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In A Wise Move, ADP Enters Healthcare IT

Posted on Wednesday, May 11th 2011

Unemployment rates in the country inched up marginally from 8.8% in March to 9.0% in April. Despite this only slight increase, the unemployment rate was 0.8% higher than in November. ADP’s report on non-farm payroll recorded the creation of 179,000 jobs in the private sector in April, which is significantly lower than February’s job gains of 217,000 and March’s gains of 207,000. Over the first four months of 2011, an average 196,000 private sector jobs have been created in the United States.

ADP’s Financials
But, despite a weak April, ADP (NASDAQ:ADP) managed to meet expectations for the recently reported quarter. Q3 revenues increased 12% over the year to $2.7 billion, marginally higher than the market’s estimate of $2.66 billion. Excluding acquisitions, revenues would have increased 7% over the year. EPS of $0.85 was in line with the market’s expectations.

By segment, Employer Services revenues grew 9% over the year and 7% organically to $1.93 billion. Domestic revenues from traditional payroll and payroll tax filing services grew 5%, and revenues from services beyond payroll grew 15% in the quarter. PEO Services revenue grew 18% over the year to $447.8 million and interest on funds held for clients grew 0.5% over the year to $148.6 million. Dealer Services revenue reported 29% growth over the year and 3% organic growth to $391.5 million.

For the year, ADP raised its guidance to revenues of $9.82 billion compared with the market’s projections of $9.7 billion. EPS of $2.51 to $2.53 is also ahead of the Street’s projected EPS of $2.49.

ADP’s Acquisitions
ADP has been following a M&A strategy of targeting companies in adjacent markets to leverage its core operations and to roll up within its existing portfolio. As part of this move, it recently acquired AdvancedMD, a privately held provider of practice management (PM) and electronic health records (EHR) solutions targeting small and mid-sized medical practices. AdvancedMD’s cloud based network is used by more than 10,000 physicians across 4,100 practices and 300 regional billing partners. ADP itself provides HR, payroll, and benefits outsourcing solutions to 45,000 physicians in 13,500 small and mid-sized practices. Through the acquisition, ADP will be able to deliver AdvancedMD’s solutions across the combined client list. You can read my interview with AdvancedMD’s CEO, Eric Morgan, recorded earlier.

Given the government’s focus on healthcare IT, I think AdvancedMD’s acquisition has helped to pull ADP’s stock up. The stock is trading at $54.16 with a market capitalization of $27.06 billion. It touched a five-year high of $54.96 earlier last week.


Paychex’s Financials
Paychex (NASDAQ:PAYX) also managed to meet Street expectations. Q3 revenues of $531.3 million increased 5% over the year and exceeded the market’s target of $528 million. EPS of $0.36 was a cent higher than the Street’s target.

By segment, Payroll Service revenues grew 2.3% over the year to $366.4 million. However, the company reported flat sale of new units compared with the previous quarter and attributed the growth in revenues to the number of checks processed per client. The Human Resource Services segment revenues grew 13.1% over the year to $153.2 million.

For the year, Paychex maintained their revenue target of $2.06 billion to $2.10 billion with earnings of $496.1 billion to $505.6 million. The Street was expecting revenues of $2.08 billion and earnings of $513 million.

Paychex’s Product Innovation
Paychex recently launched new Smart Time clocks, a timekeeping system specifically targeted at businesses with fewer than 25 employees. The plug-and-play solution helps keep track of employee time and integrates into Paychex’s payroll solution to calculate earned wages. Earlier last year, the company had released online W-2 and pay stubs as part of its ongoing focus on product enhancement.

Paychex Acquired ePlan
Paychex continued its inorganic growth and recently acquired Denver-based ePlan Services. ePlan Services’s software automates the administration of 401(k) plans and makes the fee structure of the plan more transparent. ePlan’s software has been deployed in almost 4,000 retirement plans across the country. Its software is expected to complement Paychex’s recordkeeping business and enable Paychex to serve financial advisers on fee structures with greater clarity to meet with regulatory demands.

I maintain my belief that Paychex should be evaluating Intacct, the provider of on-demand financial management applications, as their next acquisition target. Intacct’s acquisition will continue to strengthen Paychex’s position in the small and medium business sector and will be in line with their SaaS focus strategy.

Paychex’s stock is trading at $32.60 with a market capitalization of $11.6 billion. It touched a 52-week high of $33.91 in March of this year.

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