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ADP's Q4 Earnings Lag - Analyst Blog

Posted
8/1/2013 10:22:00 AM
By: Zacks.com
Referenced Stocks:ADP;EFX;NSP;PAYX

Automatic Data Processing Inc. ( ADP ) reported fourth-quarter 2013 earnings of 55 cents per share from continuing operations, which lagged the Zacks Consensus Estimate by couple of cents. Reported earnings per share increased 6.0% from the year-ago quarter.

Quarter Details

Revenues increased 7% year over year to $2.81 billion but failed to beat the Zacks Consensus Estimate of $2.82 billion. The year-over-year revenue growth was driven by strong performance of the Employer Services, PEO Services and Dealer Services segments.

Employer Services revenues increased 8% year over year to $1.97 billion. The number of employees on clients' payrolls in the United States grew 2.8% in the quarter on a same-store-sales basis. Client retention increased by 0.8 percentage points on a year-over-year basis.

PEO Services revenues increased 11.0% year over year to $490.1 million in the reported quarter. Dealer Services revenues increased 9.0% on a year-over-year basis to $463.6 million.

Interest on funds held for clients declined 16% year over year to $100.5 million. The decline was primarily due to a 50 basis points (bps) drop in the average interest yield to 2.0%, which was partially offset by a 6% increase in average client funds balances to $20.4 billion.

Total expenses in the reported quarter increased 9.2% year over year to $2.47 billion, attributable to higher operating expenses (up 6.9% year over year), selling, general & administrative expense (up 8.1% year over year) and systems development & programming costs (up 12.9% year over year).

ADP reported adjusted pre-tax earnings of $407.5 million from continuing operations, up 4% from the year-ago quarter. Adjusted net earnings from continuing operations increased 5% from the year-ago quarter and came in at $269.7 million.

ADP exited the quarter with cash and cash equivalents of $1.73 billion compared with $1.68 billion in the previous quarter. Long-term debt was $14.7 million versus $15.3 million in the previous quarter.

Guidance

ADP expects its fiscal 2014 revenues to grow 7.0% on a year-over-year basis. Earnings growth is projected in the range of 8% to 10%.

Employer Services revenues are expected to grow approximately 7% with a pre-tax margin expansion of approximately 50 bps to 100 bps. PEO Services revenues are expected to improve by 10.0% to 12.0%. Pre-tax margin is expected to grow slightly on a year-over-year basis.

ADP expects Dealer Services revenues to increase by 8.0% with a pre-tax margin expansion of approximately 100 bps. The company expects interest on funds held for clients to decline by 10.0% to 12.0% year over year.

Recommendation

The company is expected to perform better on the back of improved execution and higher client retention. Moreover, recovery in the job market will help the company. However, volatile macro economic environment and increasing competition from Paychex Inc. ( PAYX ), Insperity Inc. ( NSP ) and Equifax Inc ( EFX ) are the near-term headwinds.

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



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