ADP’s Payroll Processing Revenues Could Touch $10 Billion This Fiscal Year

Automatic Data Processing’s (NYSE: ADP) total revenue for fiscal 2019 (ending June) grew 6.5% year-over-year to $14.2 billion while net income surged by 41% to $2.3 billion thanks to strong performance across operating segments. ADP primarily generates revenues from traditional payroll processing and tax-filing services. Trefis summarizes historical trends in ADP’s Revenues in an interactive dashboard along with changes in the three key components of its revenue figure:

• Payroll Processing Services (66% of total revenues)
• Professional Employment Organization Services (30% of total revenues)
• Interest on funds held for clients (4% of total revenues)

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How Have ADP’s Revenues Changed Over The Years?

• ADP has added more than $2.5 billion to total revenue since 2016 at an average annual rate of 6.7% led by steady growth across all operating segments.
• However, PEO Services has been the primary contributor to ADP’s revenue growth, contributing roughly 47% of total revenue growth over this period
• Going forward, we expect ADP’s revenues to increase by 6.5% to cross $15 billion in FY 2020.

What Drove Growth In Revenues of Payroll Processing Segment?

This segment includes ADP’s traditional payroll processing and tax-filing services

• ADP’s Payroll Processing segment consistently contributes a majority of its revenues, with an average revenue share of more than 68% in the last 4 years.
• However, the segment’s share has declined from above 70% in 2016 to nearly 66% in 2018 due to faster growth of the PEO segment.
• The segment grew by 4.3% year-over-year in fiscal 2019, contributing more than $390 million to total incremental revenues.
• We expect the segment to continue its sustained growth and record just shy of $10 billion in revenues in FY 2020, with the operating margin expected to improve in the range of 100-120 basis points.
• The growth is expected to be driven by an increase in New Business Bookings and expected benefits from earlier acquisitions.

What Has Helped PEO To Become ADP’s Fastest Growing Segment?

ADP’s Professional Employment Organization solutions segment provides outsourcing solutions based on co-employment

• PEO segment has achieved robust growth in the last four years, adding roughly $1.2 billion to total revenues at an average annual rate of 11.5%
• The segment continued its solid performance in FY 2019, as sales increased by nearly 9.5% y-o-y to $4.25 billion. These gains were driven by an 8% increase in average worksite employees for the reported year to roughly 547,000
• We expect this segment to continue its growth trajectory, with revenues increasing at a rate of 10% to $4.66 billion in FY 2020.
• The segment’s contribution to total revenues has significantly increased over the years, which is expected to continue in the foreseeable future.

What Has Been The Contribution of Interest on funds held for clients To ADP’s Revenue?

This segment represents the interest ADP earns between pay periods on funds received from clients.

• The segment has grown steadily over recent years, adding approximately $185 million in revenue over 2016-2019 (CAGR of 14.2%).
• In 2020, we expect this segment to add nearly $30 million to total revenues.
• The segment’s share to total revenues has remained less than 4% over the years, and going forward, we expect its share to remain constant around 4%.

Per Trefis estimates, ADP’s EPS for fiscal 2020 is likely to be $6.10. Taken together with a P/E of 28x, this works to a fair value of $170 for ADP’s stock.

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