ADP

Automatic Data Processing, Inc. (ADP)

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Automatic Data Processing (ADP)

Q1 2011 Earnings Call

October 27, 2010 8:30 am ET

Executives

Elena Charles - Vice President, Investor Relations

Gary Butler - Chief Executive Officer, President and Director

Christopher Reidy - Chief Financial Officer and Corporate Vice President

Analysts

Adam Frisch - Morgan Stanley

David Togut - Evercore Partners Inc.

Julio Quinteros - Goldman Sachs Group Inc.

Kelly Flynn - Crédit Suisse AG

Glenn Fodor - UBS

Tien-Tsin Huang - JP Morgan Chase & Co

Rod Bourgeois - Bernstein Research

Ashwin Shirvaikar - Citigroup Inc

Jason Kupferberg - UBS Investment Bank

Mark Marcon - Robert W. Baird & Co. Incorporated

David Grossman - Stifel, Nicolaus & Co., Inc.

James Kissane - BofA Merrill Lynch

James Macdonald - First Analysis Securities Corporation

Michael Baker - Raymond James & Associates

Glenn Greene - Oppenheimer & Co. Inc.

Presentation

Operator

Good morning. My name is Amanda, and I will be your conference operator. At this time, I would like to welcome everyone to ADP First Quarter 2011 Earnings Webcast. [Operator Instructions] I will now turn the conference over to Ms. Elena Charles, Vice President, Investor Relations. 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 First Quarter Fiscal 2011 Earnings Call and Webcast. Our slide presentation for today's call and webcast is available for you to print from the Investor Relations homepage of our website at adp.com.

As a reminder, the quarterly history of revenue and pretax 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 2011, and all prior periods have been updated to reflect 2011 budgeted foreign exchange rates.

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, Elen. Good morning, everyone, and thank you for joining us.

I'll begin today's call with some opening comments about our first quarter results, then I'll turn the call over to Chris Reidy, our CFO, to take you through the detailed results. After which, I'll return to provide you with an updated forecast for fiscal '11. And before we take your questions, I'll also provide some concluding remarks.

Overall, I am quite pleased with ADP's first quarter results for fiscal 2011 which, as you can see from the release, were better than anticipated. You recall as we exited last fiscal year, we did reach positive inflection points in our key business metrics. I'm pleased to report for the most part, that those positive trends continued into this first quarter of '11.

Let's start with new business sales which, as you saw in this morning's release, were flat to last year. However, results were different by market segment. In the Small Business marketplace, including the PEO [Professional Employer Organization], we posted strong double-digit growth year-over-year. I believe our investments in our new RUN products and in our sales force has had a very positive impact in this market. Having said that, we are somewhat cautious as we move up market. The pipeline for new business sales is good, but the sale cycles remain relatively long and new business sales in the medium-large company markets were slightly below last year. New business sales in our international business were up nicely, excluding GlobalView sales, which declined year-over-year. We closed three quite large GlobalView transactions in the first quarter of last year, which impacted the total sales comparison from last year by a couple of points. All in all, we are still comfortable with our full year forecast for high single-digit new business sales growth for the year.

As we look at retention, I believe that the improved economy, coupled with the technology investments we have made in our service solutions and the significant increases in client service associates, helped drive this notable improvement in client revenue retention during the quarter. This increase of 1.7 percentage points clearly exceeded our expectations. And for the record, is the largest quarterly increase we have seen in this metric in about five years.

Employment levels in the U.S. have stabilized and our pays per control same-store sales employment metric was actually up 1.7% in the quarter and also ahead of our expectations. Average client funds balances increased 9% and were higher than anticipated driven by higher wage growth, growth in pays for control and increased SUI tax. It's also noteworthy that the number of worksite employees paid in our PEO grew 9.5% in the quarter. I am very pleased with the acquisitions we closed in the first quarter and the pipeline of potential transactions is also quite good. To remind you, our M&A strategy is primarily focused on entering adjacent markets that leverage our core franchise as well as competitive roll-ups within our existing product portfolio. We are currently in the process of integrating the two largest transactions we completed this quarter: Workscape and Employer Services and Cobalt and Dealer Services, and continue to be quite pleased as we go deeper with each business.

Moving onto Dealer Services. The automotive landscape is relatively stable, and dealership closings have greatly subsided. Revenues in Dealer, however, continued to be negatively impacted by the carry-forward effects of dealership closings over the past year, but fewer current closings bodes well for continued improvement in the year ahead.

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

Christopher Reidy

Thanks, Gary. Turning to Slide 4. We are very pleased as total revenues increased 6% to $2.2 billion in the quarter, including acquisitions. Revenues were negatively impacted nearly 1% from unfavorable foreign exchange rates as the dollar strengthened during the quarter compared with last year. However, our forecast assumes that foreign exchange impacts will turn favorable during the second half of the year and have no impact on the full year as compared to a year ago. Excluding acquisitions, revenues grew 4% in the quarter. Pretax and net earnings were down 2% and as anticipated, first quarter earnings and margins were lower from the investments we made over the second half of fiscal 2010 to drive growth. But I'd also like to remind you that we had frozen merit increases until the fourth quarter of last year, which also resulted in negative year-to-year grow over comparisons.

Earnings per share from continuing operations of $0.56 a share were flat with a year ago on fewer shares outstanding. And before we leave this slide, I'll also like to speak briefly about ADP's cash balance. As you know, our intent is to target the cash balance toward the $1 billion level at a minimum. We moved closer to this level during the first quarter by closing three strategic acquisitions for $475 million in net cash, and we bought back 1.2 million shares for about $50 million. As a result, our cash and marketable securities balance was $1.3 billion at the end of the quarter compared with $1.8 billion at June 30.

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