ADP

Automatic Data Processing, Inc. (ADP)

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Automatic Data Processing (ADP)

Q2 2011 Earnings Call

January 26, 2011 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

Joseph Foresi - Janney Montgomery Scott LLC

Adam Frisch - Morgan Stanley

David Togut - Evercore Partners Inc.

Julio Quinteros - Goldman Sachs Group Inc.

Christopher Mammone - Deutsche Bank AG

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

Giri Krishnan - Credit Suisse

Gary Bisbee - Barclays Capital

Timothy Willi - Wells Fargo Securities, LLC

James Macdonald - First Analysis Securities Corporation

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

James Kissane - BofA Merrill Lynch

Timothy McHugh - William Blair & Company L.L.C.

Presentation

Operator

Good morning. My name is Amanda, and I will be your conference operator today. At this time, I would like to welcome everyone to ADP's Second Quarter 2011 Earnings Webcast. [Operator Instructions] Thank you. I would now like to turn the conference over to Ms. Elena Charles, Vice President, Investor Relations. Please go ahead.

Elena Charles

Thank you. 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 for our Second 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 second quarter of fiscal 2011. 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, and thanks to all of you for joining us. Chris, Elena, and I arrived in Barcelona, Spain yesterday. We're to participate in Employer Services Global Meeting of demands, which is a large client event. This is an annual meeting where over 100 GlobalView clients and prospects meet with ADP management and exchange ideas relating to their global HR needs. It's a great networking event and very well attended.

I'll begin today's call with some opening comments about our second quarter. Then I'll the call over to Chris Reidy to take you through the details, after which I'll return to provide you with our updated forecast for fiscal '11. And before we take your questions, I'll provide some concluding remarks.

Overall, I am quite pleased with ADP's second quarter results for fiscal 2011. As you saw in the press release this morning, the positive trends in our key business metrics continued in the second quarter. New business sales grew a very strong 16% in the quarter, with pretty good results across the board in all of our markets. There was continued strength in the Small Business marketplace, including the PEO, with double-digit growth, and we were successful in closing a number of significant transactions in our national accounts space, which as you may recall, had been slower to regain momentum as the economy stabilized and begin to turn up.

One quarter double-digit growth does not make a turnaround, but we are feeling much better about the National Accounts market. And importantly, the pipeline for new business is solid. We also posted good growth in Major Accounts and believe that our investments in the Workforce Now solution will continue to position us well against the competition. New business sales in our International business were also up nicely, excluding GlobalView sales, which were down slightly year-over-year. To remind you, these are very large transactions with long sales cycles. The pipeline for GlobalView new business is quite strong, and I am optimistic about GlobalView's growth opportunities.

You can see from our year-to-date results with new business sales now up 8% that we are clearly on track to achieve our full year forecast for high single-digit growth for the year. As we look at retention, I am pleased that once again, we saw good improvement in client retention revenue this quarter. We're not completely through the critical calendar year in retention period, but we are confident that we will come through it with continued strong retention rates.

Our January results, albeit not official, anecdotally look very strong as well. In the U.S., our pays per control same-store sales employment metric was up 2.4% in the quarter and ahead of our expectations. This represents the largest quarterly year-over-year increase since the third quarter of fiscal 2007.

In Europe, pays per control are still down slightly compared with the year ago, but the decline is clearly decelerating. Growth in average clients funds balances was once again higher than anticipated, increasing 9% in the quarter, driven primarily by higher wage growth and increased pays per control. It's also noteworthy that the average number of worksite employees paid in our PEO business grew 11% in the quarter. Acquisition activity was once again good during the quarter, and we closed three transactions. Two of those acquisitions were Employer Services, MasterTax and Byte Software, which is the largest payroll provider in Italy.

In Dealer Services, we closed the previously announced acquisition of the Kuwaiti-based PACC, a distributor of our international Dealer Management System platform auto line in the Gulf States since 1992. Moving on to Dealer, the automotive landscape continues to stabilize and dealership closings, excluding the few remaining Saturn closings that were completed this quarter, are down the levels we experienced back in 2007 and 2008. The worst is clearly behind us, and we have good momentum in Dealer. Near-term, we expect revenues to still be impacted negatively by the carry-forward effect of the previous dealership closings. However, we are confident that ADP will continue to compete very effectively in the emerging healthier automotive sector.

With that, I'll turn it over to Chris to give you the details of our results.

Christopher Reidy

Thanks, Gary. And now turning to Slide 4. We are pleased that total revenues increased 9% to $2.4 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 later in the fiscal year and have no impact on the full year as compared to a year ago.

On an organic basis, revenues grew 5% in the quarter. Pretax earnings were up 1%. Last year's second quarter included a favorable tax item, which reduced the tax provision $12.2 million or $0.02 a share. We have shown the effective tax rate net earnings and earnings per share comparisons to a year ago including and excluding last year's favorable tax item. On a comparable basis for the year ago, net earnings increased 2% and earnings per share from continuing operations increased 3% on fewer shares outstanding.

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