ADP Earnings Preview: Payroll Business, PEO Services To Sustain Top Line Growth
ADP (NASDAQ:ADP) is scheduled to reported its fiscal Q3 2017 earnings on May 3. [1] The company has reported a 6-7% annual increase in net revenues through the September and December quarters of its fiscal 2017. This trend is consistent over the last few years, with the company reporting steady mid-single digit revenue growth in the same period, predominantly driven by higher demand for HR outsourcing and services (or PEO services). The HR outsourcing business has witnessed early teen growth in revenues over the last few years.
In the most recent quarter ended December, ADP’s HR outsourcing revenues rose by around 12% year-over-year to $818 million. Much of the growth in the HR services (or PEO services) business was attributable to ADP’s business outside the U.S, which witnessed strong demand for solutions catering to both small and mid-sized clients and large businesses. [2] Comparatively, payroll processing revenues were up 5% to just under $2.1 billion for the quarter.
Guidance For Fiscal Year 2017
For fiscal 2017, ADP expects to sustain revenue growth in Payroll Processing & HR Outsourcing businesses. The company has given guidance for low-single digit growth in Payroll Processing revenues (3-4%) as shown below. On the other hand, the HR Outsourcing and Other Services segment should continue to witness strength in its service offerings, with double digit growth in revenues. According to the guidance provided by the company, at the end of fiscal Q2, ADP’s adjusted EBITDA margin could improve by over around 50 basis points through the year. Consequently, diluted EPS could be up almost 12% to $3.65, which is in line with the Reuters’ consensus estimate.
Key Growth Metrics For ADP
Over the years, strong growth in ADP’s PEO Services has led to an increase in the contribution of PEO 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. The company reported a 12-13% increase in its total worksite employees in both the September and December quarters. We forecast ADP’s total worksite employees to increase to almost 480,000 employees by the end of fiscal 2017.
Comparatively, ADP’s core payroll processing business has also grown at a steady 5-6% over the last few years. In the quarter ended December, ADP’s payroll processing revenues increased by 5% to $2.1 billion, with the number of payroll clients and fee per client both growing at 2-3%. The consistent growth in these metrics should continue to benefit ADP in the long run.
ADP generated around $92 million from interest on client funds, which was 3% higher on a year-over-year basis. The average clients funds balances for the quarter were are around 2% higher on a y-o-y basis to $20.9 billion. However, flattish yields on client funds (1.76%) led to limited revenue growth, as shown above. In the long run, higher interest rates could help improve yields on interest-bearing assets for ADP.
We maintain our $87 price estimate for ADP, which is around 15% lower than the current market price.
See our full analysis for ADP.
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- ADP to Announce Third Quarter Fiscal 2017 Financial Results on February 1, 2017, ADP Press Release, March 2017 [↩]
- ADP Q1 FY 2017 Earnings Call Transcript, Seeking Alpha, November 2016 [↩]