ADP, Paychex Signal Slight Weakness

In an earlier post regarding payroll providers ADP and Paychex, I had observed that they hadn’t signaled any weakness due to the economy. Things seem to be a bit different this quarter. ADP said it is “somewhat” affected by the slowing economy. Paychex also saw signs of a weakening economy with a more difficult than normal selling season and increases in business failures especially in Florida and Southern California as well as the construction, mortgage and the real estate industries. Let’s take a closer look at their results in this post.

In the April 2008 ADP National Employment report, ADP reported an increase of 10,000 private jobs, which is above consensus forecasts of decline. Sectors hit hardest by the economy were residential construction and financial activities related to home sales and mortgage lending. However, these were offset by increase of 42,000 jobs in the small businesses.

On May 1, Automatic Data Processing Inc (NYSE:ADP) reported 12% revenue growth to $2.43 billion in the third quarter benefiting over 2% or $50 million from fluctuating foreign exchange rates. Diluted EPS grew 18% to $0.77. Analyst estimates were revenue of $2.41 billion and EPS $0.75. It bought back over 24 million shares fiscal year-to-date for about $1.1 billion in the fiscal year to-date. Its dividend for 2008 has also increased by 26%. Earlier post profiling its business is here.

Segment-wise, Employer Services grew 9% to $1.76 billion with 8% organic growth and 8% growth in US payroll and tax filing business. Beyond payroll revenues, excluding PEO Services revenues grew 13%. PEO Services grew 20% to $300 million and Dealer Services’ revenues increased 8% (5% organic) to $344 million.

Although ADP says it has been somewhat impacted by the slowing economy, it continues to expect strong growth in fiscal 2008. It expects growth of 12% to 13%, including approximately two percentage points from foreign exchange rates. It is also positive about achieving the high end of diluted EPS guidance of 18% to 21%. It has slightly lowered its worldwide sales forecast for Employer Services and PEO Services to high single digit growth. Segment wise, it expects 10% growth in Employer Services, 19-20% in PEO Services, and 9% in Dealer Services.

ADP is trading around $44 after a 52-week low of $37.74 on February 7. Market cap is around $23 billion.

Paychex Inc (NASDAQ: PAYX) reported its Q3 results on March 26 (profile available here). Revenue grew 10% to $532.2 million generated by payroll service revenue growth of 8% and human resources services revenue growth of 18%. Net income increased 13% to $142.5 million. Diluted EPS grew 18% to $0.39.

Segment-wise, payroll service revenue increased 8% to $374.2 million due to client base growth, higher check volume, and price increases. Human Resource Services revenue increased 18% to $120.6 million driven by increase in retirement services client base, comprehensive human resource outsourcing services client employees, and workers’ compensation insurance client base. The acquisition of BeneTrac also contributed about $3 million in both Q2 and Q3.

Despite a more difficult than normal selling season, checks per client have not yet shown any major weakness. For full fiscal year 2008 ending May 31, payroll service revenue is expected to grow between 8 and 9%. Human resource services revenue growth is expected between 19 and 22% with total service revenue growth between 10 and 12%. Net income is expected to grow between 11 and 13%. However, this guidance was for Federal Funds rate of 2.25% and the recent 25-basis-point cut in the Federal Funds rate could have an earnings impact of about $4.5 million, after taxes.

Paychex is currently trading around $36, picking up well after a 52-week low of $30.09 on March 10. Its market cap is around $13 billion.