ADP Earnings: PEO Services Continue To Drive Top Line Growth, Profits

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ADP: Automatic Data Processing logo
ADP
Automatic Data Processing

ADP (NASDAQ:ADP) announced its fiscal Q1 results on November 2, reporting a 7% annual growth in revenue to $2.9 billion. [1] Growth was largely driven by a 13% increase in HR outsourcing and services revenues to $790 million as shown in the table below.

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Over the last few years, ADP has witnessed strong growth in its HR outsourcing and other services (or PEO services) business, which grew at double digit percentages in each of the last 8-10 quarters. As a result, the contribution of HR Outsourcing and Services to the company’s top line  has increased from 18% in 2011 to 25% in 2016. ADP’s comprehensive scope of services – including health and welfare benefits services, compliance services, 401k retirement savings plans and worker insurance services for small and medium enterprises – has helped its HR Outsourcing & Services division grow rapidly. Correspondingly, the total number of worksite employees under ADP’s HR division has increased at a CAGR of almost 13% from 2010 through 2016.

 

In addition to the strong growth from HR outsourcing, ADP has reported steady growth in its core payroll processing business over the years. The company has reported 4-5% growth in payroll processing revenues driven by a 2-3% increase in the number of clients served a a consistent 1-2% price increase. The same trend was observed in the September quarter, with revenues rising by 6% to just over $2 billion.

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ADP generated around $89 million from interest on client funds, which was only 2% higher on a year-over-year basis. The average clients funds balances for the quarter were are around 9% higher on a y-o-y basis to $27.4 billion. However, lower yield on the client funds (1.6%) led to limited revenue growth as shown above. With an interest rate hike anticipated in December this year, the long term yields could improve for ADP.

 

For the coming year, ADP’s management expects 4-5% growth in payroll processing revenues for the full year, with revenues generated from HR outsourcing and other services expected to grow by 14-16%. Moreover, ADP’s operating profit margin is also likely to expand by about 50 basis points for the payroll division and by around 75 basis points for the PEO division for the full year. [2]

See our complete analysis for ADP

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Notes:
  1. ADP Reports First Quarter Fiscal 2017 Results, ADP Press Release, November 2016 []
  2. ADP Earnings Call Transcript Q1 2017, Seeking Alpha, November 2016 []