自動資料處理 (ADP) 2012 Q4 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to ADP's year-end fiscal 2012 earnings webcast.

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

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

(Operator Instructions)

Thank you.

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

Please go ahead.

Thank you.

Good morning.

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 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 also been posted to the Investor Relations section of our website.

These schedules have been updated to include the fourth 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 fourth quarter and fiscal year 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 and provide you with our fiscal 2013 forecast.

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

As you read in this morning's press release, ADP reported good results for fiscal 2012.

Total revenues for the year grew 8% with 6% organic growth.

Excluding the gain we reported in the second fiscal quarter, pretax earnings grew 6%, net earnings grew 7%, and earnings per share increased 9%.

These are good results given continued economic headwinds.

We still continue to face low market interest rates, ongoing low GDP growth in the US, and an economic backdrop that is becoming more challenging in Europe.

I'm particularly pleased with our sales execution in Employer Services and PEO Services during the fourth quarter, which resulted in 20% growth in the quarter and 13% growth for the year, beating our forecasted growth of 12% for the year.

Sales force productivity continued be very solid as we exited the year.

We're pleased with the sales of our core offerings, which include RUN, Workforce Now, and Vantage.

If you recall from our May analyst conference, our theme was driving innovation and market leadership, and clearly this focus is resonating in the marketplace and driving results.

New business sales were strong in absolute dollars as well and totaled over $1.2 billion for the year.

I do want to remind everyone that our new business sales represent the anticipated annual recurring revenues that will come into our P&L as we install this new business over the next several months.

Sales growth was double-digit across all major market segments in the US, small business services, the PEO, major accounts and national accounts.

You may have noticed in today's press release in the about ADP section that we updated our client count to about 600,000 clients worldwide.

This is a 5% increase from a year ago.

I'm pleased that we're gaining market share, especially in the small business market, and believe this is in large part due to our focus on product innovation and providing stellar service to our clients.

Comparatively, sales in our Employer Services international organization were not nearly as strong as they were in the US and were influenced by the difficult economic environment across Europe.

Moving on from sales to our other key business metrics, client balances continued to grow and the number of employees in our clients' payrolls as measured by same store pays per control also increased.

Client revenue retention, however, decreased slightly during the fourth quarter and ticked down 10 basis points for the year, entirely due to the large client loss that we told you about in the second quarter that was on a legacy product of an acquired business.

I am nonetheless very pleased with the absolute revenue retention level of 91% in Employer Services, which is just below last year's record high.

Achieving such high retention provides a good step off point for fiscal 2013 as the two most important drivers of future revenue growth are new sales and retaining our existing revenues as we have always discussed.

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

Transaction volumes in Dealer Services were up this year.

Sales growth was solid.

Our win/loss rates were good and we continue to have market share gains and worldwide revenue retention also improved.

On the acquisition front, the fiscal 2012 was another successful year for ADP as we added to our solution set.

We closed seven transactions this year with just over $200 million in total annualized revenue that we expect will enhance our future organic revenues.

With that, I'll turn the call over to Chris to provide the financial highlights and a look at next year's forecast for our client funds investment strategy.

Thanks, Carlos, and good morning everyone.

Let's now turn to slide 5. Total revenues grew 8% to $10.7 billion for the year.

Employer Services grew total revenues 7%.

The PEO grew 15% and Dealer grew 10%.

On an organic basis, total revenues grew 6%, with Employer Services and Dealer Services each reporting 6% organic revenue growth.

The PEO revenue growth of 15% was all organic.

Foreign exchange rates did not impact revenue growth for the year as the negative impact of approximately 1.5 percentage points in the fourth quarter offset the favorable impact of foreign exchange rates earlier in the year.

You'll hear more when we provide you with our forecast for fiscal 2013, but the unfavorable foreign exchange rate impact in the fourth quarter is anticipated to continue into next fiscal year, with the largest impact expected in the first fiscal quarter.

Employer Services and PEO new business sales growth of 13% was strong, and beat our expectations.

Sales, along with the recent acquisitions we have made to complement our solution set, continued to positively impact revenue growth.

In Employer Services, there was good revenue growth across several products, including RUN in our small business services marketplace, HR services in major accounts, time and labor management, and ASO which is our BPO for small to mid-sized companies.

Additionally, revenues for the year related to multinational companies, as well as revenue growth from our best of breed solutions in Employer Services International contributed nicely to revenue growth.

But revenue growth in the fourth quarter slowed in Employer Services international and our best of breed solutions, due in part to the softening European economy.

Same store pays per control and Employer Services in the US was strong with an increase of 3%.

However, the decline in same store pays per control across Europe that began earlier in the fiscal 2012 continued through the second half of the year resulting in a slight decline for the full year.

This is also something that we expect could negatively impact the international business in fiscal 2013, and we will speak more about this in our comments regarding the fiscal 2013 forecast.

We are pleased to have ended the year with client revenue retention of 91% which is just 10 basis points under last year's record high level.

Average client fund balances increased 6% for the year, driven by new client growth, especially in small business services, and increased pays per control.

PEO revenues grew 15% for the year with 12% growth in average number of worksite employees to about 255,000.

PEO revenue growth for the year was lower than anticipated, and I will cover that in the fourth quarter discussion in just a few moments.

Moving on to Dealer Services.

The automotive backdrop in US is healthy, as is the Asian marketplace.

Across Europe, however, is the same story as with Employer Services International.

The economic landscape is challenging and is negatively impacting growth.

Overall, Dealer Services continues to execute well.

We are effectively selling layered apps to our base of clients.

Retention is improving and we are gaining market share.

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

You may recall from this year's second fiscal quarter that 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.

To remind you, we are treating this gain as a one-time item for comparative purposes.

So although we have shown in 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 ADP's pretax margin declined 30 basis points.

Excluding a drag of about 40 basis points from acquisitions, pretax margin actually improved about 10 basis points.

If you further exclude the 90 basis point drag from the decline in high margin client fund interest, there was a 100 basis points of margin expansion in the core business for the year.

Moving next to net earnings.

We reported a 7% increase which benefited from a lower effective tax rate.

Diluted earnings per share increased 9%, and benefited from fewer shares outstanding compared to last year.

We repurchased 14.6 million ADP shares during the fiscal year for a total cost of $747 million.

For your models, basic shares outstanding at June 30 are 484 million.

Our cash and marketable securities position was strong at $1.7 billion at June 30.

Turning to slide 7, I will now take you through the results for the fourth quarter.

Total revenues grew 5% for the quarter to $2.6 billion, negatively impacted by unfavorable foreign exchange rates compared to last year's fourth quarter.

So excluding the foreign exchange impact, total revenues grew nearly 7%.

Employer Services grew total revenue 7%.

PEO grew 12%.

And Dealer grew 7%.

On an organic basis, total revenues grew 4%, Employer Services grew 5%, PEO grew 12%, and Dealer Services grew 6% organically.

New business sales for Employer Services and PEO Services were particularly strong in the quarter, with 20% growth.

All major market segments in the US achieved double-digit growth.

In Employer Services, good revenue growth continued in the small business marketplace, with RUN, HR services in major accounts, time and labor management, ASO, and we are pleased with the growth we are seeing with Workforce Now.

Minimal revenue on Vantage, which was launched in the fall, but we are pleased with sales which are slightly ahead of our expectations.

Revenue growth in the quarter related to multinational companies was solid as well.

However, growth in our best of breed solutions across Europe slowed due to softening economy there.

Same store pays per control and Employer Services in the US was strong with an increase of 3.2%.

However, as I mentioned earlier, it was a further decline in same store pays per control across Europe during the fourth quarter.

Client revenue retention declined 20 basis points in the quarter due to a handful of large clients being acquired that moved to the acquiring Company systems.

I also want to point out that we anticipate some pressure on first quarter fiscal 2013 retention, as a result of further known client consolidations.

However, we anticipate some improvement in client retention for the full year in fiscal 2013.

Average client fund balances increased 4% for the quarter.

We saw the same slowing of the growth rate in the third quarter as well, and in the fourth quarter it is again primarily due to the smaller contribution of state unemployment insurance.

On the positive side, solid new client growth continued, especially in small business services, and increased pays per control contributed to positive balance growth.

PEO revenue growth was 12% for the quarter with 11% growth in the number of average worksite employees to about 265,000.

This growth was lower than anticipated, primarily related to lower healthcare pass-through revenues due in large part to insurance rebates required under healthcare reform.

Under the Affordable Care Act, healthcare insurance providers are now required to operate within specified loss ratios, which in effect cap the percentage of premium dollars that can be retained for administrative expenses and profit by the insurance companies.

As a result, the insurance companies are required to issue rebates related to a portion of calendar 2011 and year-to-date 2012 premium dollars to employers and employees that were in excess of the specified loss ratios.

Our fourth quarter reflects the amount that will be returned to the PEO for 2011, and is calculated by the insurance providers.

This amount will ultimately be returned to our clients, and therefore is a reduction of the PEO pass-through revenues and expenses.

So very helpful to the pretax margin as there is no impact to pretax earnings, so the margin goes up on the lowered revenues.

The negative impact to PEO revenue growth in the quarter was nearly 2 percentage points, and about half a percentage point for the year.

Dealer Services performed well in the fourth quarter with total revenue growth of 7%, 6% organically.

Before we move on from the fourth quarter's discussion on revenues, I want to again point out that we saw a slowdown in revenue growth in the international business of both Employer Services and Dealer Services due to the challenging economy in Europe.

We expect this to impact the growth rates in fiscal 2013, which we'll get to in a few moments.

Now let's turn to slide 8 and continue with the highlights for the quarter.

Pretax earnings increased 11%, and ADP's pretax margin improved to 80 basis points.

ADP's pretax margin expanded in the fourth quarter due in large part to easier year-over-year comparisons, despite a drag of about 40 basis points from acquisitions, and another 90 basis points drag from the decline in high margin client fund interest.

The effective tax rate of 35% in the current fourth quarter was 2.4 percentage points higher than last year, which benefited from small favorable tax items.

Net earnings increased 7% in the quarter, impacted by the higher effective tax rate in the quarter.

Diluted earnings per share increased 10%, and benefited from fewer shares outstanding compared to last years' fourth quarter.

Let's turn now to slide 9 and I'll take you through the forecast on the client fund investment strategy in support of the overall ADP forecast that Carlos will take you flew 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 were again able to take advantage of the supply of new investment grade corporate fixed income securities in the fourth quarter, and added more highly rated corporate bonds to our portfolio.

At June 30, approximately 84% of our fixed income portfolio was invested in AAA or AA rated securities.

In addition, as has been the case over the recent past, the yield curve continued to present greater opportunities at the longer end of the maturity curve in both the extended and long portfolios, and as such, the duration of the portfolio increased slightly to 3.3 years at the end of the fourth quarter.

We continue to base the interest assumptions in our forecast on Fed Fund's future contracts and the forward yield curves for 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 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 slides, you see a summary of the anticipated pretax earnings impact of the extended investment strategy, the client fund interest portfolio for fiscal 2013.

We anticipate average client fund balances for fiscal 2013 in the range of $18.8 billion to $19.1 billion, which represents 5% to 7% growth.

We anticipate a yield on the client funds portfolio of 2.2% to 2.3%, down 50 to 60 basis points from fiscal 2012.

We anticipate a year-over-year decline in client fund interest of $65 million to $75 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 $75 million to $85 million in fiscal 2013.

Taking you back to our analyst conference at the end of May, based on futures and forward curves at that time under the 0, 5% and 10% balance growth scenarios provided, we expect fiscal 2013 to be the largest year-over-year decline in client funds earnings out to fiscal 2017.

Specifically, under the 5% balance growth scenario, we expected a $70 million to $80 million decline in fiscal 2013.

Since the end of May, the 3.5 and 5-year agency forward curves have declined 30 to 40 basis points on average.

Combining the impact of current lower expected rates with our balanced growth expectations of 5% to 7%, we anticipate a year-over-year decline of $75 million to $85 million.

So, slightly worse due to rates, offset a bit by our balance expectations that fall slightly above the 5% scenario presented in May.

Contemplating the current lower forward curves and looking beyond fiscal 2013, we still expect fiscal 2013 to be the bottom of the cycle in terms of the size of the year-over-year decline.

Now I'll turn it back to Carlos to take you through the remainder of the forecast for fiscal 2013.

We're now on slide 10.

First, I'm going to take you through our fiscal 2013 forecast for total ADP.

Then I'll give you some color around how to think about the impact on our year-over-year comparisons from foreign exchange rates, and expected lower average yield on the client funds portfolio, due to continued low market interest rates, and the year-over-year comparisons from certain fiscal 2012 items.

We anticipate total revenue growth of 5% to 7%.

We anticipate a decline in the total ADP pretax margin of about 30 basis points.

We expect the effective tax rate will be about 30 basis points below fiscal 2012's effective rate of 34.5%.

We anticipate 5% to 7% growth in diluted earnings per share compared with $2.74 in fiscal 2012, which excluded the gain on sale of assets in the second quarter of fiscal 2012.

As is our normal practice, no further share buybacks are contemplated in the forecast beyond anticipated dilution related to employee equity comp plans, though it is clearly our intent to continue to return excess cash to our shareholders depending, obviously, on market conditions.

While we don't provide quarterly guidance, I want to give you some insight into the fiscal 2013 year-over-year comparison as they impact our total guidance.

Let's turn to slide 11.

We anticipate that foreign exchange rates will negatively impact revenues about 1 percentage point for the year with nearly 2 percentage points drag anticipated in the first quarter.

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

In addition, as Chris just took you through the forecast related to our client fund strategy, the interest revenue piece of this strategy is expected to decline $65 million to $75 million year-over-year.

The negative impact from an expected lower average yield on the portfolio due to continued low market interest rates is expected to be a full percentage point of the drag on ADP revenues, mitigated to a small degree by the anticipated growth in balances.

Including the corporate extended interest income and interest expense related to the strategy, we expect a decline of $75 million to $85 million in pretax earnings.

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

Due to anticipated revenue growth in fiscal 2013, the margin drag is just slightly worse than we experienced in fiscal 2012, even though it is a larger dollar impact on earnings.

Taking it down to EPS, the $75 million to $85 million drag, the anticipated decline in pretax earnings, equates to a drag of $0.10 to $0.11 in earnings per share.

Continuing to slide 12.

I'll take you through the impact of fiscal 2012 acquisitions.

While these acquisitions are forecasted to be earnings neutral in dollar terms, we continue to anticipate pressure on the pretax margin in fiscal 2013.

For the year, we expect about 20 basis points of negative impact.

Most of the pressure is expected in the first half, about 40 basis points in the first quarter, and 20 basis points in both the second and third quarters.

Now moving to slide 13.

Lastly, certain fiscal 2012 items are expected to negatively impact the year-over-year comparisons.

The sale of assets during the second quarter of fiscal 2012, and the end of certain employee tax credits within our tax credit services business, are expected to pressure revenue and earnings comparisons in the first half of fiscal 2013.

We anticipate nearly half a percentage point negative impact on revenue growth for the year, with about 1 percentage point negative impact in both the first and second quarters.

We anticipate a negative impact on pretax margin related to the fiscal 2012 items of about 20 basis points for the year, with about 50 basis points negative impact in the first quarter, and 30 basis points negative impact in the second quarter.

This equates to $0.04 year-over-year decline in earnings per share for these items.

So to sum it all up for you, we anticipate the first quarter results will be below the low end of our full year forecast range.

Now let's turn to slide 14 for the segment update.

The impacts from the expected drag from recent acquisitions, as well as the negative year-over-year comparisons from the fiscal 2012 second quarter sale of assets, and the expiration of certain employment tax credits are reflected in the segment forecast.

For Employer Services, we are forecasting revenue growth of 6% to 7%, with pretax margin expansion of at least 50 basis points.

We anticipate an increase in our pays per control metric in the US of 2% to 3%.

We are forecasting 13% to 15% revenue growth for PEO services, with flat to slight pretax margin expansion.

We are forecasting 8% to 10% growth in annual dollar value of ES and PEO worldwide new business sales from over $1.2 billion sold in fiscal 2012.

And for Dealer Services, we are forecasting 7% to 9% revenue growth with at least 50 basis points of pretax margin expansion.

Turning to slide 15, I'd like to leave you with some closing remarks before we open it up for questions.

Overall, I'm very pleased with our results for fiscal 2012.

Our performance has been solid.

We're providing our sales force and the market with highly innovative products and Employer Services and PEO Services achieved full year new business sales that were above our expectations.

Sales force productivity is very good.

We are well positioned in the marketplace entering fiscal 2013.

Employer Services retention is strong at 91%.

Our pays per control metric is also very strong.

Dealer Services is performing very well and the automotive marketplace in North America continued to improve.

We're keenly focused on our four strategic pillars for growth that we outlined at our analyst conference back in May.

We're focused on delivering stellar service to our clients and creating an environment that fosters innovation, thereby positioning ADP as a leading global human capital management provider.

ADP remains committed to shareholder-friendly actions and returning excess cash to shareholders.

In fiscal 2012, cash dividends paid totaled $740 million, and ADP bought back 14.6 million shares at a cost of nearly $750 million.

We have a good step-off heading into fiscal 2013.

Though there are some reasons to be somewhat cautious.

Market interest rates continue to be very low with little indication of rising near term.

The economic landscape in the US is mixed and the economic backdrop in Europe is weak, but I'm pleased that ADP continues to be rated AAA by both Standard and Poor's and Moody's, reflecting the strength of our business model and of our balance sheet.

I believe we're doing the right things to grow the business and to enhance long-term shareholder value.

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

(Operator Instructions)

David Togut, Evercore Partners.

Good morning, Carlos and Chris.

The sales growth in the fourth quarter was exceptional at 20%, and 13% for the year is about the strongest I can remember in quite a long time.

Can you perhaps parse a little bit how much of this was due to let's say the comparison versus the fundamental performance of new business, share gains, et cetera?

And then provide some context as to why your sales growth target for 2013 would be substantially lower at 8% to 10% growth.

Sure.

First, the 8% to 10% forecast is obviously for the year.

I think you were asking about the strength in the fourth quarter.

So let me take that first.

In terms of the strength in the fourth quarter, last year's fourth quarter had pretty good growth.

I think it was 8%.

So I don't think that it was necessarily an easy comparison.

We did have strength, I think Chris mentioned it in his comments, across all of the major segments.

Everyone had double-digit growth.

So I think some of it is again related to the fact that our new products are getting better and better traction in the marketplace.

We are winning a bit more in the marketplace and gained a little bit of share.

So I think that's positive as well.

We also have the dynamic of our sales force being very motivated in the fourth quarter always by our sales incentives including our sales incentive trip, which this year happens to be an international trip, which is somewhat special.

I think that had a particularly strong impact on people's finish.

But I think we feel very, very good about the momentum really across the board, and I don't think it's related to an easy compare.

In terms of our guidance at 8% to 10%, again, the right comparison is to the 13% finish for the year.

I think we are obviously being cautious given some of the items that we mentioned that are happening here, both in the US and internationally.

We do have our ES international business that is included in our overall sales results.

We did experience some weakness there in the fourth quarter.

And we also are being careful about all the things that I'm sure all of you are very aware of like the fiscal cliff and other things that are impacting the US economy.

And I should also mention that included in our sales results, we had about 2 percentage points of help from acquisitions.

So the acquisitions that we made during the fiscal year, the sales from those acquisitions get counted in our total sales and total sales growth and that added about 2 percentage points.

Just a quick follow-up, Carlos.

Can you provide a little bit more detail on the general availability of Vantage, which I believe started either in June or July, what sort of client response have you had and can you give us any details on the numbers or total dollar value of sales?

We can give you a little bit.

It's still in -- for that business, given the sales cycle, I think it's still a bit early to be drawing any conclusions or trying to discern any patterns.

But I do have to say that we were very happy with the fourth quarter sales of Vantage in terms of units.

We exceeded the year's plan in terms of units, which we're very happy to see.

But it's still very minimal in terms of sales dollars and revenue impact to ADP, both in terms of absolute dollar terms and even in terms of timing.

Because as you know, any of the business sold to national accounts including Vantage takes anywhere from 3 to 12 months to start.

So very little impact on our revenues going forward but we are I think cautiously optimistic, given the results that we saw in the fourth quarter.

I think the prior quarter, I don't think we could say anything because it was just too early.

I think now the appropriate way of describing it is cautiously optimistic.

Because we did have some quite good sales results on Vantage in the fourth quarter.

Thank you very much.

Rod Bourgeois, Bernstein.

Hi, there.

Hey, the press release was very helpful.

You noted a number of one-time items that are affecting your growth rates and your margins.

Just a point of clarification that would be helpful to understand the fiscal '13 revenue growth guidance.

How much of your fiscal '13 revenue growth guidance is being helped by acquisitions?

It would be about 1 point, Rod.

Okay.

And so -- and those are acquisitions that were completed in fiscal '12.

Yes, that's right.

Your guidance doesn't assume any acquisitions that might occur in fiscal '13?

That's right.

That's right.

So if you did that as a comparison to '12 --

Okay, great.

We've got about 2 percentage points in '12 from both the acquisitions in '11 and then the acquisitions in '12.

Okay.

Great.

And then on the pricing front, this is obviously the time of the year where you roll out your new list prices.

Can you give us an idea of what you're planning this year from a pricing standpoint in terms of the pricing growth?

And then can you also tell us the net impact that you expect on pricing after accounting for discounting activity as well.

Sure.

That's the way we generally give it is on a net basis, and so the pricing that we've been doing for the last couple of years has been just about 1%, just under 1%, and we'll continue to go with that going into this year.

Again, as you know, the tradeoff there is to retention and so if you go too high on the pricing, you can suffer in retention.

And we've been striking that balance nicely over the last couple years, and we'll continue that strategy going into this year, given the fact that the economy is still where it is.

Okay, well, with retention near record levels, does that give you added confidence on the pricing front or sounds like you're still treading lightly, even though you've got retention at a record level.

I think you tread lightly because of the economy, the economic environment and all of our clients are facing pressure, and I think that's the right thing, the way to think about it going forward.

And I think if you violate that, you do run the risk of having that come back to you on retention.

But you're absolutely right.

Over the last couple years, I think we've struck that balance very nicely, as a result retention is at all-time high levels.

Okay.

Great.

And then the final point on that is on the retention for fiscal '13, are you feeling like you're keeping retention stuck in a pretty tight range at this point, or do you have some levers that you -- in place that you think that can allow you to take that to another level over time?

I think there's a number of levels that we've gone through in the past that -- levers that would help us move that forward.

Some of it is the mix of the business as well.

Obviously, as we improve service levels, as the product becomes better, all those things enable you to move up.

I think at this point in the year you heard me say that we expect the retention to improve year-over-year.

It's early in the year.

We do have some indications that there will be some pressure in the first quarter.

But even with that pressure, we expect it to be up for the year.

So at this point, that's as much as I'd want to say in terms of how much I'd want to go up on retention.

But we do expect it to go up year-over-year this year.

Just one comment on that.

One of the levers that we are trying to --

Excellent.

One of the levers that we are trying to pull is we've adopted over the last actually couple years, we've been planning and preparing to adopt something that's called Net Promoter Score, approach to measuring client satisfaction and measuring feedback and again, hard to know exactly what impact this is going to have on client retention.

But our intention is to have that be a positive impact and the idea is to have a more proactive approach to getting feedback from clients, and then reacting to that feedback in a more timely fashion.

It's a longer discussion in terms of what's really involved with Net Promoter, but it is an important initiative within our service organization that I think is an important lever for trying to drive future client retention.

James Kissane, Credit Suisse.

Carlos, Just following up on retention, it declined in the fourth quarter after being up in the third quarter.

I know you lost a large client or announced a large client loss during the second quarter.

I think you mentioned maybe a modest decline or slight decline in the first quarter you're thinking about.

So just maybe a little more color on retention, because I think, Carlos, you said it was entirely due to the large client loss.

That was for the year.

In terms of for the quarter, again, we hate to -- it's always sometimes not productive to get into a lot of detail because there is a lot of noise and a lot of things that happen and we don't like to make excuses.

But in the fourth quarter, we did have a number of clients in national accounts that actually got acquired, and it turned out that those -- that the acquirer of those companies kept or took the business onto their platform or their system.

In some cases in ERP, and in one case it was also a competitor.

Obviously, sometimes that goes the other way when a client that is ours acquires another company that isn't a client of ours, we end up winning that business by default as well as a result of that consolidation.

We obviously see that as an opportunity to go out and sell that new client that just acquired our client.

But the fact is that in the fourth quarter we had -- it was specifically in national accounts, and we had a few losses related to consolidation among our own client base, and as Chris mentioned in his comments, we know of a couple of others.

We tend to get notifications from our national account clients with some advanced notice obviously in terms of when they are going to come off of our platform.

We have a couple of additional consolidations, similar type of situation happening in the first quarter as well, which is why Chris made the comment.

But when you look underlying in our core businesses, excluding those, the noise if you will, we're feeling pretty good about retention.

Although again, it's at record levels and so you have to be careful about what your assumptions are about how much more you can push it.

But as an example, in our major accounts business, which is one of our core platforms, we have very, very good retention and it improved year-over-year and in SBS it's the same situation, which is our small business segment.

So we're feeling pretty good about retention overall.

That's great.

Thanks, Carlos.

Chris, can you quantify the decline in pays per control in international?

And more generally, is auto pay a good proxy for ADP's overall pays per control, running across all the different segments?

Yes, I think auto pay has been a good proxy and to the international, it's about less than half a point.

Thanks, Chris.

Obviously, something that we're keeping our eyes on and when we think about fiscal year '13, we don't expect that to improve internationally.

And the exit -- I think it's important to note that the half, the negative half, roughly negative half was for the year and that our exit rate right around there, it would be a slight tick higher than that.

But again, we're watching that very carefully and we'll make sure that we continue to communicate on that front.

But the exit rate was obviously worse than it was 12 months prior to that.

Thank you.

Bryan Keane, Deutsche Bank.

Good morning, guys.

This is actually Matt Diamond on for Bryan Keane.

I'm curious about the pretax margins for fiscal year '13.

There was a lot of helpful description there about the impacts of acquisitions and their drags, but the investment spend that's planned for '13, could you give us some color on that and is there any one-time investment planned in nature for the upcoming year?

We have investments planned in our product development organization as well as some modest investments.

In the May meeting around client migrations, platform migrations.

But again, I don't think that they are significant enough.

For example, the investments in product development are really in line with our revenue growth and so we're there, really trying to work harder on moving dollars that are being spent on legacy platforms to more newer, forward-looking innovative products.

It's not about increasing the total dollar amount.

So I think the fair comment would be that there aren't any major things on that -- in that category.

There is a slight uptick in the first quarter in implementation expense, as our very strong sales results I think require us to ramp up our capacity to be able to start all of that business.

Because in small business obviously that business has already started, the ones that we reported as sold, but in national accounts and major accounts that business has yet to be started.

When the backlog grows you need to really expand your implementation capabilities.

That has some impact I think in the year and particularly in the first quarter.

But I think it's -- I think our P&L is largely other than the items that we disclosed, is largely business as usual.

I would also just add on margins, Brian, that if you're looking at the ADP total margins as being down 30 basis points next year, again, we mention the 20 basis points of acquisitions, so excluding the acquisition drag at the ADP level, we would be up 10.

I'm sorry, just down 10.

And then excluding the interest rate drag of 90 to 100 basis points, we're driving great margins in the core business, and that's with all of the investments that we're contemplating and migrations and everything else that we naturally do.

If you peel back on it, yes, it's the same story.

We're predicting at least 50 basis points, and that includes the drag from acquisitions at the ES level, which is actually higher than the 20 basis points that you see at the total ADP level.

So as we look at it, we're feeling good about the margins that we're driving in the business, both in fiscal year '12 and in '13.

Okay.

Great.

Just a more general question.

Your fiscal year '14 -- or '13 guidance doesn't assume any change in the current economic environment.

If the economic environment does change, what macro factors should we look at and how do you think they would impact the model if it's a longer change in decision cycles, any color around that would be helpful.

One that you're going to see immediately would be on our sales.

Because that impacts the propensity to buy and spend.

So that would be the forerunner, just as it was when we went into this downturn.

We started giving signals that our sales numbers were suffering.

Pays per control is a little bit more of a rear view mirror and it also takes a while to funnel through because you've got some growth year-over-year built in.

So that doesn't hit immediately.

So the thing to watch is our sales performance, which we feel real good about right now.

We also have on the top line, we do have assumptions around FX rates that even though it's not a lot of impact on the bottom line, obviously depending on what happens with the Euro, could impact our top line.

Obviously, we don't try to manage the business that way.

That's why we give you transparency around FX rates.

But worth mentioning because that's been such a volatile number over the last three to six months.

Excellent.

Thanks very much.

David Grossman, Stifel Nicolaus.

Thank you.

Carlos, I was wondering if you could maybe just parse a little bit the commentary about the US and if possible, expand on how the fundamentals of the US business trended during the quarter, particularly given the strength of the overall sales performance, which seemed to remain relatively strong.

Sure.

I think that, again, because of the nature of our business, it's a bit like turning an aircraft carrier.

So I'll just really probably build on last quarter's comments.

So we continue to see good strength in our small business segment, so starting at the low end of the business.

I think our strength and our momentum improved in our major accounts business, kind of the middle market in the US.

And in national accounts, our momentum improved on the sales front, but again, because of the lag of how business starts and the cycles, that business I think is still lagging in terms of its revenue momentum.

So we feel pretty good about all three of the major market segments, with probably the middle one, major accounts, showing the best I guess improvement in momentum, if you will.

But frankly, we felt pretty good over the last two or three quarters about where the businesses were and our one area of concern as I know we've mentioned is sales in the high end or for large companies, in terms of decision making being slow and cycle times being elongated, and we cannot in that business say that one quarter is a trend.

So we're being very cautious.

But we are cautiously optimistic, given the results we had in the fourth quarter.

And is there any way to really distinguish between share gain versus just overall business momentum?

Yes.

So we do try to measure obviously what's happening with share.

I think we mentioned that our client count grew 5%.

We have some data around what's happening in terms of the growth of the market and the opportunity that we have to go after.

And we do believe that we gained market share, and the place where we've gained the most market share is in small business segment in the low end of the business where we had the highest net client count growth.

Okay.

Thanks for that.

And then just migrating quickly back to the technology platform and the acquisitions, you've gone through some fairly significant changes in your technology platform and continue to make changes.

Can you give us a sense of how quickly you're able to take acquired products and integrate them, and how that may translate into when you start seeing growth from some of these companies that you're acquiring on an organic basis.

It's a great question.

I'll try to use real life examples.

So one of the companies that we acquired during 2012 was The Right Thing which was an RPO business.

That's a very different business from our core payroll HR and benefits administration platform, and so that is a platform that really will be integrated with our product offering, but there isn't a lot of consolidation necessary in terms of from a platform standpoint.

Different example, a couple years ago, is a Company called Work Scape that is a benefits administration business that in fact does have a benefits administration platform that served a different segment of the market, but still had some overlap with our own benefits administration platform.

So benefits administration is a place as a result of that acquisition where we are working hard on platform consolidation and making decisions around what our go-forward platform is, and trying to invest all of our dollars in that platform whenever we can.

So I think it really -- it varies based on the business unit and the product, but it's something that we spent a lot of time looking at and we're trying to take every precious dollar we have for R&D and put it on kind of new forward-looking innovative products and focusing on making sure that as we acquire companies that we don't allow proliferation of platforms to go on forever or indefinitely is a major priority for me.

(Operator Instructions)

Sara Gubins, Bank of America.

Good morning.

You mentioned particularly strong market share gain in small business.

Do you think you're taking share from other competitors or is this migrating smaller companies that perhaps didn't use third party services previously?

We think it's both.

We do have some data that we track in terms of win/loss ratios and I think we're making -- gaining ground across the board.

Okay.

And then separately on Global View, obviously you've talked about some pressure in Europe and internationally.

Could you give us an update on how Global View's performing and if there's any change in your sense of timing on when it might break even?

Yes.

I think from a revenue standpoint, the growth in Global View has been very good, as we mentioned the sales have been challenged partly because of the international environment.

But it hasn't changed our view of breakeven.

For the full year, that's fiscal year '14, but we do expect to start going positive on Global View in the second half of fiscal year '13 which is consistent with what we've been saying for a while now.

Thank you.

Gary Bisbee, Barclays.

Hi, this is Theresa Chen on behalf of Gary.

So just a quick question about your float income.

So given that there's renewed speculation of QE3 being back on the table, another round of asset purchases by the Fed, and obviously your guidance reflects what's happened to the market as a result of this and there doesn't seem to be an end in sight as rate hikes get pushed out year after year.

So for that 15% to 20% of your portfolio that does come off every year, what portion of that are you ultimately comfortable putting into other high quality, non-governmental instruments or are there any other options to alter your investment strategy currently?

Well, again, I would reiterate that our investment strategy still is focused on the safety and the diversification of the portfolio.

So we are not one to go out chasing yield on securities that have a lot of risk.

And I think the evidence of that has been the performance of the portfolio over the last few years.

That's first and foremost.

We have done some things around extending the portfolio a little bit, as I mentioned in my comments, which is why the duration has gone up a little bit.

We were getting paid to do that during fiscal year '12.

Interestingly, if you're following, that has come down and it's flattened a little bit now, so it's unlikely that that will be available at least as it looks right now.

And we have as I mentioned done a little bit more in high quality corporates as well.

So we continue to do that, those kinds of things.

But again, it's with the safety of the funds in mind.

Okay.

Great.

Thanks.

And just changing tracks, so back on the migration process to these cloud-based platforms, you had mentioned that part of the reason was to free up expenses and upsell additional services.

So net of the $15 million that it costs to implement this process, what ultimate cost savings do you see after all three platforms are migrated?

That's a great question that we're spending a lot of time on and just to clarify, the $15 million isn't necessarily to implement the process, it's to start the process.

And so we believe that this is a process that's going to take -- it's a multi-year endeavor.

It's going to take longer in our large account platforms than it will in our small account platforms but it will take multiple years across the board.

It's also important to note that we've been doing this all along.

So this is really, again, back to some of the things that I said over the last couple of calls, this is a really change in emphasis and speed rather than philosophy.

So we have been migrating clients, especially in our national accounts business, and in major accounts during the last several years, and my intention is just to accelerate that process.

So the $15 million is something that we kind of put in place as, if you will, seed money to help some of the business units move forward and actually do some of this acceleration.

But the businesses have in their run rates and in their business plans additional expense for migrations, and one of the things that we're trying to be disciplined about is also trying to build into those business plans savings and improvements, as a result of doing it.

Because we obviously believe that we're doing this because we're going to get a more positive outcome than if we didn't.

So we have to bake in some of those improvements over time.

So we don't have I think a lot of detail that we can give you or that we're willing to give or share at this point.

But I think in the future as we get closer to perhaps coming to closure on one or two of the large platform migrations, we might be able to give you some color of what the impact of those migrations will be on margins, sales or revenue on a go forward basis.

Okay.

And if I could just tack on -- on the other side of the migration process, the upselling of additional services, can you just give us an update on how that's going, I guess it's more pertinent to the RUN platforms, you made the most progress there.

It's actually pertinent to all of our platforms.

I'll give you again some real world experience.

Clearly, in RUN, it helps in terms of our cross-sell.

But if you go into Workforce Now, which is our new major accounts platform, the attach rate for the additional product if you will in our bundle are much higher, meaningfully higher than they were when we were selling individual products.

And so for example, now someone instead of buying just payroll they might buy payroll, HR and benefits or they might buy payroll, benefits and time and attendance, rather than just an individual product.

So we see meaningful increases in the attach rates of buying more than one module if you will as a result of the roll-out of Workforce Now.

Vantage account is the same.

We have really under 20 clients sold in Vantage.

So again, it's hard to say that there's a trend or shared data, so I'm not going to give specific numbers.

But there it appears that the attach rates of multiple modules is much higher than the traditional sale that we had before when a client bought individual products.

And in Vantage and in national accounts it's the same situation where people can buy payroll, HR benefits, time and attendance, and other products either as a bundle or in the old days, a la carte, and the bundle is driving greater cross sell and penetration.

Great.

Thank you very much.

Jim MacDonald, First Analysis.

Good morning, guys.

Switching gears, can you talk about what the acquisition environment looks like and what your thoughts are on that going into fiscal 2013?

So we're still very active.

We continue to look at properties.

On the other side of that coin, we feel pretty good about what we have in terms of our product portfolio today.

So we are being selective.

I think the valuation environment, I think it depends, I guess would be the best way to put it.

Some of the cloud-based properties out there still continue to trade at fairly lofty multiples.

But I think there's still opportunities out there as well for us to find acquisitions that hopefully complement our product set and help us kind of move forward in terms of our ability to innovate.

So we're still actively looking.

Again, there's no I think change in our philosophy, and our thinking, and our approach about being I think careful, selective, and cautious, but also trying to continue to add to our product portfolio, and hopefully also to our revenue base on a year-over-year basis.

For my follow-up, just switching gears, on the tax rate I see you're forecasting another lower tax rate.

But at some point if you switch your investment portfolio to more corporates, is that going to have some impact on tax rate or can you talk about that, what's impacting the tax rate?

No, there shouldn't be any appreciable difference there.

So we've had a good record over the last number of years of reducing the effective tax rate across the organization.

We're down in, '07 we were at 37.8%.

Now our guidance is 34.2% for next year.

So we've seen a steady decline in the effective tax rate and in addition, what I would point out is, we've essentially closed all open years for IRS.

They're currently looking at fiscal year '11, which they essentially signed off on, just haven't gotten the final close with no adjustments.

So that's an indication of not having any open big items or very much of that.

So we feel good about that.

Just to be crystal clear, because the question may imply that we invest in municipals.

We have very minimal investments in municipals.

The government instruments that we invest in are not municipal bonds.

Thanks very much.

Joseph Foresi, Janney Montgomery.

Hi.

I was wondering if you guys could talk a little bit about Europe, how conservative do you think you've been there and maybe if you can give us any quantitative numbers around what your expectations are for next year.

Sure.

I think that, again, starting with the I guess most tangible one that we do measure fairly carefully, and that has some trend in it if you will is the pays per control number.

And as we mentioned, that number is exiting at slightly worse than negative, 0.5% decline if you will.

That number was positive at the beginning of the year but only a slight positive and so what happened is as we went through the recession back in '09 and '10 and you had some decline in pays per control in Europe, it took a little longer for that decline to get better than it did in the US.

It eventually did get better and got slightly positive, and now it is slightly negative, returning in the other direction.

The turns in pays per control in Europe tend to be much slower due to government policies around labor, et cetera.

We don't think that's something that will fall off of a cliff, at least not overnight, and we'll have plenty of warning on.

As with our other businesses, the most important metric in us thinking forward about what is going to happen in terms of revenue growth is really sales.

And that is a number that is very, very hard to get a sense of based on the economic backdrop.

So we think we have a conservative sales plan that's achievable.

But it's also a plan that we are hopefully trying to push to get some minimal growth out of.

So I think we're just going to have to take it quarter by quarter and report to you what those sales results are, because that really is the thing that has the biggest impact, other than obviously client retention which is as important.

But our client retention is holding up pretty well and we feel pretty good about that because people as they hunker down, if sales begin to get more difficult, typically retention stays fairly good because it means clients are not moving or making changes, even though some may experience economic hardships, in general retention, at least international in Europe, tends to stay relatively good as we run into difficulties on the sales side.

So it's somewhat of an offset.

Bottom line is I think we -- the trend is not positive.

I think overall.

And we're cautious and I think we're being conservative, but we'll have to report to you I think on a regular basis on what's happening with sales in international.

Okay.

Just to be clear, are you expecting it to be down next year and is that built into the present guidance?

We don't really break out our sales guidance by business segment.

Okay.

That's fair.

And then my follow-up question, maybe you could give us some color around hiring expectations for the upcoming year.

What increases are you expecting on the sales force?

Have you made any changes in the compensation structure at all and how did the increases compare to prior years?

We are trying to do the same thing next year as we did this year, which is an outstanding accomplishment, which is to drive our sales growth with a combination of headcount growth and productivity.

This year we had about 6% headcount growth and 7% productivity growth.

This is probably one of the best years we've had in a long time.

I think some of it is obviously attributable to our products helping, but we've also just had outstanding sales execution.

So we have a great sales organization, great sales leadership, and they did a tremendous job in pushing not just growth but also productivity this year.

So we have a little bit of the same planned for next year.

I believe our head count growth for next year is around 4% to 5% and our productivity growth would be in the same neighborhood to get you to the 8% to 10% guidance.

And our hope is obviously to continue to do that going forward as long as we can, because it is quite helpful in terms of our -- not only our growth rate, but also our P&L from an operating leverage standpoint.

And on the sales compensation structure, any change?

Sorry, just wanted to complete the question.

I don't think that we have -- sorry, I forgot that part of your question.

We don't have any meaningful -- I'm sure that there are -- have been tweaks and there have been adjustments to our compensation policy.

If you heard something, let me know.

But I'm not aware of any major changes in policy.

But again, we have 4,400 salespeople and I'm sure there have been some adjustments and some tweaks here and there.

But during the budget process, we didn't uncover any major changes.

Okay.

Thank you.

Jason Kupferberg, Jefferies.

Jay for Jason.

I was wondering if -- I wanted to ask a question about the HP contract.

Can you provide us with a rough sense of the size of that deal?

And also maybe a little bit of commentary on your pipeline in terms of other sort of real mega deals like that, are there more you're working on, what point are they in the sales cycle, et cetera.

We probably -- we typically wouldn't talk about an individual new client and that client is one that I think is currently in implementation.

It will be in implementation for a while.

So maybe we can think about that one and give you more color after we've got them on-board and everything is set.

But we're obviously very excited because of the global nature and the size of the opportunity.

I think we have others like that that we've sold and started over the last three to five years, and we have others like that in the pipeline.

So I don't think there's anything unique about HP.

It's quite large, and it's many countries, but it's not unique.

Okay.

Maybe as a follow-up on the implementation side, I think you indicated that was going to start in '13 and continue for about five years.

Presumably, you'll be able to start recognizing some revenue on the deal before the end of the five years.

On the cost side, how much of the implementation costs are you going to capitalize versus expense?

On the expense portion, is it significant enough to move the needle on your overall corporate margins?

I'd just say that we wouldn't get into the details of that, particularly on any one particular client.

All right.

Fair enough.

Thanks.

John T. Williams, UBS.

Mr. Williams, your line is open.

Mark Marcon, Robert W. Baird.

Good morning.

I was wondering if you could just discuss a little bit about what you're seeing in terms of the metrics in terms of client satisfaction and retention, post migrating clients either to RUN or Workforce Now, and what the implications are going forward?

And then a separate question.

There's obviously a lot of changes that are occurring in HCM and particularly with regards to the ERP players.

To what extent is that a big opportunity to potentially continue to gain share or accelerate the growth in nationals?

Okay.

On the first part of the question, I think, again, probably a little early to be able to give you I think substantive data in terms of post migrated clients versus pre, but I'll give you a couple of I guess indicators, if you will, leading indicators.

So we have in our small business segment only started the process of thinking about the migration to RUN, and there what we've done is a couple of pilots, and we've been I think pleasantly surprised by I guess the willingness and openness of the clients to move.

Because there was always, again, internally we have debates about how easy it's going to be and what the impacts are going to be of these migrations.

And so far the results in the small business segment were encouraging in terms of our ability to engage the clients and get them to move.

In other words, they seem excited and happy about the prospect of getting on to the new technology.

In Workforce Now, in major accounts, we have been migrating clients for several years now, not just to Workforce Now, but to the predecessor platform which was called Pay Expert.

We probably have some data there and I can't unfortunately give you anything concrete.

I don't know that I have a breakdown of client satisfaction pre or post, but we do have some client retention statistics that indicate, again, that it's a positive outcome for us, that we haven't had kind of the what some people would call a dooms day scenario that as a result of the migrations or the transitions that clients end up leaving.

Because they're either unhappy, or they get put in play, or whatnot.

So that's clearly a risk that we worry about a lot, and that we try to manage as part of the migration process.

But so far the work that we've been doing in major accounts has been encouraging on that front.

Great.

You had a question about ERPs and HCM.

Do you mind repeating it?

Basically, within the human capital management space and just HR in general there's obviously a lot of chatter around what's happening with the ERPs, and then obviously workday coming out.

So it seems like a lot of HR departments at large organizations are thinking about what their strategy is going to be over the next three to five years, and I was just wondering to what extent you viewed that as a significant positive opportunity.

We view it as a positive opportunity.

When you look at the statistics that our marketing business development people look at, there are a lot of decisions that need to be made but as you've seen, some of the decisions keep getting delayed.

And so when they'll be made, we're not absolutely sure.

But the numbers would appear to show, again, no different than in our Dealer business, you can look at the average age of a car and you can predict you how many cars are going to be bought in the future, kind of know what the average age is of installed human capital management systems is in ERPs and others.

And what the likely activity's going to be on a go forward basis.

And that would give us some level of optimism that there's going to be a lot of opportunities that we would then have to win in order to really capitalize on it.

But I think that most industry analysts would tell you that we are on a positive side of that trend and of that market.

Great.

And then one last numbers question, just the impact with regards to the expiration of the employment tax credits, that's all in the first half?

A big part of it is, yes.

Specifically, it's the higher tax credit, which we've got a benefit of in the first half of this year, and that goes away.

So that's the biggest driver.

Great.

Thank you.

This concludes our question-and-answer portion for today.

I am pleased to hand the program over to Carlos Rodriguez for closing remarks.

Thank you.

Give you a couple summary comments.

We want to first of all, thank you for joining us today.

As you could tell, we're very pleased with our fiscal year 2012 results.

I believe the business is performing well.

We mentioned that we believe we're gaining market share.

We achieved our targets for the year, and I think we're very well positioned heading into 2013.

So I think we're doing the right things and we'll continue to do that.

We'll continue also our shareholder friendly policies of our dividend, as well as based obviously on market timing, our share repurchases.

And we will look forward to talking to you again next quarter.

Thank you again for joining us.

Thanks, everyone.

This does conclude today's conference call.

You may now disconnect.