自動資料處理 (ADP) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ADP fourth quarter FY14 earnings conference call.

At this time, all participants are in a listen-only mode.

Later, we'll conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions)

As a reminder, this conference call is being recorded.

I'd now like to introduce your host for today's conference, Elena Charles, Vice President of Investor Relations.

Please go ahead.

Thank you.

I'm here today with Carlos Rodriguez, ADP's President and Chief Executive Officer, and Jan Siegmund, ADP's Chief Financial Officer.

Thank you for joining us for our fourth quarter and full year FY14 earnings call and webcast.

Carlos will begin today's call with an overview of our key achievements during FY14 and a discussion about our financial results.

He will then provide a high level update on the status of the spin-off of Dealer Services.

Next, Jan will then provide further information regarding the spin-off before taking you through our detailed financial results and our FY15 forecast.

Finally, before we take your questions, Carlos will provide some closing remarks.

I'd like to remind everyone that today's call will contain forward-looking statements that refer to future events and, as such, involve some risk.

These are also discussed in our earnings press release and in our periodic filings with the SEC.

With that, I'll now turn the call over to Carlos.

Thank you, Elena.

FY14 can best be described as a year of innovation at ADP.

From increasing the speed with which we bring new solutions to market, to opening ADP's second innovation lab, this latest one located in Manhattan, where we develop the new technologies that change the way businesses manage their human capital, to designing new solutions that focus on both our intuitive user experience and stellar performance, FY14 has been a year of innovation at ADP.

ADP is happy to enjoy a market leading position with our Mobile Solutions app.

In FY14, we more than doubled the number of people using our mobile app, passing the 2.5 million user mark.

This growth shows that the way people prefer to manage their personal HR needs closely mirrors how they choose to shop, bank, and connect via their mobile devices.

We've exceeded our own expectations for FY14's client migrations.

We successfully migrated almost 100,000 existing clients in the small and mid market to our newest cloud-based platforms.

This brings the total number of businesses that currently benefit from ADP's cloud-based solutions to over 430,000.

ADP now has more than 50,000 clients enjoying our HCM platform's Workforce Now and Vantage, compared with 40,000 a year ago.

Through the globalization of our solutions, we are making it easier for clients to manage employee populations across borders.

For example, our solutions are now offering in countries that are home to virtually all employees who work for multinational corporations.

And as we increase strategic investments and innovation, we simultaneously managed our internal operations to achieve expanded margin in our business units.

We did this while continuing to improve our service model to better reflect the needs of our clients.

Our small business clients continue to enjoy ADP's around-the-clock support.

Since many small business owners do not have the time during regular business hours to address their human capital needs, our move to 24-by-7 service for small businesses allows them to focus on HR at their convenience.

In other business units, we've extended our service hours during the busiest times of the year, which has been well received by our clients.

Overall, we want to make sure that when our clients are hard at work, ADP is hard at work with them.

And finally, we sharpened ADP's focus on Human Capital Management through the decision to spin-off our Dealer Services business into an independent publicly traded company.

Overall, as ADP invests in innovations of tomorrow, our clients are enjoying our leading solutions today.

So now let's move on to the fourth quarter and fiscal year results.

ADP reported solid results for the fiscal year.

Total revenues grew 8%.

Worldwide new business bookings growth in Employer Services and PEO were 5% for the quarter and 7% for the year.

These results were just below our expectations.

However, as we mentioned in last quarter's call, the fourth quarter was an especially difficult grow over compared to the prior year.

Nonetheless, we are very pleased to have sold over $1.4 billion in new annualized recurring revenues which will contribute to our revenue growth over the coming months.

New business bookings growth for the fourth quarter was mixed by market segment.

In the small and mid markets, we were very pleased with the double digit growth ADP experienced; and the PEO results continued to be strong.

However, we were disappointed with the results in the high end of the up market, where we sold fewer deals to companies with more than 10,000 employees compared with a year ago.

In the low end of our national accounts market, meaning companies with 1,000 to 10,000 employees, where ADP has historically been successful, new business bookings of both our Workforce Now and Vantage solutions were good, and we are pleased to have added 100 new Vantage clients during FY14.

This is almost twice the number we sold last year.

In our international business, we continue to see softness in new bookings growth in our in-country solutions in Europe, due to continued economic recovery on the continent.

However, we are pleased with the growth of our multinational solutions for companies based outside of the US.

In Latin America, our new bookings growth was strong.

As a result of the mixed results in the up market, our forecast for FY15 is for about 8% growth.

Our long term goal of 8% to 10% annual new bookings growth remains intact.

Moving on to retention, full-year Employer Services worldwide client revenue retention increased this year to 91.4%.

For those of you who have followed us for some time, you are aware that this level is an all-time high.

I'm particularly pleased with these results, as I believe they demonstrate the success of our new cloud-based platforms and are evidence that our migration strategy and focus on innovation are resonating in the marketplace.

The success of the PEO continues, with strong revenue growth reaching 15% for the year, primarily from growth in average work side employees paid, which was a very strong 15% for the year.

Dealer Services posted solid revenue growth in FY14, primarily through additions to its client base resulting from positive competitive win rates and higher digital advertising revenues.

The global automotive market continues to be strong, with US vehicle sales reaching pre-recessionary levels.

Our planned spin-off of the Dealer Services business is progressing well and we are still anticipating completion of the spin-off by October.

There will be a pre-spin road show with the Dealer Services management team in the weeks leading off to the final spin-off.

We are getting close to a decision on the name of the new company, as well as the branding, and we'll be ready to share that information with you in mid-August.

We remain excited about the planned spin-off of Dealer Services and the focus it will allow both management teams, as we complete the separation of these two businesses.

And with that, I'll turn it over to Jan to give you more details on the spin and walk you through our FY14 results.

Thank you, Carlos.

As Carlos stated, we are progressing well with the planned spin-off of Dealer Services.

An updated Form 10 was filed with the SEC on July 25 and can be found on the ADP Investor Relations website.

We expect to file an updated Form 10 with FY14 results for the new company in early September.

In conjunction with the spin-off, we are still expecting that ADP will receive at least $700 million from the new Dealer Services entity, which we intend to use to repurchase ADP stock.

With that, let's move onto our FY14 results.

Our FY14 results include about $15 million of spin-related costs and, as indicated last quarter, these costs were excluded from our forecast for the year.

We expect to incur an additional $40 million to $50 million of spin-related cost over the first two quarters of FY15, which are also excluded from the FY15 forecast, as these costs will be reported within discontinued operations upon completion of the spin-off.

And just a note, my comments exclude the impact of the $15 million of spin-related costs recorded in this year's fourth quarter.

And the year-over-year comparison I am discussing are to the FY13 financials, adjusted to exclude the impairment charge of last year's fourth quarter.

Before I get into the results, I want to call your attention to our cash and marketable securities balance of $4.1 billion at June 30, 2014.

This includes $2.2 billion of assets related to outstanding commercial paper in support of our extended investment strategy for the client funds portfolio and is footnoted on our condensed balance sheet.

This borrowing was repaid on July 1.

I also want to point out that ADP continued its shareholder-friendly actions, repurchasing nine million shares for $679 million and paid cash dividends of over $880 million during FY14.

So now for the results.

ADP's revenue grew 8%, nearly all organic, to $12.2 billion for the year.

We achieved 8% growth in both pretax and net earnings and 9% earnings per share growth on fewer shares outstanding compared with a year ago.

Overall, our results were solid, with each of our business segments performing well.

Employer Services grew total revenues 8%, nearly all organic.

The PEO grew 15% and Dealer Services grew 7%.

In Employer Services, growth in the small and mid market contributed particularly well; and as Carlos mentioned earlier, Employer Services' worldwide client retention improved to 91.4% on top of an already historically high retention rate.

We are pleased to see continued strength in our same-store Pay For Control in Employer Services in the US, with an increase of 2.8% per year.

In Europe, same-store Pay For Control declined by 0.5% for the full year and 0.3% for the fourth quarter.

So while the economy across Europe remains a bit soft, it does appear to be stabilizing.

Average client fund balances increased a healthy 8% for the fiscal year.

Lower state unemployment tax rates were offset by increases from our new business growth, especially in the small and mid sized markets, wage growth, including bonus payments by our clients, as well as Pay For Control.

The PEO delivered higher than anticipated results for the year, with 15% revenue growth, driven by 15% average work site employee growth and strong revenue retention.

Dealer Services revenue growth of 7% was driven by new clients and applications installed, as well as increased digital advertising revenues, but was lower than our expectations because of continued weakness across continental Europe and some softness in one of our transaction based businesses.

Dealer Services margin expansion of 130 basis points for the full year benefited from certain nonrecurring items in both the third and fourth quarter.

As anticipated, ADP's total pretax earnings were negatively impacted in FY14 by the decline in client interest revenues resulting from low interest rates.

The impact of lower interest rates reduced ADP's revenue growth by almost half of a percentage point and pretax earnings growth by 3 percentage points, as the lower yields more than offset the benefit received from the 8% growth in balances.

Pretax margin was negatively impacted 80 basis points and diluted earnings per share were lower by almost $0.08, or 3 percentage points, for the year.

Excluding the impact of the client funds investment strategy and recognizing the healthy margin expansion our business segments achieved for fiscal year, largely driven by operating efficiencies, it is evident that there is leverage in ADP's business model.

And you will see this as we move on to our discussion of next year's outlook.

So let me take you through our FY15 forecast, starting with total company guidance.

Remember that the forecast includes the Dealer Services business, but excludes any spin-related costs.

We anticipate total revenue growth of 7% to 8%.

Pretax margin for total ADP is anticipated to improve by 75 to 100 basis points from 18.8% last year, which excluded spin-related costs of approximately $15 million recorded in the fourth quarter of FY14.

We expect a higher effective tax rate of 34.6%, compared with the 33.7% in FY14.

Diluted earnings per share are expected to grow 11% to 13% compared with $3.14 in FY14, which excludes spin-related costs recorded in the fourth quarter of FY14.

As it is part of our usual practice, the forecast does not contemplate for the share buy backs 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.

In addition, this forecast does not contemplate any share repurchases from the $700 million or more ADP will receive from the new Dealer Services business at the time of the spin.

Consistent with the tax-free nature of the spin, we are required to repurchase ADP shares with this cash within 12 months of the spin.

However, our intent is to do so over the nine months remaining in FY15 after the completion of the spin, which would result in slight earnings per share accretion for the full year.

We believe the ranges we have given you for revenue and earnings per share growth have contemplated both the opportunities and the challenges ADP is facing in FY15.

Typical items that could be impactful to earnings would include the success of our sales force in bringing new products to market and our ability to implement those products, possible changes to the regulatory environment, particularly any changes relative to the ACA, as well as our ability to sustain our client retention level.

Consider, for example, at the high end of our revenue and earnings forecast ranges, we have anticipated the renewal of certain high margin WOTC tax credit revenues in the second half of the fiscal year.

Additionally, the interest rate environment will impact our new purchase rates, and foreign exchange rates could move either up or down.

And while we don't provide quarterly guidance, I want you to be aware of certain items impacting the first two quarters for the fiscal year.

As you may recall, we stepped up our investment in R&D during the second half of FY14.

Investments we have made include such innovations as data analytics, user experience, enhancement to our strategic platforms, and improvements in our time-to-market capabilities.

I also would like to remind you that new bookings growth in last year's first quarter was 1%; and as a result, we anticipate higher selling expenses in the first quarter compared with a year ago.

We expect that the year-over-year pressure from these items will result in additional expense of about $30 million in each of the first two quarters of FY15.

Therefore, you should assume that ADP margin improvement and profitability is weighted more towards the second half of the fiscal year.

And now before I take you through the details of our forecast for the client fund investment strategy, there are a few things I would like to point out.

First, the objective of our investment strategy remains safety, liquidity and diversification.

At June 30, about 82% of our fixed income portfolio was invested in AAA and AA-rated securities.

We continue to base the interest assumptions in our forecast on the Fed funds future contracts and forward year curve for the 3.5 year 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 new bond issuance behavior of corporations and other issuers.

I also remind you that our strategy usually results in about 15% to 20% of the reinvestment of the investments maturing each year, and therefore subject to investment risk each year.

We anticipate that the maturities of FY15 will be in line with this range.

We anticipate average client fund balances for FY15 in the range of $21.8 billion to $22.2 billion, which represents 5% to 7% growth.

About one percentage point of this growth is expected to come from outside of the US, evidence that our global money movement operations is gaining traction.

We anticipate a yield on the client funds portfolio of 1.7% to 1.8%, which represents a decrease of up to 10 basis points from the FY14.

We anticipate that client fund interest, as well as the total impact of pretax earnings from the extended investment strategy, will be up to $5 million to $15 million compared with FY14.

And although we are forecasting a positive impact to pretax earnings from the client fund investment strategy, we are still expecting a slight drag of 10 to 15 basis points on ADP's pretax margins, due to the highly profitable nature of these revenues, which are forecasted to grow at a slower rate than overall revenues.

If this FY14 forecast for the client funds investment strategy is realized, it will be the first time since 2008 that ADP will experience a positive impact to both revenues and earnings; however, the benefit is not expected to occur until the second half of fiscal year.

Now the guidance for all business segments.

For Employer Services, we are forecasting revenue growth of about 6% to 7%, with pretax margin expansion of about 100 basis points.

We anticipate an increase in our Pays For Control metric in the US of 2% to 3%.

For PEO services, we are forecasting 13% to 15% revenue growth, with up to 50 basis points in pretax margin expansion.

We are forecasting about 8% growth in the annual dollar value of ES and PEO worldwide new business bookings from the over $1.4 billion sold in FY14.

And for Dealer Services, we are forecasting 7% to 8% revenue growth, with about 50 basis points of pretax margin expansion.

And now I will return the call back over to Carlos for his closing remarks.

Thank you, Jan.

As I discussed earlier in the call, with the announcement of the spin-off of Dealer Services, we have sharpened our focus on HCM.

As such, we have slightly modified our strategic growth pillars to demonstrate this refined focus.

In FY15, we expect to grow our business by focusing on these three pillars.

First, we intend to grow our integrated suite of cloud-based HCM benefits and payroll solutions to serve the US market through further penetration of our strategic platforms, RUN, Workforce Now, and Vantage, as well as new HCM offerings.

Further offerings, including products related to compliance with the Affordable Care Act and other innovative solutions, are expected to be released in FY15.

We look forward to continuing our migration efforts in the mid and up markets.

Our second pillar is to invest to grow and scale our HR business process outsourcing, or BPO solutions, by leveraging our platforms and processes.

The PEO and our BPO offerings in the small and the mid market are performing well.

And finally, our third pillar is to leverage our global presence to offer clients HCM benefits and payroll solutions where they do business.

As I mentioned earlier in the call, ADP solutions are now offered in countries that are home to virtually all employees who work for multinational corporations.

We believe our multinational solutions bring global power to the marketplace and will be part of our future success.

All three of our strategic pillars are based on ADP's history of stellar client service, ability to navigate regulatory compliance, rich data set, and passion for providing innovative solutions to the market.

Our accomplishments in FY14 reflect the commitment we've made to maintain our position as the leading global provider of Human Capital Management as we step into FY15 and beyond.

I believe ADP is focused on the right things to grow the business and enhance long-term shareholder value.

We remain committed to shareholder friendly actions and returned over $1.5 billion in excess cash to shareholders through dividends and share buy backs during FY15.

And before we take your questions, I wanted to let you know that Elena has decided to join the new Dealer Services company that will be formed at the conclusion of the spin-off.

Elena has provided more than a decade of strong leadership and insight as the head of Investor Relations at ADP.

I wanted to publicly thank Elena for her years of service and wish her nothing but the best as she joins the new company.

Starting today, please direct your questions and requests to Sara Grilliot.

Many of you already know her and have worked with her.

And now, I'd like to turn the call back over to the operator to take your questions.

Thank you.

(Operator Instructions)

Our first question comes from David Togut of Evercore.

Your line is open.

Thank you.

Good morning, Carlos and Jan.

Good morning.

Good morning.

Congratulations, Elena, on your new role.

Thank you.

Carlos, could you just walk us through your thought process on FY15 ES bookings growth and maybe dig in a little more on FY14?

You seem to be scaling back expectations throughout the year.

I know you highlighted weakness in the national accounts market.

But do you think some of this was execution-oriented with the ADP sales force?

Increased competition?

What are your thoughts?

I think we, from the beginning of the year in the first quarter, I think we shared with you that we had some, what we consider to be some execution issues; not across the entire ADP sales force, but really concentrated in our upmarket sales force.

And I think that, unfortunately, continued throughout the year.

It's not unusual for us, when we have, I would say, a very slow start to then continue to struggle throughout the rest of the year.

It's been something that historically has been hard to overcome, just because of the way the incentives work and momentum and so forth.

But I just want to reiterate that I think it was clear in our comments that the rest of our ADP sales force and the rest of our markets performed incredibly well, even including the low end of national accounts.

So it was a fairly concentrated issue, in some respects, because of some [grow over] issues with some large accounts that we sold in the previous year.

But there's really no escaping the fact that we had some execution issues in our upmarket.

And it is an important part of our overall results; although it's not -- as you can see from the results, despite that weakness, we still managed to achieve what I would say are pretty respectable sales results, especially when you look at them in the context of the compounded annual growth rate over the last two or three years.

So it's an important part of our sales results, but so is the low end of the market and so is the mid market, and so is PEO and insurance services, and a lot of the other products that we sell.

But I think in view of some of those execution challenges we had, I think Jan and I took the position that we just thought it was prudent to be careful in terms of our planning process for FY15 in terms of what our expectation is from our new bookings growth.

But we hope and we -- that's why we reiterated our commitment to the 8% to 10% long-term growth in sales, because that's really what we planned for in terms of our head count and productivity improvement expectations.

But I think you can call and you can say that we're hedging, but we're just being careful because of some of these challenges we have, just in case they're related to anything other than specific execution issues, which is right now still our hypothesis.

Understood.

Just as a quick follow-up, what are your head count growth targets for the ES sales force in FY15?

Our head count growth is expected to be around 3% to 4% next year.

And again, you can obviously then back into the fact that we expect about half of our sales growth to come from head count growth and half to come from productivity improvements.

That's a little slightly faster head count growth, but not by much, than what we've been experiencing over the last two or three years, where we've actually had more productivity growth and head count growth into our sales results, which we've been extremely happy with.

But again, in view of some of our execution challenges this year, we thought it was prudent to invest a little bit more in sales and accelerate our head count just slightly more to make sure we take out a little bit of an insurance policy in terms of delivering the results.

Understood.

Thank you very much.

Thank you.

Our next question comes from Gary Bisbee of RBC Capital Markets.

Your line is open.

Good morning.

The 6% to 7% growth in employer guidance for next year is, I think, a touch slower than what you've been doing over the last year.

Is that just no M&A in the numbers and maybe in light of this slightly slower sales number?

Or is there anything else going on there?

I think some of it is, there are some timing issues in terms of calendar that, again, we typically don't get into them.

But when you start getting into tenths of percentage points, these things do unfortunately add up.

Our growth in net new business is still contributing to our growth rate, but it will contribute about 0.4% less in terms of revenue growth rate in Employer Services, assuming that we hit our retention rates and our sales plan as we've given you in terms of the guidance.

So that's some of it.

But that's really not a big number.

We have a couple of other items around calendar, and assumptions around our balance book being slightly lower, which affects the way Employer Services reports its revenues, because of the way we credit them at 4.5% fixed interest rate.

So there are two or three items that add up to it, but it's really nothing -- there's no specific one item that I could point to that is creating some sort of big issue for us.

We're still pretty positive about the acceleration on our Employer Services revenue growth over the last two or three years.

And I think we're at a level now where we're pretty comfortable with that growth.

We'd love to accelerate it even more.

But any major change in that growth rate would come really as a result of acquisitions or a major improvement in retention, or a major, I guess, beat on the sales results, as well.

And in the follow-up -- I don't know if it's possible -- can you break out or give us a sense of the difference in the revenue retention rate between those on the newer cloud offerings versus legacy offerings?

And if it is in fact a decent amount higher, what's the gating factor to more aggressively pushing through the migrations in the mid market?

Thank you.

So just to go through a couple of the numbers in terms of whether we're being aggressive or not.

We have less than 50,000 clients left in our small business segment on EasyPay, which is our legacy platform.

And I think we're down to under 5,000 of the PCPW clients left, which is our legacy platform in our major accounts space.

So this is, in my opinion, a lot of progress, and very proud of the organization, because two or three years ago, we were on a different path here.

And we're going to be off of these two platforms here within FY15, and off the EasyPay platform relatively quickly here, given that the pace that they're moving at.

So I think that we've been aggressive.

And we're going to continue to be aggressive, as we have to move on to other platforms and other parts of the business where we have some legacy platforms.

I think Jan might have some specifics on the retention rates.

I can tell you anecdotally that the last several quarters, as we've looked at the retention rates of clients who have moved from PCPW -- which is our legacy platform in major accounts -- over to our Workforce Now platform, the retention rates have been higher than the line average.

So we think it's helping us in terms of our retention rate, but there's lots of other moving parts in the retention rate other than migrations.

So you have to be careful about building any kind of model in terms of any improvements.

Likewise, we can't specifically attribute retention rates in small business to the migration of clients onto RUN, but that retention rate happens to have also been quite good over the last two or three years, as we've been moving clients.

But there are other moving parts at work.

And then, lastly, I would caution that, as we get to the last mile of some of these platforms and some of these migrations, we have to be prepared to potentially have some challenges with the last few clients in terms of retention and migrations.

We're not planning for that, and we're hoping against all hope that that doesn't occur.

But I think it's prudent to assume that the last thousand clients are going to be harder than the first thousand clients.

We had a lot of clients that have been raising their hands to migrate, and the last few of them are probably going to be ones where we're going to have to ask them nicely and provide them incentives to move over.

So I think it's a balanced picture, in terms of retention.

And we also are moving on now to other platforms that are included in our retention rates overall, so it's not just RUN and Workforce Now and PCPW and EasyPay that impact our retention.

We have a lot of benefits platforms that we're trying to consolidate and migrate off of, and we still have a couple of other smaller payroll platforms that are legacy also we're in the process of moving off of.

So we have still quite a bit of work do, but the progress has been phenomenal.

I'm incredibly proud of the organization.

I think overall, it's had a positive financial impact on us so far.

Thank you.

Thank you.

Our next question comes from Sara Gubins of Bank of America Merrill Lynch.

Your line is open.

Hello.

Thanks.

Good morning.

Just following up on the last discussion.

Could you talk a bit more about the magnitude of potential cost savings from shutting down legacy platforms?

I know that some of that may be going back into investment plans, but I was hoping to get a sense of the gross savings that you might be able to get from here.

It's a great question, which we're really trying hard to internally get our arms around exactly that issue.

But, for example -- just in terms of real life examples -- we're almost off of the EasyPay platform here, and those migrations took a great deal of effort.

And we ramped up reasonable amount of expense with people in order to accomplish that.

So as we plan for FY15, our business units working very effectively together in terms of seeing what we could do to help overall ADP, rather than just focusing on an individual business unit.

And in this example, we've decided to move some of the resources that were working on the migrations of EasyPay to RUN, and moving them over to our major account and national account migration efforts.

Because those folks are -- even though they were working on different platforms -- they're dedicated resources that were also trained on migration efforts.

So even though they have to learn new products and new platforms, rather than downsizing or eliminating those resources, our decision was to move those resources over.

And in fact, overall -- and Jan may have the exact number -- but we actually are increasing incrementally our investment and our spend on migrations in FY15 versus FY14.

So I think this call is really -- very difficult on this call to go through the level of detail.

We're a, as you know, a $12 billion company with a fair amount of legacy.

And there's a very reasonable list of projects and targets that we have that we believe will really create a better financial picture for ADP long term.

And we see evidence of that already in what we've done with RUN and with PCBW and FBS and in major accounts.

But I think, as you said it best, that we are not done and we're continuing to invest.

So I think for '15, it is not appropriate to plan any kind of savings or improvements as a result of migrations, because we actually are planning for a slight incremental increase in spend on that.

Obviously, with the view, we're not doing it without the expectation that there will be some large benefit in the future.

And I wish I could quantify that and give that to you today, but we're just not prepared to do that.

And I think what Carlos is saying is, above and beyond of the margin expansion that is pretty healthy that you have seen in our business segments; you see the results of ES in this fourth quarter, which had really very nice margin expansion.

We delivered our margin expansion FY14 above our long-term expectation of 50th basis point.

And the confidence that overall the business is scaling to which migrations, in an indirect way; and in this complicated way, help us is also reflecting in the 100 basis points guidance that we give for the improvement of our pretax margin in the Employer Services segment, which is also above what we have historically really committed to at this point in time.

So as CFO, I'm pleased with the progress we are making in the business overall, of which migrations are a small part and a part in driving the scale for us.

So my hope is that, that is being recognized as progress we are making relative to scaling of our business, which we put a lot of effort in and it's showing the results now for a number of years in a row.

Great.

Thank you.

Just switching gears briefly.

Given improving labor market trends, I'm wondering if, when you put out the 2% to 3% guidance range for pays per control, if you see any bias towards the high end of that?

And if that is potentially a conservative approach?

Thanks.

Well, the range includes the full range, 2% to 3%.

But you're right, of course, our pays per control have been now very strong for a couple of years really, at 2.8%, growing again faster than US economy is growing.

Employment, which is a benefit that ADP has that our clients' doing a little bit better on employment growth than the rest of the country.

And it is just, I think, more prudent planning, as looking forward the economy seems to be picking up and on solid grounds.

But since it is, A, above the national growth rate, and we had this up for a number of years, we don't really have a strong formed opinion if it's going to be at the upper end or the middle of the range.

But it moves slowly.

You know that from observation.

And we exited at 2.8%.

So that's I think is where I would form my mind around.

Thank you.

Thank you.

Our next question comes from David Grossman of Stifel Financial.

Your line is open.

Pardon me, David.

You might want to check your mute button.

Okay.

We'll move on to Jeff Silber of BMO Capital Markets.

Your line is open.

Thanks so much.

Wanted to switch gears to the PEO business.

It's been fairly strong and your expectations are for that to continue.

Can you give us a little bit more color what's driving that and how sustainable you think that is?

It's a great question, because we've been asking the same question over the last six or nine months.

And I think, as usual, it's a combination of things.

And I don't know that we have a scientific answer about the percentage of each factor.

It's impossible to deny that some of it is just good execution, because that business has been executing well for several years.

And I think our sense of just watching what they've done in terms of building their sales infrastructure, their go-to-market strategies, their products, that they are just doing well from an execution standpoint, and from a leadership standpoint.

So I think some of it is that.

And I just want to remind everyone that businesses have had double digit growth here for several years, and our sales results have been really quite impressive for several years, as well.

It's not just this one last year.

Having said that, as we've said on the call before, we believe that we have some help from the Affordable Care Act, which has caused, if nothing else, a lot of activity in all of the markets, but particularly in the small end of the market, in terms of people looking at alternatives, whether they be the exchanges or they be a PEO.

There are some things about the structure of ACA around large groups that provide some potential benefits in some states; some of which we got in '14, in terms of help, some of which we might get in '15 and '16.

But there are also some things in the ACA that beyond 2016 may make it actually difficult in terms of acting as a -- or at least may level the playing field and remove any potential advantage that anyone, including us, may have had in '14, '15, and '16.

And so I think it's a balanced picture there, where I think ACA appears to be helping, but we're not planning on it helping forever.

And the combination of that with great leadership, great execution, a good value proposition, and I think competitive offering from a price standpoint.

So I think it's a combination of a lot of factors.

But as you just alluded to, we're incredibly pleased with that, because it's helping not just our overall growth rate, but growth and earnings.

So that business, as you know, has a lot of [taxes] in it.

But what we care about is obviously dollars of profit and in terms of the growth in pretax operating income from that business, whether it's on a per employee, per client, or any basis, is really quite helpful to ADP's overall growth and profitability.

All right.

That's helpful.

And as a follow-up, you mentioned the additional expense in each of the first two quarters in the current fiscal year.

Can you just tell us which line items that will be affected?

And also, does that mean you're not expecting pretax margin expansion in the first half of the year and it's all going to be back-end loaded?

I don't think we want go as detailed as to the guidance of pretax margin by quarter.

I think the attempt to isolate these two items was to help you a little bit with the skewing in your models.

And they will be found really in the segment reporting line, as they pertain mostly to the ES segment, basically.

I guess I was alluding to the expense line item on the income statement.

Is that all SG&A?

It would be in systems development, as well as SG&A.

It's going to be in a couple of places.

Because I think the two items we mentioned were the comparison year-over-year of our R&D and technology spending, which is on a couple different lines; and then our sales expense, which would be mostly in the SG&A line.

So I think it is probably spread out in a couple of different places, but tilted towards the SG&A.

And back to your initial question -- the first half is really going to be depressed on the pretax margin side.

I think you got that right.

Depressed compared to the full year, not necessarily going backwards from the previous year.

Because I think your question was around -- I don't remember exactly how you worded it -- but we don't expect to go backwards, necessarily.

It's just that in comparison to the overall pretax margin for the year, Q1 and Q2 will be lower, just as we expect the growth rate of operating income to be -- the growth rate to be slightly lower in the first half versus the full year.

Compared to overall guidance.

That's very helpful.

Thanks so much.

Thank you.

Our next question comes from Bryan Keane of Deutsche Bank.

Your line is open.

Hello.

This is Ashish Sabadra calling on behalf of Bryan Keane.

My question was in regards to the interest on funds held [for the] line.

It's positive to see that number turn around and be positive inFY15.

But as you think about the out years and the funds coming up for reinvestments and the interest rate based on the forward curve, I was just wondering if you could provide some color on your expectations for the growth in that interest on funds held in going beyond FY15?

If you could just provide some color on that?

Jan and I are fighting over who gets to answer the question.

We've been waiting for five years to talk about this.

So I will let Jan do the honors.

Just to provide a little bit more color to '15, which we are guiding towards, is, you'll see our balanced growth to be still healthy, which is driven by new, good new additions to our client base, which is a good sign; and then continued good pays per control growth, et cetera.

But our rate of funds maturing during FY15 is still higher than our -- the rate is approximately 2.7%, and the reinvestment rate is lower.

So we do expect overall pressure on our yield for FY15.

So you'll have, as the turn around situation, that it will be accretive to our earnings by the $5 million to $15 million of the client fund strategy impact; but it will be putting pressure on our margins, because the growth of that client fund revenue is lower than our overall revenue base, due to this situation that I just described.

So it's really just a turning point.

And you have to be very careful in thinking that through, because it expands earnings, but it depresses margins.

And this is the mechanic beyond it.

As we look forward -- and this is now based on the forward yield curves that you could look also in the material we published for you about the embedded rate in our client funds portfolio in the third quarter -- this will get better throughout the next few years.

We don't provide specific guidance, obviously, for FY16 and FY17 and FY18.

We are happy to provide '15 guidance in this detail, but it will be naturally better.

No.

That's great, good to hear that.

And just a quick follow-up on the Dealer Services spin-off.

As we think about the model post the spin-off, and think about the other expense line item and the margin expansion in FY15, I was wondering if you could just provide some color on how we should think about the model post the spin-off?

So we mentioned it in our comments.

We just filed an updated Form 10 responding to questions that the SEC gave us and should have a look for that.

We are not prepared to provide additional financial updates at this point in time.

You'll see the updated fiscal numbers for '14 included in the September numbers, and then Dealer Services will provide their go-forward financials.

But we reconfirm that we are expecting $40 million to $50 million of incremental public company costs for the Company, and that's pretty much, I think, the model that you should build to the level of precision that we see today.

Okay.

Thanks.

Thanks for the color.

Thank you.

Our next question comes from Jim MacDonald of First Analysis.

Your line is open.

Good morning, guys.

I think you mentioned that the ACA benefits in the PEO may diminish over time.

Maybe you could explain that a little more?

I can attempt to.

But again, this call may not be the appropriate place to get into all the details.

But we're happy to, because this is all public information.

We're happy, offline, to take anyone through our view of the world, which is an uncertain view of the world, because it's been constantly changing, as you probably also know.

Things have been delayed multiple times and there's been multiple changes in the laws and the regulations.

So we will keep, every quarter, on top of that and updating you.

But in general, in 2017 there are some changes that take place -- that are scheduled to take place -- that I think would potentially diminish any -- if there is an advantage or a positive wind at the back of our PEO or any other PEO, we believe that, that might diminish in 2017 as a result of the opening up of all the exchanges and all the regulations in our large group, as well as small groups.

So I think getting into more detail would probably not be easy to do here, but we're happy to have that conversation offline with anybody, because it's not obviously related to our specific guidance.

It's just related to how the law and the regulations operate.

But again, just the footnote on that is that what we thought was going to happen two or three years ago has changed multiple times as a result of adjustments that have been made to the laws and the regulations.

So it's something that unfortunately we have to continue to monitor.

But overall, it's definitely a positive right now for us.

And maybe I'll add to just a reminder: the PEO has, of course, executed and grown for a decade, a long, long time from us.

And, as Carlos alluded in his initial comments, the principal driver -- or a principal driver-- of advantage that ADP has, aside from the competitive offering, is our strong distribution capabilities that leverages the scale and scope of our overall down- and mid-market operations to feed leads into the business.

And that strong new business bookings growth that we have seen this year was definitely aided by an excellent execution in that space, and that is something that is due to ADP's inherent structural advantages.

And that would not diminish, hopefully, in the long run.

Again, I think that's a fair point.

I'm glad Jan brought it up.

The PEO has, from the time that ADP entered the business, has grown -- from the time it made a major acquisition in the business in 1999 -- has grown from 65,000 worksite employees to 300,000 worksite employees before any Affordable Care Act impact.

So we're not planning to go backwards or to change the growth trajectory of that business as a result of ACA.

We're just acknowledging that it may be giving us some incremental help today.

And that incremental help may not be as large in the future, but we would not be planning for anything other than what we've been able to do because of just the inherent advantages that, that business has, in terms of its value proposition and its distribution as being part of ADP.

So we will continue to leverage those advantages beyond any regulatory changes that may take place in the next several years.

And related to that, your guidance for next year of 13% to 15% is below the 19% this quarter.

It seems like you're sort of built in for growth above that rate, at least early in the year?

Is that right?

And what would cause the lower growth rate maybe later in the year?

That's a great question, because we did look at it again over the last couple of days, as we were getting ready to make this call.

And all I can tell you is we had, again, a small item that helped that was a one-time item in the quarter.

And we relooked at our expectations or our plans for sales in that business and our loss assumptions in that business.

And we felt comfortable that, that was the appropriate range to provide you guys.

Because again, the business tends to -- like all of our businesses, we do have sometimes small calendar issues and other one-time issues that affect us, but we try to be transparent and give you guys a fair range of what we really expect.

And I think we're being fair, based on what we -- because you could probably look at the previous quarters and see that the 19% is somewhat -- it's great news, and we appreciate it and we'll take it -- but on the trend line, it would be out of trend, on the upper end.

And so I think we expect to get back on trend, which is a slightly lower number than the 19%.

Okay.

Thank you very much.

Thank you.

Our next question comes from David Grossman of Stifel Financial.

Your line is open.

Thank you.

Good morning.

I dropped off for a few minutes, so if this was covered, we can pass.

But Carlos, you talked about the sales execution, obviously at the high end.

And I think I understand that.

I'm just curious whether or not, since this is a new product for this segment of the market, do you have any feedback on the technical merits of the product?

And for those that have purchased it, what their experience has been and how it's stacked up?

So to clarify for just a moment, when we talk about the upmarket, and especially the higher end of the upmarket, we also -- I assume you are referring to Vantage.

But I just want to clarify that some of the GlobalView sales would be in that same category, and any increases or decreases in sales of GlobalView would also impact our comments and our guidance around growth in the upper end.

We also have some sales that take place in our benefits platforms that are also very high end, and those comparisons also would be in those numbers.

So having said that, I just wanted to clarify that we have -- we're broader than just our Vantage platform in the upper end of the market.

Having said that, the answer is no, we're not aware of any issues that would prevent us from winning.

So again, that's why we keep harping on the execution, on the execution issues.

We're clearly still -- you heard the comments about our focus on innovation and our time to market and how fast we're trying to move.

So to be clear, we're not standing still.

And so we are making a lot of enhancements, as we speak, not only to Vantage, but also to our other strategic platform in national accounts, which is our Enterprise platform.

And so I think that we are doing whatever we can to improve our user experience, to make sure that we have the right kind of functionality, to make sure that the products provide global solutions as well.

Not just GlobalView, but Vantage itself has also been enhanced with some global capabilities.

So we're doing a lot of things to enhance our competitiveness in the upper end of the upmarket.

But we're not aware of any glaring holes or problems from a competitive standpoint.

And David, in order to give you a little bit more color around the momentum of Vantage is, Carlos mentioned, we doubled the number of sales this year that got to new clients throughout the fiscal year.

So that is in line with our expectations and our plan.

So the interesting part is, the comments have to really be dissected by the part of national accounts that is selling in the 1 to 10,000 and above 10,000.

So it's not a channel upmarket comment that Carlos made.

Thanks.

That's helpful.

I'm wondering, Jan, maybe if I could just ask a financial question?

Could you perhaps give us some more color on free cash flow in FY15?

And perhaps help us understand whether the dealer business contributes pretty much prorated or free cash flow?

In general, yes.

Let me jump back to cash flow to '14 that provides you the starting point for '15.

You saw our cash flow from operations to be about $1.8 billion, and that was up 16% year-over-year.

And I want to caution that, that is impacted by items that are one-time or timing items.

So when you adjust for changes in working capital and some lower pension contributions we made and the increase for stock comp, our actual like-to-like cash flow has been closer to about $1.6 billion; so 7% growth, I would say, in a like-to-like comparison.

And historically, our cash flow from operations has really grown in line with our operating results.

And that's a good assumption to have.

And there's no difference between the business in principle.

Obviously, the cash flows that ADP will receive from the dividend are excluded from this.

But from the operational perspective, I can answer your question that it's really in line with what the business is doing.

We published our capital expenditures from Dealer Services on Form 10, that you can find.

So there's really nothing unusual in the cash flow situation for Dealer Services.

So the free cash flow conversion of Dealer is very similar to the core ADP.

Very similar.

Very good.

Thank you.

Thank you.

Thank you.

Our next question comes from Jason Kupferberg of Jefferies.

Your line is open.

Hello.

This is Ramsey for Jason.

Back to your new business bookings -- you're guiding for a slight acceleration in the metric for FY15.

And as you mentioned, your easiest comp is by far in the first quarter, which has historically been a relatively inconsistent quarter.

Can you give us some additional color on your confidence levels or expectations or just dynamics you see for the metric specific to the first quarter?

Should we assume, because of the easy comp, that the Q1 results should be quite high?

Or anything additional there would be helpful.

I wish I could, but I'm getting the look from Elena.

And really, all kidding aside, we, as you know, we're only in the first month of the quarter.

So sales, unlike revenues for us, we have a lot of visibility around a lot of things in our business, because it's a great business model because of its recurring revenue nature.

The sales are something that really can't -- we know what our head count growth is, which drives, on a -- if you look at it over multiple quarters in multiple years, it's very easy to answer the question.

If you look at any individual month or any individual quarter, we have to be careful.

Because it is a, like other companies in terms of what they consider to be revenues which are sales, for us sales is like other companies' revenues, where it's very -- it's harder.

Not very hard, but it's harder to really pin that number down.

So I think we've avoided giving quarterly guidance in the past, and we certainly don't want to start now.

So unfortunately, I'm going to have to defer.

But we believe we have a head count in place.

We believe we have an easier grow over.

So there are some factors that give us comfort about the first quarter.

But I just don't have the ability to give you -- and I honestly don't have the visibility today to be able to comment on that.

All right.

That's fair.

On another track entirely, you mentioned you're seeing some stabilization in Europe.

It's obviously been a headwind the last couple of quarters.

Are you seeing what you'd describe as an inflexion point there?

How should we think about Europe in the context of contribution to your FY15 projections guidance?

For example, from a pays per control standpoint, I think the stabilization that Jan was referring to is really purely on the employment levels in Europe, which, generally speaking, whether it's in the US or Europe or anywhere else, are indicators of other things also stabilizing.

But the only comment we were making is that the pays per control has gone from 0.8, 0.9 negative to now 0.2 or 0.3.

So the trend is heading towards flat, but not obviously growing yet.

So that's better than where we have been, and it's indication of some stability.

On the sales front, we had a slight decrease in our sales results in Europe, which, in the context of the situation, we were very pleased with.

And we expect that to grow.

That's our plan, is to have our European sales results grow in FY15.

So that's part of our assumption, that there is stabilization, that there is some improvement, and there will be some end demand generated in Europe.

So all of those things added together with very good retention rates -- because I should add also that they had an improvement in retention in FY14 versus FY13, which was great and we certainly appreciate.

So when you add that all together, we expect to have positive revenue growth.

And I think in the context of the situation, we're happy with that.

But it's not helping accelerate ADP's revenue growth.

And it was the European results -- not the international results, but the European results -- were net-net at a lower growth rate in '14 than the line average of ADP.

That's really helpful.

Thanks a lot.

Thank you.

Our next question comes from Joe Foresi of Janney Capital Markets.

Your line is open.

Hello.

Good morning.

This is Jeff Rossetti on for Joe Foresi.

Just a quick question.

I think, Carlos, you alluded to there's the transition of some of the remainder of your clients that haven't switched to cloud maybe taking a little bit longer.

Is there any kind of incentive, any kind of discount that you might provide them?

And how that might impact your assumptions with respect to margins?

I think the intent is so far, again -- and one might argue that we have gone after the largest segment first, to where there was probably the biggest opportunity -- and it's probably there where there was the most natural demand for movement.

So there, the tool was largely around better products and enhancements and integration.

And so there really wasn't year to date -- not year to date, but up until now -- in terms of our migration strategy, it hasn't been around giveaways or lower price or incentives.

It's been around, you were on this legacy payroll platform, and I think if you move to an HCM cloud platform, you now have time and attendance benefits.

It helps with compliance of ACA.

Easier user experience, you have access to mobile applications.

So it's been largely a pull strategy, if you will, of getting people excited about a product that we believe is better for them and helps them manage their employees better and more effectively and more cost effectively.

So we haven't yet found ourselves in a position where we had to do unnatural acts to move clients.

That doesn't mean we haven't spent money, because we've invested a lot in the migration tools.

And generally speaking, we haven't "charged for it." So we've incurred the expense of some of those migrations and some of those movements.

So as we go forward, we'll keep you apprised of whether or not we end up needing to use incentives, discounts, pricing, et cetera.

We are considering using our sales force more than we have thus far.

The sales force has been involved only to the extent that there's an opportunity to add additional modules and increase the penetration rate of our clients at the individual client level.

But as we move more upmarket in our migration strategy, we are likely to involve our sales force, which would obviously result in the incurrence of some commission expense.

And we would certainly keep you updated as to whether or not pricing is affected.

But so far, nothing to report.

Okay.

Thank you.

Very helpful.

And just as a follow-up, could you provide any timeline with respect to some of the compliance-related products that you'll be rolling out this year related to ACA?

Thank you.

Jan probably has the answer to that.

I think we have current plans to introduce the ACA compliance product in its comprehensive view in the second quarter of this fiscal year.

And then we hope to see contributing to sales for the second half of the fiscal year.

Thank you.

You're welcome.

Thank you.

Our next question comes from Mark Marcon of Robert W. Baird.

Your line is open.

Good morning.

Thanks for taking my question.

A couple of specific elements with regards to products, particularly as it relates to the higher end in terms of Vantage and Workforce.

Can you talk a little bit about some of the new upgrades that are going to be coming out?

I was at SHRM and saw the previews and looked pretty interesting.

Just wondering when those would be rolled out, and if your guidance is assuming any specific impact from those?

I think in terms of the impact on the guidance, I think we have convinced ourselves over the last two or three years that for us to drive our sales growth, it can't just be elbow grease.

It has to be product driven.

We also have to execute, but they have to have product to help.

The market wants it.

The market wants integration.

It wants global.

It wants a good user experience.

So those are all the things that we are focused on.

I think some of the things you may have seen are specific items around data analytics that are going to, I think, really help our clients manage their workforces better, both from a planning standpoint, but also from a compensation standpoint.

We've added some great tools in the talent management space that, from an onboarding and recruitment standpoint, we think are very positive.

So we're adding a lot of enhancements to global.

I think we've talked over the last couple of quarters that we've added Global System of Record in our Vantage platform.

We have added a capability to provide Streamline as an offering with Workforce Now in major accounts, which is -- there are many clients in our major account space, and those are 50 to 1,000 that have employees in other countries.

And so that's a fairly significant enhancement, as well.

So I think we have a lot of things.

And it's reflected in our spend rate on innovation and product development and R&D.

And I think you've seen a few of them.

And how much each one specifically is quantified in terms of our forecast in sales?

The ACA is really the only one where we have specific dollars assigned, because it was -- not because we have a scientific way of doing it, just because it was easier as a separate swim lane, if you will, to look at.

But all of the things I just mentioned and all of the things you've seen are part of the plan to continue to drive our win rates in the market and to help us, hopefully, grow our market share and grow slightly faster than the rest of the market, which is what we're trying to do through our sales results.

And Mark, the features that Carlos described are either available today or will become available in fall of what were presented at the SHRM.

So they naturally will enhance then our overall sales dynamic, driving, hopefully, Workforce Now and Vantage sales.

And I think from a packaging standpoint, which I think is important, because I think the world has moved in a direction where consumerism is a big factor in all technology solutions.

So we are really putting a new skin, if you will, on most of our products.

And some of what we talked about in terms of innovation going on in our New York innovation lab is a combination of a lot of things, some of which we're not prepared to talk about yet.

But our new user experience and our new packaging, I think, is something that is coming out very soon here, and I think will, again, help us from a competitive standpoint; and just I think really help the sales force in terms of its ability to get in the door and close business.

So you mentioned, in the fall.

Do you think it will be ready for the key fall selling season?

Or would it be more of a: this is, we're rolling this out and GA will be -- and I'm referring specifically, the analytics and the user interface is what I was specifically referring to, as well as the social aspects.

So the analytics product is in the market, actually.

I have a statistic here that we sold already the first client.

So I think in the fourth quarter, we sold a number of clients, actually.

And there's a great dynamic already for dynamics in the marketplace.

So it's available and being sold.

And the user experience coming out in fall is already part of our demonstration.

So I think you saw in the third quarter, Carlos presented, I think, a snapshot in the slides about it.

I think I want to take it from a financial point; I think that's what you are angling for.

Our new product introduction is putting risk or opportunity into our new growth number.

And my assessment would be that it is, as in past years, contemplated in our overall guidance.

They don't form a huge amount of planned sales dollars, but they clearly are part of making our product more competitive.

So I don't think there's more or less risk relative to these product introductions in our sales numbers than in previous years.

And then just a follow-up question, with regards to new sales -- what percentage of the very upper end of the client base would typically account for -- what percentage of new sales would that very upper end, 10,000-plus, typically end up accounting for?

Very small, in terms of the overall percentage, which I can say for almost any other category of ADP.

We're so big and so diversified that there isn't any one thing.

But the difference is that it is very lumpy.

And this has been going on for decades, and we've had a few quarters where we've had to tell you about some of this lumpiness that happens in the upper end of the market.

So when you're comparing just the upper end of the market to the upper end of the market, you can have swings in variability.

But in terms of its impact on overall ADP, as you can see, it can affect our overall sales growth by around 1%.

So 1% sales growth is about a -- I think it's a $15 million impact on revenue for ADP in FY15.

So these are not just giant impacts or giant numbers, but they affect the numbers; and that's why we're trying to be transparent and help you guys with it.

But it isn't what's going to make or break our results for ADP.

Appreciate that.

Thank you.

Thank you.

Our next question comes from Jim Schneider of Goldman Sachs.

Your line is open.

Thank you for taking my question.

This is S.K. Prasad Borra for Jim Schneider.

Couple of questions, if I may.

Firstly, on your cost base.

How do you expect the cost base to evolve, especially your investments around cloud solutions?

How much of that will be dedicated to R&D?

And how much would go to sales and marketing?

And secondly, on the margin profile -- what you get for cloud solutions, if you compare that with your legacy products, is there a huge gap?

Or do you think it will be comparable in the medium term?

I'll take the second part first and then maybe Jan can help with the first part.

I think on the second part -- just as a reminder, so we are not a pure software technology company.

So the spend that we have on the services component and the compliance component of our products we hope becomes more efficient and more productive over time, in part because of help from going to cloud-based products.

But there is not an enormous change that we have planned there yet.

We have seen some improvements in terms of what we need to spend on service in our low end of the business and in mid-market as a result of new cloud-based solutions.

And our implementation processes, in some cases, are easier and faster.

So I think there's some benefit there.

But we have -- unlike, again, a pure play technology software, it's not quite -- because I think if I understand the nature of your question -- it's not quite as scientific as you might find in other companies, where you can say, you're a software shop and this is how the cost changes, because now you're cloud versus -- because we have a lot of expense in our P&L that is not related to technology.

It's related to service.

So with that as a backdrop, we do think that it is helping us and will help us, which is why we're moving on these migrations as aggressively as we're moving.

But it isn't, I think, as dramatic as you would find in a software technology company.

The good news for us is, in some of the pure software technology companies, that transition comes with lower revenues in the short term as you make a transition, because they're not on a recurring revenue model.

In our case, we've always been on a recurring revenue model.

So there isn't as much change to our overall financial model, other than maybe some help in terms of our cost structure long-term, as you might find in other places.

So Jan, I don't know if you want to add to that.

Referring to the first part of your question -- if you look at our overall P&L, you notice that our systems and development and programming costs grew by approximately 10% for the year, a little slower in the quarter.

And that acceleration of expense is in line with our strategy of focusing on innovation.

So we anticipate, and we have talked in the past, about aligning our investments into R&D with revenue.

So I think that cost line you should not expect scale, because we are committed to executing our innovation strategy in '15, for sure.

Our sales and distribution and marketing costs are part, of course, of SG&A.

And this year, SG&A grew about 5.5%, so we did gain scale, obviously, relative to our revenue growth.

But the sales and marketing costs are largely driven by the new business bookings that we do.

And we have talked in the past that we have gained productivity in that channel historically.

So some very slight productivity improvements we would hope to gain also in '15.

But I think that's as specific as we can get for '15 for you.

Those are the two big drivers that you alluded to.

And I hope that's helpful.

And one last stat that I think helps in terms of to show our commitment to innovation, and then also something that may not be obvious from the numbers that Jan just talked about, in terms of our increase in system and development expense, which we're trying very hard to grow at an appropriate rate and not trying to drive scale from it.

But in addition to that, three years ago we set a target.

We wanted to move the amount of spend that we have on new R&D or new cloud-based products compared to legacy products.

And three years ago, that mix was about 40% on new and 60% on legacy.

And the reason we know that number so well is because we actually included that in the MBOs of myself and the entire management team to move that number up, so that we could not only grow our total expense, but grow the proportion of that expense that we're spending on new stuff versus legacy.

And that number now has moved from 40/60 to 60/40.

So we're spending a lot more on new, not just because of the absolute increase in expense, but also because of the change in mix of old versus new.

That's very helpful.

Thank you.

Thank you.

Our next question comes from Ashwin Shirvaikar of Citibank.

Your line is open.

Please check your mute button.

If you're on speaker, please pick up the handset.

Okay.

We'll move on to Smitti Srethapramote of Morgan Stanley.

Your line is open.

Hello.

Thank you.

This is Daniel Hussein calling in for Smitti.

Just wanted to follow up on the PEO business.

Obviously, it's done extremely well on an organic basis.

But Carlos, maybe you could just comment again on the potential to acquire some of those smaller PEO businesses out there, kind of in the same style that you've done with payroll.

Thanks.

I understand the comparison.

And we actually had some hopes over the years that we would be able to do that, because we have done that fairly effectively in the payroll business, at times.

But the two businesses are really completely different, in the sense that in the payroll space, it's really one of, frankly, just a valuation issue.

Does it make sense in terms of the economics?

Because as you can hear, we're not interested in new platforms.

So the question is, can we absorb financially and is it a net positive for our shareholders to acquire and roll up payroll businesses?

In the PEO, it's slightly different, because there's a risk component, where what you acquire has underlying workers compensation and health insurance risk, both in terms of renewal and in terms of just pure balance sheet financial risk.

And so we've been, over the years, looked at really, frankly, dozens of PEOs, and we just never felt that we ran across something that made sense from a risk profile standpoint and the return we thought we might be able to get for our shareholders.

So it's one thing do the math on paper.

When you introduce a risk element, then you have to risk adjust it, if you will, in terms of its potential down side.

And we've decided to just go it organically.

And so we will continue to look, as we always do, because we're open-minded.

But I would count on us continuing to follow the path that we've followed, because it's been pretty successful.

And ironically, the PEO is one place where, when you hear us talk about migrations and multiple platforms and so forth, one might argue and might speculate that part of why the PEO has had all the success it's had -- and I would attribute a small percentage of the success to this -- but that simplicity and that focus on having one platform and just focusing on day-to-day executions and beating the competition and winning in the marketplace, rather than being distracted by complexity and multiple platforms, I think probably has helped them.

And so we're not in any hurry to change that.

Got it.

And maybe could you just comment on how attach rates have been trending in your price expectations for 2015?

Attach rates for -- I'm sorry; what products?

Ancillary products, on your ES segment.

So I'm glad you actually brought that up, because I think I said that in the migrations, when someone asked a question about pricing, I said there's nothing to report.

And it wasn't completely fair, because even though on specific payroll portion of what we're migrating clients on, there's been no discounting or unnatural acts.

In general, we've actually benefited overall from a pricing standpoint as a Company, as clients have migrated.

Because in general, they've taken on additional products, because of the opportunity that we have with integration of the multiple modules, if you will, being on a single database.

So I think those attach rates continue to be very good in general and new sales, and also continue to hold up very well on our migrations.

I think in Vantage, the time and attendance attach rate is somewhere in the 80%-plus range.

We're getting good attach rates on benefits and also on talent.

And so we're very pleased, because these are products that we used to have to sell, first one product, and then another product and then another product.

And now, we're doing much better in terms of our attach rates up front in the sales process, as well as in the migrations.

And when you look at our penetration rates of our various ancillary products in general of the base, and you compare it to the attach rates on new sales, you would conclude that there is a huge opportunity there.

But it's going to take many years to get there and there's a lot of execution risk along the way.

But I just want to be clear that the attach rates on new business are multiples of what our penetration rates are in the base of benefits, time and attendance, and some of our other products.

And then pricing for 2015?

Pricing for 2015 is very much in line with what we've been doing for the last three or four years, which is net price increase of around 1%, in terms of the impact that you would see from that in terms of our revenues and what the clients would experience in the marketplace.

So we're still -- it's a competitive market space.

Inflation is still low.

Historically, prior to the financial crisis, we were a little bit more -- I wouldn't call it aggressive -- but I think our price increases were healthier than they have been in the last three or four years.

And there's no plan to change that in '15.

Thank you.

Thank you.

I'm not showing any further questions in queue.

I'd like to turn the call back over to Carlos Rodriguez for any further remarks.

Thank you very much for joining us today.

As you probably could tell from our tone, we're very pleased with the results.

When we report these year-end results, we don't always focus on the quarter.

But we really had a great fourth quarter.

And I just want to thank the entire organization and all of our associates, including our sales organization, for delivering great results in the fourth quarter.

We continue our shareholder-friendly actions, as Jan mentioned, through dividends and also share buybacks.

We continue to be excited about the opportunity that the spinoff provides both for Dealer Services and for us, and we'll continue to update you along the way as we get closer to the date of the spin.

I'm incredibly enthusiastic about the future as we begin 2015.

This focus that we have on Human Capital Management is finally come to fruition here as a result of the spinoff.

And I think all of our efforts and our focus are going to be in that space, which we believe is a great opportunity on a global basis.

I want to thank you again for joining us.

This concludes the analyst call for today.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes today's program.

You may now disconnect.

Everyone have a great day.