ADP’s Employer Services And Interest From Client Funds Grow On New Business Bookings

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ADP
Automatic Data Processing

Automatic Data Processing (NASDAQ:ADP) announced its first quarter fiscal year 2015 (fiscal year ends Jun 30) results on October 29 2014. The Human Capital Management company reported a 9% year-on-year increase in its revenue, reaching $2.6 billion. [1] New business bookings helped drive growth across ADP’s Employer and also led to an increase in interest earned from client funds. ADP’s net profits from continuing operations grew 12% due to productivity improvements.

We should recall that ADP’s Dealer Services segment had recently been spun-off into an independent entity named CDK Global. Revenues from CDK Global are presently reported in ADP’s income statement as a part of its income from discontinued operations net of spin-related costs.

During its first quarter earnings call, ADP reiterated its outlook for fiscal year 2015. The management expects revenues to grow 7-8%, with new business bookings increasing 8-10%. [1] Employer services are expected to grow by 6-7% driven by a 2-3% growth in pays per control metric. Additionally, PEO services are expected to grow 13-15%. Interest on funds held for clients is expected to increase $5-$15 million based on an anticipated growth in average client funds balances of approximately 5-7%. However, this may be partially offset by decline of up to 10 basis points in the expected average interest yield to 1.7-1.8%.

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New business bookings drive revenue growth

Companies of all sizes are nowadays looking to outsource their Human Resource (HR) functions in order to concentrate on their core business. Outsourcing also helps reduce many overhead costs, such as labor costs, for the company. Additionally, Human Capital Management companies such as ADP, because of their expertise in the domain and large scale, are able to provide better services to cater to the needs of employees and help in recruiting and retaining the right personnel.

In the first quarter fiscal year 2015, ADP benefited from the trend and saw an 11% year-on-year increase in new business bookings. [1] This helped drive its Employer Services segment, which grew 7%. We believe that ADP is likely to see a continued increase in business bookings, given that the global HR Outsourcing industry is expected to grow at an average rate of 12.3 % through 2018 as more and more companies outsource their HR functions. [2]

The addition of new business increased ADP’s average client fund balances by 7% year-on-year, which more than offset the 10 basis point decline in average interest yield, leading to a 1% increase in interest earned from client funds. [1] The increase in interest earned from client funds comes after having declined every quarter since 2008 due to the low interest rate environment in the U.S., which was driven by the Quantitative Easing program.

The Fed recently announced that it will be ending the Quantitative Easing program this month and will continue to maintain the low interest rate environment, within a range of 0-0.25%, for a “considerable period of time”. [3] This has raised speculation of when the Fed will actually begin to increase rates. Earlier on, some sources pointed towards an increase around mid-2015. [4] Until interest rates do rise, ADP’s interest earned from client funds will continue to decline, if it isn’t offset by significant growth in client fund balances.

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Notes:
  1. ADP Reports Solid First Quarter Fiscal 2015 Results, October 29, 2014, www.adp.com [] [] [] []
  2. Global Human Resource Outsourcing Market 2014-2018, August 18, 2014, www.prnewswire.com []
  3. Fed completes the taper, October 29, 2014, www.cnbc.com []
  4. Two Fed officials say interest rates to rise in mid-2015, October 9, 2014, www.fortune.com []