We have been looking at various Human Resources related services businesses recently, especially with a multi-part interview series with Michael Gregoire, CEO of Taleo (Nasdaq: TLEO). Taleo has not signaled any weakness due to the economy. One would expect the payroll providers to signal weakness. Let’s take a look at their numbers.
Automatic Data Processing, Inc. (NYSE:ADP) released its Q2 earnings on February 1. Earlier coverage is available here. It reported revenue of $2.15 billion, up 15% y-o-y and 7.5% q-o-q with over 12% growth on a constant foreign currency basis. Diluted EPS grew 22% to $0.55 from $0.45 a year ago on fewer shares outstanding. Fiscal year to date, ADP bought back over 18 million shares of its stock for nearly $842 million.
Segment-wise, Employer Services showed 11% growth in revenue, with 10% organic growth and 8% growth in the US payroll and tax filing business. Beyond Payroll, revenues grew 16% in the U.S. Professional Employer Organization (PEO), ADP’s HR software business saw a revenue growth of 22%. Dealer Services had a revenue growth of 9.5%, with 7% organic growth.
Despite the broader market weakness, ADP expects a strong 2008. It plans to expand its sales force by 5% to 6%. It expects revenue growth of 12% to 13% for 2008. Its stock is trading around $41 after hitting a 52-week low of $37.74 on February 7. Market cap is around $21.5 billion.
On December 19, Paychex, Inc. (NASDAQ:PAYX) reported its Q2 results. Earlier coverage is available here. Net income was $147.1 million up 11% y-o-y. Diluted EPS was $0.40, up 14% y-o-y. Total revenue was $507.8 million, up 12% y-o-y. It completed its $1 billion stock repurchase program (announced in July) on December 14, 2007, for 23.7 million shares of common stock. It paid $226 million in dividends in the first six months and $865 million in stock repurchases. Return on equity for the past twelve months was 30%.
Segment-wise, Payroll Service revenue grew 9% y-o-y to $361.6 million with growth led by client base growth, higher check volume, and price increases. Human Resource Services revenue was $115.5 million, up 24% y-o-y.
For fiscal 2008, Paychex expects payroll revenue growth of 8% to 9%. To help its Major Market Sales (MMS), it has a new time/labor management offering called Time in a Box. It has also partnered with Taleo for applicant tracking. Its stock is trading around $33 after hitting a 52-week low of $31.40 on February 7. Market cap is around $12 billion.
So, both major payroll providers are trading close to their 52-week lows, but neither are signaling any weakness. Investors have beaten them down by speculating layoffs due to a weakening economy. Perhaps, this is the time to Buy these stocks for the long-term.
Also, the intriguing question is this: how come they are not signaling weakness? The job boards are! The answer may be that there is still a large untapped market that does not use payroll services, and these companies are simply growing by selling into those accounts, their growth uninterrupted. But recurring revenues are also strong, which poses the question, are employers really laying off?