ADP Earnings Preview: Revenue To Grow On New Business Bookings, Employment
Automatic Data Processing (NASDAQ:ADP) is set to release its results for the second quarter ended December 31, 2014 on February 4. We expect the human capital management company to have grown on the improving employment conditions in the U.S., business bookings from the previous quarter and purchases of solutions for compliance with the Patient Protection and Affordable Care Act (PPACA).
In the first quarter, ADP reported a 9% year-on-year increase in its revenue, reaching $2.6 billion. [1] The company’s net profits from continuing operations grew 12% and diluted earnings per share from continuing operations increased 13% to $0.62. ADP reiterated its expectations of 7-8% revenue growth in the fiscal 2015, with new business bookings increasing 8-10%.
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Revenue To Grow On Business Bookings
In the first quarter, ADP benefited from an 11% year-on-year increase in new business bookings. [1] This helped drive its Employer Services segment, which grew 7%. For the second quarter, we expect to see revenue driven by business bookings from the previous quarter, as well as new bookings as more and more companies outsource their Human Resource (HR) functions.
Nowadays, businesses of all sizes are looking to outsource their HR functions in order to concentrate on their core operations. Outsourcing also helps reduce many overhead costs, such as labor costs. Additionally, businesses understand that 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. These trends are expected to drive growth in the global HR Outsourcing industry at an average rate of more than 12% through 2018. [2]
Apart from driving growth in its service segments, business bookings should also help increase ADP’s average client fund balances. In the first quarter, the average client fund balance increased 7% year-on-year, offsetting the 10 basis point decline in average interest yield, leading to a 1% increase in interest earned from client funds. [1] This increase was very significant for ADP, since interest earned from client funds had declined every quarter since 2008 due to the low interest rate environment in the U.S. The cash flows from interest earned form an important part of ADP’s valuation since they have very little costs associated with them, leading to almost 100% margins.
Job Additions, Declining Unemployment To Drive Pays Per Control
With December’s job additions of 252,000, 2014 has been the best year for job growth in the U.S. in more than a decade. [3] The unemployment rate further declined to 5.6% in December, a six year low, after falling to 5.7% and 5.8% in October and November, respectively. The January release of the Employment Situation Summary by the U.S. Bureau of Labor Statistics also revised job additions for the months of October and November upwards by a total of 50,000. The strong job additions and declining unemployment rate are good signs for ADP’s pays per control, which indicates the average number of employees ADP serves for a client. ADP expects 2-3% growth in its pays per control in fiscal 2015.
PPACA Requirements Could Drive Growth In Client Base
With the deadline of adherence to provisions of the PPACA having passed on January 1, the adoption of ADP’s products catering to the regulation should have increased in the second quarter, driving up its client base. According to recent research by ADP, half of the large employers (1,000+ employees) in the U.S. are unprepared to comply with the regulations of the PPACA. [4] This leaves a huge market of potential clients who are looking for solutions that will help maintain compliance with the provisions.
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- ADP Reports Solid First Quarter Fiscal 2015 Results, October 29, 2014, www.adp.com [↩] [↩] [↩]
- Global Human Resource Outsourcing Market 2014-2018, August 18, 2014, www.prnewswire.com [↩]
- Employment Situation Summary, www.bls.gov [↩]
- One in Two Large Employers Unprepared to Fully Comply with the Affordable Care Act, January 15, 2014, www.adp.com [↩]