netrashetty
Netra Shetty
Automatic Data Processing, Inc. (NASDAQ: ADP) is a global provider of integrated computing and business outsourcing. ADP has nearly $9 billion in revenues[2] and approximately 570,000 clients.[3] ADP offers a range of HR, payroll, tax and benefits administration. ADP is headquartered in Roseland, New Jersey.[4]
You may not have heard of Automatic Data Processing, but there's a good chance it affects your life. The firm is the top provider of payroll services in the U.S., processing 24 million paychecks here and 32 million worldwide.
But despite its enviable market share, ADP (nyse: ADP - news - people ) is struggling. Earnings growth is floundering, and its shares have been anchored at around $45 for the last two years.
Analysts say the firm’s current problems are, oddly enough, rooted in its more successful past. Until 2002, the company boasted 165 consecutive quarters of double-digit earnings growth, a Wall Street record. "We think ADP became a prisoner to its track record," Bear Stearns analyst James Kissane wrote in a May research note. "In order to sustain the record, we think ADP underinvested in the business, missed some unique acquisition opportunities and hung on to non-core businesses."
Analysts want the firm to shed slow growth divisions, like its Brokerage and Dealer business, and share the firm's substantial cash flow with shareholders. ADP generated $1.4 billion in cash from operations last year, on $8.5 billion in revenue. Investors fear management will squander all that dough on a dubious acquisition, Deutsche Bank analyst Brandt Sakakeeny wrote in an April research note. Analysts want the firm to buy back shares or raise the dividend instead.
Change may be on the way. Last month, ADP announced that Chairman and Chief Executive Arthur Weinbach would be relinquishing the CEO title to his chief operating officer, Gary Butler, this August. Though Butler has been with the firm for over 30 years, analysts hope his promotion will herald a more aggressive era.
Unlike Weinbach, who has a finance background, Butler comes from sales, and that should be reflected in a more open, hands-on leadership style. He's been talking to investors and asking them about their concerns. ADP has already accelerated its share buybacks since announcing his appointment, and Butler promises to address the issue directly once he's CEO.
Forbes.com spoke with Butler about the changes afoot at ADP.
Forbes.com: You recently started releasing your payroll data publicly as a monthly measure of the employment situation in the U.S. Why did you decide to do that?
Butler: We've been asked for many years to share our knowledge about employment, particularly for the U.S. market. We have a deep database of 500,000 companies and 20 million people in the U.S. that we pay on payday, yet we are intensely sensitive to client security privacy. So we decided that because of the relevance of the data, to work with an outside economic forecasting firm, Macroeconomic Advisors, and come up with this real-time data of the employment situation in the United States. It's really aggregated data that is not client specific.
ADP affects millions of peoples lives, yet most people don't know anything about it. Are you trying to increase your brand visibility?
I think that's an absolutely accurate assessment. We hope we become part of everybody's monthly statistic around the employment situation.
What other changes should we expect to see at ADP in the next couple of years?
Clearly you will see ADP expand more internationally. We're spending a great deal of time analyzing our use of capital and our capital structure. ADP is fortunate to be a generator of a large amount of cash every year, particularly in relative scale to our revenue, and we do have some excess cash. We'll analyze how we deploy that cash over the next six to nine months.
The leading change for us would be one thing in particular around human resources business process outsourcing. Most people think of human resources BPO as the outsourcing of the payroll or the HR department to a third party. Most people associate that with only very large companies. ADP has a model where we're able to outsource that function with a broad range of services all the way down to the small employer but also to the very large global companies.
But analysts have expressed concern that you would acquire a big, money-losing HR BPO provider. Do you have plans to acquire an HR BPO vendor?
I have minimal interest in acquisitions that are dilutive beyond a year, and I have no interest in acquisitions where the revenue growth or the profit growth is lower than the aggregate revenue growth or profit growth of ADP.
We announced at our last analyst meeting, at the end of April, that we had bought back over 3 million shares of ADP stock in March. Also, we said you would see us picking up the pace of share buybacks during the current quarter. If you're in that mode, you normally wouldn't be chasing a big acquisition.
Does that mean you're focusing on returning cash to shareholders?
We're approaching $3 billion in cash, which is clearly in excess of what we need to run the business on a day-to-day basis. I will come out in more of a public posture around our stance on buybacks and dividends when I take over as CEO at the end of August.
Analysts have said they want you to shed the Brokerage and Dealer division, which performs back-office functions for brokerage firms. Is that in your plans?
We analyze the portfolio on an ongoing basis. Certainly, there are people who feel that our brokerage business will not grow at the same rate as our employer services business, and think we should divest that business. The counter argument is that if you look in five-year periods, from 2005 back to 1990, each one of our businesses has grown almost the same, around 11% and 12% a year. You clearly don't want to divest a great business just because it's having a couple of down years. We've made no decision to date, but we are reviewing it.
How would you describe your leadership style?
I am a salesperson by experience and a field operation person. So I tend to be "out with the troops" and out with the clients. I strongly believe that the most effective thing a CEO can do is to really know his business. And I don't think you really know your business if you're hearing about it only through layers of management.
So I think it's very important to talk to the people who are running sales, or actually doing customer service, and most importantly talk to our clients. I think it's also a great way to communicate your expectations.
Is that a departure from Art Weinbach?
I don't think it's a departure per se, but I would tend to do it more than Art has. Art comes more from a financial background, and I come more from being in the field. He does the same thing, I think I will just be doing it more in depth and more frequently.
What challenges do you expect in this transition?
One of the challenges that any new CEO has is making sure they delegate what they used to do, so you don't end up just doing your old job. Any new CEO has the challenge of surrounding yourself with the right people that you're comfortable delegating those responsibilities to.
You may not have heard of Automatic Data Processing, but there's a good chance it affects your life. The firm is the top provider of payroll services in the U.S., processing 24 million paychecks here and 32 million worldwide.
But despite its enviable market share, ADP (nyse: ADP - news - people ) is struggling. Earnings growth is floundering, and its shares have been anchored at around $45 for the last two years.
Analysts say the firm’s current problems are, oddly enough, rooted in its more successful past. Until 2002, the company boasted 165 consecutive quarters of double-digit earnings growth, a Wall Street record. "We think ADP became a prisoner to its track record," Bear Stearns analyst James Kissane wrote in a May research note. "In order to sustain the record, we think ADP underinvested in the business, missed some unique acquisition opportunities and hung on to non-core businesses."
Analysts want the firm to shed slow growth divisions, like its Brokerage and Dealer business, and share the firm's substantial cash flow with shareholders. ADP generated $1.4 billion in cash from operations last year, on $8.5 billion in revenue. Investors fear management will squander all that dough on a dubious acquisition, Deutsche Bank analyst Brandt Sakakeeny wrote in an April research note. Analysts want the firm to buy back shares or raise the dividend instead.
Change may be on the way. Last month, ADP announced that Chairman and Chief Executive Arthur Weinbach would be relinquishing the CEO title to his chief operating officer, Gary Butler, this August. Though Butler has been with the firm for over 30 years, analysts hope his promotion will herald a more aggressive era.
Unlike Weinbach, who has a finance background, Butler comes from sales, and that should be reflected in a more open, hands-on leadership style. He's been talking to investors and asking them about their concerns. ADP has already accelerated its share buybacks since announcing his appointment, and Butler promises to address the issue directly once he's CEO.
Forbes.com spoke with Butler about the changes afoot at ADP.
Forbes.com: You recently started releasing your payroll data publicly as a monthly measure of the employment situation in the U.S. Why did you decide to do that?
Butler: We've been asked for many years to share our knowledge about employment, particularly for the U.S. market. We have a deep database of 500,000 companies and 20 million people in the U.S. that we pay on payday, yet we are intensely sensitive to client security privacy. So we decided that because of the relevance of the data, to work with an outside economic forecasting firm, Macroeconomic Advisors, and come up with this real-time data of the employment situation in the United States. It's really aggregated data that is not client specific.
ADP affects millions of peoples lives, yet most people don't know anything about it. Are you trying to increase your brand visibility?
I think that's an absolutely accurate assessment. We hope we become part of everybody's monthly statistic around the employment situation.
What other changes should we expect to see at ADP in the next couple of years?
Clearly you will see ADP expand more internationally. We're spending a great deal of time analyzing our use of capital and our capital structure. ADP is fortunate to be a generator of a large amount of cash every year, particularly in relative scale to our revenue, and we do have some excess cash. We'll analyze how we deploy that cash over the next six to nine months.
The leading change for us would be one thing in particular around human resources business process outsourcing. Most people think of human resources BPO as the outsourcing of the payroll or the HR department to a third party. Most people associate that with only very large companies. ADP has a model where we're able to outsource that function with a broad range of services all the way down to the small employer but also to the very large global companies.
But analysts have expressed concern that you would acquire a big, money-losing HR BPO provider. Do you have plans to acquire an HR BPO vendor?
I have minimal interest in acquisitions that are dilutive beyond a year, and I have no interest in acquisitions where the revenue growth or the profit growth is lower than the aggregate revenue growth or profit growth of ADP.
We announced at our last analyst meeting, at the end of April, that we had bought back over 3 million shares of ADP stock in March. Also, we said you would see us picking up the pace of share buybacks during the current quarter. If you're in that mode, you normally wouldn't be chasing a big acquisition.
Does that mean you're focusing on returning cash to shareholders?
We're approaching $3 billion in cash, which is clearly in excess of what we need to run the business on a day-to-day basis. I will come out in more of a public posture around our stance on buybacks and dividends when I take over as CEO at the end of August.
Analysts have said they want you to shed the Brokerage and Dealer division, which performs back-office functions for brokerage firms. Is that in your plans?
We analyze the portfolio on an ongoing basis. Certainly, there are people who feel that our brokerage business will not grow at the same rate as our employer services business, and think we should divest that business. The counter argument is that if you look in five-year periods, from 2005 back to 1990, each one of our businesses has grown almost the same, around 11% and 12% a year. You clearly don't want to divest a great business just because it's having a couple of down years. We've made no decision to date, but we are reviewing it.
How would you describe your leadership style?
I am a salesperson by experience and a field operation person. So I tend to be "out with the troops" and out with the clients. I strongly believe that the most effective thing a CEO can do is to really know his business. And I don't think you really know your business if you're hearing about it only through layers of management.
So I think it's very important to talk to the people who are running sales, or actually doing customer service, and most importantly talk to our clients. I think it's also a great way to communicate your expectations.
Is that a departure from Art Weinbach?
I don't think it's a departure per se, but I would tend to do it more than Art has. Art comes more from a financial background, and I come more from being in the field. He does the same thing, I think I will just be doing it more in depth and more frequently.
What challenges do you expect in this transition?
One of the challenges that any new CEO has is making sure they delegate what they used to do, so you don't end up just doing your old job. Any new CEO has the challenge of surrounding yourself with the right people that you're comfortable delegating those responsibilities to.