SaaS Acquisitions Recommended For ADP and Intuit

In a recent Automatic Data Processing (ADP) National Employment report, ADP reported a drop of 157,000 jobs, the biggest decline the company has seen since November 2002. With the economic slump becoming more severe, job cuts have spread from automakers, financial and housing-related companies to retailers and other services. ADP and Intuit both also recently cut their outlook. Let’s take a closer look at their results.

ADP Inc (NASDAQ:ADP), the leading payroll processing company (also on my Top 10 Outsourcing Stocks) with annual revenue of $8.7 billion, reported its first quarter 2009 results on November 3. Revenue grew 9.5% to $2.18 billion, benefiting 1% from favorable foreign exchange rates. Net income was down 7% to $276.9 million while diluted EPS grew 20% to $0.54. Excluding charges, EPS was $0.55, beating analyst estimates of $0.50 on revenue of $2.14 billion. 

The company bought back shares for over $280 million during the quarter and ended the quarter with $3 billion in cash and marketable securities.

By segment, Employer Services (ES) revenue grew 8% (8% organic) to $1.56 billion with 5% growth in the US payroll and tax filing business and 13% growth in beyond payroll revenue. Client retention declined 0.3 percentage points and new business sales growth declined 8% for ES and Professional Employer Organization (PEO) Services on the weaker-than-anticipated economy. PEO Services revenue grew 18% to $279.2 million and Dealer Services’ revenue increased 2% (1% organic) to $339 million. 

Based on its weaker-than-expected performance in the current economy, ADP has cut its outlook for 2009. It forecast revenue growth of 2% to 3%, down from the prior forecast of 7% to 8%. It expects 5% revenue growth for Employer Services, 14% to 16% for PEO Services, and flat revenue for Dealer Services. The company expects 10% to 14% EPS growth.

In a recent development, ADP announced that it is on the lookout for small companies to buy (in the range of $300 to $400 million) to grow in the United States, Europe or Asia. It’s a great time for ADP to go out on a shopping spree, and with its strong cash position, ADP can easily acquire some excellent SaaS companies in the HR and talent management space. It is currently trading around $35 with a market cap of about $18 billion. The stock hit a 52-week low of $30.83 on October 16.

On November 19, Intuit Inc. (NASDAQ: INTU), the tax preparation and small business accounting software maker with annual revenue of $3.1 billion, reported its first quarter results. Revenue increased 8% to $481 million while net loss widened from $20.8 million, or $0.06 per share to $52.1 million, or $0.16 per share as it lost the income of a outsourced payroll assets it sold last year to ADP. Adjusted loss per share was $0.09 versus $0.10 last year in the typically slow first quarter. Analysts estimated loss of $0.12 per share on revenue of $481.4 million.

Intuit ended the first quarter with $747 million in cash and investments. Capital expenditure was $67 million and it bought back shares worth $165.

By segment, revenue from QuickBooks grew 6% to $152 million, Payroll and Payments increased 16% to $152 million, Consumer Tax grew 7% to $14 million, Accounting Professionals rose 16% to $21 million, and Financial Institutions revenue (including Digital Insight) grew 3% to $75 million. Other Businesses revenue was flat versus last year.

For the second quarter, Intuit expects revenue to grow 3 to 5% to a range of $860 to $880 million. Adjusted EPS is expected between 40 and 42 cents, and GAAP diluted EPS between 30 and 32 cents.

Poor economic conditions have resulted in a 4% decline in the transaction volume in the Payroll and Payments segment and fewer new QuickBooks users. A stronger dollar has affected the Other Businesses segment which consists of Canadian and UK businesses, Real Estate Solutions and Quicken. 

Based on this performance, Intuit has cut its earlier outlook for revenue in 2009 between $3.35 and $3.43 billion. It now expects revenue between $3.26 and $3.38 billion, or growth of 6 to 10%, and GAAP EPS of $1.38 to $1.45. Non-GAAP EPS is expected to be between $1.82 and $1.89, or growth of 14 to 18%. The stock is currently trading around $23 with a market cap of about $7.3 billion. It hit a 52-week low of $20.24 on November 20.

Intuit (whose CEO, Brad Smith) is a former ADP executive, should also follow ADP’s lead and go on an SaaS acquisition spree. There are several excellent companies in the small business accounting and payroll software space that I have written about in the Deal Radar 2008 series: PayCycle, Bill.com, Everest, Intacct and others.