What Are The Factors Behind A 15% Growth In ADP’s Revenue Over The Last 2 Years?

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ADP’s (NASDAQ: ADP) total revenue has grown from $12.38 billion in 2017 to $14.17 billion in 2019, and is expected to further grow to $15.9 billion by 2021. Revenue growth of $1.72 billion over the next 2 years is to be driven primarily by $1 billion growth in payroll processing revenue. ADP saw its revenue grow from $12.38 billion in 2017 to $14.17 billion in 2019, on the back of a consistent drop in unemployment rates. ADP’s high client retention rate of over 90%, and its position as the market leader in HR services, has also helped support ADP’s revenue. An increased migration toward software services for employee management has led to more outsourcing, and is expected to help drive ADP’s total revenue to $15.9 billion by 2021.

Takeaway

  • ADP’s payroll processing division, which manages paycheck processing, tax filing, and pension plans for its clients’ employees, is expected to contribute $9.83 billion to total revenue in 2020, making up 66% of ADP’s $14.95 billion estimate.
  • The payroll processing division, is twice as big as the HR outsourcing division, which is expected to bring in $4.65 billion in 2020, making up around 31% of the total revenue estimate.
  • The payroll processing division is expected to add $1.86 billion between 2017 and 2021, more than 50% of the $3.5 billion the company is expected to bring in over the same period.
  • This strong growth has helped drive a more than 50% growth in ADP’s stock price since December 2017.
  • In our interactive dashboard ADP Revenue: How Does ADP Make Money?, we discuss ADP’s business model, followed by sections that review past performance and 2021 expectations for ADP’s revenue drivers, including client base, employees per client, payroll fee trends, and competitive comparisons with Paychex and Workday.

A look at ADP’s segments and their contribution to total revenue

(A) Revenue from payroll processing to grow by $1 billion in the next 2 years, to make up around 65% of total revenue in 2021

  • ADP has seen an increase in payroll clients from 650,000 in 2017 to 810,000 in 2019, and this is further expected to rise to over 860,000 clients by 2021.
  • Due to the size of the clients served, the average fee per client dropped from $13k to around $11.5k in the same period, and we expect it to stabilize around $12k.
  • These factors should help drive revenue from this segment to around $10.38 billion by 2021.

(B) Revenue from HR outsourcing is expected to add almost $800 million over the next 2 years, and make up almost 32% of total revenue in 2021

  • The number of worksite employees served has gone up from 462k in 2017 to 547k in 2019, and this has helped drive HR revenue from $3.46 billion to $4.24 billion over the same period.
  • We expect worksite employees served to go up to around 614,600 by 2021, driving revenue past the $5 billion mark.

(C) Interest earned on client funds is expected to drop by around $70 million, to make up about 3% of the total revenue in 2021

  • Rising interest rates have helped drive interest revenue from $397.17 million in 2017 to $561 million in 2019.
  • However, we expect interest rates to drop to around 1.8%, which means that revenue from this segment is expected to drop below $500 million.

 

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