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Intuit and ADP Make SaaS Acquisitions, But High Unemployment Hurts

Posted on Monday, Nov 23rd 2009

This month, both Intuit and ADP made some SaaS acquisitions. Intuit has followed an aggressive acquisition strategy this year. It began its SaaS rollup with PayCycle for $170 million in June, and early this month it bought Mint.com for $170 million. ADP made its first acquisition this year with HRinterax, which has an award-winning Web-based portal, HR411. Let’s take a closer look.

In my most recent post on Intuit and ADP, I analysed their acquisition strategies and concluded that ADP, with its $300 million-$400 million budget, would focus on the talent management space with SaaS company, Salary.comas a possible target. On November 12, ADP announced the purchase of HRinterax, Inc., an HR content and support services company focused on the small business market. In another earlier post, I said that ADP could become a powerhouse with some SaaS acquisitions, and HRinterax’s Web-based SaaS solution with over 100,000 subscribers is a good step in that direction.

For Intuit, I suggested the acquisition of Intaact, an on-demand financial management applications company. Mint.com is an online money management software service and a strong competitor to Intuit’s Quicken service; Mint is adding 3,000 customers every month and Intuit will clearly strengthen its SaaS offerings with this acquisition. Intuit plans to keep both Mint.com and Quicken products and expand its base. About 40% of Mint.com’s users are women while 85% of Quicken users are men. Last week, Intuit expanded its SaaS portfolio with Customer Manager, a CRM tool targeted at small businesses. Will Intuit’s next SaaS acquisition come from the CRM space?

Let’s now look at each company’s recent performance. Automatic Data Processing, Inc. (NASDAQ:ADP), with nearly $9 billion in revenues and about 570,000 clients, is one of the world’s largest providers of business outsourcing solutions. On November 4, ADP reported first quarter results that beat estimates as its earnings increased due to the company’s cost-cutting efforts. Q1 revenue was down 4% to $2.1 billion, mainly due to currency changes. Net income was $284.1 million or $0.56 per share, up from $276.9 million or $0.54 per share last year. Analysts expected earnings of $0.50 per share on revenue of $2.05 billion. ADP bought back shares for about $13.7 million and ended the quarter with $1.7 billion in cash. Q4 coverage is available here.

Employer services revenue declined 3%. In the United States, payroll and tax filing business declined 7%. The number of employees on clients’ payrolls declined 6.5% in the country, and worldwide client retention declined 1%. PEO Services’ revenue increased 6% mainly due to higher benefits pass-through revenues as a result of increases in both benefit rates and the number of worksite employees. Dealer Services revenue declined 4%.

ADP has updated its fiscal 2009 outlook assuming no change in the current economic environment. It now expects EPS of $2.34 to $2.39. It expects revenue to decline 1 to 2% with revenue from Employer Services declining 1 to 2%, PEO Services growing 4 to 6% and Dealer Services declining 3 to 6%.

According to the most recent ADP National Employment Report, U.S. private companies lost 203,000 jobs in October, more than the 190,000 economists were expecting, but an improvement over the 371,000 jobs lost in July. However, the U.S. unemployment rate jumped to 10.2% last month, the highest level since 1983. In Michigan it is as high as 15.1%, and several other states have rates over 10%. Holiday hiring has also been slow. Such developments do not bode well for client rentention rates.

ADP is currently trading around $43 with market cap of about $22 billion. It hit a 52-week high of $44.05 on November 17.

Chart for Automatic Data Processing, Inc. (ADP)

Last week Intuit (NASDAQ:INTU), the leading small business accounting and tax software provider with annual revenue of $3.18 billion, reported first quarter results that also beat estimates. Q1 revenue was up 2% to $493 million. Operating loss was $99 million or $0.21 per share compared to $76 million or $0.16 per share last year as marketing expenses offset higher revenues. Excluding charges, operating loss was $39 million or $0.10 per share. Analysts expected loss of $0.16 per share on revenue of $488 million. Q4 analysis is available here.

During the quarter, Intuit repurchased shares for $300 million, and the board approved a new repurchase program of $600 million. The company ended the quarter with more than $1 billion in cash and investments.

Revenue growth in core businesses was led by the Employee Management Solutions’ Payroll service and the Financial Institutions segment. Revenue from Financial Management Solutions was down 7% to $134 million, Employee Management Solutions was up 9% to $97 million, Payments Solutions was up 4% to $75 million, Consumer Tax was up by $8 million to $22 million, Accounting Professionals was up 3% to $22 million, and Financial Institutions was up 7% to $80 million.

For the second quarter, Intuit expects revenue in the range of $800 to $835 million and earnings of $0.29 to $0.32 per share. Analysts expect Q2 earnings of $0.37 per share on revenue of $833 million. It also backed its fiscal 2010 guidance of fiscal year revenue growth of 4% to 8% and operating income growth of 6% to 10%. CEO Brad Smith said that, “While we do believe we have seen the bottom, we haven’t seen any sustained positive trends in consumer spending or new business formations to suggest a rapid recovery.”

Intuit is currently trading around $30 with market cap of about $9.5 billion. It hit a 52-week high of $31.29 on August 12.

Chart for Intuit Inc. (INTU)

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Intuit and ADP Make SaaS Acquisitions, But High Unemployment Hurts … :: Online Tax Experts Monday, November 23, 2009 at 4:34 AM PT