Automatic Data Processing, Inc. · NASDAQ:ADP
Automatic Data Processing — Proxy Contest (August 2017)
168 slides from Automatic Data Processing's proxy contest presentation, Aug 17, 2017
Slide 1: ADP: The Time is Now
ADP The Time is Now August 17, 2017
Slide 2: Disclaimer
Disclaimer The information contained in this presentation (“Information”) is based on publicly available information about Automatic Data Processing, Inc. (“ADP” or the “Company”), which has not been independently verified by Pershing Square Capital Management, L.P. ("Pershing Square"). Pershing Squ
Slide 3: An Overview of Pershing Square's Analysis
An Overview of Pershing Square’s Analysis Our analysis of the Company’s performance and the potential areas for improvement on the pages that follow are based on public information and extensive due diligence completed, which includes: 85+ consultations with industry executives, including former sen
Slide 4: An Overview of Pershing Square's Analysis (cont'd.)
An Overview of Pershing Square’s Analysis (cont’d.) This presentation contains statements reflecting Pershing Square’s opinions and beliefs with respect to ADP and its business, based on Pershing Square’s research, analysis, and experience. All such statements are made to Pershing Square’s opinion a
Slide 5: Quote from Henry Taub, Founder of ADP
“As a company, we've had a knack of making a friend out of change, turning its uncertainty into opportunity. That's a relationship I hope we're able to renew for a very long time to come.” - Henry Taub, Founder of ADP
Slide 6: ADP – Overview
ADP – Overview Market cap: $49bn Headquarters: Roseland, NJ 58,000 employees Largest provider of HR services in North America, Europe, Latin America, and the Pacific Rim Recruit-to-retire services and HR solutions with a strong legacy presence in payroll processing Pays 26 million (1 in 6) workers i
Slide 7: Segment: How We Think About ADP
Employer Services (“ES”) ADP’s core business, a software and service-based delivery of payroll and a broad suite of “Beyond Payroll” HCM tools including business process outsourcing Professional Employer Organization (“PEO”) A fully-outsourced HCM solution where ADP becomes the legal co-employer of
Slide 8: ADP's Historical Success Has Made it a Lethargic and Inefficient Sleeping Giant
ADP’s Historical Success Has Made it a Lethargic and Inefficient Sleeping Giant ADP has enjoyed a decades-long, leading market position and a strong historical track record Historical dominance in payroll. Throughout the 2000s, ADP built out its “Beyond Payroll” offering, mostly through product acqu
Slide 9: Focus on Hitting the Numbers Has Led to Value-Destructive Decisions
ADP’s Focus on “Hitting the Numbers” Has Led to Value-Destructive Decisions with Negative Long-Term Consequences ADP Total Shareholder Return Expectations – 2015 Analyst Day ________________________________________________ Source: ADP Analyst Day, March 3, 2015. “[ADP is] very focused on per share v
Slide 10: Is ADP Achieving its Maximum Potential?
The Critical Question for Shareholders: Is ADP Achieving its Maximum Potential? ADP is materially underperforming its potential Employer Services growth is slowing and margins are vastly below their potential ADP is losing ground, most notably against enterprise and mid-market competitors Key eviden
Slide 11: Employer Services is materially underperforming its competitors and potential
We believe ADP’s Employer Services segment, its largest business and currently ~2/3 of profit, is materially underperforming its competitors and its potential
Slide 12: We Will Demonstrate That if ADP is Managed Optimally
We Will Demonstrate That if ADP is Managed Optimally: Employer Services can increase its actual operating margins (excluding float income) by 1,500 to 2,000 basis points by FY 2022 Assuming a 1,700 basis point expansion in ES, ADP’s overall EBIT margins can increase from 20% in FY 2017 to ~32% by FY
Slide 13: I. Industry & ADP Overview
I. Industry & ADP Overview
Slide 14: Human Capital Management (HCM) Overview
Human Capital Management (“HCM”) Overview The Human Capital Management industry is a secularly attractive, growing, and underpenetrated market HCM market overview: Comprehensive recruit-to-retire tools which help clients manage their employees, including: Payroll / HR information systems (“HRIS”) “B
Slide 15: ADP was started by accountants and has a long heritage in data processing
ADP was started by accountants and has a long heritage in data processing Payroll “service bureaus” largely thrived on scale and processing efficiency, supplemented with human service, not innovative technology The rise of Beyond Payroll HCM, largely non-processing-related functionality, led to the
Slide 16: ADP Built its HCM Offering Almost Entirely Through Acquisitions
Lacking Innovation Capabilities, ADP Built its HCM Offering Almost Entirely Through Acquisitions ADP “cobbled” together a collection of HCM products across disparate platforms which have largely remain siloed operationally ADP should be focusing on acquisition integration, product integration, and o
Slide 17: ADP's Products and Technology Need Modernization
ADP’s Products and Technology Need Modernization ADP’s buy, instead of build, strategy has led to weak product offerings (most notably in Enterprise) and inefficient legacy back-end infrastructure ADP’s Enterprise segment has multiple unintegrated products performing the same effective functions ~6
Slide 18: ADP's Products and Technology Need Modernization
ADP’s Products and Technology Need Modernization ADP’s product migration efforts in SMB and Mid-Market(1) have moved customers to version-less Cloud-based platforms Products not integrated into a single, unified HCM solution ADP’s new HCM platforms are largely “wrappers” around legacy products and b
Slide 19: SMB, Mid-Market, Enterprise, International Segments
SMB (Small Business) Mid-Market (Major Accounts) Enterprise (National Accounts) International & Multinational % of ES Revenue ~20%-25% ~35%-40% ~20% ~20% Client Size 1-49 50-999 1,000+ Varies Key Product Offering Payroll + Limited HCM Payroll + HCM Payroll + Full HCM Payroll + HCM Product Complexity
Slide 20: Industry Research Notes: ADP's Deficiencies in Enterprise HCM
Industry Research Notes ADP’s Deficiencies in Enterprise HCM Nucleus Research HCM Technology Value Matrix 2016 Emphasis Added ________________________________________________ (1) Nucleus Research, HCM Technology Value Matrix 2016, September 2016. (2) Gartner, Magic Quadrant for Cloud HCM Suites for
Slide 21: ADP's Mid-Market Competitors are Gaining Share
________________________________________________ Source: Company SEC financials, press releases and news articles. Note: Financials have been adjusted to a June fiscal year end for Paycom and Paycor. Paycor financials based on public news articles. Includes both expensed and capitalized R&D. ADP’s M
Slide 22: ADP Appears to be Losing Significant Share in Enterprise HCM
ADP Appears to be Losing Significant Share in Enterprise HCM “[Y]ou can see as you move to the right, national accounts spaces for clients with employees over 1,000. We have about a little over $2 billion of revenue in that space and 4,000 clients.” – Chris Reidy, CFO(2) ____________________________
Slide 23: ADP Appears to be Losing Significant Share in Enterprise HCM
________________________________________________ Source: ADP Analyst Day (2009), Company SEC financials, press releases and earnings transcripts. Note: Vantage reported as live clients, consistent with competitor customer counts. ADP reported 5,000 Enterprise clients as of the 2009 Analyst Day and 4
Slide 24: ADP's Enterprise Competitors are Gaining Share
ADP’s Enterprise Competitors are Gaining Share ADP’s SaaS Cloud-based competitors, with high quality and integrated HCM offerings, are stealing significant share in Enterprise Ultimate Software has spent only ~$590m on R&D cumulatively since 2011 while building and maintaining a world-class enterpri
Slide 25: Poor Technology is Compensated for with Headcount
Lee Cooperman, ADP Board Member (1991-2011) “What [Bill Ackman] doesn’t understand is they’ve never been as strong as they ought to be in software and technology, so they made up for that weakness by having a high-touch business model, with high degrees of client service. They have 700,000 clients,
Slide 26: Outdated and Inefficient Technology + Service = Less Growth and Lower Margins
Outdated and Inefficient Technology + “Service” = Less Growth and Lower Margins “They have relied on ‘service’ as a differentiator but over time ‘service’ became something the customer expected to do themselves with self-service.” – Former DVP of Business Transformation _____________________________
Slide 27: ADP is at a Critical Inflection Point
ADP is at a Critical Inflection Point The HCM industry is rapidly evolving. ADP needs to urgently become an efficient world-class technology company HCM capabilities Beyond Payroll – from recruitment to retirement – are growing in importance with the rise in strategic importance of HR in an economy
Slide 28: II. ADP has Enormous Potential
II.ADP has Enormous Potential
Slide 29: ADP has Enormous Structural Advantages
ADP has Enormous Structural Advantages ADP should be the market leader, with world-class offerings ADP enjoys significant structural advantages: ADP’s significant scale, in total and by segment, provides: Significant free cash flow and financial resources so R&D resources are not a constraint ADP’s
Slide 30: Proper Enhancements to Product and Back-End Will Drive Long-Term Value
Long-term Shareholder Value Higher Growth Greater Efficiency Higher Margins Proper Enhancements to Product and Back-End Infrastructure Will Drive Long-Term Value Enhanced technology offerings, on the front-end and back-end, would drive improvements in ADP’s competitive position, long-term growth and
Slide 31: ADP's Potential for Improved Growth
ADP’s Potential for Improved Growth We believe fixing ADP’s competitive position will increase ES’s potential revenue growth from ~4% to 7% – 8% Fixing ADP’s product, back-end technology, and go-to-market strategy would yield significant long-term value: Improved competitive position and growth pros
Slide 32: ADP has Enormous Upside If It Can Transition to a Real Technology Company
ADP has Enormous Upside If It Can Transition to a Real Technology Company ADP has a unique and incredibly valuable position at the epicenter of businesses of all sizes, collectively serving ~700,000 clients worldwide ADP should be the ecosystem and partner of choice, if it can become a technology le
Slide 33: What is The Risk of the Status Quo?
What is The Risk of the Status Quo? ADP’s current status quo is harming its long-term competitive position The risk of inaction is great; ADP is already losing share If customers are lost, they can be lost for a decade or more Exceedingly slow transformation is harmful Competitors are moving faster
Slide 34: III. ADP is Materially Underperforming its Potential
III. ADP is Materially Underperforming its Potential
Slide 35: Why has the market and the Board not recognized the problem?
Why has the market and the Board not recognized the problem?
Slide 36: Underperformance concealed by complex accounting and reduced disclosure
ADP’s underperformance has been concealed due to complex accounting and reduced disclosure which makes benchmarking to competitors difficult
Slide 37: Large PEO and Client Fund Income Complicate Benchmarking
ADP’s Large PEO + Substantial Clients Fund Income Complicates Operational Benchmarking PEO “revenue” overstates economic revenue and distorts growth rates and operational benchmarking Client Fund Income (or “float income”), overstates operational profitability. Earnings from float are not impacted b
Slide 38: PEO Revenue Accounting Overstates Growth and Economic Revenue
ADP’s accounting for PEO “revenues” overstates growth and economic revenue and complicates operational benchmarking given the significant pass-throughs ADP uniquely monetizes its Client Funds (“Funds Held for Clients”), generating nearly 100% margin float income which overstates ES’s operational pro
Slide 39: ADP's Reported Metrics are Overstating Growth
ADP’s Reported Metrics are Overstating Growth ADP’s PEO pass-throughs are inflating growth. Growth is slowing while ADP’s sales force growth is accelerating ________________________________________________ Excludes Dealer Services in all periods. PEO estimated at ~11% of total revenue based on manag
Slide 40: Reported Bookings Appear Good
Reported Bookings Appear Good ADP’s total reported bookings suggest a ~7% CAGR since FY 2011. This is not heroic in light of industry tailwinds and an 8% CAGR increase in ADP’s sales force(1) CAGR ~7% ________________________________________________ Source: SEC financials, press releases. (1)FY’2011
Slide 41: PEO Pass-Through Costs Overstate Net Economic Bookings
ADP reports worldwide new business bookings by consolidating Employer Service and PEO bookings(2), which should be reported and analyzed separately We estimate that pass-throughs embedded in gross bookings have increased materially (from ~27% to ~37% of gross bookings) given the PEO’s growth, inflat
Slide 42: Historical Disclosure Reduced Over Time
Category Example of Historical Disclosure Year Last Reported Currently Reported? Revenue and Client by Sub-Segment “[SMB] is about $1 billion of revenue, it comprises about 382,000 clients… Then in the major accounts space… our revenue is about $2 billion in that space, 63,000 payroll clients... We
Slide 43: Client Count Growth in SMB and International Masks Weak Mid-Market and Enterprise
While ADP has grown its client count in SMB and international (including acquisitions), its Mid-Market and Enterprise performance is poor ADP Reports Positive Overall Client Count Trends But This is Misleading ADP reports total client counts 2% – 3% annual growth, but this masks underlying weakness
Slide 44: High-level Disclosures Do Not Tell the Full Story
ADP’s High-level Disclosures Do Not Tell the Full Story with Respect to ADP’s Competitive Position While ADP’s total client count appears to be growing, the loss of larger clients disproportionately impacts overall performance ADP needs ~185 SMB accounts or ~13 Mid-Market clients to replace the loss
Slide 45: Management's Commentary on Client Wins/Losses is Misleading
________________________________________________ Q1’2015 Earnings Call. October 29, 2014. Ultimate Software Q1’2015 Investor Presentation. February 3, 2015. Scott Scheer. Q4’2016 Earnings Call. February 7, 2017. ADP Management’s Commentary on Client Wins/Losses is Misleading ADP Ultimate Software(2)
Slide 46: Consolidated Revenue Retention Masks Enterprise Underperformance
ADP’s client retention appears to be in-line with weighted-average peer retention when adjusted for ADP’s estimated business mix Note that Ultimate has a best-in-class ~97% retention, while growing rapidly – this contradicts the notion that ADP’s “high touch service” model leads to differentiated re
Slide 47: Weak Trends Masked by Sell-in
Weak Underlying Trends are Also Masked by “Sell-in” (Sales of Additional HCM Modules to Existing Clients) ADP’s competitive weakness is masked partially by “sell-in” driven by recent industry trends toward HCM Beyond Payroll Recent sell-in has inflated growth as the industry built-out Beyond Payroll
Slide 48: Sell-In Won't Last Forever
________________________________________________ Q2’2016 Earnings Call. February 3, 2016. Q3’2017 Earnings Call. May 3, 2017. Sell-In Won’t Last Forever… “[H]istorically our mix has been 50/50 -- about 50% of bookings roughly towards new client counts and new logos, and 50% of upsell. And but obviou
Slide 49: Reported Employer Services Margins are Overstated
ADP’s Reported Employer Services Margins in its SEC Filings are Overstated
Slide 50: Employer Services SEC Margin Disclosure
ADP’s Employer Services SEC Margin Disclosure ________________________________________________ Source: ADP Form 10-K. Page 32. ADP’s Form 10-K, Page 32 “Employer Services’ overall margin increased from 30.4% to 30.6% for fiscal 2017…”
Slide 51: Employer Services Margins are Overstated
45 Pages Later the Company Explains that Employer Services Margins are Overstated ________________________________________________ Source: ADP Form 10-K. Page 77. ADP Form 10-K, Page 77 “There is a reconciling item for the difference between actual interest income earned on invested funds held for c
Slide 52: Comparing with Competitors: Excluding Float and Charging Overhead
To compare with competitors, one must (1) exclude float-income as a separate line-item, and (2) charge Employer Services for corporate overhead(1) Our analysis focuses on a “Net Operational Profit Margin” to isolate float income (including the overstated credited yield) and to properly account for c
Slide 53: Compare with competitors after excluding float and charging overhead
Once you exclude float income and charge corporate overhead to Employer Services you can then compare with competitors
Slide 54: ADP Comparative Size by Net Operational Revenue
ADP Comparative Size: ADP Comp. Segment Size: 3x ~1x 6x ~1x 12x ~2x 13x ~1x 14x ~1x 22x ~7x 28x ~10x 32x ~11x ________________________________________________ Note: Based on latest fiscal year end, as relevant. Note that Kronos and Ceridian are two privately-owned competitors which do not have publi
Slide 55: Net Operational Revenue per Employee Underperforms Competitors
Despite its Scale, ADP’s Net Operational Revenue per Employee Significantly Underperforms Competitors When adjusted for PEO pass-throughs, ADP substantially trails its competitor group in efficiency, despite ADP’s significant scale advantages This deficiency is not specific to one “category” of comp
Slide 56: ADP's Labor Productivity is Essentially Flat
ADP’s Labor Productivity is Essentially Flat ________________________________________________ 2009 used as a starting point given the availability of segment headcount for Dealer Services (reported as 7k in 2009) in the 2009 Analyst Day presentation. Alternatively, net operational revenue per employ
Slide 57: Adjusted Gross Margins Lower than Competitors
ADP’s adjusted gross margins(1) are significantly lower than competitors’ despite ADP’s significant scale advantages ________________________________________________ Note that Kronos and Ceridian are two privately-owned competitors which do not have public financials. ADP’s gross margins adjusted to
Slide 58: Apples-to-Apples Benchmarking Shows Dramatic Underperformance
Apples-to-Apples Benchmarking to Competitors Shows Dramatic Underperformance Achieving just competitor-level efficiency would yield massive improvements in profitability Net operational revenue per employee (ADP $161k vs. $223k competitor median) Adjusted gross margins (ADP 60%(1) vs. 74% recurring
Slide 59: ADP has an Enormous Margin Opportunity in ES
ADP has an Enormous Margin Opportunity in ES Employer Services (“ES”) Current Optimized Key Drivers Gross Margin ~58% 72% – 75% Automated product support, implementation, and reduced back-end spend Sales Expense NA Low 20s% Increased sales force productivity General & Admin NA L-S-D% Corp. restructu
Slide 60: Benchmarking margin potential by sub-segment
Because ADP participates in SMB, Mid-Market, Enterprise, and International, ADP’s structural margin potential can be best estimated by benchmarking against competitors in each sub-segment
Slide 61: IV. Potential Margins by Sub-Segment
IV. Potential Margins by Sub-Segment
Slide 62: How We Analyze Business-Mix-Adjusted Structural Margin Potential
How We Analyze the Business-Mix-Adjusted Structural Margin Potential of ADP: We do not presume the current margin of any sub-segment (e.g., International) is the structural potential margin We estimate the structural potential margin of ADP's various sub-segments by analyzing the segments' underlyin
Slide 63: Paychex is an Appropriate Comparable
Paychex is an Appropriate Comparable Paychex is a direct comparable to ADP in SMB (low- to mid-20s% of ES) Both are mature industry participants with mid- to high-single-digit revenue growth and a “service bureau” legacy Paychex had ~20% operational margins in the late 1990s. Paychex expanded margin
Slide 64: ADP vs. Paychex
ADP vs. Paychex ________________________________________________ For both ADP and Paychex analysis excludes Client Funds and PEO pass-through costs. Paychex PEO pass-through estimated at $165m on ~$340m of gross PEO revenue. Assumes ADP has 2,500 dedicated PEO employees. Assumes Paychex has 580 dedi
Slide 65: ADP vs. Paychex: the Gap is Widening
While Paychex historically generated similar Net Operational Revenue per Employee as ADP (from 2008-2011), it has dramatically outperformed ADP since 2011 ADP vs. Paychex: the Gap is Widening Net Operational Revenue per Employee(1) ($’000) Net Operational Revenue Benchmarking Per Employee(3,4) ($’00
Slide 66: ADP vs. Paychex margin benchmarking
________________________________________________ Employer Services revenue only. Assumes PEO has 2,500 dedicated employees (in-line with Insperity and TriNet). $226k as reported. $214k excludes PEO pass-through costs (estimated at ~$165m). Paychex PEO believed to be ~$340m based on management commen
Slide 67: The Math Doesn't Add Up
The Math Doesn’t Add Up… If ADP earned Paychex’s ~41% SMB margin(1) on its ~$2bn SMB business, it would imply ~$820mm of operating profit. SMB-only profits would therefore account for ~50%+ of total Employer Services total profit If true, this would imply the rest of the Employer Services business e
Slide 68: Mid-Market: Structural Margin Potential
Multiple former ADP executives have articulated their belief that Mid-Market has the highest structural margin potential as it sits in a “sweet spot” between SMB and Enterprise, with moderate churn, good pricing power, lower sales-intensity, good ancillary module attachment rates, and a larger reven
Slide 69: Consider Growth and Scale of Competitors
Investors should consider the growth and scale of competitors when gauging current and potential structural operating margins of competitors Comparisons to Sub-Scale and Rapidly Growing Peers Sub-scale and rapidly growing peers have significant operating expense burdens in their P&L – margins improv
Slide 70: Comparisons to Sub-Scale & Rapidly Growing Competitors (continued)
Comparisons to Sub-Scale & Rapidly Growing Competitors (continued) Comparisons to ADP’s competitors are most appropriate at the revenue and gross margin levels given the higher operating expense levels of ADP’s sub-scale and rapidly growing competitors In comparisons to competitors on revenue and gr
Slide 71: Ultimate at Scale: Illustrative Margin Profile
Ultimate at Scale: Illustrative Margin Profile Higher absolute growth (>20%) burdens Ultimate’s P&L with implementation expense and variable sales commissions; G&A and R&D will scale over time ________________________________________________ Source: Ultimate Public financials. Adjusted to exclude ce
Slide 72: Ultimate at Scale: Wall Street Agrees
Ultimate at Scale: Wall Street Agrees ________________________________________________ Source: Wall Street research. Emphasis added. “Substantial long-term operating leverage: Longer term, our hypothetical margin expansion analysis shows the potential for a significant ramp in pro forma operating ma
Slide 73: Ultimate Software management on long-term margins
Question Answer Justin Furby, William Blair “Longer-term margins, two of your competitors have a little bit of a different margin structure: Paychex, high 30s%, 40%; ADP, mid 20s%. Where do you guys think you shake out over the very long term?” Mitch Dauerman, Ultimate Software, CFO “We look at Payc
Slide 74: Ultimate Software is an Appropriate Comparable
Ultimate Software is an Appropriate Comparable Ultimate Software (“Ultimate”) is an appropriate comparable for ADP’s upper-mid and enterprise markets Ultimate Software was founded by Scott Scheer, in 1990, a former ADP executive Transitioned to cloud-based UltiPro offering in 2002 Ultimate Software
Slide 75: Enterprise: HCM SaaS Margins 35%–40%
Enterprise: HCM SaaS Margins 35% – 40%, but Decline to ~26% to 30% When Lower Margin Sub-Segments are Included Key Observations Enterprise is now ADP’s smallest sub-segment at ~20% of ES revenue(1) Segment margins suppressed by legacy, sprawling product portfolio and archaic back-end infrastructure
Slide 76: International: Structural Margin Potential
International: Structural Margin Potential ~25% to 30% Key Observations We believe the components of International ES include: In-country domestic HCM / payroll (ADP is a #1 or #2 market player), including Canada and Western Europe, which should be structurally very profitable (i.e. 30%-40%+) Multin
Slide 77: Structurally High Margin HCM SaaS Business Mix
Structurally High Margin (35%-40%+) HCM “SaaS” (Est. ~70%-80% of ES Revenue) ADP’s Structural Margin Potential by Underlying Business Sub-Segment Substantial majority of ES’s revenue base has structurally high potential margins Small Business (Incl. ASO) Illustrative Employer Services Business Mix M
Slide 78: Segment Comparables Demonstrate Enormous Margin Opportunity in ES
Segment Comparables Demonstrate That ADP has an Enormous Margin Opportunity in ES Employer Services is materially underperforming and should achieve 35% or greater margins by FY 2022 if properly managed Employer Services % of Revenue Optimized Margin (%) Evidence Small / Medium Business Low- to Mid-
Slide 79: Unlike ADP's competitors, ADP provides service
“Unlike ADP’s competitors, ADP provides “service” to its customers” The vast majority of what ADP calls “service” is product support to compensate for weak software and technology, which when fixed, will improve growth and margins Value-added service – to the extent it is differentiated, unique, and
Slide 80: Unlike Paychex, only a minority of ADP's business is SMB
“Unlike Paychex, only a minority of ADP’s business is SMB” While this is true, if ADP achieved Paychex’s margins in its SMB business, this would imply that the rest of Employer Services earns a 12% margin on $6.5bn of revenue (Slide 66) ADP is not achieving its structural margin potential across mul
Slide 81: V. What are the Causes of ADP's Underperformance
V. What are the Causes of ADP’s Underperformance
Slide 82: Underperformance in Employer Services is Broad-Based, But Fixable
ADP’s Underperformance in Employer Services is Broad-Based, But Fixable ADP’s underperformance in Employer Services is driven by numerous inefficiencies across ADP’s organization: Service organization is overstaffed and poorly structured Implementation teams are siloed and lack automation tools Back
Slide 83: A. Service Organization is Overstaffed and Inefficient
A. ADP’s Service Organization is Overstaffed and Inefficient
Slide 84: Support ≠ Service
Support ≠ “Service” ________________________________________________ Source: Interviews with prior ADP executives. “What they call ‘service’ is mostly support. The executives don’t understand this. They count as service: ‘you tried to run it, it’s not working, walk me through how to do this again…’
Slide 85: ADP does not distinguish between service and support
ADP does not distinguish between “service” and “support” when describing its service organization Service: Value-added enhancements which help clients utilize products Value-added services include compliance, tax, filings, etc. Adds value and should generate greater market share and/or higher pricin
Slide 86: ADP's Service Footprint is Overstaffed
ADP’s Service Footprint is Overstaffed ADP is not achieving leverage on its overall associate headcount, particularly in its service organization Service is the largest component of the associate count at ADP ADP’s service offering is highly labor intensive; support-related headcount needs should de
Slide 87: ADP's Service Structure: Sprawling and Sub-Scale
ADP’s Service Structure: Sprawling and Sub-Scale ADP has ~10 million square feet of real estate and 143 US office locations
Slide 88: Service Alignment Initiative
In July 2016, ADP announced its “Service Alignment Initiative” but has made no commitments regarding improved efficiency or client service levels
Slide 89: B. Implementation Teams are Siloed and Lack Automation Tools
B. ADP’s Implementation Teams are Siloed and Lack Automation Tools
Slide 90: Implementation Teams are Siloed and Lack Automation Tools
ADP’s Implementation Teams are Siloed and Lack Automation Tools Implementations are labor intensive and generally siloed by product – the current structure precludes operating leverage Substantial “hands-on-keyboard” implementation teams – thousands of employees involved in implementation efforts La
Slide 91: C. Back-End Infrastructure is Outdated and Complex
C. ADP’s Back-End Infrastructure is Outdated and Complex
Slide 92: ADP Payroll Product Architecture
________________________________________________ Compiled based on public sources and private interviews. Certain views may be dated and as such, ADP may have modernized the architecture in recent years. We understand that all of these products are premised on PeopleSoft code from the 1990s and are
Slide 93: Core payroll engine is inefficient
While ADP’s core payroll engine “works” and has been the backbone of the Company’s offering for decades it is inefficient A “Spaghetti of code” written over time Written largely in COBOL Expensive to maintain; requires tenured engineers and programmers Does not work for other regions; payroll offeri
Slide 94: Bloated Back-End – Enterprise Product Complexity
Bloated Back-End – Example #2: Enterprise Product Complexity Enterprise is ADP’s most dysfunctional business segment – ADP goes to market with overlapping and often competitive products on legacy architecture Vantage is a sub-scale product today, a “wrapper” around the legacy siloed product architec
Slide 95: Enterprise products cobbled together as Vantage
Enterprise consists of a combination of various products acquired over time, many of which have been cobbled together as Vantage HR Anytime (HRIS) PayForce Enterprise HR (HRIS & Payroll) Enterprise Payroll Pro Business Payroll Workforce Now(1) Full HR BPO (“COS”) Health and Welfare Services (Benefit
Slide 96: Outdated and Duplicative Support Tools
ADP’s service organization has been attempting to unify onto a single instance of on premise Siebel CRM for the past ~10 years Plethora of home-grown widgets and manual workarounds By the time ADP fully migrates onto its unified CRM system, the system will be dated relative to best-in-class solution
Slide 97: D. Sales Force Productivity is Declining
D. ADP’s Sales Force Productivity is Declining
Slide 98: Sales productivity should be analyzed on a net basis
ADP sales productivity should be analyzed on a net basis, isolating the gross up of PEO pass-through revenue on bookings Sales associates have grown from ~5,000 in FY 2014 to ~6,540+ currently,(1) (targeting 4% additional growth in FY 2018) while total Net and Employer Services Bookings have increas
Slide 99: Sales Force Productivity – Less Than Meets the Eye
Sales Force Productivity – Less Than Meets the Eye ________________________________________________ Gross bookings reported per ADP management. Sales force headcount based on management commentary from quarterly conference calls. PEO bookings assumes 80-86% retention (per the 10K) and certain estima
Slide 100: Best Direct Sales Force in the World Is Underachieving
Ed Flynn, Former EVP, Worldwide Sales and Marketing “The way to think about the 10% [growth in bookings], both in the past and in terms of our future intention, is that roughly half of our growth will come through headcount additions. The other half will come through productivity lift.” The “Best Di
Slide 101: Sales productivity versus competitors
________________________________________________. Note: Analysis spreads estimated competitor net bookings over their last fiscal year average sales head count. Net bookings estimated by subtracting the change in recurring revenue (excluding implementation, PEO pass-through costs and float revenue)
Slide 102: The Problem is Not the Sales Force... It's the Products
The Problem is Not the Sales Force... It’s the Products “And this goes back to the linkage of our focus on technology and innovation, because we can't prove that over the last three or four years -- because this has really been also coincident with an economy that's been improving. And so we can't t
Slide 103: E. Spending Significantly on Legacy IT Systems Support
E. ADP is Spending Significantly on Legacy IT Systems Support
Slide 104: ADP Dwarfs Competitor Systems Spending
On an absolute dollar basis, ADP dwarfs competitor systems spending, other than Workday, which is growing rapidly and building out its ERP / financials product for Enterprise clients ADP should be an HCM technology leader given its vast spending and resources Systems Development and Programming Expe
Slide 105: Legacy Systems Costs Relatively Unchanged
Despite management’s goal to eliminate spending to support legacy architecture,(1) we believe these costs are relatively unchanged in recent years The change in composition in IT spend between legacy systems and new development is driven by higher absolute spend vs. a true reduction in legacy system
Slide 106: Significant Reductions in Legacy Systems Spend Possible
ADP should achieve significant reductions in systems development and programming spend on legacy platforms and infrastructure To date, minimal reductions in legacy systems spend If ADP cut legacy systems expense by 50% this would drive ~$150m of profit and ~180bps of margin opportunity for ES ADP ma
Slide 107: F. Corporate Structure is Bloated and Complex
F. ADP’s Corporate Structure is Bloated and Complex
Slide 108: ADP's Corporate Structure is Inefficient
ADP’s Corporate Structure is Inefficient Various business units operate in a mostly siloed manner Multiple HQs for each business unit Each business unit operates with its own staffing across most functions, including administrative functions (HR, Finance, etc.) Matrix structure with many functions h
Slide 109: ADP's Sprawling Corporate Footprint
ADP’s Sprawling Corporate Footprint ADP’s business units and corporate offices are spread across the country largely due to historical locations for each business Mid-Market (Majors) Small Business (SMB) Corporate HQ Enterprise (National Accounts) Value-Add and Tax PEO
Slide 110: Sprawling Corporate Footprint (cont'd.)
ADP’s Sprawling Corporate Footprint (cont’d.) ADP’s Corporate HQ (Roseland, NJ), SMB (Florham Park, NJ), and Mid-Market (Parsippany, NJ) offices are a 15-20 minute drive from one another
Slide 111: G. Platform Migrations Should Drive Significant Margin Uplift
G. Platform Migrations Should Drive Significant Margin Uplift
Slide 112: Product Migrations Should Yield Big Improvements in Revenue and Margin
Better user experience More cross-selling of modules Higher retention Fewer errors with real-time capabilities Fewer manual processes Fewer support calls and less support activity Less maintenance expense Less R&D supporting legacy infrastructure Significantly higher growth and margins ADP’s Product
Slide 113: VI. Root Causes of ADP's Underperformance
VI. Root Causes of ADP’s Underperformance
Slide 114: A. Management Insularity & Culture
A. Management Insularity & Culture
Slide 115: ADP's Senior Executive Management
ADP’s senior executive management Executives have decades of tenure at ADP and effectively no outside experience and perspective “He’s [Bill Ackman] saying that somehow the company is insular and that people stick around forever, and the people that have worked for me have been around the company fo
Slide 116: ADP's Management Team Needs Improvement
ADP’s Management Team Needs Improvement ADP’s senior executive management team needs outside experience and fresh perspectives; historically, outsiders have been rejected ADP’s senior executive management team is lacking critical capabilities ADP should be hiring from leading companies in its quest
Slide 117: ADP's Culture Needs to Change
ADP’s Culture Needs to Change ADP’s insular, bureaucratic, and staid corporate culture causes the Company to trail competitors in recruiting talent, eroding the Company’s long-term competitive position Many of ADP’s direct competitors rank amongst the best places to work in the country, according to
Slide 118: ADP Trails Major Peers Across Employee Satisfaction Metrics
________________________________________________ Source: Glassdoor, Inc. July 2017. Note: Green stars denote Glassdoor Highest Rated CEOs from 2016 or 2017 based on U.S. employee feedback between 5/2/15 - 5/1/17. Overall Rating Approval of CEO Approve of Senior Management ADP Rank: Last 2nd to Last
Slide 119: ADP Trails Major Peers Across Employee Satisfaction Metrics
________________________________________________ Source: Glassdoor, Inc. July 2017. Culture & Values Recommend to a Friend Positive Business Outlook ADP Rank: Last Last Last ADP Trails Major Peers Across a Variety of Employee Satisfaction Metrics
Slide 120: B. Legacy Organization Structure is Neither Client Centric Nor Efficient
B. Legacy Organization Structure is Neither Client Centric Nor Efficient
Slide 121: ADP's Structure is Not Client Centric
Intl. In-Country Structure ________________________________________________ Note: Informed by primary research interviews. The above represents a complete understanding to the best of our ability. ADP’s Structure is Not Client Centric and Requires Duplicative Back-Office Functions ADP Corporate Smal
Slide 122: ADP's Product Map Spills Across Business Units
ADP’s Product Map Spills Across Business Units Complicating the issue, ADP’s product portfolio spills across multiple business units, creating duplicative implementation and support organizations SMB Mid-Market Enterprise Canada RUN by ADP TotalSource (PEO) Workforce Now Vantage
Slide 123: ADP's Business Structure is Sub-Optimal
ADP’s Business Structure is Sub-Optimal ________________________________________________ Source: Interviews with prior ADP executives. ADP’s current structure is hurting ADP’s ability to execute in the marketplace while incentivizing sub-optimal outcomes The current structure: Does not put the clien
Slide 124: BU Presidents Manage Cost-Centers Without True Product Ownership
Hard-Line Divisional Functions Matrix Functions to Corporate ________________________________________________ Note: Informed by primary research interviews. Internal divisional segmentation may have changed in recent years. The above represents a complete understanding to the best of our ability. Ad
Slide 125: Functional Matrix Structure is Sub-Optimal
ADP’s Functional Matrix Structure is Sub-Optimal ________________________________________________ Source: Interviews with prior ADP executives. ADP’s functional matrix reporting structure hampers execution, precludes transformational change, and promotes waste The current structure: Prevents transfo
Slide 126: VII. Financial Model Assumptions
VII. Financial Model Assumptions
Slide 127: ADP has Three Distinct Drivers of Value
Continued modest ~3% – 5% growth from FY 2018 to 2022 Incremental margin improvement of +50-75bps per annum after FY’18 Continued secular growth from underpenetrated base Conservatively assuming 12% growth (vs. 15% last 5 years) Client fund balances conservatively assumed to grow ~3% Yield on float
Slide 128: Key Financial Modeling Assumptions
Key Financial Modeling Assumptions Projected CAGR (’17A–’22E) Business Unit Last 6 Yrs. (‘11-’17) Status Quo Transformation Employer Services 5% 4% 5% (exit at 7%) PEO 14% 12% 12% Operational Revenue (Gross) 7% 7% 7% Interest on Funds Held for Client (5%) 14% 14% Total Revenue 7% 7% 8% Projected Mar
Slide 129: Status Quo Valuation of ADP
Status Quo Valuation of ADP ADP will be challenged to re-accelerate Employer Services top line growth Management has guided to 2% – 3% ES growth for FY 2018 ADP’s long-term EPS algorithm should drive modest margin expansion over time but will continue to leave ADP competitively exposed _____________
Slide 130: The Value of ADP (Transformation)
The Value of ADP (Transformation) Our proposed “Transformation Case” for ADP will lead to more robust top-line growth (i.e. better competitive positioning in Enterprise) and expand long-term operating margins Near-term cash generation reduced by accelerated product investment and cash restructuring
Slide 131: The Value of ADP (Transformation) – Illustrative Valuation
The Value of ADP (Transformation) Structurally higher long-term growth should translate into multiple expansion Illustrative Valuation (1,2) ________________________________________________ 2018 financials based on management guidance. Long-term model assumes Employer Service growth rates accelerate
Slide 132: VIII. Solera & CDK Tell the Story
VIII. Solera & CDK Tell the Story
Slide 133: Case Study #1: Solera
Case Study #1: Solera (Formerly ADP Claims Services Group) ________________________________________________ Source: ADP and Solera Holdings Inc. SEC filings and transcripts. Adjusted EBITA adds back restructuring costs, acquisition related costs, litigation related expenses (most notably in FY’2015)
Slide 134: Solera Q&A on margin potential
Question Answer Gary Bisbee, Lehman Brothers “Then just the last question -- the Dealer margin is obviously doing terrific now that you've lapped the Kerridge. Can you give us a sense, as you look out over the next few years, what's sort of the margin potential of this business? Does it remain subst
Slide 135: Case Study – CDK Global
Case Study – CDK Global CDK Global, f.k.a. Dealer Services within ADP, was spun out from ADP on September 30, 2014 An activist investor, Sachem Head, announced an investment in CDK shortly after its spinoff In June 2015, aided by the help of an analysis by outside consultants, CDK announced its Busi
Slide 136: CDK Global: A Clean-sheet Look at Margins
CDK Global: A “Clean-sheet” Look at Margins Steven Anenen, CDK Global, Former CEO “What we have done with the Board is we said, listen, now is a perfect time for us; we are out 120 days. Let's look at all of our margins and see if there are areas we could get a lot more effective. So, leaning a proc
Slide 137: CDK Global: At ADP, No Urgency to Capture Potential
CDK Global: At ADP, No Urgency to Capture Potential Question Answer Brian Bissett, Morgan Stanley “And were those things that were not addressed as you were inside ADP, or are these things that are incrementally directed towards how you are going to grow the business? In other words, did ADP kind of
Slide 138: CDK Transformation Opportunities Similar to ADP
Many areas of the transformative opportunity at CDK are similar to those which exist at ADP CDK Global: Many Efficiency Opportunities Similar to ADP ________________________________________________ Source: CDK FY Q3 2017 Results, May 2, 2017. CDK Business Transformation Plan
Slide 139: IX. The Path Forward for ADP
IX.The Path Forward for ADP
Slide 140: The Path Forward for ADP
The Path Forward for ADP ADP, with support from shareholders, has an opportunity to transform Add a major shareholder to the Board and two new independent directors, with fresh perspectives and relevant expertise Board forms Committee to oversee the transformation plan Evaluation of necessary produc
Slide 141: A Transformation Plan for ADP
A Transformation Plan for ADP Commit to a transformation plan and path to achieving ADP’s potential Fix corporate structure, Business Unit silos, matrix structure, corporate bloat and inefficiency (bureaucracy, spans-and-layers) Accelerate investments in necessary product and back-end improvements B
Slide 142: ADP Should be Managed to Maximize Long-term Value
ADP Should be Managed to Maximize Long-term Value Rather than focus on short-term quarterly earnings, ADP should focus on maximizing long-term shareholder value A proper transformation will require some investments in the near term We believe these investments can be paid for by significant improvem
Slide 143: Improved Disclosure Would Allow for Analysis of Underlying Performance
Improved Disclosure Would Allow for Analysis of ADP’s Underlying Performance Additional disclosures would allow investors to analyze the performance of the business in its underlying sub-segments and increase management accountability for performance relative to competitors and potential ADP should
Slide 144: Support The Nominees for ADP's Transformation
Support The Nominees for ADP’s Transformation In order to vote at the shareholder meeting, you must own shares on or before September 5th for the September 8th record date Elect a major shareholder to the Board Add two new independent directors with fresh perspectives and relevant expertise Send a m
Slide 145: The Nominees for ADP's Transformation
William Ackman Veronica Hagen Paul Unruh The Nominees for ADP’s Transformation William A. Ackman is the founder, chief executive officer and portfolio manager of Pershing Square Capital Management, L.P., an SEC-registered investment adviser founded in 2003. Pershing Square is a concentrated research
Slide 146: Q&A
Q&A
Slide 147: Our Questions for ADP
Our Questions for ADP What is the mix of revenue by sub-segment? What are client count and revenue trends by sub-segment over time? What is the breakout of ES and PEO (gross and net) bookings over time? Why is sales force productivity declining so dramatically? What is the recent growth of payroll v
Slide 148: Supplemental Materials
Supplemental Materials
Slide 149: Pershing Square Team Biographies
Brian Welch Charles Korn Pershing Square Team Biographies Contact Details Phone: 212-652-3124 Email: welch@persq.com Biography Brian Welch is a Partner at Pershing Square Capital Management L.P. Mr. Welch joined Pershing Square in September 2011, and is responsible for identifying, analyzing and mon
Slide 150: Supporting Analyses
Supporting Analyses
Slide 151: Adjusted Segment Margins
Adjusted Segment Margins ________________________________________________ Source: ADP Form 10-K (2017), Q4’2017 financial press release. Note: Assumes Clients Funds / Float Income has a 100% profit margin to Operating Profit. Per the 10K, “there is a reconciling item for the difference between actua
Slide 152: Illustrative Bookings Analysis
Illustrative Bookings Analysis (pp.40,98) ________________________________________________ Source: SEC filings, conference call transcripts. Estimated based on the YoY growth in average worksite employees per client. Estimated based on the YoY growth in net revenue per average worksite employee. Bas
Slide 153: Revenue composition and volume analysis
________________________________________________ Note: Based on estimated net operational revenue excluding Client Funds allocations. 2009 based on 2009 Analyst Day presentation. 2009 Revenue adjusted to exclude ~$675m of allocated Client Funds. Assumes 90% of Client Funds revenue relate to domestic
Slide 154: Net Operational Revenue per Employee – Alternate Comparable Group
Net Operational Revenue per Employee(1) (Ex-Float) An alternate comparable group(1) similarly illustrates a significant opportunity for efficiency SuccessFactors and Taleo are based on the latest publicly available data prior to being acquired (circa 2011) ___________________________________________
Slide 155: Kronos Adj. EBITDA margins versus Employer Services
At ~32%, Kronos’ Adj. EBITDA margins are ~900bps(1) higher than Employer Services margins. This is despite the fact that: Kronos is sub-scale compared to ADP: Kronos produces ~$1.2bn(2) of revenue compared to ADP Employer Services of $8.5bn Kronos is engaged in a business transformation initiative:
Slide 156: HR BPO / Benefits Structural Margin Potential
HR BPO / Benefits Structural Margin Potential (pp.74) ________________________________________________ Adjusted EBIT adds back amortization, allocated corporate overhead and other stand-alone adjustments. (Source: http://www.aon.com/risk-services/acceleratinginnovation/pdfs/benefits-admin-hrbpo-sale
Slide 157: Multinational: Structural Margin Potential
Multinational: Structural Margin Potential (pp.75-77) ________________________________________________ Note: Revenue based on management commentary. 2013 margins based on management commentary. Assumes fixed costs growth at ½ the rate of revenue growth. Multinational is a highly differentiated and r
Slide 158: Estimating ADP's Non-SaaS Business
Estimating ADP’s Non-SaaS Business (pp.74,76-77) Business Line Segment Last Disclosed Revenue Time Frame Est. Current Revenue Estimated Margin Benefits Administration Enterprise “[M]ultiple hundreds of millions of dollars”(1) FY’2010 $300m - $500m(2) Estimated between 15% and 25% Recruitment Process
Slide 159: ADP's Recent Performance
ADP’s Recent Performance
Slide 160: Total Shareholder Returns Before Pershing Square
________________________________________________ Source: Capital IQ; Total Shareholder Return from November 8, 2011 to May 9, 2017, prior to Pershing Square’s rapid accumulation of ADP’s stock. Note that ADP uses a TSR calculation through “intraday on July 27, prior to rumors of Pershing Square's in
Slide 161: ADP's Recent TSR in Context
ADP’s Recent TSR in Context HCM market participants have benefitted from employment growth since 2009, trends in HCM Beyond Payroll offerings, ACA demand drivers and earnings multiple expansion Businesses which participate in attractive industries should have positive long-term performance ADP parti
Slide 162: Platform Migrations Should Drive Significant Margin Uplift
Platform Migrations Should Drive Significant Margin Uplift
Slide 163: ADP is Migrating Clients to New Product Platforms
>500k Clients 1 – 50 By year-end 2017, ADP will have completed its product migrations on the vast majority of their customer base and potential profit pool ADP is Migrating Clients to New Product Platforms 2018+ 1,000+ SMB Mid-Market Enterprise 50 – 1,000 Underlying Client Size Years RUN Powered by
Slide 164: Is ADP's Potential Post Transition Underappreciated?
Is ADP’s Potential Post Transition Underappreciated? MIGRATIONS Before During After Quality of Offering vs. Best-in-Class LOW IMPROVING HIGH Customers at Risk HIGH LOWER LOW Retention OK Revenue per Customer / Cross-Sell LOW IMPROVING Support /Service Needs On-going and Maintenance Costs Implementat
Slide 165: ADP has Highlighted its Potential Post-Migrations
ADP has Highlighted its Potential Post-Migrations Question Answer Rod Bourgeois, Sanford C. Bernstein & Co. “As you move clients off of the legacy platforms onto the new platforms across all your client segments, do you ultimately get a margin benefit?...So clearly in that bucket [in R&D] as you mov
Slide 166: ADP Potential Post-Migrations: Analyst Day (2010)
ADP has Highlighted its Potential Post-Migrations Analyst Day (2010) Question Mark Marcon, Robert W. Baird & Company “I'm wondering if you can talk a little bit about the pricing for RUN and for Workforce Now relative to the alternatives, and how we should think about the margin profiles of those so
Slide 167: Analyst Day (2010) – Continued
ADP has Highlighted its Potential Post-Migrations Analyst Day (2010) – Continued Answer Gary C. Butler, President and CEO “Yeah, RUN also has the advantage of being on newer technology which scales more cheaply in terms of incremental margins. In addition, in our traditional platforms on the low end
Slide 168: Analyst Day (2010) – Continued
ADP has Highlighted its Potential Post-Migrations Analyst Day (2010) – Continued Answer Gary C. Butler, President and CEO “The other thing and Mike, I don't know if you want to comment on this, but with our SaaS-based products we're investing not only for future functionality but for scalability, so
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