Automatic Data Processing (NYSE: ADP) is set to report its Q3 earnings on May 1. Its net income has increased for three consecutive quarters with the most recent quarter showing a y-o-y increase of nearly 21 percent.  Its main competitor in the payroll processing industry is Paychex (NASDAQ: PAYX). We expect job growth to be sluggish in the short term with small businesses and cloud services providing avenues for growth in the last quarter.
Outlook for Q3 and Trends For 2012
ADP provides business solutions such as payroll, tax & benefits. Its revenues are dependent on the US economy and with the economy recovering faster than expected, we expect a strong Q3 result from ADP. Revenue is projected to be around $2.58 billion for the quarter which implies a y-o-y growth of 13 percent. The revenue for the entire year is projected to come in at $10.71 billion.
The fee per employee and number of payroll accounts are some of the key drivers for ADP according to us. We expect fee per employee to rise to about $340 per employee at the end of our forecast period from $245 currently. Though job growth is expected to be flat or decline over the short term, we expect the growth in the fourth quarter. Employment growth has been averaging almost 250,000 a month since December 2011, and this is likely to slow down in the coming months. 
Small Businesses Key, Cloud To Drive Revenues
The ADP employment report shows that small businesses with a workforce of up to 49 employees added about a 100,000 jobs since February.  Usually small businesses keep services such as payroll in-house as it is not cost effective to outsource this function. With ADP pushing its services to the cloud, it is becoming cheaper for these businesses to outsource payroll and we expect this to be a major growth driver in the coming years. ADP has expanded its service offerings to the segment. With small businesses leading the trend towards increasing mobility, ADP launched its popular payroll management platform for small business on the iPhone as well as Android smartphones.
We currently have a $57 Trefis Price Estimate for ADP, which is slightly higher than its current market price.Notes: