Automatic Data Processing (NASDAQ:ADP) will report its third quarter earnings on May 3, after delivering a strong performance in the second quarter ending December 2012. Established in the year 1949, ADP offers a wide range of human resource, payroll, tax and benefits administration solutions from a single source. It is also a leading provider of integrated computing solutions to auto, truck, motorcycle, marine, recreational vehicle, and heavy equipment dealers throughout the world. It provides these services under the brand ADP dealer services.
We estimate that the Payroll processing division contributes about 80% to the stock’s value. Total revenues from payroll processing was $7.26 billion in fiscal 2012, up 6.3% over the previous year. During the same period, revenues from HR services and Dealer services grew by 14.7% and 9.6% respectively, to reach $1.7 billion each. We estimate the total revenues to grow at about the same pace in the upcoming earnings.
Increased Treasury Yields To Improve Interest Income
ADP generates interest income on the client’s funds by holding them before depositing with the required treasury department in the form of taxes. This is a major source of income for ADP as it added almost $500 million during the last year to its total revenues. The portfolio is predominantly invested in AAA/AA rated fixed-income securities.
ADP reported $101 million of interest revenues last quarter, which was lower by 17% year-on-year as a result of low-interest rates, partially offset by an increase in the average client funds balances. The prevailing low-interest rate scenario has impacted the total interest generated for ADP, but we estimate the company to report a higher interest income this quarter as the average 10-year yields on U.S. Treasury has improved from 1.71% last quarter to 1.95% in this quarter. 
Employer Services To Lead Revenue Growth Supported By HR And Dealer Services
The revenue from employer services is directly linked to the number of employed people in the country. Employer services revenue increased by 7% to $1.9 billion for three months ended December 2012. We estimate this division to continue the strong growth momentum in the quarter ending March 2013, as the unemployment rates have fallen to about 7.7% from over 7.8% last quarter.  Similarly, we estimate the HR services to provide a solid support to revenue growth as it grew by over 13% in the last quarter, adding $465 million in revenues. The company’s flagship cloud-based human capital management platform is now used by over 40,000 organizations. 
ADP dealer services revenue increased by 11% year-on-year during last quarter. This was backed by an increased subscription for digital marketing solutions, “Drive” and “PFW IntelliDealer” dealer management systems (DMS) solutions, as well as for hosted IP telephony and data services. We estimate dealer services to lend a much stronger support to the top line during this quarter, as the company has launched a completely electronic end-to-end, dealer to lender financing process solution, which is a first of its kind in the industry. 
We will update our $61 price estimate for ADP, after the company files its earnings report.Notes: