Elena Charles Carlos A. Rodriguez - Chief Executive Officer, President and Director Jan Siegmund - Chief Financial Officer.

David Togut - Evercore Partners Inc., Research Division David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division Ryan Davis - Crédit Suisse AG, Research Division Gary E. Bisbee - RBC Capital Markets, LLC, Research Division Ashish Sabadra - Deutsche Bank AG, Research Division James R.

MacDonald - First Analysis Securities Corporation, Research Division Paul B.

Thomas - Goldman Sachs Group Inc., Research Division Danyal Hussain - Morgan Stanley, Research Division Kartik Mehta - Northcoast Research Ryan Cary - Jefferies LLC, Research Division Sara Gubins - BofA Merrill Lynch, Research Division Tien-tsin Huang - JP Morgan Chase & Co, Research Division Mark S. Marcon - Robert W. Baird & Co.

Incorporated, Research Division Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division Glenn Greene - Oppenheimer & Co. Inc., Research Division.

Good morning. My name is Victoria, and I will be your conference operator. At this time, I would like to welcome everyone to ADP's Second Quarter Fiscal 2014 Earnings Webcast. I would like to inform you that this conference is being recorded. [Operator Instructions] I will now turn the conference over to Ms.

Elena Charles, Vice President, Investor Relations. Please go ahead..

Thank you, and good morning. I'm here today with Carlos Rodriguez, ADP's President and Chief Executive Officer; and Jan Siegmund, ADP's Chief Financial Officer. Thank you for joining us for our second quarter fiscal 2014 earnings call and webcast.

As a reminder, the quarterly history of revenue and pretax earnings for our reportable segments is also available in the Investor Relations portion of our website. Please be aware that we recently launched an updated Investor Relations website accessible at adp.com.

Current quarter results, as well as the reportable segment schedules, can be found in the financial section of the new website and have been updated to include the second quarter of fiscal 2014.

I'd like to remind everyone that 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 in our earnings release and in our periodic filings with the SEC. With that, I'll now turn the call over to Carlos for his opening remarks..

W2s in the U.S., as we know them, and T4s in Canada. Our ability to help clients succeed is based on our Human Capital Management strategy, or HCM, as it's known in the industry.

Deeply rooted in our culture and before the term cloud was part of anyone's vocabulary, ADP's one-to-many solutions offered clients the benefit of an application hosted in a secure, remote data center.

By having cloud-based solutions embedded early on in our innovation culture, ADP is able to say that today more than 360,000 client companies are using ADP cloud-based solution, a number that grows with each new client and migration.

However, what differentiates ADP from pure software and technology offerings is our ability to provide fully outsourced service solutions along with comprehensive technology.

Our solutions span the full HCM life cycle, from the early recruitment of prospective employees through employee retirement, ADP provides organizations of all sizes and the human resources professional with a proven service model, strong history of compliance management and insightful expertise from our decades of experience in the industry, an industry that ADP had a large part in creating and shaping.

We continue to execute against our HCM strategy, emphasizing innovative cloud-based solutions, complementing technology with compliance and service. As we continue to expand the functionality of our integrated platforms and focus on stellar service, migrating clients to our newest platforms remains an important initiative.

I'm pleased to report that migrations to ADP RUN are progressing well. We migrated about 25,000 clients during the quarter, and now have about 315,000 clients on this platform. We expect to be complete with all small business migrations in fiscal 2015.

In addition to ADP RUN migrations, we are also executing on our plan to move all our midsized clients to ADP Workforce Now. We currently have more than 45,000 clients on this platform and expect to complete these migrations in fiscal 2015 as well. These migrations are an important part of our growth strategy as they allow for up-sell opportunities.

As you may already know, just about half of the clients we migrate to Workforce Now from a standalone payroll platform sign up for one or more additional solutions such as time and attendance, HR and benefits administration or talent.

Overall, we are executing well on our migration strategy and our new platform is providing more streamlined, integrated experience for our clients, as well as a better service experience. Another important item to touch on is the level of product integration ADP offers.

ADP sits at the intersection of benefits administration, payroll and time and attendance. Within this intersection, human resources professionals manage regulatory requirements, such as the Affordable Care Act, or ACA, and other compliance issues. Having an integrated solution is essential to helping our clients minimize compliance risks.

For instance, we recently introduced additional innovative tools and resources to help our ADP RUN platform -- to our ADP RUN platform that allow our small business clients to comply with ACA.

Among them, the new simple-to-use full-time-equivalent calculator is essential in helping employers determine their status under the ACA's shared responsibility provisions.

As the regulatory environment becomes even more complex, be it as a result of ACA or other compliance matters, our clients take comfort in knowing that we have helped businesses manage all kinds of change for more than 6 decades.

When you combine our expertise in compliance matters with our service strength and innovative HCM solutions, you get a powerful platform that is second to none. Before we turn to the quarter's results, you may be interested to know that we held our annual meeting called ReThink in Paris this year.

This is a great networking event, where ADP management and multinational clients and prospects have the opportunity to exchange ideas and discuss global HR needs. We are quite pleased with the high level of interest in our multinational service offerings. And now for the quarter results.

ADP reported strong revenue growth of 9%, 8% organic, driven by solid starts of previously sold business. New business bookings growth for the quarter in Employer Services and PEO was 7%. Our momentum of bookings growth increased from the first quarter, but we are still behind our expectations for the first half of the fiscal year.

I'm pleased that bookings growth in the U.S. in both the small and midmarkets were quite strong, which we believe is a testament to the strength of our RUN and Workforce Now offerings.

Additionally, we saw strength in bookings growth from the PEO, in large part because ADP's value proposition in compliance surrounding the Affordable Care Act, or ACA, is resonating with small employers. Moving upmarket.

As we discussed on our last call, we are rebuilding the pipeline in the U.S., which was drained as a result of the strong fiscal '13 fourth quarter. Our bookings results in this space were better than in the first quarter but are still behind our expectations in terms of closed contracts.

In the multinational space, we closed 3 GlobalView deals during the quarter, and as you can probably tell from my earlier comments about the success of our meeting in Paris, the pipeline is solid.

However, given where we are in the first half of the year, it will be difficult to make up enough of the shortfall to obtain the high end of our 8% to 10% forecast range.

As a result, we are now expecting new business bookings growth to finish at approximately 8% for the year, which is the low end of our previous guidance range despite expectations for a strong second half. Now switching to the PEO. We continue to see positive momentum in this business.

As I mentioned a moment ago, new business bookings were strong and growth in average worksite employees paid was a strong 12% for the quarter. Moving on to Dealer Services. The global outlook for the automotive industry continues to be positive. While we still see softness in Continental Europe, U.S.

auto sales continue to advance towards pre-recessionary levels. Dealer Services performed well in the quarter as they continue to grow their client base through strong, competitive win rates while also benefiting from increased transactions in the U.S. I recently attended the NADA conference in New Orleans with the Dealer Services team.

Organized by the National Automobile Dealers Association, it is the largest automotive trade show in North America, with thousands of attendees representing manufacturers, dealers and suppliers. We showcased a number of our product innovations that were very well received by our clients and prospects.

And with that, I'll turn the call over to Jan for a look at the quarter's financial highlights and the full-year forecast..

the negative impact from the decline in high-margin client fund interest revenues due to lower interest rates; and there was also a higher level of expenses outside the business segments of about $20 million to $25 million, primarily relating to higher stock compensation expense as a result of the higher share price, as well as certain severance charges recorded in the quarter.

Also, as you may have seen in this morning's earnings release, we had an increase of 12% in our systems development and programming expense, which is ahead of our revenue growth. This increase is a result of our continued focus on innovation.

On the positive note, I would like to point out that Employer Services posted strong pretax margin expansion year-over-year, primarily driven by increased operating efficiencies.

Expenses related through the second quarter new business bookings increased compared to the first quarter as anticipated from the acceleration in new bookings growth, but I'm pleased that the expenses increased at a slower rate compared with revenue growth.

And before we leave the discussion on the quarter's results, I want to point out that the decline in client interest revenues resulting from low interest rates continues to be the most significant drag on ADP's results.

As anticipated, ADP's revenue growth was muted about half of a percentage point as the lower yield more than offset the benefit from the 9% growth in balances. Pretax margin was negatively impacted 90 basis points, and diluted earnings per share were lower by $0.02, or 3 percentage points, for the quarter.

Excluding this impact, it is evident that the leverage in ADP's business model is strong and intact. Now I will give you our full-year forecast, which we have updated to reflect the solid results achieved during the first half of the fiscal year. We are now anticipating revenue growth of about 7% to 8% for a total ADP.

I want to make -- I want to take a moment and remind you that although ADP's revenue growth was 8% for the first half of the year, we're anticipating some tougher comps in the second half, as I mentioned a few moments ago.

We anticipate slight pretax margin improvement for a total ADP from 18.8% last year, which excludes the goodwill impairment charge we recorded in the fourth quarter of fiscal year 2013. We expect the effective tax rate will be about flat with fiscal year 2013's effective tax rate of 33.9%.

I want to point out that although the full year effective tax rate forecast is unchanged, the year-to-date effective tax rate is 33.3%, which means that the effective tax rate during the second half of the year will be higher.

We anticipate 8% to 10% growth in diluted earnings per share compared with $2.89 in fiscal year 2013, which excluded the goodwill impairment charge recorded in the fourth quarter of fiscal year 2013.

As is it our normal practice, no further share buybacks are contemplated in the forecast beyond anticipated dilutions related to employee equity comp plans, although it's clearly our intent to continue to return excess cash to our shareholders depending, obviously, on market conditions. And now for the segments.

In Employer Services, we continue to forecast revenue growth of about 7%, but we believe we will now attain pretax margin expansion of about 100 basis points. Consistent with our prior forecast, we're still anticipating an increase in our pays per control metric in the U.S. of 2 to 3 percentage points.

For PEO Services, we are forecasting 12% to 13% revenue growth, with slight pretax margin expansion. We are forecasting about 8% growth in the annual dollar value of ES and PEO worldwide new bookings -- new business bookings from the $1.35 billion sold in fiscal year 2013.

And for Dealer Services, we continue to forecast about 8% revenue growth, with about 100 basis points of pretax margin expansion. There is no change to our previous forecast related to the client funds investment strategy, and the detail is available both in the press release and in the supplemental slides on our website.

And before we take your questions, I want to remind you that ADP has continued its shareholder-friendly actions. We repurchased 1.4 million ADP shares in the quarter for a total cost of $109 million. And as you know, in November 2013, the board approved a 10% increase in the tax cash dividend, our 39th consecutive year of dividend increases.

Now I will turn it over to the operator to take your questions..

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

Carlos, you highlighted weakness upmarket in bookings in the December quarter.

Can you give us a little bit more detail and perspective around client traction that you're seeing with Vantage HCM?.

Sure. I think I'm not sure that we said that we had weakness. I think that it really was an improvement from the first quarter, so I think we're heading in the right direction from a trend standpoint. But mathematically, we still, obviously, came short of where we had our plans.

So I think it's fair to say we had weakness, but I just want to make sure that we clarify that it was much better than in the first quarter. And we do have a little bit of visibility now, with January results in, and January, I think, was also even more promising from a trend standpoint than the second quarter.

So we're actually feeling better about our comments last quarter that this is really a pipeline issue, that we needed to rebuild the pipeline and that we felt that the second half of the year was going to be better.

So again, I think in my comments I talked about an expectation for a strong second half, which, obviously, to get us into the 8% to 10% range would be necessary.

And I think January gives us some confidence of that, specifically in the upmarket business that we have, which really includes not just national accounts and Vantage, but also includes multinational benefits administration. There are a number of products that comprise our upmarket business globally.

And I think Jan may have some additional information on Vantage, in terms of where we stand there..

David, we don't really disclose the actual quarterly numbers of units sold, but we saw a significant increase in Vantage sales quarter-over-quarter, and we're tracking in line with last year and feeling good about the progress we're making with Vantage.

Also, as Carlos said, we are upmarket, and particularly in the national account space, we see in addition to the demand for Vantage, also a demand for Workforce Now in the lower end of national accounts. So overall, the momentum is really increasing in national accounts..

That's very encouraging. And just to follow-up on a comment you made, Jan, 12% increase in systems development and programming costs year-over-year in the quarter.

What do you have in the innovation pipeline? Is this enhancements to existing products or new products?.

Well, as you know, we have a product strategy that focuses really very much on strategic platforms in ADP, migrating clients from our legacy platform and focusing all our R&D and engineering efforts onto our core platform.

And so it's a mix of highly innovative solutions for the next-generation that will really benefit most of our platforms, but in particular upmarket. Vantage was released just last year, so we'll continue to invest and make it better every quarter with new releases. So it is really our making real our promise on innovation..

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

Carlos, I wonder if you could go back to the PEO for a minute. Obviously, a good quarter in PEO, and it sounds like with the changes that are going on with the ACA that, that service offering is becoming even more relevant.

Can you give us any thoughts on whether you think that -- how sustainable that may be, given how things may play out? Is it the initial confusion that then runs off, or is this something that you think continues for a multiyear period?.

It's a good question because we obviously over the last 2 or 3 years has -- the law has evolved, and eventually went to -- or parts of it were implemented, we were trying to assess both the upsides and the downsides for not just our PEO, but other parts of our business. So all I can tell you is that it looks right now like it's mostly positive.

And based on the January results, which are an outsized proportion of the total sales of the PEO for the year, just because of the way that PEO works with tax restarts and other issues that's probably not worth getting into, a significant portion of our annual sales take place in the actual month of January or start in the month of January because we count, in the PEO, our sales and our clients started the same or in equivalent.

And again, we did look at our January results and they were, I would say, even stronger than the first half. And so it really does feel like that business has quite a lot of momentum. And when we look at the factors that are driving that momentum, they do feel like multiyear or that they are not just 1 or 2 quarters.

Now, whether multiyear means 5 or 10 years, that's a different story because it's hard to see that far out. But we don't see this momentum letting up in the near future..

And if you look at -- well, I guess, just a quick follow-on to that, so is that pretty much concentrated in the small business segment? Or are you seeing it overflow into other segments, like in the midmarket, for example, as well, even though it may not be tied to the PEO?.

Well, our think our sales force is I think using the Affordable Care Act and changes in regulation and compliance and so forth as, I think, one of the reasons why we think prospects should be talking to us. And particularly the fact that we have integrated products in Workforce Now and in Vantage, I think, really help with that conversation.

The ability to have time and attendance, benefits and payroll and HR all in one integrated database is a very, very strong value proposition. So I think it is providing a door-opening opportunity for all segments of ADP. But the PEO, I think, has -- is in a unique position, where they are benefiting, I think, in an outsized manner.

I think I'd hasten to say that they're also just executing very well, so we have really great sales leadership there and great salespeople.

So I don't want to take anything away from them because when I look back, I just happened to glance as we were talking about the PEO at our historical results in PEO in terms of sales, and this is really the fourth year of very good sales results.

So I think we're benefiting somewhat from the wind at our back from ACA, but we've got to give credit where credit is due. They've done just a fabulous job execution-wise..

David, just a quick reminder, the size of employees that we serve in the PEO ranges really from 10 to 250 employees, so it really stands a little bit different than our historical segments. So it does cover small- as well as midsized clients in there..

Okay. And then just quickly on the bookings and the characteristic of those bookings relative to your revenue growth. Obviously, you're coming in a little bit stronger on the revenue growth -- and, sorry, I got dropped from the call, so perhaps this was covered.

But is there something -- because of the relative strength of the small business segment and perhaps the midmarket, does that impact the conversion of the bookings to revenue in a different way than maybe what you've seen historically because of that relative strength? Or are we pretty much on kind of a trajectory that we typically are on in terms of the conversion of bookings to revenue?.

I'll let Jan give a scientific answer. But I think the short answer is, yes, it helps. A shortfall in our upmarket business in bookings, I think, doesn't affect us as much in the short term as, obviously, a shortfall in our low end of our business because of just how fast those clients start. So I think we've done some modeling.

And I think maybe Jan can talk about it a little bit in terms of the potential impact of shortfall in the high-end. But I think you're correct that it tends to be a more muted impact in the short run. It tends to be spread out more over time. And again, you should also keep in mind that our business is quite diversified.

So we have a midmarket business, we have a low-end business and we have an upmarket business, we have international, we have global, we have dealer.

So this shortfall in sales in the upmarket does not have a significant impact on our revenue growth, either in any of the ensuing quarters or, frankly, even in the long-term, as long as we recover as we expect in the second half..

I think I have little to add. I think I just want to moderate that we have, of course, upped our revenue guidance for the year and you saw the strength in our revenues in the quarter.

Some of it came due to this help of expiring tax credit programs, but then you saw we had strong balanced growth, we had strong pays per control growth, we had solid retention in the quarter. So all those factors together really helped to drive the organic revenue growth in ES.

And the strength in the downmarket, where the conversion is a little bit faster to revenue than in the upmarket, obviously, helps. But as Carlos said, the misses on the upmarket are not impacting our revenue forecast in a meaningful way..

Your next question comes from the line of George Mihalos with Credit Suisse..

This is Ryan Davis, filling in for George. I want to start with the new bookings growth and kind of the new guidance.

Could you give us maybe the puts and takes of what you were seeing when you gave the original guidance, the 8% to 10%, and kind of what differs now? I guess, the first quarter came in a little lower, so it's a little further to overcome..

Well, let me start by saying that we give guidance based on our plan. So we put together a budget or what we call our operating plan, obviously, well before the fiscal year started, that contemplated sales in that range.

And then we had just what I would call a blowout finish in the fourth quarter that happened after we put those operating plans together. And clearly, we could have adjusted our guidance in our plans, but we felt that given the momentum we had in that fourth quarter, that we would go forward with the original plan that we had.

I did mention in the fourth quarter conference call that based on our experience or my experience personally, even though we weren't trying to change our guidance, that, that fourth quarter strong finish presents some challenges for the first quarter just because of the way our incentive system works and just based on mathematics, just because of how large ADP's sales results are in terms of laws of large numbers.

And so I think the 8% to 10% guidance was, I think, what we thought we could do. And that was our objective, and we weren't ready to come off of it. And then the first quarter, as you know, was 1% growth. And the math for us on making a comeback from 1% growth is not easy, again, just because of the laws of large numbers.

But again, we thought because of what we had in our pipeline and the fact that we thought that our challenge is really more execution-related in the high end of our business, that we had a shot at still making somewhere in the middle of that range, which is what our intention would be when we gave 8% to 10%.

And I think now we've moderated that to 8%, and it could be a little bit higher than 8%, frankly, or it could be a little lower than 8%. But I think prudence, I think, called for mathematically looking at the -- taking a hard look at the numbers and being transparent saying it's harder.

It's harder to get to 10% now and it's harder to get to 9%, but we feel very comfortable getting to 8%..

Okay, that's helpful. And just one more, and sorry to follow-up, I don't want to hit on the bad things, but could you just give a little commentary around the retention in the quarter.

I see it's down year-over-year?.

Happy to do that, although I wouldn't call it a bad thing. And again, I recognize the numbers are the numbers. But our retention rates are still at historically high levels.

Again, we have the benefit of having seen our January results, and for those of you who follow us closely, you know that January is a very important month for us in sale -- or new bookings, but it's also very important for us in terms of retention.

Obviously, many clients who decide to take their business in-house or look for another alternative do so December 31, and so those losses will show up in our results at year end, as well as in January.

So now we have the benefit of both our December and January period, and I would tell you that coming out of January, we feel very good about our retention, which, again, when I look at it over the last 4 years is, I believe -- I don't have the number in front of me, but it's 20 to 30 basis points up or down each year, still at record levels.

And so although we, from an operating plan standpoint, try to put additional pressure on the organization to drive that up a little more, and I think we can because our client migrations in some respects might help us longer term in our retention rates, but the fact of the matter is that they are very, very good right now, and we're very happy with our retention rates.

And I think having looked now at the January results, I would say that the quarterly comparison is the same story that we've been sharing for many years, which is we have fluctuations because we have a few large losses here and there, and then it affects the quarter, and then the next quarter, we have, I think, a recovery.

So we see nothing in either the quarter or in the January results to lead us to believe that there's any issues with our service or with our retention rates..

Your next question comes from the line of Gary Bisbee with RBC Capital Markets..

I just wanted to ask quickly about -- you mentioned some severance in the quarter.

How much exactly was that? And where are you reducing heads, anywhere in particular, or was it pretty minor?.

Gary, I mentioned it only because it happened in the quarter to be a little bit higher than normal. We had very low restructuring charges in the first quarter, so the difference popped up a little bit higher. And it's really broad-based and just regular business operations.

So it just aggregated in this quarter, drilled a little bit higher, so it made it the second highest item. Nothing to worry about. Really nothing to point out and isolate in there..

Okay. I was wondering if you're going to say due to the migrations, you need fewer people supporting the legacy systems or something, but I guess, that's still the future....

Not quite yet.

I understand the interpretation toward the operational efficiencies due to migration that Carlos and I share the excitement for you, but as you know, the migrations require a big deal of resources actually to be invested themselves in the migrations and then also require the training of our associates on the new platforms, and that takes a little bit of time for them to gain full productivity.

So that's kind of the fundamental reason why the efficiencies will trickle down a little bit later..

And I think to -- just to make sure that our level's set and people understand our business model from that perspective, ADP's business is, as you know, quite stable and predictable in terms of recurring revenues.

And so there's no question we expect to become more productive and more efficient over time as a result of migrations, but also as a result of other initiatives that we have around productivity. That's been shared very widely internally with our associates and our leadership.

Having said that, we hire approximately 4,000 to 5,000 new associates each year because of our size, just because of retirements and turnover. And by the way, we have a very low turnover rate. But that's a lot of people. So this process of us becoming more productive and more efficient will happen in an organized fashion.

And you are unlikely to see a multi-hundred-million-dollar restructuring charge, which is not what this is. This is relatively small. But again, just because of who we are, we give you all the details.

In the grand scheme of things it's a relatively small number, it just happens to affect the quarter and the results, and we thought you should know that the number was in there.

But historically, some of our restructuring charges have been -- and I'm not saying that this one is, but as an example, if we do anything in Europe, even a restructuring that involves 5 to 10 people can add up to $10 million to $12 million. So it's not the case in this example.

I just want to put perspective around -- when you do the math, around the size of this restructuring charge. This is not hundreds or thousands of people, and it's not a major shift. And I just want to level set that you are unlikely -- we will manage our way into productivity and efficiency without large-scale disruption to our associates..

Fair enough. And then just one other quick one. I haven't got an update in a while on the trend towards profitability with the GlobalView product. And just maybe a little more color on -- you talk every once in a while about the contracts you sign.

But how many people have actually been -- are up and running in the product? And is that really the key to achieving that profitability and targets unchanged? Any update there..

I appreciate that. I'll take this question, I appreciate it. As you know, our multinational offerings are a key part of our global growth strategy. And just for level setting, when this discussion a number of years started, we focused on GlobalView.

But today, we're really selling a combined solution between GlobalView and a product that is called Streamline. And almost all GlobalView deals now include also components of Streamline. So we internally really focus on our multinational solutions and, of course, they are profitable and continue to gain margin and growing very nicely.

As a matter of fact, they are accretive to our revenue growth and our earnings growth overall ADP. So it's a very nice business that we really like and to do so. But in order to satisfy the academic question background about is GlobalView profitability? Yes, we're pursuing the plan.

We indicated I think last year that we would achieve profitability, which we did. And of course, we'll continue to in the second half, and we continue to improve upon that business. We had more sales, as Carlos has reported, on GlobalView, so the product is doing fine, and we're very satisfied with it.

But again, it is important to think -- better to think about our multinational offerings, and that's now more than a $300 million business for us, and it's growing very nicely. About 1 million employees are processing on GlobalView right now..

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

This is Ashish, calling on behalf of Bryan Keane. Looks like you had a pretty solid quarter for small- and medium-business bookings. And as you said, coming out of the selling season, that was pretty strong as well. Now the small-business formation overall, that has been pretty weak. So obviously, you're gaining share.

So I was wondering if you could just provide some details on the competitive dynamics, like, are you gaining share from regional or national players, or is it mostly in-house moving over? I was just wondering if you could give some more color on that. And as well as talk about pricing and discounting, how that has trended during the selling season..

We haven't heard anything different about pricing or discounting. I think, obviously, we keep track -- very close track of those dynamics. And I'm not aware of any changes in the market in terms of pricing or discounting.

In terms of the success in that business, I think, again, like the PEO, I think the first order of business is to give credit to the management team and to the organizations that have been working multiple years on making sure they have the right products, the right leadership, the right service because you do have to execute in this business and I'm sure in any other business, and they are executing quite well.

I think that our success there, I think, is broad-based. Again, we do look on an annual basis and then in our strategic planning process at shifts in the marketplace in terms of in-house versus regional versus national competitors, and then we track obviously monthly and then quarterly where sales are coming from and where losses are going to.

And I wish there was something exciting to report or something that jumps out, but it's just broad-based success, I think, across the board. And so it's not any particular category or size range, it's just across the board. And I think it's related to the very strong products and very strong execution, both in sales, implementation and in service..

Just to answer your question regarding the discounting level, I did actually, prior to this call, review and anticipated your question and looked out across our business, and we have not seen any significant changes in trend relative to discounting level. As a reminder, approximately 1% of our revenue growth is driven by price increases..

That's good, good to know. And one much more broader question about the industry trend. We've seen some increase in charter around private exchanges, large employers contemplating moving to private health-care exchanges.

I was just wondering if you have seen similar trends, and if you can comment on what that means, would it have any impact on PEO or any other business, any impact on ADP?.

Well, there really would be no impact on the PEO, at least not for the next, I believe, it's 3 or 4 years, because the exchanges are really not right now open to small companies. They're really, I think, really for large companies. And so, the -- I'm sorry, I think that's correct. I don't know if it's the public or the private exchanges.

But my information is that this is really -- the exchanges are really not an issue for the PEO until I believe it's 2017. And then we have to -- as we get closer to that, we would, obviously, keep you informed in terms of whether we think there is going to be an issue or not.

Because as of -- when we first started this process 3 years ago, I think it just doesn't help to -- the lesson learned is that we have to get a little closer, based on what you've seen around all the changes that the government has made to the original laws and regulations, I think it's just better for us to wait until we get closer to have that discussion.

So I think no impact on the PEO. The only, I think, impact that I think we need to talk about and think about is our benefits administration business, which, again, in relative terms, it's an important business, as all of our businesses are important, but it's relatively small in the overall scheme of ADP's total revenues.

But that business, we are hearing prospects and clients asking us about private exchanges. And so we are looking at alternatives, including partnerships and other options, building our own private exchange. There's a lot of ways you could go in terms of creating a solution. Some of which are easier to implement, for example, a partnership.

And others, whether it's an acquisition or doing something organically, are probably a little bit harder to do. But we are hearing, I think, from some of our larger clients, specifically the ones that have a lot of hourly employees who are highly sensitive to employee benefit costs, we're hearing a lot of questions about private exchanges.

Having said that, a lot of clients are not even bringing it up because they are very comfortable with the benefit plans that they have and the approach that they're taking with their current health-care carriers and their current health-care plans.

I think we all read the papers, I think you tend to see restaurant chains and there are certain industries that are very sensitive to employee benefit costs that are very interested in private exchanges. And we, I think, are currently looking at how to fulfill that need for our benefits administration business..

The next question comes from the line of Jim MacDonald with First Analysis..

Going back to the PEO, could you tease out for me the strengths there between converting some of your existing customers and selling new customers? And as a follow-up in advance, are either of those particularly impacted by ACA uncertainties or trying to escape the impact of the ACA?.

That's a great question, because I think it's a really good example of, I think, the improvements we've had over the last several years, starting 5, 6, 7 years ago when we started focusing on this kind of OneADP strategy.

One of the important, I think, benefits that we thought we could get is more synergies from cross-selling, among other synergies in our business.

And the last -- certainly, this last quarter showed, and I think the last several quarters, and even for 2 or 3 years, an improving trend in terms of the amount of business that the ADP is -- I'm sorry, that the PEO is getting from some of the sister divisions within ADP.

Specifically, I want to point out that the -- our mid-market business and major accounts, which, as you know, goes all the way from 50 up to 999, so in the low end of that major accounts business, there's been a really nice improvement in the amount of leads being given over to the PEO that have been converted into PEO clients.

Very, very happy to see that, and I think that goes back to a lot of hard work over multiple years of aligning incentives and people working together to make that happen.

Other than that, I'm not sure that we have a lot to report because I think in our low-end of the business, we've always had a very good exchange of leads between our SBS business and the PEO. I think where there's been the noticeable improvement is in the mid market and in major accounts, and we're very pleased with it..

And just my second part of the question, were new customers kind of frozen by some of the ACA implementation issues or existing customers impacted, thinking about those -- some of those implementation issues?.

So I think it's a great question. I think what -- the way I would say it is that, we've always believed, whether it was in Y2K or ACA or other major compliance issues, that you get more at bats. There's just a lot more activity, because people are looking for help and they're looking for solutions.

And we have a more-than-5,000-person direct sales force, and it is a huge advantage in terms of being able to take advantage of these disruptions, if you will, to the average small business, midsized business or large business.

And so we spent the last 2 or 3 years gearing up our sales force to be able to talk about ACA, and the day has arrived where there are a lot of people who have a lot of questions. And we're there to answer those questions and at the same time, hopefully, sell them solutions to help them address those questions.

So I think that's what's happening in some parts of our business, that we're just getting a lot more -- there's a lot more activity and a lot more at bats, and we're converting some of that, obviously, into new bookings and eventually into revenue.

So I think it just provides a nice opportunity for us and for our direct sales force to go out and help our clients solve -- or address the uncertainties that they're facing..

The next question comes from the line of Paul Thomas with Goldman Sachs..

It sounds like pays per control is still lagging in Europe.

Is there any expectation that it will improve in the back half of fiscal '14?.

Paul, I've studied the pays per control metrics in detail for each of the European countries, and I wish I could report that I see an improvement. It is at the rounding error, a slight improvement, and you see a couple of countries slightly improving. Of course, Germany and France would be those.

But overall, Europe is kind of flattish on the pays per control. I just -- as a point of clarification, that does not translate in declining revenue growth. Europe is still growing for us as a revenue contributor and, of course, nicely expanding also its margin.

So while we see the economic environment impacting sales are difficult in some countries, but, overall, we continue to grow our revenues based on new business that we could do good retention rates and a little bit mitigated by these pays per control weakness..

Okay. Just one more from my end.

Could you talk about the increase in margin expectations from Employer Services, how much of the improvement was lower sales compensation versus specific actions you took in the quarter?.

It's not specific actions I would describe. I think you see some of the organic revenue growth acceleration is helping us on the margins. We have good control on our operating expenses. So we have FTE for employee growth is slower than revenue growth.

So we're kind of carefully executing on the program of driving productivity in the business unit in an organic way that Carlos just described.

And so there could be a little bit of improvement on the margin due to the sales expense, but it's a mix, as sales get more productive as we have achieved higher sales productivity and a little bit of slightly lower sales growth. But that's probably not even fully factored into our forecast.

So it's kind of really mostly these operational efficiencies that we mentioned to you..

I think just to be specific on the -- because we mentioned in the first quarter that we benefited from lower sales costs and that helps us a little bit in the margin.

It is not the case in the second quarter because even though we do have good sales productivity still, as you know, our sales results were 7% increase in the second quarter versus the first quarter growth rate of 1%. And some portion of our sales cost is variable, obviously, related to commission expense.

And so on a sequential basis, the second quarter compared to the first quarter, we did not have the kind of, I guess, wind at our back. In fact, sequentially, our sales cost not only increased in absolute terms, but increased in relative terms as a percent of revenue. So I just want to make sure that, that was clear.

We are -- continue to invest in sales, we continue to add headcount and, obviously, we're also expecting, I think, some level of productivity. So I think the numbers that we shared with you in terms of the mix of headcount versus productivity, I think, still stands for the year and for our forecast.

And this benefit that we had in the first quarter, which was an unfortunate benefit because of the low growth rate, we did not experience in the second quarter..

The next question comes from the line of Smitti with Morgan Stanley..

This is Danyal Hussain, calling in for Smitti. I just wanted to touch back on PEO.

So as you guys raised growth expectations, is that a function of growing popularity of the PEO model as a whole, or is this something that's more TotalSource specific?.

If you look at the market and you have now a number of competitors public or going public, you see that ADP has the strongest organic growth number. And for a number of years, really, our business model, at least since its inception 13 years ago, 15 years ago, we have really grown exclusively through organic growth.

So the ADP sales model and our success in distribution and executing well is the main source of our success. And I think, organic growth rates in our competitors are more muted, and that's certainly a standout for ADP's model..

I think I would just add, again, since I came from that business, that the popularity of the PEO ebbs and flows for a variety of reasons, but ADP's PEO continues steadily along. I think it's 4x the size it was when ADP first started in the business through a couple of acquisitions and it's almost doubled just in the last 4 years.

So it's really quite an impressive performance by that team. But it is fair to say that, that industry or that category does ebb and flow for a variety of reasons, depending on external factors around insurance markets. And -- but the business, it's in an industry we have to be cautious in terms of your expectations.

We happen to be the beneficiaries of having a captive sales force that provides lead to our PEO sales organization, we have good leadership, we have good technology, so we, I think, are in a very good position..

Okay.

And then on international, I recognize Europe is still floating [ph], can you maybe talk about revenue growth in international as a whole, and maybe how it's different in your multinational clients versus the local international?.

I think our international business still has quite respectable growth, frankly because we have really great retention rates there. And so even though, as Jan said, sales are difficult or have been difficult in the first half, and I'd hasten to add that last year, we had actually pretty good sales, even in a very bad environment, we had good sales.

But when you add all those ingredients together, the very strong retention rate with really a minor decrease in pays per control because it just not -- doesn't drive that much in terms of revenue drag, and then just the size of the sales not, if you will, as a total sales in relation to how much we lose because of retention being so strong, I think, leaves us with a very decent organic growth rate in international.

And then we, on top of that, benefited a little bit from the acquisition that we made in South America to expand our presence in Latin America. That's giving us a little bit of a lift in our international business. But our organic growth rate there is still quite strong..

Actually, in an interesting way, the organic growth rates between U.S. and international are about the same, and the weakness or softer revenue growth in Europe is offset by strength in Latin America and strength in our multinational business..

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

Carlos, you talked a lot about Workforce Now and RUN, and it seems as though you're getting some benefit as clients are migrating, or at least that's what it looks like as your margins are improving in ES.

But is there a way for you to size what the eventual benefit will be once you get all your clients migrated? Because I know you've also said there's some additional costs right now because you do have 2 platforms..

I think that it's a good question. And I think it's a risk of having you get out in front of us from a margin standpoint in the future. I think it's important -- more important for you to understand in the short run kind of what is happening.

In the short run, I think Jan said it best that our margin improvement in Employer Services is not related to client migration. Our client migrations activities are putting pressure on our margins.

We are investing very, very heavily both in our -- in all 3 of our segments, in the low end, on midmarket and our high-end, because it's a strategic imperative for us to get our clients on a new platforms.

I was looking at some statistics over the quarter where the number of clients that are left on our nonstrategic platform on midmarket have declined fairly significantly and, simultaneously, our retention rate has improved quite a bit.

So it just feels like the right thing to do to continue to spend at whatever level we need to spend in order to accelerate those client migrations. And by the way, that will not always be the case. We had one example in our time and attendance business where we shut down a platform, and so it was not an organized, orderly transition.

And that had a negative impact on retention. So those -- it's really a mixed story. That's a long way of saying that you should not interpret our margin improvement as coming from already benefits of our client migration. The benefits of our client migrations are yet to occur..

And then just as a follow-up, and maybe there isn't a relationship, but we're seeing more clients migrate to these new platforms, more clients interested in mobile applications.

As a result, on the small business side, have you seen any change at all in how your customers are buying your services, as in are more customers today than 2 years ago are using the Internet? So in relation, do you need to change maybe the way you sell your products?.

It's absolutely changed. And again, visually, I'll give you one, and I'll give you a factual. Visual is our sales force are out doing demos with iPads now. Two years ago, they weren't doing that. Our old EasyPay platform, I don't believe we had a demo, forget about doing it on an iPad, it's just not -- it wasn't even a possibility.

So the factual numbers are that 4, 5 years ago, the majority of our clients were on what we call either call-in or fax, so they would basically send us their information. They would call us in and tell us, "This is how many hours for this person and this is how many hours for that." This is in small business is what I'm describing.

That now with RUN, new sales in RUN has completely flipped over where more than 70% of our new sales are basically web-based sales, where they're using our -- where they're not calling in their payroll, they're not having any interaction other than service interactions if they have questions or if they have issues with their payroll.

Obviously, that's what we are about, is a full-service outsourcing solutions. So we do take questions and phone calls or chats or emails.

But the fact of the matter is there's been a tremendous change in the last 3 years in how we sell our business and how our clients receive the service that we provide or receive the technology, specifically in RUN, which I think was your question..

If I may add on the distribution side, in a down market, we sell through our sales force. But we have also channel relationships in the bank and the accounting channel, and the good deal of our businesses are now also generated through certain marketing and web-based leads.

The actual sale, I think, is still going mostly through either our inside sales force or field salespeople, but the lead generation through these channels all have changed and have contributed to the growth..

So should that translate to lower selling costs as we move forward?.

Well, it has. So I think our SBS sales force is one of the, I think, one of the highlights in terms of our sales productivity improvement over the last several years. And so I believe we have gotten, I think, some benefit from what you are describing..

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

This is Ryan Cary, calling in for Jason. Just a quick one. Are you expecting acquisitions to contribute any material amount in near-term revenue growth? I know you mentioned in the past couple of quarters LatAm acquisition, but I just wasn't sure how big that's going to be, and maybe you'd give us some sort of idea on when we should see some benefit..

We continue to be out there looking at stuff, and we've recently looked at some things and, I mean, I think our normal practice, as you know, is we can't comment. So we can't really say specifically what we're looking at and what we are not looking at.

But we are, contrary to popular belief, because I probably have developed a reputation, we are open, we have capital, and we are open to acquisitions if they fit our long-term strategy. And our long-term strategy has been laid out very clearly.

And so we're not looking to just cobble things together and add additional platforms that are not going to be integrated into our strategic platform. But if we find things that either fit or can be fitted in relatively quickly that accelerate our sales growth and, hence, our revenue growth, we will use our capital to get that done..

Okay. And forgive me if you already mentioned this, I might have just missed it.

Did you announce the -- your expectation for the increase in the sales force headcount for the year? Is that still at about 4%?.

Yes. And I think we are right now running 3%..

3%..

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

HR analytics is a hot area right now, and I wanted to get your take on how you're positioned in it and what you think perhaps you're differentiating points are in the areas that you might want to focus on to add more?.

That's a good question because actually when Jan was answering the question about the 12% increase in our R&D expense, one of the things that I can mention about that is that analytics specifically is one of the categories where we are -- and I think Jan mentioned some exciting things that we're working on to enhance our current platform but also to provide kind of new solutions to our clients to help them more with their business needs.

I think analytics is an area where we've been investing quite a lot of time and money, specifically our -- what we've been calling our innovation labs, the ADP Innovation Labs, which, by the way, we've now opened an office in Chelsea, New York, and we're really attracting some incredible talents.

And so part of what those folks are doing is working on those types of solutions and specifically, some of the business intelligence and analytics solutions that we think are kind of the next step in helping businesses really manage their human capital assets better. So we are -- we've seen some previews.

Jan and I, I think, have seen some examples of the things we're working on, and we're quite excited about what, hopefully, is to come here in the near future..

Actually, we released in the second quarter and we talked in our last call, I think, about our HR analytics tool that's now in pilot with a number of clients. We have shown it at several industry fairs, received tremendous amount of feedback.

And the fundamental differentiator is, of course, not only the functionality and the thought process that we engineered into the product, but it can rely and base its insight on an unparalleled amount of data, with 600,000 clients at our fingertips and information that is really deep and with a broad history of it, will allow clients really just better understand how to run the HR business and put ADP in a position to be truly a strategic partner for our clients.

So it is really an opportunity that we are looking forward to fully leverage. And if you follow out national success of our national employment success -- National Employment Report, we anticipate similar type of credibility and power in our HR analytics product..

And then as a follow-up, the focus on Vantage or the strategy so far has been more to sell to new clients as opposed to migrations. And I'm wondering if there is some point in the future when perhaps you'd consider turning more to trying to convert the existing client base..

We migrated also clients in Vantage.

But as -- you're right, as we scale and build our implementation organization and optimize the implementation processes of Vantage, we are focused on leveraging that capacity for market shares, competitive market, we like our product, and that's the focus, I think, what you see us more is open Vantage up to a variety of bundles, from standalone payroll Vantage to a full suite of Vantage as we build it out.

But medium run, you should expect us to convert clients onto the Vantage platform. So it is just a matter of timing, and Vantage will be following a similar path over time as Workforce Now did..

Yes, and I think just to emphasize, I think Jan mentioned this, I think, especially earlier in the call in answer to a question, that we continue to invest in Vantage.

So I just want to kind of reiterate that, that the days are over of us kind of building a platform and then spending the next 5 or 10 years, and it's not because that was the wrong thing to do, it's because times have changed.

And so we -- you should hear that we are making -- continuing significant investments in our upmarket products, including Vantage, not just around analytics, but around usability, around the product itself, feature, functionality. And so we are making significant investments in Vantage and in the upmarket products as we speak..

Your next question comes from the line of Tien-tsin with JPMorgan..

Just a couple of follow-up questions to past questions. Just first on the upper end of the market and replenishing the pipeline, just curious how the visibility and predictability of the new sales look now versus, whatever, a quarter ago or a year ago. I caught some of the 3 deals you talked about.

But just in general, the replenishing of the pipeline is what I was curious about..

I think the place where we feel the most positive about the pipeline is the MNC business. But it also happens to be the most lumpy of our businesses.

So I personally went on a sales call for a multinational client that was a $15 million annual deal, and so we feel pretty good that we're going to that deal, but whether we get it in February or we get in March, I think, is in the grand scheme of things, not the only important thing. And, hence, we have to be careful.

So I think historically, our multinational business, I told you specifically, have been our most volatile and most lumpy business. But right now, it feels pretty good. This meeting in Paris, like we had the Who's Who of the Global 100.

I mean, I'm not going to mention names, obviously, but these are all names that are household names, and these were prospects. Some clients, but many, many prospects, as well, and I think we even closed one right there at the meeting. So we're feeling pretty good about that pipeline.

I think in our upmarket core national accounts business, by that I mean payroll, HR, kind of the core business, I think that pipeline also feels pretty good, and our January results, frankly, were good from a growth standpoint. And there's a couple of other categories in national accounts, frankly, that are not performing as well.

And I mentioned some of the other categories that make up our upmarket. But in that core business, we're actually feeling pretty good, too, about what's happening with the pipeline and also the conversion of that pipeline into contracts..

Understood.

So the upper, upper end, is really just the timing issue, you feel good about the pipeline?.

Yes..

Okay. Just on the -- just I know retention was asked about and I know we're nitpicking here about whether it's less than 50 bps.

But any areas stand out in terms of surprising attrition, focused on major and national specifically?.

If you look at our losses, the second quarter losses on an absolute dollar value also are not that meaningful to us, so it's a lower-loss quarter. And we did see it's not focused on one business unit. We had, really, a number of business units coming a little bit down also.

It may play, if you look a quarter, a year over back, we had a very strong retention quarter. So I wouldn't over read, again, the 30 bps or so into anything here..

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

With regards to the sales target for the year of 8% growth, given what the performance was in the first half, you do have some tough comps coming up in the second half, particularly fourth quarter of '13, how comfortable are you with that, with the 8% target? I mean, I know it's your best estimate, but....

I think it's a very fair question, I'll just use history as my -- to help me. Last year, I think we entered into the fourth quarter -- and I'm not sure this necessarily helps me or hurts me, because as you've said, in some ways a strong fourth quarter creates a tougher comparison.

But last year, we entered the fourth quarter with 9% growth and we ended up with 11%. And so we do have the ability to execute in our sales force, and that's what we're going to do.

And so I think we obviously are very -- we are constantly scrubbing our forecast, looking at our pipeline and, again, there are a few large deals that can go one way or the other, but we have 5 months to get those done and get the contracts signed.

So again, our best information is that we feel pretty good about the 8%, and being the optimist, I always hope it could be 9%. And could it be also a little bit short of 8%? Yes, but I'm focused more on the 9% than I am on the 8%.

So I think we're pretty comfortable, when we see the January results and we see the size of the January results and how much quota has been extended through the end of January, I think that our level of confidence is good..

Great. And it also sounds like the pipeline on the upper end has been rebuilt since the changes that you put in place.

Is that a correct read?.

I think that it's a correct read, but you're maybe reading too much into it. Changes that are made in a large account mature sales force do not necessarily translate into results in 1 or 2 quarters.

I think what you're seeing is just regular -- the cycle working its way through, which is the pipeline was drained in the fourth quarter and it's being rebuilt.

So I don't think it's fair to attribute it to any specific actions we took, although we did take actions, and we think those actions will, over the course of multiple years, make them stronger and better national account. I don't think that we can take credit for the short-term results..

Can I add one more comment to it while we're focusing a lot on the upmarket? It should not be underestimated that we have reported strength in our mid- and small-market segments and PEO separately. And as you might imagine, that's going to also add comfort to our full-year forecast.

And that consistency has been strong for both quarters throughout this fiscal year. So I think it would be also important to look at the entirety of our new business bookings volume and not focus on just a segment in the marketplace..

And I think it's important, again, even though we don't disclose business by business, back to the diversification of our business, none of the categories that we are talking about or mentioned are disproportionately large. They are all large, and they all make up the $1.4 billion, is it, that we are forecasting for our sales for the year.

And so, again, fortunately, we have the benefit of being in many categories and being global. And I think Jan is right that we clearly would like to have better results in the upper end in the first half of the year.

But as you saw, we delivered 7% either in the face of what I would call historically unprecedented headwinds from an execution standpoint..

Fully appreciate the strength in both majors and SBS, and I was taking for granted that, that was going to continue to be strong. With regards to the nice performance, with regards to the margins on the ES side, you mentioned that you're actually spending as you're making the conversions going through.

What would you attribute -- what would be the biggest single contribution to the really strong margin performance that we're seeing on an incremental basis, particularly when we strip out the interest impact?.

Well, I think at the business segment level, again, we have this quirky issue with the way interest is calculated at the ADP level. It drags our revenue growth. You don't see the operating leverage as clearly, but when you look in the segments, I think Jan said it well, which is really operating leverage.

So it's really growing our expenses slower than our revenues. And again, just because of the nature of our business model, this is not -- we don't have a business model where we go and cut $100 million in expense and then 2, 3 years later, we have to put back $300 million.

The trick for us is to grow our expenses at half the rate of our revenue growth or slower. That means that our expenses are still growing, but they're growing at a slower rate. So that still allows us to invest in things.

It allows us to more focus on migration, but it does create scarcity of resources because we have to decide where to put those resources. But we're not cutting cost. We're reducing the growth rate of cost and achieving operating scale and operating efficiency, which is a very organized and very methodical and very good way to run a business..

Great. And then last question. Since last time I saw you, rates have changed.

How should we think about when we hit the inflection point as it relates to the float income, assuming that rates stabilize around these levels?.

We've just reconfirmed our guidance about the impact of our -- the net impact of the client funds strategy and the guidance stays impact -- in tact. So the forward rates move a little bit up and down, and I think we are speaking with Carlos' first quarter comment that in FY '15, we should see an even or slightly up on interest rate.

We're going to give more visibility to all of that for you traditionally at third quarter. We're planning to do so also this year..

But again, I think, I don't know if we mentioned the balances growth. So we had -- and, again, trying to focus on both the positive and the negative, so our balance growth was quite good. And I think some of it is a reflection of a decent economic backdrop. Some of that is also related to growth in units, starting new business, et cetera.

But the overall balance growth is quite good and helps offset some of the negatives in terms of some of the interest rate drag.

I think as Jan was alluding to, as we get to '15, '16 and beyond, when interest rates become -- if they become a positive, this balance growth combined with a better interest rate environment is something that we look forward to..

And we have 2 more questions in queue. Your next question comes from Joseph Foresi with Janney Montgomery..

We talked a couple -- well, at an Analyst Day that you had obviously in the distant future -- or, I'm sorry, in the distant past, and you mentioned that as you continue to move to more of a technology platform, that the structure of the company may start to look a little bit different.

I was wondering, is there any association here between some of the restructuring and what the new look ADP would look like now that it's more technology-focused? And maybe you can just give us an update on where we stand with that..

So based on your comment about the distant past, it sounds like you missed us and you want to have another Analyst Day..

Yes, sure, why not..

I think on your comment -- I'll let Jan make a comment also, but I think we are -- the restructuring discussion, again, just to reemphasize, is not related to any broad strategic issue. It was housekeeping, if you will, in terms of the size of it.

Having said that, over the last couple of years, and I think we continue -- it'll continue into the next few years. We are trying to invest more in R&D, and you see it creeping up, and creeping is the typical ADP way of doing things.

It's not a dramatic change, but rather than R&D becoming a lower and lower percent of revenue, it's actually now reversed and has become -- it's actually grown as a percent of revenue, only slightly, but it has grown as a percent of revenue.

And even if it grows at the same rate of revenue, that would be, in my estimation, an investment, because in other places, we're gaining operating efficiency. So there's no question that we are investing more in our R&D, and that changes the face of ADP, if you will.

The opening of this office in Chelsea, New York is a fairly significant change for us in terms of our way of doing things, in terms of the types of people we're trying to attract and the place that we're doing business. And there's a few other examples of that as well.

So there is change under way, but I think you would be -- it would not be right to read into these -- some of these numbers or try to find it in the numbers because we have, on an annualized basis, $12 billion of revenue and approximately $10 billion in expense.

And the way we look at things is we've got a lot in that $10 billion that we can move around to really focus on our strategic priorities and imperatives without creating any big problems for you guys, for us or for our shareholders. And that's what we're doing..

Got it. Okay. And then with the move to technology, I guess maybe my focus here, where I wanted to ask my question, was on the smaller business side. With the focus on technology there, are you seeing any change in any of the price points for any of your products? If you could talk about the small business or the medium to large.

I'm just wondering if there's any kind of structural change in pricing..

I think Jan was right that -- or correct in pointing out that we have different channels that we use that actually allow us to compete in different places from a price standpoint.

For example, the banking channel would be slightly different from our traditional channel, and we have a few places but there's really nothing to report over the last 2 or 3 years. There's been no major shift in any of those channels or any of those price points.

We do keep our eye on it because for the last 15 years, we've been told that the technology is going to replace -- technology by itself is going to replace ADP, frankly, in every one of our segment.

And all we see is the opposite, because with the Affordable Care Act or more complexity in compliance or the trend towards outsourcing, whatever the factors are, they drive people towards our solutions, which are to have technology paired with compliance and service.

And now with analytics and other tools, we're elevating our purpose to really helping our clients make their businesses successful.

And I think when you package all of that together, I think we're pretty confident that we have a highly differentiated business model that continues to win and continues to win at the prices that we've been able to charge historically.

So we have nothing to report other than, I think, the fact that things are all on track or in the same place from a pricing standpoint in all of our segments..

Okay. And then just lastly for me, how do you feel -- have you seen any change in the competitive environment at the small business level? And maybe you could just talk about how you feel like you'd progressed on the technology front..

In the small business level, again, you know some of our national competitors -- you might not know that we have hundreds of regional and local competitors everywhere.

And so, again, my hats off to the field sales organization, to the field service organization, the people who run these businesses on the low-end because it is hand-to-hand combat and it's a fight every day. So they are just out-executing the competition in a lot of ways and a lot of respect.

Some of it is product, some of it is technology and some of it is just good people and good execution and good focus. And so again, I wish I had a more exciting story, but I think it's just great people executing very well..

And your final question comes from the line of Glenn Greene with Oppenheimer..

Just one quick question.

Just sort of looking at your new sort of sales growth expectation, the 8%, and I think you alluded to last year was 11%, and then sort of just coupling that with call retention, say, flat to maybe modestly down year-to-date, is it a reasonable inference to expect your revenue growth in '15 to decelerate relative to the '14 growth rate? Because I've always thought about sales growth and retention being the key factors driving your revenue growth..

They are the key factors to driving revenue growth, and I would just tell you that, again, the retention rate is one quarter, and it's not our expectation for retention for the full year, and our retention results in January would give me a good degree of confidence that we can achieve our annual objective for retention.

Caveat that by saying that things could change. We have an economic calamity, some sort of issue. But based on our year-to-date January results, we don't expect retention to be a drag on revenue growth in '15. The difference between 8% sales growth and 9% sales growth also is not a material impact on our revenue growth in '15.

So I think it's hard to -- the math is the math. It has an impact. And you can the math yourself in terms of what 1% translates into of sales growth. And I believe it's somewhere around $13 million, $10 million or $13 million of revenue growth.

But I would not call that a significant impact to ADP's revenue growth, and -- because we can all do the math ourselves. I don't know that, that has a material impact on our growth rate in '15..

This concludes our question-and-answer portion for today. I am pleased to hand the program over to Carlos Rodriguez for closing remarks..

Thank you very much for joining us today. As you probably could tell from our tone, we're once again very pleased with our results for the quarter and appreciate the contributions from all our associates and our leaders globally.

We continue to be, I think, committed to our shareholder-friendly actions around returning cash to our shareholders through dividends and share buybacks. And I think you are seeing that in our actions, and we, obviously, as you can tell, also remain very focused on delivering against the HCM strategy that we have laid out.

So I thank you again for joining us, and we look forward to talking to you again next quarter..

Thank you for your participation. This concludes today's conference. You may now disconnect..