ADP Awaits Its Future

ADP (NYSE:ADP) recently reported earnings and wants the market to believe all is reasonable well. They are even predicting earnings at the high end of guidance. But this is after three quarters are in the bag. They refused to give 08 guidance, stating they are still in the budget and forecast stage. ADP executives feel that because of favourable FX rates ADP will experience attractive revenue growth. This comment was not expanded on by management or significantly questioned by analysts on the conference call.

The FX comment needs to be considerable more colour. As ADP expands internationally, more revenue in foreign currency is sourced. They also are supposedly leveraging facilities and staff in India to take advantage of cheap labour costs. The mix of foreign revenues and foreign costs will become increasingly more critical.

As ADP continues to shift from expensive US domestic wage rates to cheaper foreign costs the favourable FX assumption for revenues may provide compensating penalties when calculating costs. Also as we can see from stocks such as Infosys (NasdaqGS:INFY) India is running out of cheap intelligent labour and ADP may have guessed wrong on India’s ability to reduce costs.

The sleeper on ADP’s income statement is the growing reliance on interest income earned from client balances. Currently approximately 55% of net income is derived from this source. ADP is becoming a spread management concern. Clients will eventually start demanding pricing concessions as they become tired of this specific friction cost. When ADP refuses third party independent stand alone software solutions will become more attractive to employer organizations.

ADP is slowing turning on a roasting spit waiting for the future to run it over.