BR: Look Ahead to September 2008 Quarterly Results

While we have been keeping an eye on Broadridge Financial since Automatic Data Processing (NYSE: ADP) spun it off in March 2007, we waited until the end of the company's 2008 fiscal year, in June, to compute gauge scores.  The Overall Gauge measured 34 of the 100 possible points, and the Profitability Gauge was strongest at 19 of 25 points. 

We expect the GCFR gauges to vary widely until Broadridge adds more chapters to its financial history.

Revenue in the June 2008 quarter was 2.4 percent more than in the year-earlier period.  However, the effective income tax rate was five percent higher, which was a big reason Net Income in the quarter fell by 1.0 percent.

Broadridge Financial Solutions, Inc. (NYSE: BR) provides investor communication, securities processing, and clearing services to financial companies.  Broadridge's broker, bank, and investment manager customers have been pummeled by the credit crisis.  Broadridge recently found it necessary to announce that Barclays Bank (NYSE: BCS and LON:BARC) and Lehman Brothers are/were clients of the company's Securities Processing business.  Barclays bought Lehman's investment banking and capital markets units in the U.S. when the latter went bankrupt.

Asset manager Neuberger Berman, which is a Lehman subsidiary not in bankruptcy, recently signed a three-year contract with Broadridge for clearing services, effective 22 September 2008.  Lehman has just announced plans to sell Neuberger Berman to private equity firms Bain Capital and Hellman & Friedman.

Broadridge has already had other moments in spotlight.  A $380 million loan raised questions about the company's risk management practices.  However, the loan was repaid, and it might have escaped notice entirely if the transaction hadn't spanned two fiscal quarters.  More recently, a Broadridge error caused Yahoo! Inc. (NASDAQ: YHOO) to under-report votes withheld from board members at its highly publicized shareholder meeting.  Votes withheld often signify lack of support for management, and Yahoo management has been widely criticized for its response to the purchase offer from Microsoft Corp. (NASDAQ: MSFT).

We expect an early-November announcement by Broadridge of its results for the September quarter, the first of fiscal 2009.  In anticipation of this report, we've modeled Broadridge's Income Statement for the quarter.  The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data.  GCFR estimates are derived from trends in the company's historical financial results and guidance provided by company management.

This will be the first time we've projected Broadridge's earnings.  Given this, and the turmoil in the financial services industry, readers are strongly cautioned that our estimates may turn out to be far from reality.

Guidance for fiscal 2009 was included Broadridge's report on the fiscal year and quarter that ended on 30 June 2008.  The key paragraph was:

We anticipate net revenue growth in the range of 2% to 4%, earnings before interest and taxes margin in the range of 15.9% to 16.6%, and earnings per share in the range of $1.45 to $1.55, based on diluted weighted-average shares outstanding of approximately 143 million shares. As a result of the timing of expense buildups in fiscal year 2008, we expect earnings to be lower in the first six months of fiscal year 2009, and up in the latter half of the year with a strong exit rate. Our guidance does not take into consideration any share repurchases.

Given this guidance, we will set a $465 million target for Revenue in the September 2008 quarter.  This figure is 3 percent greater than Revenue of $451 million in the year-earlier quarter.

We expect the Broadridge to achieve a Gross Margin of 25 percent of Revenue, which is the average margin for non-June quarters.  Given our Revenue estimate, the Cost of Goods Sold (CGS) -- called Cost of Net Revenues on Broadridge's Income Statement -- is estimated to be (1 - 0.25) * $465 million = $349 million.

Sales, General, and Administrative (SG&A) expenses have been between 9 and 13 percent of Revenue.  We will split the difference and look for SG&A of 11 percent of Revenue, or 0.11 * $465 million = $51 million.

With these estimates, we get a projected Operating Income, as we define it, of $65 million, $3 million below the equivalent year-earlier figure.

Other expenses, mostly interest, have been between $5 million and $10 million per quarter in the last year.  Our estimate for the September quarter is $8 million.  This would bring pretax income to $57 million.  If the Income Tax Rate, which has been increasing, stabilizes at 41 percent, the tax provision will be $23 million.

The end result would be Net Income in the quarter of $34 million ($0.24 per share), compared to $36 million ($0.26 per share) in the September 2007 quarter.

Please also note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats.  A common difference is the classification of income and expenses as Operating and Non-Operating.  The standardization is simply for convenience and to facilitate cross-company comparisons.

($ M)		September 2008 (predicted)	September 2007 (actual)
Revenue (1)		465	451
Operating expenses
	CGS (2)	(349)	(334)
	SG&A	(51)	(49)
	Other	(0)	(0)
Operating Income		65	68
Other income
	Investments	0	0
	Interest, etc. (3)	(8)	(9)
Pretax income		57	59
Income tax		(23)	(23)
Net Income		34	36
		$0.24/sh	$0.26/sh
Shares outstanding		142	140

^{1.  Total Revenues= Services revenues + Other revenues - Interest expense from securities operations.
2.  Cost of Net Revenues
3.  Other expenses, net (mostly interest)}

NT: Look Ahead to September 2008 Quarterly Results

The GCFR Overall Gauge measure of Nortel Networks stood at 41 out of the 100 possible points after we analyzed the company's 10-Q financial statements for the second quarter.  This period featured positive Operating Income, no sure thing for Nortel, but non-operating expenses pushed Net Income into the red yet again.

We didn't consider the score to be especially credible, as discussed below, but the underlying analysis was still revealing.

At GCFR, we try to discern when a company's financial performance is improving or worsening compared to normal conditions as reflected in the historical accounting record.  [We then look to see if the changes are reflected in the stock price.] Nortel hasn't achieved what we would deem stability in many years, and this gives us fits.  Net Income and Cash Flow from Operations are often negative, and too-frequent special charges obscure the situation.  Occasionally, however, some positive data appears and hints at a turnaround.  We're fairly certain that our gauges give too much weight to these evanescent upswings, and yet we don't want to stop looking for them.

We've wondered if Nortel's raison d'être is to pay income taxes on non-existent profits.  In the last 10 quarters, Provisions for Income Taxes totaled $1.27 billion.  During this period the cumulative Pretax loss was $137 million.

Tougher times also revealed shortfalls in the company's internal financial controls, resulting in numerous restatements, and, sadly, allegations of misdeeds.  The RCMP charged a former Nortel CEO and two other executives with fraud for errors for errors in the company's financial statements. 

We will now turn our attention to the third quarter.  Nortel warned on 17 September 2008 that sales in certain markets are under "significant pressure" and that products deliveries are expected to be delayed until the fourth quarter.  Guidance for the quarter and year were revised downward.  The warning was accompanied by an announcement that Nortel intends "to explore a divestiture of its Metro Ethernet Networks business," which it refers to as "a premium asset."

Nortel Networks Corp. (NYSE: NT) is the Canadian-based supplier of products and services to telecom carriers, other networking enterprises, and businesses.  Nortel has defied the worst-case predictions and managed to stay in business and even independent, unlike fellow fallen telecom Lucent Technologies -- now part of Alcatel-Lucent (NYSE: ALU).  Losses have been the norm at Nortel for most of this decade, resulting in an unfathomable accumulated deficit (i.e., negative retained earnings) of $36.7 billion (U.S.). 

On 6 November 2008, Nortel is scheduled to announce its results for the third quarter.  In anticipation of this report, we've modeled Nortel's Income Statement for the quarter.  The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data.  GCFR estimates are derived from trends in the company's historical financial results and guidance provided by company management.

In the recent earnings warning, Nortel explicitly stated that it expects Revenue of about $2.3 billion in the third quarter.  This figure is 15 percent below September 2007's quarterly sales of $2.7 billion.  The revised guidance is also 12.3 percent less than Revenue in the June 2008 quarter.

Nortel also told investors to expect the Gross Margin to be approximately 39 percent of Revenue.  The margin had been more like 42 to 43 percent in recent quarters, although 39 percent would not represent a new low.  The company's guidance translates into an estimate for Cost of Goods Sold of (1 - 0.39) * $2.3 billion = $1.4 billion.

Management also took the trouble to report that "Third quarter operating expense (SG&A and R&D) is currently expected to be $60 million less than the second quarter 2008 level." (Do they enjoy forcing analysts to do arithmetic?)  Research and Development and Sales, General, and Administrative expenses in the second quarter totaled $1.016 billion, so the guidance for the third quarter is obviously $956 million.  Not that it really matters, but we have allocated this value as $397 million for R&D and $559 million for SG&A.

Nortel's quarterly results usually include other operating expenses such as Amortization of Intangibles, In-process R&D, and Special Charges.  These items were not mentioned in the company's guidance, and it's possible they included these items with operating expenses.  The average over the previous eight quarters for these miscellaneous expenses has been $60 million.  We will use this figure as our target for the September quarter. 

Rolling up the estimates described above would lead to an Operating Loss, as we define it, of $119 million in the quarter. 

Gains and losses from Non-operating activities (minority interests, equity in associated companies, asset sales, an interest expense) are extremely volatile at Nortel from quarter to quarter.  If we take two-year average values for these figures, but throw out the high and low values, the aggregate expected non-operating loss is $50 million.

This would increase the pretax loss to $169 million.

Nortel's quarterly effective income tax rate defies prediction.  There have been many quarters where the income tax far exceeds income.  Oddly enough, there have also been quarters where the company had negative Provisions for Income Taxes despite positive earnings.  Admitting our inability to make sense of Nortel's tax situation, we have arbitrarily assumed a +40 percent tax rate for the third quarter.  Given the pretax loss, the company would get a tax credit of $67 million. 

This would yield a Net Loss of $101 million ($0.20 per share).

Please note that the table format below, which we use for all analyses, can and often does differ in material respects from company-used formats.  A common difference is the classification of income and expenses as Operating and Non-Operating.  The standardization is simply for convenience and to facilitate cross-company comparisons.

($M)		September 2008 (predicted)	September 2007 (actual)
Revenue (1)		2,300	2,705
Operating expenses
	CGS	(1,403)	(1,542)
	R&D	(397)	(416)
	SG&A	(559)	(613)
	Other (2)	(60)	(68)
Operating Income		(119)	66
Other income
	Investments (3)	(37)	(42)
	Asset sales	9	(3)
	Interest, etc. (4)	(21)	56
Pretax income		(169)	77
Income tax		67	(50)
Net Income		(101)	27
		($0.20)/sh	$0.05/sh
Shares outstanding		500	500

^{1.  Total revenues includes products and services.
2.  Amortization of intangible assets + Special charges + In-process R&D
3.  Minority interests + Equity in net income of associated companies.  Both figures are net of tax.
4.  Other income - Interest expense}

WPI: Look Ahead to September 2008 Quarterly Results

When we analyzed the second-quarter financial statements of Watson Pharmaceuticals, the GCFR Overall Gauge score advanced from 48 to 56 of the 100 possible points. 

Net Income increased by 66 percent, relative to the year-earlier quarter.  This was achieved with improvements to Revenue, the Gross Margin, and lower Depreciation expenses.  Howerver, Revenue growth was slowed by the company's Distribution segment, which markets products other than those made by Watson itself.  Distribution sales fell by 13 percent in the quarter.  Watson attributed the decline to "fewer new product launches in the quarter."

We're nervously watching an uptick in Watson's Inventory, which rose from 109 days, as measured by Cost of Goods Sold (CGS), on 30 June 2007 to 131 days on 30 June 2008.  The proportion of Inventory deemed to be Finished Goods grew from 66 percent to 68 percent.  By historical standards, the Inventory level is not excessive.  However, expanding Inventory can signal slower-than-expected sales.  Or, more positively, the company might be getting ready to launch a new product.

Our attention is now turned towards Watson's results for the nearly complete third quarter of 2008.

Watson Pharmaceuticals, Inc. (WPI) develops, manufactures, and sells generic and, to a lesser extent, branded pharmaceutical products.  Watson had been expanding beyond generic drugs into higher-margin branded products.  However, Watson's acquisition of Andrx in late 2006 reversed this strategy, and generics are now responsible for three times as much Revenue as branded products.  Watson's management may have deliberately increased their generic drug exposure to take advantage of the large number of branded pharmaceutical products that have, or will soon, lose their patent protection.

The Andrx acquisition, for $1.9 billion in cash, distorted year-to-year comparisons throughout 2007.  However, this big purchase is now fading into the rear-view mirror, and we're hoping to get a better handle on Watson's finances.

On 6 November 2008, Watson is scheduled to announce its third-quarter results.  In anticipation of this report, we've modeled the company's Income Statement for the quarter. The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data.  GCFR estimates are derived from trends in the historical financial results and guidance provided by company management.

When the company announced its second-quarter results, it also revised its guidance for the full year.

For the top-line, management estimated that Revenue in 2008 would be approximately $2.5 billion, which would represent zero growth over 2007.  Revenue in the first two quarters was $623 and $627 million -- both remarkably close to 25 percent of the expect annual total.  We have no reason to expect third-quarter Revenue will stray far from the $625 million bogey.


The company didn't provide a forecast for Gross Margin. We will, after looking at historical data, assume Watson will achieve a margin equal to 41 percent of Revenue.  Therefore, our estimate for the Cost of Goods Sold (CGS) in the third quarter is (1 - 0.41) * $625 million, which equals $369 million.

Watson stated that 2008's Amortization expense is expected to be $80 million.  In the first half of the year, this expense was right on track at $40 million.  We will look for another $20 million in the third quarter. 

The company forecast Research and Development expenses for 2008 at $160 million.  These expenses through June were $77.2 million, slightly under the halfway figure.  We will look for $41.4 million of R&D in the third quarter.

Watson also predicted this year's Sales, General, and Administrative expenses to be between $420 to $440 million.  The first-half expense was on track at $211 million.  We will set the third quarter target for SG&A at $109.5 million, to bring the results towards the middle of the guidance range.

These estimates would result in an Operating Income of $85 million, up 52 percent from $56 million in the September 2007 quarter.

Watson's non-operating income and expenses are typically minor.  Lacking specific guidance, we'll assume a $4 million net expense.  This would lead to Income before Taxes of $81 million.

With a 37 percent Income Tax Rate, Net Income will be $51 million ($0.44/share) for the quarter.  This is consistent with Watson's increased guidance for GAAP earnings in 2008 to be between $1.90 to $2.00 per diluted share.  Our estimate is 47 percent above Net Income in 2007's third quarter.

Please note that the table format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.

($ M)		September 2008 (predicted)	September 2007 (actual)
Revenue		625.0	594.7
Op expenses
	CGS	(368.8)	(346.4)
	Depreciation	(20.0)	(44.2)
	R&D	(41.4)	(35.7)
	SG&A	(109.5)	(112.5)
	Other	(0)	(0)
Operating Income		85.4	56.0
Other income
	Investments	0	6.1
	Interest, etc.	(4.0)	(6.7)
Pretax income		81.4	55.4
Income tax		(30.1)	(20.8)
Net Income		51.3	34.6
		$0.44/sh	$0.29/sh
Shares outstanding		117.8	117.4

ADP: New Listing

A few days ago we looked ahead to ADP's results for the September quarter, which is their first of fiscal 2009.

One piece of news we didn't anticipate was that Automatic Data Processing, Inc. (NYSE: ADP) would change its share listing, effective 21 October 2008, from the New York Stock Exchange (NYSE: NYX) to the NASDAQ Stock Market (NASDAQ: NDAQ).

For those of us that remember when a Big Board listing was considered prestigious and a badge of honor for a successful company, it still seems odd that a healthy blue-chip firm would give up its NYSE listing voluntarily.

E*Trade Financial (NASDAQ: ETFC) made the NYSE-to-NASDAQ switch in December 2006.

Delisting is more common when a company fails to satisfy the Exchange's criteria, which include requirements to maintain a minimum market value and to file quarterly and annual reports. A foreign company might delist to avoid stringent U.S. regulatory requirements.

With the advent last year of portable stock symbols, ADP can retain its eponymous three-character symbol. In prior years, a company making a change to the NASDAQ would have had to switch to a four-character symbol.

Automatic Data Processing, Inc. is a top provider of payroll and other personnel-related information technology services. ADP is one of a mere handful of U.S. companies with a AAA bond rating.

KG: Look Ahead to September 2008 Quarterly Results

A year has elapsed since the U.S. Court of Appeals invalidated the patent for Altace® (Ramipril) held by King Pharmaceuticals, Inc. (NYSE: KG), a maker of brand-name prescription pharmaceutical products.  Altace®, an ACE inhibitor used to treat patients with cardiovascular risks, had accounted for roughly 1/3 of King's net sales.

King's share price dropped in the immediate aftermath of the Court's decision.  The company recognized asset impairment charges (covering intangible assets and inventory) totaling $250 million, announced plans to layoff 20 percent of staff, and the company sped up a shift towards neuroscience, hospital and acute care products.

The effects of the invalidation on the company's sales and profitability were slower to be felt.

Consistent with the strategic shift, King recently approached the shareholders of Alpharma, Inc. (NYSE: ALO) with a sweetened $1.5+ billion acquisition bid.  This offer, which has been rejected by Alpharma's management, answered the question of what King planned for its $1 billion cash hoard.  King's interest in Alpharma was probably piqued by the latter's KADIAN and FLECTOR products for treating acute pain.  King and Pain Therapeutics, Inc. (NASDAQ: PTIE) recently presented test results for a budding chronic-pain treatment known as REMOXY.

When trading in King call options surged in early August, Bloomberg reported on speculative rumors that King itself could be an acquisition target of Pfizer Inc. (NYSE: PFE).

During the first few quarters after the Altace decision, before its negative consequences really took hold, the GCFR gauges of King's performance went haywire and misleadingly indicated that King shares were significantly undervalued.  It was during this period that the Overall gauge soared to 75 points, normally a superlative score.  It took until the second quarter of 2008, when generic Ramipril became available from firms other than Cobalt Laboratories, for our gauges to move towards a more realistic assessment of King.  The Overall gauge fell 20 points when we analyzed King's June 2008 quarterly results.

On 6 November 2008, King is scheduled to announce its results for the nearly concluded third quarter.  In anticipation of this report, we've modeled the company's Income Statement for the quarter.  The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data.  GCFR estimates are derived from trends in the historical financial results and guidance provided by company management.

Readers are advised to read the transcript (at SeekingAlpha.com) from King's conference call with financial analysts on 7 August 2008.  The conference call in May 2008 had more content related to earnings guidance.

Based on the results from the second quarter, we expect Revenue in the September 2008 quarter to be 30 percent less than in the September 2007 quarter.  Given that Revenue in the earlier period was $545 million, this sets our target for the current quarter at $381 million.

King's Gross Margin had once been a Microsoftian 80 percent, or nearly so.  High margins such as this are not unusual for specialty drug manufacturers.  Management indicated that the margin would slip to approximately 75 percent of Revenue in 2008.  If we apply this ratio to our second quarter Revenue estimate, Cost of Goods Sold (CGS) would be (1 - 0.75) * $381 million = $95 million.

The company was very clear in May that it expects quarterly expenses for Depreciation and Amortization to be about $31 million.  This figure is 8.1 percent of our Revenue estimate, which is consistent with historical results.

Management indicated that Research and Development expenses in 2008 will grow to about $180 million, from nearly $150 million in 2007.  If we subtract the first half's $77 million from the expected total for the year, and split the result evenly over the two remaining quarters, we get an R&D estimate for the September quarter of $51.5 million.  This is 13.5 percent of our Revenue estimate, which is much higher than 7 percent ratio more typical at King.

King stated that Sales, General, and Administrative expenses would drop in 2008 by $75 to $90 million as a result of restructuring decisions.  Based on what we've seen in the first two quarters, the savings should be much greater.  In the first two quarters of the year, SG&A expenses were about 29 percent of Revenue.  Given our $381 million Revenue estimate, our SG&A target for the third quarter is $110.5 million.

King often takes special, purportedly non-recurring, operating charges that can determine whether quarterly earnings meet expectations -- for analysts that track GAAP earnings, not the "ex-items" figures that get so much attention.  In the last 10 quarters, the average charge was about $60 million.  We will be more modest in our expectations, and look for the $22.5 million average of the first two quarters of 2008.

The estimates above would lead to an Operating Income for the quarter of $70 million, compared to the charge-driven $78 million loss in the September 2007 quarter.

Net Non-Operating Income or (Expense) has been about $10 million in the last few quarters.

If the Income Tax Rate matches the second quarter's 34 percent, Net Income would be $53 million ($0.22 per share).

Please note that the table format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.

($ M)		September 2008 (predicted)	September 2007 (actual)
Revenue		381	545
Op expenses
	CGS	(95)	(198)
	Depreciation	(31)	(37)
	R&D	(51)	(35)
	SG&A	(111)	(185)
	Other	(23)	(168)
Operating Income		70	(78)
Other income
	Investments	0	(10)
	Interest, etc.	10	8
Pretax income		80	(80)
Income tax		(27)	(40)
Net Income		53	(41)
		$0.22/sh	($0.17)/sh
Shares outstanding		245	243

MSFT: New Debt Rated AAA

In January, we noted that the number of non-financial companies with AAA bond ratings had dropped to 5.  The change occurred when Standard & Poor's reduced the credit rating of United Parcel Service (NYSE: UPS) a notch.

Ironically, in the midst of great financial upheaval, a sixth member has been admitted to the club.  Microsoft Corp. (NASDAQ: MSFT) short-term debt and commercial paper received the highest S&P rating, according to BusinessWeek, on 22 September 2008.

Microsoft simultaneously established a program under which they may issue up to $2 billion of commercial paper.  They also opened a $2 billion revolving credit facility.  Microsoft's board authorized as much as $6 billion worth of debt.

Microsoft has no long-term debt.  See our latest analysis for more details.

If that wasn't enough, Microsoft also initiated a new $40 billion share repurchase program, and the company increased its quarterly dividend by 18 percent.

ADP: Look Ahead to September 2008 Quarterly Results

Our earlier analysis of ADP's 10-K annual report for the fiscal year that ended in June 2008 determined that the GCFR Overall gauge score had slipped slightly to 54 points. The score had been 57 of the 100 possible points after the March quarter.

The recent 50-plus scores are quite good and were last achieved by ADP in 2003. This rock-solid company is growing, highly profitable, and trading at a discount relative to historical measures. The Value gauge is at a strong 16 of 25 possible points.


Automatic Data Processing, Inc. (NYSE: ADP) is a top provider of payroll and other personnel-related information technology services. ADP is one of a mere handful of U.S. companies with a AAA bond rating, and it is an S&P 500 Dividend Aristocrat. The company publishes the monthly ADP National Employment Report on non-farm private employment, and it competes with firms such as Paychex, Inc. (NASDAQ:PAYX). Last year, ADP divested its Brokerage Services Group business, which became Broadridge Financial Solutions (NYSE: BR).

Despite the favorable score, we did have some concerns. For one thing, the Broadridge divestiture and other other restructuring actions might have skewed comparisons with historical results. In addition, and more esoterically, ADP made two changes to the way it accounts for client funds and obligations. The first change, which doesn't concern us, reclassifies these amounts as Current Assets and Current Liabilities. The second change moves the net increase in Client Fund Obligations from the Investing to the Financing section of the Cash Flow Statement. This arcane but big-dollar change -- $3.5 billion in the last fiscal year -- significantly alters the Net Cash Used in Investing Activities. We use this figure to compute the Accrual Ratio, which is an indicator of Earnings Quality and Profitability. For consistency with historical data, we adjusted the newly reported Cash Flow figures to comply the older classification.

On 3 November 2008, ADP is scheduled to announce its results for fiscal 2009's first quarter, which will end on 30 September 2008. In anticipation of this report, we've modeled ADP's Income Statement for the quarter. The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data. GCFR estimates are derived from trends in the company's historical financial results and guidance provided by company management.

ADP management, in its report at the end of fiscal 2008, provided guidance for fiscal 2009.

The guidance indicated that Revenue is projected to grow by 7 to 8 percent. This rate, lower than in fiscal 2008, reflects both more challenging comparison and the weaker economy.

Our working estimate for Revenue in the September quarter is $2.13 billion. This figure is 7.0 percent more than Revenue in the prior-year quarter. It also translates into year-over-year Revenue growth of 10.9 percent.

The Gross Margin in the last four sequential quarters has averaged about 55 percent. If we assume ADP will attain this same margin in the September quarter, the Cost of Goods Sold (CGS) -- what ADP calls "Operating Expenses" -- will total (1 - 0.55) * $2.13 billion = $960 million.

Depreciation and amortization expenses have been about 2.7 percent of Revenue in the last year. Given our Revenue estimate, it seems reasonable to expect these expenses to equal about $58 million in the September quarter.

Our estimate for Research and Development (R&D) expenses ("Systems Development and Programming Costs") is 6.0 percent of Revenue. This would equate to $128 million

Sales, General, and Administrative (SG&A) expenses average 27 percent of Revenue, which is a reasonable expectation for the September quarter. Our target for these expenses becomes 0.27 * $2.13 billion = $580 million.

Rolling up the figures identified above, our estimate for Operating Income, as we define it, is $412 million. This is 12.6 percent above the $366 million of Operating Income in the year-earlier quarter.

For net non-operating income (i.e., other income less interest expense), $15 million would seem to be a reasonable estimate based on recent data.

If the Income Tax Rate remains at around 36.5 percent, Net Income will be $271 million ($0.52 per share). In the year earlier quarter, Net Income from continuing operations was $240 million ($0.45 per share). Therefore, the growth rates on an absolute and per-share basis are predicted to be 12.9 and 15.6 percent, respectively.

ADP management forecast they would achieve diluted Earnings per Share growth of 10 to 14 percent.

Please note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.

($ M)		September 2008 (predicted)	September 2007 (actual)
Revenue (1)		2,132	1,992
Operating expenses
	CGS (2)	(959)	(908)
	Depreciation (3)	(58)	(59)
	R&D (4)	(128)	(124)
	SG&A	(576)	(534)
	Other	0	(0)
Operating Income		412	366
Other income
	Investments	0	0
	Interest, etc.	15	15
Pretax income		427	382
Income tax		(156)	(141)
Net Income from continuing operations		271 $0.52/sh	240 $0.45/sh
Income from discontinued operations (5)			57 $0.11/sh
Shares used in per-share calculations		520	536

<sup>1. Total revenues includes interest on funds held for clients and Professional Employer Organization revenues.
2. Operating expenses
3. Depreciation and amortization.
4. System development and programming
5. Net of tax</sup>