自動資料處理 (ADP) 2012 Q2 法說會逐字稿

Good morning.

My name is Christy and I will be your conference operator.

At this time I would like to welcome everyone to ADP's Second 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) I will now turn the conference over to Ms.

Elena Charles, Vice President Investor Relations.

Thank you.

I am here today with Carlos Rodriguez, ADP's President and Chief Executive Officer and Chris Reidy, ADP's Chief Financial Officer.

Thank you for joining us for our Second 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 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 second quarter of fiscal 2012.

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 Carlos for his opening remarks.

Thanks Elena.

Good morning and thank you for joining us.

Before we get started, I would like to take this opportunity to thank Gary Butler for his 37 years with ADP and especially for his tenure as ADP's President and CEO.

With his guidance and direction ADP successfully navigated the worst recession since the Great Depression.

I'm also personally grateful for Gary's guidance and counsel over the years.

As you know, I have been in this role for just over two months now and I'm pleased to be you're speaking with you this morning on my first ADP Earnings Call.

I will begin today's with some opening remarks about our second-quarter results.

Then I'll 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 an updated fiscal year 2012 forecast.

And before we take your questions, I'll provide some concluding remarks.

Now let's turn to slide 4.

As you read in this morning's press release, ADP reported solid results for the second quarter of fiscal year 2012, despite the mixed economy.

Total revenues grew nicely at 7% for the quarter.

Additionally, we experienced continued strength in our key business metrics.

Starting with employer services, new business sales, the number of employees on our client's payrolls and client balances all increased during the quarter.

Client revenue retention did tick down in the second quarter due to a large client loss that we anticipated although we were not certain of the timing.

Although client retention is down slightly year-to-date, it remains at excellent levels.

And as you know, our third fiscal quarter is a particularly important period for retention and we will certainly update you further on next quarter's earnings call.

I am particularly pleased with our new business sales results in employer services and PEO services.

New business sales grew 14% year-over-year assisted slightly by recent acquisitions.

And although we did not provide sales dollars -- and although we do not provide sales dollars on a quarterly basis, I think it's important to let you know that the dollar value of the sales in the second quarter reached an all-time high.

We've been focusing on product innovation, both in internal development through acquisitions that complement our existing solutions set.

This focus is clearly paying off with strong growth in new business sales which are anticipated to increase our future organic revenue growth.

We have also invested in the distribution -- in distribution and in client service, all of which are having a positive impact on new business sales.

It's also noteworthy that sales productivity is also improving.

You may recall that productivity was significantly down over the last couple of years as a result of the recession, especially at the high end of the market.

But our continued investment in our sales force for us as well as in our solution set meant that our market conditions -- as market conditions improved, we were well poised to benefit.

And I believe this is well evidenced by the sales results across all of our markets.

Small business services, national accounts, AVS and GlobalView all achieved double-digit sales growth.

ES International Best-of-Breed sales growth was also double-digit.

But results there were mixed by country as economic pressures continued, especially in Western Europe.

Sales in Canada, Australia and Brazil were also strong.

I am pleased that sales in national accounts were double-digit during the second quarter, driven by domestic GlobalView sales.

But I want to point out that the sales cycles are still very long at the high-end of the market and as you know GlobalView sales can be lumpy due to their size.

Moving onto dealer services, the automotive landscape in North America continued to stabilize as calendar year vehicle sales finished strong.

I am pleased that new business sales and dealer services were ahead of expectations in the quarter.

Dealer services worldwide revenue retention increased for the quarter and dealer services revenue growth was 7% on both a total and organic basis as Cobalt is now fully in the organic results as we lap the acquisition date in the first quarter.

Before I turn the call over to Chris, I want to spend a moment on acquisitions.

We are pleased to have closed three transactions since our last update.

ADP acquired a provider of revenue cycle management services targeting small physician practices.

It will provide Advanced MD entry into the growing segment of physician billing BPO solutions making it a natural extension of Advanced MD's growth strategy.

ADP also acquired a provider of payroll and other compliance services in India.

This acquisition supports our broader strategy to expand our global footprint across large and developing markets.

And finally, in dealer services, ADP acquired a key supplier of digital services for our Cobalt and Dealix businesses.

We believe this transaction will help enhance our new and used car lead generation.

I'm confident that these acquisitions are the right investments as we expect it will contribute to ADP's future growth opportunities.

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

Thanks Carlos and good morning everyone.

Let's now turn to slide 5.

Total revenues grew 7% to $2.6 billion, 6% organically in the quarter.

Unlike the first quarter, where revenue growth included two percentage points from foreign exchange rates, rates were neutral in the second quarter.

We continue to see a positive impact on revenues from strong new business sales growth and from acquisition activity that complements our solutions set.

Employer services grew total revenue 7%, 5% organic.

It was good revenue growth across several products including running our small services business market place, time and labor management, HR services in major accounts, and ASO which is our BPO for small to midsize companies.

Pays per control in employer services in the US continue to be strong with an increase of 2.8%.

Growth in average client fund balances increased 6% for the quarter, driven by new client growth especially in small business services, growth in stand-alone tax filings, increased pays per control and increased state unemployment taxes.

The PEO strong revenue growth continued with 16% growth during the quarter, all organic.

Average work site employees grew 13% during the quarter to over 251,000.

As Carlos mentioned, dealer services revenue grew 7%, all organic as we have anniversaried last year's Cobalt acquisition.

And dealer services is benefiting from strength in the North American automotive market.

Transaction activity increased, our win rates are solid and retention improved year-over-year.

Continental Europe is still a weaker environment, but we are seeing continued strength in the luxury brand market in Asia.

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

As you read in this morning's release, during the second quarter, we sold assets related to a third-party expense management platform that resulted in a pretax gain of $66 million, $41 million after-tax and $0.08 of earnings per share.

We now have a referral arrangement for new business with this third-party, versus the formal reseller arrangement.

We are treating this gain as one-time item for comparative purposes so although we have shown on this slide the year-over-year results both including and excluding this gain, I'm only going to take you through the results excluding the gain.

On that basis, pretax earnings increased 6% and net earnings increased 8% with net earnings benefiting from the expected lower effective tax rate in the quarter.

Diluted earnings per share increased 10% and benefited from fewer shares outstanding compared to last year's second quarter.

ADP's pretax margin declined 25 basis points but I want to take you through what negatively impacted the margin.

Excluding a 30 basis point drag from acquisitions, ADP's pretax margin was slightly positive.

And then if you exclude the 80 basis point drag from the decline in high margin client fund interest revenues from lower yields, it was very positive margin expansion.

It's important for you to understand that even though the year-over-year negative impact margin is declining, as anticipated for last year's acquisitions, we do anticipate a larger negative impact to our third-quarter margin for the acquisitions announced since our last forecast in October.

I point this out because one of the three recent acquisitions that Carlos mentioned earlier occurred in our third quarter or so there was no impact in the second quarter and I want to be sure you include the impact in the third quarter.

We believe that all of these transactions are great complements to our existing solution sets and should please our organic revenue growth in the future, but will negatively impact margins due also to the fact that they are small and need to gain scale to achieve overall ADP-like margins.

I also want to take a moment to discuss the 120 basis point decline in employer services pretax margin in the quarter.

Excluding an 80 basis point drag from acquisitions, employer services pretax margin was down 40 basis points.

As you read in this morning's earnings release, the decline was also due to the year-over-year impact of higher selling and implementation expenses, investment and services and increased R&D spend.

Our forecast is up to 30 basis points improvement employer services pretax margins for the full year is driven by a particularly strong fourth quarter as we expect to fully lap last year's investments.

Moving on, we repurchased 6.3 million ADP shares fiscal year-to-date for a total cost of about $305 million.

Our cash and marketable securities position was strong at $1.5 billion at the end of the quarter.

Let's turn to slide 7 and I'll take you through the updated forecast on a client fund investment strategy in support of the overall ADP forecast that Carlos will take you through in a few moments.

Before I get into the details of the forecast, I will point out that the objectives of our investment strategy remain safety, liquidity and diversification.

At December 31, over 85% of our fixed income portfolio was invested in triple A/double A rated securities, consistent with the past seven quarters.

In the duration, the portfolio remained 3.1 years at the end of the second quarter.

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

I'll also remind you that 15% to 20% of the investments are subject to reinvestment risk each year.

Focusing now on the slide, you see a summary of the anticipated pretax earnings impact of the extended investment strategy for the client funds investment portfolio for fiscal 2012.

We anticipate average client fund balances for fiscal 2012 in the range of $17.9 billion to $18.1 billion which represents 6% to 7% growth.

This is slightly lower than our previous forecast of 7% to 8% growth as our current forecast calls for less wage and bonus growth than previously anticipated.

We have also factored in through the end of the fiscal year '12, the continuation of the 2% Social Security or FICA tax holiday that was set to expire December 31 and has been extended.

It is also important to keep in mind that while average client balances have grown 8% year-to-date, 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 to the same extent this year.

Therefore, we anticipate tougher balance growth comparisons the remainder of the fiscal year.

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

However, due to the lower balance growth forecast, we anticipate a slightly larger year-to-year decline in client fund interest of $45 million to $55 million.

As you can see at the lower right of the chart, in terms of the total pretax impact of the extended investment strategy, we anticipate a decline of $50 million to $60 million for fiscal 2012.

About $5 million more of a decline due to the lower balance forecast versus last quarter.

We continue to anticipate the overall yield from the net impact of this strategy and decline about 50 basis points from fiscal 2011's overall yield of 3.6%.

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

Thank you Chris.

We are now on slide 8.

Our performance has been solid.

We do expect continued pressure on earnings and margins in the second half of the fiscal year, from a continued low interest rate environment.

We have been very active in executing against our M&A strategy which will also put pressure on margins near-term, but we believe will enhance ADP's future organic revenue growth.

And now to the forecasts.

Our forecasts exclude the gain realized in the second quarter on the sale of assets.

We continue to anticipate total revenue growth of 7% to 9%.

I also want to remind you that we continue to anticipate that the impact from foreign exchange rates will become unfavorable during the second half of the year and will be about neutral for the full year.

To remind you, the euro today is hovering around $1.30 which is close to where it was a year ago, and then increased to over $1.40 toward the end of last fiscal year.

Therefore at current FX rates, we anticipate a negative impact to revenue growth of about one and two percentage points in the third and fourth quarter respectively.

As you know, moving in FX rates is not as impactful on pretax earnings.

We've adjusted the range of our diluted earnings per share growth forecast to exclude the $0.02 per share loss for the remainder of the year from the sale of assets in the second quarter.

As a result, we now anticipate 8% to 9% growth compared to 252 in fiscal year 2011, compared to our prior forecast of 8% to 10% growth.

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

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

As Chris mentioned a moment ago, expected growth in average client balances is lower than our last forecast.

And we anticipate a decline of $50 million to $60 million in pretax earnings related to the client funds investment strategy as Chris just took you through.

This translates to a drag of about 90 to 100 basis points on ADP's total pretax margin.

Pretax earnings related to the client funds strategy are down less than $20 million year-to-date, so another $30 million to $40 million plus of expected declines is to occur over the next two quarters and will be a significant drag on total pretax margin.

And before we move on to the segment forecast, I want to provide some additional directional comments regarding our third and fourth quarters.

We stepped up investments during the second half of last fiscal year.

Most of which started in the second -- at the end of our third quarter.

These investments were in distribution primarily for sales over hires and also in service.

As a result, we anticipate a $15 million to $20 million grow over in expenses for these investments the third quarter compared to last year's third quarter.

I also want to point out that in last year's third quarter, there were some favorable pretax items that are one-time in nature that we don't anticipate recurring in this year's third quarter.

These items and last year's third quarter totaled nearly $10 million and include a realized gain on the sale of securities among other things.

So the takeaway here is that we expect a difficult year-over-year comparison for our third quarter.

And the negative grow over impact goes away in the fourth quarter, other than the drag from flow.

Now let's turn to slide 9 for the segment update.

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

We are currently forecasting pretax margin expansion of up to 30 basis points, compared with our prior forecast of about 50 basis points expansion, due to slightly lower than anticipated growth in average client fund balances, lost earnings for the remainder of the year from the sale of assets in the second quarter, and the impact of acquisitions closed since our last update.

We anticipate an increase in our pays-per-control metric into the US of about 2.5%, compared with our prior estimate of 2% increase.

We continue to anticipate about 17% revenue growth for PEO services, and in PEO anticipate a slight margin expansion compared with our prior forecast for a float margin -- for a flat margin with fiscal year 2011.

We anticipate about 12% growth in the annual dollar value of ES and PEO worldwide new business sales from the nearly $1.1 billion sold in fiscal year 2011.

This is up from our prior forecast of 8% to 10% growth, due to the strong sales execution and was aided slightly by recent acquisitions.

And for dealer services, we anticipate 9% to 10% revenue growth, up from our prior forecast of 8% to 9% growth, due to additional revenues from the acquisition closed at the end of our second quarter.

We anticipate pretax margin expansion of at least 50 basis points, up compared to our prior forecast of about 50 basis points.

Turning to slide 10, I would like to leave you with some closing remarks before we open it up for questions.

You can tell from our comments that we are very pleased with ADP's second quarter results.

I think you'll agree that by most accounts, the economy is still somewhat mixed.

And with that in mind, I am particularly pleased with our strong execution in sales.

A priority of mine, is to give the best innovative products to our excellent sales force.

I believe our revenues are growing nicely, not only from the good sales execution, the from the investments we have made in our solutions to both internal R&D and acquisitions.

ADP is a strong franchise with strong and consistent cash flows which enable us to make these investments.

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

I'm pleased that ADP continues to be rated AAA by both Standard & Poor's and Moody's with S&P reaffirming this past September and Moody's reaffirming just last month.

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

I believe there is an opportunity for ADP to expand its market-leading position, both domestically and internationally.

And I look forward to what the future holds for ADP.

And now I would like to turn it over to the operator to take your questions.

(Operator Instructions)

David Togut, Evercore Partners

Thank you, and congratulations on your promotion, Carlos.

Thank you, David.

Can you give us some more granular insight on growth rates, both as small business, majors, and nationals.

You've got new products in each areas.

Can you give us some insights more on growth rate and more on competitive win rates versus, let's say, paychecks at the low end and the suite of competitors at the high end?

Obviously, the thing that we look for from a growth rate standpoint in terms of as a leading indicator of sales.

So I'll focus on that.

I'm not sure if you meant revenue or sales growth.

But on the sales front, new business sales were strong, really across all of our segments, in both Small Business, Major Accounts, and National Accounts.

Some of that is a reflection of the product enhancements that we've made over the last several years and the investments that Gary has been referring to.

In National Accounts, it does reflect a bit of a bounce back.

But again, sales in National Accounts tend to be very lumpy and we still feel that the sales cycles are still quite long in the high end of the market.

But we're quite pleased with the sales growth in all of the markets, and all three of them were in the double-digit range.

From a competitive standpoint, in terms of win-loss ratios, we feel like we're in a very good competitive position in Small Business.

In Major Accounts, we have seen a return to what I would consider to be good strong growth from a sales standpoint.

I think reflecting also the improvements in the product of Workforce Now.

And also in National Accounts, with our new Vantage product, we're expecting good strong sales growth in the future from Vantage.

Could you give us a little more insight into client reaction to Vantage, which launched a few months ago?

So the reaction has been very positive from a client standpoint and from an industry analyst standpoint.

And we've obviously demoed the product in several conferences.

I was at one of them called the HR Tech Conference, where there was a very positive reception by what we call the Industry Analyst Community.

And we have, I think, a growing pipeline, but it's very early.

We launched the product in October of last year.

It is, just as a reminder -- Vantage, unlike GlobalView, is not intended to be a product to address a new market segment.

It's a -- really a replacement or upgrade of our current platforms, which will take time to execute on from a replacement standpoint.

But from a new business sales standpoint, it's intended to sell into the National Account space where we were selling other platforms before.

So, even though we expect it to help our National Account sales over time, it's not expected to be an incremental new market segment or product as it is in GlobalView.

I see.

And Chris, just a question on the outlook for float.

Do you a preliminary view for fiscal '13 in terms of possible earnings pressure from the reinvestment of some of your longer dated maturities?

Yes.

What I would point you to, David, is that what I went through back at the May analysts meeting.

And in that meaning, you will recall that I gave how much of the portfolio matures over the next couple years.

And you'll see the same amount basically matures in next year.

And you can see what the embedded base is.

And so if rates stay the same, that gives you a pretty good clue.

So I think I've given you all the puzzle pieces.

I hesitate giving fiscal year '13 guidance yet.

But I will be updating that as we go throughout the year.

But I think you can get what you need out of that meeting.

The interesting thing is, since May, when rates were low, rates have actually ticked down a little bit.

And if you remember, I gave you a way to think about balance growth, et cetera.

So it's all there and I'll be doing that more towards the end of this year to give insight into next year.

Thank you.

Appreciate it, Chris.

Julio Quinteros, Goldman Sachs

Thanks, Chris.

This question is for you just in terms of the puts and takes for the acquisitions and the dispositions for the rest of fiscal '12.

Is there a way for us to understand what the contribution in the numbers is from the acquisitions, and then ultimately the asset disposition?

Just to get a better sense of what the underlying organic would look like for the back half of fiscal '12 here?

Yes.

I think from an NOI standpoint, it's not particularly material.

But from a margin standpoint, it continues to be a drag.

The drags get a little bit better, as we said in our earlier remarks, from the acquisitions we did last year, though they're still negative.

But then, as you look into the third and fourth quarter, you've got some of the more recent acquisitions that have the full impact in the third and fourth quarter.

So they are a bit of a drag as well.

And what about from a revenue contribution perspective for the acquisitions?

You know, the most recent ones that we did since the last time we updated guidance on all of that material, we had the RightThing in.

And the last time, right?

So that was a little bit bigger.

The dealer acquisition we did recently is kind of mid-teenish kind of revenue.

But the only one that's meaningful is the sale of the assets that we mentioned, which are on a $0.02 for the rest of the year.

So you can do the math on the full year -- it's $0.04 per year, more or less, drag from an NOI standpoint.

And I think revenues are somewhere around $60 million to $70 million on an annualized basis.

Got it.

Great.

Thank you guys.

Rod Bourgeois, Sanford C.

Bernstein

I just wanted to inquire about the selling and churn season.

We are well into the new year now.

And I know this is selling and churn season.

Can you just give us an update on how things look so far with sales and churn?

I'm sorry?

Sales and where?

What were you saying?

Churn?

Sales and client churn.

This is the key.

Client churn.

Okay -- retention.

Well, in terms of new business sales, within six months of our year end, we are at 11% growth year-to-date, and our sales results, 14% for the quarter.

So we're feeling pretty good about that.

In terms of our churn, our retention -- if you exclude the one large loss, which is a little unusual -- there was a client that we brought on as a result of an acquisition a couple of years ago.

And it was a product and service that was really 10 years old.

It was a legacy product.

We, at the time of the due diligence, anticipated that at some point, we would have that client leave we just didn't know what the timing was.

And in fact, the timing kept getting pushed forward.

But, unfortunately, we did end up losing the client over the quarter.

I think you if exclude that client, that large client loss, our retention was about flat for the quarter.

So it's still slightly ahead year-to-date.

And we are still forecasting to be ahead for the full year.

So as you can tell, based on the six months and what we feel and see so far in January, we're feeling pretty good about client churn and about retention for the full-year forecast.

On the sales front, again, January -- as with retention -- January is an important sales month in a couple of our business units, where we record our larger sales results in January; and again, our early feelings and our early read gives us confidence to increase our sales forecast as we did, to about 12% from the previous range that we had.

So we're feeling pretty good about both.

That's great.

Thanks for the update on what has happened in January.

Can you give us any specificity?

I mean I guess you are seeing an encouraging sign in January on the bookings front.

Is that because of better sales execution?

Or is there something happening in the market that you think is giving you better lift in January bookings than you might have been expecting before?

So I wasn't trying to make a comment specifically on January.

We did meet with our sales leader yesterday just to get an update on the view of the full year.

And although we are feeling pretty good about January, my comment was really more about the full-year forecast, and also the year-to-date.

So the overall picture I think is feeling pretty strong.

But I'm not sure that we want to get into the specifics about the results in the month of January.

But there was nothing --

January hasn't closed yet.

Yes.

But we haven't really closed the results.

So, but we do have a weekly results and we have some sense of where we will be.

And we are feeling good.

And again, I think our feelings are similar to what they were for the first six months -- no big change.

We have, other than in our Small Business segment, some visibility as a result of pipelines and other metrics about where things are headed from a sales standpoint.

In Small Business sales and in Total Source, those are two places where you actually have to wait for the actual results, because we count the sales at the time that they are started.

And again, January, in both of those Businesses, are fairly large months.

And through today in January we are feeling good about what we are seeing so far.

And to your question about execution versus something else going on, I think now, as we've been saying, if we put really good innovative products into the hands of our salespeople, it helps with execution.

So it's a combination of both.

It is hard to tell which.

But it is a winning combination.

And one thing that's worth mentioning is the execution is beyond just the products and the sales force.

These kinds of lumpiness in sales, particularly in January, as a result of these large starts require a very well-trained and dedicated service and implementation organization, who is also performing quite well in being able to handle what is obviously more than what we expected from a volume standpoint.

So just to clarify -- it seems like part of the reason you are increasing your bookings guidance is that you have some data on January.

So that was my understanding.

But if you had to pinpoint the main thing that's helping you on the sales front to up the guidance, would you say it's just having better product for sales this year?

And you've got some momentum as a result of the new product rollout stuff?

Is that the main factor?

Well it was also -- it wasn't just January, it was the whole second quarter.

So we are 11% year-to-date.

We see the momentum.

The momentum is strong across the business.

So it's not just one unit.

It's -- we're seeing the strength everywhere.

We mentioned specifically double digits in SBS and National Accounts and AVS, and Best-of -Breed, and International.

But then, even if you peel back on Total Source, they had very high single digit growth against a very difficult compare.

Majors is very strong, high single digits.

So it's across the board, and the momentum feels good.

So it's all those things.

It is everything that we are seeing.

And that's why we increased what we expect to see for the year.

But there is no question that we feel strongly that the product enhancements over the last couple of years have helped our sales force.

Our sales force has always been successful in selling in any kind of an environment.

And not necessarily with any kind of products, but they certainly do better when they have help from good strong product from a competitive standpoint.

Excellent.

Great to hear.

Thanks, guys.

(Operator Instructions)

Jason Kupferberg, Jefferies.

Just wanted to ask a little bit about the circumstances around some of the higher sales and implementation expense.

Obviously, new sales themselves have been running ahead of plan and it was nice to see the guidance raised there.

So, is the higher sales and implementation expense purely a byproduct of you guys are selling more than you had originally forecast?

Or are any of the implementations proving to be more complex or lengthy and therefore more costly than you might have originally anticipated?

Well, it is that, but it also includes the fact that sales growth was strong last year.

And so that creates a little bit of higher grow over on implementation expense this year.

I think it is more the former than -- I think there is clearly some additional, I think, complexity in terms of some of our higher-end starts.

But I think the main increase in our -- we've, I think, been talking about this for several quarters -- that we've invested in our sales organization and our distribution last year.

And I think we're just now lapping some of those investments.

And I think what we're the most pleased with is the productivity improvements that are starting to show up from those investments.

So, even though in sales dollars we are still feeling pressure, as you are alluding to, we're really getting the return that we expected in the form of a productivity improvement.

So in terms of the details behind that, we've had only about half of the sales force headcount growth as we have in sales results.

And that's a big turn for us in the last couple of years, where we've been adding to the sales force and waiting for the productivity, which is a normal course for us.

As we begin to add distribution, as we come out of a downturn like we did, as our confidence grows in the future of the economy, we begin -- and this is again a cycle that's been repeated for many decades at ADP -- we start to add back sales resources.

Those folks take time to get trained, and they take time to get productive.

And we appear to be getting close to that inflection point now, where we're going to lap those investments, first of all in terms of dollars.

And the productivity enhancements are starting to show up in the sales results.

And they did show up in the second quarter.

Absolutely.

And just to follow-up on that -- when you think about the raise of the sales growth guidance for the year, I guess at the midpoint of your prior range versus current, you're up about three points.

It sounded like there was a little bit in there from the recent acquisitions.

I'm guessing probably not more than a point, but correct me if I'm wrong.

And so, just the balance of the two or so points, is that because you've had more success in converting some of those GlobalView opportunities that are a bit chunkier?

Or is it broader-based than that, really across all the customer segments in terms of driving your increased outlook for new sales?

So just to be clear -- the GlobalView chunky sales that you refer to did help us on the domestic side in our national account results in the second quarter.

But our sales strength and results are strong across all of the segments.

So we're very pleased with the entire across-the-board sales results.

And to your question about the acquisitions, I think we -- you mentioned in terms of how much help we would get from the acquisitions is about right.

It's not material, and it's not significant to the guidance increase.

Right.

You clearly would have still increased the guidance without the acquisitions.

Okay.

Terrific.

Thank you, guys.

Bryan Keane, Deutsche Bank

Hello.

Good morning.

In your guy's comments today, you guys reference a mixed economic environment.

And since ADP really has a great view on the economy, I was just hoping you guys could define some of the positives and negatives that you are seeing?

I think there are really two things that I would point to.

One is, despite the strong results in national accounts this quarter that were aided by some of the domestic GlobalView sales, we are still seeing long sales cycles, and it's difficult to get people to make decisions.

And, in fact, we are very actively -- many people trying to help and close deals that are kind of close to the goal line.

So I think that's one place where, if we had to define the environment, and we wouldn't define it as perfect, because we do have strength in other parts of our business from a selling standpoint.

We have strength in retention, we have strength in pays per control.

So most of our metrics are looking actually quite good and strong.

But we still have some uncertainty in the upper end of the market.

And in GlobalView, again, those sales are lumpy.

And so we're just not ready to declare that the upper end of the market is back in complete open buying mode.

The second item that I would mention from a mixed standpoint is Europe.

We do have about a little less than 20% of -- or around 20% of -- our revenues from outside of the US.

A lot of that from Europe.

And, as you know, the European markets are somewhat unsettled.

We have a relatively small pretax contribution from our international operations.

So we're not all that concerned about it from a bottom-line standpoint.

But it's still a place where, from a new business sales standpoint, we're concerned.

They had good results in the second quarter, and some of that may be the comparison to the prior year.

But, as everyone knows, that's a -- certainly an unsettled situation.

And if things were to get much worse there, we would probably, as usual, see an impact on our new business sales results.

Not as much short-term on our revenue and our pretax, but certainly on our new business sales.

And that's why we are being cautious about the economy.

Yes.

I think the only other thing would be the interest rate environment hasn't gotten any better, either.

And so, you put all those things together, so when we say mixed, bear in mind some of the key indicators we look at, to your point, are things like pays per control to the employment levels.

And we are seeing good growth there.

And across-the-board sales growth, particularly in the -- other than the National Accounts, as Carlos mentioned, everywhere else it's strong and has been strong.

So there's positive signs and yet there is still a bit of that cloud.

And I think that's probably indicative of what most people feel about where the economy is right now.

It's not going great guns.

It is just sort of chugging along.

So that's kind of what we meant by that.

Okay.

And just as a follow-up, I just wanted to ask Carlos now, in the CEO role, do you have any thoughts on any changes to the strategic direction or anything that you might be bringing to the table that could be different than the Gary Butler regime?

Thanks.

Well, as you know, everyone -- people are different terms of their styles and also their approaches.

But I have been in ADP for quite a while.

I've been actually a part of building the strategies that we have been pursuing over the last five or six years with Gary.

So Gary and I saw eye-to-eye on most things.

And again we're different people.

We're going to have different styles.

And I would say that what you will see is more of a change in emphasis on things.

Gary and I talked a lot about, over the last two years, how pleased I was, and how supportive I was of our investments, particularly in product and innovation and technology.

And so that's something that Gary was very supportive of, and he made investment commitments to.

And I intend to continue that.

And if there's any place where I would expect to put more focus and attention, is in that area.

But this is a great business model that we have.

I value -- I have been at ADP for a long time.

I understand very well the value of our direct sales force and how they're able to execute.

So I plan and expect to continue to invest in our sales force and support our sales force.

And I also understand that our service organization is a key differentiator for us versus some of our other competitors.

And that's also a place where I intend to continue to invest.

So, I think that Gary shared that same perspective and I think where there may be differences is in degrees of emphasis on those three categories.

But those three categories are what made ADP great.

And I intend to continue to follow through on those same three categories.

Okay, super.

Thanks for the color.

Gary Bisbee, Barclays Capital

Hello, guys.

Good morning.

I guess the first question is can you give you more color on the deceleration in the organic revenue growth in the employer business?

Was that adjusted for this asset sale?

Or is that part of it?

And any other contributing factors?

And I'm talking versus last quarter.

Sure.

Yes.

No, sequentially, just taking it from the ADP level, although you focused on it -- yes, I will start with ADP.

We were down sequentially on an internal basis.

Let me point you to that, because it takes some of the noise out from the acquisitions.

Where we were 9.7% growth on an internal basis in Q1 and down to 5.9% in Q2.

Two whole percentage points of that was related to FX, which we talked about in our remarks, that we didn't get in the second quarter.

So that kind of makes the comparison 7.7% to 5.9%.

If you break that down now to the ESB's, it was really 7.3% in ES going to about 5%.

And there were two things that impacted that.

One is just the fact that there is one less calendar day in Q2 than there was in Q1.

And so, it's kind of an anomaly the calendar.

But one whole day makes a big difference.

And so that was part of it.

The other is, if you recall us talking in the past about our tax credit services business and the HIRE Act that was in place through last year, the last bit of that came through in the first quarter, which was kind of a retention credit if the people that you hired were still around.

And that came through in the first quarter.

And that all went away in the second quarter.

So that was the -- those are the two reasons for that deceleration in the sequential.

Dealer, on the other hand, actually ticked up slightly from 5.6% to 6.7%.

And primarily because Cobalt is now internal for the entire quarter versus being halfway in the first quarter.

So when you put all that together, that accounts for the difference.

But I think it is fair to say that, if you look at the trends over the last several quarters, even going back a couple of years, I think if you exclude some of this noise around FX, calendar, the HIRE Act, other things, I think the message should be -- I think that you should hear is that all of our underlying metrics with the only, quote-unquote, clouds that we have mentioned -- all of the underlying metrics are still pointing in the right direction.

They are still either strong or improving.

And it's really the sales in the high end of National Accounts, our concerns about the Euro zone, and also a continued low interest rate environment, are really the only things that you should be focused on as potential things to really worry about or focus on.

Because again, as the new person looking at some of these trends and going back and studying all the numbers, the numbers are quite consistently improving and still heading in the right direction from a strength standpoint, whether it's pays per control, new business sales, all of the underlying metrics that drive the true underlying core growth of the business.

Yes, and I would also add that the items that I talked about, driving the sequential change, were all things that we anticipated in our plan when we gave guidance initially and when we upped that guidance in October.

So nothing unexpected.

So is that 5% number a reasonable ballpark for the second half of the fiscal year?

Yes, it probably is.

I would have to check.

I'll come back to that.

But that's probably about right.

If you look at our internal growth rate for the six months of this year versus the six months of last year, it accelerated slightly, 10 basis points.

So again, that to me is evidence that you're not going to have a 2 to 3 percentage point movement up or down in that internal growth rate.

But it is still quite strong and either holding steady or improving slightly.

Okay.

And then my follow-up.

Can you give us a sense on the revenue contribution and margin contribution to ADP from a customer who would upgrade to the Vantage product versus the legacy system?

And also I'm curious -- at the mid-level and on the low end, with run versus just the legacy payroll platform, are you doing better or worse in revenue?

Are you doing better or worse on margins?

Thank you.

Well, I think that one of the key strategies for us on the RUN platform is to be able to attach additional products and services that we were not able to or didn't have available in our old Easypay platform.

So one of the things that we're finding some success with on the RUN platform is adding, for example, some HR products.

And again, these are small business tools.

So these are not large ticket items.

But they do move up the average revenue slightly, versus Easypay on the RUN side.

But our strategy in rolling out that product, not unlike our strategy with Vantage, would not necessarily to change the pricing in the marketplace, either up or down.

But really, it was an upgrade and a replacement of an old platform.

And so, I think on the RUN side, we are seeing, I would say, overall, consistent to slightly up revenues versus Easypay on a per-unit basis if you will.

But long-term, our strategy, because of the technology and its ability to integrate other products, our hope is to actually move the average revenue per unit on the RUN side.

On the Vantage side, I think a similar approach, where we did not expect a major -- from a planning standpoint, we did not expect a major increase or decrease on a per-unit basis.

But Vantage does, because of its nature, being a single database integrated product with multiple services -- I think our assumption and -- not our assumption, but our hope -- is that there will be a higher [take rate] of additional products and services in addition to our core Payroll and HR.

So, for example, Time and Attendance systems, Benefit Services -- we expect the tax rate advantage to be higher than they have been in the past in the upfront selling of those products.

And Gary, just looked at a schedule that gave us a little bit more info on the internal growth in ES in the third and fourth quarter.

It will pick up slightly from the 5% that you see in the RUN rate in the second quarter.

Great.

Thank you very much.

David Grossman, Stifel Nicolaus

Thank you.

Carlos, it has been a while since the current product renovation, starting with RUN a couple of years ago.

I was wondering if you could just give us a sense of what the ongoing product development strategy is going to be?

Including the product cycles going forward.

And then, what impact that could have in terms of how you are thinking about the financial profile of the company, since acquisitions seem to be an element of that strategy?

And obviously, they had an impact last year and they are having an impact this year on margins as well.

I think that is a two-part question regarding product development and also acquisitions?

Or did I --?

It is a two-part question.

One being, what are the product cycle timing going to be going forward, given that it had been a while before the current renovation?

And then secondly, what impact, if any, will your focus on technology and product development have going forward on the margin structure of the company?

And since acquisitions are part of this, introducing new products, what impact would that have financially, as well, on an ongoing basis?

Well, my and my team's assumption on a going-in basis is that we have opportunity in the existing portfolio and the existing spending to fund higher spending from an innovation and product development standpoint.

So as an example, we do have -- you talked about our product development cycles having potentially gotten shorter, which is true.

So that is one of my expectations, and part of my vision is to focus more on the age of the products and bring product out sooner, which is something that maybe 10 or 20 years ago was not as important to ADP and our business model.

But I think based on what is happening in the world from a technology standpoint, we do believe that our product cycles need to be shortened.

So we are focused on that.

If you could call it a positive, we have some platforms -- I'll take the example of Easypay since we were just talking about RUN -- where, as we move off of that Easypay platform, tate Easypay platform is very difficult to make changes on.

It is very expensive to maintain.

So, as we move off of that platform, which is not an overnight process, but it is a -- call it two- to three-year process.

That will create funds and resources for us to be able to reinvest back into product development.

And the example of running Easypay is repeated in Major Accounts and in National Accounts.

And I think our team, whether it is our R&D and product development organization or our service and operations folks, understand that we need to find ways to fund our future product development goals, which are to shorten product cycles by finding the resources that we have in some of these old platforms that we hopefully will be able to migrate off of.

And in terms of regards to acquisitions, you know we have -- our acquisitions have been -- or many of them have been really additional products that we are adding into the portfolio.

So, to the extent that any of the acquisitions are platforms that are in our core space either in Benefits Administration or in Payroll, our view would be that we want to be as much as possible on as few platforms as possible.

So, if we were to do an acquisition that was in our core space, we would move as quickly as possible to move those clients onto one of our new go-forward platforms.

I think the only other color I would add is, some of the development that was seen in the new product innovations -- it's less of a once-and-done, and it's kind of a continuous process.

So, though I mentioned RUN for a couple of years now, it's continuing to evolve.

The most recent would have been the introduction of the mobile app for employees of small businesses, which I think was back in October or November.

We've done some things with RUN around the wholesale market.

So it's a kind of a continuous evolvement, probably more so going forward than it had been in the past.

Yes, and I think it's important to add again to the color.

As Chris is saying, the implication of what do my views imply for margins would not be consistent with my original comments, which were that Gary, I think, was on this path already along with the rest of the team, of investing more in product and technology.

So again, I think it is back to the comment of degrees of emphasis and attention, rather than a wholesale change in strategy that's going to impact financials of ADP.

Very good.

Thank you.

Tim McHugh with William Blair & Company

Thanks.

Just wanted to ask if you could extrapolate a little bit on the pricing environment.

Is it consistent with the last few quarters, or have you seen it get any better or worse?

I guess maybe differentiating between national and small customers?

I think if you look in our Small Business space, I would say in 2009 -- the latter half of 2008 and in 2009 -- there was a lot of noise and a lot of discussion about pricing that, from our perspective was -- because I was running that business at that time, we didn't see quite as clearly as other people saw that there was a big change in pricing in the market place.

But whatever noise there was abated.

And we are not saying that we don't compete.

We do compete, so we have many competitors both national and regional.

But we are able to achieve our sales results consistent with the pricing that we've had over the last year or two.

So I haven't seen any change in the pricing environment.

And as you know, we typically put in our price increases at the beginning of the year, from a slightly different pricing perspective.

And I think, as I said on the last call, we had just about 1% increase, which is consistent with what was done for the last two years.

So that certainly is a conscious decision on our part to be at the 1%.

We've gotten 1% to 2% in the past.

But given the economy, we move to the low end of that range.

And because it certainly has an impact on retention, if you try to go too high.

But we've, even in the economy that we've had over the last two or three years, have been able to get a 1% on average across the company.

Okay thanks.

And then my follow-up would just be the sale of the right to resell that expense management system.

Can you give a quick comment on why you made that decision?

Was there something about your ability to resell it?

Or was this a good value you could get for transitioning that relationship?

I think it's fair to say that the decision was mutual.

So when you ask why did you make that decision -- again, these types of things require two parties.

And again, without getting into the specifics about who prompted the decision or who didn't prompt the decision, the decision was mutual.

It was not a core product to us.

And I think there was some desire to have a different arrangement on a go forward basis.

And it was not necessarily all our decision.

Okay.

Thank you.

Jim Kissane with Credit Suisse.

Thanks, guys, and congratulations, Carlos.

Do you have an update on GlobalView achieving profitability?

I think the last one was 2013, but now -- as you bring on stronger new sales domestically, are you still on track for 2013?

Thanks.

Yes.

Nothing has changed in that regard.

Okay.

And Chris, did you give pays per control in Europe?

I didn't catch it.

I thought you said it was solid?

But I'm not sure if you gave a particular number.

We didn't.

It was down just a tick.

But it was pretty mixed by country.

And so it was all over the map by country.

But it's down a tick.

But you know, when we look at that, sales grew nicely at the high end of the market.

And so it wasn't a meaningful change overall.

Okay.

And just a nit -- I know it's a third question -- but there was a $6 million impairment, I guess, in the investment portfolio, Chris?

What does that relate to?

Sure.

That was related to a bond that we held.

It was a Norwegian export finance.

And that was actually downgraded, I think, seven notches by either Moody's or S&P, I don't recall.

Both of them went down significantly.

And so we intend to sell that.

And that's actually ticked up a little bit in terms of pricing in January.

But it was a decision to sell that and get out.

Okay.

Thank you.

Tien-Tsin Huang, JPMorgan Chase

Thanks.

Good morning.

I wanted to ask about ES margins.

And I know you gave a lot of great details there, Chris.

I just wanted to better understand -- what is going to drive you to achieve the, I think, the 30 BPS of expansion for the year?

I think you're down -- what -- 90 BPS or so, year-to-date?

And, Carlos, you mentioned a tougher comp in the third quarter.

So what gets you to 30 for the full year?

Well, I think one of the -- I'll let Chris get into the details, but it really -- some of it does relate back to my comments about sales productivity.

Because we do, as I mentioned, I think, lap some of our sales investments completely in the fourth quarter.

So if you look at our sales forecast and you compare it to our sales costs, it is an improving picture over the second half.

And it was already positive in the second quarter.

So I think some of it comes from a turn, if you will, and the impact of our investments in selling expense from the first half of the year; and also, by the way, from last year to finally now becoming actually mutual rather than a drag on our margin in ES.

So that's a fairly significant part of it is improvement in sales productivity and how it relates to the margin impact on revenue.

And I think you know that other than what we said this morning, Tien-Tsin, the real turnaround really is the grow overlapping.

And most of what we had invested in was towards the end of the third quarter and into the fourth quarter.

And so we bore the brunt of that on a grow-over basis in the first three quarters.

And that turns around in a big way in the fourth quarter.

Which kind of points to some of the lumpiness we were talking to around the third and fourth quarter going forward.

And I think it is fair to say that we -- none of what we're saying was a surprise to us.

So I think that we, all along, I think, from a plan standpoint, had a view of the fourth quarter and of the third quarter that are in line with what we are describing today.

So we're just trying to help provide more color to be more clear in terms of how the numbers stack up versus last year.

And then, where we expect things to come out for the third and fourth quarter.

And if you look at our guidance for the ES margins, it's ticked down a little bit from about 50 to -- up to 30.

And that was taking into consideration a few things, which I think we outlined even in the press release.

But it took everything from higher sales expense, to the lost earnings that we have from the sale of the assets that we referred to.

And the lower balance growth.

So all of those things, putting them together, tick down slightly what our expectation was for the margins for the year.

But excluding those items, the core business is performing as we expected and as we planned.

Yes.

That's very clear.

I just wanted to make sure that was principally the tougher comp.

I just wanted to make sure I didn't miss that, given the rate of change.

I think you didn't miss that.

That's I think correct.

Got it.

Thanks Carlos.

Just last one from me -- just the float portfolio?

Any change in the duration or the risk profile in general there?

Versus last quarter?

No.

Very consistent duration is right on where it was.

So not much to speak of there.

Well, not to reiterate the negative, but we do have more pressure on us as a result of the interest rate environment.

I think we highlighted that in our script.

And again, we would prefer for that to be going in a different direction.

It's certainly not helpful.

Yes, I think you went back to our original guidance and looked at what balance growths look like and what interest rates look like, in the first quarter, it ticked down because interest rates were lower than what we had originally used for guidance at the beginning of the year.

And then in this quarter, as we said, it is mostly the slightly lower balance growth.

Put all that together, and it is down $20 million since the original guidance that we gave.

So it's unusual, because you don't think you can get any lower, but it did get a little bit lower.

Got it.

I have that slide posted up on my desk.

I will update it for that.

I appreciate all the details.

That's helpful.

Thanks.

Joseph Foresi, Janney Montgomery Scott

Hello.

I guess my first question here is, Carlos, how do you see -- I'm just trying to get your longer-term views on the balance between the technology and services portion of your sell?

And, maybe, how you think that's going to play out over time?

And what impact it would have on the business as we look at it?

Well, I think I'll describe it the way I describe it to our leaders and also to our Associates.

Which is -- my view has been that we have a great sales force.

We have a great service organization.

And we have good products.

And what I think the term we use is that good is not good enough anymore.

So because of the pace of change -- today you saw Apple's earnings results, and the fact that everyone has an iPhone and everyone has an iPad.

So the usability and the experience that our clients and their employees have with our products, has become more important over the last five years, and is going to become very important over the next five years.

So I think it's natural that we have to have more focus and attention on product, both in terms of usability, feature functionality, and quality.

But also in terms of age of products.

So I think these are natural outgrowths of a changing world and a changing market.

But it doesn't really imply -- and I believe that we have the ability -- to still maintain great sales, great service, and just elevate product to the same level.

So that's really the plan.

The plan is not to make trade-offs, or to take from one and give to the other.

I think the plan is to elevate products.

And we believe, our CIO believes, I believe, and I think the team believes that we have the ability within the existing resources and structure that we have, to be able to accomplish that.

And just kind of building off of that.

Do you think that has any impact longer-term on the pricing structure of the business in general or of the product itself?

And then maybe you could just talk about what your impressions are about that impact on your competitive environment?

In other words, why you went into these relationships?

I think that Business 101 would tell you that differentiation is very important.

You don't want to ever be commoditized or in a commodity market, which we are not.

And so the product development focus is intended to maintain differentiation that ADP has historically had, which helps us from a pricing standpoint.

Again, service and our ability to use a direct sales force to sell our value, are also incredibly important to the business model.

But our product focus is really all about differentiation.

And differentiation helps with price.

If you look at the example of RUN, I think it's helped us maintain or be consistent from a pricing standpoint in the market.

So I think that there are two schools of thought.

One is, doing these types of things and creating this differentiation will help you increase your price.

And another school of thought is that it will help you maintain your price.

Both objectives are good.

Thank you.

Jim MacDonald with First Analysis.

Welcome, Carlos.

Most of my questions have been answered.

But could you maybe give us an update on how the acquisition of the RightThing is going, and how that's fitting in, and how you maybe expect that to move down market if at all?

It is actually quite early to make any pronouncements.

But, so no surprises.

No negative surprises so far.

Positive surprises in terms of the culture, or fit, if you will, in the sense that the leadership team of the RightThing has been incredibly positive and supportive.

As you know, the leader of that business is remaining the leader of that Business with ADP.

And what we think is a category that helps us grow into more of a human capital management provider by providing some recruitment process outsourcing.

So I think it's really an extension for us in terms of our product set.

And again, with the benefit of only a few months or several months, it is hard to make any kind of conclusions other than to say that there have really been no negative surprises; and I think we're very happy with the management team, with their level of enthusiasm, and with the way that they're integrating themselves into our National Account organization and the National Account sales force.

Because, ultimately, one of the big synergy points that we think we're going to have is distribution in that business.

But the management team is seasoned.

They're quite knowledgeable about their business.

And we're excited to have them on board.

Thanks very much.

Matt O'Neill with CLSA.

This is Matt on the line for Craig Moore.

Just was hoping to get a update, sort of taking a step back on the small business environment and what you guys are seeing there.

And maybe if you could just talk to software as a service and how that might be impacting the competitive landscape going forward?

That would be appreciated.

Thanks.

Well, I think that from a small business market standpoint, I think we see the same -- we have obviously retention figures.

And we have pays per control figures and we have lots of data.

But we also see the same things that you all see, which is NFIB surveys and other surveys of confidence in small businesses -- which impacts business formation, which has an impact on us, and also impacts, to some extent, the level of bankruptcies, which also affect our retention rates.

So I think the environment to us feels consistently better than it did in '08 and '09, as reflected in our retention rates, which are impacted also by better service delivery.

But clearly in that space in small business, also we're impacted by the number of bankruptcies and out-of-business.

So we are seeing no negative, if you will, in the small business markets in the numbers that we're seeing.

So we feel good about the environment in general.

And I think you had a second?

What was the second part of your question, I'm sorry?

Yes it was just regarding software as a service, and how that is playing into the competitive landscape on the small business side?

Right.

So RUN is a software as a service.

And again, I like to think that software as a service -- it has the word service, but many of the software as a service providers merely distribute software over the Internet, which is not really providing service.

So, ironically, we think that we are the actual software as a service provider.

Because we are providing software over the Web.

It is resident on our servers and not on the clients'.

So I think it's the same business model as what you all hear about software as a service.

But we really put the service in SaaS.

But we do solve problems for clients and we do take issues and resolve them on the tax side or on the payroll side.

And I think that is where our differentiation comes in.

But we are a SaaS provider in the small business market.

Great.

Thank you.

Ashwin Shirvaikar, Citigroup

Thank you.

And congratulations from me as well, Carlos.

You provided a lot of good data on the sales front.

I guess my question really is about the conversion of business sales to revenues.

Once you sign the contract, are you seeing any change in the historical pattern or clients changing the pace of implementation in any of the geographies?

Well, I think I will make a general comment.

Because I'm not sure that I have specifics by (technical difficulty).

But generally speaking, what we call our starts which is -- versus our sales, our sales dollars -- our starts are clients who actually started their first processing.

The growth in our starts, year-over-year, is consistent or better than our sales growth.

So I think that would be an indication that, overall, for all of Employer Services, we are not having an issue with clients or us slowing down implementations.

Having said that, I do want to again thank and congratulate our service and implementation organization, because this is a very difficult time of the year for them.

And to accomplish that and to accomplish the level of starts that they've had, is no small feat.

So we, I think, are pleased with the efforts that we have made, and we don't see clients delaying in the [FBS] and Major Accounts space.

We don't see any issues around delays, either on our part or the client's part.

In GlobalView and in National Accounts, in '08 and '09, we experienced some deterioration in our starts as a result of client cancellations or delays.

And that has been abating.

But there is still some of it, particularly in our GlobalView space.

Okay.

That's useful.

And margin take down, at a lower rate of margin growth, and in ES because of the sales investment -- but we don't have corresponding entries in revenue -- I guess is that because of the divestiture of the changed sales arrangement, partially?

And we'll see the revenue impact in fiscal '13, I guess?

I think some of it is just timing.

It is really not -- the acquisition -- the divestiture certainly doesn't help.

But it's really not meaningful in the quarter.

I think it's really just a timing issue.

Because, again, the sales results -- we are a recurring revenue business.

So sales are the annual value of our sale.

And we recognize those revenues monthly, quarterly, as time goes on.

So I think this is a natural part of our business model, that there is, I think, a lag from when you see the revenue show up when sales turn up.

Exactly.

Okay.

And if I may squeak in a third quick question -- the buybacks ticked down sharply 2Q.

Is there any particular reason?

Or -- let me just leave it there.

If you can comment on that.

No particular reason other than we flex that with acquisitions.

So we obviously did a number of acquisitions in 2Q.

If you look at the year-to-date share buybacks, they are still fairly substantial at over $300 million.

So it can be a little bit lumpy there, too, depending on acquisitions that we are about to do or the ones that are in the pipeline, et cetera.

So it was more that.

But at $300 million year-to-date, that is pretty consistent with what we've seen in the past, if not a little bit higher.

And, as we say, we're committed to being at least what we see in dilution, and we're probably double in terms of number of shares purchased versus the amount that was dilutive from option exercises.

So the $300 million is pretty healthy, I think.

And that's about it.

Okay, great.

Thank you, guys.

Mark Marcon, Robert W.

Baird

Good morning.

I'm wondering with the -- from a longer-term perspective -- with the increased emphasis on innovation and improving the products and shorter product cycles, is there going to be any departure, or should we anticipate a departure relative to the five-year plan that was outlined in March and reiterated in London recently?

So again, if I think if you see a departure it would be more around communication and emphasis.

Because I was part of putting together that five-year -- that five-point plan.

I was part of that management team.

So I think any adjustments you see will be, again, around emphasis and not around wholesale shifts in strategy or business model.

So again, that's really, I think, all that's appropriate for me to say.

Because this is my second month in the job.

And when and if we have adjustments or revisions to our strategy, we would obviously communicate those openly with everyone.

And I think, Mark, the takeaway you should have is -- we've had some real good success in seeing the fruits of the investments in technology with RUN, Workforce Now.

It works.

You see it.

It is not like this is a change in emphasis.

But it's a continuation and maybe a little bit more emphasis.

So I don't think it is a dramatic change from where we've been.

And, you know, it's clear, when you have really good products, like what we've seen with RUN and Workforce Now, it's -- put that with a great sales and distribution group and a great service group, and it's a real winning combination.

And we just intend to keep that going.

Absolutely.

I was just wondering whether or not from a very specific perspective if there any implications for the longer-term plan in terms of 50 basis points of margin expansion on the ES side, or if there is a little bit of a trade-off in terms of potentially innovating the products, maybe getting faster revenue growth, but maybe slower margin improvement?

Not right now.

There is no update that we have to that guidance.

Okay, great.

And then as a follow-up, is there an anticipation that there could be any other large clients that could end up leaving?

And how should we think about the reported client retention over the next three quarters?

Is that one large client going to basically be a headwind that we're going to have to adjust for in terms of our expectations?

So again, somewhat -- sometimes you have to wonder whether you should even bring up some of these things.

This is a very unusual -- we typically would not mention this or focus on it.

But it was so unusual, both because of its size and because of the product that it was, and where it came from -- from an acquisition and a legacy platform of the acquisition -- that we thought it was worth mentioning.

So our intention of mentioning it was to emphasize that it was one-time in nature.

So no, we don't have any other large client losses of the same magnitude that we're aware of today.

As you know, things can change and things can happen.

But I think we were trying to really send a message that we're comfortable and confident with our current forecast or the updated forecast on our retention, and trying to does give some color around what happened in the quarter.

Because the way we calculate losses, it had an outside impact in the quarter, and we just wanted to help provide some clarity on that.

It was not something that was unanticipated.

And it was actually in our plan that it would be a loss this year.

We just didn't know was it going to be in the first quarter, second quarter, third quarter, fourth quarter.

Actually, as Carlos and, as you calculate that impact, it's over the second quarter.

So you look at that comparison.

It has more of an impact when it happens earlier in the year.

And so it's not as much of a drag for the full year.

But, you know, some of these things do happen.

And we don't have 100% retention.

And this was one that we thought we'd call out.

But really, no change to how we think about retention for the year.

I fully appreciate that for the last couple of years, retention metrics have been improving nicely, partially because of the economy improving and partially because of the service improvements that you have put in place.

So this was an outlier.

I just wasn't sure in terms of what the implications were when you report the same metric coming up in the next two quarters -- whether it's just something we should take into account, so that if we're down in terms of the way that you report the retention in the third and fourth quarters, we should all just recognize that it's all due to this one single element, which is an outlier.

We are not giving anything.

We have told you, and if you think back to what we said in the past, we are at historical highs.

We're thrilled with that, but we expect that to be able to get a little bit better each year.

And we're still looking at the same for this year.

Perfect.

Thank you.

Now this is a quarter -- it really isn't the second quarter, and what happened isn't that meaningful.

It's this quarter that's more meaningful from a retention standpoint.

As in the third quarter, you mean.

Third quarter.

Got it.

Thank you.

Nathan Rozof, Morgan Stanley

Thanks for taking my question.

And Carlos, congratulations from us here, as well, on your recent promotion.

Thank you.

The question I have for you is -- ADP has been referencing reluctance to commit at the high-end of the market for, I guess, a few quarters now.

And yet you saw some really pretty healthy improvement in terms of sales this quarter.

So the question I have for you is, do you think that reluctance was in some way driven by the calendar year budgeting season of your clients?

And will we see that reluctance start to fade as 2012 budgets get firmed up?

And related to that, what is the takeaway, or what are you seeing from your clients' spending expectations for calendar year '12?

What I would say is that, as much as this seems obvious, one quarter is not a trend in the high end of the market.

And some improvement in our GlobalView sales, I think, is also not something to be interpreted as a trend.

Some of these sales that we've closed have been in process literally for multiple years.

And they happened to close on a particular quarter.

So I think our sense comes from talking to our sales force, talking to our sales leaders, and we can't help but be influenced also by what we see around us.

So when you look at other large companies who are selling into the enterprise space, I think that we are consistent.

Our view and our feeling on the high end of the market is not inconsistent with what we're seeing and hearing in some other companies.

And obviously that varies by industry.

But generally speaking, I think large companies are still cautious in their spending.

You can look at it, and we have surveys around from the BRT that show CEO willingness to invest in capital expenditures.

Our solutions aren't necessarily capital expenditures in buildings.

But they are large investments and large commitments that typically requires CEO or CFO sign-off.

And I think it's safe to say that with the clouds in Europe and some of the other kind of uncertainty, whether it's political or otherwise, I think is causing some reluctance in the high end of the market.

Okay, thank you for that.

And then for my one follow-up question -- to switch gears briefly to the margin questions that have been going throughout this call -- I wanted to ask, in terms of the selling and implementation costs, particularly the implementation costs that relate to your newer products like RUN and Vantage -- should we expect that on a per client basis?

That implementation costs would go down as the mix shifts towards those new products?

Thank you.

At the risk of getting to the weeds, only because I had this conversation last week with someone -- the cost of implementation for RUN on a per unit basis is lower.

So we're happy about that.

But that's now two years plus after the rollout of the product.

I think on Vantage, it's safe to say that the cost of implementation on a per unit basis will actually be higher in the short term; but of course, our expectation is that it will be lower over the long term.

But it is going to take a while.

Thank you.

Michael Baker with Raymond James.

Thanks a lot.

I was wondering if you could update us as to how some of the newer products are doing with respect to penetrating the in-house market?

Maybe that's best given in terms of whether or not you are seeing a shift in mix.

In terms of your new sales, as it relates to competitive takeaways from other outsource partners versus moving into the in-source market?

We tend to look more at our competition against other outsourcers because what we looked at -- over the last decade or so, the data is fairly consistent that people tend to switch within their category.

So, for example, someone who is outsourcing tends to switch from one outsourcer to another.

And people that are in-house tend to stay in-house.

Having said that, clearly one of our biggest market opportunities is penetrating the in-house.

I don't think that we have -- fortunately or unfortunately, depending on how look at it -- any news to report on any major shifts in terms of our win rate against the in-house market.

I think products like Vantage and RUN and Workforce Now are intended to help, because they look and feel more like an in-house and give more control to the client and to the marketplace.

But we still tend to be the most successful against -- with a client or with a prospect who is comfortable switching within their own category.

So at this point, it doesn't appear as though some of those cloud technologies are really making a meaningful penetration in the in-house?

But stay tuned?

I would stay tuned.

And I'm not ready to say it's not making a meaningful impact.

I'm just not ready to get into -- to provide I guess the --

The market is so large.

It takes a long time for those kinds of shifts to happen in a meaningful way.

And so it is too early to call that one.

I appreciate the update.

Thanks.

I will turn the call back to Carlos Rodriguez for any closing remarks.

I appreciate it very much.

Thanks to everyone for calling in.

Thanks everyone.

This concludes a ADP's second quarter fiscal 2012 earnings call.