ADP

Automatic Data Processing, Inc. (ADP)

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Automatic Data Processing, Inc. (ADP)

F2Q10 Earnings Call

February 2, 2010 8:30 am ET

Executives

Elena Charles - Vice President of Investor Relations

Gary Butler - President and CEO

Chris Reidy - Chief Financial Officer

Analysts

Tim Willi – Wells Fargo

Ashwin Shirvaikar – Citigroup

Jason Kupferberg – UBS

Julio Quinteros – Goldman Sachs

Rod Bourgeois – Sanford Bernstein

James Kissane – Bank of America/Merrill Lynch

Glenn Greene – Oppenheimer

Kartik Mehta – North Coast Research

Jim MacDonald - First Analysis 

David Grossman - Thomas Weisel Partners

Analyst for Adam [Hirsch] – Morgan Stanley

Gary [Cushman] – Credit Suisse

Analyst for Tien-tsin Huang – JP Morgan

Analyst for Gary Bisbee - Barclays Capital

Sasa Zorovic – Janney Montgomery Scott

Chris Mammone – Deutsche Bank

Presentation

Operator

Welcome everyone to the ADP’s second quarter fiscal 2010 earnings webcast. (Operator Instructions) I would now like to turn the conference over to Elena Charles, Vice President of Investor Relations. Please go ahead.

Elena Charles

Thank you. Good morning. I am 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 second 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 second quarter of fiscal 2010. 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 will 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 today. I will begin today’s call with some opening remarks about our second quarter results. Then I will then turn the call over to Chris Reidy, our CFO, to take you through the detailed results, after which I will return to give you and updated forecast for fiscal 2010. Before we take your questions I will provide some concluding remarks.

Let me begin, ADP’s results for the quarter were pretty much in line with our expectations. The cumulative impact from the difficult economic environment we have seen over the last 15 months continued negatively impact our results. Revenues for the second fiscal quarter of 2010 were flat to a year ago but included a benefit of nearly two percentage points from favorable foreign exchange rates as the dollar weakened during the quarter. However, I am pleased that pre-tax and net earnings both grew 1% and earnings per share from continuing operations grew 2% excluding the favorable tax item we had in the quarter.

I am also encouraged by our key business metrics. Employer Services new business sales, client retention, client funds balances and number of pays were all somewhat lower compared with a year ago but the pace of the decline has certainly slowed and in some cases our key metrics in the quarter were actually better than we expected. We continue to see some indications of stabilization in terms of employment levels in the US and client retention while still under pressure, leveled off during the quarter. However, as you are aware, the key retention period is our third quarter and until we see those results we are holding our estimate for the full year of up to a full year one point decline.

Moving onto sales, although new business sales declined 3% in the second quarter our sales force is seeing market receptivity from companies once again willing to invest again in their businesses. However, the selling environment continues to be somewhat mixed across the business units within Employer Services. Similar to what we told you three months ago, sales cycles for the largest companies, particularly in the US, remain challenged and as a result new business sales in our national accounts business units were behind our expectations and declined year-over-year.

That being said, new business sales to mid-sized companies in our major accounts division were flat to a year ago but continued to be ahead of our expectations and sales in Europe, our largest international market, were down year-over-year but also ahead of our expectations. New business sales and small business services grew year-over-year which I am quite pleased with given the sales headcount reductions that were made in last year’s fourth quarter.

Total store sales which include the PEO were also strong in the quarter with good growth year-over-year. As a result of this positive sales momentum in most of our markets we are now investing for future growth and have begun the acceleration of next year’s sales force hiring. I believe this will position ADP for stronger sales growth over the next 12-18 months. However, we expect this necessary investment will also be a drag on earnings through the same 12-18 month period.

Let me emphasize, this is well worth the investment to increase revenues and in turn profitability over the longer term. Everything considered, we are also more confident in our ability to achieve the same dollar amount of new business sales as last year, or perhaps come in slightly higher than last year.

Moving onto Dealer Services, the automotive marketplace is still quite challenged but on a positive note December was the second consecutive month of year-over-year increases in US car sales volume. We are not calling it a trend but it certainly feels a heck of a lot better than the declines over the last couple of years. The industry is certainly not out of the woods as dealership closings continue but Dealer Services’ win/loss rate in the marketplace continue to be strong and resulted in increased North American market share for ADP year-over-year.

We continue to estimate that dealership closings will be completed over the next 12 months with about $50 million in total of annualized lost revenues in Dealer Services. Today, closed ADP sites represent about $10 million of the $50 million of annualized revenue. By the end of fiscal 2010 we expect additional dealership closing representing another $20 million in annualized lost revenue and these closings will occur throughout this fiscal year, we estimate the fiscal 2010 impact will be approximately $15 million of lost revenue.

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