ADP Beats Q3 Earnings Estimates, New Bookings Decline

Automatic Data Processing Inc. (NASDAQ:ADP) reported third-quarter fiscal 2017 adjusted earnings from continuing operations of $1.29 per share, beating the Zacks Consensus Estimate of $1.23.

Including 2 cents per share tax benefit related to the adoption of new stock-based compensation accounting guidance, earnings were $1.31 per share, up 12% from the year-ago quarter.

However, revenues of $3.41 billion missed the Zacks Consensus Estimate of $3.43 billion but grew 5% on a year-over-year basis.

Shares were down more than 3.4% in pre-market trading. We note that ADP has underperformed the S&P 500 Index on a year-to-date basis. While the stock returned 1.3%, the S&P 500 gained 6.9%.

Quarter Details

Employer Services revenues in the quarter increased 2% year over year to $2.63 billion at constant currency. The number of employees on ADP clients' payrolls in the U.S. increased 2.5% on a same-store-sales basis. Client revenues retention declined 170 basis points (bps) on a year-over-year basis.

PEO Services revenues surged 12% year over year to $974.4 million.

In the quarter, combined worldwide new business bookings for the company declined 7% on a year-over-year basis. New business bookings represent annualized recurring revenues anticipated from new orders.

Interest on funds held for clients in the quarter increased 9% to $112 million. The company’s average client funds balance inched up 2% year over year to $27.3 billion in the quarter while average interest yield of 1.6% was up 10 bps on a year-over-year basis.

Adjusted EBIT margin declined almost 20 bps to 24.6% primarily due to slower revenue growth and increased investments on product, sales, and service including dual operation costs related to the company’s Service Alignment Initiative.

Employer Services segment margin decreased approximately 40 bps on a year-over-year basis. Meanwhile, PEO Services segment margin increased approximately 100 bps in the quarter.

Guidance

ADP still anticipates year-over-year revenue growth of 6%. New business bookings are expected to decrease 5–7%, when compared to the $1.75 billion sold in fiscal 2016. Earlier, the company had anticipated new business bookings to remain flat on a year-over-year basis.

ADP continues to expect adjusted earnings to grow 17–18%, up from 15–17% over fiscal 2016 level. This represents almost 50 bps expansion in adjusted EBIT margin.

The company projects Employer Services revenues to grow in the range of 3–4%. The company estimates pay per control to increase 2.5% for the year.

PEO Services revenues are expected to increase 13% and margin expansion of at least 100 bps.

Additionally, the company anticipates interest on funds held for clients to increase $20 million or about 6% as compared with earlier guidance of $15 million, or approximately 4% over fiscal 2016 level.

It is based on estimated growth in average client funds balances of 3% from $22.4 billion in fiscal 2016.

Further, the total contribution from client funds extended investment strategy is anticipated to be up $15 million (up from $10 million).

Our Take

Automatic Data Processing holds a dominant position in the payroll processing and human capital management market, primarily owing to its robust product portfolio. We believe that the company’s higher revenue per client and a decent customer retention ratio position it in an advantageous position.

However, we expect the company’s investments in new initiatives to weigh on near-term earnings. Moreover, the divestiture of Consumer Health Spending Account (CHSA) and Consolidated Omnibus Reconciliation Act (COBRA) businesses will impact top-line growth in the rest of 2017.

Additionally, increasing competition from the likes of Paychex (NASDAQ:PAYX), Equifax (NYSE:EFX) , Insperity Inc. (NYSE:NSP) and TriNet Group Inc. (NYSE:TNET) is a major headwind.

Zacks Rank

Currently, Automatic Data Processing carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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