ADP Sets a Steady Course For Continued Growth

ADP announced fiscal Q2 2011 Employer Services revenues of $1,663m, up 7% year-over-year.  PEO Services came in at $358m, up 15%.

Payroll and tax filing revenues were flat primarily because certain end-of-year service billings fell into January.  U.S. beyond payroll revenues increased 16% with the help of recent acquisitions and growth across tax services, T&L services, benefits administration, BPO, and HR services.

Pretax margins for Employer Services declined 80 basis points for the quarter due to planned higher selling expenses, investments in sales and service headcount, and recent acquisition activity.

For the second quarter in a row, ADP increased its 2011 forecast.  Employer Services revenue growth is now expected to be 5%, up from 4%.  Including acquisitions, Employer Services revenue is expected to be 6% to 7%, up from 5%.  With a solid pipeline, increased sales force, and its own unique payroll window into economic recovery, ADP is confident in achieving higher results than the original forecast of 1% to 3% revenue growth.

In a sign of general business health, ADP has seen an uptick in clients funding wage increases and paying bonuses.  Its U.S. clients increased employee payrolls by 2.4%, the single largest quarterly increase since 2007.  Also, the ADP large client segment is finally seeing growth in employee payrolls.  While Europe is not adding employees back yet, the rate of decline is slowing.

Employer Services completed two acquisitions during the quarter, including MasterTax for approximately $10m and Byte Software, the largest payroll and HR products and services provider in Italy, for c. $60m.  ADP was already the second largest provider in Italy and now it will be solid in the top position.

The quarterly earnings call was handled from Barcelona, Spain where senior ADP leaders were hosting their annual Global View conference for more than 100 clients.  This is a great opportunity to listen and learn about client HR service needs and gain business insight into the large multinational market.  This was especially important for Global View which represents a major investment for ADP.  Even with growth on track and a solid pipeline, the platform is not expected to breakeven until fiscal year 2013.

In February, ADP’s RUN mobile payroll app, which is already available for the iPhone, will be released for other Smartphone platforms.  Watch for ADP to roll out more HR mobile apps with increased functionality later this year.

ADP knows its business and understands how each aspect is linked to growth and margins and it continues to confidently execute on its long-term strategy of balanced organic growth and expansion through acquisitions.  Steady as she goes – forward.

Linda Merritt, Research Director, HRO, NelsonHall

Q4 2010 HRO Ends on an Up Note

While we wait to see 2010’s full year HRO financial results, we can review activities in the fourth quarter.  HRO growth is occurring across most industry segments, with the public sector lagging.  The fastest growth rates are still outside of the mature economies in North America, U.K., and Europe for the global providers, although the U.S. is starting to rebound.

Benefits administration showed a nice level of new business activity, even in the mature areas.  Congratulations to Fidelity for the competitive wins of AT&T for both defined contributions and defined benefits and Office Depot for broad benefits administration services.  There were also notable benefits wins by Mercer, Aon Hewitt, Ceridian and Xafinity.  Meanwhile, we are still waiting for a major jump start in learning and multi-process HRO contracts.

The volume of new business and growth with existing clients will continue to rise in 2011, but the pricing environment will not likely ease much in 2011 as buyers remain price sensitive.  Maintaining efficiency will be critical in order to win with both clients and investors.  For example, The Right Thing recently introduced dedicated Solution Teams to manage the transition from sales and implementation into operations. Managing implementation was a costly problem for service providers and customers in multi-process HRO for years, so it is good to see the lessons learned extending to other areas of HRO.

Preparing for further growth also continues in partnerships, mergers, and acquisitions.  Aon Hewitt is expanding its benefits capabilities in Scotland via a pension services partnership with Babcock International Group.  Towers Watson is jumping back into the benefits fray with a partnership with Wage Works and the acquisition of Aliquant, a mid-range benefits service provider.

Fourth quarter good news stories continued with revenues up in most areas of HRO.  Several HR service providers reported a 4% to 6% increase in revenues including ADP Employer Services up 6%, Aon Consulting up 4%, and Mercer up 6%. RPO and staffing companies continued recovering at a rapid pace, leading the way out of the downturn just as they led the way into it.  Revenues for Manpower were up 19% and The Right Thing’s revenues were up 30%.  GP Strategies, Kelly, and Kenexa all had increased revenues in the mid-20% range.

Operating margins are remaining consistent as the HRO industry adds back employees indicating they will be able to manage growth while keeping an eye on hard-won profitability.  Investments in technology and global service delivery capabilities will now be bearing fruit and should also support margin growth.

Happy New Year – may 2011 be a great year for us all in the HRO community in every way!

Linda Merritt, Research Director, HRO, NelsonHall

Modesty is the Order of the Day in Big HRO

As the earnings reporting season rolls on, some of the HRO heavy weights are reporting modest revenue growth for the second quarter 2010:

• ADP  Employer Services  $1.6 billion, up four percent

• Aon Consulting  $317 million, up six percent

• Mercer $838 million, up one percent  

There was no exuberance, rational or irrational, among the reporting executives. There was modestly cautious optimism based on some growth, strong pipelines and faith in that the cost-cutting actions taken during the downturn will continue to pay margin-enhancing benefits.

Benefits outsourcing revenues were stable at Aon Consulting ($51 million) and Mercer ($161 million). The hot action again seemed to be outside of the U.S., with health and benefits doing particularly well, and compensation consulting also up.

While ADP does not break out HRO, it did say revenue in the U.S., beyond payroll services, grew six percent. ADP Employer Services revenues are now 20 percent international, largely from payroll, and the global growth rate is expected to exceed that in the U.S.

Moderating a nice quarter is continued pricing pressures, client reluctance to make spending commitments on new outsourcing, and a slow return of discretionary spend on projects and other services. Mercer saw a nice sequential increase quarter to quarter in talent management and rewards, which it considers may be a bellwether of improved conditions.

Vendor operating margins have held up relatively well once actions were taken to lower expenses in line with lower incomes. ADP’s took a small dip of 3.2 percent because it has chosen to hire ahead of the full upturn, adding about 300 heads in sales and service. Mercer feels it is poised to move quickly to capture increased opportunities as they appear.

Aon Consulting will, of course, be busy with planning and then integration when it becomes Aon Hewitt. In commenting on the merger, Mercer was comfortable that, overall, it will be a stabilizing force in the market and a confirmation of Mercer’s own three pillars of consulting, outsourcing and investment services. Further, it expressed confidence in its ability to compete in the changed benefits landscape.

Still, it sure sounds likely that it will add something to bulk up a bit as well. MMC, Mercer’s parent,  has $1.5 billion in cash, with more coming in from the sale of Kroll. While it is perhaps not iminent, do expect to see Mercer make a move by the end of the year.  Any speculation on where it may add? Mercer is already strong in consulting, and at $2 billion per year, would it add in outsourcing, or perhaps investment services, which is its smallest, yet nicely growing unit?

Linda Merritt, Research Director, HRO, NelsonHall

Weathering the Weather in HRO

I am weary of Winter and ready to get on with Spring! A record setting Winter snow storm just blasted the East Coast of the U.S. this past weekend, and more snow is heading this way by mid-week. London has also seen the heaviest snows in twenty years. Some areas are prepared for lots of snow and can handle it with aplomb and as an economic boom. But in cities like London, Philadelphia and Washington, D.C., big snow is disruptive, dangerous and a budget buster.

At least we are seeing signs of the coming Spring in HRO, with a generally upbeat tone to most of the earnings calls, even as most vendors continue to report revenue declines and offer guidance of relatively flat revenues for 2010.

Winter is not yet over

For example, last week ADP announced that its Employer Services fiscal Q2 2010 revenues were down two percent compared to 2009. ADP saw client payrolls down five percent leading to a drop of seven percent in payroll and tax filing revenues, reflecting continued workforce reductions at the end of 2009.

ADP’s Employer Services revenue growth will be constrained until payroll volumes increase, which are expected to start improving in the first half of 2010.

An expected thaw is on the way

HRO vendors reporting results that are less bad compared quarter over quarter and the universally reported increased pipeline activity are indicators of a thaw.

For example, for ADP, the view beyond payroll revenues, which includes HRO services, remains more optimistic based on three percent increases in each of the last two quarters. And ADP’s small business sales have increased, largely due to the successful introduction of Workforce Now, a new payroll, benefits and HR services SaaS platform for the less than 100 employee market. Workforce Now has already added 2,000 clients since its introduction in October 2009.

According to ADP, larger employers are starting to reengage in new services discussions, but remain slow to make contract commitments. Even with the uptick in the small market and the beyond payroll services, the overall decline in revenues driven by smaller payroll pays and lower client fund balances keeps the forecast for FY 2010 ES as flat to down one percent.

With some signs of the coming Spring

ADP is confident enough that the economic recovery is starting that it plans to begin modest hiring to have more sales and service personnel onboard and trained to take advantage of increased opportunities.

The truth is, Winter is still not over. We need to see an increased rate of contract signings Then we need to see positive revenue gains not clouded by currency exchange rates. And a few larger HRO deal announcements would help warm us up nicely.  

For awhile yet we will continue to see mixed signs of recovery and there is likely another Winter storm or two to weather. Still, I can almost hear the birds of Spring chirping…can you?

Linda Merritt, Research Director, HRO, NelsonHall