自動資料處理 (ADP) 2012 Q3 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 the ADP third-quarter fiscal 2012 earning webcast.

I would like to inform you that this conference is being recorded.

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

(Operator Instructions) I will now turn the conference over to Ms. Elena Charles, Vice President, Investor Relations.

Please go ahead.

Thank you.

I 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 third-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 www.ADP.com.

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

These schedules have been updated to include the third 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 risks.

And these are discussed on page 2 of the slide presentation and in our periodic filings with the SEC.

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

Thank you, Elena.

Good morning, and thank you for joining us.

I'll begin today's call with some opening remarks about our third-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'll return to provide you with our updated fiscal 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 third quarter of fiscal 2012.

Total revenues grew nicely at 7% for the quarter and our key business metrics continued to be strong.

Starting with Employer Services and PEO services new business sales, and pleased with our sales execution, which drove 12% new business sales growth in the quarter for Employer Services and PEO services combined.

Sales growth was strong for small business services, the PEO, and added value services, and major accounts also posted good sales results.

The high end national accounts market in the US continues to be somewhat challenging, though we have seen good sales growth from the recruitment process, outsourcing acquisition that we made to enhance our HR BPO solutions in this market.

Looking at sales in our Employer Services international space, ES international best of breed sales growth was strong in the quarter, but mixed by country, as the economic pressures continued, especially in Western Europe.

Sales in both Canada and Brazil were strong.

Global View sales were down year-over-year, primarily due to a large sale in last year's third quarter.

Moving on from sales, the number of employees on our clients' payrolls as measured by pays per control, client balances, and revenue retention, all increased during the quarter.

As you know, the absolute value of our revenue retention is quite high.

And I'm very pleased there was a 10-basis point improvement in this important metric during the fiscal third quarter, which is a particularly critical period.

On the acquisition front, we closed one transaction since our last update.

We acquired the human resource solutions subsidiary of SHPS, a provider of benefits administration services for larger US companies, including eligibility enrollment, spending accounts, Cobra, absence management solutions, and benefits advocacy.

This acquisition significantly expands our capabilities with the addition of health savings account and health reimbursement account administration.

Moving on to Dealer Services, the outlook for the automotive landscape in North America is good, as the market forecast per calendar year 2012 vehicle sales continues to improve.

Dealer Services sales growth was also solid.

We're making market share gains and worldwide revenue retention increased for the quarter.

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 $2.9 billion, 6% organic in the quarter.

Revenue growth included a slight drag of about half a percentage point from unfavorable foreign exchange rates.

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

Employer Services grew total revenues 7%, 6% organic.

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

Same-store pays per control in Employer Services in the US was quite strong, with an increase of 3.3%.

However, same-store pays per control across Europe declined compared with the year ago, due to the economic pressures Carlos mentioned earlier.

Growth in average client fund balances increased 5% for the quarter, driven by new client growth, especially in small business services, growth in stand-alone tax filings, and increased pays per control.

This growth slowed from the 6% year-over-year growth in the second quarter, primarily due to the expected smaller contribution from state unemployment insurance as the second-quarter growth benefited from the 2011 calendar year increases.

The PEO strong revenue growth continued with 15% growth during the quarter, all organic.

Average work site employees grew 11% during the quarter to about 260,000.

Dealer Services revenues also grew nicely in the quarter, with 7% growth, 6% organic, and Dealer Services is benefiting from strength in the North American automotive market, where we continue to benefit from increased transaction activity.

Dealer Services win rates are solid.

We are further penetrating our base with layered applications and client revenue retention improved year-over-year.

The continued weakness across Europe is something we are keeping an eye on for Dealer, but we are seeing continued strength in Asia's luxury brand market, which is where we primarily play in Asia.

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

Pretax earnings increased 5%.

I'm sure you noticed in today's release that systems development and programming expenses are down as a percentage of revenues.

The amount of expenses capitalized during the quarter increased as a result of increased spend on large projects related to product innovation.

The quarter also included a charge of nearly $25 million in cost reduction initiatives to align our business structure with the softer business environment we are seeing in Europe.

Now, looking at the pretax margin, ADP's pretax margin declined 40 basis points, excluding a drag of about 40 basis points from acquisitions, pretax margin was about flat.

And if you further exclude the 90 basis points from the decline in high margin client fund interest, it was very positive margin expansion in the quarter in the core business.

Moving next to net earnings, we reported a 7% increase, which benefited from a lower effective tax rate in the quarter.

Diluted earnings per share increased 8% and benefited from fewer shares outstanding compared to last year's third quarter.

We repurchased 8.9 million ADP shares fiscal year to date for a total cost of about $445 million.

Our cash and marketable securities position was strong at $1.8 billion at the end of the quarter.

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

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

Fully consistent with these objectives, we are again able to take advantage of the supply of new investment grade corporate fixed income securities and add more highly rated corporate bonds to our portfolio.

At March 31, approximately 85% of our fixed income portfolio was invested in AAA, AA-rated securities, consistent with the past eight quarters.

In addition, as has been the case over the recent past, the yield curve continue to present greater opportunities at the longer end of the maturity curve in both the extended and long portfolios.

As such, the duration of the portfolio increased slightly to 3.2 years at the end of the third quarter.

We continue to base the interest assumptions in our forecast on fed funds futures contracts, and the forward yield curves of 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 yield curve, or the new bond issuance behavior of corporations.

I'll also remind you that up to 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 continue to 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.

It's also important to keep in mind that while average client balances have grown 7% year-to-date, I'll remind you as I did last quarter, that growth was very strong in the last fiscal year's second half, in large part due to the January 1, 2011 increases in state unemployment tax rates, which have not recurred to the same extent this year.

Therefore, we anticipate a tough balance growth comparison in the fourth quarter 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 2011.

We anticipate a slightly smaller year-over-year decline in client fund interest of $45 million to $50 million, and 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 $55 million for fiscal 2012.

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

Now, I'll turn it back to Carlos to take you through the remainder of the forecast for fiscal 2012.

Thank you, Chris.

We're now on slide 8. As you can see, our performance has been solid.

We do expect continued pressure on earnings and margins from a continued low interest rate environment.

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

Now, to the forecast.

Our forecast continued to exclude the gain realized in the second quarter on the sale of assets, as well as the related lost revenue and profit streams, which were anticipated to be about $0.02 in lost earnings per share for the remainder of the year, from the time of the sale.

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

I also want to remind you that we anticipate that the impact on revenues from foreign exchange rates will be up to 1.5 points unfavorable during the fourth fiscal quarter, but will be about neutral for the full year.

The euro today is hovering around $1.30, whereas this time last year, the euro had started to increase and was over $1.40 by the end of last fiscal year.

As you know, movement in FX rate is not as impactful to pretax earnings.

We continue to anticipate 8% to 9% growth in diluted earnings per share, compared with $2.52 in fiscal 2011.

We expect an effective tax rate of about 35% for the fourth quarter.

Our effective tax rate in March is about 34.5%, and we anticipate ending the year with an effective tax rate below 35%.

However, our forecast also contemplates pressures in the fourth quarter related to the additional impact from the SHPS acquisition, which was completed after the third quarter close, as well as our sales over hires as we gear up for fiscal 2013.

We also anticipate a decline of $50 million to $55 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 margins.

Pretax earnings related to the client funds strategy are down about $35 million year-to-date, so another $15 million to $20 million decline is expected to occur in the fourth quarter and will be a significant drag on total pretax margins.

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

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

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 that the pretax margin will be flat with last year compared with our prior forecast of 30 basis points expansion, primarily due to the impact of the acquisition close since our last update.

We anticipate an increase in our pace control metric in the US of 2.5% to 3% compared with our prior estimate of about 2.5% increase.

We continue to anticipate about 17% revenue growth for PEO services, with a slight pretax margin expansion.

We continue to 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 2011.

And for Dealer Services, we continue to anticipate 9% to 10% revenue growth, with at least 50 basis points of pretax expansion.

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

We're very pleased with ADP's third-quarter results and are on track to achieve our full-year forecast.

Growing new business sales is the key to driving future organic revenue growth, and I am pleased with our execution in this area.

We are investing in distribution by hiring additional sales associates going into next year, and as you have heard me say before, that a top priority of mine is to give the best, most innovative products to our excellent sales force.

And we are focused on doing just that, with innovative internal development and through acquisitions that complement our existing solutions.

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 Moody's reaffirming this past December and S&P reaffirming just over a month ago in March.

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

I believe we are doing the right things to grow the business long-term and I am proud of what the organization has been able to accomplish this year.

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

(Operator Instructions) David Togut, Evercore Partners.

Thank you.

Good morning, Carlos and Chris.

Good morning, David.

Good morning.

Could you provide a little bit more insight into new sales trends within national accounts in the US, and more specifically, what were bookings like for your new Vantage HCM product?

We have right now a little under a dozen clients that we have on the books.

We have less than half of that that are actually in implementation and we have a few that have actually started.

And when you think about the timing of when Vantage was rolled out at the HR tech conference in October and you think about sales cycles in this space, we're pretty, pretty pleased with the progress so far.

And then could you provide some insight into January sales trends in particular, which typically are critical for the sales season overall and in the year ahead?

Well, I think as you saw from the sales results for the quarter, which obviously include January, you know, based on my remarks, we're pretty pleased with the outcomes.

We've had good results in all of our core businesses.

In fact, probably to quote the comments we made in the opening statement, they were strong results.

The national accounts space was the only place excluding the sales that we got from The Right Thing acquisition, was the only place where we saw I think continued softness.

But very, very pleased with the results in our core businesses, as well as some of the ancillary products that we sell that are additions to the payroll solutions.

Just final question for me, any competitive issues in national accounts in the US that you're focused on improving?

Well, I think, I think Vantage is I think our response to what is obviously a changing landscape.

So Vantage not only has a new and better user interface to make it easier to do business with ADP, but it really is single-database solution that integrates all of the core products.

So I think our intention was to have Vantage really be our next generation solution in the national account space and we're very optimistic about where that positions us in the marketplace, especially when you think about the breadth of the offering that we'll have now in comparison to our competition in that space.

I think the new user experience, along with true unified integration or true unification, if you will, of the database I think will really create a real competitive differentiation for us.

Thank you very much.

Thanks, David.

Nathan Rozof, Morgan Stanley.

Good morning.

Thank you for taking my question.

I wanted to dig in a little bit more to the pays for control numbers since that was obviously a key positive this quarter.

Specifically, given the increased guidance, I was wondering if you could give us any differences in trend by customer segment or client size that may not be obvious from the top line number.

They were all up, both industry-wide, you know, all the industries continue to be positive with the exception of public administration, which probably no big surprise.

And geographically, all the geographies were up, some more than others.

We saw Texas-Oklahoma, for example, growing particularly fast, you know, that eastern seaboard still a little bit slower, particularly down in that Philadelphia-South Jersey.

But all very positive.

And as you say, the pays for control across the board were very strong for the quarter.

Thank you very much.

And then for a follow-up question, I believe you mentioned that Global View sales would have been up excluding the impact of a large sale last year.

Can you provide us any more color there, or what the growth rate would be ex that large sale last year?

Well, there would be -- it would be strong, and we don't actually give the specific sales growth numbers, but we had a big sale in that prior quarter.

I think we mentioned it, if you go back to the record for the third quarter of last year, it was a pretty good project and it's still on track.

So, you know, we were very pleased with the Global View sales results for the quarter.

Thank you.

James Kissane, Credit Suisse.

Good job, guys.

Good morning, James.

Just a question on the European sales.

You said it was kind of weak.

Maybe a little more color.

Was it weak across the board?

And just a follow-up to that, maybe be a little more specific on the European pays per control.

Actually on the sales, on the overall international sales were strong.

I think to the point we made is Canada and Brazil were particularly strong, and we saw some more softness in Europe proper, central Europe, so to speak.

The pace per control, while they were relatively flat in previous quarters, took a dip down a little bit in the third quarter, again, probably no great surprise to anyone.

I think it's important to note that even though the sales in Europe were not as strong as other parts of our business, we don't want you to get the impression either that they were down significantly, because they were not.

So it's actually quite I guess comforting that so far, our sales execution in Europe has been very good under the circumstances and we're, I would call it holding our own.

But a very difficult situation obviously, because of a lot of the uncertainty.

So I think our sales organization is doing a terrific job of trying to hold on to what I would call decent sales results.

Right, and maybe can you give us an update on the pricing environment generally across the different products, as well as maybe more specifically in the small business arena?

Thanks.

Yes, the -- you know, the critical new pricing time, as you know, Jim, is in the beginning of our fiscal year.

So that's well behind us.

And, you know, we got what we traditionally have gotten over the last couple years and, you know, we had, you know, a net of about 1% or thereabouts increase.

In terms of what we're seeing in the market, there's nothing remarkable to report in terms of, you know, pricing deal by deal.

I don't think there's anything to point out there, nothing special.

Perfect.

Thank you.

Jason Kupferberg, Jefferies.

Okay, thanks, guys.

I just wanted to clarify.

Did you mention that there was a $25 million charge in the quarter for the European business?

Did I catch that right?

Yes, you did.

We do take restructuring charges from time to time.

It's really kind of just the pruning of the business that you would expect in order to drive efficiencies, and we did take that in the third quarter.

But it's, you know, really a combination of a number of things.

You're right, that the bulk of it was international.

It does include some M&A synergies.

We've done a couple of acquisitions internationally.

We've got some building consolidations and the like.

But the real impact to that is going to be next year because of long lead times when you take charges like that in Europe.

But think about it as more charges to continuously improve process efficiency.

Can you give us a rough sense of what percent of your European head count was affected?

No, it wasn't--

It was very, very small.

This is small pruning.

Okay.

Because of the waste we want to make sure we don't alarm anyone.

Based on the way -- the rules and laws work in Europe, this would be a relatively small number of people because the cost of restructuring in Europe is relative -- is very high on a per head basis, if you will.

And so this is a relatively small group and it's to, again, make what I'm calling modest adjustment to our cost structure for what is obviously a slower environment in Europe.

This is not again, our sales are still holding up in a decent way, so this is not a dramatic downsizing of any of our businesses in Europe.

Okay.

That's really helpful.

And then can you just talk about how all the influx of all the new products that you've introduced over the past, you know, 12 to 24 months, has that had a positive impact on your sales force turnover, or any metrics you can give us there?

I think we'll let Chris kind of scramble for the turnover figures, but I can tell you that to me, the most important metric is the sales results themselves.

And clearly, turnover is a factor in that.

We need to have stability and lower turnover in order to drive good sales results.

But the sales results do speak for themselves in a sense that where we have rolled out new products, we are having better results.

And of course whether that's cause and effect is -- there is no scientific evidence.

But the sales force teams are very excited and very positive about getting new products and new solutions.

We're also doing other things to help our sales force, giving them new tools, like for example, giving them the ability to use electronic sales order rather than paper.

Doing a number of things to make their jobs easier and to increase productivity.

But I think the sales results themselves I think are the best indication of our -- the soundness of the strategy of trying to drive additional productivity by focusing on product enhancements.

Yes, I think -- I would say a few things on that.

Clearly, the new product innovations, such as running Workforce Now, get the sales force jazzed up and that helps significantly drive new sales.

Some of our turnover is, you know, directed turnover, you know, culling out the bottom performers and that thing.

So when we look at the turnover of the head count and sales, there's nothing really out of trend or nothing remarkable to point out.

What I would point out, however, is that our head count grew in the area of about 5% to 6% overall.

Which when you look at 12% kind of growth in sales, you know, says that there's 6% to 7% improvement in productivity, and that's particularly strong.

So we are very, very pleased with that metric.

Okay, and just last for me, I know longer term you guys have talked about the five-year organic revenue growth CAGR of 8% to 10%, and I guess technically we're finishing up year one of that and you're sort of around maybe the lower end of that range.

Maybe can you guys just comment on your comfort level with that five-year outlook?

I know, Carlos, you technically inherited that from Gary, but I'm sure you were part of the process in setting that target.

Just as you look at the outlook for employment, and rates, and dealer, because it does seem like the fed is saying hikes are still a couple of years away.

So anything you can share on that front?

Well, I think we are obviously intending in May to -- I guess providing updates.

This is probably not the right forum to have that discussion, but in May, we'll be happy to have that discussion.

I can say that clearly, I was part of the communication with Gary as I was part of the management team and we do believe that that is the long-term potential of the Company.

As you know, and you just mentioned, when we made that, those statements, interest rates were in a very different place and the trend and the forecast from the futures markets, if you will, the forward curves, was very different than it is today.

It's hard to believe, but rates are significantly lower than they were, at least the rates that affect us are significantly lower than they were in May of last year, which no one would have ever thought possible.

That's exactly what happened.

So clearly, in the short-term, and I think Chris will probably provide more detail in May, in the short-term, that does put pressure on us, not only on margins, but also obviously on our revenue growth as well.

All right.

Okay.

We'll wait for the analyst meeting I guess then.

Thank you.

(Operator Instructions) Gary Bisbee, Barclays Capital.

Hi, guys.

Good morning.

Can you just quantify how big this SHPS acquisition was?

And I know you've talked in the past as you've done these acquisitions in the HR area that scalability remains key.

You want them to have the ability to scale and have a margin profile close to the core business.

Is that -- does this acquisition fit that thought process?

Thanks.

I think that this acquisition -- I think first of all, I believe it's about $80 million in annualized revenue.

This was really what I would call, not sure if this is a term of art or not, but a product acquisition, in the sense that we had some gaps in our offering, that we believe were important to fill in order to make us competitive in the benefits administration space.

Specifically, I mentioned HSAs and HRAs, but also absence management.

For the typical buyer today, whether it's in benefits or in HR payroll, is typically looking for a broader solution set than just a single solution.

And what we were finding is in the benefits administration space, we were having trouble winning deals in the core benefits admin business without really having a competitive spending accounts product or an absence management product.

And so this was really intended to further strengthen, if you will, our existing base and we're going to take those two products, those two or three products from SHPS and those will become the go-forward platforms.

And then the rest of the products will be consolidated into our existing portfolio and we'll move forward with hopefully a broader, more competitive product set and benefits.

Okay, great.

And the quick follow-up, can you give us a sense how much of the new sales growth in recent quarters is products that you've acquired in the last two to three years versus organically developed products or sort of more legacy products in the payroll and tax side?

Yes Gary, if you look at the 12% that we're forecasting for the year, it's a couple of points.

Couple of points is the acquisition?

Yes.

Yes, okay, great.

Thanks a lot.

Bryan Keane, Deutsche Bank.

Hi.

Good morning.

Good morning, Bryan.

Good morning.

This is [Ashish Rana] calling on behalf of Bryan Keane.

I was wondering if you could give some more color on the small business trend.

Have you seen any change in the business starts or any change in the comp driven environment and how do you continue to drive sales in that particular segment?

Is it combination of the sales force channels, if you can just provide some more color on that?

One of the -- when we mentioned that we're increasing our spend in the fourth quarter on our -- what we call sales over hires for the next fiscal year, a good bit of that or a good portion of that is actually in the small business space.

Where we really are -- drive a lot of our growth to both feet on the street headcount as well as telesales.

And so in small business, it would seem to be intuitive, but it's important to remember that we have a very large sales force.

So when we add sales people, the total number of sales people we're adding, most of them would end up in a small business space.

So we're obviously doing that because we're confident that there's demand in the marketplace and that we're able to execute with the existing management infrastructure that we have, and so we're hopeful to be able to continue I think the positive trends we've had, of being able to drive good sales in that space with our new run product, as well as some bank partnerships that we have been able to establish through what's always been for us a very strong channel, which is our bank partners.

Okay, thanks.

And one quick follow-up on the PEO.

The PEO guidance that just you see some acceleration in year-over-year growth for the PEO revenues in the fourth quarter.

I was just wondering if you could give more color on what is driving that improvement and year-over-year growth in the fourth quarter for PEO revenues.

I'm sorry, Ashish.

We would -- we were troubled with the question.

Are you asking about the PEO?

Yes, that's right.

Okay, and so just could you restate the question?

Yes, my question was that the PEO revenues were up 16% for the first nine months and you have guided to 17%, which would indicate that you'll see some improvement in the year-over-year growth in the fourth quarter from 15% to maybe like 18% to 19%.

And I was wondering if you could highlight the growth drivers for the PEO.

We've seen good, strong growth, as you've said throughout the year.

Some of that has to do with when you look at where we were to come out for the full year, as some of the pass-through revenues.

What I would advise you to look at is more of the growth in our processing revenues or look at the proxy metric that we use with work site employees.

And if you look at that, that continues to be strong throughout.

So this quarter, we were up 11% to about 260,000 work site employees.

We're very happy with the continued strength in the PEO.

I think it is, I think I would just point out that there's really nothing that is expected to happen in the fourth quarter to have a material change in the growth trajectory of the PEO.

The PEO is growing quite nicely right now, so there may be some issues in terms of cutoffs or pass-throughs, as Chris was saying.

We tend to do in June our open enrollment for our benefits plans, so sometimes at least to the slightly higher rates for the clients and that's included as part of our building, so that may have a little bit to do with that number, but that doesn't really change pretax margin for us or drive any kind of profit.

So I would tell you that it's steady as she goes in the PEO.

And the nature of that business is such that there's really nothing happening in the fourth quarter other than open enrollment that would lead one to believe that there's a major change in the growth trajectory.

Okay, thanks.

Glenn Greene, Oppenheimer.

Thank you.

Good morning.

Just a couple questions left for me but maybe a little bit of color on the retention trends by segment, in particular, the small business.

Sort of what are you seeing there in small business?

You know, retention is quite strong, and it's -- I don't know that I have the historicals by the [you] but there are several business units and I think SPF may be one of them where we are at an historical high in terms of our client retention.

We're very pleased with that.

It does ebb and flow, so it goes up and down.

But on a year-to-date basis, we're quite happy with the progress.

I think in small business, there's slight improvement over the previous year and when you reach these levels of retention, any kind of improvement is quite satisfying, because, you know, we're at pretty high levels right now.

Are you seeing an alleviation of sort of the bankruptcy headwind, which I know has been a problem for the last two or three years?

Yes, but I don't know that it would be fair to say that that happened in the last quarter.

I think there's some continuing improvements in some trends in small business.

But, you know, that, that's kind of already I think behind us in terms of -- if you recall, and it's in our actual, in our press release in the statistics and the metrics, that in the last year, the year-over-year improvement in retention was significantly high.

So I believe it was 190 basis points, if I'm not mistaken, for last year's third quarter over the previous year's third quarter.

So that's really where you had the big improvements in terms of some of the economically-driven factors that helped drive improved retention.

Some -- most of that is really behind us and now it's, you know, you got to continue to improve service, you got to continue to improve ease of use, you have to be competitive.

It's good old traditional in the trenches competition.

Okay.

That said, the retention rate as you know is very high, all-time high across -- in total.

And you see that pretty much across the board.

There's no one that was driving that any more than the others.

They are all very strong, which is great.

All right, and Chris, I think I'll try this on the sales side.

Not to get too specific, but any way to sort of frame the order of magnitude of the sales growth across segment?

I mean, was small and majors kind of in the low double digits and national close to flat?

I mean, just trying to get some directional--

We tried to give a little bit of that.

You know, SBS and our PEO and ABS were very strong for the quarter.

So think double-digit kind of strength.

Majors had a bit of a tough compare against the strong prior quarter, prior year, but it's very strong year-to-date and so, you know, we're very happy with majors over the course and the forecast would have them very strong as well.

National accounts, again, is getting some help from the recent acquisition of The Right Thing.

But as we said in our comments, it's not quite as strong.

It's still growing, but not quite as strong as the others.

And if I can add one thing, I think obviously Chris is right, that we're very pleased with the performance across the board, but at the risk of playing favorites, it's important to note that our major account sales force is really performing very, very well this year and we couldn't be happier, because that is a core business for us, where it's important for us to drive new business or to be able to grow what is obviously one of our more profitable businesses.

It also happens to create an opportunity for us to sell additional product and services attached to that Workforce Now platform.

So our ability to generate new unit growth in that major account space this year, I believe is one of the highlights of the year for us from a sales standpoint.

And although you haven't asked, I'm sure somebody will.

I mean, we're at May 1 now.

We have some preliminary view of our April sales results and I would say, reiterate the fact that majors was particularly strong in April as well.

And what I would say is that the strong growth that we saw in Q3, coupled with what we've seen in April, make us very confident in our full-year guidance of about 12%.

Great.

Thanks for the color.

Appreciate it.

Rod Bourgeois, Sanford Bernstein.

Good morning, Rod.

Hey guys.

Great.

Couple questions here.

Is there any issue with pipeline drain?

You've had two, I guess what I would call above-normal bookings growth quarters in a row.

I'm encouraged, Chris, by your comments about what's happening with majors, as you move into the month of April.

But as you look forward and you enter next fiscal year, I mean, after these two strong bookings quarters, is there a bit of a bubble in the pipeline that will create some weakness, or is the pipeline strong and steady?

Well, my experience, since I've been with ADP, is that when you are in a position that you're in at this point in the year, and the fiscal year ends I'll remind you on June 30, it's very, very unlikely that we will experience any sort of drain or any sort of slowdown.

It's possible obviously.

Could be factors outside of our control that make that not the case.

But we have very, very strong incentives in place for a very strong finish for the fiscal year.

So frankly, I right now, and my leadership team and our sales leader, will be very focused on first quarter of next year and making sure that we get off to a strong start to prevent exactly what you're describing, which is a drain of the pipeline in the fourth quarter going into the first quarter.

But we're not -- I'm not overly concerned about the fourth quarter, in part because of what Chris just said, which is one third of our quarter, we have the ability to and it was quite strong in April.

I would also say a couple things, Rod.

You know, obviously our long-term goal for sales growth is still in that 8% to 10% kind of range.

So, you know, I think we exceeded that this year and we did get a little bit of a lift from acquisitions, as I mentioned on a previous question.

But particularly, I'm pleased with the products that we have.

We'll talk a lot more about some those innovations at the May conference.

But across each of the major market segments, we've got new products so run is still doing really well in the small business space coupled with some of the mobile innovations that we're coming out with and in the mid-market, Workforce Now is really taking hold.

We'll have new versions of Workforce Now coming out in July.

We'll talk more about that and give some product demos in May, and then obviously Vantage in the national account space.

So I think that really helps drive the market as well and get the sales people excited.

So I'm not particularly troubled by pipeline drain.

Excellent.

Just in keeping with that, are there any extra investments planned for your June quarter, just to get you prepared for fiscal '13?

Anything noteworthy in the sales force or either in the new product development area?

I mean, as you stated, you have new products that you rolled out across all of your segments in recent history.

And so I guess the question there related to upcoming investments, are your technology investments going to subside, or are you going to continue to go to the next level with those investments?

So on the sales force and on the technology side, any thoughts on upcoming investments?

Our technology investments are not going to subside.

I think when you look at the environment that we're operating in today, I think we not only need to continue to focus on new product development, but I think the speed with which we need to develop new products and the amount of time that is acceptable in between new product leases has shortened.

And so I think one of the, again, changes in emphasis I think that you'll see that I think started really over the last couple of years is a greater focus by us on product development and we don't intend to have that subside at any time in the near future because we believe that there is a new competitive basis out there and I think product is now important element of our differentiation, our ability to win business in the marketplace.

Having said that, to your question about the fourth quarter, we are adding 200 additional sales people earlier than what would be in the plan right now and that was mentioned in our comments, so that's contemplated in our forecast for the fourth quarter.

We're also, as part of our efforts around innovation, we also believe that innovation requires some rationalization and consolidation of our existing platforms.

We want to not only give our sales force the best and most innovative products, but we want to have all of our clients on our best and most innovative products.

And so we are in the process of pushing forward some migrations in a very careful and methodical way in several of our business units and we've actually have some of that baked into our forecast for the fourth quarter and we hope that that will allow us eventually to shift more of our R&D and development expense into new product innovation, rather than into maintenance as a result of proliferation of platforms or versions of products.

That's wonderful.

Seems like there's a big opportunity or at least a meaningful opportunity on the platform rationalization side, so good luck with that.

Thanks, guys.

Thanks, Rod.

David Grossman, Stifel Nicolaus.

Thanks.

Good morning.

I have a quick question just going back to the acquisition activity.

With that ramping up, can you give us some rough parameters on how you think about the impact on annual revenue growth going forward from acquisitions and then perhaps secondly, help us understand the margin impact.

Are you simply acquiring lower margin businesses, or is there a substantial investment process that's diluting in the margin profile up front?

It depends on the acquisition.

We've actually --a couple of our acquisitions have actually been very good margin businesses.

And obviously, I'm not going to mention which ones versus the others.

But I think it really varies what is almost always the case as we acquire businesses that we, quote unquote, tuck into our existing infrastructure.

We do typically have to make investments up front in areas like infrastructure and security to bring them up to I guess what we would consider to be ADP standards.

There's also typically some integration expenses that take place early in the timeframe of the acquisition after closing.

But I wish I could give you -- we've bought a business in the Dealer Services space, which is completely different from SHPS, which is completely different from the Indian payroll acquisition, so they are all quite different.

But in most cases, they do require some upfront integration and investment expense.

But some of these businesses are actually at quite good margins.

Yes, I think the experience I've had is the biggest mistake you can make is to acquire a company and not invest, integrate, and to bring their product up to where they need to be.

And so we will do that.

That is a part of it.

Biggest part, typically our acquisitions are a drain on margins, not necessarily on bottom line.

And it's because of those investments and some of them tend to be a little bit lower margin businesses, still making money.

Some of the more recent ones, as we implied for the impact on the fourth quarter, for example, SHPS, is both margin and NOI drag, will continue to be.

So for Q4, as well as into next year.

You can see that we've had, you know, the drag this year from margin basis points, for example, in the third quarter to ES it was 90 basis point drag across ADP, it was about a 40-basis point drag.

That's the combination of a couple of things that, you know, obviously we had a lot of acquisitions last year, like $900 million worth of acquisitions.

Typically we only do $300 million to $400 million.

You'll see this year we are in that zone of $300 million to $400 million.

So we're going back to a more normal acquisition level.

We do have the impact of those prior year acquisitions, full-year impact this year hitting us.

So, you know, now we're looking at next year and you can expect to see continued drag from the acquisitions that we did in fiscal year '12 going forward.

But there is going to be some abatement from the fact that we did less acquisitions this year than we did the year before.

So do you have any, you know, data, Chris, perhaps that helps us understand a year later, are these acquisitions of these portfolios seeing accelerated revenue growth and higher margins, so that as you buy more companies, what you bought in the prior year on a year-over-year basis at least offsets some of that impact?

Yes, I think you can see that in the difference between our internal growth and our total growth, and so we are getting some lift.

Now that lapse after the 12 months, but we're particularly pleased with some of the recent acquisitions, for example, Cobalt in the dealer space gave us a nice lift in, in revenue growth, and the Workscape acquisition, for example, AdvancedMD, all of those are giving us some lift in revenue growth.

I think one of the recent ES acquisitions, The Right Thing, which is the RPO business is literally accelerating from what was already a very fast growth rate.

That was a fast growing business when we acquired it, and that's an example of where true synergies are being I think realized from certainly a distribution standpoint.

So that business is not just adding to growth for the 12-month period after we blend it in, but I believe that's additive to the overall growth rate of ADP on a going forward basis.

Okay and just one other thing on the acquisitions.

As you acquire products as you mentioned earlier -- are these products available on a stand-alone basis, or are they being sold in conjunction with payroll primarily?

Well, again, it unfortunately is not a single answer, so as an example, the RPO business, we do sell that product on a stand-alone basis.

The SHPS acquisition where we have spending accounts, FSA products, we would tend to flex towards selling those products as part of a broad benefits offering.

But in some cases, we will sell those products on a stand-alone basis.

We do have some sales people dedicated to individual product lines but it really varies in terms of how much focus and attention we put on the stand-alone products versus selling of the bundled product.

Okay.

Thank you.

Just one other question on the rates, Chris.

If rates stayed flat from where we are today, do you have any sense for when the comparisons in client funds would flatten out or turn positive?

Well, I'll go through that over the next couple years, as I have in the past on the May 25.

So you know that's a long conversation.

What I will tell you is as we look at it, looking at the current forward yield curves, which as Carlos mentioned, are significantly below where they were this time last year, we expect that the drain, the drag -- this year's drag is $50 million to $55 million, as you know, and so when we look at next year, we see at least as much pressure next year, if not a little bit more.

Don't forget, you get the full-year impact of the reinvestments at low new purchase rates this year, get full impact of that next year and you get the full impact of everything next year hitting.

So it's at least as much of a drag.

And, again, that's 90 to 100 basis points of drag, which is significant to overcome.

So, you know, when we look at the margins, when you exclude the acquisitions, we're, you know, relatively flat at the ADP level.

And that's overcoming 90 to 100 basis points of drag from interest rates.

So that's, that's stellar performance in our operating businesses, much higher than what we talk about is the long-term model of 50 basis points over the long-term.

So, you know, we're pushing hard to drive margin improvement to offset some of that interest, but that, you know, that interest is going to continue at least into next year and, you know, we'll talk more about the impact on '14 and '15 in a couple weeks.

All right, great.

Thanks very much.

Kartik Mehta, Northcoast Research.

Good morning.

Chris, I just wanted to follow up on your funds per client question.

I'm just wondering, as rates have stayed where they are, and obviously nobody knows what's going to happen over the next couple years, have you given any thought to changing the strategy, or are you fairly comfortable with the strategy you've taken and it's just a matter of time when things turn around and you start having a positive impact from rates?

We're particularly comfortable with the approach.

You know, the whole approach was to average your way through interest cycles, and, you know, obviously, nobody likes a long cycle of this extended low rate, but when you look at the ROE of this approach, it's very strong.

You know, we still have the long and the extended and the 2.8% over 3% and the yield is up over 3% in total.

That's valuable, you know, from an ROE standpoint.

It also matches our longer-term investors because it lessens the volatility and that's a good thing.

So we're very happy with the approach.

In an extended period of low interest rates, it's going to be, you know, an extended period of drag year-after-year, but it's the right approach.

It's the right strategy.

And then just one last question on acquisitions, Carlos, has there been any change in acquisition pricing or opportunity, because the economy's getting better?

I know last year, you did -- I think you indicated $900 million acquisitions.

This year, it's going to be a lot less.

Is that just a reflection of opportunity or is that a reflection of what might be happening maybe in other parts, especially pricing of acquisitions?

I think it's really more opportunity.

I think we have always been, I think, an opportunistic disciplined acquisition company, if you will.

So we, you know, we're I think looking for the right kinds of products to complement our existing product set, but we're also very disciplined in terms of what we're willing to pay.

So I don't think that I would be able to say that there's been a dramatic change that I'm aware of.

That's not what I'm hearing from our M&A folks.

So they are out looking around and trying to I think find the right kinds of opportunities for us.

It probably was a better environment a year or two years ago and some of our increased acquisition activity may be a reflection of that.

I'll just remind you that some of that is a reflection of one large acquisition, which was the Cobalt acquisition that tends to drive that number up into that $800 million to $900 million range that Chris talked about.

So I don't think our strategy has changed in terms of how we do acquisitions and I don't believe that we've seen any kind of meaningful change in the environment.

Thank you very much, gentlemen.

Julio Quinteros, Goldman Sachs.

Great, Carlos.

Just one quick question on the higher end clients and decision-making cycles.

Anything in particular, just to go back to some of the comments you made at the beginning about the higher end clients.

Anything in particular about decisions, decision cycles that you could focus on in terms of length of these cycles right now?

I think it's -- again, we don't have a lot of scientific evidence, but we do have a lot of anecdotal stories about cycle times and decision-making process.

And so, you know, back to the question about, you know, draining of the pipeline, I'm hoping that we actually are having a building of the pipeline, particularly in the national accounts space, because when you look at CEO confidence indicators, because remember, these products are being sold typically to CEOs and CFOs, if you look at the BRT's confidence indexes, there has been some significant improvement in people's, I guess, willingness to say they are going to hire and that they are going to make capital expenditures.

And obviously in our case, it's neither of those, but it's a proxy, if you will, for spending.

We believe that the environment has gotten better, but our results don't reflect that yet, so we're not ready to say that there's been a change yet, but I think the elements are in place for hopefully our national accounts business to have better results on a go-forward basis than what we have had in the last two or three years, which has been incredibly painful for us.

Thanks, guys.

Good luck.

Joseph Foresi, Janney Montgomery Scott.

Hi.

I wonder if you could talk about the sales force.

Maybe you could put the hiring in some historical context, any impact, or potential impact to margins going forward.

And if you could talk about any changes in the comp structure there.

I would love to talk about that, because I'm incredibly proud of our sales organization and our sales leadership in the sense that they have been able to continue to grow our sales force, but more importantly, now they are getting productivity improvements.

What those productivity improvements lead to, is it allows to us accelerate our growth rate, either without impacting our margins or by actually helping our margins.

And so we continue to add, as Chris said, new sales people into our organization at a rate of around, I believe it was 7% year-to-date.

The balance of obviously the 7% and the 12% sales results is productivity improvement, that 5% productivity improvement.

It's an incredibly important thing to our overall P&L and to our ability to accelerate our growth rate.

I would say that not only is our sales organization executing well in terms of delivering sales results, but they are able to continue to add people and also help us from a margin standpoint.

So we're very, very proud of what they have been able to accomplish this year and actually we had some progress last year as well.

But this year, it's particularly satisfying to see the productivity improvements.

Okay, and then just sort of switching gears here, maybe you could talk about the sales process and its evolution.

How -- do you see a transition moving towards more of a technology first offering versus services and how can that play out on the pricing front over the long-term?

Well, are you referring to from our distribution standpoint or just from an overall product standpoint?

From an overall product standpoint.

From an overall product standpoint, we definitely believe that we need to have products that are more competitive from a quote, unquote, technology standpoint.

In other words, usability, experience of the practitioner, and also of the employees, because one of the changes in our business over the last 10 years is we have millions of our clients' employees who actually interact with and use our products as well.

And these are the same people who are going home and using iPads and iPhones.

That experience is becoming very important.

But we still are a service business.

And so we are still going to have our differentiation be based on service and also on the breadth of our offering.

So it's really not our intention to be a software company or a company that competes solely based on product and on technology.

I do want to elevate the competitive level of our products, but it doesn't change the fact that we are still committed to being a services and compliance company that will continue to really drive our results by solving our clients' problems, not just by providing them software product and allowing them to go off and use it on their own.

So could that affect pricing over the long-term, just as you sort of shift that, or is that just part of the regular sell?

The reason we're doing this is my hope is that it will either enhance our pricing or at least allow to us maintain our pricing.

We're not doing it to decrease pricing, so I believe that, if we can differentiate in terms of the breadth of our offerings and really solve problems for our clients and add value to their business, analytics and other tools, we believe that we'll be able to hopefully increase our pricing, if not maintain our pricing.

But we're not trying to come down to someone else's level from a pricing standpoint if the implication is, are we looking to be a traditional software vendor, whether it's distributed as a [sassmal] or not, that is not our intention.

All right.

Thank you.

Sara Gubins, Bank of America.

Okay, thank you.

Good morning.

Following up on a prior question on pricing, I wanted to ask about pricing and PEO specifically.

Could you talk about the pricing environment there?

And also, what portion of your PEO sales are conversions versus competitive bids?

So I believe that our -- we have a significant amount of our PEO business that is referrals from our small business sales organization.

We have a very large small business sales organization that is obviously selling payroll and other products.

They provide leads to our PEO sales organization, which is a separate sales organization, but they work very, very closely and are incented to share those leads.

We've been as high as 50% of our business coming from here a combination of leads from our SDS sales force and/or existing clients that are already are on an ADP payroll platform.

So the synergies there are quite good.

And I think what your second question was around pricing and PEO?

Yes.

So pricing in the PEO, again, we really look at our sales results as kind of a leading indicator of where we are competitively.

Clearly, execution is a factor in that, and I believe that our sales execution in the PEO has been particularly exceptional over the last couple of years.

But I'm very comfortable with where we are price wise, because we're continuing to grow and we're continuing to grow our sales results in a very, very robust and positive way.

So it feels to me like we're in a very good position in the marketplace.

As you know, in the PEO, it's not just about the pricing of our own services, but it's also the pricing of our pass-throughs.

And we believe that our workers' compensation and our benefits solutions, which are included in the bundle in PEO, that we are particularly competitive in those two areas when it comes to the outside market with regard to our competition.

Great, thanks.

And then separately, this may be a simplistic question, but your guidance of pays per control for the full year of 2.5% to 3% versus what you've done in the first three quarters of the year, is there any reason to think that things should slow down in the fourth quarter based on the guidance?

No, I think it's just, it's the fact that we started to see that growth in the second half of last year, so it becomes a compare issue more than anything else.

I think we're at about 2.9% year to date or there about.

So it's more of a compare issue than anything of note dramatic in terms of employee growth at our client.

Okay, thank you.

(Operator Instructions) Jim McDonald, First Analysis.

Hi, I just have two quick technical questions.

The $25 million charge, was that in G&A?

And could you tell me what the amount of capitalized software was?

Yes, it is in G&A.

And we don't normally disclose the amount of capitalization in that detail.

But you can see it as a percentage.

But I think it's safe to say that our software and development expense would have gone up for the quarter instead of gone down.

I'm not sure that we can get exactly precise.

But it would have been up probably $5 million to $10 million instead of down, I believe it was $10 million.

Great.

That's kind of what I was looking for.

Thanks.

Michael Baker, Raymond James.

Carlos, I was wondering if you could give us a sense of what you think the impact of health reform has been on the business in case we do get a strike-down of the law at the end of June.

Well, I think that our benefits administration business, I think is in a very good position to I guess benefit from some of the change in regulation and actually a lot of parts of our business are in a very good position to take advantage.

You think about some of the upcoming changes as a result of the law.

As an example, one of the changes in the law is going to require as part of the compliance to be able to count the number of FTEs that you have.

That's really going to require a time and attendance system, which we have.

It's going to require having that time and attendance system be linked to your payroll system, which we have.

Then it's going to require that both of those systems be linked to your benefits administration system, which we have, in Workforce Now and in Vantage.

So, we believe that there's opportunities as a result in changes in regulation that has really been ADP's I guess forte, is responding to the compliance needs of our clients into a changing regulatory landscape.

I think this is a big one.

So these changes in law I think will create opportunities for us, so we are watching across the entire spectrum what the impacts may be on our business and the PEO, as an example, we need to make sure that our benefits offerings are competitive, if in fact the law isn't struck down and exchanges become a factor in the marketplace.

We have to respond to that and make sure that the offerings that we provide are as competitive as the ones that are offered by the exchanges.

But I think we see -- I'm not aware of any major downsides, other than the competitiveness of our business and the PEO.

But I'm not aware of any other major downsides as a result of the law being struck down and if the law isn't struck down, there are thousands and tens of thousands of pages of opportunity for ADP, by pages of opportunity I mean the complications of the regulations and the fact that large, medium, and small companies are going to need help with that compliance and that's really where ADP performs best.

Thanks for the update.

Tim McHugh, William Blair & Company.

Yes, thank you.

Most of my questions have been asked, but I was just going to ask on Europe.

Can you give us a directional sense how the business progressed over the last, if you look at over the last four or five, six months, is it still getting worse or does it feel like you've hit a bottom at all during the last couple months in terms of the demand trends and sales cycles throughout Europe?

I think if you look at the pays per control figure in Europe, it's hard to tell, because it has been up and down, but it's not -- [it's up].

It's worse than it was six months ago, but it hasn't kind of fallen precipitously either.

Part of the issue in Europe is that it's difficult -- we talked about the restructuring charge.

It's difficult to restructure and reduce costs in Europe.

That also tends to cushion during these types of situations what happens with employment.

In other words, you typically don't have mass layoffs and major decreases in employment.

They tend to take longer to play themselves out.

So it is possible that there is more to come in terms of pays per control situation in Europe.

But what's still refreshing for me is the fact that our sales results are, I would call it holding up, which is I think a good time.

Okay, thank you.

Mark Marcon, Robert W. Baird.

Two questions.

First, can you talk a little bit about the plans for Vantage just in terms of what you would expect as the next fiscal year unrolls and unfolds?

How many clients you would hope to get on it and what percentage of the national client base would transition?

No.

No, we're not going to track the number of clients on Vantage.

Just think about it, Mark, as that is the platform going forward, so, you know, when we talk about human capital management, Vantage is the offering that is a complete package of human capital management offering, so payroll and time and labor management and benefits and HR and talent management, et cetera.

So that is the bundled package.

The best way to track Vantage is tracking national account sales and, you know, that would be the metric you want to watch.

So as we get traction in Vantage, you know, you'll see that, just like you saw it with run and the small business space and Workforce Now in mid-market.

This clearly takes longer.

So we will clearly try to provide some color over the next several quarters.

But I think in this business, it's particularly difficult to get into the very specific comments about individual clients, because it's very lumpy and very volatile.

Understood.

Just wanted to get a sense for whether it was tracking along your expectations or if there are things that you needed to do to fine tune it.

And it is.

It's just that it's early in the process.

Okay.

I think it's fair to say it's tracking according to our expectations.

And again, the good news about Vantage, again, it is a true SAS product which is [minimalist] and so we do have enhancements that as we speak I believe are either being rolled out or will be rolled out shortly, which will enhance I think the offering even more and you will see more of that from us in the future, where we will have rapid releases every three or six months, not every several years.

Great.

And then with regards to the margins for the ES segment, you basically indicated they are going to be flattish for the entire year, which implies a fairly significant increase in Q4.

Can you give a little bit of color with regards to the drivers, particularly overcoming some of the drag from some of the acquisitions?

Yes, the -- as you said, there was a big drag from acquisitions of about 90 basis points in the quarter.

But it's consistent with what we've been saying all year, that we did have some spending in, you know, the latter half of last year, that we would lap going into the fourth quarter.

And that's the biggest driver.

So now the compare is a little bit more on an apples-to-apples basis.

And that's consistent with what we've been saying throughout the year.

And, you know, I think I would just reiterate that the fact that we're able to, you know, overcome that 90 basis points of drag in the acquisitions at the ES level shows that we're driving some, you know, sell and margin improvements for the year in ES and, you know, that's a demonstration of the leverage that we've had, and again, you know, it's more than what we traditionally are able to drive.

We typically go for 50 basis points and I think we're outperforming that, and, you know, I think that demonstrates a real focus on trying to get process efficiencies, et cetera.

Completely agree.

Just -- I keep getting questions about it from various investors.

Could you just remind for the people who on the call, for their benefit, some of the -- some of the increases in the investments that occurred last year in the fourth quarter?

Yes, so I think we talked a little bit about that on the last quarter's call, and specifically talked about some sales increases, some investment in R&D, service increases.

So, you know, each one of those areas increased last year.

And I think rightly so.

We said we wanted to invest in the business and make sure that we had enough people to support the growth that we saw coming and the growth has come.

Terrific.

Thank you.

John Williams, UBS.

Hi, good morning, guys.

Thanks for sneaking me in.

Just two quick questions.

Number one, just wanted to get an update on your thoughts surrounding the dividend payout ratio and maybe a little bit more on your capital allocation priorities as they stand now.

Great.

I think one of the things, if you look back over the years, our dividend payout ratio has gone up significantly, and you know, 10 years ago or thereabouts, we were looking at, you know, mid-20%s kind of payout ratio and even five years ago, it was a whole 10 basis points lower than it is.

We're now in the 55% payout ratio.

And so that's been increasing every year.

As you know, in November, we were happy with the increase of 10% that our Board approved.

So, you know, we've been creeping that up.

I think we're right in the zone of a range that we're comfortable with, and I think it's, you know, continues to be something that we do in terms of returning cash to shareholders, like the share buybacks, which have been very consistent over the last couple of years as a way to drive cash back to shareholders.

You know, our target is to try to stay in that zone of $1.5 billion-ish kind of cash and as you can see this quarter, we're a little bit higher than that.

It can be lumpy, depending on acquisitions, et cetera.

But I think the way to think about the target is to continue that 1.5 billion and returning the rest through share buybacks and dividends.

All in all, it sounds like not much different from your prior--

No, consistent with what we have said in the past.

Okay.

One other quick question, if I could.

The interest on funds, I noticed you narrowed the guidance range there for the decline.

Is that a function of being late in the year, or is there something else we should read into that?

Yes, I think it is later in the year.

And, you know, we've got two months to go.

So that's the primary driver.

Okay.

Thanks, guys.

Tien-Tsin Huang, JPMorgan.

Good morning, Tien-Tsin.

Good morning.

I know the call is going long.

I'll try and be quick.

Just first on dealer.

I thought I heard Carlos he said the outlook's still good there.

I'm curious, what's driving some of the sales and geographically any differences that we need to think about?

Well, one of the -- again, starting off with places to watch, I think we mentioned in our comments that dealer does have some exposure to Europe.

Right.

As our Employer Services business does.

So keeping an eye on that, and I would say that the results there are not as robust as in North America and in our digital marketing businesses.

But the fact of the matter is that it's a very good environment, so the backdrop is very positive.

Car sales are back over $14 million on an annualized basis.

I believe that's 10% or 11% growth over the prior year.

We continue to see positive surprises in terms of vehicle growth.

And even though a relatively small part of our business is directly linked to volume of car sales, clearly, the ability of our dealerships of our clients to generate additional revenue and to grow allows them to invest in hopefully products that will enhance their productivity on a go-forward basis.

So it's just a much better I think backdrop and environment than it was obviously two or three years ago, and we really don't see anything on the horizon that would indicate any change in that.

So that's why we continue to be positive, I think, and optimistic about our dealer business.

Okay.

Good to know.

Just quickly, last one, just clarification, the 3.3% the pays per control.

Obviously very good.

Is that adjusted at all, Chris, for leap year?

I'm just curious how clean it is.

No, it would include -- it's same-store sales, so it's, you know, this same client this year versus last year.

I don't think leap year would really have too much of an impact on that.

Okay.

So very positive.

Okay.

Just wanted to make sure.

Thank you.

Very good question.

I want to thank everyone for joining us today and for your questions.

As you heard, we're overall very pleased with the third-quarter results, and we're obviously on track to achieve our full-year guidance.

I hope that all of you will join us for the half-day conference the morning of May 24 at the Roosevelt Hotel in New York City.

We've got some great feedback last year on the product demos and we will be showcasing our latest solutions again this year so we hope you'll all be able to join us.

Obviously, the conference will be webcast for those of you who can't make it.

But we hope you will be able to join us.

And I thank you again for joining us today.

Thanks, everyone.

Thank you, everyone, for your participation today.

This does conclude today's conference call.