What To Watch For In ADP’s Q1 Earnings

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 4Q earnings. Net sales of the company rose to $13.3 billion, up 8% from the prior-year quarter, with adjusted earnings per share at $4.35. This was driven by the strength of their business model, increase in worldwide new business bookings, and an increase in their employer Services client revenue retention. The company has been client-centric focused and their drive to meet the evolving needs of the global HCM market through leading-edge product and unparalleled service is delivering clear and positive results that are also contributing to an improvement in retention and a sustained acceleration in their new business bookings.

The company is scheduled to announce its Q1 earnings on October 31, and we expect it to report a healthier quarter on account of its ever growing PEO service and their payroll processing. For 2019, ADP anticipates full-year fiscal 2019 revenue to grow between the band of 5% to 7%, and adjusted diluted earnings per share growth of 13% to 15% y-o-y. Please refer to our ADP’s Outlook For Q1’19. 

Below we take a look at some of the key trends that we will be watching when the company reports its Q1 FY2019 earnings.

PEO Services will continue To Boost Top-Line Growth – ADP’s PEO Services business has been ever expanding as more companies are exploring the option of using HR outsourcing.  For Q4, revenues were up 10% year over year to $976.7 million. The upside was driven by an 8% increase in average worksite employees for the reported quarter. Average worksite employees paid by PEO Services were roughly 523,000.  As the popularity among businesses to outsource their HR services keeps rising, this figure is likely to grow even further in Q1 2019 and beyond. 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.

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 of $2.49 billion increased 7% year over year on a reported basis and 4% on an organic constant-currency basis. The number of employees on ADP clients’ payrolls in the United States rose 3.1% on a same-store sales basis. Client revenue retention, however, declined 120 basis points (bps) on a year-over-year basis. 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% rate.

Going forward, ADP is focusing on the strategic initiatives to create long-term shareholder value by balancing top line revenue growth and strong margins to drive EPS growth. We, therefore believe that driven by the above trends, the company will drive growth with steadier footing this coming year.

 

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