ADP Earnings Preview: Steady Increase In Clients, Pricing To Drive Top Line Growth

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ADP: Automatic Data Processing logo
ADP
Automatic Data Processing

ADP (NASDAQ:ADP) is scheduled to reported its fiscal Q1 2017 earnings on November 2. [1] The company has reported a steady 7-8% increase in revenue over the last few years, driven by higher demand for HR outsourcing and services over the years and a consistent growth in its core payroll processing business. In the fiscal year ended June, ADP’s HR outsourcing revenues rose by around 16% year-over-year to just over $3 billion. Much of the growth in the HR services (or PEO services) business was attributable to ADP’s business outside the U.S, which witnessed a strong demand for solutions catering to both small and mid-sized clients and large businesses. [2] Comparatively, payroll processing revenues have witnessed moderate single-digit growth in the last few years, including the fiscal year 2016 when revenues were up 4% to $8.2 billion as shown below.

adpq1ep1

In addition to the steady revenue growth, ADP successfully restricted the the proportional increase in cash operating expenses. As a result, ADP’s operating profit increased almost 10% for fiscal year 2016 and the adjusted EBITDA margin improved by around 50 basis points for the year.

adpq1ep2

Key Growth Metrics For ADP

In terms of key growth metrics, the company has witnessed double digit growth in HR Outsourcing and Services revenues, which has led to an increase in the contribution of HR Outsourcing and Services to the company’s top line from 17% in 2010 to 26% in 2016. Correspondingly, the total number of worksite employees under ADP’s HR division has increased at a CAGR of almost 13% from 2010 through 2015. In the most recent earnings, the company reported an almost 12% increase in its total worksite employees to 432,000 by the end of June.

adp_q4e_4

 

On the other hand ADP’s core payroll processing business has also grown at a steady 5-6% over the last few years. In the fiscal year ended June, ADP’s payroll processing revenues increased by 4% to $8.2 billion, with the number of payroll clients and fee per client growing at 1-2% as shown below. The consistent growth in these metrics should continue to benefit ADP in the long run.

adp_q4e_3

 

See our full analysis for ADP.

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Notes:
  1. ADP to Announce First Quarter Fiscal 2017 Financial Results on November 2, 2016, ADP Press Release, September 2016 []
  2. ADP Q3 FY 2016 Earnings Call Transcript, Seeking Alpha, April 2016 []