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ADP Tops Q1 Earnings & Revenue Estimates, Raises '18 View

Automatic Data Processing Inc. ADP reported first-quarter fiscal 2018 adjusted earnings of 91 cents per share, which beat the Zacks Consensus Estimate by a nickel. The figure increased 5.8% from the year-ago quarter.

Moreover, revenues of $3.08 billion beat the Zacks Consensus Estimate of $3.06 billion and grew 5.6% on a year-over-year basis.

Worldwide new business bookings declined 3%, in line with management’s guidance.

Based on impressive first-quarter results, ADP raised fiscal 2018 guidance for revenues and earnings. The company reiterated new business bookings guidance, which was in the range of 5-7%.

ADP’s stock has returned 12.3% year to date, substantially outperforming the 5.1% rally of the industry.



Quarter Details

Employer Services revenues in the quarter increased 2% year over year to $2.32 billion. The number of employees on ADP clients' payrolls in the United States increased 2.4% on a same-store-sales basis. Client revenues retention increased 160 basis points (bps) on a year-over-year basis.

PEO Services revenues increased 14% year over year to $903.6 million. Average worksite employees paid by PEO Services increased 10% to almost 484,000.

Interest on funds held for clients in the quarter increased 11% to $99 million. The company’s average client funds balance climbed 6% year over year to $21.2 billion in the quarter, while average interest yield of 1.9% was up 10 bps on a year-over-year basis.

Adjusted EBIT margin declined almost 150 bps to 18.3% primarily due to increased investments on product, distribution and service coupled with pressure from higher pass-through revenues.

Employer Services segment margin fell approximately 110 bps on a year-over-year basis. Meanwhile, PEO Services segment margin declined approximately 60 bps in the quarter.

Guidance

ADP anticipates fiscal 2018 revenue growth in the range of 6-8%, up from previous guidance of 5-6%. The Global Cash Card acquisition and the impacts from foreign currency translation are anticipated to add approximately one percentage point of growth to revenues.

ADP expects adjusted earnings to grow in the range of 5-7%, up from 2-4%. Adjusted EBIT margin is still forecast to decline 25-50 bps for the fiscal year.

Employer Services segment revenues is expected to grow almost in the range of 4-5%, up from previous guidance of 2-3%. Margin is projected to decline in the range of 50 to 75 bps for the year.

ADP expects pays per control to increase 2.5% for fiscal 2018. For the PEO Services segment, management anticipates revenue growth of 11% to 13% and margin expansion of 25 bps to 50 bps.

Interest on funds held for clients is expected to increase $45-$55 million, or about 11%. This is based on anticipated growth in average client funds balances of approximately 3% from $23.0 billion in fiscal 2017 and an average yield which is anticipated to increase about 20 bps to 1.9%. The total contribution from the client funds extended investment strategy is expected to be up $35-$45 million over fiscal 2017.

Zacks Rank & Key Picks

Currently, ADP carries a Zacks Rank #3 (Hold).

Adobe Systems Inc. ADBE, Microsoft Corporation MSFT and Cadence Design Systems Inc. CDNS are a few better-ranked stocks worth considering in the broader sector. While Adobe sports a Zacks Rank #1 (Strong Buy), Microsoft and Cadence has Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Adobe, Microsoft and Cadence are pegged at 17.00%, 12.20% and 12.00%, respectively.

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