taken Workforce Now and rolled it up into the low end of national accounts.

So for clients in the 1,000 to 3,000 employee space, they have a choice of either Workforce Now, particularly if they have less complex needs, Workforce Now may actually be a better choice for them than Vantage going forward.

So the whole sector of national accounts now has fresh product, most the large accounts as well as for smaller national accounts.

Great.

And so by the time we get to the third and fourth quarter, that's what it should really start kicking in?

That would be the plan.

Great.

Thank you very much.

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

Again, just in closing, we were very pleased with the quarter, sales and retention results being up, great revenue growth, good acquisitions.

And I think a lot of this call really demonstrated the point, the big progress we have made on the product side around innovation and winning in the marketplace and creating pull for our products.

So we are confident in our forecast, and look forward to talking to you next quarter.

This concludes today's ADP first quarter fiscal 2012 earnings webcast.

You may now disconnect.