ADP Earnings: HCM Demand, New Bookings Drive Top Line Growth
ADP (NASDAQ:ADP) announced its results for its fiscal first quarter on Wednesday, October 28, reporting a 6% annual growth in net revenues to $2.7 billion. [1] The company had a strong end to its fiscal 2015 which ended in June, with its human resource outsourcing and services segment driving much of the top line growth. The trend continued in Q1’16 with its Professional Employer Organization (PEO) revenues rising by almost 18% year-over-year to $698 million. Business bookings from the previous quarter and purchases of solutions for compliance with the Patient Protection and Affordable Care Act (PPACA) helped contribute to the growth in PEO revenues. On the other hand, payroll processing witnessed a slowdown in growth compared to previous years.
We have a $78 price estimate for ADP’s stock, which is about 10% lower than the current market price. ADP’s stock price has risen by about 12% this month.
See our complete analysis of ADP here
Payroll Processing Grows Modestly, Strong Outlook
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. 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. [2] ADP’s bookings through FY 2015 were up by 6%, which helped its Employer Services segment grow by 5%. The moderate growth continued in Q1’16, with payroll processing revenues rising by about 2% y-o-y to just over $1.9 billion.
According to the Employment Situation Summary released by the U.S. Bureau of Labor Statistics (BLS), job additions for the month of September totaled 142,000. [3] Job growth has averaged about 198,000 every month from January through September. Similarly, the unemployment rate in the U.S. fell from 5.4-5.5% in early 205 to 5.15% in August and September. 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’s same store pays per control were up by 2.3% in Q1’16, while the company expects to sustain a 2-3% growth in its pays per control through fiscal 2016.
PEO Revenues Drive Growth
In fiscal 2015, ADP benefited from a 13% year-on-year increase in new business bookings. Resulting PEO revenues were up by almost 17% y-o-y to $2.6 billion. In the first fiscal quarter, ADP’s new business bookings were up by 13% y-o-y, which led PEO revenues to rise by 18% to $698 million. [4] After the deadline for adherence to provisions of the PPACA having passed in January this year, the adoption of ADP’s products catering to the regulation increased, subsequently driving up its client base. According to recent research by ADP, about half of large employers (1,000+ employees) in the U.S. were unprepared to comply with the regulations of the PPACA around the beginning of the year. [5] As a result, ADP witnessed strong activity in this space as clients chose providers to help them implement ACA solutions. This trend is likely to continue in the coming quarters, as ADP expects its total new bookings to grow by as much as 10% through FY 2016.
Apart from driving growth in its service segments, business bookings helped increase ADP’s average client fund balances. In the fiscal first quarter, the average client fund balance stood at $25 billion, which was a 4% annual rise. However, the average yield on these client assets was about 10 basis points lower than the comparable prior year period at 1.70%, limiting revenue growth in this segment. With interest rates likely to increase from next year, ADP’s net interest revenues from client funds are likely to pick up.
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- ADP Reports First Quarter Fiscal 2016 Results, ADP Press Release, October 2015 [↩]
- Global Human Resource Outsourcing Market 2014-2018, August 18, 2014, www.prnewswire.com [↩]
- Employment Situation Summary, www.bls.gov [↩]
- Automatic Data Processing’s (ADP) Q1 2016 Earnings Call Transcript, Seeking Alpha, October 2015 [↩]
- One in Two Large Employers Unprepared to Fully Comply with the Affordable Care Act, January 15, 2015, www.adp.com [↩]