Automatic Data Processing (ADP) Beats On Q4 Earnings

Automatic Data Processing Inc. (NASDAQ:ADP) reported fourth-quarter fiscal 2016 adjusted earnings from continuing operations of 69 cents per share, beating the Zacks Consensus Estimate of 67 cents. Earnings also improved 25% year over year.

For fiscal 2016, the company reported adjusted earnings of $3.26, an increase of 13% over fiscal 2015.

Fourth-quarter revenues of $2,898.2 million fell short of the Zacks Consensus Estimate of $2,933 million but grew 7.6% year over year. The company’s fiscal 2016 sales increased 7% over the prior year to $11.7 billion.

Quarter Details

Employer Services revenues in the quarter increased 6% year over year to $2,291.8 million. PEO Services revenues rose 13% year over year to $768 million.

In the quarter, combined worldwide new business bookings for the company grew 6% year over year. New business bookings represent annualized recurring revenues expected from new orders.

Interest on funds held for clients in the quarter increased nearly 2% to $97 million. The company’s average client funds balance increased 3% year over year to $23.1 billion in the quarter while average interest yield remained flat on a year-over-year basis.

Total expenses in the reported quarter increased 6.8% year over year to $2,486.9 million.

Balance Sheet

Automatic Data Processing exited fiscal 2016 with cash and cash equivalents (including short-term marketable securities) of approximately $3.2 billion compared with $1.7 billion as on Jun 30, 2015. Long-term debt was approximately $2 billion compared with $9.2 million as on Jun 30, 2015.

New Initiative

The company announced a new service alignment initiative for fiscal 2017. The new plan is designed to align Automatic Data Processing’s service operations with its strategic platforms. This apart, it would allow the company to enhance the client service experience while boosting its own service capabilities.

However, as a result of this initiative, the company expects pre-tax restructuring charges in the range of $100 million to $125 million through fiscal 2018. Of this, $45 million will be recorded in the current quarter and another $45 million in the back half of fiscal 2017.

Guidance

Automatic Data Processing initiated guidance for fiscal 2017.

The company expects year-over-year revenue growth of 7% to 9% in fiscal 2017. New business bookings are expected to grow 4% to 6%.

Automatic Data Processing expects adjusted earnings per share to grow 10% to 12% over fiscal 2016 levels.

This represents a 25 to 50 basis points (bps) expansion in adjusted EBIT margin from 19.5% in fiscal 2016.

The company projects Employer Services revenues to grow in the range of 4% to 5% in fiscal 2017. The company expects pay per control to increase 2.5% in the year.

PEO Services revenues are expected to increase 14% to 16% in the year.

In addition, the company expects interest on funds held for clients to increase up to $5 million, or approximately 2% over fiscal 2016 levels.

It is based on estimated growth in average client funds balances of 2% to 4% from $22.4 billion in fiscal 2016.

Further, the total contribution from client funds extended investment strategy is expected to remain flat with fiscal 2016 levels.

The comparison in the guidance excludes the $29 million benefit from the sale of ADP’s AdvancedMD business, a $14 million benefit from the sale of a building in the second quarter of fiscal 2016 and a workforce optimization charge of $48 million in the fourth quarter of 2016. The guidance also excludes expected restructuring charges of $90 million in fiscal 2017.

Our Take

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

However, in the past, the company seen some negative impact on its retention rate owing to migration from the legacy business and increasing competition in the sphere. Furthermore, we expect the company’s investments in its new initiatives to weigh on near-term earnings.

In addition, a volatile macroeconomic environment, strengthening U.S. dollar and increasing competition from the likes of Paychex (NASDAQ:PAYX), Equifax (NYSE:EFX) , Insperity, Inc. (NYSE:NSP) and TriNet Group, Inc. (NYSE:TNET) are the other near-term headwinds.

Currently, Automatic Data Processing has a Zacks Rank #3 (Hold).

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