ADP Earnings Preview: Revenue To Grow On HR Outsourcing Demand, Business Bookings

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Automatic Data Processing

Automatic Data Processing (NASDAQ:ADP) is set to release its results for its fiscal fourth quarter on Thursday, July 30. [1] We expect to see an increase in the company’s revenues driven by a rise in demand for outsourcing Human Resource (HR) functions. Additionally, business bookings from the previous quarter and purchases of solutions for compliance with the Patient Protection and Affordable Care Act (PPACA) will contribute to top line growth. The strong employment conditions in the U.S. will likely have helped drive ADP’s pays per control.

In the previous quarter, ADP reported a 7% year-on-year increase in its revenue, to reach $3 billion. Its net profits and earnings per diluted share from continuing operations increased 14% and 16%, respectively. Due to the stronger U.S. dollar, ADP expects its revenues to track the lower end of its guidance of 7-8% growth, 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%. [2] 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 fund balances. 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

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HCM Demand And Business Bookings To Drive Service Revenue

In the fiscal third quarter, ADP benefited from a 6% year-on-year increase in new business bookings. [2] This helped drive its Employer Services segment, which grew 5%, partially offset by foreign currency headwinds. For the fourth 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 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 (HCM) companies such as ADP, because of their expertise in the domain and large scale, are generally 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. [3]

Apart from driving growth in its service segments, business bookings should also help increase ADP’s average client fund balances. In the third quarter, the average client fund balance increased 4% year-on-year, offsetting the decline in average interest yield, leading to a 1% increase in interest earned from client funds. [2] The cash flows from interest earned form an important part of ADP’s valuation since they have very few costs associated with them, leading to almost 100% margins.

Pays Per Control To Grow On Strong Job Additions

According to the Employment Situation Summary released by the U.S. Bureau of Labor Statistics (BLS), job additions for the month of April totaled 223,000, compared to market expectations of 224,000 job additions. [4] Despite the miss, experts were pleased with April job additions as it marked a significant turnaround from the poor showing in March, when only 85,000 jobs were added.

The unemployment rate in the U.S. increased marginally from 5.4% in April to 5.5% in May. In May, the U.S. economy added 280,000 jobs, against expectations of 225,000 job additions. In June, 223,000 jobs were added, which was slightly below expectations. However, the unemployment rate dipped to 5.3%.

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 Adherence To Drive Growth In Client Base

With the deadline for 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 fiscal fourth quarter, driving up its client base. According to recent research by ADP, around half of the large employers (1,000+ employees) in the U.S. are unprepared to comply with the regulations of the PPACA. [5] 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 to Announce Fiscal 2015 Financial Results on July 30, 2015, ADP News Release []
  2. ADP Reports Third Quarter Fiscal 2015 Results, April 30, 2015, ADP News Release [] [] []
  3. Global Human Resource Outsourcing Market 2014-2018, August 18, 2014, www.prnewswire.com []
  4. Employment Situation Summary, www.bls.gov []
  5. One in Two Large Employers Unprepared to Fully Comply with the Affordable Care Act, January 15, 2015, www.adp.com []