自動資料處理 (ADP) 2013 Q1 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 First Quarter Fiscal 2013 Earnings Webcast.

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

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

(Operator Instructions)

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

Thank you.

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

Thank you for joining us for our First Quarter Fiscal 2013 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 Investor Relations section of our website.

These schedules have been updated to include the first quarter of fiscal 2013, and all prior periods have been updated to reflect fiscal 2013 budgeted foreign exchange rates and the impact of discontinued operations.

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 will now turn the call over to Carlos for his opening remarks.

Thank you, Elena.

Good morning and thank you for joining us.

For those of you joining who have been impacted by Hurricane Sandy, our thoughts are with you and we extend our best wishes for a speedy recovery.

ADP's Headquarters and many of our other operations were in the path of the storm.

I'm proud to say that when I visited four of our major facilities in New Jersey on both Monday and Tuesday of this week, all were operational, running on emergency generator power, and with committed and dedicated associates who continued to make good on our obligations to our clients and their employees.

As all of you know, ADP pays 23 million people in the US and 34 million people worldwide, and while the safety and security of our associates is our number one priority, the last three days were another example of ADP's commitment to deliver.

While there are obviously areas where courier deliveries are not yet possible, our associates worldwide are supporting each other, going above and beyond to make sure our clients and their employees don't have yet another challenge during these difficult moments.

Before we get started on the earnings discussion for the first quarter, I want to discuss the CFO transition we announced earlier this morning.

As you read in the Press Release, we announced that Jan Siegmund is transitioning to the CFO role, as Chris Reidy will be leaving ADP.

As Elena just said, Chris is here with me today to discuss our first-quarter earnings, and I want to take this opportunity to thank Chris for his many contributions over the six years he spent at ADP.

Chris and Jan will work together over the next few weeks to ensure an orderly transition.

Jan will be joining our second quarter earnings call on February 5, so our plans are to have Jan meet many of you over the next several weeks before the next quarterly earnings call.

Jan's background is in the Press Release, so I'm not going to go through all of that, but I want you to understand why Jan has been selected for this key role.

As head of strategy at ADP for eight years now, Jan has been instrumental in developing the strategy for ADP's evolution from a payroll-centric company to a leading provider of a broad and diverse human capital management solution.

Jan's tenure and experience at ADP are enormous positives for ADP as we move forward to leverage the many opportunities ahead of us.

I hope you will all join me in wishing Chris well and welcoming Jan to the CFO role.

Now let's turn to the first quarter results.

After my opening remarks about the first quarter, I will turn the call over to Chris, who will take you through the highlights of the quarter, after which I will return to provide you with an update on our fiscal year 2013 forecast.

Before we take questions, I will provide some concluding remarks.

Let's turn to slide 4. As you read in this morning's press release, ADP reported good results for fiscal 2013's first quarter.

Total revenue growth of 5%, 3% organic and 2% earnings-per-share growth from continuing operations, were in line with the expectations we outlined for you back in August.

I am very pleased with the performance of our business segments during the quarter, despite the negative impact on overall ADP results from several items that we communicated to you back in August, which you read in this morning's press release.

Once again, I am particularly pleased with our sales execution and sales productivity in our Employer Services and PEO Services during the quarter, which resulted in 15% growth in worldwide new business sales in the quarter.

Sales were good across our core offerings in the US, which include RUN, Workforce Now, and Vantage.

Across our major market segments in the US, Small Business Services and National Account Services sales were strong, with double-digit increases over the prior year.

We recently released our latest version of Workforce Now, which delivers a robust new user interface and provides a consistent look and feel across all roles and modules.

This new version of Workforce Now is also offered in Canada and we are quite pleased with the positive early market acceptance in that region.

I am pleased that sales of our GlobalView solution for multi-national companies were strong in the quarter as well.

In our Employer Services International organization, sales of our best-of-breed solutions across Europe were somewhat mixed, given the economic weakness in certain of these markets.

We saw strength in our other geographies, however, particularly in Canada, Brazil, and Australia.

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

As we indicated back in August, client revenue retention declined 40 basis points during the quarter.

It's important to note that retention is near historically high levels, and this makes it difficult to improve on a quarterly basis.

Although retentions declined this quarter, we do expect year-over-year improvement in client retention on a full-year basis.

Moving on to Dealer Services, automotive sales in North America were solid.

However, the weak economic landscape across Europe resulted in lower car sales, though the Asian markets where Dealer Services participates are doing quite well.

Dealer Services continues to execute well on its share of wallet strategy with strength in digital marketing.

Transaction volumes, sales growth, and our win/loss rate continue to be positive in Dealer.

I am pleased with the improvement in worldwide revenue retention and market share gains.

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

Thanks, Carlos, and good morning, everyone.

I'm going to be on slide 5, when you can see it.

Total revenues grew 5% for the quarter to $2.6 billion; organic growth was 3%, as acquisitions contributed two points of growth.

As anticipated, unfavorable foreign exchange rates during the quarter negatively impacted revenues 2%.

As we indicated when we provided our initial forecast in August, lower client fund interest revenues, due to lower market interest rates, negatively impacted revenues 1%.

Revenues were also negatively impacted an additional 1% from lost revenues related to last year's second quarter sale of assets and the expiration of certain employment tax credits in our Tax Credit Service business.

Pretax earnings increased 2%, and ADP's pretax margin declined 50 basis points.

As there were several items that negatively impacted ADP's revenue growth, many of these items negatively impacted pretax earnings and margin growth.

Fiscal 2012 acquisitions did not have a meaningful impact on pretax earnings, but negatively impacted ADP's pretax margin 40 basis points.

The client fund extended investment strategy, which is driven primarily by interest on client funds, negatively impacted pretax earnings growth 4%, and pretax margin 100 basis points.

The impact from last year's sale of assets and expiration of certain employment tax credits negatively impacted pretax earnings growth 4% and pretax margin 50 basis points.

Moving next to net earnings, we reported a 1% increase on a higher effective tax rate.

Diluted earnings per share increased 2% and benefited from fewer shares outstanding compared to last year.

The negative impacts from the decline in client interest and the grow-over from last year's second quarter items also created significant pressure on net earnings and diluted earnings per share.

The point I am making is that when you peel back and remove the impact of these items, ADP's businesses are delivering very good revenue, earnings, and pretax margin improvement.

We repurchased 3.7 million ADP shares fiscal year-to-date for a total cost of $215 million.

We ended the quarter with cash and marketable securities of $1.2 billion, excluding the assets related to our reverse repurchase borrowing related to our extended investment strategy for the client funds portfolio.

Let's move on to slide 6 and the business segment results.

As I've stated, we are pleased with the performance of our business segments.

Employer Services grew total revenue 6%, the PEO grew 13%, driven by 11% growth in the number of average worksite employees, and Dealer grew 9%.

On an organic basis, Employer Services grew 5%; PEO's 13% growth was all organic; and Dealer Services grew 7%.

Worldwide new business sales for Employer Services and PEO Services were particularly strong in the quarter with 15% growth.

Carlos took you through the sales details a few moments ago, so I will move on to discuss the revenue growth drivers in [Employee] Services.

Of the items we called out that impacted total Company results in the quarter, the foregone revenues related to last year's second-quarter sale of assets and the expiration of certain tax credits negatively impacted our Employer Services segment revenue growth nearly 2 percentage points.

Good growth from RUN and Insurance Services were the primary drivers of our healthy growth in the small business market place.

In the mid-market, revenues from our Workforce Now solution are growing nicely, as are HR Services and Comprehensive Services revenues.

Across the mid-market and large-company market, we are pleased with the revenue growth from our time and labor management solutions, and at the high end of the market, we are pleased with Vantage sales, but the contribution of revenue growth is still small at this point.

Revenue growth in the quarter from our best-of-breed solutions across Europe and from multi-national solutions was also solid in the quarter.

Same-store pays per control in Employer Services in the US was strong, with an increase of 3.3%; however, same-store pays per control across Europe declined during the quarter, in line with our expectations.

As Carlos mentioned, client revenue retention declined 40 basis points in the quarter.

Average client fund balances increased 6% for the quarter.

Solid new client growth continued, especially in Small Business Services, and increased pays per control contributed positive balance growth.

Now let's turn to slide 7, and I'll take you through the 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 objective of our investment strategy remains 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 first quarter and added more highly-rated corporate bonds to our portfolio.

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

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 slide, you will see that a summary of the anticipated pretax earnings impact of the extended investment strategy for the client funds investment portfolio of fiscal 2013.

We continue to 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 also continue to anticipate a yield on the client funds portfolio of 2.2% to 2.3%, down 50 to 60 basis points from fiscal 2012, resulting in an anticipated year-over-year decline in client funds interest of $70 million to $75 million, slightly worse than our prior forecast, as anticipated new purchase rates declined from the time we provided our initial guidance in early August.

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 $80 million to $85 million for fiscal 2013, which reflects the $5 million deterioration in the client interest forecast.

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 that we provided, we expected 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 about 30 basis points on average.

Combining the impact of current lower expected rates with our balanced growth expectation of 5% to 7%, we anticipate a year-over-year decline of $80 million to $85 million -- so slightly worse due to rates, offset a bit by our balance expectations that fall slightly above the 5% scenario I 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 will turn it back to Carlos to take you through the remainder of the forecast for fiscal 2013.

Thank you, Chris.

We are now on slide 8. Our forecast excludes the results of operations of a business we intend to sell, as it is reported within discontinued operations.

It is important to note that despite the impact of discontinued operations, we have maintained our fiscal 2013 forecast for total revenues and earnings per share growth.

For total ADP, we continue to anticipate total revenue growth of 5% to 7%.

We continue to 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 effective tax rate of 34.5%.

We also continue to anticipate 5% to 7% growth in diluted earnings per share compared with $2.72 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 shareholders, depending, obviously, on market conditions.

And while we don't provide quarterly guidance, I do want to give you some insights into year-over-year comparisons for the remainder of fiscal 2013, as they are impactful to the second quarter and the full year.

Let's turn to slide 9. We anticipate that foreign exchange rates will negatively impact revenues about 1 percentage point for the year, with about 0.5 percentage point drag anticipated in the second quarter.

As a reminder, movement in FX rates is not impactful to pretax earnings.

In addition, as Chris just took you through the forecast related to our client funds strategy, the interest revenue piece of this strategy is expected to decline $70 million to $75 million year-over-year.

The negative impact from an expected lower average yield on the portfolio due to lower new purchase rates is expected to be 1 full percentage point of drag on ADP revenues for the full year, and in each of the second through the fourth quarters, mitigated to a very 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 $80 million to $85 million in pretax earnings.

This translates to a drag of about 100 basis points on ADP's pretax margin for the year.

The negative impact by quarter is anticipated to be about 100 basis points in both the second and third quarters, and about 120 basis points in the fourth quarter.

Taking it down to EPS, the $80 million to $85 million anticipated decline in pretax earnings equates to a drag of about $0.11 on earnings per share, an anticipated decline of about $0.03 per share in each of the second through the fourth quarters.

Now continuing to slide 10.

Fiscal 2012 acquisitions are forecasted to be earnings-neutral in terms of dollars, but we continue to anticipate pressure on the pretax margin in fiscal 2013.

For the year, we expect about 20 basis points of negative impact, with 20 basis points negative impact in both the second and the third quarters.

Moving to slide 11.

Lastly, I want to remind you about certain 2012 items that 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 employment tax credits within our Tax Credit Services Business are expected to pressure revenue and earnings comparisons in fiscal 2013.

We anticipate nearly 0.5 percentage point negative impact on revenue growth for the year, with about 1 percentage point negative impact in the second quarter.

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

This equates to a $0.04 year-over-year decline in earnings per share for these items, with about $0.02 in decline in the second quarter.

I also want to point out that in last year's second quarter there were favorable pretax items totaling between $15 million and $20 million that are one-time in nature that we don't anticipate recurring in this year's second quarter.

The takeaway here is that we expect continued difficult year-over-year earnings and pretax margin comps for the second quarter.

Now let's turn to slide 12 for the segment update.

The impacts from the expected drag from fiscal 2012 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 these segment forecasts.

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 14% 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 the over $1.2 billion sold in fiscal 2012.

For Dealer Services, we are forecasting 7% to 9% revenue growth with about 100 basis points in pretax margin expansion.

And now turning to slide 13, I'd like to leave you with some closing remarks before we open it up to questions.

Overall, I am very pleased with our first quarter results.

Our key business metrics are strong.

Employer Services and PEO Services new business sales and productivity are particularly strong.

Dealer Services is performing well and gaining market share.

Momentum in the Business is good, though I am somewhat cautious given the uncertain economic landscape here in the US and in Europe.

Unfortunately, market interest rates continue to be very low with little indication of rising near term.

But I believe ADP is well positioned to leverage the opportunities of the large, global human capital management marketplace, and we are keenly focused on our four strategic pillars for growth, which include cloud-based HCM solutions, market-leading HR BPO solutions, leveraging our global presence, and growing and deepening our key adjacencies.

And now turning to slide 14 -- we're focused on delivering stellar service to our clients and creating an environment that fosters innovation.

ADP remains committed to shareholder-friendly actions and returning cash to shareholders through dividends and share repurchases.

I am pleased that ADP continues to be rated AAA by both Standard & Poor's and Moody's, reflecting the strength of our business model and our balance sheet.

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

Now I will turn it over to the operator to take your questions.

(Operator Instructions)

David Togut, Evercore Partners.

Congratulations on your retirement, Chris.

Thank you, David.

Very strong new business sales growth, 15% for ES and PEO.

Can you give us more detail by small, major, and national accounts and maybe some insights into how some of the newer products are doing, particularly Vantage HCM at the high end?

In all of our core markets we had good growth, and it was particularly strong in national accounts.

There we did have an easier comparison.

In small business we had also very good results, which are consistent with what we have been seeing for a while now.

In major accounts we had solid results there as well.

I think it is somewhat reflective of, I think, the underlying product portfolio still generating good traction in the marketplace and our sales organization still being excited about the new product offerings.

I want to caution you that the strong sales in national accounts, just keep in mind there is a relatively long lag between when a sale takes place in national accounts and when it actually starts.

I think the other caveat there is that although Vantage sales are quite positive in the last quarter, it is still relatively small in terms of total dollars on our sales number, as well as a relatively small impact on revenue given the lag for those also large accounts to start.

But overall, you are on the right issue, which is our sales results were quite positive.

It's been a while since we've had four consecutive quarters of double-digit sales growth and I couldn't be more pleased with that, because that bodes well for our future revenue growth.

Carlos, can you give us a little more granularity on Vantage HCM sales?

You have a very effective competitor in the national accounts segment, instead of cloud and SaaS base offerings.

Can you can you give us some more details around bookings and how you are doing in head-to-head competition with Vantage HCM?

We obviously have a number of competitors.

Our differentiation with some of the pure-play cloud competitors is really our service capabilities.

And I think we are still effectively differentiating ourselves with, now, a better technology solution, which is more user-friendly and has better -- it's actually a unified database, in terms of a cross module, so it's really not even an integrated offering.

We are quite pleased with the technology backdrop, but we are also very happy that we continue to differentiate ourselves and win business in the marketplace based on our ability to deliver service in addition to the technology.

In terms of the numbers, I don't know that it would be appropriate for us to give specific numbers, but I would just say we are very pleased.

And I would say the results in the quarter were quite good and an accelerating path in terms of numbers of new business sales.

I think the last call, we told you we had a dozen or less; I would say we have over three times that now.

And I think that is probably as much as we would like to say there, and we probably won't say much going forward either, because we don't really break out our sales results by individual products.

It will show up in the results eventually, but again, there is a lag because of the size and the timing of implementation.

Thank you very much.

Paul Thomas, Goldman Sachs.

Continuing on the strong new sales start to the year, you talked about some macro concerns of course, but it doesn't seem to be slowing new sales yet.

Is the expectation that we're not going to see much change until the second half of the year, or are there some signs of deceleration already, or how should we be thinking about new sales progression through the year?

I think the concern I have, is the concern I think everyone has, which is the uncertainty in the economy as a result of the election and then the so-called fiscal cliff.

What we have seen historically is that when concerns emerge in the economy, or when the economy actually starts to slow, our sales results do get negatively impacted as people put off decisions or don't make decisions.

As you just pointed out, through this last quarter, we have not seen any signs of that happening yet.

But I think we are appropriately cautious because of, obviously what is going on in terms of the fiscal situation and the uncertainty in the marketplace regarding tax policy and other items as well.

But we are not seeing it yet in our sales results and obviously if and when we do see weakening, we would share that with all of you.

David Grossman, Stifel Nicolaus.

You've had obviously some strong renovations and new product offerings.

You've made some acquisitions in adjacent markets.

Can you share any metrics or trends, perhaps, in revenue per client or, perhaps, profitability per client given these changes?

I think the number that I think is the most interesting for us, besides the absolute sales results, is the attach rates in both national accounts and major accounts of multi-modules.

Because we are trying to become more of a full-suite human capital management solutions company in addition to just selling payroll.

One of the things our new products are allowing us to do is to really provide solutions across HR, payroll, benefits, time and attendance in kind of a seamless technology solution.

But, obviously, those are also sold separately, so it doesn't necessarily mean people will buy all those modules.

But we are actually pleased with how many multi-modules are being purchased in both Workforce Now, which is our new solution in major accounts, and also in Vantage in national accounts.

So those attach rates are much higher in percentage terms.

In other words, the number of clients buying more than one solution at a time is much higher than it has been historically in both of those businesses.

That obviously drives higher revenue per client, and it obviously creates an opportunity for us to further differentiate ourselves and create additional stickiness with the clients given that we have other aspects of the human capital management strategy that we're providing to them.

Should we expect that to be a margin driver as well then, Carlos?

I think that is fair, because for sure there is some sales efficiency that we gain, and we do have -- sales cost is a decent part of our overall cost structure.

I think that providing service in a multi-module environment is different than how we were doing it before, so we are re-tooling and re-equipping our folks to be able to deliver service in a seamless fashion.

In other words, when a client calls in to ask a question, they can go to one team to be able to get the answer to their questions rather than having to go to four different departments or four different units within ADP.

So that requires some investment up front, which is what we are doing now, to have a seamless, unified service experience in addition to our unified technology.

But I think medium and longer-term, I think both on the sales side and on the operating cost side, I do think that higher attach rates of multi-modules and higher revenue per client should really generate improved margins for us.

Great.

Thank you.

Gary Bisbee, Barclays Capital.

My first question has to do with your view on IBM's acquisition of Kenexa; how do you think this might affect or compete with your current HR services offerings?

I think that there have been a number of transactions, as you know.

SuccessFactors and Taleo were also acquired by other providers, and so Kenexa is just kind of the latest in a number of consolidations taking place.

We have done a couple of acquisitions ourselves.

We compete with Kenexa in our applicant tracking services business as well as in some of our talent management businesses, but we don't anticipate a huge change, at least not in the short- and medium-term, and I guess we're just going to have to wait and see.

We haven't really seen any major changes or disruptions to our sales force as a result of that transaction.

Great.

Thank you.

Switching gears back to the macro environment, over the past couple of quarters we've seen some moderate jobs growth, choppy at best, including today's number from ADP.

I was wondering if there's a straight-forward way of deducing how quickly jobs growth feeds into your revenue stream and, specifically, what kind of threshold does national employment growth have to get to, to really move the needle in either Employment Services alone or the business in general.

The metric that we've disclosed, and we talked about it on the call this morning, is really what we call same-store pays per control.

The dollar impact on revenue for each 1 percentage point increase in pays per control is $20 million.

And that's pretty much close to a 100% margin, it goes straight to the bottom line.

Even though there's some additional expense related to serving additional employees at client sites, it's a very margin-rich type of revenue.

We disclose that, we track it very carefully.

And, again, our business is going to be obviously reflective of what is going on in the economy at large, but we, for example, have less exposure to the public sector, which has been a very hard hit sector when it comes to employment over the last two or three years.

So our set of clients is slightly different from the overall economy, but obviously, also overall reflective of the economy.

But that 3% to 3.3% pays per control growth we are now experiencing does help us and it creates wind at our back, and it is clearly helping us to the tune of $20 million per 1 percentage point.

Thank you very much.

Jeff Silber, BMO Capital Markets.

In your prepared remarks, you talked about your confidence in retention still being up this year, despite the fact that it was down a bit in the first quarter.

I'm just wondering what gives you that confidence and what indicators are you looking at?

Thanks.

Actually the follow through of the call from last quarter, where we experienced a couple of losses in the fourth quarter in our National Accounts space, and I think we also had notifications of another couple of losses that actually affected our retention rate in the first quarter.

I think we talked about it in our fourth quarter call.

I know it was a while ago, but we were aware of these losses.

Losses in our National Accounts space are lumpy.

It's not a scientific term, but they do go up and down, and we have decent amount of visibility into the future regarding losses in our National Accounts space.

Given that that was where we experienced the decline in the first quarter and given the visibility that we have, we are very confident on a go-forward basis we can deliver our forecast.

Obviously, if the economy were to change or other things, external factors could impact that, but we had good retention in our other businesses outside of National Accounts in the first quarter.

That's great to hear, and then just a couple numbers-related questions.

If you can give us what capital spending was in the quarter, what you think it might be for the year, and also what you think the depreciation and amortization will be for the year as well.

Thanks.

Wow, that's specific (multiple speakers).

I never got that questions before.

In the quarter, we had -- let's see -- capital for the quarter was $32 million, $30 million-ish.

And last year, for the full year, we had about $150 million.

We expected it to be slightly higher than that, but not much, so kind of in that range.

I don't think we've gone into depreciation and amortization, but that doesn't change too much -- I wouldn't expect it to change too much year-over-year.

Okay, great.

Thanks so much.

Jim MacDonald, First Analysis.

Just quickly, can you say anything about the business you divested, what area it was in?

Unfortunately, we are right at the tail end of negotiations on that, so we can't.

But I think what we disclosed, or I believe what we are disclosing is that it is around $50 million in annualized revenue.

So it is a relatively small business that -- I think it will become clear that even though we entered the business with expectations, it doesn't really fit incredibly well into the existing portfolios and that is the reason for the divestiture.

We're really just trying to focus in more on the HCM space.

Can you talk a little bit about healthcare going into calendar 2013, as some of the changes start to kick-in here, and how do you think that will affect specifically your PEO sales?

I'm going to have a lot more detail on that after next week.

I'm actually spending a day with our PEO folks in TotalSource to get into a lot more detail.

Right now, our sales are actually doing quite well in PEO, so because there is a lot of discussion about healthcare, I think that creates opportunities for our sales force.

Because inertia is a powerful force and now everyone is thinking about what the impact of healthcare is going to be both in small companies, medium companies, and also large companies.

We believe we have a unique value proposition in the PEO, as being a quote-unquote large employer, if you will, and providing health insurance to small companies on an aggregated group basis.

We think we're going to still be able to maintain our differentiation and a competitive advantage, but we are also obviously watching all of the implementations of all the regulations.

Because even though the legislation is passed and has been upheld by the Supreme Court, there is a lot of rule-making still going on in the background by various government agencies.

We, so far, have not seen anything that leads us to believe that we are not going to be able to continue to be successful in the PEO space.

We also have a National Accounts business that does benefits administration, including COBRA, FSA administration, health and welfare administration, open enrollment, etc.

We believe that there, because, again, of all the uncertainty, and all the questions, and all the change, that we will have opportunities to help our clients.

In other words, providing them solutions to get through the changes and deal with the changes and stay in compliance.

There are going to be a lot of compliance requirements as a result of all of these legislative changes, and the solutions and products we have in National Accounts, as well as the ones we have in the PEO, are really designed to help clients navigate those waters and get through all of that regulation.

Thanks.

Ashish Sabadra, Deutsche Bank.

I had a quick question regarding the solid sales growth.

Is that driven off of share gains from your regional or national competitor, or is this mostly in-house from smaller CPAs moving over to ADP?

I think that we believe, again, across our markets that we are gaining market share.

When you look at the number of the client -- the actual client unit growth, as we mentioned earlier, we are also getting higher revenue per client in both our Workforce Now and Vantage products.

But when you look at our overall client count, it is growing faster than the overall market, which leads us to believe that we are gaining market share.

Okay, in terms of pricing, how is the pricing trending?

Any color there?

Not really.

No news to report, other than business as usual.

Our price increases last year, I think, was in the same neighborhood of, I think, 1% net.

And I think the market environment from a sales standpoint, in terms of sales, I think discounting and other aspects of our pricing I think remain pretty stable.

We haven't heard anything different.

Okay.

One final question, and this is in regards to your cloud solution.

Is there any kind of a risk that the cloud solution as the cloud solution gets more traction that could cannibalize your full-service offerings, especially as Vantage gets a lot more traction in the marketplace?

And how do you think about it versus ability to sell on newer or additional modules?

So the risk of cannibalization versus the ability to sell on additional modules.

That is a great question.

Just to be clear, to start off, I want to say our cloud-based solutions are full-service as well.

And I can tell you that after 60 or more years in business at ADP, we've done a lot of cannibalization in order to be here today.

We have every intention to, over time, move our clients to our new solutions and the new solutions are full-service as well.

We believe pricing and margins are at least the same, if not better, in our new solutions.

We believe we can sell more modules by being broader, with an HCM solution in addition to just being payroll.

So we don't see this cloud opportunity as a negative at all.

We have been selling cloud solutions for almost a decade now.

We wrap service around them, we wrap tax filings, we wrap open enrollment call centers, we do a lot of things that are beyond just the pure technology.

That is really our differentiator and it works very well for us and we are going to continue to do that, and that is absolutely going to lead to cannibalization, and we don't see that at all as a negative.

Okay, thanks for the color.

Jason Kupferberg, Jefferies.

I just wanted to ask a question on the interest in client funds as you start looking out to next year.

I know you guys had said at the analyst meeting that in fiscal 2014 we would see a year-over-year decline in interest on client funds.

I know you are still saying the trough will be in fiscal 2013.

But the magnitude of the projected decline in fiscal 2014, is that now a bigger order of magnitude than what you were expecting at the time of the analyst meeting, given the move in the forward curves, and is there any way you can help us quantify that?

I tried to give you some of that color in my remarks.

But as we look out at '14, and not from a guidance standpoint, but just as a way to think about it, we still see it being less of a drag than it is this year.

Because of the year-over-year compare, it hasn't moved much from what we disclosed to you back in May.

Okay, understood.

Any color you can give us -- and I apologize if I missed this earlier -- but in Europe, specifically, trends in new sales, and pays per control, and retention?

Pays per control were slightly down and actually have been pretty consistent, so it's not dropping like a rock.

It's been a little better than 1% negative, so 0.7%, if you will, negative pays per control.

I think it has been there for several months now.

Right in line with what we expected.

Yes, in line with what we expected.

Our sales have been soft, but frankly, have also held up relatively well.

So I'm quite proud of our sales organization there in the face of what is obviously a very, very difficult situation.

But we do have positive revenue growth; it is kind of low single-digits, purely just in Europe.

But our overall international business, under the circumstances, is holding up quite well.

We obviously are seeing where you're reading about slowdowns in some of the emerging markets, but our Brazilian business continues to grow very, very well and they have had very strong sales results.

I think all in all, I'd have to say that we are quite pleased under the circumstances with what is happening in our international business, specifically in Europe.

And just lastly for me, as you think about, again, just directionally for next year, understanding that it's way too early to give formal guidance, should ADP as a whole be back to overall corporate level pretax margin expansion next year?

Again, understanding that the float income is going to be down year-over-year.

It is a fair question.

The headwinds we've had from interest rates have been obviously very prolonged, and it's getting very frustrating for a lot of us, but it is a significant headwind.

I think it's important to note that we have significant margin expansion this quarter and this year, when you strip out interest income.

And you have to be careful about stripping it out because it is part of our business, so we get that.

But for you to understand what's going on in the underlying business segments and the health of the business, it is important to strip out.

When you do that, the businesses are performing quite well and having really good margin expansion.

We have a couple of those comparison issues in the first and second quarter that we talked about that also aren't helping from a comparison standpoint, but those will abate in the second half of the year, and it will be even more obvious that we are driving very, very strong underlying margin improvement in this business despite the headwinds from interest.

It's way too early for us to say anything about next year, because this is not the appropriate time for us to be talking about what's going to happen with interest rates.

We have to wait quite a while to really know exactly what has happened in terms of market interest rates to give you clear guidance on how much that headwind will be next year.

At this point, today, as Chris just said, we do expect it to be less of a headwind in 2014 than it was in 2013.

But it's way too early for us to be able to give you any kind of sense of how much we have to overcome and then what the underlying margin improvement will be.

But we are exactly driving towards, as rates bottom, returning to our historic, if you will, margin improvement abilities we have.

Okay, understood.

Thank you, guys.

Joe Foresi, Janney.

This is Jeff Rossetti.

Just wanted to see -- I believe you mentioned on the question back about share gain, you highlighted Workforce Now and Vantage.

I just wanted to see if you were also seeing that on the small business side.

Actually, I don't think I -- I may have highlighted them as doing well in terms of sales results, but when we talk about client counts, we talk about client counts across all of our segments.

So when I talk about market share, I'm talking about total client count, which includes also our Small Business Services division.

All three of those combined are growing faster than the market and we're gaining market share.

If I was speaking about any specific product, it was unintentional.

Client growth in our Small Business is particularly strong.

Okay, thanks.

Any thoughts about the acquisition environment, what you are seeing out there?

Thank you.

We continue to look at opportunities in the marketplace.

I think we have a pipeline of things we're looking at.

I think nothing different from what we have been communicating in the past, in terms of the things we are looking for, which are tuck in acquisitions that fit into our existing businesses.

We probably have a couple of opportunities to round out our HCM portfolio, but we are actually quite pleased today with what we have, and we are very focused, as you can tell, on just driving additional new business sales through our distribution system of what we currently have in place.

But there are still things out there that we are interested in, that we are looking at.

Sara Gubins from Bank of America.

You mentioned in your prepared remarks that GlobalView was strong.

Could you give some more color there about what you are seeing, and any metrics that you could provide?

Other than it was strong, that is another business, who in addition to National -- it is actually more true in GlobalView than in National Accounts that the business is quite lumpy.

When the sales come in and how they compare to the previous year I think are important, but nevertheless, we are pleased.

We had a good quarter, we had good sales.

But I don't know that we can say anything more, other than we had a good quarter.

I wish there was some underlying trend that I could point to, but I think it is somewhat related to the nature of the business, which is the lumpiness.

I could be off, but I seem to remember you were expecting to reach profitability for GlobalView this fiscal year.

Is that right, and is that still the case?

What we said was it would be breakeven in the next fiscal year, but we do expect to start to go positive in the second half of this fiscal year, but not positive for the full-year this fiscal year.

Okay.

And then just last one.

Is there anything that's worth pointing out around how your fundamentals trended over the course of the quarter and in the earlier part of this past month?

Sorry -- what fundamentals?

Fundamentals in the US, I'm wondering if there's anything you thought was particularly interesting about how things trended over the last 3.5 months or so.

Again, to reiterate what we've already said, I think our pays per control was strong and we are very pleased with that.

Our retention results, when you peel back the onion, I think we're also -- we're satisfied because of what we saw in our small and mid-size business segments and across some of our other businesses.

Sales were strong.

I think our revenue growth was in line with what we expected.

So again, I know there's a lot of noise in the economy and we have this fiscal cliff we are all facing, and a lot of uncertainty, but our underlying fundamentals really held up and were in line with our expectations.

Thank you.

Mark Marcon, Robert W. Baird.

I was wondering if you could talk a little bit more about the client retention trends.

It sounds like it is primarily in Nationals that you are seeing a little bit of the lumpiness.

Is it normal for it to occur around this time of the year, or when would it typically be most pronounced in terms of client decisions?

Remember, from an impact standpoint, we are talking about comparisons.

So I don't think anything has changed in terms of the seasonality of when losses take place in our National Accounts business.

There is no change in terms of what we are seeing in terms of behavior of clients or otherwise.

I think when you look at being at a 91%, I think we were close to 91% retention for the year last year, and also that was close to what the retention was the previous year.

The previous year was a historic high, and last year was 10 basis points off of that historic high.

We clearly are planning and are working towards continually improving our client retention.

We believe our new products, and some of the things we are doing on the quality side, should drive better retention.

But when you get to these levels of retention, the laws of large numbers make it difficult, particularly in places like our Small Business segment, which, by the way, has had good improvements there as well.

They have a natural amount of attrition just because of companies going out of business and dropping out of the system.

We count everything in our losses and in our client retention.

Having said that, that's maybe a long-winded way of saying that I'm very proud of the organization in terms of where we are retention-wise, and we will continue to push to try to get better.

But it does get hard at the levels that we are at now.

I would also just point out the first quarter is not a huge driver of retention for the year.

Usually our third quarter is what drives the full year a little bit more, with the calendar year change, etc.

So it is right in line with expectations and no surprises there.

As we said, we do expect it to pick up for the year.

Carlos, it's higher obviously in Nationals.

Can you give us a sense for what that level is?

And also how is the communication strategy going with regards to the significant improvements that you've made, particularly in terms of Vantage and potentially getting people transitioned to the new platforms?

I think in terms of the retention rates, in National Accounts, they do approach the mid-90%s, which is quite impressive.

And by the way, in GlobalView, it is in the high-90%s.

When you think about that, those clients are staying on average 20 years with us, so it's quite impressive.

As you go down into major accounts, obviously low-90%s, and then when you get into Small Business, low-80%s.

Those are very broad numbers, obviously, and we're talking about 10s of basis points here as we measure the results.

So you can see just how easy it is to move the needle from one year to the other, from quarter to quarter.

But we are quite happy with the overall retention results.

On the question about transitioning clients, we have not transitioned -- I believe -- I think we may have one or two clients we are piloting in terms of transition over to Vantage.

But we are trying to use our implementation capacity to gain new share and to sell new business as much as possible.

We are obviously now developing plans to be able to migrate clients as well, because we are getting demand, obviously, from our existing clients that they want to move over to our newest technologies.

But we want to do that, obviously, in a thoughtful away, precisely because of this conversation.

We don't want to negatively impact client retention.

As an example, in our Workforce Now solutions, we have been transitioning clients over to our new Workforce Now solutions.

And frankly, the retention rates of the clients that have been transitioned is actually higher than what the retention rate was of those clients before -- when they were on the older platforms that we had.

So, I think that is a testament to our associates, who are doing an excellent job of transitioning those clients in a positive way, so they get all the positive things of the new platforms without any of the negative consequences that sometimes transitions bring with them.

So I am very optimistic our transitions will actually help our retention and not hurt it.

Thanks for the color, and, Chris, best wishes in the future.

Thanks very much, Mark.

Timothy McHugh with William Blair.

I was wondering if you could give a quick update on your hiring expectations for the next year, especially as it relates to the sales force.

I think it was up 6% last year, and I think you may have previously mentioned you expect it to grow 4% to 5% this year.

How did you progress towards that this quarter and has that changed at all?

I think it is in that range; it's around 4%, and I think that's what we are hoping to do for the year, 4% to 5%.

I think what we are trying to get to is double-digit sales growth, and we're trying to get there half through headcount growth and half through productivity improvements.

And again, the last year was remarkable in terms of the productivity improvement we had, and some of that continued into the first quarter.

I sure hope that continues into the future, because it is a huge leverage point for us from a margin standpoint.

Great.

Thanks.

Michael Baker with Raymond James.

A follow-up on the question around healthcare, particularly as we look to 2014.

We have some of the health insurers out indicating they expect the potential for some employers with less than 10 employees to kind of push employees off onto the exchange.

I was wondering, as it relates to your PEO business, whether you sense a similar risk, or is it just simply at this point, too early.

If you do, if you could give us just some general sense of what that would potentially mean in terms of percentage of the PEO book.

And then with any dynamic like this, I know there are other potential tailwinds, so I was wondering if you could point to any of those as well.

I think our PEO is relatively unique in the sense that our average client size -- I used to know this off the top of my head when I ran that business -- but I think it is in the 20s.

So that, I think is reflective of a typically larger average size client than in a typical PEO.

We do have clients that are under 10, but I can tell you that our sales policies and our sales training and our efforts are aimed at clients over 10, and it has been that way for over a decade.

So it is not as a result of the changes in healthcare.

We just believe that once clients are under 10 that the risk profiles from both a healthcare and a workers' compensation standpoint are not as attractive.

We naturally gravitate towards clients that are larger than 10 employees, but we do have, obviously, some clients that are under 10 employees.

So we are obviously watching that and monitoring, as I said earlier.

And I'm going to get a full de-brief next week when I'm with the folks from Tools, who is trying to understand that better.

But I think we are in a pretty good position just because of the types of clients we sell to and the average size client that we have in the PEO.

And I think you had another question.

I apologize.

I --

Yes, it's just a sense of any time you get this type of change, there always presents some headwinds, but also some tailwinds.

And I was wondering, based upon what you know now, what other aspects of the business you might see a positive pickup in.

It's a great question, because I am fond of saying that ADP has been really benefiting from government regulation and compliance requirements and that tailwind for decades.

So each time new regulations come up, again, as a full-service provider, in addition to just providing the technology, we help clients with compliance; that's part of what we sell.

So you look at our set of HCM solutions today, the likes of COBRA, FSA, now we are going to have the same sorts of situations in healthcare, where, in addition to just helping people manage operationally their benefits plans, there are going to be serious compliance requirements that you are going to need to have someone's help with.

You are going to have to have a time and attendance system to track who is part-time and who is not part-time.

You are going to have to send out eligibility notices telling people when they are eligible for healthcare; otherwise, you get fines.

All these things are significant tailwinds to us and create significant opportunities for us to go out and take advantage of and exploit.

And that's what we are in the process of doing, is building solutions and capabilities to help our clients get through these new requirements.

Thanks for your thoughts, Carlos.

And Chris, enjoy your future endeavors.

Great.

Thanks, Michael.

Tien-Tsin Huang with JPMorgan.

News sales, obviously solid, I know a lot of questions about that, but any change in client desire to outsource more than before?

Or is it more just existing clients being smarter about some of their resources and pushing more to ADP?

Every time we do our strategic plan, we visit this issue of how many people are using outsources versus how many people are doing in-house versus how many people use software.

There have been some changes depending on which market segment you look at, with, for example, in-house declining with software and outsourcing going up in small business, but in our larger space, major accounts and national accounts, those numbers have stayed relatively constant.

I think people do make a decision around whether or not they want to outsource, or they want to use software, or if they want to be in-house.

They tend to stick with that.

Our job is to try to convince people who are not outsourcing to become outsourcer's, but also to win as much market share in the space where people are willing to outsource.

We just haven't seen huge changes in those numbers over the last five to ten years, other than in small business with some migration from do-it-yourself or in-house, to using software and also using outsourcer's.

A follow-up to that last point, thinking about the more self-service guys, like an Intuit and others.

Any thought on developing more assets geared towards the self-service side, and in addition, how about the indirect channel, working more with banks and others to reach that market in this time of need for small businesses?

For the record, we have a robust indirect channel with banks and also with CPAs.

In fact, banks are a very large part of our distribution.

We have do-it-yourself products that we provide to the banks, which they private label.

Which is us really doing the processing in the background, which helps us take a little bit of that segment of the market, or that market share of the do-it-yourself providers.

We have a couple of those relationships in the hopper right now with banks that we are trying to provide them a do-it-yourself solution managed by us and provided by us as part of an overall solution to their small business client.

I think we do compete in that space, but our strength is really in the outsourcing segment.

We do continue to look at that do-it-yourself market, and for now we have attacked it using our bank partnerships.

Do you foresee a step up in emphasis there in terms of investment to expand that, or are you pretty happy with the go to market today?

Given Intuit, I think it's constantly thinking about our outsourcing market.

We are constantly thinking about their do-it-yourself market, but having said that, when we look at our start plans and look at the revenue per client that you generate on a do-it-yourself pure software solution on desktop or cloud and compare that to the revenue per client of an outsourced solution full-service, it's hard to drive a lot of investment, a lot of attention into the do-it-yourself market.

We would literally have to sell millions of additional clients to equate the same revenue that we get from selling in the outsource market.

It is an attractive market because it has a large number of units.

The revenue per unit is quite low, but it is still an opportunity potentially to upgrade and migrate clients upward.

So we are always looking at all those dynamics in that do-it-yourself market.

James Friedman, SIG.

It is such a dynamic time for the company, and for the industry, what sort of resources are you putting towards both training the sales force, because they seem to have so much in their toolkit now, and also training the customer as to the new opportunities and solutions in the market?

Those are incredibly insightful questions.

As we become more of a full-service HCM provider, we spent a lot of time talking about what we need to do to give our sales force the right tools to help our clients identify what we can do to help them improve their business as well as reduce their total cost of ownership.

I think we are investing more in sales.

We have had a number of certifications, but basically attempts to get people additional information, whether it's around benefits, our talent management, or other parts of HCM.

We put them through training and then we give them tests and then we give them certifications, a seal of approval that you now have the ability to go sell a broader suite of services beyond the simple payroll.

We are investing more in sales training.

I think your point about the clients is also valid.

The good news is, even though our products are new and we have multi-modules, they are much easy to use and much more intuitive.

It's been part of the improvement and upgrades in our products in all three segments, in the RUN, the Workforce Now, and the Vantage.

I think more intuitive, easier-to-use products require less training and less support.

So it doesn't mean that you don't have to have change in management.

We're doing a lot of that, as we roll out new product, but I am very confident that the positives way outweigh the negatives in the transition to the new products.

I know a lot of you had long and good relationships with Chris, and I think it's appropriate to give Chris a second to give you some thoughts.

I want to thank you all for your well wishes.

I am extremely proud of the accomplishments we have had here in the past six years.

I think you would all agree the company is in a position better than ever to take advantages of the opportunities in front of it.

I think we clearly articulated who we are as a company and then we executed against that vision.

We focused on our core businesses, we've emphasized top and bottom line growth, coupled with strong dividend payout ratio.

I'll remind you that it was only 45% back in 2007, so we have increased that steadily over the past six years and we couple that with consistent reliable share buybacks and acquisitions that enhanced our HCM offerings.

We navigated the economic downturn extremely well.

We said we'd continue to invest in product sales and service, and I think we delivered on that commitment.

In this downturn and throughout this downturn, we introduced many great new products that we're now talking about including RUN, Workforce Now and the Vantage and they are redefining the HCM market.

Our investment in sales is clearly evident in our results and our investments and services has us at all-time highs in retention.

I think our clients have seen the benefits of these efforts.

I know our competitors have noticed, and I think our investors and all of you have noticed as well.

We've tried to increase the visibility we have provided all of you and the transparency we have provided all of you into details of our business.

I know I will miss the deep dives on the portfolio and our laddering strategy and the impact of interest rates and I'm sure you will miss my deep dives, I'm sure Jan will go through those as well.

As I said, I think ADP is in the best position that it has ever been.

Carlos has a year under his belt, so it feels like no better time to take on my next career challenge.

I appreciate ADP for giving me the first large, public company CFO role and it has been fun, so thanks very much.

I want to thank Chris one more time.

It has been a remarkable six years when we think about going through the most difficult downturn, I'm sure any of us will ever see, and Chris's part in helping us navigate through that is greatly appreciated.

I also want to acknowledge that Chris leaves us with an incredibly strong and talented finance organization, which he's helped to build over the last several years, so we appreciate that.

In closing, I want to reiterate again that we were very pleased with our first quarter results, as you can tell from the tone of her comments.

I think our businesses are performing very well.

Unfortunately, we continue to experience this headwind from interest rates and there was some noise in the first and will be in the second quarter with some items, but the underlying trends in the business segment is quite positive.

Chris just mentioned the dividend.

We continue to be focused on being shareholder-friendly, both in terms of dividend and on share repurchases.

The last comment I will make is we will continue to focus on growing the business and enhancing shareholder value.

We look forward to talking to you in the next quarter, and again to all of those who are impacted by the hurricane, our best wishes for a speedy recovery.

Thank you again for joining us today.

This does conclude today's conference call.

You may now disconnect.