25 December 2007

ADP: Look Ahead to December 2007 Results

When we analyzed ADP (ADP) after the third quarter of the calendar year (first quarter of ADP's fiscal year), we found that the company had achieved its highest Overall Gauge score, 43 out of 100 possible points, since December 2003. However, we noted that corporate restructuring activities, such as the Broadridge spin-off, could have skewed the calculations by degrading the comparability of ADP's recent and historical financial performance.

Quarter-to-quarter and year-to-year comparisons of key metrics greatly influences our gauge scores.

With each new set of quarterly results, we get a chance to see whether recent blips in particular metrics were due to one-time factors or whether they indicate sustained trends in, for example, Growth and Profitability. Given some significant changes at ADP, we're anxiously awaiting the company's results for the waning December quarter.

Also, since ADP invests billions of dollars in client funds in high-quality debt securities, we'll be looking to see if the credit market's problems have seeped into ADP's triple-A world.

ADP's third-quarter report included some helpful guidance for fiscal 2008. The guidance indicated that the company anticipates full year revenue growth between 12 and 13 percent. Therefore, it seems reasonable to expect Revenue in the December quarter of about $2.1 billion. This figure would translate into year-over-year Revenue growth of 12.8 percent, while only being 11.0 percent more than Revenue in the December 2006 quarter.

We don't have explicit guidance for Gross Margin, only hints that margins are improving. Using recent history as guide, we'll look for a Gross Margin of 57 percent in the December quarter. Therefore, we're anticipating Cost of Goods Sold (CGS) -- what ADP calls Operating Expenses -- of 0.43 * $2.1 billion = $903 million.

Depreciation expenses are normally about 3 percent of Revenue. This should work out to be about $63 million in December quarter.

Our estimate for Research and Development (R&D) expenses ("Systems Development and Programming Costs") is 6.5 percent of Revenue. This would equate to $137 million

Sales, General, and Administrative (SG&A) expenses are volatile, but the ratio recently came down to 27 percent of Revenue. For the subject quarter, the estimate would be 0.27 * $2.1 billion = $567 million.

Rolling up the figures identified above, we come up with an estimate for Operating Income in the quarter of $431 million.

For net non-operating income (i.e., other income less interest expense), $15 million would seem to be a reasonable estimate based on recent data.

If the Income Tax Rate is 37.0 percent, Net Income from continuing operations will be $281 million ($0.52 per share).

($ M)

Dec 2007
Dec 2006
Revenue (1)


CGS (2) (903)

Depreciation (3)

R&D (4) (137)

SG&A (567)


Other income


Interest, etc.
Pretax income

Income tax

Net Income

1. Total revenues includes interest on funds held for clients and Professional Employer Organization revenues.
2. Operating expenses
3. Depreciation and amortization.
4. System development and programming

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