ADP posted a stronger-than-expected set of Q1 FY'23 results, with revenues rising almost 10% to $4.2 billion and adjusted diluted EPS standing at $1.86. Growth was driven by strong demand for the company's human capital management and HR outsourcing services as well as robust retention rates. ADP also raised its guidance for FY'23, projecting revenue growth of 8% to 9% from a prior outlook of 7% to 9%, with EBIT margin expansion projected at 125 to 150 basis points.
Note: ADP's Q1 FY'23 ended on July 27, 2022. The company's FY ends in June.
Below are key drivers of ADP's value that present opportunities for upside or downside to the current Trefis price estimate for ADP:
For additional details, select a driver above or select a division from the interactive Trefis split for ADP at the top of the page.
ADP offers payroll processing to businesses of varying sizes around the globe. Payroll processing includes the paper and electronic distribution of employee compensation along with the processing of tax withholdings and other employee contributions. Businesses save time and resources by outsourcing their payroll processing needs to companies like ADP.
The number of payroll accounts managed by ADP is an important driver of ADP's revenues. As of June 30, 2021, ADP had more than 920,000 payroll clients.
The company divides its US payroll business into three segments based on the number of employees in an account: National Accounts (1000+ employees), Major Accounts (50-999 employees), and Small Business Accounts (<50 employees). The Fee Per Client is an important metric as it shows how ADP's pricing power and the competitive scenario translate into fee per client for ADP.
During the recession, unemployment rates in the U.S. had increased drastically as many businesses laid-off employees to reduce costs. The U.S. unemployment rate peaked at 10% in October 2009. However, driven by a recovery in the U.S. economy, businesses have begun hiring again. Since October 2009, the unemployment rate has been declining month on month. In August 2019, the unemployment rate remained at 3.7%, a multi-year low. The pandemic caused a temporary increase in the unemployment rate but, it has again reached pre-pandemic levels. (Link) Declining unemployment rates are beneficial to ADP since it will have a positive impact on its revenue and number of clients.
Interest rates in the U.S. have been low due to the Quantitative Easing program undertaken by the government in order to promote growth in the economy. As the U.S. economy started registering sustained growth, the Fed ended its Quantitative Easing program in 2021. Subsequently, Fed has raised interest rates to curtail inflation.
The recently introduced Affordable Care Act in the U.S. has certain complexities that will force businesses to take advice from professionals. ADP has proactively taken steps and has begun to offer solutions that will help clients navigate through these complexities. As more businesses look for such solutions, ADP's clients will increase.