ADP

Automatic Data Processing, Inc. (ADP)

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Automatic Data Processing, Inc. (ADP)

F1Q10 Earnings Call

November 4, 2009 8:30 am ET

Executives

Elena Charles - Vice President of Investor Relations

Gary Butler - President and CEO

Chris Reidy - Chief Financial Officer

Analysts

James Kissane – Bank of America/Merrill Lynch

Ashwin Shirvaikar – Citigroup

Glenn Greene – Oppenheimer

John Williams – Goldman Sachs

Rod Bourgeois – Sanford Bernstein

Jason Kupferberg – UBS

Gary Bisbee - Barclays Capital

Jim MacDonald - First Analysis 

Kelly Flynn - Credit Suisse

David Grossman - Thomas Weisel Partners

Tim Willi – Wells Fargo

Mark Marcon - Robert W. Baird 

David Cohen – JP Morgan

Chris Mammone – Deutsche Bank

Presentation

Operator

(Operator Instructions) Welcome everyone to the ADP’s First Quarter Fiscal 2010 Earnings Webcast. I would now like to turn the conference over to Elena Charles, Vice President of Investor Relations.

Elena Charles

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 first 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 homepage of our website at www.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 first quarter of fiscal 2010 and all prior periods have been updated to reflect fiscal 2010 budgeted for an exchange rate. 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 two 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

Let me begin today’s call with some opening remarks about our first quarter results. I’ll then turn the call over to Chris Reidy who will take you through the detailed results, and then I’ll return a little bit later to give you and updated forecast for fiscal 2010. Before we take your questions I will provide some concluding remarks.

To begin, ADP’s first quarter results were against very tough comparisons a year ago when we posted 9.5% revenue growth, pre-tax margin expansion of 100 basis points and 20% EPS growth. As you recall it was toward the end of the first quarter in fiscal ’09 that the financial market volatility led to the most difficult economy in decades. Considering the cumulative economic impact on ADP’s business metrics in the quarter, which include lower new business sales, lower client retention, lower client fund balance, fewer number of payees and continued dealership closings, I am encouraged by what we achieved this quarter.

Revenues for the first quarter declined 4% year over year but were slightly ahead of our expectations. Foreign exchange rates gave us a revenue benefit of 1% in last year ’09 first quarter but had been working against us throughout fiscal 2010 in the first quarter. The current quarter’s revenues were negatively impacted about two percentage points from unfavorable exchange rates. However, I am pleased that ADP posted positive growth in both pre-tax and net earnings of 1% and 2% respectively. Earnings per share from continuing operations grew 4% on fewer shares outstanding.

New business sales declined 2% in the first quarter which is an improvement over the decline posted through fiscal 2009. These results were ahead of our expectations but were mixed by business unit within employer services. Sales in our National Accounts Division declined year over year as the sales cycle for larger companies remained challenging with continued delays in outsourcing decisions. Sales to mid-side companies in our Major Accounts Division grew compared with last year’s first fiscal quarter.

Our International Division also grew sales with particular strength in Global View. Sales in our small business services division were down year over year; however, we view the quarter’s results as quite solid considering the sales headcount reductions that were made in last year’s fourth quarter. Total Source sales which include our PEO were also strong in the quarter. Client retention continues to be under pressure but its still at historically high levels even though down one percentage point in the quarter in Employer Services. As you know, January is the critical retention period in our ES business. We are appropriately cautious about the full year retention metric.

The number of employees on our clients payroll on a same store basis also declined in the quarter from a year ago, down 6.5% which is slightly better then we anticipated. This decline is against a compare of an increase of 0.4% in last year’s first fiscal quarter. Let me leave ES and talk for a moment about Dealer Services.

As you may know, General Motors will be discontinuing the Saturn brand and closing those dealerships as the plan to sell the brand fell through just some few weeks ago. As Chris will tell you in a few minutes, Dealer Services did record an intangible asset impairment charge in the quarter due to this expected closure of the Saturn dealerships. The annualized loss of revenues from the Saturn relationship is about $12 million to ADP. We anticipate the full year impact of this revenue loss won’t actually occur until fiscal 2011.

To help you with your perspective on this we had previously estimated that the impact to Dealer Services for industry wide dealership closings over the next 12 to 18 months was at the low end of our original $50 to $75 million estimate. This is still the case including Saturn because we have done much better then previously forecasted with other manufacturers dealership closing.

Additionally, many of the closed dealerships were much smaller with low car sales volume so they have impacted us far less then our average dealer client. Some of these dealerships are also becoming used car dealerships or are staying in business as service centers. I also want to point out that despite the continued tough automotive market Dealer Services is continuing to do very well on the competitive front.

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