Motley Fool  Aug 1  Comment 
ADP earnings call for the period ending June 30, 2018.
Yahoo  Jun 14  Comment 
As an investor, I look for investments which does not compromise one fundamental factor for another. By this I mean, I look at stocks holistically, from their financial health toRead More...
Yahoo  Jun 13  Comment 
Transformation initiatives allow ADP to expand margins and improve innovation abilities.
Wall Street Journal  Jun 12  Comment 
Automatic Data Processing’s finance chief plans to resign from his post, the payroll-processing company said, a departure that comes as the firm faces scrutiny from a trio of activist investors.


Automatic Data Processing (ADP) offers a wide range of human resource, payroll, tax and benefits administration solutions and is also a leading provider of integrated computing solutions to automotive, heavy truck, motorcycle, marine, recreational vehicle and heavy machinery dealers. In 2009, ADP processed payroll for 570,000 companies, delivered 51 million year-end tax statements (W-2), delivered 39 million employer payroll tax returns and deposits, and moved $1 trillion in client funds.[1]

Beyond basic payroll processing, ADP sells companies other outsourced human resources services, such as payroll tax administration, retirement plan administration, health benefit administration, and workers' compensation insurance services. Additionally, ADP earns interest on funds that are temporarily held for its clients (e.g. between the time the money is transferred to ADP and the time the checks are sent to and cashed by employees).

Aside from ADP's payroll and HR segments, which it collectively refers to as Employer Services, the firm has two other segments: Professional Employer Organization (PEO) Services, in which ADP handles nearly all of its clients' employment tasks, and Dealer Services, which provides inventory management, accounting, and related business services to automobile and other vehicle dealers in over 50 countries.[2]

Economic downturns do put a damper on ADP's earnings because higher unemployment decreases demand for payroll services and falling interest rates decrease the revenue earned from interest in funds held for clients. The U.S. unemployment rate reached 9.3% in May 2010 and the Federal Reserve Bank has slashed interest rates to 0.25%.

Company Overview

Business and Financial Metrics

Second Quarter 2010 Results[3]

ADP reported 2.5% revenue growth to $2.20 billion for the second fiscal quarter ended December 31, 2008. Revenue growth was negatively impacted nearly 3 percentage points by unfavorable foreign exchange rates during the quarter. Pretax earnings from continuing operations grew 7%. Net earnings from continuing operations grew 3% and diluted earnings per share from continuing operations increased 7% to $0.59 from $0.55 a year ago on fewer shares outstanding. Excluding the prior year's favorable tax settlement, fiscal 2009 net earnings and diluted earnings per share from continuing operations increased 8% and 11%, respectively.

Business Segments

Employer Services

Employer Services offers a comprehensive range of HR information, payroll processing, tax and benefits administration solutions and services, including traditional and Web-based outsourcing solutions, that assist approximately 540,000 employers in the United States, Canada, Europe, South America (primarily Brazil), Australia and Asia to staff, manage, pay and retain their employees. Employer Services markets these solutions and services through its direct marketing sales force and through indirect sales channels, such as marketing relationships with banks and accountants. In fiscal 2009, 80% of Employer Services’ revenues were from the United States, 13% were from Europe, 5% were from Canada and 2% were from South America (primarily Brazil), Australia and Asia.

Professional Employer Organization Services

ADP’s professional employer organization (PEO) business provides approximately 5,300 clients with comprehensive employment administration outsourcing solutions through a co-employment relationship, including payroll, payroll tax filing, HR guidance, 401(k) plan administration, benefits administration, compliance services, health and workers’ compensation coverage and other supplemental benefits for employees. ADP TotalSource is the largest PEO in the United States based on the number of total paid worksite employees. ADP TotalSource has 46 offices located in 22 states and serves approximately 193,000 worksite employees in all 50 st

Dealer Services

Dealer Services provides integrated dealer management systems and other business management solutions to automotive, heavy truck, motorcycle, marine, recreational vehicle (RV) and heavy machinery retailers in North America, Europe, Africa and the Asia Pacific region. Approximately 27,000 automotive, heavy truck, motorcycle, marine, RV and heavy machinery retailers in over 90 countries use ADP’s DMS solutions, other software solutions, networking solutions, data integration, consulting and/or digital marketing solutions and services.

Clients use ADP’s DMS solutions to manage core business activities such as accounting, inventory management, factory communications, appointment scheduling, vehicle financing and insurance, sales and service. In addition to its DMS solutions, Dealer Services offers its clients a full suite of additional integrated applications to address each department and functional area of the dealership, including Customer Relationship Management (CRM) applications, front-end sales and marketing/advertising solutions, and an IP Telephony phone system fully-integrated into the DMS to help dealerships drive sales processes and business development initiatives. Dealer Services also provides its dealership clients computer hardware, hardware maintenance services, software support, system design and network consulting services.

Dealer Services also designs, establishes and maintains communications networks for its dealership clients that allow interactive communications among multiple site locations as well as links between franchised dealers and their vehicle manufacturer franchisors. These networks are used for activities such as new vehicle ordering and status inquiry, warranty submission and validation, parts and vehicle locating, dealership customer credit application submission and decision-making, vehicle repair estimation and acquisition of vehicle registration and lien holder information.


U.S. unemployment rate

ADP's revenue depends on the fees that businesses pay to have ADP operate their payroll. When an economic downturn or recession occurs and unemployment rises, firms don't need as many paychecks, which translates to lower demand for ADP's payroll processing services.

Also, high unemployment, which reached 9.3% in May 2010, is indicative of an economic downturn. The 2008 Financial Crisis caused many businesses to cut back on their spending, and payroll processing is one expense that some small businesses have decided not to outsource to ADP.

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U.S. Unemployment Rate[4]

Fed slashed interest rates

Since 2007, the U.S. Federal Reserve has consistently cut interest rates. The Federal Funds rate now stands at just 0.25%. This impacts ADP because it makes part of its total revenue from the interest earned on clients' money.[5] Some payroll services require that clients give ADP money directly, which ADP then pays out to the employees or other recipients. To avoid complications, customers often give ADP the money before it's actually needed. In the time between receiving money from clients and sending it out to recipients, ADP puts it in an interest-bearing account, earning a return in between major transactions. Unlike banks, however, ADP doesn't pay out interest to others, so it benefits from higher rates.

U.S. Interest Rate (central bank overnight rate)
U.S. Interest Rate (central bank overnight rate)[6]

Competition/Market Share

ADP is the largest firm in the payroll outsourcing market in terms of both revenue and net income. In second is Paychex (PAYX), a firm that specializes in small to medium-sized businesses, those with under 100 employees. Finally, in third place in the market is Ceridian (CEN). The following table compares the 3 firms:
Note 1: Ceridian went private in 2007 when it was acquired by Fidelity National Financial (FNF) and Thomas H. Lee Partners [7], so net income and revenue for 2007 are not available.
Note 2: Market share percentages are based on a figure of 5,885,784[8] as the total number of U.S. firms with employees: a number accurate as of 2004, the last year with available data.

(dollars are USD in millions) Revenue Net Income W-2s Clients Share of Total U.S. Firms
Automatic Data Processing (ADP) 7,8001,021[9] 54 million[10]585,000[11]9.94%
Paychex (PAYX)1,887515[12]11 million[13]561,000[14]9.53%
Ceridian (CEN) N/AN/AN/A110,000[15]1.87%

While Paychex (PAYX) closely rivals ADP in terms of the number of companies each one serves, ADP had approximately twice the amount of net income that PAYX does. This is because ADP serves many large companies, while only about 2% of PAYX's clients have over 100 employees.[16] The difference in the numbers of actual employees processed either shows that Paychex operates more efficiently because ADP produced almost 5 times as many W-2's as PAYX, but had only 2 times PAYX's net income or ADP is more affordable and makes more business sense to employers.


  1. ADP 10-k 2009
  2. ADP 2007 10-K, page 5
  3. ADP Reports Second Quarter Fiscal 2009 Results
  4. Google Labs: U.S. Unemployment Rate Data
  5. PAYX 2007 10-K, page 13
  6. Trading Economics: United States Interest Rate
  7. Ceridian to Be Taken Private in $5.3 Billion Deal, The New York Times, May 31, 2007
  8. Statistics about Business from the Census Bureau
  9. ADP 2007 10-K, page 13
  10. ADP 2007 10-K, page 3
  11. ADP 2007 10-K, page 7
  12. PAYX 2007 10-K, page 13
  13. Paychex F3Q07 (Qtr End 2/28/07) Earnings Call Transcript, Page 2
  14. PAYX 2007 10-K, page 1
  15. Ceridian - About Us
  16. PAYX 2007 10-K, pages 2-3
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