ADP and Intuit Should Acquire Some SaaS

Last week, Intuit (NASDAQ:INTU) the leading accounting and tax software maker with annual revenue of $3.1 billion, reported a strong third quarter in which it beat estimates, driven by strong sales in Consumer Tax and growth in the small business customer base despite the tough economy. In the past few weeks there have been expressions of optimism in the news media and signs from companies such as Intel and Cisco that the economy is recovering. Let’s take a look at ADP’s and Intuit’s results for any such signs.

Q3 revenue at Intuit increased 9% to $1.434 billion. GAAP operating income was up 13% to $764 million or $1.47 per share. Excluding charges, profit was $1.68 per share, beating analyst estimates of $1.60 per share on revenue of $1.4 billion. Q2 analysis is available here.

Consumer tax revenue was up 18% to $777 million with 11% growth in the customer base and 36% growth in online sales. Small Business revenue grew 1% to $307 million. Payroll and Payments revenue was up 11% to $157 million, Accounting Professionals up 4% to $179 million, and Financial Institutions up 3% to $78 million. QuickBooks revenue was down 8% to $149 million and Other Businesses was down 9% to $94 million.

Intuit ended the quarter with $1.7 billion in cash and investments. It did not repurchase shares this quarter and has $400 million remaining in the current repurchase authorization. Capital expenditures were $31 million and the company expects to meets its $200 million capital spending estimate for the year. Overall, Intuit has a strong balance sheet, and as I said last quarter, it should acquire into the Saas sector. Some likely targets include Paycycle, Everest, Intacct and Bill.com from the Deal Radar series.

For the fiscal year 2009, Intuit has tightened its guidance. It now expects revenue of $3.155 to $3.185 billion or growth of 3-4% from its earlier outlook of 2-6%; non-GAAP operating income of $918 to $938 million; and non-GAAP EPS of $1.78 to $1.82. It has also updated its full-year consumer tax segment revenue guidance to $980 to $990 million or growth of 5-7%. Analysts expect earnings of $1.55 per share on revenue of $3.16 billion for 2009. The stock is currently trading around $27.72 with market cap of about $9 billion.

On May 5, Automatic Data Processing, Inc. (NASDAQ:ADP), the leading payroll processing company with annual revenue of $8.7 billion, reported a mixed third quarter. Q3 revenue declined 2% to $2.37 billion due to rising unemployment at the company’s clients and unfavorable exchange rates. Net income declined to $402.5 million, or $0.80 per share, from $413.6 million, or $0.79 per share last year. Analysts expected earnings of $0.80 on revenue of $2.39 billion. Gross margin fell to 48.7% from 49.6% and ADP bought back shares for about $550 million.

As per its latest monthly employment report, nonfarm private employment decreased 491,000 from March to April 2009. In February, the ADP report indicated a loss of 522,000 jobs. The picture is far from rosy — the Bureau of Labor Statistics indicated that unemployment was 8.9% in April.

By segment, Employer Services (ES) revenue grew 1% with a 3% decline in the US payroll and tax filing business and 6% growth in beyond payroll revenue. Year–to-date client retention declined 1 percentage point. The dollar value of new business sales declined 10% for ES and Professional Employer Organization (PEO) Services. PEO Services revenue grew 10% and Dealer Services revenue decreased 3%, hurt by the collapse of the auto industry.

ADP expects clients’ payrolls to continue to decline this quarter. However, it continues to expect revenue growth of 1 to 2% and the low end of its 10% to 14% growth forecast in diluted earnings per share. During the conference call, President and CEO Gary Butler said that while deals were not moving quickly through the sales pipeline (new business sales were down 10% over both the year and the quarter), large companies in particular are showing interest.

The stock is currently trading around $36.98 with market cap of about $18.55 billion. ADP ended the quarter with cash and marketable securities at $1.47 billion. I earlier said that ADP should also acquire some SaaS companies, and this may be the best time to do so.