ADP Earnings Review: Core Business Segments Drive Revenue, Profits
ADP (NASDAQ:ADP) announced its fiscal Q2 2017 earnings on Wednesday, February 1, reporting a 6% annual increase in net revenues to just under $3 billion. [1] The company reported 5% y-o-y growth in payroll processing revenues to $2.1 billion in the December quarter, a trend consistent over the last few years. Similarly, ADP’s PEO services (or HR outsourcing and other services) revenues were up 12% over the prior year period to $818 million. Steady revenue growth across segments was complemented by a 17% growth adjusted EBIT to $592 million, with the adjusted EBIT margin expanding by almost 2 percentage points to 19.8% for the quarter.
Performance Across Revenue Streams
ADP has witnessed double digit growth in PEO Services revenues over the last few years, with many employers switching to HR outsourcing as an option. As a result, the contribution of PEO Services revenues to the company’s top line has increased from 17% in 2010 to 26% in 2016, with revenues growing at early teens in each of the last 7-8 years. This trend has continued in fiscal year 2017 for the company, with combined revenues for the first two quarters growing by over 12% y-o-y to $1.6 billion for the six-month period ended December. ADP has reported a corresponding increase in the number of worksite employees in the same period. At the end of December, the total number of ADP’s worksite employees was around 12% higher than the year-ago period, reaching 452,000 employees. We forecast ADP’s total worksite employees to increase to almost 480,000 employees by the end of fiscal 2017 and subsequently to almost 600,000 employees by the end of the decade.
Comparatively, ADP’s core payroll processing business grew at high single digits in the early part of this decade. While this has slowed down to around 4-5% over the last couple of years, the company has observed a steady growth rate in every quarter in that period. ADP has attributed the steady growth to a 1-2% increase in the average fee per client complemented by a 2-3% increase in the number of clients served. In the six-month period ended December, ADP’s payroll processing revenues were up by 5% to $4.1 billion. We forecast the company to continue to witness consistent growth in this segment in the long run.
ADP generated around $91 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 also around 2% higher on a y-o-y basis to $21 billion. The average implied annualized yield on the client funds for the December quarter was roughly flat over the comparable prior year period at 1.76%. Similarly, the average implied annualized yield on client funds for the six-month period ended December was also flat over the comparable prior year period at 1.77%. However, higher interest rates could help improve yields on interest-bearing assets for ADP in the long run.
For fiscal 2017, ADP expects to sustain revenue growth in both the Payroll Processing & PEO Services businesses. The company has given a guidance of mid-single digit growth in Payroll Processing revenues (4-6%) as shown below. On the other hand, HR Outsourcing and Other Services segment should continue to witness strength in its service offerings, with a double digit growth in revenues. We forecast ADP’s adjusted EBITDA margin to improve by over 70 basis points through the year.
See our full analysis for ADP.
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- ADP Reports Second Quarter Fiscal 2017 Results, ADP Press Release, February 2017 [↩]