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Payroll Sector: Acquisitions And Management Changes

Posted on Tuesday, Aug 10th 2010

The payroll sector continued to improve in the recent quarter as seen from the recent results of Automatic Data Processing (NASDAQ:ADP) and Paychex (NASDAQ:PAYX). ADP made two acquisitions in the quarter while Paychex on the other hand, is still shying away from acquisitions. Meanwhile, CEO has Jonathan Judge, who joined Paychex in 2004, has resigned. Let’s take a closer look.

The recently released Bureau of Labor Statistics report, which includes public sector jobs says, there was a loss of 131,000 jobs in July and the unemployment rate remained stuck at 9.5%. The private sector fared slightly better with addition of 71,000 jobs in the month. In its employment report for the private sector, ADP reported the sixth straight month of job growth. However, the rate of growth has been disappointingly slow. In July, companies added 42,000 jobs, but job growth declined to just 19,000 in June after reaching 30,000 in May.

ADP reported annual revenue of $8.9 billion or growth of 1% in fiscal 2010. Net profit declined 9% and EPS was $2.4, down from $2.62 last year. Fourth quarter revenue increased 4% to $2.2 billion driven by 25% growth in Employer Services and PEO Services new business sales. Q4 net profit declined 40% to $207.9 million and EPS declined 39% to $0.42. ADP bought back shares for $485 million in the quarter and ended the quarter with cash and marketable securities of $1.8 billion. Q3 coverage is available here.

ADP reported that the pays per control (the number of employees that clients pay) metric has grown 0.3%. This is the first sign of improvement after a series of declines. Client retention levels improved 1.6 percentage points to end the year at about 90%, an improvement over declines in the past two years.

For fiscal year 2011, ADP expects revenue to increase 1% to 3% and EPS to increase 1% to 3%. Analysts forecast revenue growth of 4% and EPS growth of 5%. The company expects pays per control to be flat to up 0.5% for the year. The stock is currently trading around $41.56 with market cap of about $21 billion. It hit a 52-week high of $45.74 on April 26 and a 52-week low of $26.46 on May 6.

Chart forAutomatic Data Processing, Inc. (ADP)

ADP targets the large enterprise market and has about 570,000 clients. It recently announced plans to acquire Workscape, a leading provider of Web-based or SaaS integrated benefit and compensation solutions and services. Workscape’s average client has over 20,000 employees.

Earlier in the year, ADP made two acquisitions in the SaaS space: HRinterax,  an HR content and support services company focused on the small business market, and DO2, which provides electronic invoicing software. I earlier pointed to another attractive acquisition in the SaaS space:, which has about 3,500 enterprise customers and a market cap of about $50 million and annual revenue of $45.75 million. My interview with CEO Kent Plunkett is available here.

Its other acquisition of Cobalt Group is for the Dealer Services segment. Cobalt group is a provider of digital marketing solutions to automotive manufacturers and dealers in North America. Apart from bringing some changes to ADP’s marketing, the $400 million acquisition will  bring a larger global marketing network to its manufacturers and a supportive sales force for its dealers.

Paychex in June reported annual revenue of $2 billion in fiscal 2010, down 4%. Net income declined 11% to $477.0 million or $1.32 per share. Fourth quarter revenue was $496.2 million, flat versus last year’s $495.9 million. Net income increased 2% to $115.5 million or $0.32 per share.

The economic downturn has severely affected Paychex’s growth: Its client base declined 3.2%, new client sales declined 4.9%, and checks per client declined 2.6% in fiscal 2010. However, fourth quarter results showed some positive signs. For the first time since the third quarter of fiscal 2007, checks per client increased 1.1% in the fourth quarter.

Payroll Services revenue decreased 2% to $341.3 million and Human Resource Services (HRS) revenue increased 6% to $141.2 million.

Paychex expects the check per client metric to continue improving in 2011. It expects Payroll service revenue for fiscal 2011 to be flat compared to fiscal 2010. Further, the company anticipates Human Resource Services revenue to increase 10% to 13%. The stock is trading around $25.5 with market cap of about $9.2 billion. It hit a 52-week low of $ 24.89 on July 6.

Chart forPaychex Inc. (PAYX)

Tiernan Ray on Barron’s blog wonders if the departure of its CEO is an indication of long-term problems. Stifel Nicolaus analyst David Grossman says the resignation was not a surprise given that Judge has been unable to find new growth for Paychex through either signing up new customers or increasing the amount the company gets from each customer.

Paychex, which targets the small businesses with fewer than 100 employees, has shied from making any acquisitions despite having a strong liquidity position with cash and total corporate investments of $657 million and no debt. SaaS is a good business model for small businesses, and Intacct would be an attractive prospect for Paychex. Will the change in management change its outlook toward acquisitions? Let’s wait and see.

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