ADP’s Growth Continues On The Back Of Its Strong PEO Services Growth Momentum

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ADP: Automatic Data Processing logo
ADP
Automatic Data Processing

ADP (NASDAQ:ADP) announced its first quarter fiscal 2018 financial results on November 2nd. For the first quarter, the company posted a 6% growth in its organic revenue (which excluded foreign currency translation and the results of acquisitions and dispositions of fiscal 2017) to $3.1 billion. The growth in revenue was largely driven by the growth in its PEO Services whose revenues grew by 14% y-o-y. This segment has witnessed a consistent growth of around 12%-13% in each of the last few years. As a result, the contribution of HR Outsourcing and Services to the company’s top line  has increased from 18% in 2011 to 28% in 2017. 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.

On the profitability front, the company’s adjusted EBIT margin declined by around 150 basis points to 18.3%. This was due to the significant expansion of margins by 230 basis points in Q1 fiscal 2017 due to the combined impact of the incremental Affordable Care Act related revenues, better operating efficiencies, and lower selling expenses. ADP has recently acquired Global Cash Card, the company offering pay cards and other electronic payment accounts, thereby allowing employers the option to pay their employees with cards instead of paper paychecks or electronic deposits. This acquisition along with some foreign currency translation adjustment has led to an improved overall outlook for the company. Hence, the management has revised its forecasts for 2018 upward. Going forward, ADP expects its revenues to grow at a steady rate of 6%-8%, and its adjusted diluted EPS to improve by 5%-7% for the full fiscal 2018. We have a price estimate of $107 per share for ADP, which is around 5% below the current stock price.

See Our Complete Analysis For ADP Here

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Segment-Wise Performance

As anticipated, ADP reported a stable growth of 6% in its 2017 revenue, primarily driven by a double digit rise in PEO Services. The PEO Services business has been expanding rapidly over the last few years as more employers are exploring the option of using HR outsourcing. In Q1 2018, the company’s average work site employees grew by 10% to 484,000 employees resulting in its PEO Services revenues growing  by 14% to $899 million. The growth in revenues for this segment was boosted by the rise in worksite employees and the accelerated growth in the healthcare renewal premiums. The management expects the revenues from this segment to hover between 11% to 13% for the full fiscal 2018.

In the Employer Service segment, the company’s revenues grew by 2% (3% on an organic basis) to $2.08 billion for the first quarter. This was driven by a 2.4% growth in the same-store pays per control and a 6% growth in the average client fund balances. ADP’s pays per control indicates the average number of employees ADP serves for a client. Net new additions of businesses and increased wages compared to Q1 2017 were some of the factors driving the growth of these metrics. Revenues from this segment is expected to grow between 4% to 5% for the full fiscal 2018.

 

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