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Automatic Data Processing (ADP) Q3 Earnings & Sales Lag

Automatic Data Processing Inc. ADP reported third-quarter fiscal 2016 earnings from continuing operations of $1.17 per share, missing the Zacks Consensus Estimate by a penny. Earnings, however, improved 13.6% year over year.



Operational Details

Quarterly revenues of $3,248.6 million came below the Zacks Consensus Estimate of $3,273 million but grew 7.4% year over year.

Employer Services revenues in the quarter increased 5% year over year to $2,576.7 million. PEO Services revenues rose 16% year over year to $866.3 million.

In the quarter, combined worldwide new business bookings for the company grew 13% year over year. New business bookings represent annualized recurring revenues expected from new orders.

Interest on funds held for clients in the quarter increased nearly 2% to $103 million. The company’s average client funds balance increased 2% year over year to $26.7 billion in the quarter while average interest yield was 1.5%.

Total expenses in the reported quarter increased 7.5% year over year to $2.5 billion.

Balance Sheet

Automatic Data Processing exited the quarter with cash and cash equivalents (including short-term marketable securities) of approximately $3 billion compared with $1.7 billion as on Jun 30, 2015. Long-term debt was approximately $2 billion compared with $9.2 million as on Jun 30, 2015.


For fiscal 2016, the company continues to expect revenue growth in the range of approximately 7% over fiscal 2015 (9% on constant currency basis). The guidance includes an expected negative impact of approximately 100 basis points from the sale of the AdvancedMD business.

Automatic Data Processing expects earnings per share to grow approximately 12% over fiscal 2015 levels, compared with the earlier projection of 11% to 13%.

This represents 50 basis points (bps) expansion in adjusted EBIT margin from 18.8% in fiscal 2015. Worldwide new business bookings are still expected to rise at least 12% from $1.6 billion in fiscal 2015.

The company continues to expect Employer Services revenues to grow in the range of 4% to 5% in fiscal 2016 (7% on constant currency basis). The company expects pay per control to increase 2.5% in the year (earlier projection was 2% to 3%).

PEO Services revenues are expected to increase 17% (earlier projection was 16% to 18%).

In addition, the company continues to expect interest on funds held for clients to remain flat at $378 million in fiscal 2015 (earlier projection was of an increase of $5 million or 1% over 2015 levels).

It is based on estimated growth in average client funds balances of 3% to a range of $22.4 billion (earlier it was projected to increase 2% to 4% or $22.3 billion to $22.5 billion).

Further, the total contribution from client funds extended investment strategy is still expected to remain flat with fiscal 2015 levels.

The guidance excludes the benefit from the sale of ADP’s AdvancedMD business and a $14 million benefit from the sale of a building in the second quarter of fiscal 2016.

Our Take

Automatic Data Processing’s business has been impacted by a volatile macroeconomic environment, especially because of the strengthening U.S. dollar. Also, slower-than-expected employee recovery and increasing competition from the likes of Paychex, Equifax EFX, Insperity, Inc. NSP and TriNet Group, Inc. TNET are the other near-term headwinds.

Despite a strong customer retention ratio and steady recurring revenues, the company has been seeing some negative impact on its retention rate owing to migration from the legacy business and increasing competition in the sphere.

To overcome this to an extent, it has been ramping up its resources in the service-and-support division in tune with growing demand. While we expect the company’s continuous investments in these new initiatives to drive growth over the long term, it will weigh on near-term earnings.

Nonetheless, its higher revenue per client and lower cost of operations place it in an advantageous position. In addition, the company’s stable business, solid free cash flow and high dividend rate make it lucrative to investors.

In addition, the company has been benefiting from an increasing demand for its offerings propelled by the Affordable Care Act (ACA) and some other similar bills. 

Currently, Automatic Data Processing has a Zacks Rank #3 (Hold).

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