Automatic Data Processing (ADP) Tops On Q3 Earnings

Automatic Data Processing Inc. (NASDAQ:ADP) reported first-quarter fiscal 2017 adjusted earnings from continuing operations of 86 cents per share, which beat the Zacks Consensus Estimate by 9 cents and jumped 26.5% on a year-over-year basis.

Revenues of $2.92 billion also beat the Zacks Consensus Estimate of $2.91 billion and grew 7.5% on a year-over-year basis.

Quarter Details

Employer Services revenues in the quarter increased 6% year over year to $2.26 billion at constant currency. The number of employees on ADP clients' payrolls in the U.S. increased 2.7% on a same-store-sales basis. PEO Services revenues surged 13% year over year to $794.7 million.

In the quarter, combined worldwide new business bookings for the company remained flat on a year-over-year basis. New business bookings represent annualized recurring revenues expected from new orders.

Interest on funds held for clients in the quarter increased 2% to $89 million. The company’s average client funds balance climbed 4% year over year to $20 billion in the quarter while average interest yield remained flat on a year-over-year basis.

Adjusted EBIT margin increased about 230 basis points (bps) in the quarter to 19.8% driven by operational efficiencies and a slower growth in selling expenses.

Balance Sheet

Automatic Data Processing exited first-quarter 2017 with cash and cash equivalents (including short-term marketable securities) of approximately $2.82 billion compared with $3.21 billion as on Jun 30, 2016. Long-term debt was approximately $2 billion at the end of the quarter.

Divestiture

On Nov 1, 2016, Automatic Data Processing signed an agreement to sell its CHSA and COBRA businesses to WageWorks for $235 million. The company anticipates a pre-tax gain of approximately $200 million. Management expects the sale to be completed during second-quarter fiscal 2017.

Guidance

Automatic Data Processing now anticipates year-over-year revenue growth of 7% to 8% (down from 7% to 9%) for fiscal 2017. New business bookings are expected to grow 4% to 6%.

Automatic Data Processing expects adjusted earnings to grow 15% to 17% (up from 6% to 8%) over fiscal 2016 levels. This represents almost 50 bps expansion in adjusted EBIT margin.

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

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

Additionally, the company expects interest on funds held for clients to increase $5-$10 million, or approximately 2% to 3% 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 anticipated to be up $5 million.

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 has 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 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.

Zacks Rank & Key Picks

Currently, Automatic Data Processing has a Zacks Rank #4 (Sell). Equifax with a Zacks Rank #2 (Buy) is a better-ranked stock in the sector. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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