On February 4, Automatic Data Processing, Inc. (NASDAQ: ADP) reported in its latest ADP employment report a loss of 522,000 jobs in the private sector. Later, on February 6, the US Labor Department reported that nonfarm payrolls plunged 598,000 in January, the largest drop in 34 years. About 3.6 million US jobs have been lost since the recession began in December 2007, with the last three months showing the greatest declines: payroll losses were 577,000 in December and 597,000 in November. The unemployment rate has reached 7.6%, the highest since September 1992. Despite the worsening economy, ADP did reasonably well in its second quarter. Let’s take a closer look.
On February 3, ADP, the leading payroll processing company with annual revenue of $8.7 billion, reported second quarter results that met estimates. Q2 revenue grew 2.5% to $2.2 billion, down nearly 3 percentage points due to a stronger US dollar. Net income grew 3% to $300.4 million while diluted EPS grew 7% to $0.59. Analysts were expecting earnings of $0.59 on revenue of $2.2 billion.
ADP bought back shares for over $190 million during the quarter. It also increased its dividend 14%, marking its thirty-fourth consecutive year of dividend increases. Cash and marketable securities at the end of the quarter were $1.45 billion compared with $3 billion at the end of the first quarter.
By segment, Employer Services (ES) revenue grew 6% to $1.64 billion with 3% growth in the US payroll and tax filing business and 10% growth in beyond payroll revenue. Year–to-date client retention declined 0.5 percentage points. The dollar value of new business sales declined 13% for ES and Professional Employer Organization (PEO) Services due to price sensitivity and the increased number of companies going out of business. PEO Services revenue grew 14% to $285.4 million and Dealer Services revenue decreased 1% to $342.7 million.
Executing on its strategy for international expansion through acquisitions that was announced last quarter, Dealer Services recently announced the acquisition of Automaster, a leading DMS provider in Finland.
ADP reiterated its fiscal 2009 growth forecast of 2 to 3% growth in revenue and 10 to 14% growth in earnings per diluted share. It is currently trading around $37, recovering from its 52-week low of $30.83 on October 16. Market cap is around $19 billion.
I continue to believe that this year is an excellent opportunity for the company to pick up a portfolio of SaaS companies that align well with their channel at very attractive prices.