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ADP’s and Paychex’s Results Improve

Posted on Tuesday, Nov 2nd 2010

Payroll companies ADP (NASDAQ:ADP) and Paychex (NASDAQ:PAYX) recently reported better than expected results. Their results reflect a modest improvement in economic conditions, but the companies remain cautious in their outlook. Let’s take a closer look.

Paychex’s Financials
Paychex, with annual revenue of $2 billion in fiscal 2010 in September, reported first quarter revenue of $518.3 million, up 4%. Net income increased 7% to $131.9 million or $0.36 per share. Paychex exited the first quarter with cash and cash equivalents of $272.9 million. Payroll service revenue increased 2% to $360.7 million, driven by a 1.2% increase in checks per client and annual price increases. The improvement in checks per client was primarily driven by an increase in corporate hiring and a higher retention rate. Client retention improved as client losses decreased 12% for the first quarter. However, new client sales were down slightly for the first quarter.

Human Resource Services revenue increased 10% to $145.5 million reflecting the modest improvements in economic conditions and annual price increases. The recently passed Healthcare Reform Act also had a positive affect. Human Resource Services revenue growth was impacted by the sale of Stromberg time and attendance operations in October 2009. Excluding Stromberg, Human Resource Services revenue would have increased 13% for the first quarter.

Paychex expects Payroll service revenue for fiscal 2011 to be flat compared to fiscal 2010. Further, the company expects Human Resource Services revenue to increase 10% to 13%. The stock is trading around $28 with market cap of about $10 billion. It hit a 52-week high of $32.88 on December 2009 and a 52-week low of $ 24.89 on July 6.

Chart forPaychex Inc. (PAYX)


Paychex now has a new CEO, Martin Mucci, after Jonathan Judge recently resigned. Paychex has till now shied away from making any acquisitions. Paychex targets small businesses, and SaaS is a good business model for small businesses. Hopefully, the new CEO will lead Paychex to some strategic acquisitions in this space. I earlier suggested Intacct as an attractive prospect for Paychex.

ADP’s Financials
ADP, with annual revenue of $8.9 billion, reported first quarter revenue of $2.2 billion, a growth of 6% and 4% organic. Net profit declined 2% to $278.5 million and EPS was $0.56, flat with last year. ADP bought back shares for about $50 million in the quarter and ended the quarter with cash and marketable securities of $1.3 billion. Long-term debt was $35.6 million as compared with $39.8 million in the prior quarter.

ADP reported that the pays per control metric in the United States continued to grow at 1.7%, as measured on a same-store-sales basis for clients on its Auto Pay platform. Global client retention levels improved 1.7 percentage points. Employer Services revenue grew 6% for the first quarter with 5% organically. In the United States. Revenue from its traditional payroll and payroll tax filing business grew 2%, and beyond payroll revenues grew 9% for the quarter.

Professional Employer Organization (PEO) Services’ revenues increased 15% and average worksite employees paid by PEO Services increased 9.5% to approximately 214,000. Dealer Services’ revenues increased 12% with 1% organic growth. ADP raised its revenue outlook for fiscal year 2011. It now expects revenue to increase 3% to 5% compared to its previous guidance of 1 to 3% growth. It expects EPS to increase 3 to 5% versus its earlier guidance of 1% to 3%. The company expects pays per control to be up at least 1% for the year and client retention to be up 0.5 percentage points.

It expects PEO Services to grow 13 to 15% driven by higher benefits pass through revenues, compared with our prior forecast of low double-digit revenue growth. Including acquisitions closed during the first quarter, it expects Employer Services to grow 5%. Including its Cobalt acquisition, it expects Dealer Services to grow over 20%. The stock is currently trading around $45 with market cap of about $22 billion. It hit a 52-week high of $45.74 on April 26 and a 52-week low of $26.46 on May 6.

Chart forAutomatic Data Processing, Inc. (ADP)

Unlike Paychex, ADP has been making quite a few acquisitions, and the results are paying off. Its M&A strategy is focused on entering adjacent markets that leverage its core franchise as well as competitive roll-ups within its existing product portfolio. For its Dealer Services, it acquired Cobalt, a provider of digital marketing solutions. It has also been active in the SaaS space with the acquisitions of HRinterax, an HR content and support services company and DO2, an electronic invoicing company. It recently completed its acquisition of Workscape, a leading provider of Web-based or SaaS integrated benefit and compensation solutions and services. I had earlier pointed to Salary.com as an attractive acquisition prospect in the SaaS space. It has now been acquired by Kenexa.

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