Cloud-Based products To Drive ADP’s Growth Post Dealer Services Spin Off

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Automatic Data Processing

Automatic Data Processing (NASDAQ:ADP) stands to lose out on 15-16% of its revenues post the spin-off of its Dealer Services segment in October 2014. Investors have been concerned about how the company intends to recover the loss of revenue and continue to grow in the future. ADP recently announced that it intends to increase focus on its cloud-based and Affordable Care Act oriented products in order to drive growth in revenues once the Dealer Services segment is spun off. [1] This is the first step ADP has taken in order to demonstrate enhanced focus on its Human Capital Management (HCM) business. It corroborates ADP’s reasoning behind the Dealer Services spin off, that it would allow the company to increase focus on its payroll and human resource business.

In April 2014, ADP decided to spin off its Dealer Services segment into an independent publicly-traded company. ADP will rake in $700 million from the spin-off, which will be utilized to repurchase its own shares. The deal cost ADP $15 million in the fourth quarter. [2] Additional spin-related expenses of approximately $40-$50 million will be recorded in discontinued operations in fiscal 2015.

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Focus on cloud-based products will help drive clients and margins

ADP intends to grow its cloud-based solutions through increased penetrations of its integrated strategic platforms – RUN, Workforce Now and Vantage. These platforms offer a wide range of services such as payroll, benefits, human resource management, tax compliance, and time and attendance, integrated into one packaged solution and are targeted at various businesses according to their sizes. The RUN platform serves small businesses; Workforce Now caters to mid size businesses; and Vantage is for large enterprises with more than 1000 employees.

Cloud-based solutions are gaining eminence in the payroll and HR services industry due to the convenience of using such products. Clients can access these services from any remote location through an internet enabled device. It also does away with the need to hire a professional to handle HR related activities, thereby reducing costs and removing human error. Since clients find cloud-based products more convenient to use, they will be attracted to such products. Therefore an increase in such offerings bodes well for ADP.   Given the number of ADP’s payroll clients and the revenue generated by the segment in fiscal year 2014, we calculated that the addition of one client to ADP’s payroll service will increase revenue by approximately $12,500.

Increasing cloud-based solutions will also be advantageous for ADP on the competitive front since other players, such as Paychex (NASDAQ:PAYX) and Intuit (NASDAQ:INTU), already have significant presence in Cloud-based human capital management solutions market.

By increasing its cloud-based solutions, ADP will not only benefit from an increase in clients but also from reduction in costs, which will lead to improved margins. Cloud-based solutions eliminate the need to hire professionals at ADP’s end to help clients manage their payroll and HR responsibilities. As more and more clients shift to these online services, labor costs for ADP will decrease and help in improving margins. Also, since the service is online, scaling up the service will be easier and would not require intensive capital expenditures.

ADP has been actively migrating clients from its stand alone payroll services to its integrated platforms. During 2014, ADP migrated 90,000 clients to its RUN platform and expects the remaining small business clients to migrate to RUN by fiscal year 2015. It migrated 7,000 clients to its Workforce Now platform, driving the total up to 50,000 users, compared to 40,000 a year ago. Also in 2014, ADP managed to double the sales of its Vantage solution. These efforts have led to a 45% increase in ADP’s clients for its cloud-based solutions.

Lack of awareness and approaching deadline will drive demand for products catering to ACA

Apart from focusing on cloud-based solutions for its integrated platforms, ADP is looking forward to products that are intended for clients looking to maintain compliance with the Affordable Care Act (ACA). Though ADP introduced such products in 2013, their adoption has been slow due to the lack of awareness and uncertainty of the timeline for implementation. The complexities behind adherence to the ACA and the delay in implementation dates have kept potential clients at bay.

A survey conducted by ADP revealed that only around half of the small, midsized and large businesses in the U.S. are aware of the impact of the ACA and are prepared for them. [3] This leaves a huge market of potential clients who are looking for solutions that will help maintain compliance with the ACA provisions. ADP is well positioned to cater to these clients given its existing presence in the Payroll and Human Resources outsourcing industry and readily available services designed for the ACA.

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Notes:
  1. Automatic Data Processing’s (ADP) CEO Carlos Rodriguez On Q4 2014 Results – Earnings Call Transcript, July 31, 2014, www.seekingalpha.com []
  2. ADP Reports Fiscal 2014 Results, July 31 2014, www.adp.com []
  3. Health Care Reform Is The Big HR Compliance Challenge, www.adp.com []