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Automatic Data Processing, Inc. (NASDAQ:ADP)

F3Q10 Earnings Call

April 27, 2010 8:30 am ET

Executives

Elena Charles - Vice President of Investor Relations.

Gary Butler – President and CEO

Christopher Reidy - CFO

Analysts

Julio C. Quinteros, Jr. - Goldman Sachs

Rod Bourgeois - Sanford C. Bernstein & Co., LLC

Jason Kupferberg - UBS

James MacDonald - First Analysis Securities

David Grossman - Thomas Weisel Partners

Michael Baker - Raymond James

Analyst for Adam Frisch - Morgan Stanley

Analyst for Kelly Flynn - Credit Suisse

Gary Bisbee - Barclays Capital

James Kissane - Bank of America Merrill Lynch

Mark Marcon - Robert W. Baird & Co.

Jennifer Dugan – Lazard Capital

Timothy McHugh - William Blair & Co.

Tien-tsin Huang - JP Morgan

Operator

Good morning. My name is Amanda and I will be your operator. At this time I would like to welcome everyone to ADP’s third quarter fiscal 2010 earnings webcast. I would like to inform you that this conference is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. (Operator Instructions)

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

Elena Charles

Thank you. Good morning. 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 third 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 home page of our website at adp.com. Just to remind you, the quarterly history of revenue and pre-tax earnings for our reportable segments have been posted to the IR section of our website. These schedules have been updated to include the third quarter of fiscal 2010 as well as the restatement of the Dealer Services commercial business to discontinued operations since the business was sold during the quarter.

During today’s conference call we will make some forward-looking statements that refer to future events and as such involve some risks and these are discussed on Page 2 of the slide presentation and in our periodic filings with the SEC.

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

Gary Butler

Thank you Elena. Good morning everybody and thank you for joining us. Let me begin today’s call with some opening comments about our third quarter results. Then I will then turn the call over to Chris Reidy as normal to take you through the detailed results, after which I will return to provide you with our updated forecast for fiscal 2010. Before we take your questions I will provide some concluding remarks.

ADP’s results for the quarter were pretty much in line with our expectations. You have already read in our press release this morning that year-over-year comparisons in our key metrics did begin to ease in the second half of this fiscal year as we had anticipated. Having said that, our results continue to be below ADP historical standards and still being negatively impacted but to a lesser degree by the cumulative impact of the difficult economic environment over the last year and a half.

Let me now point out to you what I believe are the noteworthy items in the quarter. In employer services we did continue to see increased market receptivity from companies willing to invest again in their business infrastructure. New business sales growth flattened in the quarter after six consecutive quarters of year-over-year decline.

Having said that, sales were again mixed across the business units within employer services. Sales to larger companies in the US are still lagging somewhat from a year ago but sales to small and midsized companies are increasing. New business sales in both Europe and global view are also increasing.

I am becoming more encouraged; however I’d like to remind everyone that there is a lag in the high end of the market between reported new sales and when those bookings actually turn into revenues due to the implementation periods required as you move up market to larger, more complex clients.

Additionally, as you may recall, last quarter we did begin accelerating next year’s sales force hiring to better position ADP for stronger sales growth but this is also expected to be somewhat of a drag on earnings over the near term.

Directionally it will take a period of time for revenues and in turn profits to increase but I am pleased that new business sales are moving in the right direction and that the growth of our sales team is meeting the increasing demands in the marketplace.

Let me move on to retention. You have heard from us about declining client retention levels dating back to the last quarter of fiscal ’08 and continuing throughout the full year of fiscal 2009. I am especially pleased that during this year’s critical calendar year end period, client retention levels improved 1.4 percentage points.

ADP’s revenues are still being negatively impacted by the losses of the last several quarters prior to this quarter and we are still not quite yet back to the retention levels from several years ago. But again, the current quarter’s increased retention is directionally a very positive sign.

Our pays per control metric did decline 2.5% during the quarter but the pace of the decline has certainly slowed. We continue to see some indications of stabilization in terms of employment levels across the US and believe that the Hire Act recently passed by Congress may provide a needed catalyst to employers who are on the cusp of making hiring decisions, and of course ADP will assist its clients to enable them to realize the benefits from the provisions of the Hire Act.

We also reported growth of nearly 5% in client fund balances during the quarter after reporting declines for the last 5 consecutive quarters. This growth is primarily the result of higher bonus payments than we anticipated and an increase in state and employment insurance rates and we also got a small lift from favorable Canadian foreign exchange rates.

Let me over on now to Dealer Services. The automotive market is obviously still under pressure but continues its comeback with increases in US car sales volume. Consumers have responded well to recent manufacturer incentives which I also believe is a positive indicator that the outlook is strengthening. Dealers Services continue to improve its North American chair, with increased new business sales and strong competitive win/loss rate. As you may already know, GM and Chrysler have previously announced plans to reinstate a portion of the announced closed dealerships. And of course, some of those are ADP clients.

We remain very comfortable that our earlier estimate of the revenue impact on these closings that we had previously shared with you will be no more than the $50 million of annualized lost revenues to Dealer Services, and will most likely be less than our estimate.

Additionally, increased consumer credit availability and apparent demand appears to be positively impacting this marketplace. As a result we are encouraged by the upswing in market indicators, which I believe bodes well for the future growth of the automotive marketplace. With that, let me turn it over to Chris to provide you the details of our results.

Christopher Reidy

Thanks Gary, and good morning everyone. We’re on Slide 4. Revenue growth turned positive in the quarter, increasing 3% including a benefit of nearly 2 percentage points from foreign favorable exchange rates. Increased PDL pass through revenues also contributed 2 percentage points of growth.

The lower client fund interest reduced growth by nearly 1 percentage point. Pretax earnings grew 1%, also assisted nearly 2 percentage points by favorable FX rates. There were a lot of swings in the quarter, and I'd like to take you through the larger more impactable items.

As you can see in the detail of other income net in the press release, we received the distribution from the reserved fund compared with the charge we recorded in last year's third quarter. The current quarter comparison also benefited from lower severance costs and favorable foreign exchange rates, negatively impacting the year-over-year comparisons with lower interest on client funds and increased investments in service and technology platforms.

Net earnings declined slightly as a result of the higher effective tax rate in the current quarter due to a favorable IRS ordered adjustment in last year's third quarter. Earnings per share from continuing operations declined 1% in the quarter. Fiscal year-to-date we have spent nearly $280 million to purchase over 6.5 million shares of ADP stock.

You saw in our press release this morning that our cash balance was $2.1 billion on March 31 and I want to assure you that we are committed to returning excess cash to our shareholders. We are on track to return at least $400 million of excess cash to our shareholders through share repurchases for the full fiscal year. And this amount may be higher, depending on market conditions as well M&A activity. No one should interpret that to mean we are changing our M&A strategy, because we're not.

We continue to look for small close-to-the-core acquisitions, not large acquisitions that will be dilutive over multiple years. Before I leave this slide, I'd like to review some of the expense categories with you. You saw in this morning's release that operating expenses increased about $100 million during the quarter. More than half of this increase is from higher PDL pass-throughs and increased expense from the FX impact that I already mentioned.

Additionally, bonus payouts are expected to be higher this year. We also spent more on systems development and programming during the quarter, primarily from the investments spoken with you about in our newest solutions Run and Workforce Now. Increased expenses from FX rates had an impact here as well.

Now let's turn to Slide 5. In Employer Services, total revenues grew 1% for the quarter, all organic. Revenue in our payroll and tax filing business in the United States declined 3% in the quarter. And our Beyond Payroll revenues in the US continue to grow, with 8% growth in the quarter. The excess pretax margin was flat a year ago.

We're seeing the benefits from last year's fourth quarter restructuring and continued expense control, and the quarter also benefited from higher client fund balances. However, the continued investments in newer solutions and the recent acquisitions that we shared with you in February at our annual analyst conference pressured the pretax margin. Additionally, fewer W-2s were processed.

Decline in pays per control, our same-store-sales employment metric, lessened this quarter, at down 2.5% year-over-year. Losses also eased as evidenced by an increase of 1.4 percentage points in our client revenue retention metric.

Gary spoke with you about the sales results a moment ago, so let's move on to the quarter's results for PEO and turn to Slide 6. The PEO reported 15% revenue growth for the quarter, all organic. This growth was due to increased pass-through revenues and an increase in the number of worksite employees.

Pretax margins declined as the benefits from last year's restructuring and continued expense control were offset by the year-over-year impact of one-time items in both the current and last year's quarters and higher pass-throughs. Year-over-year for the third quarter, average worksite employees pay increased 5% to nearly 206,000. Now let's turn to Slide 7.

Dealer Services revenues declined as anticipated, 3% to the quarter, 4% organic, and continued to be negatively impacted by the cumulative effect of dealership closings, lower transactional revenues year-over-year and a decline in our software license fee revenue, which is recognized upon installation of our international business.

Dealer's pretax margin improved 140 basis points due to lower head count from the expense actions taken in last year's fourth fiscal quarter, as well as the excellent cost control measures that we have put in place. Dealer Services continued to increase its share of the consolidating market.

Now let's turn to Slide 8. This schedule shows the overall impact in the client funds portfolio extended investment strategy. At the top of the slide, in orange, you see the breakdown of both the average balances and the average interest yields for the short, extended and long portfolio components, which corresponds to the orange portion of the pretax P&L impact on the bottom of the slide.

The total pretax P&L impact for this section represents the P&L revenue line item interest on funds held for clients. Now let's take a look at the quarterly results. Near the top right of the slide you can see that average client fund balances were up $0.8 billion compared with the year ago period.

The cumulative impact of few pays, client losses and slower sales was more than offset by a combination of wage growth, particularly bonuses, increased state unemployment and insurance rates and the positive impact of Canadian foreign exchange rates during the quarter.

Staying in this orange section, the average yield on the client fund portfolio declined 50 basis points, to 3.2% this quarter due to the seasonally high level of client funds that were invested overnight at about 15 basis points. The decrease from the average yield more than offset the growth in client balances, resulting in a decline of $16 million in interest on funds held for clients on the P&L that you see near the bottom right of the slide.

The impact from lower new purchase rates was most pronounced in the client short portfolio due to the seasonally high level of client funds invested overnight at rates which were 70 basis points lower than last year. This decline in market interest rates have continued since last year's third quarter.

Moving on to the blue section of the slide, average borrowings were down this quarter and the average interest rate paid on those borrowings dropped about 10 basis points, so a blended average borrowing rate of .2%. Our third quarter is seasonally our highest client fund balance quarter, which makes it our lowest borrowing quarter.

As a result, the impact interest expense that you see near the bottom right of the slide is negligible. When you take into consideration the entire extended strategy, which also includes the corporate extended interest income shown in purple on the slide, the result was a $20 million pretax decrease for a decline of about 12%.

Now let's turn to Slide 9 where I'll take you through the extended investment strategy forecast for fiscal 2010. We anticipated decline on average client fund balances of 1% to 2%, which is an improvement from our previous forecast of a decline of 4% to 5% as a result of increased balances related to wage growth and state unemployment tax rates.

We are anticipating a yield on the client funds portfolio of about 3.6%, down about 40 basis points from fiscal 2009 and down slightly from our prior forecast. Client fund interest revenues are expected to decline about $70 million, which is an improvement of about $5 million compared with our previous forecast.

We continue to anticipate that average overextended balances will decline about $200 million. The average yield on the corporate extended investments is expected to be down 20 basis points, a slight decrease in yield from our prior forecast which partially offsets the benefit of the client fund interest revenue line.

We continue to anticipate average borrowings will decline about $200 million, and the average interest rate paid on those borrowings to be down about 90 basis points. So blended average borrowing rate of 0.2%.

Taking into consideration the pretax earnings impact of the overall extended investment strategy, including lower borrowing cost, we anticipate a decline of about $65 million in fiscal 2010, as you see at the bottom right of the slide. Now I'll turn it back to Gary to take you through the remainder of the forecast for fiscal 2010.

Gary Butler

Thank you, Chris. We're now on Slide 10. For fiscal 2010 we do anticipate total ADP revenues will be about flat with last year. And we anticipate achieving diluted EPS from continuing operations from around $2.36 to $2.38, compared with $2.38 in fiscal '09 excluding favorable income tax items and the divested commercial business for both fiscal years.

As is our normal practice, no further share buybacks are reflected in the forecast, though it remains clearly our intent to continue to return excess cash to our shareholders depending upon market conditions. Prior to reportable segments, we anticipate employer services revenues declining up to 1% which reflects the client in pay per control of about 4% on average for the full year and about flat client revenue retention.

We anticipate 8% to 10% revenue growth in the PEO services, driven by higher pass-through revenues. And we do anticipate slightly higher combined Employer Services and PEO sales worldwide for new business. We expect a decline in Dealer Services revenues of minus 3% to minus 4%, and we continue to anticipate no improvement in our segment pretax margins.

Turning to Slide 11, I'd like to leave you with some closing remarks before we open it up for your questions. We have seen certainly some easing in the US economic landscape, and the economy appears to be on its way to recovery. Our key business metrics are improving and we are focused on the right things for the long term. We continue to invest in our direct sales team, fundamentally adding new hires to accelerate new business sales growth.

As we spoke with you at our annual analyst event back in February, we are also invest ting in newer technology platforms and solutions such Run for our low end market, Workforce Now, our ASO offerings, Global View, and Streamline for our international and global clients.

These are all designed to meet the needs of our clients and prospects and we are continuing to invest incrementally in client service which is critical to our continued success and to maintain our market leadership position. These investments will to some degree pressure ADP's near term outlook, but are necessary for growth over the long term. Our business model remains solidly intact with highly recurring revenues, client life cycles of just under 10 years and excellent cash flows.

Our cash position as Chris mentioned earlier, is strong at $2.1 billion and our capital requirements are very low. I remain committed to returning excess cash to our shareholders, including ongoing share repurchases obviously depending upon the market conditions.

ADP is a great company and we continue to execute successfully against our 5-point strategic growth program that we reviewed again with you back in February at our analysts conference. I've said previously that ADP is well positioned to leverage the inevitable recovery in the economy, and it feels like the recovery is upon us. I remain optimistic about ADP's long term opportunities for growth. Let me now turn it over to the operator to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from Julio C. Quinteros, Jr. - Goldman Sachs.

Julio C. Quinteros, Jr. - Goldman Sachs

Just real quickly, on the [SMB] side in terms of your performance there, can you just characterize the growth of the SMB? Is it market share gains versus sort of a recovery of the SMB segment in terms of employee growth, any way to characterize what you guys are saying there?

Gary Butler

I think it's, you know, a series of things. One is I think we're executing extremely well in both of those segments. Secondly I think the economy, and you see it in the national employment report in terms of the return of the service sector as well as small business, in terms of employment. And thirdly, I think that our new product platforms, particularly the Run platform and our Workforce Now, are somewhat making hay in the marketplace and it feels real good.

Julio C. Quinteros, Jr. - Goldman Sachs

And then just lastly, when you look at the longer term impact of things like healthcare reform and you kind of balance that against new payroll additions, can you just give us a sense on when you think that that actually begins to manifest itself in some impact to your business? Or I guess alternatively, is it holding back people from hiring at this point? Is there any way to sort of triangulate around healthcare reform specifically?

Gary Butler

I think there were people that were apprehensive, and still are. In fact, we're involved in some of the discussions in Washington today in terms of trying to figure out exactly how the compliance and the regulation works for the new healthcare reform. Obviously, as the biggest mover of funds to the IRS and the biggest person in the client business across the US, ADP will certainly play a significant role there.

It's still not 100% clear on healthcare reform, but clearly payroll and HR systems have to be the system of record for all healthcare reforms. And any kind of compliance, money movement, penalties, enforcement is going to have to be administered by companies like ADP. And some of the reforms will clearly require regulatory compliance and reporting, both to employees and employers. And to the IRS and in some cases even on W-2s.

We're also selling healthcare as you know, and particularly in the PEO where we're qualified to sell healthcare in multiple states and could be properly positioned as an insurance pool because we provide healthcare to multiple companies in multiple states.

I think it generally will be a positive for us, but I think it's going to take a period of really 12 months to have that kind of come to fruition and the regulations get published, etc. On top of that, I think the higher act is helping us across the board, probably more up-market, and then the mid-market than down-markets. But in general regulation, compliance, penalties and higher taxes, although we may not like them personally generally help ADP the company.

Operator

Your next question is from Rod Bourgeois - Sanford C. Bernstein & Co., LLC

Rod Bourgeois - Sanford C. Bernstein & Co., LLC

I just wanted to inquire about the selling environment. It appears that you have a pretty easy comparison in the June quarter for your sales or booking growth. Do you anticipate your sales growth will turn substantially positive in the June quarter based on the easy comparison and some of the progress that you've noted in the sales environment?

Christopher Reidy

Yes.

Rod Bourgeois - Sanford C. Bernstein & Co., LLC

Is there an explanation point behind that yes?

Christopher Reidy

We'll see.

Rod Bourgeois - Sanford C. Bernstein & Co., LLC

Gary, can you comment on fiscal '11, what a realistic sales goal would be? I mean, can you get into the sort of upper single digit or low double digit sales growth range in fiscal '11, particularly as you get the sales force primed before fiscal year '11 has even started?

Gary Butler

Rod, we've said many times, you know, over time the ADP model is really focused on driving sales growth and driving retention. They are the two things that affect our organic growth the most. And historically, we've always strived for upper single digits approaching double-digit kind of sales growth across the enterprise and as we return to more normal times I don’t expect that the change from a historical perspective.

Christopher Reidy

Yes, and I think the two are related Rod, how we do in the fourth quarter will set a foundation for what we would expect to happen fiscal year ‘11 so the two are interdependent and to expand a little bit on your question we are hopeful the year-over year-compare in the fourth quarter is an easy compare; however, having said that, a national count should tend to have and our bigger client a bigger portion of the sales in May and June traditionally.

So, as we have said we haven’t seen that to begin to turn around in that part of the market. So, that’s an open question of just, even though it’s a easy compare it’s traditionally a higher seasonal selling time in May and June so, still a lot of water to come under the bridge before we can talk too much about fiscal year ‘11.

Rod Bourgeois - Sanford C. Bernstein & Co., LLC

Okay great. And I guess on the margin front it seemed key for the payroll and tax business to resume positive growth so that you can get some scale leverage benefit on the margin front.

Do you think it’s feasible in fiscal ‘11 to get at least some skill leverage benefit given the improving economy and the possibility that payroll and taxes is going to resume positive growth again? Do you see that potentially playing out or is it just way too early to call that at this point?

Gary Butler

Well again it is it’s too early to call any year to be at this point and call next year. A lot will depend on how we finish. But as we’ve said in our remarks we do expect there to be significant pressure on our margins next year and on our earnings for some good reasons.

If sales do begin to ramp that’s a good thing and we want to go with that, we want to continue investing and the business. We’re investing in IT technology with what you saw with Run and Workforce Now and in others so, all those things we’re going to continue to invest, we’re going to continue to ramp sales as quickly as possible.

And then you have the issue of the client fund balance interest overhang which I went through at the February meeting and all those things put pressure on the bottom. So, but they’re all designed to get the payroll growth back growing again so I think it’s the right thing to do for the long term.

Operator

Your next question is from Jason Kupferberg with UBS.

Jason Kuperferberg – UBS

I just wanted to pick up on some of that forward-looking commentary if I could and go back to the analyst meeting in February when you guys did make comments on the longer-term growth trajectory of the business and I think at the time you guys suggested that the fiscal ‘11 revenue growth without being specific would be below the 6% to 8% category your targeting through fiscal ’15 and that many margin expansion next year would be less than your typical 50 basis point target which sounds like what you’re reinforcing here.

So, I guess any other EPS leverage for next year would really need to come from either interest income on your corporate cash or share buy-backs. Is that kind of the right read there?

Gary Butler

As accurate as that.

Christopher Reidy

That’s about right.

Jason Kuperferberg – USB

Okay, okay, so all that still holds.

And what kind of price lift is baked into those figures when you think about a revenue growth south of 6% to 8% next year? Is it more like kind of a class of one that we’ve been seeing or more like the one to two that you were more accustomed to prior to the downturn?

Gary Butler

I think we’re going to be cautious on pricing next year. It’s more important to us long-term as a company to drive increased retention than it is to drive price increases in the near term. So, I think we will get more price next year that we have for the last year or two but that being said I think it’s the time for conservatism as opposed to aggressiveness in the market place.

Jason Kuperferberg – USB

Okay, that makes sense. And then can you just talk about your comfort level with the dividend pay-out hour ratio. I mean obviously earnings growth should be better over the next couple of years. Should investors expect dividend to just keep pace with the earnings growth or is there a possibility for the pay out ratio to increase? Obviously you’ve got some other cash deployment priorities with potential M&A and --

Gary Butler

You have to remember that dividend pay-outs are board decisions not CEO and CFO decisions. So, it’s really easy for us to be comfortable and since we don’t make the decision but in terms of the recommendations I don’t see any real changes to our go-forward policy as contrasted to our more recent policies of the past.

Christopher Reidy

Yes, we’ve said that we’re happy with the dividend pay-out ratio where it is and that would imply that the dividends would go up with earnings growth. But again that’s subject to board approval and that position hasn’t changed.

Jason Kuperferberg – USB

Okay, and last one for me on the ASO market, kind of the mid market HR BPO stuff I mean how big of a business is that for you guys today? I mean I know you’ve been highlighting it in the past as one of your potential longer-term growth opportunities. Like can you help us size it a bit currently and how fast it’s growing?

Gary Butler

Well the COS business which is just a different name for ASO up-market is $150 million kind of business with very nice growth estimates. The low end of the market in the SBS space, the ASO we have there is today certainly less than a $50 million business and we just really launched the ASO business in the mid market last fiscal so it’s relatively nascent with great growth rates obviously off of the small number but these business, all three are multi $100 million businesses for ADP and the planning horizon.

So, we have great plans and great expectations for all three segments with the ASO model.

Operator

The next question is from James McDonald – First Analysis

James Macdonald – First Analysis Securities

Beyond Payroll looks like a nice pick up this quarter. Could you talk a little more on what caused that?

Gary Butler

I don’t think there was anything specifically. You have to remember that particularly in mid-market where we have our highest penetration of Beyond Payroll that Workforce Now which includes our benefits offering, time and labor modules and our HR benefits kind of businesses. All those aren’t doing very well because Majors is doing extremely well both in terms of the product with Workforce Now but as a business unit in terms of new sales.

So, I guess it would be primarily there plus we’re doing very well particularly selling workers comp and 401k into the base on the small end which would drive that. Our workers comp penetration is way up year-to-year and so I suspect that’s doing it as well.

Christopher Reidy

Yes it is. It’s pretty much across the board. No one particular item driving it but it extends to COBRA and Taxware and VirtualEdge which we have the screening and selection business over the HR kind of businesses that Gary mentioned. So it’s pretty much across the board.

James Macdonald – First Analysis Securities

Where can that growth rate get to in Beyond Payroll do you think?

Gary Butler

Well certainly if we’re striving to grow sales as I described earlier historically we’ve always been able to grow sales for our Beyond Payroll at a faster pace than Pure Payroll. So if the blended average you pick the number in terms of going towards forward growth it’s going to be a little lower for payroll and a little higher for Beyond Payroll.

So, certainly it’s capable of getting back to the double digits.

Christopher Reidy

Which is true if you look back over the last couple of years it was double digits comparison.

James Macdonald – First Analysis Securities

Right, and one last quickie, you had four small acquisitions, anything strategic you want to talk about there?

Gary Butler

Well we mentioned earlier our accounts payable business which we’re pretty excited about and we bought a new internet HR platform for primarily the UK market although we think it has legs beyond the UK market. And we had a couple of other kind of roll ups kinds of acquisitions, but those would be the two that come first to mind.

Christopher Reidy

Yes, those are the main ones and if you look back at our February analyst meeting we went through most of those before.

Operator

The next question is from David Grossman - Thomas Weisel Partners.

David Grossman - Thomas Weisel Partners

You’ve done a great job of [inaudible] at least near term kind of the impact of a lot of different things that you’re doing and what impact that will have on profitability. Can you help us understand how much of this is you reminding us of a typical ADP cycle, coming out of the downturn with depressed revenue and the need to continue to reinvest in the business and how much of this may be things that have changed in the marketplace that you want to either take advantage of or you need to respond to.

Christopher Reidy

I think there is a little bit of that. You want to make sure that you’re still investing throughout because the business model is a great business model, so you don’t want to do some of what we talked about in the past having done under the last downturn which was tightening the belt a little too much and you’ll recall Gary was talking about several years ago getting the [ballast] of the ship up. We want to make sure that the ballast of the ship stays up so we continue to do that.

Now having said that, we have some great opportunities in the market with the Run introduction and the Workforce Now introduction which I think captures an opportunity in the market so we want to make sure we continue to invest in that area.

Gary Butler

I think it’s really the three things that you have to take into consideration as you think about your modeling for next year. One is for sure interest income is going to go down next year and we tried to lay that out for you as much as we can without getting into the forecasting game.

Secondly, we are investing in the business and particularly in sales and new technology, and for the future of the business, I want to continue to do that because it’s the right thing to do long term and even as we recover in the new sales category, it does take some period of time for sales to turn to revenue and ultimately that’s what drives organic growth and scale margin contribution.

So it’s a little bit about timing and I think what you’ve seen in previous down cycles, like we saw in ’02 and ’03, it probably won’t be all that different this time as we come out of the valley and start going back up the mountain on the other side.

Christopher Reidy

As we’ve said when we go through the waterfall chart, the key to growth in this business is that differential between the revenue driven by sales and what you lose on the retention and the revenues that you don’t retain. It’s much less impacted as you know by the pace per control and the client fund balance. All that is nice but the real differential is getting that sales engine moving again and generating the revenue and then doing everything you can to stop losses and to improve retention and that’s where you get the bulk of the growth going forward.

David Grossman - Thomas Weisel Partners

If you just look at the new sales as a standalone and that commission downward impact, the commissions, does it typically take a full 12 month period to kind of get out of that downward pressure from the commissions? Is that a good way to think about that headwind in particular?

Gary Butler

I think that’s fair.

David Grossman - Thomas Weisel Partners

Just one last thing, on the balances, I think you said that you got an unemployment benefit during the period. Is that something that is sustained? Is that an ongoing benefit that goes on for the next --

Gary Butler

It’s recurring but you don’t get the growth again. You’ve kind of got to grow over that next year, so it will be there but you won’t be growing the same amounts from that item.

Christopher Reidy

You’ve got to remember there are three or four things that affect balances. The primary thing is adding new clients which we’re highly focused on. Secondly is higher wages to employees. You’re seeing that now in the form of bonuses and I think even though we don’t see the data, what’s happening in the general economy would indicate that people working more hours, people are starting to be hired, so we are seeing wage growth as well as internal employee growth in certain of our companies.

On top of that, unemployment taxes are going to be up for a while because they typically lag a year on the way down and they will continue to lag a year beyond on the way up because the states have to fill their coffers to pay for all this 10% unemployment tax.

Then on top of that, you’re going to see higher taxes that will come out beyond that. So again, the one thing that we can control as a company is selling more payroll accounts as well as making sure that most of them use our tax filing and direct deposit services, so we’re highly focused on that but I think the trends are certainly at our back, we would hope, as opposed to in our face at this point in time.

Operator

Your next question comes from Michael Baker - Raymond James.

Michael Baker - Raymond James

Gary gave good color in terms of what was going on from the sales perspective in terms of large, mid-size, and small employers. I was wondering if you could do a similar dynamic around pays or hiring, just kind of what you’re seeing or your sense as it stacks up on a relative basis.

Gary Butler

We have seen our pays per control really start to flatten. But you have to remember that even though we’re down 2.5% pace of control for this quarter, that’s on top I think on the same quarter last year of around down 3.5% or 4%. So we’re still down on a 2 year basis almost 6% in pays per control.

So that’s starting to flatten and will still take another, call it 2, 3, maybe even 4 quarters before we get through that and get to a real flat to positive growth kind of area . Another statistic is not something that we really publish. We have a screening and selection business which has I think around 10,000 or 15,000 clients mostly in the mid and up market, and we’re seeing the selection, the screening processes, up in recent months 20% to 30% over a prior period so that’s a pretty good indication that within our base, although not statistically fully accurate, it’s more anecdotal, but clearly people are starting to hire again.

I think you see the balance increases are indicative around increased hiring and bonuses and certainly the national employment report is getting close to a push in terms of pay growth with positives in the service sector and the low end of the market. So again, I think all the signs are good but it’s pretty easy to be good compared to how bad it’s been for a period of time.

I think this thing is through the bottom and going to start to ease up, but I think we have to be cautious and not get rampant enthusiasm as we go through this cycle because it’s going to be a gradual upswing and [if passes prolog] it will take some period of time before we really start to see the benefit.

Christopher Reidy

As you look at what we said in our guidance that we would be around 4% down for the full year, just to put that in perspective as Gary began to, it’s 4.6% year-to-date. That was 6.5% down in the first quarter, 5% down in the second quarter, now 2.5%. So it’s going in the right direction but 4% for the year would imply very close to zero in the fourth quarter, so you can kind of see that it’s leveling off. I look forward to the days where that’s going positive but it will take a while to get there and it’s a gradual kind of thing.

But our guidance for this year would be about 4% down when all is said and done.

Gary Butler

Just to help you guys think about it a little bit, last down cycle as we came through the recession of ’01, ’02 and pulled out in ’03 and ’04, it actually took 10 quarters before we went from negative or near flat kind of growth to a positive pace for control growth because of just the way the cycle works because people will go to more hours and more hours and overtime and more temporary staff before they start putting permanent people on the payroll.

So we just have to raise our expectations here a little bit as we think about that.

Christopher Reidy

But it’s also worth putting that in perspective because going through a period where it’s down 6% a quarter, 5% a quarter, pays per control become very prominent. But now that unemployment rates have reached a very high level, any improvement from that 1%, I’ll remind you is only worth about $20 million of revenue to us so there’s a lot of focus on that metric but the reality going forward is it’s driving sales in excess of the losses from retention and if we get flat employment levels for a while, you’re basically forgoing a traditional 1% to 2% or 20 to 40 million. It’s not that big of a deal now that the bulk of the client in pays is behind us.

I think that’s sometimes misunderstood, that’s more important going forward and it really isn’t as impactful as the differential in sales and retention.

Michael Baker - Raymond James

Just to follow up, which employer segment would you anticipate improving the quickest? Large, mid, or small?

Christopher Reidy

We’ve seen in the past that it is led by small, but it’s not clear that’s evidence that’s the way it will recover this time. But that’s where it did last time.

Gary Butler

The shrinkage that we’ve seen in pays per control is not dramatically different by segment. I mean, it’s different but not anything that I would run to my PC and change my model on. In the previous recession we saw a much deeper dive at the high end of the market which we didn’t see this time.

So I think it’s pretty much back to Chris’ comment, it’s all about selling new clients and keeping the ones we have and growing the business.

Michael Baker - Raymond James

I just had one different question. I appreciate those comments. If you look at the small business segment and you take a look at PEO, obviously we have a pretty good sense of how that’s growing with what you provide. I was wondering how the ASO plus agency option is shaping up. Is it opening up a new market for you of those that would not really consider PEO or are you seeing maybe a little bit of cannibalization on the PEO side?

Gary Butler

That was obviously one of our strategic concerns because we’ve been highly successful in the PEO, arguably the best in the industry, and so we clearly see the need for the ASO platform but we’re also concerned about left pocket and right pocket in terms of the sales team. So far we haven’t seen any degradation in PEO sales based upon move to ASO, but we’ve been kind of careful about how we do that.

We’re pretty stringent on our underwriting criteria in the PEO, more towards a white collar/gray collar kind of environment and the ASO clearly opens up the category for people who don’t meet our underwriting requirements in the PEO as a natural candidate for the ASO operation or product set.

So I think we’ve got it pretty much in hand and I don’t expect any significant drag on the PEO, at least near term.

Operator

Your next question comes from Adam Frisch - Morgan Stanley.

Analyst for Adam Frisch - Morgan Stanley

This is Nathan [inaudible] for Adam Frisch. I wanted to turn briefly to changes you’re seeing coming out of Washington. Specifically, can you provide us any insight into your strategy to capture some of the opportunity from the recent healthcare reform bill?

Gary Butler

You have to wait until the regulations are finalized. As I mentioned previously, the system of record for all of these kinds of compliance and money movement and penalties and enforcement, has to be either the payroll system or the HR benefit system, both of which arguably we are market leaders in both categories. And as the largest mover of funds and compliance to the IRS, kind of by default we think we’ve got to be one of the go-to guys here so to speak in terms of enforcement.

We also sell healthcare and it clearly will drive more employers and employees to healthcare options, so we think it’s clearly going to help us there. Secondly, the PEO is already a qualified health provider as a co-employer in 30 states or whatever the number is, something like that, so we think we’re going to be well positioned in terms of leads to the PEO for people who know want to offer healthcare, and in terms of reporting, a lot of it in the early reviews are going to have to be done either thorough employer reporting or W2 reporting in terms of the individual compliance and what happens to be there.

You’ve also seen us respond very aggressively on the opportunity on the Hire Act in the media as well in some of our advertising and I certainly think that’s helping us in the marketplace. So clearly we’ve got more definitive strategies to work on as these regs get finalized and we’ll try to be a little bit more clear on that as we go into fiscal ’11 to kind of help you plan for the years ahead.

Analyst for Adam Frisch - Morgan Stanley

For my follow up I wanted to turn just briefly over to the Dealers Services segment. Can you provide any additional color on what’s driving the improvement in new sales? Where is demand improving, where does it remain soft and how does the pricing environment look specific to dealer?

Gary Butler

First of all, I think we’ve made tremendous strides as a company to being the global provider for the OEM. So our partnerships with the manufacturers has never been better both in terms of the US as well as Europe and the Far East.

I think that’s number one. Number two is I think we’ve done an excellent job in expanding the breadth of our product offering and keeping it current from a technology standpoint. A good example of that would be the recent NADA we released all the mobile platforms for all of our applications where service writers can write up service orders and do inquiries straight from a PDA or any of the mobile platforms that we may have and pricing wise, it’s certainly more competitive than it’s been, but the bigger bundle of applications is also helping us from that standpoint and we have seen a lessening of losses of dropped applications in our businesses over the last number of months.

I would expect our market share gains to continue along the same pace as they’ve been for the last year as we look for the year ahead.

Operator

Your next question comes from Kelly Flynn - Credit Suisse.

Analyst for Kelly Flynn - Credit Suisse

This is Gary for Kelly. Just had a couple of quick questions. One, I’m not sure if you’ve updated us before, could you tell us about national accounts and what you’re seeing this quarter versus what you saw this last quarter and if you see things changing noticeably there?

Gary Butler

We actually did say in our prepared comments that’s the one area in sales that we still haven’t seen the bounce back and that remains challenged.

Analyst for Kelly Flynn - Credit Suisse

Any thoughts on Europe and what you’re seeing in Europe versus the US in terms of trends?

Christopher Reidy

The environment n Europe is certainly tougher than say it was a year, year and a half ago, although our sales results are still positive in Europe. The shrinkage is not nearly as dramatic because the social laws and the regulations are much more stringent in Europe than they are in the US and we’re continuing to have great success with our goal to view streamline offerings in Europe and I expect that to continue.

Operator

Your next question comes from Gary Bisbee - Barclays Capital.

Gary Bisbee - Barclays Capital

I understand you’re not giving guidance for next year but you’ve made a comment a bunch of times that there’s a certain period of time it takes sales to turn into revenue. Can you help me think about that? I understand global view it could be up to a year [inaudible] a new customer but if one of the areas of strength is small and midsize businesses, I was under the assumption that you actually brought those on fairly quickly. Is that accurate?

Gary Butler

Let me help you with that. When we report a sales number in the PEO or in SBS, that means that they’ve actually started processing with ADP. When we report a sales number in Major Account, depending upon how many applications it typically takes 4 to 6 months, maybe as long as 8 months, in our Major Accounts or our ASO offerings in that space to actually start processing and in national accounts, you should be thinking more like 9 months as an average so business we’re selling today in National Accounts won’t turn to revenue in best case until the first of October and kind of worst case, a year from now.

Gary Bisbee - Barclays Capital

So on a blended basis though, it sounds like about 6 months until we really start to see some and if you [inaudible] the large accounts it could take a little longer.

Gary Butler

Europe and Global View are much more like the National Accounts kind of space and the 6 t o 9 months plus kind of category.

Christopher Reidy

Bear in mind that year-to-date was still down 1% and we were flat in the quarter but we’re encouraged but it hasn’t happened yet, so the timing into next year rolls out --

Gary Butler

It’s pretty straightforward. We’re obviously more encouraged than we’ve been. A lot of things are turning positive. We’re just trying to make sure the folks on the other end of the phone call don’t get revenues too far out in front of themselves as they start thinking about converting sales to actual revenue and what implications that has to the bottom line and when you couple that with the interest income drag we’re going to have for next year, we’re just trying to be as helpful as possible without getting too far out in front of ourselves.

Gary Bisbee - Barclays Capital

Totally understood. Let me take that one step further. You said earlier that duet o the rates falling in some of the sales investments, there would be significant pressure on margins. Was that on an absolute basis or were you just saying significant pressure from those items? Should we think that margins might be down in fiscal ’11 quite a bit or is it just pressure relative to the long term goal of 50 to 75 basis points?

Gary Butler

Pressure to the relative goal of 50 basis points year in, year out. That’s an average over a 5 year period. Next year is the investment period and the period where you’re ramping in the sales model. So it’s relative to that 50 basis points. It’s not necessarily negative but it’s still too early –

Christopher Reidy

You have to remember that interest income is very high margin as you think about that as you get through all the ramifications and the ins and outs of ADP’s P&L. You have to remember in prior year we didn’t do any merit increase and our bonus payouts were modest based upon our performance and we want to continue to invest in the business in terms of platforms and sales growth and service for the long term while at the same time trying to deliver the best result to our shareholders that we can with keeping long term objectives in mind. But you shouldn’t read any great surprises in terms of our historic business models because you’ve coupled those things with acquisition activity which we’re pleased about, it just puts some pressures on the business, particularly as we go into ’11 that would normally be quite as much of a contrast in more normal times.

Gary Bisbee - Barclays Capital

If I could just sneak one more question in, why wouldn’t you I guess given how strong the balance sheet and cash flow are consider accelerating the buybacks. When you throttle back a bit three or four quarters ago, I think the thought process or one of the things you said was just challenge markets, you want to make sure you’re liquid, etc., etc. It seems like we’ve seen an awful lot of improvement in credit markets and what not and it would seem like the right time from my perspective to buy your stock prior to rates start going up and job growth getting a lot better.

Gary Butler

I think that’s a fair comment. The $2 billion of cash that we have is higher than we said we wanted it to be. We said $1.5 billion was the target even as things turn around, we’ve always said that $1 billion is the more appropriate place. I think you don’t do it all right away. You kind of time diversify share repurchases but as I said, you could see that going forward. You could see us accelerating that to get that cash balance down.

Operator

Your next question comes from James Kissane - Bank of America Merrill Lynch.

James Kissane - Bank of America Merrill Lynch

On client retention, can you provide a little more color? It was up nicely year-over-year. Was it strong across the different employer services segments?

Gary Butler

It was strong across the board. National accounts in Europe weren’t really affected to the same degree as the mid market and the low end of the market, but in the mid and low end, it certainly improved in both categories.

James Kissane - Bank of America Merrill Lynch

Clarification, in the release you said that the acquisitions that you’ve done this year will be dilutive this year, I assume there will be a drag on margins for F’11, but will they also be dilutive in fiscal ‘11?

Gary Butler

Small dilution going into next year from overseas so far.

James Kissane - Bank of America Merrill Lynch

Update on global view in terms of how the implementations are going and the breakeven target?

Gary Butler

Implementations are going fine. Our quality and speed around implementation continues to improve. Sales activity is up dramatically from last year but again, that was off of a very low number because it kind of fell off a cliff last year as you recall. I believe our internal projections around break even or fiscal ’12, am I right there, Elena?

Elena Charles

[inaudible]

Christopher Reidy

Exiting ’12, yes.

Operator

Your next question comes from Mark Marcon - Robert W. Baird & Co.

Mark Marcon - Robert W. Baird & Co.

The first question relates to Run and Workforce Now. I was wondering if you could talk a little bit about, a little more color in terms of what you’re seeing there in terms of the take up in the market, and also how that’s impacting margins and how we should think about that from a margin perspective, and to your earlier comment Gary in terms of left pocket right pocket, is there any impact there from that perspective, particularly with regard to Run?

Gary Butler

We are in process with completing the rollout across all regions in Run and the product is a real current state of technology in terms of look and feel, it’s a real-time payroll, it’s got some nice reporting attributes to it, and it’s just doing well in the marketplace with clients as well as prospects and CPAs and the banking community.

So it just really shows well, where EZ Pay was a much older product. We’re talking about decades older, and didn’t demo that well. Sales force has a lot of confidence in the product now. It’s running extremely well. The CPAs and the bankers like it. We’re getting a lot of traction in the wholesale market with our CPAs as we’re starting to roll that out, so we’re just feeling real good about the product in general and the service people and the sales people are real enthused about it.

Mark Marcon - Robert W. Baird & Co.

Is there a margin difference between -- You’re not relative to --

Gary Butler

Well there’s certainly a margin difference in the beginning because it’s a smaller scale.

Mark Marcon - Robert W. Baird & Co.

Right. But I mean on an incremental basis.

Gary Butler

Now as you think about it over time, we’re not expecting any real significant margin pressure as we go from the left pocket to the right pocket because there is enough volume and enough units that you get to scale fairly quickly.

Mark Marcon - Robert W. Baird & Co.

Great. And then when we think about Workforce Now I mean that’s more complimentary but can you talk a little bit about the margin impact there?

Gary Butler

Well again, you have to remember that Workforce Now is an integrated, new user interface for our employee platform, HRB, we call it, Pay Expert and our Easy Labor Manager and it’s brought their modules together so it has a common user interface for both the employee as well as the administrator and the employer who does that and the data integration and transparency is dramatically better than our historical perspective. So again, the sales guys are excited about it. It’s priced much more simpler then our historical model on a pays per control basis and it includes this module or includes three modules. So it’s just I think right on the mark for what the market wants and the sales guys are turned on about it.

Christopher Reidy

So when we talk about investments in those two products, we’re not talking about investments vis-à-vis lower margins necessarily, it’s the IT investment to build those products out and continue to put bells and whistles on them as appropriate. So that’s the investments we’re talking about.

Mark Marcon - Robert W. Baird & Co.

Got it and then I was wondering if I could switch over the interest income on the float. We appreciate the color as it relates to next year. As we look out a little further, obviously the whole yield curve has been moving up recently and there’s lots of projections that the long end of the curve is going to continue to move up and certainly the short end should and ultimately we should end up with some [revergent] to the mean and some flattening. How should we think about interest income from a longer term perspective? Should we think about basically the same dynamic in terms of how long it took for the effective yield to go down and will just be in reverse?

Gary Butler

It is gradual but the effective yield coming down, obviously, rates. You know even on a short term rates went from 5.25 down to 25 days [splint] in a very short period of time. That doesn’t necessarily mean that it will be the same on the way up. The forward yield curves do show some growth but if you notice, that’s been extending out further and further so it’s on the overnight fed funds rate as well as the longer part of the yield curve.

So it’s anybody’s guess. It’s hard to predict what’s going to happen to interest rates. We’re not in that business but the [laddering] strategy we have sort of mitigates the downside of that great volatility and we’ll participate on the upside. The good news is that the bulk of the portfolio is still earning 3.6% thereabouts and the extended and the long are up in the 4s and that’s real return on equity.

So we don’t have the volatility but it’s going to take awhile before interest rates to get back to that 3.5 % to 4% level and in the meantime our portfolio is earning those kinds of rates. So from an ROE standpoint, it’s much better this model.

Operator

Your next question is from Jennifer Dugan – Lazard Capital.

Jennifer Dugan – Lazard Capital

I have a question on the sales force additions as you guys have been talking about you’re reversing some of the prior cutbacks. What portion of the add backs did you complete in the current quarter?

Gary Butler

As we had mentioned in I think the last quarterly call, we’re scheduled to add around 350 to 400 headcount in the sales arena. We are well on target to achieve that by the June period and I’m hopeful we’ll even get there before then but you have to remember you have some turnover as you go. So we don’t want to sacrifice quality of hiring just to fill slots so we’re well over half way through that and on target to be there by the May-June timeframe.

Jennifer Dugan – Lazard Capital

And is there any way to quantify what the drag on margins was this quarter and obviously as you add more and they’re still working towards productivity, I would imagine the drag from that actually increases a little bit in the fourth quarter versus the third quarter?

Gary Butler

You know Jenny, we haven’t gone to specifics because that’s kind of cherry picking in terms of the overall impact. There’s still many levers that impact margins so we don’t go into each one of those in detail but clearly there is incremental pressure as we do that and more in the fourth quarter then what we’ve seen to date. And as you start to ramp those hires and as they start coming on board, it’s more in the fourth quarter and going forward.

Jennifer Dugan – Lazard Capital

And I mean I know it depends on how the sales environment plays out but when would you imagine that they’re productive to the point that they’re no longer a drag, they’re at least break even?

Gary Butler

You have to remember that sales costs are a drag even with productive people in the first year. So we kind of target getting our costs of sales back in about a year on average across the enterprise. It takes a little then that in and SBS takes a little less longer then that up market because you have to get the margins so that will be a drag all of next year. It won’t really start to be a positive until the next year. But again we’ll start to ramp up again the following year and it kind of gets back to business as normal. It’s just that looking back historically, we were flat in Major Accounts up and we actually went down in head count in small business so we’re again, adding that across the board.

Operator

Your next question is from Timothy McHugh - William Blair & Co.

Timothy McHugh - William Blair & Co.

I’ll just have one question here and I was wondering if you could elaborate a little more on the reasons or at least as best as you can, tell why you think the national accounts remained weaker then improvement you’re seeing in the small and medium sized businesses and then global view. If there’s anything you can put your finger on.

Christopher Reidy

Well there’s a couple of areas and one is that I don’t want to be too negative here because we have seen a pickup in terms of our perspective business forecast as we look out. But really there were two factors. One is in terms of the economic impact, the high end of the US market was the one that was affected the most. And most people in either Chris’s chair or my chair have been very reticent on any kind of capital spending or outlays, cash or internal effort until there is more crispness and clarity allowed in the recession really behind us and is it back to business as usual?

So I think it’s not surprising that the US submarket would be the slowest to recover. That being said, we also had some additional drag because over the last few quarters we’ve had some previously booked business in our backlog that has either been deferred or cancelled outright and we’ve taken down. So you’ve got a slowing of new sales and a little bit accelerated rate of unwind in the previous backlog because a lot of these accounts take a year to implement.

So now as you, as growth sales start to increase and the backlogs become, I don’t want to use the term “clean” but more current then I think it will go back to the normal pattern which should occur in the next quarter.

Timothy McHugh - William Blair & Co.

Is there anything, consistent trend in terms of the reasons for the cancellations other than just economic weakness and hesitancy to –

Christopher Reidy

Pure economic weakness or companies are downsizing. The last thing they want to do is be putting in a new HR system. Or a new time and labor system because they’ve got other people focused on doing other things and as people start preparing for growth once again, it really brings out the need for more accurate payroll, HR, benefits kinds of systems and clearly we’re starting to see that in our prospective business outlook.

Operator

Your next question comes from Tien-tsin Huang - JP Morgan.

Tien-tsin Huang - JP Morgan

On the new sales front, are you seeing any signs of new business starts picking up for the small business unit? I’m sorry if I missed that, if you talked about it.

Gary Butler

As you know in the National Employment Report, we have seen increases, particularly in the service sector and moreso in small business than anywhere else. So even though we don’t track new business versus existing business statistics, the anecdotal evidence would tell you that we are seeing somewhat of an upswing.

I’d like to help you more but we just don’t track that data in any kind of digital way.

Christopher Reidy

Some anecdotal evidence of a little bit less out of business as well.

Tien-tsin Huang - JP Morgan

That was really where I was going next, the retention side of small business. So business failures and bankruptcies down a touch it sounds like based on what you’re hearing?

Gary Butler

Absolutely.

Operator

That does conclude the Q&A session. I’ll turn the call back over to management for further remarks.

Gary Butler

Let me conclude by just thanking everyone for being here this morning. I’m sure as all of you gathered from the tone of the call, we are encouraged but at the same time we’re just trying to make sure that people are appropriately conservative as they think about our encouragement turning to actual revenue and bottom line, but you shouldn’t hear anything negative from that perspective, it’s just the way the business model works and we definitely feel that the winds are beginning to be at our back rather than our front and the results will play out accordingly.

Again, we remain very pleased with how we’re positioned and we expect improving results as the future unfolds. Thank you for attending.

Operator

Thank you for participating in today’s conference call. This concludes the call and you may now disconnect.

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Source: Automatic Data Processing, Inc. F3Q10 (Qtr End 3/31/10) Earnings Call Transcript
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