Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Automatic Data Processing (NASDAQ:ADP)

Q3 2012 Earnings Call

May 01, 2012 8:30 am ET

Executives

Elena Charles -

Carlos A. Rodriguez - Chief Executive Officer, President and Director

Christopher R. Reidy - Chief Financial Officer and Corporate Vice President

Analysts

David Togut - Evercore Partners Inc., Research Division

Nathan A. Rozof - Morgan Stanley, Research Division

James F. Kissane - Crédit Suisse AG, Research Division

Jason Kupferberg - Jefferies & Company, Inc., Research Division

Gary E. Bisbee - Barclays Capital, Research Division

Ashish Sabadra - Deutsche Bank AG, Research Division

Glenn Greene - Oppenheimer & Co. Inc., Research Division

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

David Grossman - Stifel, Nicolaus & Co., Inc., Research Division

Kartik Mehta - Northcoast Research

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Sara Gubins - BofA Merrill Lynch, Research Division

James Macdonald - First Analysis Securities Corporation, Research Division

Michael J. Baker - Raymond James & Associates, Inc., Research Division

Timothy McHugh - William Blair & Company L.L.C., Research Division

Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division

John T. Williams - UBS Investment Bank, Research Division

Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division

Operator

Good morning. My name is Christie, and I will be your conference operator. At this time, I would like to welcome everyone to the ADP's Third Quarter Fiscal 2012 Earnings Webcast. I would like to inform you that this conference is being recorded. [Operator Instructions] Thank you. I will now turn the conference over to Ms. Elena Charles, Vice President, Investor Relations. Please go ahead.

Elena Charles

Thank you. I am here today with Carlos Rodriguez, ADP's President and Chief Executive Officer; and Chris Reidy, ADP's Chief Financial Officer. Thank you for joining us for our Third Quarter Fiscal 2012 Earnings Call and Webcast. Our slide presentation for today's call and webcast is available for you to print from the Investor Relations homepage of our website at adp.com.

As a reminder, the quarterly history of revenue and pretax earnings for our reportable segments has also been posted to the IR section of our website. These schedules have been updated to include the third quarter of fiscal 2012. During today's conference call, we will make some forward-looking statements that refer to future events and, as such, involve some risks. And these are discussed on Page 2 of the slide presentation and in our periodic filings with the SEC.

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

Carlos A. Rodriguez

Thank you, Elena. Good morning, and thank you for joining us. I'll begin today's call with some opening remarks about our third quarter results. Then I'll turn the call over to our CFO, Chris Reidy, who will take you through the detailed results. After which, I'll return to provide you with our updated fiscal 2012 forecast. And before we take your questions, I'll provide some concluding remarks.

Now let's turn to Slide 4. As you read in this morning's press release, ADP reported solid results for the third quarter of fiscal 2012. Total revenues grew nicely at 7% for the quarter, and our key business metrics continued to be strong, starting with Employer Services and PEO Services new business sales. I'm pleased with our execution, which drove 12% new business sales growth in the quarter for Employer Services and PEO Services combined. Sales growth was strong for Small Business Services, the PEO and Added Value Services. And Major Accounts also posted good sales results. The high-end National Accounts market in the U.S. continues to be somewhat challenging, though we have seen good sales growth from the recruitment process outsourcing acquisition that we made to enhance our HR BPO solutions in this market.

Looking at sales in our Employer Services international space. ES international best-of-breed sales growth was strong in the quarter but mixed by country as the economic pressures continued, especially in Western Europe. Sales in both Canada and Brazil were strong. GlobalView sales were down year-over-year primarily due to a large sale in last year's third quarter.

Moving on from sales. The number of employees on our clients' payrolls as measured by pays per control, client balances and revenue retention all increased during the quarter. As you know, the absolute value of our revenue retention is quite high, and I'm very pleased there was a 10 basis point improvement in this important metric during the fiscal third quarter, which is a particularly critical period.

On the acquisition front, we closed one transaction since our last update. We acquired the human resource solutions subsidiary of SHPS, a provider of benefits administration services for larger U.S. companies, including eligibility enrollment, spending accounts, COBRA, absence management solutions and benefits advocacy. This acquisition significantly expands our capabilities with the addition of Health Savings Account and Health Reimbursement Account administration.

Moving on to Dealer Services. The outlook for the automotive landscape in North America is good as the market forecast for calendar year 2012 vehicle sales continues to improve. Dealer Services sales growth was also solid. We're making market share gains, and worldwide revenue retention increased for the quarter.

With that, I'll turn it over to Chris to provide the financial highlights and the updated full year forecast for our client funds investment strategy.

Christopher R. Reidy

Thanks, Carlos, and good morning, everyone. Let's now turn to Slide 5. Total revenues grew 7% to $2.9 billion, 6% organic in the quarter. Revenue growth included a slight drag of about 0.5 percentage point from unfavorable foreign exchange rates. We continue to see a positive impact on revenues from strong new business sales growth and from acquisition activity that complements our solution set.

Employer Services grew total revenues 7%, 6% organic. There was good revenue growth across several products, including running our Small Business Services marketplace, time and labor management, HR services in major accounts and ASO, which is our BPO for small- to mid-sized companies. Same-store pays per control in Employer Services in the U.S. was quite strong with an increase of 3.3%. However, same-store pays per control across Europe declined compared with a year ago due to the economic pressures Carlos mentioned earlier.

Growth in average client fund balances increased 5% for the quarter, driven by new client growth especially in Small Business Services, growth in standalone tax filing and increased pays per control. This growth slowed from the 6% year-over-year growth in the second quarter primarily due to the expected smaller contribution from state unemployment insurance as the second quarter growth benefited from the 2011 calendar year increases.

The PEO strong revenue growth continued with 15% growth during the quarter, all organic. Average worksite employees grew 11% during the quarter to about 260,000. Dealer Services revenues also grew nicely in the quarter with a 7% growth, 6% organic. And Dealer Services is benefiting from strength in the North American automotive market, where we continue to benefit from increased transaction activity. Dealer Services win rates are solid. We are further penetrating our base with layered applications, and client revenue retention improved year-over-year. The continued weakness across Europe is something we are keeping an eye on for Dealer, but we are seeing continued strength in Asia's luxury brand market, which is where we primarily play in Asia.

Now let's turn to Slide 6 and continue with the highlights of the quarter. Pretax earnings increased 5%. And I'm sure you noticed in today's release that systems development and programming expenses are down as a percentage of revenues. The amount of expenses capitalized during the quarter increased as a result of increased spend on large projects related to product innovation. The quarter also included a charge of nearly $25 million in cost reduction initiatives to align our business structure with a softer business environment we are seeing in Europe.

Now looking at the pretax margin. ADP's pretax margin declined 40 basis points. Excluding a drag of about 40 basis points from acquisitions, pretax margin was about flat. And if you further exclude the 90 basis points from the decline in high-margin client fund interest, it was very positive margin expansion in the quarter in the core business.

Moving next to net earnings. We reported a 7% increase, which benefited from a lower effective tax rate in the quarter. Diluted earnings per share increased 8% and benefited from fewer shares outstanding compared to last year's third quarter. We repurchased 8.9 million ADP shares fiscal year-to-date for a total cost of about $445 million. Our cash and marketable securities position was strong at $1.8 billion at the end of the quarter.

Let's turn to Slide 7. And I'll take you through the updated forecast on the client funds investment strategy in support of the overall ADP forecast that Carlos will take you through in a few moments. Before I get into the details of the forecast, I'll point out that the objectives of our investment strategy remains safety, liquidity and diversification. Fully consistent with these objectives, we are again able to take advantage of the supply of new investment-grade corporate fixed-income securities and added more highly rated corporate bonds to our portfolio.

At March 31, approximately 85% of our fixed-income portfolio was invested in AAA, AA-rated securities consistent with the past 8 quarters. In addition, as has been the case over the recent past, the yield curve continued to present greater opportunities at the longer end of the maturity curve in both the extended and long portfolios. As such, the duration of the portfolio increased slightly to 3.2 years at the end of the third quarter. We continue to base the interest of assumptions in our forecast on Fed Funds futures contracts and the forward yield curves of the 3.5- and 5-year U.S. government agencies as we do not believe it is possible to accurately predict future interest rates, the shape of the yield curve or the new bond issuance behavior of corporations. I'll also remind you that up to 15% to 20% of the investments are subject to reinvestment risk each year.

Focusing now on the slide, you see a summary of the anticipated pretax earnings impact of the extended investment strategy for the client funds investment portfolio for fiscal 2012. We continue to anticipate average client fund balances for fiscal 2012 in the range of $17.9 billion to $18.1 billion, which represents 6% to 7% growth. It's also important to keep in mind that while average client balances have grown 7% year-to-date, I'll remind you as I did last quarter that growth was very strong in the last fiscal year's second half in large part due to the January 1, 2011, increases in state unemployment tax rates, which have not recurred to the same extent this year. Therefore, we anticipate a tough balance growth comparison in the fourth quarter of this fiscal year.

We continue to anticipate a yield on the client funds portfolio of 2.7% to 2.8%, down 40 to 50 basis points from the fiscal 2011. We anticipate a slightly smaller year-over-year decline in client fund interest of $45 million to $50 million. And as you can see at the lower right of the chart, in terms of the total pretax impact of the extended investment strategy, we anticipate a decline of $50 million to $55 million for fiscal 2012. We continue to anticipate the overall yields from the net impact of the strategy to decline about 50 basis points from fiscal 2011's overall yield of 3.6%.

Now I'll turn it back to Carlos to take you through the remainder of the forecast for fiscal 2012.

Carlos A. Rodriguez

Thank you, Chris. We're now on Slide 8. As you can see, our performance has been solid, but we do expect continued pressure on earnings and margins from a continued low-interest rate environment. We have been very active in executing against our M&A strategy, which will also continue to pressure margins near-term but we believe will enhance ADP's future organic revenue growth.

Now to the forecast. Our forecast continued to exclude the gain realized in the second quarter on the sale of assets, as well as the related loss revenue and profit streams, which were anticipated to be about $0.02 in lost earnings per share for the remainder of the year from the time of the sale. We continue to anticipate total revenue growth of 7% to 9%. I also want to remind you that we anticipate that the impact on revenues from foreign exchange rates will be up to 1.5 points unfavorable during the fourth fiscal quarter but will be about neutral for the full year. The euro today is hovering around $1.30, whereas this time last year, the euro had started to increase and was over $1.40 by the end of last fiscal year. As you know, movement in FX rates is not as impactful to pretax earnings.

We continue to anticipate 8% to 9% growth in diluted earnings per share compared with $2.52 in fiscal 2011. We expect an effective tax rate of about 35% for the fourth quarter. Our effective tax rate through March is about 34.5%. And we anticipate ending the year with an effective tax rate below 35%. However, our forecast also contemplates pressures in the fourth quarter related to the additional impact from the SHPS acquisition, which was completed after the third quarter closed as well as our sales overhires as we gear up for fiscal 2013.

We also anticipate a decline of $50 million to $55 million in pretax earnings related to the client funds investment strategy, as Chris just took you through. This translates to a drag of about 90 to 100 basis points on ADP's total pretax margin. Pretax earnings related to the client funds strategy are down about $35 million year-to-date. So another $15 million to $20 million decline is expected to occur in the fourth quarter and will be a significant drag on total pretax margin. As is our normal practice, no further share buybacks are contemplated in the forecast beyond anticipated dilution related to employee equity comp plans, though it is clearly is our intent to continue to return excess cash to our shareholders depending obviously on market conditions.

Now let's turn to Slide 9 for the segment update. For Employer Services, we continue to anticipate revenue growth of about 7%. We are currently forecasting that the pretax margin will be flat with last year compared with our prior forecast of 30 basis points expansion primarily due to the impact of the acquisition closed since our last update. We anticipate an increase in our pays per control metric in the U.S. of 2.5% to 3% compared with our prior estimate of about 2.5% increase. We continue to anticipate about 17% revenue growth for PEO Services with a slight pretax margin expansion. We continue to anticipate about 12% growth in the annual dollar value of ES and PEO worldwide new business sales from the nearly $1.1 billion sold in fiscal 2011. And for Dealer Services, we continue to anticipate 9% to 10% revenue growth with at least 50 basis points of pretax expansion.

Turning to Slide 10. I'd like to leave you with some closing remarks before we open it up to your questions. We're very pleased with ADP's third quarter results and are on track to achieve our full year forecast. Growing new business sales is the key to driving future organic revenue growth, and I am pleased with our execution in this area. We are investing in distribution by hiring additional sales associates going into next year. And as you've heard me say before that a top priority of mine is to get the best of innovative products to our excellent sales force. And we are focused on doing just that with innovative internal development and through acquisitions that complement our existing solutions. ADP's cash position is strong, and we remain committed to returning excess cash to our shareholders through dividends and share buybacks. I'm pleased that ADP continues to be rated AAA by both Standard & Poor's and Moody's, with Moody's reaffirming this past December and S&P reaffirming just over a month ago in March. ADP's AAA credit rating reflects the strength of our business model and of our balance sheet.

I believe we're doing the right things to grow the business long-term and I am proud of what the organization has been able to accomplish this year. And now I'll turn it over to the operator to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We will take our first question from the line of David Togut with Evercore Partners.

David Togut - Evercore Partners Inc., Research Division

Could you provide a little bit more insight into new sales trends within National Accounts in the U.S.? And more specifically, what were bookings like for your new Vantage HCM product?

Carlos A. Rodriguez

We have, right now, approximately a little under a dozen clients that we have on the books. We have less than half of that, that are actually in implementation. And we have a few that have actually started. And when you think about the timing of when Vantage was rolled out at the HR Tech Conference in October and you think about sales cycles in this space, we're pretty pleased with the progress so far.

David Togut - Evercore Partners Inc., Research Division

And then could you provide some insight into January sales trends in particular, which typically are critical for the sales season overall in the year ahead?

Carlos A. Rodriguez

Well, I think as you saw from the sales results for the quarter, which would obviously include January, based on my remarks, we're pretty pleased with the outcomes. We've had good results in all of our core businesses. In fact, probably to quote the comments we made in the opening statement, they were strong results. The National Account space was the only place, excluding the sales that we got from the RightThing acquisition, was the only place where we saw, I think, continued softness, but very, very pleased with the results in our core businesses as well as some of the ancillary products that we saw that were additions to the payroll solutions.

David Togut - Evercore Partners Inc., Research Division

Just final question for me. Any competitive issues in National Accounts in the U.S. that you're focused on improving?

Carlos A. Rodriguez

Well, I think Vantage is our response to what is obviously a changing landscape. So Vantage not only has a new and better user interface to make it easier to do business with ADP, but it really is a single database solution that integrates all of the core products. So I think our intention was to have Vantage really be our next-generation solution in the National Accounts space. And we're very optimistic about where that positions us in the marketplace, especially when you think about the breadth of the offering that we'll have now in comparison to our competition in that space. I think the new user experience along with true, unified integration or true unification, if you will, of the database, I think, will really create a real competitive differentiation for us.

Operator

Your next question comes from the line of Nathan Rozof with Morgan Stanley.

Nathan A. Rozof - Morgan Stanley, Research Division

I wanted to dig in a little bit more to the pays per control numbers since that was obviously a key positive this quarter. Specifically, given the increased guidance, I was wondering if you can give us any differences in trend by customer segment or client size that may not be obvious from the top line number.

Christopher R. Reidy

Yes. There were all up, both industry-wide, all the industries continue to be positive with the exception of public administration, which is probably no big surprise. And geographically, all the geographies were up, some more than others. We saw Texas, Oklahoma, for example, growing particularly fast. That Eastern Seaboard is still a little bit slower, particularly down in that Philadelphia, South Jersey. But all very positive and as you say, the pays per control across the board were very strong for the quarter.

Nathan A. Rozof - Morgan Stanley, Research Division

And then for a follow-up question, I believe you mentioned that GlobalView sales would've been up, excluding the impact of a large sale last year. Can you provide us any more color there or what the growth rate would be x that large sale last year?

Christopher R. Reidy

Well, it would be strong. And we don't actually give the specific sales growth numbers. But we had a big sale in that prior quarter. I think we mentioned it. If you go back to the record for the third quarter of last year, it was a pretty good project. And it's still on track. So we were very pleased with the GlobalView sales results in the quarter.

Operator

Your next question comes from James Kissane with Credit Suisse.

James F. Kissane - Crédit Suisse AG, Research Division

Just a question on the European sales. You said it was kind of weak, maybe a little more color. Was it weak across the board? And just a follow-up to that, maybe be a little bit more specific on the European pays per control.

Christopher R. Reidy

Actually on the sales, the overall international sales were strong. I think to the point we made is Canada and Brazil were particularly strong, and we saw some more softness in Europe proper, Central Europe, so to speak. The pays per control, while they were relatively flat in previous quarters, took a dip down a little bit in the third quarter, again probably no great surprise to anyone.

Carlos A. Rodriguez

But I think it's important to note that even though the sales in Europe were not as strong as other parts of our business, we don't want you to get the impression either that they were down significantly because they were not. So it's actually quite, I guess, comforting that so far, our sales execution in Europe has been very good under the circumstances and we're -- I would call it holding our own. So it's a very difficult situation obviously because of a lot of the uncertainty. So I think our sales organization is doing a terrific job of trying to hold on to what I would call decent sales results.

James F. Kissane - Crédit Suisse AG, Research Division

Great. And maybe can you give us an update on the pricing environment, generally across the different products as well as maybe more specifically in the Small Business arena?

Christopher R. Reidy

Yes. The critical new pricing time, as you know, Jim, in the beginning of our fiscal year. So that's well behind us. We've got what we traditionally have gotten over the last couple of years. And we had a net of about 1% to their balance increase. In terms of what we're seeing in the market, there's nothing remarkable to report in terms of pricing deal by deal. I don't think there's anything to point out there, nothing special.

Operator

Your next question comes from the line of Jason Kupferberg with Jefferies.

Jason Kupferberg - Jefferies & Company, Inc., Research Division

I just wanted to clarify, did you mention that there was a $25 million charge in the quarter for the European business? Did I catch that right?

Christopher R. Reidy

Yes, you did. We do take restructuring charges from time-to-time. It's really kind of just the pruning of the business that you would expect in order to drive efficiencies. And we did take that in the third quarter. But it's really a combination of a number of things. You're right that the bulk of it was international. It does include some M&A synergies. We've done a couple of acquisitions internationally. We've got some building consolidations and the like. But the real impact of that is going to be next year because of the long lead times when you take charges like that in Europe. But think about it as more charges to continuously improve process efficiency.

Jason Kupferberg - Jefferies & Company, Inc., Research Division

Can you give us a rough sense of what percent of your European headcount was affected?

Christopher R. Reidy

No. It was very, very small. I mean, this is small pruning.

Carlos A. Rodriguez

Because of the way -- just to make sure that we don't alarm anyone. So based on the way the rules and laws work in Europe, this should be a relatively small number of people because the cost of restructuring in Europe is relatively very high on a per head basis, if you will. And so this is a relatively small group, and it's to again make, what I would call, a modest adjustment to our cost structure for was obviously a slower environment in Europe. And this is not -- our sales are still holding up in a decent way, so this is not a dramatic downsizing of any of our businesses in Europe.

Jason Kupferberg - Jefferies & Company, Inc., Research Division

Okay. That's really helpful. And then can you just talk about how all the influx of all the new products that you've introduced over the past 12 to 24 months? Has that had a positive impact on your sales force turnover? Any metrics you can give us there?

Carlos A. Rodriguez

I think we'll let Chris kind of scramble for the turnover figures. But I can tell you that to me, the most important metric is the sales results themselves. And clearly, turnover is a factor in that. We need to have stability and lower turnover in order to drive good sales results. But the sales results do speak for themselves in the sense that where we have rolled out new products, we are having better results. And of course, whether that's cause-and-effect, there's no scientific evidence. At least the sales force seems very excited and very positive about getting new products and new solutions. We're also doing other things to help our sales force, giving them new tools. Like for example, giving them the ability to use electronic sales order rather than paper, doing a number of things to make their jobs easier and to increase productivity. But I think the sales results themselves, I think, are the best indication of the soundness of the strategy of trying to drive additional productivity by focusing on product enhancements.

Christopher R. Reidy

Yes. I think I'd say a few things on that. Clearly, the new product innovation, such as RUN and Workforce Now, get the sales force jazzed up, and that helps significantly drive new sales. Some of our turnover is directed turnover, calling out the bottom performers and that thing. So when we look at the turnover of the headcount and sales, there's nothing really out of trend or nothing remarkable to point out. What I would point out, however, is that our headcount grew in the area of about 5% to 6% overall, which when you look at 12% kind of growth in sales says that there's 6% to 7% improvement in productivity, and that's particularly strong. So we're very, very pleased with that metric.

Jason Kupferberg - Jefferies & Company, Inc., Research Division

Okay. And just last for me, I know longer-term, you guys have talked about the 5-year organic revenue growth CAGR of 8% to 10%. And I guess, technically, we're kind of finishing up year one of that. And you're sort of around maybe the lower end of that range. So maybe can you guys just comment on your comfort level with that 5-year outlook? Carlos, I know you technically inherited that from Gary, but I'm sure you're part of the process in setting that target, just as you look at the outlook for employment and rates and dealer because it does seem like the Fed is saying hikes are still a couple of years away. So anything you can share on that front?

Carlos A. Rodriguez

Well, I think we are obviously intending in May to -- I guess, provide any updates. This is probably not the right forum to have that discussion. But in May, we'll be happy to have that discussion. I can say that clearly, I was part of that communication with Gary because I was part of the management team. And we do believe that, that is a long-term potential of the company. As you know and you just mentioned, when we made that, those statements, interest rates were in a very different place and the trend and the forecast from the futures market, if you will, and the forward curves were very different than it is today. It's hard to believe, but rates are significantly lower than they were. At least the rates that affect us, are significantly lower than they were in May of last year, which no one would've ever thought possible. That's exactly what happened. So clearly, in the short-term -- and I think Chris will probably provide more detail in May. In the short-term, that does put pressure on us not only on margins but also obviously on our revenue growth as well.

Operator

[Operator Instructions] Your next question comes from the line of Gary Bisbee with Barclays Capital.

Gary E. Bisbee - Barclays Capital, Research Division

Can you just quantify how big this SHPS acquisition was? And I know you've talked in the past as you've done these acquisitions in the HR area that scalability remains key. You want them to have the ability to scale and have a margin profile close to the core business. Does this acquisition fit that thought process?

Carlos A. Rodriguez

I think that this acquisition -- I think, first of all, I believe it's about $80 million in annualized revenue. This was really what I would call -- I'm not sure if this is a term of art or not, but a product [ph] acquisition, in the sense that we had some gaps in our offering that we believe were important to fill in order to make us competitive in the benefits administration space, specifically I mentioned HSAs and HRAs but also absence management. So typical buyer today, whether it's in benefits or in HR payroll, is typically looking for a broader solution set than just a single solution. And what we were finding is that in the benefits administration space, we were having trouble winning deals in the core benefits admin business without really having a competitive spending accounts product or an absence management product. So this was really intended to further strengthen, if you will, our existing base. And we're going to take those 2 products, those 2 or 3 products from SHPS, and those will become the go-forward platform. And then the rest of the products will be consolidated into our existing portfolio, and we'll move forward with hopefully a broader, more competitive product set in benefits.

Gary E. Bisbee - Barclays Capital, Research Division

Okay, great. And a quick follow-up, can you give us a sense how much of the new sales growth in recent quarters is products that you've acquired in the last 2 to 3 years versus organically developed products or sort of more legacy products in the payroll and the tax side?

Christopher R. Reidy

Gary, if you look at the 12% that we're forecasting for the year, it's a couple of points.

Gary E. Bisbee - Barclays Capital, Research Division

A couple points is the acquisition.

Christopher R. Reidy

Yes.

Operator

Your next question comes from the line of Bryan Keane with Deutsche Bank.

Ashish Sabadra - Deutsche Bank AG, Research Division

This is Ashish on for -- calling on behalf of Bryan Keane. I was wondering if you could give some more color on the Small Business trend. Have you seen any change in the business starts or any change in the competitive environment? And how do you continue to drive sales in that particular segment? Is it a combination of direct sales force channels? If you could just provide some more color on it.

Carlos A. Rodriguez

So one of the -- when we mentioned that we're increasing our spend in the fourth quarter on what we call sales overhires for the next fiscal year, a good bit of that or a good portion of that is actually in the Small Business space, where we really drive a lot of our growth through both feet-on-the-street headcount as well as in telesales. And so in Small Business, it would seem to be intuitive, but it's important to remember that we have a very large sales force, so when we add salespeople, the total number of sales that we're adding, most of them would end up in the Small Business space. So we're obviously doing that because we're confident that there's demand in the marketplace and that we're able to execute with existing management infrastructure that we have. And so we're hopeful to be able to continue, I think, the positive trends we've had of being able to drive good sales in that space with our new RUN product, as well as some bank partnerships that we have been able to establish through, what's always been for us, a very strong channel, which is our bank partners.

Ashish Sabadra - Deutsche Bank AG, Research Division

Okay. And one quick follow-up on the PEO. The PEO guidance suggests that you'll see some acceleration in year-over-year growth for the PEO revenues in the fourth quarter. I was just wondering if you could give some more color on what will drive that improvement and year-over-year growth in the fourth quarter for PEO revenues.

Christopher R. Reidy

I'm sorry, Ashish. We were troubled with the question. Are you asking about PEO?

Ashish Sabadra - Deutsche Bank AG, Research Division

Yes, that's right.

Christopher R. Reidy

Okay, now. And just, could you just restate the question?

Ashish Sabadra - Deutsche Bank AG, Research Division

Yes. My question was that the PEO revenues were up 16% for the first 9 months and you've guided to 17%, which would indicate that you'll see some improvement in the year-over-year growth in the fourth quarter from 15% to maybe like 18% to 19%. And I was wondering if you could highlight the growth drivers for the PEO.

Christopher R. Reidy

Well, we have seen good, strong growth, as you said, throughout the year. Some of that has to do with -- when you look at where it would come out for the full year is some of the pass-through revenues. So what I would advise you to look at is more of the growth in our processing revenues or look at the proxy metric that we use with worksite employees. And if you look at that, that continues to be strong throughout. So this quarter, we're up 11% to about 260,000 worksite employees, so we're very happy with the continued strength in the PEO.

Carlos A. Rodriguez

But I think it is -- I think I would just point out that there's really nothing that is expected to happen in the fourth quarter to have a material change in the growth trajectory of the PEO. PEO is growing quite nicely right now, so there may be some issues in terms of cutoffs or pass-throughs. As Chris was saying, we tend to do in June our open enrollment for our benefits plan. So sometimes that leads to slightly higher rates for the clients and that's included as part of our billings so that may have a little bit to do with that number. But that doesn't really change pretax margin for us or drive any kind of profit. So I would tell you that it's steady as she goes in the PEO. And the nature of that business is such that there's really nothing happening in the fourth quarter, other than open enrollment, that would lead one to believe that there's a major change in the growth trajectory.

Operator

Your next question comes from the line of Glenn Greene with Oppenheimer.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Just a couple of questions left for me. But maybe a little bit of color on the retention trends by segment, in particular this Small Business. Sort of what are you seeing there in Small Business?

Carlos A. Rodriguez

Retention is quite strong. And it's -- I don't know that I have the historicals by BU. But there are several business units, and I think SBS may be one of them where we are at a historical high in terms of our client retention. We're very pleased with that. It does ebb and flow, so it goes up and down. But on a year-to-date basis, we're quite happy with the progress. I think in Small Business, there's slight improvement over the previous year. And when you reach these levels of retention, any kind of improvement is quite satisfying because we're at pretty high levels right now.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Are you seeing an alleviation of sort of the bankruptcy headwind, which I know has been a problem for the last 2, 3 years?

Carlos A. Rodriguez

Yes. But I don't know if that would be fair to say that, that happened in the last quarter. I think that there's some continuing improvements in some trends in Small Business. But that's kind of already, I think, behind us in terms of -- if you recall, and it's in our actual press release, the statistics and metrics that in last year, the year-over-year improvement in retention was significantly high. So I believe it was 190 basis points, if I'm not mistaken, for last year's third quarter over the previous year's third quarter. So that's really where you had the big improvements in terms of some of the economically driven factors that help drive improved retention. So most of that is really behind us now. And now it's -- you got to continue to improve service. You got to improve ease-of-use. You have to be competitive. It's just good, old, traditional, in-the-trenches competition.

Christopher R. Reidy

I said that the retention rate, as you know, is very high, all-time high across -- in total. And you see that pretty much across the boards, there's no one that was driving that any more than the others. They're all very strong, which is great.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

All right. Then Chris, I mean, I think I'll try this. On the sales side, not to get too specific, but any way to sort of frame the order of magnitude of the sales growth across segment, I mean, was small and majors kind of in the low double-digits and national close to flat? I mean, just trying to get some directional...

Christopher R. Reidy

I think we tried to give a little of that, SBS and our PEO and AVS were very strong for the quarter, so think double-digit kind of strength. Majors had a bit of a tough compare against the strong prior quarter and the prior year. But it's very strong year-to-date. And so we're very happy with majors over the course and the forecast would have them very strong as well. National Accounts again is getting some help from the recent acquisition of the RightThing, but as we said in our comments is not quite as strong. It's still growing but not quite as strong as the others.

Carlos A. Rodriguez

And if I can add one thing, I think, obviously, Chris is right that we're very pleased with the performance across the board. But at the risk of playing favorites, I think it's important to note that our Major Account sales force is really performing very, very well this year. And we couldn't be happier because that is a core business for us, where it's important for us to drive new business in order to be able to grow what is obviously one of our more profitable businesses. It also happens to create an opportunity for us to sell additional products and services attached to that Workforce Now platform. So our ability to generate new unit growth in that Major Account space this year, I believe, is one of the highlights of the year for us from a sales standpoint.

Christopher R. Reidy

And although you haven't asked, I'm sure somebody will. I mean, we're at May 1 now, we have some preliminary view of our April sales results. And I would say -- reiterate the fact that majors was particularly strong in April as well. And what I would say is that the strong growth that we saw in Q3 coupled with what we see in April make us very confident in our full year guidance of about 12%.

Operator

Your next question comes from the line of Rod Bourgeois with Bernstein.

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

A couple of questions here. So is there any issue with pipeline drain? You had 2, I guess, what I would call, above-normal bookings growth quarters in a row. I'm encouraged, Chris, by your comments about what's happening with majors as you move into the month of April. But as you look forward and you enter next fiscal year, I mean, after these 2 strong bookings quarters, is there a bit of a bubble in the pipeline that will create some weakness? Or is the pipeline strong and steady?

Carlos A. Rodriguez

My experience, since I've been with ADP, is that when you're in a position that you're in at this point the year and the fiscal year ends, I'll remind you on June 30, it's very, very unlikely that we will experience any sort of drain or any sort of slowdown. It's possible obviously. There could be factors outside of our control to make that not the case. But we have very, very strong incentives in place for a very strong finish for the fiscal year. So frankly, I am right now, and my leadership team and our sales leader will be very focused on the first quarter of next year and making sure that we get off to a strong start to prevent exactly what you're describing, which is a drain of the pipeline in the fourth quarter going into the first quarter. But we're not -- I'm not overly concerned about the fourth quarter in part because of what Chris just said which is 1/3 of our quarter, we have visibility to and it was quite strong in April.

Christopher R. Reidy

I'll also say a couple of things, Rod. Obviously, our long-term goal for sales growth is still in that 8% to 10% kind of range. So I think we exceeded that this year, and we did get a little bit of a lift from acquisitions, as I mentioned on a previous question. But particularly, I'm pleased with the products that we have. We'll talk a lot more about some of those innovations at the May conference. But across each of the major market segments, we've got new products. So RUN is still doing really well in the Small Business space, coupled with some of the mobile innovations that we're coming out with. And in the mid-market workforce, now is really taking hold. We'll have new versions of Workforce Now and they're coming out in July. We'll talk more about that and give some product demos in May, and then obviously Vantage in the National Account space. So I think that really helps drive the market as well and get the sales people excited. So I'm not particularly troubled by pipeline drain.

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

Excellent. And then just in keeping with that, are there any extra investments planned for your June quarter just to get you prepared for fiscal '13? Anything noteworthy in the sales force or either in the new product development area? I mean, as you stated, you have new products that you rolled out across all of your segments in recent history. And so I guess, the question there related to upcoming investments, are your technology investments going to subside? Or are you going to continue to go to the next level with those investments? So on the sales force and on the technology side, any thoughts on upcoming investments?

Carlos A. Rodriguez

Our technology investments are not going to subside. I think when you look at the environment that we're operating in today, I think we not only continue to focus on new product development, but I think the speed with which we need to develop new products and the amount of time that is acceptable in between new product releases has shortened. And so I think one of the, again, changes in emphasis I think that you'll see that I think started really over the last couple of years is a greater focus by us on product development. And we don't intend to have that subside anytime in the near future because we believe that there's a new competitive basis out there. And I think product is now an important element of our differentiation, our ability to win business in the marketplace. Having said that, to your question about the fourth quarter, we are adding a couple of hundred additional sales people earlier than what would be in the plan right now. And that was mentioned in our comments, that's contemplated in our forecast for the fourth quarter. We're also, as part of our efforts around innovation, we also believe that innovation requires some rationalization and consolidation of our existing platforms. So we want to not only to give our sales force the best and most innovative products, we want to have all of our clients on our best and most innovative products. So we are in the process of pushing forward some migrations in a very careful and methodical way in several of our business units. And we've actually have some of that baked into our forecast for the fourth quarter. And we hope that, that will allow us eventually to shift more of our R&D and development expense into new product innovation other than into maintenance as a result proliferation of platforms or versions of products.

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

That's wonderful. It seems like there's a big opportunity or at least a meaningful opportunity on the platform rationalization side. So good luck with that.

Operator

Your next question comes from the line of David Grossman with Stifel, Nicolaus.

David Grossman - Stifel, Nicolaus & Co., Inc., Research Division

I have a quick question, just going back to the acquisition activity. With that ramping up, can you give us some rough parameters on how you think about the impact on annual revenue growth going forward from acquisitions? And then perhaps secondly, help us understand the margin impact. Are you simply acquiring lower-margin businesses? Or is there a substantial investment process that's diluting the margin profile upfront?

Carlos A. Rodriguez

It depends on the acquisition. We've actually -- a couple of our acquisitions have actually been very good margin businesses. And obviously, I'm not going to mention which one versus the others. But I think it really varies. What is almost always the case is as we acquire businesses that we "tuck in" to our existing infrastructure, we do typically have to make investments upfront in areas like infrastructure and security to bring them up to, I guess, what we would consider to be ADP standards. There's also typically some integration expenses that take place early in the timeframe of the acquisition after closing. But I wish I could give you -- we bought a business in the Dealer Services space, which is completely different from SHPS, which is completely different from the Indian payroll acquisition. So they're all quite different. But in most cases, they do require some upfront integration and investment expense. But some of these businesses have actually quite good margins.

Christopher R. Reidy

I think the experience I've had is the biggest mistake you can make is to acquire a company and not invest, to integrate and to bring that product up to where they need to be. And so we will do that, so that is a part of it. The biggest part -- typically, our acquisitions are a drain on margins, not necessarily on bottom line, and it's because of those investments. And some of them tend to be a little bit lower-margin businesses but still making money. Some of them, more recent ones as we implied for our -- the impact on the fourth quarter, for example, SHPS is both margin and NOI drag and it will continue to be. So for Q4, as well as into next year, you can see that we've had -- the drag this year from margin basis points, for example, on the third quarter to ES, it was a 90 basis point drag. Across ADP, it was about a 40 basis point drag. And that's a combination of a couple of things that obviously we had a lot of acquisitions last year, like $900 million worth of acquisitions. Typically, we only do $300 million to $400 million. You'll see this year, we are in that zone of $300 million to $400 million. So we're going back to a more normal acquisition level. We do have the impact of those prior year acquisitions, the full year impact this year hitting us. So now we're looking at next year, and you can expect to see the continued drag from the acquisitions that we did in fiscal year '12 going forward. But there is going to be some abatement from the fact that we did less acquisitions this year than we did the year before.

David Grossman - Stifel, Nicolaus & Co., Inc., Research Division

So do you have any data, Chris, perhaps that helps us understand a year later these acquisitions or these portfolios you're seeing accelerated revenue growth and higher margins so that as you buy more companies, what you bought in the prior year on a year-over-year basis at least offset some of that impact?

Christopher R. Reidy

Yes. I think what you -- you can see that in the difference between our internal growth and our total growth. And so we are getting some lift. Now that lapse after the 12 months, but we're particularly pleased with some of the recent acquisitions. For example, Cobalt in the Dealer Space gave us a nice lift in revenue growth. And the Workscape acquisition, for example, AdvancedMD, all of those are giving us some lift in revenue growth.

Carlos A. Rodriguez

And I think one of the recent ES acquisition, the RightThing, which is the RPO business, is literally accelerating from what was already a very fast growth rate. So that was a fast-growing business when we acquired it. And that's an example of where true synergies are being, I think, realized from certainly from a distribution standpoint. So that business is not just adding to growth for the 12-month period after we blend it in, but I believe that, that's additive to the overall growth rate of ADP on a go-forward basis.

David Grossman - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And just one other thing on the acquisitions, as you acquire products, as you mentioned earlier, are these products available on a stand-alone basis? Or are they being sold in conjunction with payroll primarily?

Carlos A. Rodriguez

Well, again, it's unfortunate there's not a single answers. So as an example, the RPO business, we do sell that product on a stand-alone basis. The SHPS acquisition, where we have spending accounts, FSA products, we would tend to flex towards selling those products as part of a broad benefits offering. But in some cases, we will sell those products on a stand-alone basis. So we do have some salespeople dedicated to individual product lines. But it really varies in terms of how much focus and attention we put on a stand-alone product versus selling a bundled product.

David Grossman - Stifel, Nicolaus & Co., Inc., Research Division

And just one other question is just on the rates, Chris. If rates stayed flat from where we are today, do you have any sense for when the comparisons in client funds would flatten out or turn positive?

Christopher R. Reidy

Well, I'll go through that over the next couple of years, as I have in the past, at the May 25. So you know that's a long conversation. What I will tell you though is as we look at it, looking at the current forward yield curves, which as Carlos mentioned are significantly below where they were this time last year, we expect that the drain -- this year's drag is $50 million to $55 million, as you know. And so when we look at next year, we see at least as much pressure next year, if not a little bit more. Don't forget, you get the full year impact of the reinvestments at low new purchase rates this year and get the full impact of that next year and you get the full impact of everything next year hitting. So it's at least as much of a drag. And again, that's 90 to 100 basis points of drag, which is significant to overcome. So when we look at the margins, when you exclude the acquisitions, we're relatively flat at the ADP level. And that's overcoming 90 to 100 basis points of drag from interest rates. So that's stellar performance in our operating businesses, much higher than what we talk about as the long-term model of 50 basis points over the long-term. So we're pushing hard to drive margin improvement to offset some of that interest, but that interest is going to continue at least into next year. And we'll talk more about the impact on '14 and '15 in a couple of weeks.

Operator

Your next question comes from the line of Kartik Mehta with Northcoast Research.

Kartik Mehta - Northcoast Research

Chris, I just wanted to follow-up on your funds per client question. I'm just wondering as rates have stayed where they are and obviously, nobody knows what's going to happen over the next couple of years, have you given any thought to changing the strategy? Or are you fairly comfortable with the strategy you've taken and it's just a matter of time when things turn around and you start having a positive impact from rates?

Christopher R. Reidy

No. We're particularly comfortable with the approach. And the whole approach was to average your way through interest cycles. And obviously, nobody likes a long cycle of this extended low rates. But when you look at the ROE of this approach, it's very strong. We still have the long and the extended and the 2.8% to over 3%, and the yield is up over 3% in total. That's valuable from an ROE standpoint. It also matches our longer-term investors because it lessens the volatility, and that's a good thing. So we're very happy with the approach. In an extended period of low interest rates, it's going to be an extended period of drag year after year. But it's the right approach, it's the right strategy.

Kartik Mehta - Northcoast Research

Then just one last question on acquisitions, Carlos. Has there been any change in acquisition pricing or opportunity because the economy is getting better? I know last year you did -- I think you indicated $900 million acquisition. This year, it's going be a lot less. Is that just a reflection of opportunity? Or is that a reflection of what might be happening, maybe in other parts especially pricing of acquisitions?

Carlos A. Rodriguez

I think it's really more opportunity. I think we have always been, I think, an opportunistic, disciplined acquisition company, if you will. And so we're, I think, looking for the right kinds of product to complement our existing product set. But we're also very disciplined in terms of what we're willing to pay. So I don't think that I would be able to say that there's been a dramatic change that I'm aware of. That's not what I'm hearing from our M&A folks. So they're out looking around and trying to, I think, find the right kinds of opportunities for us. It probably was a better environment in 1 year or 2 years ago. And some of our increased acquisition activity may be a reflection of that. But I'll just remind you that some of that is a reflection of one large acquisition, which was the Cobalt acquisition, that tended to drive that number up into that $800 million to $900 million range that Chris talked about. So I don't think our strategy has changed in terms of how we do acquisitions. And I don't believe that we've seen any kind of meaningful change in the environment.

Operator

Your next question comes from the line of Julio Quinteros with Goldman Sachs.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Carlos, just one quick question on the higher-end clients and decision-making cycles, anything in particular just to go back to some of the comments you made at the beginning about the higher-end clients. Anything in particular about decisions, decision cycles as you get focused on in terms of length of these cycles right now?

Carlos A. Rodriguez

So I think -- again, we don't have a lot of scientific evidence, but we do have a lot of anecdotal stories about cycle times and decision-making process. And so back to the question about draining of the pipeline, I'm hoping that we actually are having a building of the pipeline, particularly in the National Accounts space because when you look at CEO confidence indicators -- remember, these products are being sold typically to CEOs and CFOs. If you look at the BRT's confidence indexes, there has been some significant improvement in people's, I guess, willingness to say they're going hire and if they're going to make capital expenditures. And obviously in our case, it's neither of those, but it's a proxy, if you will, for spending. And so we believe that the environment has gotten better, but our results don't reflect that yet. So we're not ready to say that there's been a change yet, but I think the elements are in place, where hopefully our National Accounts business to have better results on a go-forward basis than what we have had over the last 2 or 3 years, which has been incredibly painful for us.

Operator

Your next question comes from the line of Joseph Foresi with Janney Montgomery Scott.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

I wonder if you could talk about the sales force, maybe you could put the hiring in some historical context. Any impact or potential impact to margins going forward? And if you could talk about any changes in the comp structure there.

Carlos A. Rodriguez

I would love to talk about that because I'm incredibly proud of our sales organization and our sales leadership in the sense that they've been able to continue to grow our sales force. But more importantly now, they're getting productivity improvements. And what those productivity improvements lead to is it allows us to accelerate our growth rate either without impacting our margins or by actually helping our margins. And so we continue to add, as Chris said, new salespeople into our organization at a rate of around, I believe it was 7% year-to-date. The balance of obviously the 7% and the 12% sales results is productivity improvement, that 5% productivity. It's an incredibly important thing to our overall P&L and to our ability to accelerate our growth rate. So I would say that not only is our sales organization executing well in terms of delivering sales results, but they're able to continue to add people and also help us from a margin standpoint. So we're very, very proud of what they've been able to accomplish this year. And actually, we had some progress last year as well. But this year, it's particularly satisfying to see the productivity improvement.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Okay. And then just sort of switching gears here. Maybe you could talk about sales process and its evolution. Do you see a transition moving towards more for a technology-first offering versus a services? And how can that play out on the pricing front over the long-term?

Carlos A. Rodriguez

Well, you're referring to from our distribution standpoint or just from an overall product standpoint?

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

From an overall product standpoint.

Carlos A. Rodriguez

From an overall product standpoint, we definitely believe that we need to have products that are more competitive from a "technology standpoint". In other words, usability, experience of the practitioner and also of the employees because one of the changes in our business over the last 10 years is we have millions of our clients' employees who actually interact with and use our products as well. And these are the same people who are going home and using iPads and iPhones. So that experience is becoming very important. But we still are a service business. And so we are still going to have our differentiation be based on service and also on the breadth of our offering. So it's really not our intention to be a software company or a company that competes solely based on product and on technology. I do want to elevate the competitive level of our products, but that doesn't change the fact that we are still committed to being a services and compliance company that will continue to really drive our results by solving our clients' problems, not just by providing them a software product and allowing them to go off and use it on their own.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

So could that affect pricing over the long-term, I mean, just as you sort of shift that? Or is that just part of the regular sell?

Carlos A. Rodriguez

Well, the reason we're doing this is my hope is that it will either enhance our pricing or at least allow us to maintain our pricing. We're not doing it to decrease pricing. So I believe that if we can differentiate in terms of the breadth of our offerings and really solve problems for our clients and add value to their business through analytics and other tools, we believe that we'll be able to hopefully increase our pricing, if not maintain our pricing. But we're not trying to come down to someone else's level from a pricing standpoint if the implication is are we looking to be a traditional software vendor, whether it's distributed as a SaaS model or not, that is not our intention.

Operator

Our next question comes from the line of Sara Gubins with Bank of America.

Sara Gubins - BofA Merrill Lynch, Research Division

Following up on a prior question on pricing, I wanted to ask about pricing in PEO specifically. Could you talk about the pricing environment there? And also what percent of your PEO sales are conversions versus competitive bids?

Carlos A. Rodriguez

So I believe we have a significant amount of our PEO business that is referrals from our Small Business sales organization. We have a very large Small Business sales organization that is obviously selling payroll and other products. They provide leads to our PEO sales organization, which is a separate sales organization, but they work very, very closely and our intent is to share those leads. We've been as high as 50% of our business coming from either a combination of leads from our SBS sales force and/or existing clients that already are on an ADP payroll platform. So the synergies there are quite good. And I think what your second questions was around pricing and PEO?

Sara Gubins - BofA Merrill Lynch, Research Division

Yes.

Carlos A. Rodriguez

So pricing in the PEO. Again, we really look at our sales results as kind of a leading indicator of where we are competitively. Clearly, execution is a factor in that. And I believe that our sales execution in the PEO has been particularly exceptional over the last couple of years. But I'm very comfortable with where we are price-wise because we're continuing to grow and we're continuing to grow our sales results in a very, very robust and positive way. So it feels to me like we're in a very good position in the marketplace. As you know in the PEO, it's not just about the pricing of our own service business, but it's also the pricing of our pass-throughs. And we believe that our workers' compensation and our benefit solutions, which are included in the bundle in PEO, that we are particularly competitive in those 2 areas when it comes to the outside market to our competition.

Sara Gubins - BofA Merrill Lynch, Research Division

Great. And then separately, this may be a simplistic question, but your guidance of pays per control for the full year of 2.5% to 3% versus what you've done in the first 3 quarters of the year, is there any reason to think that things should slow down in the fourth quarter based on the guidance?

Christopher R. Reidy

No. I think it's just the fact that we're starting to see that growth in the second half of last year, so it becomes a compare issue more than anything else. I think we're at about 2.9% year-to-date or thereabouts. So it's more of a compare issue than anything dramatic in terms of employee growth in our plans.

Operator

[Operator Instructions] Your next question comes from the line of Jim Macdonald with First Analysis.

James Macdonald - First Analysis Securities Corporation, Research Division

I just had 2 quick technical questions. The $25 million charge, was that in G&A? And can you tell me what the amount of capitalized software was?

Christopher R. Reidy

Yes. It is in G&A. And we don't normally disclose the amount of capitalization in that detail. But you can see it as a percentage.

Carlos A. Rodriguez

I think it's safe to say that our software and development expense would've gone up for the quarter instead of gone down. So I'm not sure that we can get exactly precise, but it probably would've been up $5 million to $10 million instead of down, I believe, it was $10 million.

Operator

Your next question comes from the line of Michael Baker with Raymond James.

Michael J. Baker - Raymond James & Associates, Inc., Research Division

Carlos, I was wondering if you could give us a sense of what you think the impact of health reform has been on the business in case we do get a strike down of the law at the end of June.

Carlos A. Rodriguez

Well, I think that our benefits administration business, I think, is in a very good position to, I guess, benefit from some of the changes in regulation. And actually a lot of parts of our business are in a very good position to take advantage. When you think about some of the upcoming changes as a result of the laws -- so as an example, one of the changes of the law is going to require, as part of the compliance, to be able to count the number at FTEs that you have. That's really going to require a time and attendance system, which we have. It's going to require having that time and attendance system be linked to your payroll system, which we have. And then it's going to require that both of those systems be linked to your benefits administration system, which we have in Workforce Now and in Vantage. So we believe that there's opportunities as a result of changes in regulation. That has really been ADP's, I guess, forte as responding to the compliance needs of our clients and to a changing regulatory landscape. And I think this is a big one. So these changes in law, I think, will create opportunities for us. So we are watching across the entire spectrum what the impact may be on our business. In the PEO, as an example, we need to make sure that our benefits offerings are competitive. If, in fact, the law isn't struck down and exchanges become a factor in the marketplace, we have to respond to that and make sure that the offerings that we provide are as competitive as the ones that are offered by the exchanges. But I think we see -- I'm not aware of any major downsides other than the competitiveness of our business in the PEO. But I'm not aware of any other major downside as a result of the law being struck down. And if the law isn't struck down, there are thousands and tens of thousands of pages of opportunity for ADP. By pages of opportunity, I mean, the complications of the regulation and the fact that large, medium and small companies are going to need help with that compliance. And that's where ADP performs the best.

Operator

Your next question comes from the line of Tim McHugh with William Blair & Company.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Most of my questions have been asked. But I was just going to ask on Europe. Can you give us a directional sense how the business progressed over the last -- if you look at over the last 4 or 5, 6 months, is it still getting worse? Or does it feel like you've hit a bottom at all during the last couple of months in terms of the demand trends and sales cycles throughout Europe?

Carlos A. Rodriguez

I think if you look at the pays per control figure in Europe, it's hard to tell because it has been up and down. But it's not up. It's worse than it was 6 months ago, but it hasn't kind of fallen precipitously either. So part of the issue in Europe that it's difficult. We talked about the restructuring charge, it's difficult to restructure and reduce costs in Europe. That also tends to cushion during these types of situations what happens with employment. In other words, you typically don't have mass layoffs and major decreases in employment. They tend to take longer to play themselves out. So it is possible that there is more to come in terms of pays per control situation in Europe. But what's still refreshing for me is the fact that our sales results are, I would call it, holding up, which is, I think, a good sign.

Operator

Your next question comes from the line of Mark Marcon with Robert W. Baird.

Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division

Two questions. First, can you talk a little bit about the plans for Vantage just in terms of what you would expect as the next fiscal year unrolls and unfolds, how many clients you would hope to get on it and what percentage of the national client base would transition?

Christopher R. Reidy

No, we're not going to track the number of clients on Vantage. Just think about it, Mark, as that is the platform going forward. So when we talk about human capital management, Vantage is the offering that is a complete package of human capital management offering, so payroll and time and labor management and benefits and HR and talent management, et cetera. So that is the bundled package.

The best way to track Vantage is tracking National Account sales. And that would be the metric you want to watch. So as we get traction in Vantage, you'll see that just like you saw it with RUN in the Small Business space and Workforce Now in mid-market.

Carlos A. Rodriguez

This clearly takes longer, so we will clearly try to provide some color over the next couple of quarters. But I think in this business, it's particularly difficult to get into very specific comments about individual clients because it's very lumpy and it's very volatile.

Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division

Understood. Just wanted to get a sense for whether it was tracking along your expectations or there are things that you need to do to fine-tune it.

Christopher R. Reidy

And it is. It's just early in the process.

Carlos A. Rodriguez

I think it's fair to say it's tracking according to our expectations. And again, the good news about Vantage is, again, it is a true SaaS product, which is [indiscernible] and so we do have enhancements that, as we speak, I believe, are either being rolled out or will be rolled out shortly, which will enhance, I think, the offering even more. And you'll see more of that from us in the future, where we will have rapid releases every 3 or 6 months, not every several years.

Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division

Great. And then with regards to the margins for the ES segment, you basically indicated they're going be flattish for the entire year, which implies a fairly significant increase in Q4. Can you give a little bit of color with regards to the drivers particularly overcoming some of the drag from some of the acquisitions?

Christopher R. Reidy

Yes. As you said, there was a big drag from acquisitions of about 90 basis points in the quarter. But it's consistent with what we've been saying all year that we did have some spending in the latter half of last year that we would lap going into the fourth quarter. And that's the biggest driver. So it's now -- the compare is a little bit more on an apples-to-apples basis. And that's consistent with what we've been saying throughout the year. And I think I'd just reiterate that the fact that we're able to overcome that 90 basis points of drag in the acquisitions at the ES level shows that we're driving some stellar margin improvements for the year in ES. And that's a demonstration of the leverage that we've had. And again, it's more than what we traditionally are able to drive. We typically go for 50 basis points, and I think we're outperforming that. And I think that demonstrates a real focus on trying to get process efficiencies, et cetera.

Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division

Completely agree. Just I keep getting questions about it from various investors. Could you just remind for the people who are on the call, for their benefit, some of the increases in the investments that occurred last year in the fourth quarter?

Christopher R. Reidy

Yes. So I think we talked a little bit about that on the last quarter's call and specifically talked about some sales increases, some investment in R&D, service increases. So each one of those areas increased last year. And I think rightly so, we said we wanted to invest in the business and make sure that we had enough people to support the growth that we saw coming, and the growth has come.

Operator

Your next question comes from the line of John Williams with UBS.

John T. Williams - UBS Investment Bank, Research Division

Just 2 quick questions. Number one, just want to get an update on your thoughts surrounding the dividend payout ratio and maybe a little bit more on your capital allocation priorities as they stand now.

Christopher R. Reidy

Great. I think one of the things, if you look back over the years, our dividend payout ratio has gone up significantly. And 10 years ago or thereabouts, we were looking at mid-20s kind of payout ratio. And even 5 years ago, it was a whole 10 basis points lower than it is. We're now in the 55% payout ratio. And so that's been increasing every year. As you know, in November, we were happy with the increase of 10% that our board approved. So we've been creeping that up. I think we're right in the zone of a range that we're comfortable with. And I think it continues to be something that we do in terms of returning cash to shareholders, like the share buybacks, which have been very consistent over the last couple of years as a way to drive cash back to shareholders. Our target is to try to stay in that zone of $1.5 billion-ish kind of cash. And as you can see this quarter, we're a little bit higher than that. It can be lumpy depending on acquisitions, et cetera, but I think the way to think about the target is to continue to have that $1.5 billion and returning the rest through share buybacks and dividends.

James Macdonald - First Analysis Securities Corporation, Research Division

So all in all, it sounds like not much different from your prior.

Christopher R. Reidy

No. It is consistent with what we've said in the past.

James Macdonald - First Analysis Securities Corporation, Research Division

Okay. One just other quick question, if I could. Just the interest on funds, I noticed you narrowed the guidance range there for the decline. Is that just a function of being late in the year? Or is there something we should read into that?

Christopher R. Reidy

Yes. I think it is later in the year. And we've got 2 months to go. So that's the primarily driver.

Operator

We have time for one more question. That question comes from the line of Tien-Tsin Huang with JPMorgan.

Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division

Just first on PEO. I thought I heard Carlos, he said that the outlook is still good there. I'm curious what's driving some of the sales, and geographically, any differences that we need to think about.

Carlos A. Rodriguez

Well, one of the -- again, starting off with places we still need to watch, we, I think, mentioned in our comments that Dealer does have some exposure to Europe, as our Employer Services business does. So we're keeping an eye on that. And I would say that the results there are not as robust as in North America and in our digital marketing businesses. But the fact of the matter is that it's a very good environment, so the backdrop is very positive. So car sales are back over 14 million on an annualized basis. I believe that's 10% or 11% growth over the prior year. We continue to see positive surprises through the vehicle growth. And even though a relatively small part of our business is directly linked to volume of car sales, clearly, the ability of our dealerships of our clients to generate additional revenue and to grow allows them to invest in hopefully products that will enhance their productivity on a go-forward basis. So it's just a much better, I think, backdrop and environment than it was obviously 2 or 3 years ago. And we really don't see anything on the horizon that would indicate any change in that. So that's why we continue to be positive, I think, and opportunistic about our Dealer business.

Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division

Okay. Good to know. And just quickly and just last one, just a clarification. The 3.3% of pays per control, obviously very good. Is that adjusted at all, Chris, for leap year? I'm just curious how clean it is.

Christopher R. Reidy

No, it would include -- I mean, it's same-store sales. So it's this same client this year versus last year. I don't think leap year would really have too much of an impact on that, so it's very positive.

Carlos A. Rodriguez

I want to thank everyone for joining us today and for your questions. As you heard, we're overall very pleased with the third quarter results, and we're obviously on track to achieve our full year guidance. I hope that all of you will join us for the half-day conference the morning of May 24 at The Roosevelt Hotel in New York City. We've got some great feedback last year on the product demos, and we'll be showcasing our latest solutions again this year. So we hope that you'll all be able to join us. Obviously, the conference will be webcast for those of you who can't make it. But we hope you will be able to join us. And I thank you again for joining us today.

Christopher R. Reidy

Thanks, everyone.

Operator

Thank you, everyone, for your participation today. This does conclude today's conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Automatic Data Processing's CEO Discusses Q3 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts