ADP Earnings: HCM Demand, U.S. Job Strength Drive Top Line

+0.89%
Upside
250
Market
252
Trefis
ADP: Automatic Data Processing logo
ADP
Automatic Data Processing

Automatic Data Processing (NASDAQ:ADP) announced its third quarter fiscal 2015 results on April 30. The human capital management company reported a 7% year-on-year increase in its revenue, to reach $3.0 billion, and tracking the lower end of its guidance. ADP’s third quarter results benefited from solid growth in new business bookings and strength in the U.S. job environment, while facing foreign currency translation headwinds. ADP’s net profits and earnings per diluted share from continuing operations increased 14% and 16%, respectively. 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 revised its revenue and earnings per share outlook for fiscal year 2015 on account of foreign currency translation headwinds. The company now expects revenues to grow 7%, compared to previous guidance of 7-8%, with new business bookings increasing 10%. Diluted earnings per share from continuing operations are expected to grow 14%, compared to previous guidance of 12-14%. [1] Employer services revenue is forecast to grow 5%, including the negative impact of foreign currency translation. ADP expects its PEO services revenue to grow 16%, compared to previous estimate of 15-17%. Interest on funds held for clients will likely increase $5 million based on anticipated growth in average client funds balances of approximately 5. However, this may be partially offset by a decline of up to 10 basis points in the expected average interest yield to 1.7%.

See our complete analysis of ADP here

Relevant Articles
  1. Will ADP’s Strong Gains Of Recent Years Continue?
  2. What To Expect From ADP’s Q4 Results?
  3. What To Expect From ADP’s Q3 Results?
  4. With The Job Market Holding Up, What To Expect From ADP’s Q2 Earnings?
  5. Forecast Of The Day: ADP Number of Clients Served
  6. Company Of The Day: ADP

New Business Bookings Grow On HCM Service Demand

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 6% in the third quarter, despite tough comparables from the same quarter of the previous fiscal year. [1] The new business bookings helped boost Employer Services revenue by 5%, which was partially tempered by unfavorable foreign currency translation. New business bookings also helped increase ADP’s average client fund balances by 4% year-on-year, which more than offset the decline in average interest yield, leading to a 1% 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]

Pays Per Control Higher On Strong U.S. Job Environment

Unemployment rate declined to 5.5% in March, a six year-low. [3] 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. 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. 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]

Fed May Raise Interest Rates Later In The Year

In October 2014, the Fed ended the Quantitative Easing program. After the Fed’s meeting on March 17, Janet Yellen, Chair of the Board of Governors of the Federal Reserve System, said that the Fed was giving serious consideration to hiking rates later this year. [4] However, concerns regarding slow economic growth present headwinds, which may result in lower than expected rate hikes.

An increase in interest rates this year should have a positive impact on ADP’s interest earned on funds held for clients in the fiscal year 2016, since it will help increase returns on investments. However, the increase in interest rates might not be substantial enough to drive interest earned to pre-recession levels. Until interest rates rise, ADP will have to rely on growth in the average balance of clients’ funds to help boost interest earned, as seen in the first half of fiscal 2015.

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 1.7%. [5] This bodes well for the job environment and companies like ADP, since their number of employees per client will likely improve further.

View Interactive Institutional Research (Powered by Trefis):

Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Notes:
  1. ADP Reports Third Quarter Fiscal 2015 Results, April 30, 2015, www.adp.com [] [] []
  2. Global Human Resource Outsourcing Market 2014-2018, August 18, 2014, www.prnewswire.com []
  3. Employment Situation Summary, www.bls.gov []
  4. Janet Yellen says US interest rates likely to rise gradually, March 27, 2015, www.ft.com []
  5. Unemployment Insurance Weekly Claims data, www.doleta.gov []