What To Watch As ADP Publishes Q2 Results
Automatic Data Processing (NYSE: ADP), a leading global provider of Human Capital Management (HCM) solutions, delivered healthy results in its recent Q1 earnings. Net sales of the company rose to $3.3 billion, up 8% from the prior-year quarter, with adjusted earnings per share at $1.20, up by 28% y-o-y. 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 Q2 earnings on January 30, 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 6% to 7%, and adjusted diluted earnings per share growth of 15% to 17% y-o-y. Please refer to our ADP’s Outlook For Q2’19.
Below we take a look at some of the key trends that we will be watching when the company reports its Q2 FY2019 earnings.
PEO Services will continue To Boost Sales Growth – ADP’s PEO Services business has been ever expanding as more companies are exploring the option of using HR outsourcing. For Q1, revenues were up 10% year over year. 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 528,000. As the popularity among businesses to outsource their HR services keeps rising, this figure is likely to grow even further in Q2 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 increased by 8% year over year. The number of employees on ADP clients’ payrolls in the United States rose 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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