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

Jason Kupferberg - UBS Kartik Mehta - FTN Midwest Securities Corp. James Kissane - BAS-ML Julio Quinteros - Goldman Sachs Kelly Flynn - Credit Suisse First Boston Rod Bourgeois - Bernstein Glenn Greene - Oppenheimer & Co. Michael Baker - Raymond James David Grossman - Thomas Weisel Partners Franco Turrinelli - William Blair & Company, LLC Gary Bisbee - Barclays Capital Tien-Tsin Huang - J.P. Morgan Mark Marcon - Robert W. Baird & Co., Inc.

Good morning. My name is [Carol] and I will be your conference operator. At this time, I would like to welcome everyone to the Automatic Data Processing, Inc. second quarter fiscal 2009 earnings conference call. (Operator Instructions) I will now turn the conference over to Elena Charles, Vice President of Investor Relations. Ms. Charles, please go ahead.

Thank you and good morning, everyone. 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 our fiscal 2009 second quarter earnings call and webcast. A slide presentation accompanies today's call and webcast, and it is available for you to print from the Investor Relations homepage of our website at ADP.com. Just to remind you, the quarterly history of revenue and pre-tax earnings for our reportable segments has been posted to the IR section of our website, and these schedules have been updated to include the second quarter of fiscal 2009. 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 Gary for his opening remarks.

Thank you, Elena. Good morning, everyone. I'd like to begin today's call with some opening remarks about our second quarter, obviously including the current economic environment, and address how we see this affecting ADP as we look ahead. Now I'll turn the call over to Chris Reidy, our CFO, to take you through the detailed results, and I'll return a little later to provide you with an update to our fiscal 2009 forecast. Then I'll give you some concluding remarks before we take your questions, as usual. Overall, ADP posted good results for the second quarter of fiscal 2009; however, new business sales continue to be weaker than a year ago. I'll come back in a few minutes to talk more about sales with some more detailed commentary. Our revenues grew 2.5% for the quarter. Pre-tax earnings were up 7%. Earnings per share grew a strong 11%, excluding last year's favorable state tax settlement of about $0.02. All in, very solid results for the quarter despite the economic headwinds. That being said, the economic situation continues to be very challenging and we don't see that changing much for the remainder of fiscal 2009. Over the recent days and weeks, the media has been reporting layoffs of thousands of employees at a number of companies across the U.S. I think it's worthwhile at this time to spend a minute or two on that subject and how it relates to ADP. You saw in our press release this morning that our pays per control same-store sales metric in Employer Services turned negative in our second quarter, down 0.6%. I'm sure many of you are surprised by that slight of a decline given the rise in unemployment levels and announced layoffs. Our pays per control metric does not decline as sharply as unemployment may rise for a couple of reasons you may have heard me state before, but I think they are worth repeating. First of all, companies that outsource generally tend to be growing, healthier companies overall. Also, ADP's client base does not in any significant way include large scale heavy manufacturing, which has been particularly impacted of late. And there's usually also a period of ongoing severance payment post-separation that is reflected in our pays per control metric that we report every quarter. I also want to remind you that ADP's sensitivity to a 1% change in pays per control is about $15 to $20 million in annual revenue - certainly higher margin revenues, but the impact is not something a $9 billion plus company like ADP can't manage through. It also may be helpful for you to look back at our revenue waterfall chart from our last earnings call to see the impact relative to other revenue drivers in our overall growth. Having said that, any period of sustained high unemployment does not signify a healthy economy, and a challenged economy is where we see an impact, as do all other companies. Most notably impacted at ADP is the selling environment. As you read in our press release, the dollar volume of new business sold during the second quarter declined 13% from last year's second quarter and we are now down 11% year to date. Despite this challenging environment, we are holding our forecast for the year to be down about 10%, which means we are still selling over $1 billion in new annual recurring revenue this year versus the $1.15 billion that we sold last year in fiscal 2008. As you read in the earnings release, Employer Services' client retention declined 0.5 percentage points year to date from record levels a year ago - still extremely strong retention at well over 90% as of December 31st. But we did see an increase in out of business losses in the second quarter, and we are appropriately cautious in our forecast about the impact for the full year. As you know, January's a very critical retention period for ADP and early indications for the month indicate retention was better than our expectations, but did decline compared with a year ago as out of businesses continue to increase over last year. Let me move now to Dealer Services, which, as you well know, is certainly being impacted by the slowing economy and the difficulties of the auto sector. New car sales have declined significantly and consumer credit remains quite tight for new car loans, resulting in increased dealership consolidations and closings. This is putting continual pressure on dealers to reduce costs, which is obviously having a direct impact on our results. Despite the very onerous challenges, I believe that the results achieved by Dealer Services in this environment are actually quite remarkable considering the state of the economy. You may also have seen in our press release a few days ago that Dealer Services announced the acquisition of Automaster, a leading DMS provider in Finland. With Automaster's established footprint in many markets including the Nordic region, Central and Eastern Europe, and Russia, this is clearly an acquisition that complements our strategy for international expansion. So to summarize my opening comments, despite the stronger than anticipated economic headwinds, we achieved very solid results in the quarter across ADP. With that, I'll turn it over to Chris to provide you the details on our results.

Thanks, Gary, and good morning, everyone. We're on Slide 4, and as you just heard, total revenues grew 2.5% to $2.2 billion. Unlike the first quarter where revenue growth was assisted by favorable foreign exchange rates, the U.S. dollar strengthened and negatively impacted revenue growth by nearly 3% in the second quarter, as we had anticipated. And as you will hear a bit later in our presentation as part of our full year forecast, we expect that FX will work against us the rest of the year as well. Pre-tax earnings grew 7% and net earnings grew 3%, while earnings per share from continuing operations increased 7% to $0.59 a share. Both net earnings and earnings per share growth were impacted by a favorable income tax settlement in last year's second quarter. Excluding this amount from a year ago, net earnings grew 8% and earnings per share grew 11%. We continued to repurchase shares, buying back 5.1 million shares for just over $190 million in the quarter and 11.1 million shares fiscal year to date for over $450 million, reflecting our long-term optimism regarding ADP and consistent with our ongoing commitment to return excess cash to shareholders. Now let's turn to Slide 5. This slide should be now familiar to you and I particularly like this slide because it provides a clear and succinct view of the overall impact of our extended investment strategy for the client funds portfolio. As shown on the slide, this strategy includes interest on funds held for clients, corporate extended interest income, and corporate interest expense on our short-term financing. I think it's important for the current state of the financial markets to remind you that the safety and liquidity of our client funds continue to be the foremost objectives of our investment strategy. Client funds are invested in fixed income securities in accordance with ADP's prudent and conservative investment guidelines. Our strategy is to ladder and extend the maturities of our client funds. On days when inflows of cash from clients and maturing investments are lower than the days cash obligations, we may choose to borrow short term to satisfy client fund obligations. This extended investment strategy allows us to temper the effects of interest rate fluctuations and average our way through an interest rate cycle. You can see that the yield on the client funds and corporate extended balances at 4.2% and 4.3%, respectively, held well compared with the year ago period. This chart also shows very clear the significant favorable impact from lower borrowing costs, most notably 0.7% on our average commercial paper borrowings compared to 4.6% in the second quarter last year. Average client fund balances declined in the quarter due to lower wage growth, fewer pays, lower bonus payments, and the negative translation impact of Canadian foreign exchange rates compared with a year ago. When you take into consideration the entire extended strategy, which includes the lower borrowing cost and the interest income on the corporate extended, the results are a $14 million P&L increase before tax or a 9% increase over last year. The $175 million of pre-tax dollars generated by this strategy in the quarter resulted in an overall yield of 4.9% compared with 4.5% in last year's second quarter. This shows the benefit of the extended, laddered strategy in a declining interest rate environment, with a positive impact to the P&L. Before we leave this slide, you may have noticed that the corporate extended balance and the commercial paper borrowings were higher in the '09 second quarter when compared to a year ago, while total client fund balances were lower. You will also see this for the full year when we get to Slide 10 for the full year forecast. Toward the end of fiscal 2007 and early fiscal 2008, we delayed increasing the size of the extended portfolio temporarily because of the inverted yield curve present at the time. We again started to build the extended portfolio toward the end of the first quarter of fiscal 2008 and continued to build through the first half of fiscal 2009, making the year-over-year comparables as you see them here. Now let's move to Slide 6, where I'll take you through the segment results. Employer Services revenues grew 6%, all organic. Revenue growth in our payroll and tax filing business in the United States grew 3% in the quarter. This is slower growth than a year ago due to slower balance growth, lower pay growth, and slower sales; however, we are still growing despite the difficult economy. Our beyond payroll revenues in the U.S. grew 10%, led by growth in our time and labor management solutions and HR benefits, which is the employees platform that we acquired early in fiscal 2007. ES's pre-tax margin expanded 160 basis points due to operating leverage, continued expense control and lower selling expenses from lower than anticipated new business sales. As you heard earlier, pays per control, which is our same-store sales employment metric, declined 0.6% in the quarter compared to the second quarter last year and is indicative of the rising unemployment levels in the U.S. Growth in the number of pays in Europe continued to be positive, though it is beginning to slow. Client retention declined 0.5 percentage points fiscal year to date, but it is still at excellent levels over 90%. The dollar value of new business sold declined 13% in the quarter for ES and PEO services on the continued weak economy and its impact on the sales cycle. To remind you, new business sales represents the expected new annual recurring dollar value of these sales and are an incremental recurring revenue to our existing recurring revenue base. Now turning to Slide 7, the PEO continues to grow, with 14% growth, all organic. Pretax margin was flat in the quarter as a result of higher pass-through costs. Average worksite employees increased 13% to approximately 193,000 in the quarter. Now let's turn to Slide 8. Moving on to Dealer Services, revenues declined just 1% in the quarter despite the incredibly tough market for the automotive industry, creating tremendous pricing pressures for the manufacturers and dealers. Dealer Services pre-tax margin increased 30 basis points in the quarter. While dealerships continued to close and the overall market is consolidating, Dealer Services has been effective at gaining market share. Dealer recently acquired Automaster, a leading DMS provider based in Finland. And as Gary stated earlier, this acquisition supports Dealer's strategy for geographic expansion. Before we leave Dealer Services, you may be wondering how Dealer's results are holding up as well as they are considering the significant challenges facing the automotive industry, particularly in the U.S., with the Big Three automakers and the news of dealership closings. Dealer also has a recurring revenue model - not as high as ES's, but most revenues are recurring in nature. Transactional revenues such as credit checks and vehicle registration are down as they are most impacted by the slowdown in new car sales. But they only make up about 10% of total dealer revenue. Our international business, which is about 30% of total Dealer Services revenues, continues to grow. There is a softening in auto sales in Western Europe, but many of the developing markets, such as China, are still growing, which helps us to continue to grow. The market is challenged, but Dealer Services' sales were very strong last year, so we came into fiscal 2009 with a solid backlog that we are implementing this year. And in the North American marketplace, Dealer has successfully increased sales of solutions such as CRM, IP telephony, and digital marketing and advertising that help dealers find and retain customers and increase efficiencies. We're not minimizing what is going on in the auto industry, but Dealer Services is gaining share in the challenged North American marketplace and we believe it will be well positioned when the markets become more favorable. Now I'll turn it back to Gary to take you through the updated forecast for fiscal 2009.

Thank you, Chris. We're on Slide 9 for those of you that are following along. Before I get into the numbers, I want to let you know that this forecast reflects the difficulties present in the economy today and we are assuming no change, positive or negative, in the current economic environment in this forecast. As you know, this is an incredibly challenging environment and I am pleased that ADP continues to grow despite these significant headwinds. Our forecast is for the most part unchanged from our update to you last quarter. We are confirming our 2% to 3% revenue growth forecast for the year, albeit, as Chris mentioned earlier, negatively impacted by about 2 percentage points from unfavorable foreign exchange rates as the dollar strengthened. For Employer Services we continue to forecast about 5% revenue growth, PEO Services, 14% to 15% growth, and flat to slightly down revenues for Dealer Services. I'd like to point out that the Dealer Services forecast does include revenues of about $7 million from the European acquisition of Automaster that we announced in late January. We've also updated our pre-tax margin forecast. For Employer Services we anticipate about 100 basis points of pre-tax margin expansion and we continue to anticipate up to 50 basis points of margin expansion for the PEO. We are confirming our sales forecast for Employer Services and PEO Services combined. As I stated earlier, the sales environment continues to be tough and we continue to forecast about a 10% decline this year. But again, to remind you, we remain on track to add over $1 billion in new annual recurring revenues. For Dealer Services we anticipate the pre-tax margin, including the announced acquisition, will be flat compared with a year ago versus our previous forecast of up to 50 basis points of margin expansion. I am pleased to confirm our earnings per share growth forecast of 10% to 14%, up from $2.18 per share from continuing operations in fiscal 2008, which again, to remind you, excludes the gain on the sale of a building in last year's fourth quarter. Consistent with our practice, there are no additional share buybacks contemplated in the fiscal 2009 guidance, though it is our intent to continue to repurchase ADP stock depending on market conditions. So a solid forecast, despite the headwinds from the tough economy. Moving to the next slide, Chris will now discuss the '09 client portfolio forecast, then I'll come back with some concluding remarks and we'll be happy to take your questions.

Thanks, Gary. We're on Slide 10 now. This slide gives you the full year view, which is basically unchanged from the forecast we provided on last quarter's earnings call. I would focus your attention on the P&L impact on the lower portion of the slide. When you take into consideration the overall extended investment strategy, which is shown on the last row of this chart, the anticipated year-over-year P&L impact is less than one might have assumed given the precipitous decline in rates. The client and client funds interest income is partially offset by the increase in the client extended interest income and significantly lower borrowing costs. The net result is a $5 to $15 million [per year] year-over-year decline or $0.01 to $0.02 per share, and the change from our last forecast is less than $0.01. The overall yield when calculated at 4.4% is flat with the '08 overall yield. With that, I'll turn it back to Gary for some concluding remarks before we go to Q&A.

As I look at the results ADP has achieved through the first half of fiscal 2009, I am pleased that ADP continues to grow both revenues and earnings despite a very difficult economy. As I said to you last quarter, I'm not satisfied by ADP historical standards. But ADP is actually doing well relative to the pressures on the global economy today. And, while we are anticipating the rest of fiscal 2009 will remain challenging, our fiscal 2009 forecast reflects very solid growth. This business has tremendous scale and, as you know, we have undertaken cost containment measures while we continue to invest in client-facing resources and in new products and services. Several recent examples are our new health and welfare service engine, which offers real-time integration to enterprise payroll for large clients. The early results of this new product are quite encouraging, with 83 live clients and, most importantly, 118 in the backlog. Our new major accounts portal, which will be released in the near future, features a highly improved client experience which includes universal access, unified navigation and integrated employee and manager self-service. And we continue our investments in scaling GlobalView for our large, multinational clients and prospects. I'm particularly pleased with our prudent and conservative investment strategy for the client funds portfolio, which obviously has served us quite well, and we remain committed to returning excess cash to our shareholders, as clearly evidenced by continued share repurchases. Additionally, as I'm sure most of you know, ADP did increase its dividend 14% effective January 1, 2009. And to remind you, this represents the 34th consecutive year of dividend increases at ADP. I know most of you are familiar with ADP's highly successful business model, but I think it is worth repeating. As I close, I would remind you that our model has tremendous scale advantage. Our revenues are 90% recurring in nature. Our average client stays with for 10 years or more on average. We have excellent margins, with strong and consistent cash flows, and our capital requirements are very low. ADP is one of only six non-financial U.S. companies rated triple A by both major credit rating agencies, and the markets we serve are under penetrated and still growing. ADP is a great company with a strong franchise, and as we continue to execute successfully against our five-point strategic growth program, I remain optimistic about ADP's long-term opportunities for growth. With that, I'll conclude and turn it back to the operator, and we'll be happy to take your questions.

(Operator Instructions) Your first question comes from Jason Kupferberg - UBS. Jason Kupferberg - UBS: So now that the fiscal 2009 is essentially halfway over and understandably most investors focus is starting to turn to fiscal 2010, I know it's too soon for you guys to provide official fiscal 2010 guidance but can you give us some kind of framework to think about how the top line growth trends might look directionally next year versus this year, just as we look at some of the new sales trends, obviously the pays per control weakening, the client retention getting a bit softer. I know you provided the waterfall chart last quarter, but if you can help us think through some of the directional changes that you might expect to observe in the business as these leading indicators play out, that would be helpful.

I think there's a couple of things you need to think about. Obviously, we're not in any position to give forecasts for fiscal 2010, but I think there are some things that are obvious. One is the environment continues to be tough; I don't think that's going to change in the next four or five months as we go into fiscal 2010. I think our execution has been terrific in terms of new business sales, with over $1 billion despite the environment. So as I look into fiscal 2010, I would be surprised if we went below that low-water mark as we think about growing the business for next year. I think we're still going to be able to get price increases, particularly for accounts that we discount; get them started as we look ahead. Clearly, our retention rate is north of 90% as we make the turn, and although I expect some continued pressure, I don't think we're going to see a big step back in retention either this year or next year even though I think it will be down from last year's rate. So when you look at that all together, I think clearly it will be a challenging environment, but still one that has growth and absolute performance that's pretty darn good. Jason Kupferberg - UBS: And just a quick follow up on that. As you mentioned, the year-to-date new ES sales are down about 11%, and you're looking for it down about 10% for full year, so I guess you're actually looking for a little bit of improvement, if the math is right there, for the back half of the year. I know that your year-over-year comparisons are easier but, aside from that, can you talk about what's in your pipeline or your close rates or anything to help us understand the visibility that you might have on achieving the down 10% for the full year?

Sure. First of all, you're absolutely correct - the compares in the first half are much more difficult than they were in the second half. Secondly, our prospective business tracking in terms of potential clients and prospects is absolutely the highest level I've ever seen them despite the economy. I think thirdly, we're not going to be faced with basically the crisis environment, hopefully, that we saw in October and early November that basically just froze decision-making around the globe. So the absolute headcounts, where we are, the environment - we can sell in a tough environment. It's just difficult to get decisions like we had in October and November when literally the world is in almost a crisis mode and everybody's spending all their time every day watching CNBC rather than running the business. So I think the environment, even though tough, is actually a little better than it was in the second quarter. We do have an easier compared, and the product set is still very fresh and I have a pretty good confidence level that we'll be at or around that number that we forecast. Jason Kupferberg - UBS: The ES margin guidance coming up, 50 basis points for the full fiscal year, can you parse for us individual drivers? I know you mentioned some of the factors in the press release that drove the year-over-year increase in Q2 specifically, but I wanted to get a sense of what the specific sources on a relative basis are in terms of the full year picture.

Probably the two or three single biggest things are I think ADP was fortunate that we saw this happening back in the March/April timeframe and we began to tamp down our expenses in the fourth quarter of '08. So consequently, we stepped off into the first quarter of '09 with a very solid expense structure, and we have been very conservative in how we add to that expense structure since that time. Secondly, our revenues, despite the FX challenges, have held up very well, and so as a result, the incremental margin contribution from the revenues holding up is great. And regrettably, our selling expense is less than planned because I'd sure like for it to be back at plan. So I think as you think about that - I don't know, Chris, you may have something else.

I'd just like to add that you'd have to go back, Jason, to the fact that we were at the end of the first quarter when we said it was at least 50 basis points. I don't want to imply that it went from 50 to 100 in the quarter. It's really more where we are in the year and what our visibility through the rest of the year is. With that, everything that Gary said is the drivers of it. The only other point I'd make is back to your sales in the second half. We do, although not completely closed, we do have some good visibility to January as well, and we were pleased with the January sales results, which is a big selling month for us.

Your next question comes from Kartik Mehta - FTN Midwest Securities Corp. Kartik Mehta - FTN Midwest Securities Corp.: Gary, I wanted to get your thoughts on the Dealer business and maybe, as you look forward, what could happen to margins. Obviously, you talked about the tough environment we're in, at least in North America. So I guess a two-part question - one, I wanted to get your outlook for what you anticipate in that business from a growth or a contraction standpoint, and two, the impact of that on margins as we move forward.

Well, you've obviously heard our margin forecast for the full year. Some of that's tamped down by the acquisition expense. Secondly, we have been very judicious in terms of headcount in Dealer, getting out in front of the curve in terms of what's happening there. In a tight revenue environment like they're in, in a slight declining environment which may continue for some period of time, very difficult to improve margins in that environment. That being said, we're continuing to sell internationally, continuing to sell in the U.S. at a reasonable rate, so I expect status quo that margins won't be materially impacted either way. Now the caveat in all that is depending on what happens with GM, Chrysler and their plans and what the federal government does in terms of their loans. If they decide to do major closings, short term versus over some extended period of time, that's kind of the wild card that we really can't project. I've put a ring around that, basically kind of saying that if GM were down 20% in dealers or Saturn were to close, it could cost us $20 to $30 million in revenue, but my guess is that's going to be over a multiyear period and there are commitments and franchise laws and contracts with us that have to be dealt with as you go through that. So I'm sure that won't be a whole lot of fun, but it's certainly not going to be something that's going to cause us a significant downward pressure other than the kind of numbers that I talked about. Kartik Mehta - FTN Midwest Securities Corp.: So, Gary, would it be fair to say based on kind of what you're seeing now, even if there is a decline, the decline will be a little bit slower, not this just kind of falling off of a cliff that sometimes is anticipated?

You've got to remember, you know, Chris talked about the recurring revenue model in Dealer, and a good way to think about it is 80% plus kind of recurring revenues. Only 10% of those revenues are driven by transaction businesses, like vehicle registration or credit checks. But believe it or not, things like credit check are only down like 10% year-to-year because people are doing everything they can to get somebody qualified, so they're running multiple credit checks with multiple sources to try to get people through the system. And we are continuing to sell new business. Our international business is still growing. North America is down slightly. So all that being said, I think it's going to be tough, but I think we're going to get through it. Kartik Mehta - FTN Midwest Securities Corp.: Chris, a question on the float portfolio. Do you think there's any reason to change the manner in which you manage this, at least in the near term, because of current conditions, or the way you have it structured now can withstand what's kind of happening in the marketplace?

Yes, we're very comfortable with the float portfolio and the way we're managing it. We think this laddered strategy really takes the volatility of interest rates. And, you know, we used to talk about that hypothetically and now we've been through a period where you can see it in actuality, to be able to increase the impact to the P&L in the second quarter when short-term rates went from 4% plus down below 1%. It's absolutely terrific. We're actually seeing on the short-term borrowing rates we've had absolutely no problems with access to the commercial paper market at a time where arguably it was as stressed as it's every going to be, and I think that's a credit to our triple A and the fact that we do overnight type of commercial paper borrowings. And the rates that we're getting in commercial paper are terrific. You saw the average for the quarter was 70 basis points. That, in fact, believe it or not, is a misleading because it was higher in October than it was in November and December, and in January it's less than 20 basis points. So that's been terrific. So we're very happy with the laddered strategy. It's really taken a lot of that volatility out. Couldn't be more pleased. Kartik Mehta - FTN Midwest Securities Corp.: You talked about an increase in businesses going out of business and that's had an impact on retention rate. I was just wondering if you can compare today what's happened to percentage of business going out of business, impact that to retention versus six months ago, if there has been a change?

I mean, there's an increase but, again, nothing's fallen off the cliff, you know? We're still over 90% retention through the first half. It's just we're seeing a little bit more this last quarter than we've seen in previous quarters. But again, you should interpret that as a falling off the cliff. Companies have to pay their employees, and we're usually the last thing to go if there's a problem there. But that being said, there is more than what we've seen historically. It's probably a bigger issue in the Dealer business because you have a good bit more of them going out of business. And again, we're out in front of that curve in terms of reserving and making sure that we're appropriately covered there. But again, it's not, but it's again not falling off a cliff.

Your next question comes from James Kissane - BAS-ML. James Kissane - BAS-ML: In the release you talked about pricing sensitivity impacting your retention rates, but then, Gary, you said that you'd be able to push through price increases this year. Can you kind of talk about the pricing environment generally?

The pricing environment probably is as tough as I've ever seen it. In the Dealer world, one of our biggest factors in terms of losses is dropped applications because the dealer's using us for 12 applications, he's looking to cut costs and he's willing to give up some things in order to cut that cost. So the biggest pricing sensitivity we've seen in Dealer is not necessarily against the competition, but against just the cost burden that the dealer has every month. In the ES environment, we're not the only one that's affected by this difficult economy, so all of the major competitors as well as the local competitors are being what I'd call frisky around pricing. And so a lot of folks, to get a deal are giving away setup or implementation costs or they're giving a couple of months free to get people up and going. But again, it's not anything that's precipitous. It's just down from what I've seen in previous periods. James Kissane - BAS-ML: So the recurring customers, you would be raising prices in line with where you've done historically?

I think it's going to be tougher to do that, Jim, than we've seen in past periods, but it's not uncommon for us to give somebody a 10% or 15% discount to get started versus our quoted price or if we're trying to unhook them from a competitor. So to go back to somebody that you have a 15% discount to to get started and raise their price 5% is not unreasonable. James Kissane - BAS-ML: And, Gary, can you give us an update on GlobalView, you know, the sales progress there, the implementation progress and when you think you'll get to breakeven?

Well, I think the good news in GlobalView is that the backlogs are quite large and we've got lots to do for this year. I think the bad news in GlobalView is it's probably the place that has been most impacted by the freeze in corporate decisions around the world, not just in the U.S. So their new bookings are down significantly. We still have a good backlog. We're still getting business. But it will certainly delay the profitability of GlobalView for probably another year than what our previous estimates were. James Kissane - BAS-ML: So is that contributing to the bigger swings in your new sales declines or growth?

No, I think the way to think about it, Jim, is that in the middle and the low end of the market you can kind of - I call it slugging your way through the process. It's tougher to get a deal. It may be a little less price. But you can get it done. When you get to the high end of national accounts in North America or at GlobalView, if you're one of the global technology companies or financial services companies or global manufacturing companies, there's just a freeze on spending. And so we're seeing kind of, call it, 5% to 10% drag in the low and the mid-size market, but we're seeing 10% to 20% drag in the high end of the market because guys like me or guys like Chris are just saying no.

Your next question comes from Julio Quinteros - Goldman Sachs. Julio Quinteros - Goldman Sachs: I just wanted to go back to some of those comments you just made about the state of the world as far as enterprise spending is concerned, and I guess, specifically, are clients at this point done with sort of the normal paralysis or delays and freezes on the more discretionary or any IT development issues they might have been sort of focused to and have they moved more towards outsourcing? In other words, are you seeing sort of that shift away from kind of the normal paralysis into some real decision making at this point or is it still a bit early to sort of assume that?

There's a lot of receptivity to outsourcing, so that is a positive for us. But the return on the investment for the conversion is being worked to a fare-therefore-well, so they're really tight on pricing and returns. But the appetite to outsource is clearly still there because a lot of these big companies, particularly as they have expanded internationally, have got real cost challenges themselves.

And I would agree with you, Julio, that there is a paralysis that goes on and then you kind of go into a stage of more appetite for outsourcing. And I think I could fairly say that the paralysis is still there. I don't think we've begun to see us come out of that yet. But you would expect to as you start getting a little bit more confidence. So we're not there yet, but I think when that begins to happen you will begin to see the dynamics of the move to outsourcing. Julio Quinteros - Goldman Sachs: And then just real quickly on the margins front. I think you talked a little bit about some of the drivers for the current quarter and for the rest of fiscal year '09, but again, as we think about fiscal year '10, what are the sort of normal drivers that we should think about and is there anything incremental that you guys will plan on doing into fiscal year 2010 potentially to help continue to drive margins or is this just more of the same natural scale in the business?

Well, I think there's a lot of natural scale in the business, but I can assure you that we will be very tight on headcount. We will get revenue growth - the question is obviously how much - but that revenue growth will be highly incremental because headcount and variable costs are either staying flat or going down. We're being very tight in terms of merit increases and those kind of issues. We're working on a lot of productivity improvements. Hopefully our sales expense next year goes up, which would obvious be the intention. But again, I think it's more of the same with the kind of things I just mentioned.

And I think we'd also continue some of the programs that you've heard us talking about before just in a bigger way, some of the smart shoring and offshoring that we do of the data center consolidation will continue in pockets and we'll see that kind of stuff. Telesales will continue to be a growing way of doing business. So you'll continue to see those things, which are things we put in place years ago that are paying dividends now and will continue to pay dividends particularly as we grow in the future. The one point around next year that Gary alluded to earlier, obviously as sales begin to pick up, sales commission starts picking up and that puts pressure on your margins as well. But we'd be thrilled to see that happen.

Your next question comes from Kelly Flynn - Credit Suisse First Boston. Kelly Flynn - Credit Suisse First Boston: I just wanted to ask you to elaborate on what you said in the Q&A about thinking things maybe have gotten a bit better versus the frozen state they were in, I guess, a quarter or so ago. Can we infer some optimism about the direction of the economy from here or maybe could you just give us a little more color on that?

Yes, Kelly. What I was referring to there was I've never seen a sales environment as frozen as it was in October when the markets went freefall and a lot of conjecture around the financial services industry, etc., and that continued through the first parts of November. We had an improved result in January, as an example, over our year-to-date [remarks] because we know how to sell in a tough environment. But again, when you've got a market in free fall and people are just frozen watching CNBC, it's hard to get anything done. And that's really what I was alluding to.

You should not take from anything that we've said thus far that there's any high level of optimism. I mean, we're in a touch economy and we see that continuing for the rest of the year. Kelly Flynn - Credit Suisse First Boston: Can you talk about maybe market share gains you might be seeing relative to some of the smaller players and any dynamics on that front that might be relevant?

I don't think there's anything that's material there versus where we've been. We're clearly gaining market share in the Dealer world, both internationally and domestically. And I think we're continuing to do business as usual in the North American segment. Kelly Flynn - Credit Suisse First Boston: On pays per control, can you help us with any forward guidance on where that might trend, specifically addressing the point you made at the beginning about severance still being reflected in those numbers. Does that imply that as severance rolls off you should see a significant deterioration in that figure?

Well, let me take a stab at that. What we have - year-to-date it's about flat and we would expect it to go to about 1% negative for the year, which implies a 3% average decrease over the second half of this year. Now we have looked out and stressed our guidance up to a 3% for the full year level and that would imply a 5% decrease in the second half of this year. So our guidance contemplates both of those.

Your next question comes from Rod Bourgeois - Bernstein. Rod Bourgeois - Bernstein: Gary, on the pricing front, can you characterize how widespread the pricing challenges are? I mean, I'm assuming it's mostly on new deals. Is that true and is it across all segments or mostly at the low end of the market?

Let's talk about existing clients for the moment. On the high end of majors and the high end of national accounts and internationally, almost all the clients have contracts, so there's really not a pricing negotiation that goes on there except when those contracts are renewed. But that's kind of business as usual. In the low end of the market and in majors where we don't have contracts, we're constantly and again, this is not new news - our client base is constantly attacked by regional competitors as well as the major competitors. So I'd say the environment is higher than normal, but again, not precipitous. And our client services people and our general managers who run our local regions are fully empowered to do what's appropriate to retain a client, including lower his price. So as long as we know about it, we can generally deal with it. Occasionally we have clients who just leave without bringing it to our attention and those are usually over a pricing environment. In the new deals I would say we are seeing probably the highest level I've seen in terms of discounting in terms of setup and a few months free to get things up and going. I'd say that environment is pretty widespread, with both the national folks as well as the regional folks, and I expect it's going to continue for awhile.

When Gary mentions the few months free, I would want to point out that typically what we do is require a couple of months paid, then a couple of months free, then a couple of months paid. We like that model because it gets the customer used to paying us. We have a track record, no turnover, and then we give them a couple of months free.

And again, Rod, this has been going on for awhile. It's not something that just happened last week. Rod Bourgeois - Bernstein: I noticed that you're offering a six months for free plan for certain groups of clients. Is that fairly new? And when you book a deal under a six months for free plan, what do you do with the bookings? Do you book bookings for that or do you wait until the first six months are over?

First of all, that was a one-off anomaly that you somehow stumbled upon, and so that's not any kind of a national program that we have regardless. It wouldn't be surprising to me if we had larger clients that were signing up for five or six-year contracts that we gave them the first number of months free in exchange for a five-year contract. I'd probably do that all day long in this kind of environment. I don't know what the second part of your question was. Would you repeat it?

I think it was just how do you book that and again what I would point to, Rod, in that specific instance is it's not six months free. It's three months on, three months free, six months on, three months free, and we would accrue revenue ratably. We wouldn't do that all in one shot. So we're obviously accounting for that correct. But again, I would -

I think you'd just be billing it as it was billed.

Therefore the biggest point there is that is not a significant program - very, very rarely used and is not anything that I think you can take to indicate our getting more aggressive on pricing. And, you know, there's a lot of other competitors out there that have very similar programs, but also, again, oneoffs not typically used and not very significant in terms of how many deals close under a scenario like that. Rod Bourgeois - Bernstein: I guess the main thing on this, is the pricing challenges you're seeing right now, which would seem somewhat above normal, do you believe, Gary, that this is mostly cyclical issues or are there some secular issues here with competition just getting generally more aggressive or is it combination?

Well, I think competition's more aggressive because if it's tough for us, it's tough for them, let me tell you. So they're being more aggressive than normal. I think that will abate in normal times. But from a product set standpoint, which would be the thing that would most concern me, I'm very, very comfortable with how we line up from a competitive standpoint. So we're not losing for feature functions. If somebody wants to give the store away and they want the deal bad enough, then they may get it. Rod Bourgeois - Bernstein: Chris, real quickly on the float, I noticed that your yield on your client funds, your assumption for fiscal 2009 is at 4% and I think that was the same assumption you had in place three months ago, but yields in the overall market have dropped meaningfully in the last three months, so I'm just trying to make sure I understand the math on how the guidance for the yield for fiscal 2009 is flat with where it was three months ago despite the drop in yields across the market.

Yes, well, there's a couple of things you'd have to look at and it's difficult for you to model this because you don't know much is coming due and how much is maturing, so that's one factor. And most of what we had maturing, the majority of what we had matured in the first half of this year, particularly in the second quarter, and the reinvestment rates in the second quarter were particularly high, so that's one factor. In terms of the short portfolio, we were also achieving good returns in the first half of this year. We do see a market drop off in that and I think we gave in our guidance that we would average around 50 basis points in the second half of this year. We achieved much higher than that in the first half of this year. So when you put all those things together, we yield the 4% despite rates in the short coming down because, again, most of our portfolio is locked in to the three - five-year kind of timeframes and those haven't moved and we have an embedded base. So that's really the beauty of the model. Rod Bourgeois - Bernstein: Just to make sure I understand, so the things that you had maturing in Q2 you were able to reinvest at higher rates?

In the second quarter you had the three and a half and five-year agencies over 4% or in the neighborhood of 4%. So that has come down significantly since then, but fortunately we don't have a lot of maturities.

And you had high quality corpus paying 5.5% and 6%

That's right. Rod Bourgeois - Bernstein: So are you doing anything in recent quarters or even today to sort of make your portfolio more conservative in light of the credit crisis or do you think you're past the need to do any of that?

We're very comfortable with the portfolio and we feel that it is appropriately conservative. One of the things I would specifically point to is commercial mortgage backs and people are concerned about those - obviously, a lot of press about those - and clearly that is a big part of our unrealized loss in the portfolio, which, by the way, the overall portfolio is a net unrealized gain, but the commercial mortgage backed piece is a drag on that. Now we've talked about the fact that the commercial mortgage backed that we hold are super senior triple A tranches. You know, it's easy to say that and I'm not sure people really understand what all that means, so let me just give you a little bit of color on that. Really, the principal and interest from the underlying commercial mortgages go first to that class, and if there are any defaults, it goes to that class first, so it's actually somewhat beneficial in the return of principal. It's a payment priority. So we have the first call on any income coming in, even before other triple A tranches, so it's a super senior triple A. Basically, you know, one insight I can give you is that on a weighted average basis across our entire portfolio, cumulative defaults would have to be in excess of 65% for the remaining life of the portfolio to negatively impact our position, and currently the default percent on underlying collateralization is in our portfolio 0.25%. So, with an average remaining life of three years, the annual default rates would need to be extremely high for us to realize any loss on that portfolio, so we feel that's very solid despite the concerns around commercial backs. So that's an indication of - it may sound like it's not ultra conservative, but we were ultra conservative in the tranches that we invested in, and I think that's indicative of our investment philosophy, while still earning a good return. So we're very comfortable with the conservative nature of the portfolio.

Your next question comes from Glenn Greene - Oppenheimer & Co. Glenn Greene - Oppenheimer & Co.: Similar to your commentary on the pays per control and your expectations embedded in your guidance, can you talk similarly about retention? What are you assuming for the back half of the year and what's your early view on how that may play out in '10?

We're basically covered up to a full point loss in retention, so I think at this point our best view is 50 basis points for the year going backwards, and worst case is kind of 100. But we're covered up to that 100 level. Glenn Greene - Oppenheimer & Co.: And how do you sort of see things playing our for fiscal 2010? Obviously, it's early but sort of given the bankruptcy trends we've seen, maybe some impact from pricing, what's your view? Does that get worse in '10 or better?

I'm sure there will be pressure, but again, I wouldn't feel comfortable making a forecast there anyway. But again, I don't see any significant difference that would really impact your model as you think about fiscal 2010. Glenn Greene - Oppenheimer & Co.: And then quickly on Dealer, similarly, I'm trying to get a sense if there's any kind of lag effect here given that '09 is benefiting from the good backlog you had entering the year.

We're continuing to sell at Dealer at pretty decent rates. The fortunate thing for us is our competitive unhooked level is very strong and although we're losing clients to out of business, as a general rule we're still maintaining a neutral position in terms of market share. And so I don't think that will materially change as we go into fiscal 2010. I think the wild care for fiscal 2010 is what's the timeline on what GM and Chrysler do, if anything.

Your next question comes from Michael Baker - Raymond James. Michael Baker - Raymond James: Gary, I was wondering if you could provide some color across your Employer Services segment, that being small, medium and large size employers, in terms of layoffs and out of business dynamics given the economy. Are you seeing any meaningful differences there?

It's pretty similar across the tranches. I'd say the one thing that's been a pleasant surprise in this environment is that if you went back historically, our losses based on layoffs and those kind of things was at the high end of the market. This time, because of the fact that we've got much broader market options in terms of the products we sell and the high quality companies that we're selling, that we're seeing less layoff effect at the high end of the market than we've historically seen like we saw in 2002 and 2003. So the layoff factors are about the same across the board, and we typically are going to see higher out of businesses in the low end of the market than you do in the high end of the market for obvious reasons. Michael Baker - Raymond James: In terms of the changes being contemplated to COBRA as part of the stimulus package, should we anticipate any meaningful impact to your business given that's one of your service lines?

Well, it will certainly help new business sales there because the coverage is longer. But again, COBRA is a relatively small part of our revenue stream and so even if it were up 10% or 15% or 20%, it wouldn't materially impact the numbers at the ES level.

Your next question comes from David Grossman - Thomas Weisel Partners. David Grossman - Thomas Weisel Partners: Gary, if I heard you right, I think you said that you could get some growth in fiscal 2010. If for some reason that didn't happen and the ES segment was flattish or even modestly down, is the expense structure configured in a way that you could still get margin expansion next year?

Well, let me first say I don't expect your scenario to be anything that we're talking about.

That's not a forecast.

Yes, that's not a forecast. But it's like I said earlier, our facilities, our headcount are equal to or less than last year and if for whatever bizarre reason we actually went negative, we'd certainly be looking at reducing those variable costs. All that being said, there's still some fixed costs that don't go away. But as long as we've got positive revenue growth, our ability to increment margins in the scalable model we have is very high.

I would just have to reiterate, too, something that we've said in the past, which is we don't intend in this downturn to cut into the bone because we really are very happy with the long-term growth prospects. And so we learned a lesson in the last downturn, where we cut into sales, service, implementation too deeply, and it took a little while to grow out of that. And so, despite this environment, I think you can assume that that's still our position. David Grossman - Thomas Weisel Partners: And just one quick follow up to that. You mentioned selling expenses, obviously, fluctuate with the new sales growth. How significant are those? I don't know if you've ever disclosed that as a percentage of revenue, but can you give us any framework to think about?

You know, I think a good way for you to think about it is $1 of new revenue costs us about $1 of sales and implementation expense.

Your next question comes from Franco Turrinelli - William Blair & Company, LLC. Franco Turrinelli - William Blair & Company, LLC: Chris, could you remind me, in the segment disclosure, what goes into other on both the revenues and the pre-tax line and maybe just comment on why the pretty significant year-over-year and sequential change there?

Sure I can. In other you would find things like - one is the client offset. Don't forget we give the units, the segments, 4.5% interest, so to the extent that we earn 4%, you would have a change there and that's where it goes, into the other. So in terms of other segment revenues, they're down about $66 million in the quarter. Essentially that was due to the FX because we assign the units standard budgeted rates and the offset goes into other. So that was the biggest driver. And then the second biggest driver was the client fund interest offset with the field getting 4.5% and the difference in the second quarter down to 4.2%. So those are the biggest drivers of the other segment. Some of the other things that typically go in there are interest expense; Credit Corp is in there; we have some eliminations, but that's about it. Franco Turrinelli - William Blair & Company, LLC: So we can look at those growth rates on both the revenue and pre-tax and they're essentially a constant currency, constant interest rate?

That's right.

A good way to think about it, Franco.

Your next question comes from Gary Bisbee - Barclays Capital. Gary Bisbee - Barclays Capital: If we were to assume or were using personally the view that interest rates are going to stay at their current levels for the next two years, how quickly would the yield on the client float portfolio decline or ramp down over the next two years, sort of fiscal 2010 and 2011? Obviously, you've done a great job of increasing the duration to push out that, but clearly you're going to at some point, if rates don't start going up, get hurt by the fact that rates are substantially lower. So are we looking at 50 basis points next year?

As a way to think about that, Gary, we've said in the past that about 20% of our portfolio turns in a year, so it doesn't happen quickly, but obviously, if it was five years of sustained, then it would come down to the current [break in audio] rate. But in the interim, we're projecting 4% for this year. It's going to take awhile before short-term rates get back up to that 4%. So while we won't have the volatility of going from very low interest income to high, we are very happy with the ROE impact of the interest income that we get at that 4% level. Gary Bisbee - Barclays Capital: But it wouldn't be unreasonable, though, then if you did use a two-year note change scenario, that the number's going to notch down probably at least as much as it's doing this year next year and the year after?

That's a pretty good way to think about it. Gary Bisbee - Barclays Capital: And then, Chris, following up on a comment you made a couple of minutes ago that, if sales start growing again, commissions will grow and could hurt the margin. Is that a big piece of the margin gain this year? I'm trying to gauge how substantial that could be.

It's just one of the many pieces. You know, we articulated all the pieces that drive margins. It's just one of the pieces that goes into it, but I don't think you can say that's the overwhelming factor in the 100 basis points, for example, that we're predicting for the year. It's just one of the many. Gary Bisbee - Barclays Capital: The other thing that gives you some leverage, Gary, just to help you think about it, is that we obviously planned sales growth and we're obviously negative 11% through the first six months. So it's not just the delta the last year. We also had made room to absorb growth. So it does give us more leverage. But again, it's not geometric kind of leverage in terms of the kinds of things that we were talking about because a lot of sales is fixed and it does come down ratably on the part that is variable. But it's not going to be purely ratable over the numbers we were talking about. Gary Bisbee - Barclays Capital: The PEO business, hanging in there in terms of the growth pretty well. Every indication I get is that small businesses are really starting to get hurt. They can't borrow money because of the credit crunch. And according to your survey I guess we'll see what tomorrow shows, but it really started to fall off dramatically in December. How do you get confident that PEO continues to do midteens growth? Is it just that you continue to have real success upselling existing customers or how shall we think about that? Gary Bisbee - Barclays Capital: It's all a function of new sales. Their comparisons for last year are a little better than the rest of the group, so they're continuing to focus. The competitive scenario there is pretty good with the people that we compete against, so we think our product set is pretty strong. But all that being said, the points that you make are absolutely valid.

And I think our guidance, if you look at it over the year, reflects that as we have moved down and now most recently to the low end of our previous range now at the 14 to 15 level.

We have time for one or two more questions. Your next question comes from Tien-Tsin Huang - J.P. Morgan. Tien-Tsin Huang - J.P. Morgan: First on Dealer, I don't know if you gave this or not, Gary, but new sales performance and attrition and how that changed, I guess, within the quarter and relative to the prior quarter? Gary Bisbee - Barclays Capital: Well, we don't release or quote sales performance per se or retention in Dealer like we do in ES. I would say to you that Dealer retention, however, is noticeably down from last year, and it's all driven by out of business and dropped applications, which I talked about the last time. It's fairly significant. I mean, I'd just - to throw a number out, it's probably 4% or 5% loss in retention because of those factors. That being said, we're still selling a lot of unhooks from the competition and they're offsetting that entire loss. In terms of new bookings, it's down from last year, but better than the comparison in ES, believe it or not. Tien-Tsin Huang - J.P. Morgan: Is the attrition comment more isolated to the U.S.? Gary Bisbee - Barclays Capital: Yes, it's clearly a U.S. statistic. I mean, we're seeing pressure in Europe and the other places, but it's clearly a U.S.-centric statistic. Tien-Tsin Huang - J.P. Morgan: Just in ES new sales, are you seeing any delays in implementations or cancellations in your prior bookings? Gary Bisbee - Barclays Capital: You know, odds and ends, but again, nothing precipitous. You've got to remember that most of our sales at the majors and PES are all implemented in a matter of weeks or months, and the only real place where we're seeing some anecdotal odds and ends are at the high end of the market. But again, at your level of analysis, it's anecdotal, not directional.

Your last question comes from Mark Marcon - Robert W. Baird & Co., Inc. Mark Marcon - Robert W. Baird & Co., Inc.: Can you just talk a little bit about historically what's the worst impact that you've seen from bankruptcies in terms of client retention rates? And can you also mention, when we talk about client retention, how much of that is due to bankruptcies as opposed to various other issues so that we can gauge the level of sensitivity that could occur if the economy continues to falter through the rest of the year? Gary Bisbee - Barclays Capital: I think a way for you to think about that, Mark, if we got 90% retention, of the 10% we lose is about half of what we can control and about half of what we can't. And of the half of what we can't, about half of that is out of business is the way to think about it. The other is mergers, those kind of things, people get bought, which is a form of out of business. And the other issues are typically pricing, service or product. Mark Marcon - Robert W. Baird & Co., Inc.: So basically 2.5% loss. Gary Bisbee - Barclays Capital: I didn't say that. Just something about it's a way to think about it. Mark Marcon - Robert W. Baird & Co., Inc.: And what's the worst that you've ever seen? Gary Bisbee - Barclays Capital: About the levels we've got. Mark Marcon - Robert W. Baird & Co., Inc.: This is as bad as you've ever seen it? Gary Bisbee - Barclays Capital: Pretty much. Mark Marcon - Robert W. Baird & Co., Inc.: And then can you talk a little bit about, obviously, you've put in place a number of cost efficiency initiatives that have been bearing fruit throughout this year. How much further do you have to go in terms of those, without cutting into muscle, but just the initiatives that you've had in place in terms of moving towards India, moving towards smart shore locations, things of that nature. As we start thinking about next year, how should we think about that?

I think you should we thinking about it that it continues, particularly, for example, when we talk about offshore and smart shore. Particularly as we grow in areas like COS and the like, we take advantage of smart shore and offshore, and that helps to continue. So it's not something that it's once and done. It continues particularly as we grow. Data center consolidation, particularly hosting center consolidations at this point, because we've, as you know, done most of the big data centers, but hosting centers, that kind of thing helps. Telesales can continue growing as long as it's successful and it is successful. So those continue and you wouldn't expect them falling off a cliff at any point. Mark Marcon - Robert W. Baird & Co., Inc.: Is there any way to quantify out of the margin improvement that you'll see in ES this year how much of the improvement may be due to those factors?

No, we don't want to be that specific. But gain, just bear in mind that there's a normal leverage in the business and that continues, obviously, and then layered on top of that is these programs that we put in place and you've heard us talking about for years. The only point I would make there is that you can't just pull a trigger and make those things happen if you haven't laid the groundwork like we've done over the last few years. And as Gary said, we saw this coming and tightened some discretionary spending as well. You put all those things together and it's yielding the kind of margins that we are executing on. Gary Bisbee - Barclays Capital: Again, let me close the commentary. We appreciate all of the great questions. Again, we're pleased with the quarter. We're pleased with the forecast for the year. I think all of you should take some comfort that we're on top of the expense issues in terms of making sure they are appropriate with our revenue, both in terms of '09 and fiscal 2010. I'm particularly pleased with the performance of the portfolio, and I think when you look at all things considered in this environment, we're doing a pretty darn good job and I think the strength of the franchise is very obvious in the results. So, again, we appreciate all the great questions and we look forward to talking to you next quarter. Thanks.

This concludes today's Automatic Data Processing, Inc. second quarter fiscal 2009 earnings conference call. Thank you for participating. You may now disconnect.