ADP Earnings Preview: New Business Bookings, PPACA, Employment Growth To Drive Revenue

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ADP: Automatic Data Processing logo
ADP
Automatic Data Processing

Automatic Data Processing (NASDAQ:ADP) is set to release its results for the third quarter ended March 31, 2015 on April 30. We expect the human capital management company to have seen growth on business bookings from the previous quarter and purchases of solutions for compliance with the Patient Protection and Affordable Care Act (PPACA). The strong employment conditions in the U.S. should have helped drive ADP’s pays per control.

In the second quarter, ADP 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%. 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]

See our complete analysis of ADP here

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Service Revenue To Grow On Business Bookings

In the second quarter, ADP benefited from a 15% year-on-year increase in new business bookings. [1] This helped drive its Employer Services segment, which grew 4%, partially offset by foreign currency headwinds. For the third 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]

New Business Bookings Will Benefit Interest Earned From Client Funds

Apart from driving growth in its service segments, business bookings should also help increase ADP’s average client fund balances. In the second quarter, the average client fund balance increased 7% year-on-year, offsetting the 10 basis point decline in average interest yield, leading to a 2% 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

Unemployment rate declined to 5.5% in March, a six year-low. However, job additions were fairly low at 126,000, compared to expectations of 245,000, breaking the 12 month long streak of 200,000 plus job additions.  ((Employment Situation Summary, www.bls.gov)) Experts attribute the weak job additions to the poor weather conditions and disruptions on the West Coast, both of which are temporary factors. Job additions in January and February came in at 201,000 and 264,000, respectively, which were significantly higher than the previous year. 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 third 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. [3] 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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Notes:
  1. ADP Reports Second Quarter Fiscal 2015 Results, February 4, 2015, www.adp.com [] [] []
  2. Global Human Resource Outsourcing Market 2014-2018, August 18, 2014, www.prnewswire.com []
  3. One in Two Large Employers Unprepared to Fully Comply with the Affordable Care Act, January 15, 2015, www.adp.com []