Payroll Providers Using Acquisitions To Grow In Still-Shaky Market

Analysts estimate that the third-party payroll services industry accounts for $45 billion annually in the U.S. Industry observers project growth in the sector in the following year as the economic conditions improve. Meanwhile, payroll service providers in the country are already seeing strong results.

ADP’s Financials
ADP’s (NASDAQ: ADP) Q1 revenue grew 13% over the year to $2.52 billion, ahead of the Street’s projections of $2.44 billion. EPS of $0.61 grew 9% over the year and was in line with the market’s expectations.

By segment, revenues from employer services grew 9% over the year to $1.75 billion. The number of employees on clients’ payrolls in the United States grew 3% in the quarter. PEO revenues grew 17% over the year to $400.5 million in the quarter and dealer services revenues grew 18% to $407.9 million.

During the quarter, the company repurchased 5.9 million shares at a total cost of $280 million.

For the current year, ADP projected revenues to grow 7.0%-9.0% with an EPS of $2.52. The Street was looking for EPS of $2.74 for the year.

ADP’s Acquisitions
ADP continued with acquisitions to strenghten their market leadership. Their latest acquisition was that of WALLACE, a privately held provider of Training Tax Credit services. Georgia-based WALLACE is known for having developed the reliable tax credit analysis process for the Georgia Retraining Tax Credit. Their process lets experts help clients understand and maximize the credits available to them as part of training efforts, and deliver a state-approved tax credit. The acquisition is expected to complement ADP’s own Tax Credit and Incentive offering and will help them expand their presence in Georgia.

They also acquired TheRightThing, a recruitment process outsourcing provider. Ohio-based TheRightThing is also the parent company for the AIRS, a recruitment training and technology provider. ADP plans to leverage TheRightThing to strengthen their existing applicant tracking and talent management solutions. Finally, during the previous quarter they acquired Asparity, a developer of online employee benefit tools. Asparity’s Web-based decision support technology provides federal employees with a benefit decision support tools under the brand PlanSmartChoice. Asparity also provides consumer behavioral data analytics to FORTUNE 1,000 companies and public-sector employers.

ADP’s stock is trading at $52.85 with a market capitalization of $25.8 billion. It touched a 52-week high of $55.12 in May of this year.

Paychex’s Financials
Paychex’s (NASDAQ:PAYX) Q1 revenues grew 9% over the year to $563.1 million, ahead of the Street’s projections of $544.6 million. EPS of $0.41 grew 14% over the year and was ahead of the analyst target of $0.38

By segment, Payroll service revenues grew 6% to $382.3 million, and human resource services revenues grew 17% to $169.7 million.

For the year, Paychex projected total revenues grow 7%-9% over the year with earnings growth projected at 5%-7%. The Street was looking for revenue growth of 7% to $2.2 billion with EPS of $1.51.

Paychex’s SMB Focus
Paychex continued to expand in the small and medium business sector and delivered services to attract these clients. Recently, they hosted weekly Web seminars to cover business and regulatory environment topics. These free, 20-minute seminars were aimed to help business owners improve understanding of environment changes and the resources available to handle these changes.

Paychex’s stock is trading at $29.58 with a market capitalization of $10.72 billion. It touched a 52-week high of $33.91 in March of this year.