ADP’s Top Line Rises On New Business Bookings, Pays Per Control
Automatic Data Processing (NASDAQ:ADP) announced its second quarter fiscal 2015 results on February 5. The human capital management company reported a 7% year-on-year increase in its revenue, crossing $2.6 billion, and tracking the lower end of its guidance. ADP’s second quarter results benefited from solid growth in new business bookings and strength in the U.S. job environment. ADP’s net profits from continuing operations increased 6% and earnings per share grew 8%. The continuing operations results exclude ADP’s Dealer Services segment, which last year was spun off into an independent entity named CDK Global. Revenues from CDK Global are currently reported in ADP’s income statement as a part of its income from discontinued operations net of spinoff-related costs.
On its earnings call, ADP reiterated its revenue and earnings per share outlook for fiscal year 2015. Management expects revenues to grow 7-8%, with new business bookings increasing 10%, and diluted earnings per share growth from continuing operations of 12-14%. [1] Employer services revenue is forecast to grow 5%, compared to the previous guidance of 6-7%, due to foreign currency headwinds. ADP expects its PEO services revenue to grow 15-17%. Interest on funds held for clients will likely increase $5-15 million based on anticipated growth in average client funds balances of approximately 5-7%. However, this may be partially offset by a decline of up to 10 basis points in the expected average interest yield to 1.7-1.8%.
See our complete analysis of ADP here
Growing Demand For HCM Services Drives New Business Bookings
Businesses of all sizes are increasingly 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 (HCM) 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.
The rising demand for human capital management services helped increase ADP’s new business bookings by 15% in the second quarter, which led to an increase in Employer services revenues and client fund balance. [1] Employer services revenues increased 4%, tempered by unfavorable foreign currency translation. New business bookings 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 2% increase in interest earned from client funds.
We believe that ADP is likely to see continued growth 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]
Strong U.S. Job Environment Boosts Pays Per Control
The job environment in the U.S. continued to strengthen in the fourth quarter, as the unemployment rate declined to a new six year low of 5.6% in December. In October and November, the unemployment rate was 5.7% and 5.8%, respectively. [3] Around 252,000 jobs were added in December, continuing with the streak of 200,000 plus job additions since February 2014. The January release of the Employment Situation Summary by the U.S. Bureau of Labor Statistics revised job additions for the months of October and November upwards by a total of 50,000. These factors helped drive 3% growth in ADP’s pays per control, which indicates the average number of employees ADP serves for a client. [1]
Unemployment Rate Likely To Decline Further
The Insured Unemployment Rate (IUR) represents the portion of the labor force that is eligible to receive unemployment insurance. It is considered to be a leading indicator of unemployment conditions in the U.S. When the number of people claiming unemployment benefits rises, the IUR also increases, following which the unemployment rate also rises. The seasonally adjusted IUR had been declining consistently since 2008 and has reached the pre-recession rate of 1.8%. [4] This bodes well for the job environment and companies like ADP, since their number of employees per client will likely improve further.
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- ADP Reports Second Quarter Fiscal 2015 Results, February 4, 2015, www.adp.com [↩] [↩] [↩]
- Global Human Resource Outsourcing Market 2014-2018, August 18, 2014, www.prnewswire.com [↩]
- Employment Situation Summary, www.bls.gov [↩]
- Unemployment Insurance Weekly Claims data, www.doleta.gov [↩]