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Acquisition Outlook: Intuit, ADP

Posted on Wednesday, Aug 26th 2009

This post looks at the recent performance of Intuit and ADP. Strengthening its SaaS strategy, Intuit recently acquired PayCycle, which was at the top of my recommendation list for a SaaS roll-up.Its lineup of SaaS offerings now accounts for about $900 million in revenue, an increase of 22%, faster than the company average. We will also look at what companies it can acquire next.

Last week Intuit (NASDAQ:INTU), the leading small business accounting and tax software provider, reported its fourth quarter and fiscal year 2009 results. Q4 revenue was $479 million, about the same as last year. Due to charges related to its recent $170 million Paycycle acquisition and restructuring, the company reported a loss of $116 million or $0.22 per share compared to a loss of $94 million or $0.19 per share last year. Excluding charges, loss was $49 million or $0.10 per share. Analysts expected a loss of $0.12 per share on revenue of $469.9 million.

For the full fiscal year, Intuit reported revenue of $3.18 billion, an increase of 4%. Operating income was up 5% to $682 million or $1.35 per share. It generated $812 million in cash and repurchased shares worth $100 million in the fourth quarter, $300 million for the full year and ended the fourth quarter with $1.4 billion in cash and investments.

Intuit now has a new reporting structure. The Small Business Group includes three reporting segments: Financial Management Solutions (formerly QuickBooks), Employee Management Solutions and Payments Solutions. The latter two segments were formerly part of the Payroll and Payments segment.

In fiscal 2009, revenue from Financial Management Solutions was down 2% to $579 million, Employee Management Solutions was up 8% to $365 million, Payments Solutions was up 15% to $291 million, Consumer Tax was up 7% to $996 million, Accounting Professionals was up 8% to $352 million, and Financial Institutions was up 4% to $311 million.

Consumer Tax and Small Business Group or payroll processing are the major revenue drivers for the company. Intuit has about 40% penetration in the payroll processing or QuickBooks space and with the PayCycle acquisition, it expects to increase its share. Paycycle has more than 75,000 customers and annual revenue of $30 million in 2008. Its CEO is Jim Heeger, whose story you can read here. It was founded byRené Lacerte, CEO of

If Intuit wants to expand its share further, Intacct which provides on-demand financial management applications to over 2,500 SMBsis another interesting prospect. In March 2007, Intacct was recognized as “Best for Replacing QuickBooks” by Inc. magazine. In my recent Forbes column, I looked at other acquisition prospects, Intacct’s rival Everest and NetSuite is another acquisition possibility that I discuss in the article, although it is less compatible with Intuit. With $1.4 billion in cash, Intuit can definitely afford another acquisition within the year and with the attractive valuations right now, picking up Intacct could be a good idea.

For fiscal 2010, Intuit expects revenue growth of 4-8% or a range of $3.30 billion to $3.43 billion. Operating income is expected to grow 15-20% to $785 million to $825 million or EPS of $1.49 to $1.56. Analysts expect earnings of $2 a share and revenue growth of 6% to $3.36 billion.

For the first quarter, Intuit expects revenue in the range of $479 to $493 million (0-2% growth) and loss in the range of $126 million to $107 million. Adjusted loss is expected to be $0.15 to $0.19 per share versus analyst estimates of a loss of $0.08 per share on revenue of $489 million. It is currently trading around $28 with market cap of about $9 billion. The stock hit a 52-week high of $31.29 on August 12. It was downgraded by Credit Suisse following the release of the company’s disappointing outlook.

On July 30, Automatic Data Processing, Inc. (NASDAQ:ADP), the leading payroll processing company, also reported its fourth quarter and fiscal 2009 results. Q4 revenue was down 5% to $2.1 billion due to the poor economy. However, profit increased to $352.8 million, or $0.70 per share from $233.5 million, or $0.45 per share last year. Excluding charges, it earned $0.45 per share, in line with analyst estimates. Q3 analysis is available here.

For the full fiscal year 2009, revenue grew 1% to $8.9 billion and profit grew 7.8% to $1.33 billion, or $2.63 per share.

In the company’s largest segment, employer services, revenue was flat in Q4 and grew 4% in 2009. In the US, payroll and tax filing business declined 4% in Q4 and were flat in 2009. Employees on clients’ payrolls were down 5.7% in Q4 and 2.5% in 2009. PEO Services’ revenue increased 7% in Q4 and 12% in 2009. Dealer Services’ revenue declined 9% in Q4 and 3% for the year.

During the fourth quarter, ADP bought back shares worth $550 million. It ended the year with $1.7 billion in cash. ADP says it would like to spend $300 million to $400 million on acquisitions this year. I have earlier said that ADP should also acquire some SaaS companies. It had earlier in 2007 acquired Employease, Inc., VirtualEdge Corporation, and the fully-outsourced payroll business of Intuit. The talent management space could therefore be a good fit for ADP and with a market cap of $45 million an interesting prospect. My interview with its CEO is available here.

ADP expects fiscal 2010 profit in the range of $2.29 to $2.39 per share. Analysts expect profit of $2.44 per share. ADP expects revenues to decline 1% to 4% and the number of employees on client payrolls to fall 5% to 6%. According to its recent ADP National Employment Report, US private companies lost 371,000 jobs in July, more than the 345,000 economists were expecting. This is an improvement over its April report, when there was a loss of 491,000 jobs. The stock is currently trading around $39 with market cap of about $19 billion.


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