ADP

Automatic Data Processing, Inc. (ADP)

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Automatic Data Processing, Inc. (ADP)

F4Q09 Earnings Call

July 30, 2009 8:30 am ET

Executives

Elena Charles - Vice President of Investor Relations

Gary Butler - President and Chief Executive Officer

Chris Reidy - Chief Financial Officer

Analysts

Steve Fordham - UBS

Kartik Mehta - North Coast Research

Jim MacDonald - First Analysis Corp.

Rod Bourgeois – Sanford Bernstein

David Grossman - Thomas Weisel Partners

Gary Bisbee - Barclays Capital

Mark Marcon - Robert W. Baird & Co., Inc.

Kelly Flynn - Credit Suisse First Boston

Presentation

Operator

Good morning. My name is [Ray] and I will be your conference operator. At this time, I would like to welcome everyone to the Automatic Data Processing, Inc. fiscal 2009 earnings conference call. (Operator Instructions)

I will now turn the conference over to Elena Charles, Vice President of Investor Relations. Ms. Charles, please go ahead.

Elena Charles

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 fiscal 2009 earnings call and webcast.

A slide presentation accompanies today's call and webcast and is available for you to print from the Investor Relations homepage of our website at ADP.com.

Just to remind you, the quarterly history of revenue and pre-tax earnings for our reportable segments has been posted to the IR section of our website. These schedules have been updated to include the fourth quarter of fiscal 2009.

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'll now turn the call over to Gary for his opening remarks.

Gary Butler

Thank you, Elena. Good morning, everyone and thank you for joining us.

I'll begin today's call with some opening remarks about our fourth quarter and our fiscal year '09 results. I'll then turn the call over to Chris Reidy to take you through the detailed results, and I'll return to provide you with our forecast for fiscal '10 and before we take your questions I'll provide some concluding remarks.

To begin, ADP's results this year were clearly impacted by the severe economic conditions. Just to highlight a few, rising unemployment, frozen credit markets impacting companies' buying decisions and consumers' ability to purchase new cars, record low interest rates, volatile financial markets and the list goes on. This year has clearly not been business as usual not just for ADP but for most companies.

Toward the end of fiscal '08 we saw a lengthening of the sales cycle at the high end of the market, particularly in Employer Services, indicating a slowdown and then early on in fiscal '09 the financial market volatility led to the most challenging economic environment that any of us has ever seen.

Revenues for the '09 fourth quarter declined 5% year-over-year as foreign exchange rates continued to work against us, auto dealerships continued to cut discretionary spending, and new business sales growth and client retention continued to be under pressure.

While in line with our forecast, we are not used to reporting such declines here at ADP; having said that, I am pleased that ADP reported both top and bottom line growth for the year despite the very challenging economy. Revenues grew 1%, pre-tax earnings grew 6%, and net earnings grew 5% excluding certain one-time items from both the current and prior fiscal years as were detailed in this morning's press release.

Revenues were also negatively impacted about 2% by unfavorable foreign exchange rates. Earnings per share from continuing operations grew 10%, also excluding certain one-time items from both the current and the prior fiscal years.

However, as we ended fiscal '09, our key business metrics were further weakened by the recession. You saw in the release this morning that new business sales declined 29% in the fourth quarter. As I indicated on our last earnings call, there were several large deals that occurred in May and June of last year which in part impacted the grow-over comparison.

When we spoke to you last quarter we had seen an increase in the sales pipeline with large companies. This is still the case; however, it remains very difficult to close these transactions and as a result we did not get the same level of those large transactions in fiscal 2009.

For the full year new business sales of $982 million were down 15% year-over-year compared with our forecast to be down around 13%, which clearly speaks to the continued difficult selling environment. Still, the addition of over $980 million of new recurring revenue is a great achievement given the weak economic backdrop.

Client revenue retention in Employer Services for the year was down 1.2 percentage points, pretty much where we expected the year to end. Losses due to pricing pressures and out of business losses continue to be up significantly from a year ago as a result of the stressed economy.

The number of employees on our clients' payrolls on a same-store sales basis also declined in the quarter from a year ago. The 5.7% decline in the quarter was anticipated given the continued rise in U.S. unemployment. This metric did grow 0.4% in our first fiscal quarter, then declined each subsequent quarter during the year, resulting in the full year fiscal year decline of 2.5%. Keep in mind that with this declining trend we anticipate tough year-over-year comparisons through the first half of fiscal 2010, but a lot more on that later in our discussion.

Moving on to Dealer Services, as all of you know, both GM and Chrysler declared and have emerged from bankruptcy since we last spoke with you. In analyzing the data provided, Chrysler was specific as to dealership closings, but GM has still not provided specific data dealership by dealership. We believe the impact to Dealer Services is much more likely to be at the low end of our initial estimate of a $50 to $75 million annualized loss of revenue; however, as a result of the acceleration of dealership closings, we currently anticipate the impact will occur over the next 12 to 18 months compared with our previous forecast of about two years.

Having said all that, the lost revenues and accelerated timing does not change our positive outlook for Dealer Services longer term. We still believe that what will emerge is an overall healthier automotive industry in which Dealer Services is well positioned to compete very successfully. You've heard me say this before, but it's worth repeating: Dealer Services' results in fiscal 2009 have been quite remarkable considering the extreme difficult automotive environment. Our Dealer Services associates have truly done a stellar job in executing against very tough economic circumstances.

With that, let me turn it over to Chris to provide the details of our results.

Read the rest of this transcript for free on seekingalpha.com