Automatic Data Processing, Inc. (ADP)
F3Q10 Earnings Call
April 27, 2010 8:30 am ET
Elena Charles - Vice President of Investor Relations.
Gary Butler – President and CEO
Christopher Reidy - CFO
Julio C. Quinteros, Jr. - Goldman Sachs
Rod Bourgeois - Sanford C. Bernstein & Co., LLC
Jason Kupferberg - UBS
James MacDonald - First Analysis Securities
David Grossman - Thomas Weisel Partners
Michael Baker - Raymond James
Analyst for Adam Frisch - Morgan Stanley
Analyst for Kelly Flynn - Credit Suisse
Gary Bisbee - Barclays Capital
James Kissane - Bank of America Merrill Lynch
Mark Marcon - Robert W. Baird & Co.
Jennifer Dugan – Lazard Capital
Timothy McHugh - William Blair & Co.
Tien-tsin Huang - JP Morgan
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Good morning. My name is Amanda and I will be your operator. At this time I would like to welcome everyone to ADP’s third quarter fiscal 2010 earnings webcast. I would like to inform you that this conference is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. (Operator Instructions)
I would now like to turn the conference over to Ms. Elena Charles, Vice President of Investor Relations.
Thank you. Good morning. I’m here today with Gary Butler, ADP’s President and CEO, and Chris Reidy, ADP’s Chief Financial Officer. Thank you for joining us this morning for our third quarter fiscal 2010 earnings call and webcast.
A slide presentation accompanies today’s call and webcast and is available for you to print from the Investor Relations home page of our website at adp.com. Just to remind you, the quarterly history of revenue and pre-tax earnings for our reportable segments have been posted to the IR section of our website. These schedules have been updated to include the third quarter of fiscal 2010 as well as the restatement of the Dealer Services commercial business to discontinued operations since the business was sold during the quarter.
During today’s conference call we will make some forward-looking statements that refer to future events and as such involve some risks and these are discussed on Page 2 of the slide presentation and in our periodic filings with the SEC.
With that, I will now turn the call over to Gary for his opening remarks.
Thank you Elena. Good morning everybody and thank you for joining us. Let me begin today’s call with some opening comments about our third quarter results. Then I will then turn the call over to Chris Reidy as normal to take you through the detailed results, after which I will return to provide you with our updated forecast for fiscal 2010. Before we take your questions I will provide some concluding remarks.
ADP’s results for the quarter were pretty much in line with our expectations. You have already read in our press release this morning that year-over-year comparisons in our key metrics did begin to ease in the second half of this fiscal year as we had anticipated. Having said that, our results continue to be below ADP historical standards and still being negatively impacted but to a lesser degree by the cumulative impact of the difficult economic environment over the last year and a half.
Let me now point out to you what I believe are the noteworthy items in the quarter. In employer services we did continue to see increased market receptivity from companies willing to invest again in their business infrastructure. New business sales growth flattened in the quarter after six consecutive quarters of year-over-year decline.
Having said that, sales were again mixed across the business units within employer services. Sales to larger companies in the US are still lagging somewhat from a year ago but sales to small and midsized companies are increasing. New business sales in both Europe and global view are also increasing.
I am becoming more encouraged; however I’d like to remind everyone that there is a lag in the high end of the market between reported new sales and when those bookings actually turn into revenues due to the implementation periods required as you move up market to larger, more complex clients.
Additionally, as you may recall, last quarter we did begin accelerating next year’s sales force hiring to better position ADP for stronger sales growth but this is also expected to be somewhat of a drag on earnings over the near term.
Directionally it will take a period of time for revenues and in turn profits to increase but I am pleased that new business sales are moving in the right direction and that the growth of our sales team is meeting the increasing demands in the marketplace.
Let me move on to retention. You have heard from us about declining client retention levels dating back to the last quarter of fiscal ’08 and continuing throughout the full year of fiscal 2009. I am especially pleased that during this year’s critical calendar year end period, client retention levels improved 1.4 percentage points.
ADP’s revenues are still being negatively impacted by the losses of the last several quarters prior to this quarter and we are still not quite yet back to the retention levels from several years ago. But again, the current quarter’s increased retention is directionally a very positive sign.
Our pays per control metric did decline 2.5% during the quarter but the pace of the decline has certainly slowed. We continue to see some indications of stabilization in terms of employment levels across the US and believe that the Hire Act recently passed by Congress may provide a needed catalyst to employers who are on the cusp of making hiring decisions, and of course ADP will assist its clients to enable them to realize the benefits from the provisions of the Hire Act.
We also reported growth of nearly 5% in client fund balances during the quarter after reporting declines for the last 5 consecutive quarters. This growth is primarily the result of higher bonus payments than we anticipated and an increase in state and employment insurance rates and we also got a small lift from favorable Canadian foreign exchange rates.
Let me over on now to Dealer Services. The automotive market is obviously still under pressure but continues its comeback with increases in US car sales volume. Consumers have responded well to recent manufacturer incentives which I also believe is a positive indicator that the outlook is strengthening. Dealers Services continue to improve its North American chair, with increased new business sales and strong competitive win/loss rate. As you may already know, GM and Chrysler have previously announced plans to reinstate a portion of the announced closed dealerships. And of course, some of those are ADP clients.
We remain very comfortable that our earlier estimate of the revenue impact on these closings that we had previously shared with you will be no more than the $50 million of annualized lost revenues to Dealer Services, and will most likely be less than our estimate.