HR Insight: An Industry Update

Transcription

1 First Analysis Investment Banking May 2011 Labor Markets The Bureau of Labor Statistics ( BLS ) reported continued labor market improvements with nonfarm payrolls up 244,000 in April the seventh consecutive month of positive employment numbers. However, the BLS unemployment rate turned up again in April (an increase of 0.2%) after stringing together four months of steady declines. Facing a stillfragile employment environment, payroll and payroll related companies have found growth primarily through addon or bundled services. Monthly Change in U.S. NonFarm Employment Monthly U.S. Unemployment Rate (all employees, in thousands) Jan01 Jan03 Jan05 Jan07 Jan09 Jan11 12% 10% 8% 6% 4% 2% 0% Jan01 Jan03 Jan05 Jan07 Jan09 Jan11 Source: U.S. Bureau of Labor Statistics Source: U.S. Bureau of Labor Statistics Industry Perspectives Human Resources Outsourcing Trends Human Resources Outsourcing has grown significantly over the last fifteen years as large, midmarket, and smaller companies all have seen the benefit of leveraging external expertise to improve operations, reduce costs, and focus on core competencies. Outsourced spending has grown from essential services (such as core payroll processing) to addon bundled services, and to fully outsourced professional employer organization models ( PEOs ). Providing comprehensive services, PEOs allow business owners to concentrate on running their businesses while providing employees with benefits that would normally only be available at much larger companies. In addition, companies increasingly leverage their outsourced HR partners to help navigate complex tax and regulatory requirements. Companies across the HR sectors are adding services and updating their models to generate growth against the backdrop of a maturing, and slower growing, market for traditional payroll services. In particular, many companies are repositioning their services around, and making investments in, cloudbased solutions. Other notable recent trends affecting the HR services and technology sectors include: Healthcare. The cost of healthcare insurance continues to grow and is shared between employers and employees, principally through payroll deductions. Governmentinitiated policy mandates increase overall costs as regulations grow and public budgets tighten, adding to the cost burden to employers and employees. Companies rely on HR partners to evaluate and select insurance providers that will minimize costs while delivering benefits that will enable the employer to remain competitive in attracting and retaining top talent. Recruiting and Training. While still nascent, the recovery in employment has provided lift to HR providers. In a market moving from rightsizing to growth, HR needs have changed from managing workforce reductions to helping employers identify and hire the best talent. Specialized services and solutions, whether part of a comprehensive offering or a la carte, enable companies to meet these challenges.

2 Page 2 of 7 May 2011 Telecommuting and Relocating. Jobseekers and employees are telecommuting or relocating to accommodate lifestyle goals or to find jobs. At the same time, employers may have to reach beyond local markets for talent and turn to HR partners to create solutions to attract and retain top performers. Workforce Flexibility, Empowerment and Mobility. Changing how, when, and where we work is a natural for distributed systems and technology can keep us connected to home base. As a result, hosted HR solutions that enable employee selfservice and provide remote workforce management solutions enable clients to remain flexible and be firstinline for customers. nology. Better, faster, cheaper the technology mantra certainly applies to HR providers. Empowering the HR platform or driving specific applications for attendance, benefits, payroll, and other enabling technologies extends the reach of HR providers and leverages infrastructure, knowledge and expertise. HR providers that effectively leverage technology are best positioned to outperform their peers as customers seek efficient, scalable and costeffective solutions. Industry Stock Market Performance After falling dramatically during the economic crisis, nology stocks recovered to outperform and the broader indices over both the fiveyear and oneyear historical periods. Share price appreciation across the HR Technology sector reflects strong projected growth for these companies and their ability to capitalize on that growth given the operating leverage they enjoy from higher average gross profit margins. Over the past year, stocks have performed strongly as well, with the group generating an average return of 17.9%. 5 Year Indexed Performance 1 Year Indexed Performance 200% HR Svcs S&P 500 NASDAQ 200% HR Svcs S&P 500 NASDAQ 150% 151.4% 150% 100% 100% 50% 0% 26.4% 3.4% 3.3% 50% 0% 55.1% 20.5% 17.9% 17.8% 50% 50% 100% May06 May07 May08 May09 May10 May11 100% May10 Aug10 Nov10 Feb11 May11 includes: ADP, AON, CBZ, HRB, KELY.A, MAN, NSP, PAYX and TW. nology includes: CNQR, INTU, KNXA, SFSF, TLEO, and ULTI.

3 Page 3 of 7 May 2011 Current Public Market Trading Multiples Current multiples for nology Companies are generally higher than those for their peers, reflecting higher projected revenue growth for the sector (21.2% for nology vs. 9.1% for ) and greater operating leverage derived from higher gross margins (median of 66.5% for nology vs. 30.3% for ). Investors are excited about companies that offer technologyenabled solutions that deliver significant and sustainable ROI to their customers, and they have been willing to pay higher multiples for the opportunity to participate in this segment of the HR market. The technology theme is also at play within the segment of the market. Companies such as Paychex and ADP that have notably acquired or otherwise invested in technologies that complement their more traditional offerings have generally garnered higher valuations than the rest of the group. Select private companies in the sector have also been leaders in leveraging technology. For example, TriNet, the largest private PEO, has invested to provide integrated applets that can be added to its core service bundle. Similarly, Strategic Outsourcing, another large PEO, has invested in its SOI Portal a gateway to its payroll administration, workers compensation management, employee benefits administration and other services. Finally, businesses that deliver scalable, integrated offerings and are able to crosssell may outperform the rest of the sector over the longerterm Revenue Multiples nologies 8.1x 6.4x EV/2011 Rev: 4.4x Fwd Rev Growth: 21.2% LTM Gross Margin: 66.5% Multiples for HR Service companies leveraging technology can resemble those of nology firms EV/2011 Rev: 1.4x Fwd Rev Growth: 9.1% LTM Gross Margin: 30.3% 5.1x 4.4x 4.2x 5.3x 2.7x 1.7x 2.5x 1.9x 1.4x 1.4x 1.3x 1.3x 0.9x 0.8x SFSF CNQR ULTI TLEO INTU KNXA MWW PAYX ADP AON NSP (1) MAN (1) HRB TW CBZ KELY.A (1) YOY Fwd Rev Growth 36.3% 19.9% 18.6% 30.3% 12.2% 38.1% 21.2% 4.5% 9.1% 31.5% 16.5% 18.0% 0.3% 7.5% 0.7% 10.2% LTM Gross Margin 71.2% 72.2% 56.3% 66.5% 82.3% 64.0% 48.4% 68.5% 51.1% 41.0% 17.6% 17.1% 38.5% 30.3% 12.2% 16.1% Data as of May 13, (1) Reflects EV/2011E Gross Profit EBITDA Multiples nologies 22.6x 32.4x 21.4x EV/2011 EBITDA: 19.0x 2011E EBITDA Margin: 17.3% LT Proj. EPS Growth: 23.8% Multiples for HR Service companies leveraging technology can resemble those of nology firms EV/2011 EBITDA: 8.0x 2011E EBITDA Margin: 17.8% LT Proj. EPS Growth: 11.7% 16.7x NMF 11.3x 10.0x 12.4x 11.5x 8.5x 7.0x 8.1x 6.0x 7.5x 8.0x 6.9x SFSF CNQR ULTI TLEO INTU KNXA MWW PAYX ADP AON NSP MAN HRB TW CBZ KELY.A 2011E EBITDA Margin 1.4% 28.3% 15.8% 20.8% 37.4% 16.0% 17.3% 42.7% 21.9% 22.2% 3.6% 2.9% 22.6% 17.8% 11.1% 1.9% LT EPS Growth 26.3% 24.6% 26.9% 23.8% 13.7% 19.3% 15.5% 11.7% 10.9% 7.5% 29.3% 11.3% 10.0% 12.0% 15.1% 17.5% Data as of May 13, 2011.

4 Page 4 of 7 May 2011 Historical View of Forward EBITDA Multiples nology companies have seen significant multiple expansion after bottoming out in November On a relative basis, multiples for companies have been far more stable, trading within a range of approximately 5x to 10x EBITDA over the past five years. Notably, despite more volatility, companies with greater technologydriven solutions consistently garnered higher valuations throughout a volatile economic period. More recently, multiples for both groups have stabilized and trade closer to their averages. 5 Year Historical Mean Forward EBITDA Multiples 1 Year Historical Mean Forward EBITDA Multiples Service Avg Service Avg 30.0x Tech Avg 25.0x Tech Avg 25.0x 20.0x 20.0x 15.0x Average = 16.0x 15.0x Average = 16.4x 10.0x Average = 8.9x 10.0x 5.0x 5.0x Average = 7.9x 0.0x May06 May07 May08 May09 May10 May11 0.0x May10 Aug10 Nov10 Feb11 May11 includes: ADP, AON, CBZ, HRB, MAN, PAYX, NSP, and TW (excludes KELY.A as an outlier). nology includes: CNQR, INTU, KNXA, LWSN, SFSF, TLEO, and ULTI (excludes SFSF as an outlier).

5 Page 5 of 7 May 2011 Select Yearto Announced M&A Transactions Industry M&A activity continues to underscore interest in acquiring or expanding technologyenabled solutions that are scalable, easilydeployed (cloudbased), and support employee selfservice offerings. For example, in February 2011, Paychex, Inc. acquired SurePayroll, Inc., a provider of SaaS payroll processing for small businesses (the purchase price represented approximately 5x revenue). The acquisition added SurePayroll s webbased payroll platform to Paychex s more traditional payroll solutions and helps Paychex expand further into the fastgrowing online market for small business. Still, operating scale in more traditional services remains important as well, as evidenced by ongoing acquisitions of staffing and benefits management providers. With addon bundled services continuing to be a source of industry growth, larger industry players remain on the lookout for new or complementary services to add to their arsenal of bundled services. Strategic acquisitions are an important part of growth strategies for industry leaders, enabling them to leverage resources and deliver the best products and services to clients. Anncd. Closed Target Target Industry Target Location Acquiror Transaction Value ($ millions) 05/03/11 05/03/11 eplan Services, Inc Systems Software Colorado Paychex Inc. (PAYX) 04/29/11 04/29/11 Advantec HR HR and Employment Svcs Florida Oasis Outsourcing, Inc. 04/28/11 04/28/11 Accounting Jobs Today HR and Employment Svcs California Internet Brands, Inc. 04/26/11 Pending Plateau Systems, LTD. Internet Software and Svcs Virginia SuccessFactors, Inc. (SFSF) $ /19/11 Pending MedReady Healthcare, LLC HR and Employment Svcs California SK3 Group Inc. (SKTO) 04/19/11 04/10/11 Cameo Personnel Systems, Inc. HR and Employment Svcs New Jersey Diamond Staffing Services, Inc. 04/18/11 Pending I.Q. BackOffice, LLC HR and Employment Svcs California HRMall Inc. 04/07/11 04/07/11 Blue Water Benefits, Inc. HR and Employment Svcs 04/07/11 Pending Priority One Management Services, Inc. HR and Employment Svcs South Carolina Florida Arthur J Gallagher & Co. (AJG) Rockwood National Corporation (RNTL) 04/04/11 04/04/11 Aquire, Inc. Application Software Texas Peopleclick Authoria, Inc. 04/01/11 04/01/11 Crdentia Corp. HR and Employment Svcs Florida 03/31/11 02/17/11 PBS Holding, Inc. (PBHG) HR and Employment Svcs Texas 03/28/11 03/28/11 Salesforce Assessments Ltd. HR and Employment Svcs Ontario 03/16/11 03/16/11 Certain temporary staffing assets of AC Lordi SeniorBridge Family Companies, Inc. Artfest International, Inc. (ARTS) Callidus Software Inc. (CALD) HR and Employment Svcs Pennsylvania Magellan Search Group, Inc. 03/14/11 03/17/11 Jambok, Inc. Internet Software and Svcs California SuccessFactors, Inc. (SFSF) 03/03/11 03/03/11 Aboutime Business Solutions Ltd Internet Software and Svcs Greater London $0.8 $1.0 TOA Technologies, Inc. 02/08/11 02/08/11 Astra HR HR and Employment Svcs Maryland Xcel HR Corporation 02/07/11 01/01/11 Unnati Consultants Pvt ltd HR and Employment Svcs Bangalore, India Sapta Global Inc. 02/02/11 01/31/11 Creative Benefits Systems, Inc. HR and Employment Svcs Michigan Hylant Group, Inc. 02/01/11 04/01/11 Cytiva Software Inc. HR and Employment Svcs British Columbia Taleo Corp. (TLEO) $ /18/11 01/18/11 Payroll Computing Services HR and Employment Svcs New York Valiant Solutions, Inc. 01/11/11 01/31/11 Diamond Staffing Services, Inc. HR and Employment Svcs New York 01/06/11 01/06/11 Certain assets of HumanConcepts, LLC Corporate Resource Services, Inc. (CRRS) Application Software California Insperity, Inc. (NSP) 01/04/11 01/04/11 Grizzaffi Darby, LLC HR and Employment Svcs Texas Lockton Dunning Benefit Co. ` 12/09/10 02/08/11 SurePayroll, Inc. Internet Software and Svcs Illinois Paychex Inc. (PAYX) $115.3 $38.2

6 Page 6 of 7 May 2011 M&A Transaction Synopses May 3, Paychex Inc. (NasdaqGS:PAYX) announces the acquisition of eplan Services, Inc. eplan offers software solutions and is a provider of technologyenabled outsource solutions to the U.S. defined contribution industry. April 29, Oasis Outsourcing, Inc. announces the acquisition of Advantec HR. Advantec HR integrates, develops, and supports human resource business process outsourcing models for small to midsize companies. April 28, Internet Brands, Inc. announces the acquisition of Accounting Jobs Today. Accounting Jobs Today, a career portal, educates and connects accounting and finance professionals in the U.S. April 26, SuccessFactors, Inc. (NasdaqGS:SFSF) announces the acquisition of Plateau Systems, LTD. Plateau Systems provides software as a service talent management solutions in the U.S. and internationally. April 19, SK3 Group Inc. (OTCPK:SKTO) announces the acquisition of MedReady Healthcare, LLC. MedReady offers temporary healthcare staffing services (which includes temporary nursing and allied healthcare staff) and operates MedReady Housecalls (through which it offers medical house call services). April 19, Diamond Staffing Services, Inc. announces the acquisition of Cameo Personnel Systems, Inc. Cameo Personnel Systems provides temporary staffing, direct hire placement, and temporary to hire staffing services. April 18, HRMall Inc. announces the acquisition of I.Q. BackOffice, LLC. I.Q. BackOffice operates as a business process outsourcing company offering accounts payable, accounts receivable, and other accounting outsourcing solutions. April 7, Arthur J Gallagher & Co. (NYSE:AJG) announces the acquisition of Blue Water Benefits, Inc. Blue Water Benefits provides employee benefits consulting and administration services for businesses in the state of South Carolina. April 7, Rockwood National Corporation (OTCPK:RNTL) announces the acquisition of Priority One Management Services, Inc. Priority One Management Services offers payroll management, A/P and A/R services for loss mitigation law firms. April 4, Peopleclick Authoria, Inc. announces the acquisition of Aquire, Inc. Aquire provides workforce planning and management solutions. April 1, SeniorBridge Family Companies, Inc. announces the acquisition of Crdentia Corp. Crdentia provides healthcare staffing and recruiting solutions in the U.S. March 31, Artfest International, Inc. (OTCPK:ARTS) announces the acquisition of PBS Holding, Inc. (OTCPK:PBHG). PBS, through its subsidiaries, provides human resource outsourcing services and solutions in the United States. March 28, Callidus Software Inc. (NasdaqGM:CALD) announces the acquisition of Salesforce Assessments Ltd. Salesforce Assessments provides tools that enable companies to make hiring decisions. March 16, Magellan Search Group, Inc. announces the acquisition of certain temporary staffing assets of AC Lordi Corporation. The Philadelphia temporary staffing operations of AC Lordi Corporation consist of temporary staffing services in Philadelphia, Pennsylvania. March 14, SuccessFactors, Inc. (NasdaqGS:SFSF) announces the acquisition of Jambok, Inc. Jambok operates a SaaSbased social business platform that enables employees to create content and share it with others as part of a community. March 3, TOA Technologies, Inc. announces the acquisition of Aboutime Business Solutions Ltd. Aboutime Business Solutions offers mobile workforce management technology solutions. February 8, Xcel HR Corporation announces the acquisition of Astra HR. Astra HR provides human resource management solutions, including payroll administration services and HR administration services, and risk management services. February 7, Sapta Global Inc. announces the acquisition of Unnati Consultants Pvt ltd. Unnati Consultants offers job consultancy and manpower resourcing services. It caters to express, freight, banking and financial, engineering and telecommunication sectors. February 2, Hylant Group, Inc. announces the acquisition of Creative Benefits Systems, Inc. Creative Benefits offers employee benefit services. February 1, Taleo Corp. (NasdaqGS:TLEO) announces the acquisition of Cytiva Software Inc. Cytiva Software provides ondemand talent management software and services to small, mid, and large sized companies in Canada and the United States. January 18, Valiant Solutions, Inc. announces the acquisition of Payroll Computing Services. Payroll Computing Services provides payroll services to the restaurant and catering industries. January 11, Corporate Resource Services, Inc. (OTCBB:CRRS) announces the acquisition of Diamond Staffing Services, Inc. Diamond Staffing Services offers temporary and permanent employment staffing services. January 6, Insperity, Inc. (NYSE:NSP) announces the acquisition of certain assets of HumanConcepts, LLC. The assets comprise the OrgPlus software product that facilitates rapid creation, management and communication of detailed organizational charts. January 4, Lockton Dunning Benefit Co. announces the acquisition of Grizzaffi Darby, LLC. Grizzaffi Darby offers employee benefit consulting services. It offers human resource (HR) consulting, employee benefits, legal and compliance and evolving benefits services. December 9, Paychex, Inc. (NasdaqGS:PAYX) announces the acquisition of SurePayroll, Inc. SurePayroll provides online payroll, retirement, health insurance, and human resources services for small businesses.

7 Page 7 of 7 May 2011 Select Equity Capital Markets Activities In line with broader market activity, IPOs and followon offerings among HR related companies have been few. However, with market valuations improved, companies with strong projected growth and the ability to leverage technology to accelerate earnings growth are expected to tap the equity markets to fund future growth and provide liquidity to shareholders. The sector continues to attract the interest of investors, and larger private companies are likely to pursue public market options, including potential IPOs. Initial Filing Offer Status Type Company Primary Industry Location Amount ($ millions) 05/09/11 05/10/11 Closed FollowOn Dice Holdings, Inc. (NYSE:DHX) Internet Software and Services New York, NY $ /25/11 Filed IPO WageWorks, Inc. 04/12/11 Filed IPO Staffmark Holdings, Inc. HR Resource and Employment Services HR Resource and Employment Services San Mateo, CA $75.0 Cincinnati, OH $ /28/11 03/02/11 Closed FollowOn Team Health Holdings, Inc. (NYSE:TMH) Healthcare Services Knoxville, TN $ /15/11 02/16/11 Closed FollowOn Dice Holdings, Inc. (NYSE:DHX) Internet Software and Services New York, NY $99.8 Source: IPO Monitor, Capital IQ. First Analysis Securities Corporation One South Wacker Drive, Suite 3900, Chicago, IL Matthew Nicklin Managing Director (312) [email protected] Michelle Moreno Senior Vice President (312) [email protected] Paul Johnson Senior Vice President (312) [email protected] Brian Friedman Managing Director (312) [email protected] This report has been prepared by the Investment Banking Department of First Analysis Securities Corporation. This report is an overview and analysis of trends and is not intended to provide investment recommendations on any specific industry or company. This is not a complete analysis of every material fact regarding any company, industry, or security. The opinions expressed herein reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. This report may contain information which was previously included in a First Analysis Research Report. A complete listing of all companies covered by First Analysis Equity Research and applicable research disclosures can be obtained by calling or writing to: First Analysis Securities Corporation, Equity Research, One South Wacker Drive, Suite 3900, Chicago, IL First Analysis Securities Corporation is a registered broker/dealer with FINRA and member SIPC.