Elena Charles - Vice President of Investor Relations Gary Butler - President and CEO Chris Reidy - Chief Financial Officer

James Kissane – Bank of America/Merrill Lynch Ashwin Shirvaikar – Citigroup Glenn Greene – Oppenheimer John Williams – Goldman Sachs Rod Bourgeois – Sanford Bernstein Jason Kupferberg – UBS Gary Bisbee - Barclays Capital Jim MacDonald - First Analysis Kelly Flynn - Credit Suisse David Grossman - Thomas Weisel Partners Tim Willi – Wells Fargo Mark Marcon - Robert W. Baird David Cohen – JP Morgan Chris Mammone – Deutsche Bank

I'm here today with Gary Butler, ADP's President and CEO, and Chris Reidy, ADP's Chief Financial Officer. Thank you for joining us this morning for our first quarter fiscal 2010 earnings call and webcast.

A slide presentation accompanies today's call and webcast and is available for you to print from the Investor Relations homepage of our website at www.ADP.com. Just to remind you, the quarterly history of revenue and pre-tax earnings for our reportable segments has been posted to the IR section of our website.

These schedules have been updated to include the first quarter of fiscal 2010 and all prior periods have been updated to reflect fiscal 2010 budgeted for an exchange rate. 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 two of the slide presentation and in our periodic filings with the SEC.

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

Let me begin today’s call with some opening remarks about our first quarter results. I’ll then turn the call over to Chris Reidy who will take you through the detailed results, and then I’ll return a little bit later to give you and updated forecast for fiscal 2010.

Before we take your questions I will provide some concluding remarks. To begin, ADP’s first quarter results were against very tough comparisons a year ago when we posted 9.5% revenue growth, pre-tax margin expansion of 100 basis points and 20% EPS growth.

As you recall it was toward the end of the first quarter in fiscal ’09 that the financial market volatility led to the most difficult economy in decades. Considering the cumulative economic impact on ADP’s business metrics in the quarter, which include lower new business sales, lower client retention, lower client fund balance, fewer number of payees and continued dealership closings, I am encouraged by what we achieved this quarter.

Revenues for the first quarter declined 4% year over year but were slightly ahead of our expectations. Foreign exchange rates gave us a revenue benefit of 1% in last year ’09 first quarter but had been working against us throughout fiscal 2010 in the first quarter.

The current quarter’s revenues were negatively impacted about two percentage points from unfavorable exchange rates. However, I am pleased that ADP posted positive growth in both pre-tax and net earnings of 1% and 2% respectively.

Earnings per share from continuing operations grew 4% on fewer shares outstanding. New business sales declined 2% in the first quarter which is an improvement over the decline posted through fiscal 2009.

These results were ahead of our expectations but were mixed by business unit within employer services. Sales in our National Accounts Division declined year over year as the sales cycle for larger companies remained challenging with continued delays in outsourcing decisions.

Sales to mid-side companies in our Major Accounts Division grew compared with last year’s first fiscal quarter. Our International Division also grew sales with particular strength in Global View.

Sales in our small business services division were down year over year; however, we view the quarter’s results as quite solid considering the sales headcount reductions that were made in last year’s fourth quarter. Total Source sales which include our PEO were also strong in the quarter.

Client retention continues to be under pressure but its still at historically high levels even though down one percentage point in the quarter in Employer Services. As you know, January is the critical retention period in our ES business.

We are appropriately cautious about the full year retention metric. The number of employees on our clients payroll on a same store basis also declined in the quarter from a year ago, down 6.5% which is slightly better then we anticipated.

This decline is against a compare of an increase of 0.4% in last year’s first fiscal quarter. Let me leave ES and talk for a moment about Dealer Services.

As you may know, General Motors will be discontinuing the Saturn brand and closing those dealerships as the plan to sell the brand fell through just some few weeks ago. As Chris will tell you in a few minutes, Dealer Services did record an intangible asset impairment charge in the quarter due to this expected closure of the Saturn dealerships.

The annualized loss of revenues from the Saturn relationship is about $12 million to ADP. We anticipate the full year impact of this revenue loss won’t actually occur until fiscal 2011.

To help you with your perspective on this we had previously estimated that the impact to Dealer Services for industry wide dealership closings over the next 12 to 18 months was at the low end of our original $50 to $75 million estimate. This is still the case including Saturn because we have done much better then previously forecasted with other manufacturers dealership closing.

Additionally, many of the closed dealerships were much smaller with low car sales volume so they have impacted us far less then our average dealer client. Some of these dealerships are also becoming used car dealerships or are staying in business as service centers.

I also want to point out that despite the continued tough automotive market Dealer Services is continuing to do very well on the competitive front. With that let me turn it over to Chris to provide you the details on our results.

We’re on slide four. Total revenue has declined 4% to $2.1 billion in the quarter.

This decline reflects the cumulative impact of the difficult economy that began toward the end of last year’s first quarter. The quarter was also negatively impacted two percentage points from unfavorable foreign exchange rates due to a stronger US dollar.

Pre-tax earnings were up 1% and net earnings were up 2%. The quarter’s earnings benefited from lower headcount resulting from last year’s fourth quarter restructuring.

Before I continue with the results, I want to allay any concerns about our lower headcount. We have not cut too deeply into critical client facing areas.

As you have heard us say numerous times, we learned our lesson from the early 2000’s where we did cut too deeply and took us longer to hire up and to grow our sales engine. With the exception of sales headcount for the small business market we have pretty much held our sales headcount levels ahead of an economic recovery.

As a result, we believe we are better positioned then we were five or six years ago to emerge from this economic downturn. We are also investing in our service organization.

FTE’s or full time equivalents are up year over year primarily in smart sure locations. We anticipate growing service headcount throughout fiscal 2010 in this area.

Additionally, we continue to invest in products such as Run for the small business market and workforce now for the mid-market. Earnings per share from continuing operations increased 4% to $0.56 a share on fewer shares outstanding.

As you saw in this morning’s press release we spent about $13.7 million to purchase over 360,000 ADP shares. This may be lower then many of you anticipated so I want to reiterate our commitment to returning excess cash to shareholders.

We continue to anticipate strong operating cash flows in the $1.5 billion range for fiscal 2010. As such, our full year target to repurchase $300 to $400 million worth of ADP shares during fiscal 2010 remains in tact.

Assuming the landscape doesn’t change significantly form where we are today you can expect a steadier level of share repurchases for the balance of fiscal 2010. Now let’s turn to slide five.

Employer Services, total revenues decline 3% for the quarter. This was a very tough comparison versus year ago when ES revenues grew 8%.

Revenue in our payroll and tax filing business in the United States decline 7% in the quarter from lower new business sales during fiscal 2009 compared with the year earlier, lower client fund balances from slower sales, lower wage growth, fewer employers on our clients payrolls and lower client retention. Our Beyond revenues in the US continue to grow with 3% growth in the quarter.

ES pretax margin expanded 70 basis points benefiting primarily from lower headcount levels due to the expense actions taken in last year’s fourth quarter. You can read the rest of the stats on the slide as Gary took you through these key metrics in his opening comments.

Now let’s continue with the quarter’s results and turn to slide six. The PEO reported 6% revenue growth for the quarter.

This growth was entirely due to increased benefit pass through revenues that resulted from increases in both benefit rates as well as the number of worksite employees. Pre-tax earnings included a $9 million benefit from the settlement of a state unemployment tax matter.

Pre-tax margins declined 125 basis points excluding the $9 million benefit. Lower headcount, the continued expense control was offset by higher pass through revenues as well as increased promotional activities to drive new sales.

Year over year, for the first quarter, average worksite employees increased 3% to over 195,000. Now let’s turn to slide seven.

Moving on to Dealer Services, revenues continued to be negatively impacted by the cumulative effect of dealership closings and consolidations. Revenues for Dealer Services were slightly ahead of our expectations declining 4% in the quarter.

Transactional revenues although lower then a year ago were higher then anticipated on higher volumes from the “Cash for Clunkers” program which pulled car sales volumes and thus transactional revenues into our first fiscal quarter. As you know, GMs deal to keep the Saturn brand alive fell through a few weeks ago.

As a result, Dealer Services recorded a $7 million impairment charge relating to an intangible asset from our fiscal 2004 acquisition of a business that provided the MF solutions to Saturn. Dealer pre-tax margin decline 130 basis points but it increased 90 basis points excluding this charge primarily as a result of expense actions taken in the last year’s fiscal quarter.

Dealer Service has also continued to be very successful with increasing its share despite the market consolidation. Now let’s turn to slide eight.

We’re continuing to use this schedule that you’re all quite familiar with by now because it shows a clear and succinct view of the overall impact of the client fund portfolio extended investment strategy. Our disclosure of the client funds extended investment strategy includes the breakdown of the client fund portfolio into the short, extended, and long components which you can see in orange on the slide.

At the top of the slide you see the breakdown of both the average balances as well as the average interest yields. The orange section at the bottom of the slide gives you the corresponding pre-tax P&L impact the total representing the interest on funds held for clients P&L revenue line item.

Near the top of the slide you can see that the average client fund balances were down $1.4 billion compared with a year ago period. Lower wage growth, fewer pays, slower sales, and the negative impact of Canadian foreign exchange rates compared with a year ago all contributed to the decline in average client fund balances.

In addition to the client and average client fund balances, the average yield on the client funds portfolio declined 30 basis points to 4% this quarter, resulting in an overall decline of $24 million in interest on funds held for clients on the P&L. The impact form the lower new purchase rates were most pronounced in the client short portfolio where the average yield earned was 240 basis points lower the last year due to the decline in the Fed Funds Rate.

Average borrowings were up this year; however, the average interest rate paid on these borrowings dropped significantly 210 basis points to a blended average borrowing rate of 0.2%. The result was a $15 million reduction in interest expense and positive impact to the P&L thus the lower rate was more then offset by the higher borrowing When you take into consideration the entire extended strategy presented here the result was an $8 million pre-tax decrease or a decline of only about 5%.

I’d like to remind everyone that the decline in interest rates accelerated in October 2008 making this quarter the easiest comparison to fiscal 2009. The estimated P&L decline increases as the year progresses as you’ll see the full year forecast on the next slide.

Now let’s turn to slide nine where I’ll take you through the extended investment strategy forecast for fiscal 2010. Before I get into discussing the detailed forecast I’d like to update you on the credit quality of the portfolio.

I want to again state that the safety and liquidity of our client’s funds continued to be the foremost objectives of our investment strategy. Client funds are invested primarily in fixed income securities in accordance with ADP’s prudent and conservative investment guidelines.

Over 80% of the portfolio remains AAA or AA rated. Net unrealized gains as of the end of last week totaled $665 million which is up slightly from the net gain as of September 30 reported in this morning’s earnings release.

I’d also like to point out that no asset classes in the net unrealized loss position within the $665 million net unrealized gain amount. While the level of unrealized gains will change as the interest rate environment changes, the way to think about this is that the unrealized gains indicate we are holding securities yielding higher rates the current market rates.

Its part of our extended investment strategy, our intent is to hold these securities to maturity and earn these higher then current market yields. Now to the fiscal 2010 forecast.

This slide summarizes the anticipated pre-tax earnings impact of the extended investment strategy of the client funds investment portfolio for fiscal 2010. We are anticipating a decline in average client fund balances of 5% to 6% which represents pressure on a level of new business sales, continued pressures on wage growth as well as the number of employees on our client’s payrolls.

We are anticipating a yield on the client funds portfolio of about 3.7% down about 30 basis points from fiscal 2009. It’s important to keep in mind about 20% of the extended and long investments are subject to reinvestment risk each year, all of which result in a decline of $70 to $80 million in client funds interest.

We are anticipating that average corporate extend balances will decline about $300 to $400 million in line with the expected decline in average borrowings. The average yield on the corporate extended is expected to be about flat.

We anticipate average borrowings will decline about $300 to $400 million and the average interest rate paid on these borrowings is forecasted to be down again in fiscal 2010 about 80 basis points so blended average borrowing rate of 4.3%. Taking into consideration the overall extended investment strategy including lower borrowing costs we anticipate a $65 to $80 million decline to pre-tax earnings in fiscal 2010 which is about a $10 million higher decline then our initial forecast.

Now I’ll turn it back to Gary to take you through the remainder of the forecast for fiscal 2010.

For those of you following along we’re now on slide 10. We are assuming in our fiscal ’10 outlook no change in the current economic environment.

We continue to anticipate tough year over year comparisons for the second quarter but easing comparisons in the second half of the fiscal year. Having said that we are narrowing our forecast range.

We now anticipate a decline of 1% to 2% for total revenues and diluted EPS from continuing operations of $2.34 to $2.39 which represents flat to a 2% decline from the $2.39 in fiscal ’09 which did exclude favorable income tax settlements in the fourth quarter of last year. As is our normal practice, no further share buybacks are reflected in this forecast, though it is clearly our intent to continue to return excess cash to our shareholders obviously depending on market conditions.

For our reportable segments we anticipate Employer Service revenue declining 1% to 2% which reflects a decline in pays for control of 4% to 5% and flat to down one percentage point in client revenue retention. We anticipate that the year over year comparison for pays per control will begin to ease during the second half of fiscal 2010 as compared to the second half of fiscal ’09 when this important metric declined significantly.

We do anticipate PEO services revenues will be up 4% to 6% and we do expect a decline in Dealer Services revenues of -3% to -6%. We anticipate the annual dollar value of ES and PEO worldwide new business sales will be about flat compared with last year’s fiscal ’09.

We continue to anticipate no improvements in pre-tax margins. As you turn to slide nine I’d like leave you with some closing remarks before we open it for your questions.

Clearly ADP’s near term growth has been under pressure from the difficult economic landscape. We have appropriately reduced our expense structure to align the forecasted near term lower revenue growth while continuing to invest in new products and client facing resources that will help drive our strategic growth initiative.

We are more positive on fiscal ’10 full year outlook then we were just some three months ago as it appears the US economy is at the bottom of the downturn. We continue to expect strong operating cash flows of about $1.5 billion and we do anticipate another year of 20% plus ROE in fiscal 2010 which I believe is quite strong relative to the economy.

Our prudent and conservative client funds extended investment strategy, coupled with the strength of our AAA credit rating continue to serve us quite well and we remain committed to returning excess cash to our shareholders including ongoing share repurchases again obviously depending on market conditions. Our business model is solid and remains in tact with highly recurring revenues and client life cycles of just under 10 years.

I continue to be confident that once organic revenue growth returns we will again be able to achieve consistent pre-tax margin expansion. The questions now as I see them are how long the economy remains in this trough and when will we begin to see some evidence of economic growth.

I’m certainly not an economist so I don’t know all the answers but what I can tell you is that ADP is extremely well positioned to leverage the inevitable recovery in the economy. That concludes my comments and I’ll turn it back over to the operator to take your questions.

Do you have a sense of the magnitude of the decline in the sales and small business arena? Maybe give us your sense of the tone in small business as well as the pricing environment there.

Actually the tone is really pretty positive. Our productivity per sales person is up.

Our sales are down less then the amount of headcount, obviously that we reduced. We’re still seeing some price pressure there.

It seems to be abating somewhat but its still there so I don’t want to give anybody the impression that it’s gone away. It’s certainly not getting worse and its abating.

Actually we’re pretty encouraged with the sales scene on the small and new business.

I know you don’t give out pays per control by segment just a sense of how small business is doing relative to the other areas within Employer Services?

It’s actually down a little bit less then the rest of the world.

On the other end of the spectrum maybe a little more color on Global View. It sounds like demand has pick up there, any update on when you’ll achieve break even there and how the implementations are going for Global View?

We had a really strong first quarter in Global View sales. We had a number of big deals that entered the pipeline that came to fruition.

I think we’re still a year or two away from break even on Global View. The loss continues to come down and we are committed to this product and this whole program over the long term.

We’re going to continue to do what it takes to drive the top line.

As you look at the recovery there are certain parts of your business that you expect to come back quicker or slower then others? I know you’re not clearly talking 2010 here maybe 2011.

Could you talk about that?

I think the thing that will come back first is new business sales because as the mood of the country and the world changes people are more comfortable making decisions for the long term about infrastructure and how they deal things. I would expect some of the balanced growth to come back before the paid growth comes back because people will start working overtime, we’re getting some stock option profits back into the equation and hopefully you’ll stop reducing the number of paid.

I would expect some balances to come back. With the strength of our product line across the board I don’t see any place in particular coming back faster then somewhere else.

I think it’ll be the same across the board.

This is less related to a recovery then to your own investment in various products. Can you also talk about going forward the expected revenue margin profile in areas like BPO?

When you say the margin, obviously the margin in BPO where you’re doing employee call centers you have a much larger labor component. They will be less then they are in say traditional payroll but again they’re very acceptable margins and we’re going to continue to grow there.

We’ve added a lot of BPO services over the last three or four years and if you followed us our margins have improved every year during that same time we’ve been expanding in BPO. I don’t expect it to be any significant impact on ADP.

Certainly not against the average margin of ADP. It might be less then pure payroll in certain instances but not against the overall margin.

I want to drill down a little bit on the sales activity and get a sense for how it progressed during the quarter. My point here is your tone seems markedly different then it was in July.

Am I reading to much into that and maybe a little contrast across segments?

Don’t be confused, I’m definitely encouraged. I think we’re in the trough and starting to come up the other side.

There are always puts and takes when you deal across as wide a spectrum as ADP but in general the tone of the sales group and our results is certainly encouraging. Don’t read into that that I’m buoyant but I’m certainly encouraged.

Any contrast across the segments or maybe a little more granularity as opposed to just directionally down.

The only place where we were discouraged or weren’t encouraged was in the high end in the North American marketplace. We’re still seeing corporate America not as willing to make fairly big decisions.

It’s a little bit in contrast to the fact that actually our international sales results and our Global View sales were strong, they weren’t even just good, and they were strong. Europe certainly didn’t universally go into the trough as deeply as the US markets and so we’ve continued to see pretty good sales results in Europe.

It was refreshing to see Global View bounce back and reaffirm the value equation that we thought was represented in global View. With the one exception of the high end of the market in the US we were pretty encouraged.

Any way to put some metrics on this. Was National down double digits; was International up double digits, anyway to frame it directionally?

I don’t think we want to go there. We typically don’t report those kinds of things.

None of them were off the charts in either direction. I’d really like to leave it where it is.

How are you feeling about where your cost structure is at this point? You’ve kind of taken the major initiatives and efforts going into this year that you needed to and given the sense of stability and improving sales town do you feel like you’re at a place where you’re comfortable.

Yes I do.

I was hoping you could possibly give a little bit more color on your FX expectations for the next year.

It is moving all over the place that’s for sure. What we do is we look at the last three months average when we provide our forecast and so that’s the basis of the forecast.

Then we obviously look at the spot rate and use that to stress the upside/downside. Obviously the dollar had gotten a little bit weaker more recently and we take that into consideration on the upside.

That’s moved around quite a bit. As you know, first quarter was impacted by two full basis points of revenue growth because of the compare against the first quarter of last year where, for example, the dollar against the Euro was about $1.52.

Last year in the second quarter that dropped significantly into the $1.20 actually so we would expect the compare to be a little bit better going forward and actually be getting a lift in revenue from the compares. The way to think about that is we used the average but then we looked at the spot and our revenue guidance takes that into consideration both on the high end and the low end.

On the margin improvement, you guys said you don’t really expect any pre-tax margin improvement but it seems as though your commentary is a little bit more positive then it has been and you’ve certainly got expenses under control. I’m wondering is that related to your other comments about how long we’re going to sit in the trough or is it just the fact that you guys haven’t changed your other economic assumptions that is really leading you to say you’re not going to see margins expand this year.

It’s really the fact that it’s too early to tell at this point, it’s too early to call. The first quarter is really isn’t indicative of the full year.

If you went back to last year, for example, the first quarter only represented about 20% of the full year’s NOI. Margins in the first quarter in the 24% versus the 27% that they ended for the full year ’09.

Our guidance is down 1% to 2% in ES revenues. That one percentage point makes a big difference, $65 million worth of revenue.

It’s hard to get a clear picture depending on where it is in the range. We’re continuing to invest in service so we’ll continue to do that throughout the rest of this year.

Overall, it’s just too early to call so our best view right now is no increase in margins.

Can you specify what are the main economic trends that are causing you to sight stabilization and indicate that US economic metrics may have troughed at this point? Is it mostly in some of the employment metrics that you guys have unique visibility into or is it just the general GDP trends that we’re seeing in the world?

I think its general trend but the thing that I find most encouraging is the sales scene. Its people’s willingness to invest in infrastructure kinds of services like we provide.

Clearly the pays for control is leveling off in terms of the decline and we think it will start to go the other way. As you looked at the national unemployment report that came out its certainly getting less worse is I guess the way they described it on CNBC this morning.

I do believe that the decline in balances is at the bottom and is going to have to come back up as the economy turns.

Six months ago you accurately predicted where your pays per control would go to this point in the year. Now you’re indicating that maybe it’s going to go the other way.

You have easier comparisons so that’s probably part of the reason why you think pays per control will get better. Beyond the easing comparisons it sounds like you may be seeing things in the market that makes you more encouraged on the pays per control employment growth front.

Is that accurate?

When you say the market the sales scene again is more positive then it’s been but from a standpoint of pure market we’re not seeing anything different then what you read in the paper is the same stuff I read.

I think it’s more when we gave guidance back in late July I think the economists were predicting anywhere from 10.5% up to 11.5% ultimate unemployment. I think since then you’ve seen a lessening of the decline as Gary put it and so there’s more settling around that 10.5% to 11% range.

I think we’ve seen that in the first quarter where pays were a little bit better, still pretty bad at 6.5% but better then we had forecasted. We see that continuing, we see it in the NER report today in terms of the decline, certainly less of a decline then there was in prior months.

I think it’s that combination that point us to a slight improvement, still pretty bad though slight improvement for our full year forecast on pays.

Your commentary on the small business segment you sighted that you’re more encouraged on that segment. I’m wondering is that due to share gains or is there something happening with small business formation that’s more encouraging there?

I don’t have any hard statistics that I could share with you other then our productivity at the individual sales person level is up this year versus last year. Again, that’s on a reduced headcount.

We’re not seeing per se we don’t track sales and where it comes from in terms of new business formation versus somebody that’s already been in business for some period of years. Most of my evidence is anecdotal as opposed to empirical.

That’s really about the best I can provide for you.

Has pricing and discounting activity become less bad or more encouraging on that front?

It seems to have calmed down. Its still there.

It’s not at the heightened level that we saw say six months ago.

On core payroll I know it was down about 7% and wanted to get a sense of where you guys think that can go in a more normal economy? As part of that answer if you can talk a little bit about how you guys view current market penetration in core payroll across the small, medium, and large segments and to what extent those penetration figures have changed in recent year?

I think a number of years ago you guys used to call out some of that data at analyst meetings and so forth, don’t know that I’ve seen any of that recently so would love to get an update if you have it.

In terms of core payroll and tax which is the way we look at it, I guess this time last year that number was 7% or 8%. I think that will give you a pretty good idea of where we think it can go once we return to a normal kind of environment.

Clearly the balances were affected by pay, they’re affected by new sales, they’re affected by bonuses which had been down 30% to 40%, and they’re affected by merit increases which generally get 3% to 4% which we think you got very little of over the last 12 months. Those kinds of things will clearly help us propel that.

Again, new business sales are the single biggest thing that helped all of our businesses. In the case of balances we think we’ll get some natural lift across that.

I don’t have any updated numbers on market share to share with you this morning. Typically our SBU presidents go through that at our analyst meeting which we will do again in February.

I don’t think there’s any real significant change to where it was the last time we shared it with you in March.

Turning to the ancillaries, the beyond payroll service offerings in ES, can you talk about the specific offerings that you guys think had the most significant near term and long term potential in terms of actual financial impact for ADP?

The single biggest area is our HR/BPO activities which would include the PEO as well as our new ASO offering in the mid-markets as well as our COS offering at the high end. You put those three coupled with Global View and they’re probably the biggest things that will drive long term internal revenue growth.

Our results in all those categories are quite strong and we expect they’re going to be an even bigger portion of our go forward sales then they have been historically.

I know you’ve got the key year end selling season coming up here in the next couple months or so. Do you expect any material difference in the competitive dynamics this time around?

Are you guys planning to operate in any different fashion this time around as we hopefully are coming out of this downturn, maybe an opportunity to pick up some more market share?

I wouldn’t say there’s going to be any material difference in what our traditional activities have been. The year end is in National accounts pretty much the year end is not a big thing.

If you haven’t sold it by November you’re not going to sell for a January 1 start. The real key activity is in SBS and PEO and to a lesser degree at the low end of major accounts.

We have our typical promotional kinds of activities going on there. We’re very excited about what’s happening with our new run platform on the low end of the market, it’s getting really great traction in the marketplace.

We just introduced for general release our workforce now product in the middle market and it’s basically a new product that has a single user interface for time and labor management, payroll, and HR benefit. It’s really getting great traction and so we think the strength of the product is going to help our major accounts marketplace a lot.

You’ve sighted for a while even outside of the recent improvement in Global View, somewhat stronger International performance at least on a relative basis to the US. Can you give us a sense what’s going on there, what your product portfolio looks like right now outside the US, ex-Global View and are there real long term growth opportunities or is it much more that you’re focused on Global View?

Global View is certainly doing extremely well. We have another product called Streamline which we haven’t talked about a lot.

For example, there are a lot of companies including some of our Global View clients who have small employee populations in a lot of countries. It doesn’t really pay to put in a fully burdened SAP implementation.

We’ve developed a software layer that allows for integration with our best of breed products where you have smaller populations into the Global View database and single feed into our Global customers. It’s getting a tremendous amount of traction and it’s certainly been one of the things that has done well for us.

We’ve expanded our headcount in Europe over the last three years and some of that headcount is now maturing in terms of productivity and so we’re getting real good benefits there. We’re also pleased with our acquisition in China, the small payroll service bureau based in Shanghai and we’re starting to get good results there as well.

We’ve got some other kinds of HR products and self-service products that we’ve released across Europe that are also helping us drive core payroll. In general, the scene in International and Europe specifically is actually quite good.

I would add that we’re also doing well on the money movement side in International as well, particularly in the UK but we’ve started that up in Netherlands and we’ve already made some progress although still in the early stages in France as well. That’s something that we’re particularly encouraged by.

Last quarter I think you said you were spending a fair amount of your time actually out selling. What are you hearing from customers?

I understand the large company North American market hasn’t really turned yet. Do you get the sense that maybe when we get into January and in a new budget year that maybe the purse string will loosen up a bit or are companies still so tight on expenses that maybe that takes a while longer?

What I’m hearing as I go around, particularly at the high end of the market which is where obviously where I’m focused on because it’s a bigger dollar amount, are the guys that are sitting in my chair or Chris’s chair now are kind of feeling the same bottom that we’re feeling. Therefore they are moving back to business as usual of how do I move my company forward.

I would contrast that to six to nine months ago when the economy was in freefall and people were hanging from the rafters and nobody want to make decisions when you don’t know where the bottom is. That’s my general sense as I talk to people in my chair across the country and the anecdotal evidence that I hear form the sales force is that people are starting to make decisions again.

We don’t want to be too optimistic but again I think the word encouraged is the way to describe it.

I know in the last year or so the focus on the state and local governments and what not has increased a bit. Are you seeing any increased willingness to outsource just due to the pretty massive financial pressure most of the state and local governments are facing?

We actually have created a sales unit within our National accounts business that’s focused on selling benefits, outsourcing and payroll HR outsourcing into governmental units. It’s not a big effort but its enough for us to watch.

The results are pretty encouraging. It’s hard to spend money on big software purchases in state and local governments today with the budget pressures that they have.

We’re certainly a good solution for them without a lot of up front capital required to get started. I think its good news.

Any update on the acquisition plans? The market having gone up so much raised the multiple expectations of people or do you still think the $300 to $400 million is a reasonable target for this year?

I think that’s still a reasonable target. Our pipeline is pretty good but mostly its smaller $10, $20, $30 million acquisitions not $200 or $300 million acquisitions.

We’re looking for product extensions that we can leverage across our distribution capability and those kinds of acquisitions still are not inexpensive to buy, particularly in employer services area. We’re seeing again, continued good activity in Dealer because obviously in that environment if you don’t have ADP’s balance sheet then it’s a difficult place to operate over the last couple years.

I think that $300 million target is a reasonable expectation.

On Beyond Payroll it’s held in really well with the rest of the business decline. Do you think we’ve reached a bottom in Beyond Payroll, for growth?

I think that’s a fair assessment.

Do you see that being able to come back to the double digit growth? How would that look?

As we get the core payroll and tax business back in the positive direction I think it’s not unreasonable to expect that Beyond Payroll is going to grow five points faster then the core payroll. I don’t think that ratio should change based on any kind of history.

Can you tell us what the price impact was ES in the quarter?

We don’t really publish that number.

We talk about that as of the beginning of the year for full year.

Are you talking about price increase as opposed to concessions?

Price increase, I think you put it in your Q?

That’s an annual increase.

That generally happens; you threw us with the quarter question. We do that at the beginning of July and we did increase, although less then we had in the past.

You’ve heard us talk about 2% on average in the past and most of that’s sticking. I think it was certainly less then that this year.

Most of it stuck interestingly but think about a net of one or thereabouts.

I want to revisit this small/midsize client versus large company issue. I know a lot of people have asked about this but I want to clarify are the comps getting easier earlier on the small business side or are you actually seeing pickup in activity on a sequential basis?

Are you talking sales?

Yes, I’m talking about sales. You talk about your feeling better.

I want to make sure it’s not an issue of easier comps as opposed to actually more activity versus the prior sequential quarter.

Our productivity per sales person is up so that’s good. We have pretty much held headcount steady across the board in ES last year with the exception of small business because it’s easier to ramp back up there because it’s a simpler more straightforward sale.

We will continue to add headcount there over the course of the year. The activity there is good and so because you’re comparing headcount levels this year that are lower then last year its difficult to give you a metric because the headcounts are different.

Again, it feels pretty good in terms of productivity.

I wouldn’t say in terms of easier compares, you don’t start seeing real easier compares until the fourth quarter because last year’s fourth quarter was down significantly from the prior year. The rest of the quarters are all pretty equivalent.

I know you’re not economists but do you have any qualitative theories on this issue of the small business versus the larger business based on what you’re hearing from your clients or how you’re interpreting economic data? Do you actually think there’s reason to believe that small businesses will recovery faster then larger on the employment front?

I don’t have any empirical data that I could share with you. The only anecdotal data that we hear is from the sales leaders in that part of the marketplace and they feel pretty good about the activity that’s coming from our banking partners, our CPA partners, and just in general.

If I were to describe the economic situation for small, medium, and large I would say at least for us it appears slightly more positive on the small end then it does in the middle and the large.

I’m wondering if I could elaborate on a question asked earlier about the margins. It’s understandable that you’re thinking flat margins with some revenue declines this year.

If the economy just bumps along and we migrate into a more flattish environment do you think we can see margin expansion in a flattish revenue environment?

It’s fair to say that if we’re more flattish then down 1% to 2% that with that comes the opportunity to drive more margins. Certainly selling expense driven by what’s happening in sales impacts that.

As you’ve heard us jokingly say in the past, we’d love to be able to explain that margins were flat to down because we’re driving so much in the way of sales. You do have to watch that a little bit.

There are a number of things that affect you in the second half of the year that didn’t really catch up to you in the first half. Certainly healthcare benefit increases year over year and that catches up more in the rest of the year.

I think everybody would like to get back down to the point where merit increases come back; we’d certainly like to see our clients do that. If we do that as well that’ll put pressure on the rest of this year in the fourth quarter particularly.

The big issue that we have, what I talked about in my opening remarks is the impact of interest rates. We lose that favorable compare and so the impact of the interest on our client funds is getting worse then what we originally said in the beginning of the year.

That’ll have a dramatic impact and you saw the $70 to $80 million year over year impact which is up from $60 or $70 million that we had said at the beginning of the year. That’s what has us cautious and really in a mode of too early to call that one.

Ex rates is there anything happening this year that gives us a tailwind into the following year, again excluding the impact of rates?

On interest?

No, on operating expenses year over year in fiscal ’11, are there things still being done this year that give you a tailwind into fiscal ’11?

I think we’ve done a huge amount in the fourth quarter of last year that you can see reflected in the expense structure in the first quarter and the ultimate increase in EPS. I think that will continue to help us.

The biggest thing that helps you, you return to organic revenue growth that’s the highest margin contributor you can get. Whatever your assumptions are around our organic revenue growth for next year it certainly gives us the leverage to drive margin improvement as compared to the environment we’re in.

Certainly on the sales side that will have ramifications going forward. Also in client fund balances when everything is going in the negative direction with the economy that drives client fund balances down in a lot of different ways.

Certainly the pays component of that is the most obvious. The contrary is also true.

When people start giving merit increases, bonuses start coming back to normal people start hiring again which has all sorts of implications in terms of [inaudible] deductions, feuded deductions and FICA deductions. All of those things as you have the wind at your back there’s a number of factors that increase on a client fund balance nature.

Around the M&A environment and thinking about if there’s any changes in the probability you see of doing some M&A if the market is easing or in gridlock, how you look at that and any changes in your thoughts or the environment over the last handful of months.

As I discussed a little bit earlier in the call, our backlog in M&A transactions is pretty good right now. Our internal expectations are still around spending somewhere around $300 million in terms of M&A activity.

I don’t want to give you the impression that there are a lot of really big deals but there are a number of product extensions that we think are going to happen. The market is kind of what it’s been in our kinds of space, particularly in ES if you’re looking for good product extensions the multiples are not low and we haven’t seen any real change in those kinds of activities.

Again, I think we’re pretty optimistic at this point.

Around hiring in the service organization, I think you said small business operation, is that something where you are being proactive around an expectation for the growth trajectory of that business where you find something competitively where adding a little bit more to the service organization on small business might help with market share in this environment or were you reacting to something that you were seeing just around that business that you wanted to correct?

From a clarification we didn’t specifically call out small business. We’re increasing service in a number of different areas but not necessarily focused on small business.

The increase this year in the first quarter, for example, its up about 3.5% FTE. It really is the fact that service is the foundation of our business and as the differentiator it certainly is a competitive advantage.

Making sure that we continue to be solid in service foundation particularly as we look at growth in some of the Beyond Payroll kinds of areas that need a service component to that as well as just in core payroll. We’re preparing ourselves for the inevitable recovery in the economy to make sure that our services is solid.

I was wondering if you could talk a little bit about client retention. You mentioned that that was down a little bit.

Can you distinguish between whether you think that was the economic impact or if there’s anything that’s occurring from the service level perspective? This is obviously the critical period, how are you going to approach client retention here in the late part of the year as we go into next year?

The most important thing is that we really didn’t cut service despite some of the pressures we’ve had across the business. Our average client loads, for example, in service are about the same as they’ve been.

The important thing in service, particularly as you go through year end is that you’ve got people who can answer the phones fairly quickly and if they have a problem, resolve it on the first call or shortly thereafter. Most of our increases in retention have been around price in our business.

Obviously if you have any kind of a service issue and you have a full price it certainly escalates a client’s willingness to leave. Again, I think we see that escalation moderating and declining and we expect to have a good year end and no real departure from business as usual.

It sounds like basically what you’ve been seeing is primarily due to the economic environment from your perspective to the extent the economic environment is improving that should help your retention statistics should it not?

Absolutely should, and the fact that we’re very conservative on our price increase this year. All of those things should help.

Again, the proof is in the eating and we don’t want to make that call until we get through the year end.

I don’t want to be premature about this but to the extent that we are starting to see an economic recovery, as we look at your excess capacity within your system, how should we think about incremental margins, let’s say a year from now or six months from now we start seeing employment actually grow in the United States, start seeing new business development pick up. How should we think about the longer term trajectory for margins and your ability to leverage your current infrastructure?

It’s always a tradeoff because obviously as you’re growing the business and generating incremental margins you also have areas that you want to invest in. We always try to balance margin improvement with increased investment.

Obviously if your sales growth is accelerating, which we hope it will over the next couple of years, then clearly you’re spending more money on sales that obviously drag down margins at least for the near term. I think the way we’ve historically talked about a 50 basis point improvement on a business as usual basis once we return to positive internal revenue growth should be the same way you think about it going forward.

That would also be inclusive of the time period when your sales could potentially start spiking up but before the revenue starts really getting layered in?

We’re in pretty good shape right now from an expense side. As balances start to go up or interest rates turn that clearly gives us more flexibility in terms of margin improvement.

We try to balance it so we increase margins but at the same time we want to make investments in our long term future growth around distribution and products. It’s always a tradeoff and there’s no magic formula depending on what’s happening at any particular point in time.

That 50 that we referred to isn’t 50 every quarter in and out you just can’t manage it that way but its 50 over a longer period of time on average.

HR/BPO is clearly the area that you think is going to be the best growth opportunity from a longer term perspective which would include PEO, ASO, COS and then maybe throwing in Global View.

Global View has a BPO option beyond just pure service.

When we look at that on a combined basis can you give us a feel for, on a combined basis, how big that is and how we should think about it in terms of its margins relative to its ultimate potential?

Our posture there has always been until we entered this economic blip that we’ve been enjoying for the last 12 to 15 months, is that COS is $0.5 billion business over the planning period and that Global View is clearly a potential of $0.5 billion business and both the PEO is already a billion dollar business so we think its clearly got potential over the planning period to grow at double digit rates. The ASO offering in the low end of the middle are clearly multiple hundred million dollar growth opportunities as we look forward.

The key is to make sure we continue to do what we do with all the other products while we’re focused on growing those businesses faster then our historical services.

Ultimately the margin should improve maybe they won’t get to where the core payroll is just because of the different types of businesses.

When you look at just a pure ASO kind of service and pure COS kind of service the margins there actually will be quite good over time. The place where you have the margin pressure is when you’re talking to employees and you’re operating fairly large call centers, the margins in that, because of the labor component will never be as high as a pure service bureau.

You have to manage that component of it.

The worst period is the year that you make that initial investment. Even margin drains as they get better year over year are helping your margins.

Balancing that as you’re looking out is critical.

You gave overall margin guidance for the year. Can you break that down by segment if possible?

No, not ready to do that yet.

The new sales you said were down 2% year over year. What was the change sequentially?

If you have another question I’ll come back to that.

Following on the new sales what was the mix between new clients and then new products to existing clients within the new sales number?

We don’t really publish that number. Generally it’s around 50/50 and there’s no real difference now versus say historically.

Can you remind us what historically the contribution to the full year new sales number is from the first quarter?

Generally sales for the first quarter is usually our smallest quarter. It would be in the low 20% range.

It’s pretty even. The difference between the split of sales by quarter is within 23% to 26%.

We typically don’t disclose the quarter over quarter because it’s so different in terms of the cyclicality of the business. The fourth quarter of last year was the low point last year and that certainly increased in the first quarter, quarter over quarter.

I would remind you that as we said on the last call sometimes that can be impacted by a restart of the sales incentive periods for those sales people that are out of the hunt that flows into the Q1 and I’m sure there was a little bit of that in the first quarter of this year but still up.

Did you quantify how much you think the “Cash for Clunkers” program contributed to Dealer?

No we didn’t quantify it. Its tough to quantify something like that, its anybody’s guess as to how much you would have gotten anyway.

Just like the automotive market is saying that there was some pull forward we clearly did experience some of that.

I know you gave the change in the retention but where is retention currently tracking?

We’re still tracking for the full year to be down about 100 basis points, flat to down we said. When you think of overall we said we were just under 90% that’s where we’re tracking with that guidance.

It sounds like much of your encouragement on the sales front is related to the new sales environment. How are you feeling about the ancillary services to existing clients, has it the rate of decline of those cut gotten any better over the past three months?

Could you give some color on that part of the sales environment?

We don’t track on a monthly basis, sales to the client base versus sales of new. In general I think the environment is kind of the same with both.

We’re seeing an uplift in both selling into the base as well as selling to new clients. Clearly on small business you have less to sell to the base because they typically don’t buy some of the services that our large clients buy so you see a much more new business in the low end then you do say at the high end with the large components of Beyond Payroll.

I wouldn’t read anything into that if I were you.

Back to “Cash for Clunkers” is there any measurement, how many months of car buying demand do you think was pushed forward by that program? You have any sense for that?

It’s not that material. I think the thing you should focus on is that we have slightly improved our guidance for Dealer from the 4% to 8% down to 3% to 6% down.

That takes everything into consideration including the “Cash for Clunkers”. Don’t forget we also have the Saturn issue which we talked about that had the one time charge in the first quarter but it also had a bit of a revenue drag for the remainder of this year, full year impact of that $12 million hits you in fiscal year ’11 or the bulk of that would.

You’ve got that consideration as well.

Thanks everybody for coming to the conference today. I think you should read from our comments that we are encouraged but again I want to caution everybody that we’re not buoyant, that we still have a number of issues that we have to deal with.

We think we are at the trough in terms of the pays for control decline and should start to see some improvement. Again, we will face some negative pressures on the interest rate environment, particularly in the second half of the year.

Pleased with the results and think we’re in good shape in terms of our forecast for the full year. Thanks again for signing in.