PEO Services Continue To Boost ADP’s Revenues And Profits

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ADP: Automatic Data Processing logo
ADP
Automatic Data Processing

ADP (NASDAQ:ADP) announced its fourth quarter and full year fiscal 2017 financial results on July 27. ((ADP To Report Fourth Quarter Fiscal 2017 Results, 16th June 2017, www.adp.com)) The company posted a 6% growth in its annual as well as quarterly revenue, beating the consensus expectations by a small margin. The rise in ADP’s revenue was largely driven by the growth in its PEO Services, the division which has witnessed a consistent growth of around 12%-13% in each of the last few years. On the profitability front, the company managed to grow its adjusted EBIT margin to 19.8%, 30 basis points higher than the last year, despite lower-than-expected new business bookings during the year. Going forward, ADP expects its revenues to grow at a steady rate of 5%-6%, and its adjusted diluted EPS to improve by 2%-4%.

In addition to this, the company stock rose to almost $120 per share on July 27, before closing 9% higher than the previous trading day, as William Ackman, a billionare investor, bought a large stake in the company. While the size of his position has not been disclosed, there is a possibility that Ackman, through his hedge fund Pershing Square Capital Management, could try to overhaul ADP’s management.

See Our Complete Analysis For ADP Here

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Performance Across Revenue Streams

As anticipated, ADP reported a stable growth of 6% in its 2017 revenue to $12.38 billion, primarily driven by a double digit rise in PEO Services during the year. The PEO Services business has been expanding rapidly over the last few years as more employers are exploring the option of using HR outsourcing. In 2017, the company’s average worksite employees increased 12% to about 462,000, resulting in a 13.3% jump in its PEO Services revenue to $3.46 billion. The division also saw a margin expansion of 80 basis points because of operational efficiencies during the year. As a result, ADP remains positive about the future of its PEO Services, and foresees a revenue growth of 11% to 13% from this segment in 2018.

In addition, ADP’s interest on client funds grew by 5.3% y-o-y to $397 million, backed by a 3% rise in the average client fund balances during the year. The client fund balance rose due to wage inflation, which was partially offset by the impact of client losses and pressure from improving employment environment. However, the average implied annualized yield on the client funds remained flat at 1.7% for the year. Going forward, ADP expects its interest on client funds to increase about $40-$50 million in 2018 due to its extended investment strategy.

Lastly, ADP payroll processing operations grew by 3.5% y-o-y to $8.52 billion, consistent with the past trend of a low-to-mid single digit revenue growth. The company attributed the growth of its core operations to a 2.4% improvement in the number of clients it served during the year. In 2018, ADP expects its payroll processing division to deliver a steady revenue growth of 2% to 3%.

 

Guidance For 2018

ADP estimates its revenue to grow by 5% to 6% in 2018, but expects to remain in the lower range of the guidance in the first half of the year. The company foresees a rise of 5% to 7% in its new business bookings during the year, which is likely to drive its revenue expansion. Further, the company’s PEO Services business is estimated to expand by 11% to 13% during the year, while its payroll processing segment will continue to deliver a stable growth of 2% to 3%. The total impact of ADP’s client funds extended investment strategy is expected to result in incremental revenue of $30-$40 million in 2018.

Also, ADP expects its adjusted EBIT margin to contract by 25 to 50 basis points in 2018, with majority of the margin contraction concentrated in the first half of the year. The company expects its payroll processing margins to decline by 50 to 75 basis points, while the operational efficiencies from its PEO Services are likely to offset this reduction by 25 to 50 basis points. Consequently, ADP expects its adjusted diluted EPS to grow by 2% to 4% y-o-y in 2018.

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