ADP

Automatic Data Processing, Inc. (ADP)

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Automatic Data Processing (ADP)

Q2 2012 Earnings Call

January 25, 2012 8:30 am ET

Executives

Carlos A. Rodriguez - Chief Executive Officer, President and Director

Christopher R. Reidy - Chief Financial Officer and Corporate Vice President

Elena Charles -

Analysts

Michael J. Baker - Raymond James & Associates, Inc., Research Division

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

James F. Kissane - BofA Merrill Lynch, Research Division

Bryan Keane - Deutsche Bank AG, Research Division

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Nathan A. Rozof - Morgan Stanley, Research Division

Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

Ashwin Shirvaikar - Citigroup Inc, Research Division

Matthew O'Neill - Credit Agricole Securities (USA) Inc., Research Division

Timothy McHugh - William Blair & Company L.L.C., Research Division

Jason Kupferberg - Jefferies & Company, Inc., Research Division

James Macdonald - First Analysis Securities Corporation, Research Division

Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division

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

Gary E. Bisbee - Barclays Capital, Research Division

David Togut - Evercore Partners Inc., Research Division

Presentation

Operator

Good morning. My name is Christie, and I will be your conference operator. At this time, I would like to welcome everyone to ADP's Second Quarter Fiscal 2012 Earnings Webcast. I would like to inform you that this conference is being recorded. [Operator Instructions] Thank you. I will now turn the conference over to Ms. Elena Charles, Vice President, Investor Relations. Please go ahead.

Elena Charles

Thank you. I'm here today with Carlos Rodriguez, ADP's President and Chief Executive Officer; and Chris Reidy, ADP's Chief Financial Officer. Thank you for joining us for our second quarter fiscal 2012 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 have been posted to the IR section of our website. These schedules have been updated to include the second quarter of fiscal 2012.

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 Carlos for his opening remarks.

Carlos A. Rodriguez

Thanks, Elena. Good morning, and thank you for joining us. Before we get started, I would like to take this opportunity to thank Gary Butler for his 37 years with ADP and especially for his tenure as ADP's President and CEO. With his guidance and direction, ADP successfully navigated the worst recession since the Great Depression. I'm also personally grateful for Gary's guidance and counsel over the years.

As you know, I've been in this role for just over 2 months now, and I'm pleased to be here speaking with you this morning on my first ADP earnings call. I'll begin today's call with some opening remarks about our second quarter results. Then I'll turn the call over to our CFO, Chris Reidy, who'll take you through the detailed results, after which I'll return to provide you with an updated fiscal year 2012 forecast. And before we take your questions, I'll provide some concluding remarks.

Now let's turn to Slide 4. As you read in this morning's press release, ADP reported solid results for the second quarter of fiscal year 2012, despite the mixed economy. Total revenues grew nicely at 7% for the quarter. Additionally, we experienced continued strength in our key business metrics.

Starting with Employer Services. New business sales, the number of employees on our clients' payrolls and client balances all increased during the quarter. Client revenue retention did tick down in the second quarter due to a large client loss that we anticipated, although we were not certain of the timing. Although client retention is down slightly year-to-date, it remains at excellent levels. And, as you know, our third fiscal quarter is a particularly important period for retention, and we'll certainly update you further on the next -- on next quarter's earnings call.

I'm particularly pleased with our new business sales results in Employer Services and PEO Services. New business sales grew 14% year-over-year, assisted slightly by recent acquisitions. And although we did not provide sales dollars on a -- and although we do not provide sales dollars on a quarterly basis, I think it's important to let you know that the dollar value of the sales in the second quarter reached an all-time high.

We've been focusing on product innovation, both in internal development and through acquisitions that complement our existing solution set. This focus is clearly paying off with strong growth in new business sales, which are anticipated to increase our future organic revenue growth. We have also invested in the distribution -- in distribution and in client service, all of which are also having a positive impact on new business sales.

It's also noteworthy that sales productivity is also improving. You may recall that productivity was significantly down over the last couple of years as a result of the recession, especially at the high end of the market. Our continued investment in our sales force, as well as in our solution set, meant that our market conditions -- as market conditions improve, we were well poised to benefit. And I believe this is well evidenced by the sales results across all of our markets. Small Business Services, National Accounts, DVS and GlobalView all achieved double-digit sales growth.

ES International best-of-breed sales growth was also double digit. Our results there were mixed by country as the economic pressures continued, especially in Western Europe. Sales in Canada, Australia and Brazil were also strong.

I'm pleased that sales in National Accounts grew double digit during the second quarter, driven by domestic GlobalView sales. I want to point out that the sales cycles are still very long at the high end of the market. And as you know, GlobalView sales can be lumpy due to their size.

Moving on to Dealer Services. The automotive landscape in North America continued to stabilize as calendar year vehicle sales finished strong. I'm pleased that new business sales in Dealer Services were ahead of expectations in the quarter. Dealer Services worldwide revenue retention increased for the quarter, and Dealer Services revenue growth was 7% on both a total and organic basis, as Cobalt is now fully in the organic results as we lap the acquisition date in the first quarter.

Before I turn the call over to Chris, I want to spend a moment on acquisitions. We're pleased to have closed 3 transactions since our last update. ADP acquired a provider of revenue cycle management services targeting small physician practices. We will provide AdvancedMD entry into the growing segment of physician-billing BPO solutions, making it a natural extension of AdvancedMD's growth strategy. ADP also acquired a provider of payroll and other compliance services in India. This acquisition supports our broader strategy to expand our global footprint across large and developing markets. And finally, in Dealer Services, ADP acquired a key supplier of digital services for our Cobalt and Dealix businesses. We believe this transaction will help enhance our new and used car lead generation. I'm confident that these acquisitions are the right investments, as we expect they will contribute to ADP's future growth opportunities.

With that, I'll turn it over to Chris to provide the financial highlights and the updated full year forecast for our client fund investment strategy

Christopher R. Reidy

Thanks, Carlos, and good morning, everyone. Let's now turn to Slide 5. Total revenues grew 7% to $2.6 billion, 6% organically in the quarter. Unlike the first quarter, where revenue growth included 2 percentage points from foreign exchange rates, rates were neutral in the second quarter. We continue to see a positive impact on revenues from strong new business sales growth and from acquisition activity that complements our solution set.

Employer Services grew total revenue 7%, 5% organic, with good revenue growth across several products, including RUN in our Small Business Services marketplace, Time & Labor Management, HR Services and Major Accounts and ASO, which is our BPO for small to midsize companies. Pays per control in Employer Services in the U.S. continue to be strong, with an increase of 2.8%. Growth in average client fund balances increased 6% for the quarter, driven by new client growth, especially in Small Business Services, both in standalone Tax Filing, increased pays per control and increased state unemployment insurance taxes.

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