What To Expect From ADP’s Q4 2018

by Trefis Team
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Automatic Data Processing (NYSE: ADP), a leading global provider of Human Capital Management (HCM) solutions, delivered healthy results in its recent 3Q earnings. The company posted an 8% growth in sales, reporting at $3.7 billion, with diluted EPS at $1.52, up 16% y-o-y driven by strength of their business model, increase in worldwide new business bookings, and an increase in their employer Services client revenue retention.

The company is scheduled to announce its fourth-quarter earnings on August 1, and we expect it to report a healthier quarter on account of its ever growing PEO service and their payroll processing. For full year 2018 earnings, the company management has forecast its earnings to grow between the band of 11% to 12%. Please refer to our dashboard analysis on ADP.

Below we take a look at some of the key trends that we will be watching when the company reports its Q4 earnings.

PEO Services will continue To Boost Top-Line Growth – Over the last few years ADP’s PEO Services business has been ever expanding as more companies are exploring the option of using HR outsourcing. The contribution of HR Outsourcing and Services to the company’s top line had increased from 18% in 2011 to 28% in 2017. In Q3 FY 2018, its PEO Services revenues grew  by 10%. 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 be approx 12% for the full fiscal 2018.

Over the last five years, ADP’s revenue from its PEO services have grown at around 14.5% annually. As the popularity among businesses to outsource their HR services keeps rising, this figure is likely to grow even further in the future. One of the important drivers for the growth in ADP’s client base has been brought about by the implementation of the Affordable Care Act (ACA). The adoption of ADP’s products has been increasing significantly post the Act, especially since larger employers  (+1,000 employees) find it easier to outsource the job to a third party who can help them implement ACA solutions for their employees. Consequently, the significant growth in the rise of demand for its PEO services has led to a 9% annual rise in its worksite employees over the last couple of years.

Payroll Processing Will Continue To Be The Core Business – While ADP’s PEO services business has driven much of the top line growth in the last few years, payroll processing continues to be its core business, contributing the largest portion of its top-line. The company’s revenue from its payroll processing services has grown at a steady rate of 5% annually over the last five years, driven by stable growth in the number of clients served by the company, and an annual rise in client fees. With a large and growing customer base and a high retention rate of clients (over 90%), the company is in a strong position to generate sustained revenue growth in this segment. Based on the company’s guidance, we estimate ADP’s total number of payroll processing clients to continue to grow consistently at a 5%.  We therefore expect the sustained growth in ADP’s core business to boost its bottom line going forward and drive the company’s future value.


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