ADP Beats on Q2 Earnings, Revenues Miss; Lowers Guidance

Automatic Data Processing Inc.ADP reported second-quarter fiscal 2017 adjusted earnings from continuing operations of $1.13 per share, which beat the Zacks Consensus Estimate of 81 cents and jumped 52.7% on a year-over-year basis.

After adjusting for gain on sale of business (27 cents), ADP reported earnings 87 cents per share, which increased 20% from the year-ago quarter.

However, revenues of almost $2.99 billion missed the Zacks Consensus Estimate of $3.02 billion but grew 6.4% on a year-over-year basis.

Automatic Data Processing, Inc. Price, Consensus and EPS Surprise

Automatic Data Processing, Inc. Price, Consensus and EPS Surprise | Automatic Data Processing, Inc. Quote

Shares declined 1.23% in pre-market trading .

Although ADP (22.9%) has outperformed the Zacks Outsourcing industry (19.9%) in the last one year, we believe that the revenue miss and revised down fiscal 2017 guidance will remain an overhang on the stock in the near term.

Quarter Details

Employer Services revenues in the quarter increased 4% year over year to $2.31 billion at constant currency. The number of employees on ADP clients' payrolls in the U.S. increased 2.3% on a same-store-sales basis. Client revenue retention was up 10 basis points (bps) on a year-over-year basis.

PEO Services revenues surged 12% year over year to $822.9 million.

In the quarter, combined worldwide new business bookings for the company declined 5% on a year-over-year basis. New business bookings represent annualized recurring revenues expected from new orders.

Interest on funds held for clients in the quarter increased 3% to $92 million. The company's average client funds balance inched up 2% year over year to $20.9 billion in the quarter while average interest yield of 1.8% remained flat on a year-over-year basis.

Cost of revenues as percentage of revenues declined 80 bps to 59.2%, primarily due to lower operating expenses (down 50 bps) as well as systems development & programming costs (down 20 bps). As a result, gross margin expanded by the same magnitude on a year-over-year basis to 40.8%.

Moreover, selling, general & administrative (SG&A) expense as percentage of revenues declined 90 bps in the reported quarter.

Employer Services segment margin increased approximately 150 bps on a year-over-year basis driven by operational efficiencies and slower growth in selling expenses. Further, PEO Services segment margin increased approximately 120 bps in the quarter.

ADP exited first-quarter 2017 with cash and cash equivalents (including short-term marketable securities) of approximately $2.71 billion compared with $2.82 billion as on Sep 30, 2016. Long-term debt was approximately $2 billion at the end of the quarter.


In Jan 2017, ADP acquired The Marcus Buckingham Company for total cash consideration of approximately $70 million and contingent consideration of up to $35 million payable over the next three years on fulfilment of certain conditions.


ADP now anticipates year-over-year revenue growth of 6%, down from previous guidance of 7% to 8% for fiscal 2017. New business bookings are expected to remain flat from fiscal 2016, down from previous growth expectation of 4-6%.

ADP continues to expect adjusted earnings to grow 15-17% over fiscal 2016 level. This represents almost 50 bps expansion in adjusted EBIT margin.

The company projects Employer Services revenues to grow in the range of 3-4%, down from earlier guidance of 4-5% in fiscal 2017. The company estimates pay per control to increase 2.5% in the year.

PEO Services revenues are expected to increase 13% down from earlier guidance range of 14-16% in the year.

Additionally, the company expects interest on funds held for clients to increase $15 million or about 4% as compared with earlier guidance of $5-$10 million, or approximately 2-3% over fiscal 2016 level.

It is based on estimated growth in average client funds balances of 3% from $22.4 billion in fiscal 2016.

Further, the total contribution from client funds extended investment strategy is anticipated to be up $10 million (up from $5 million).

Our Take

Automatic Data Processing holds a dominant position in the payroll processing and human capital management market, primarily owing to its robust product portfolio. We believe that the company's higher revenue per client and a decent customer retention ratio place it in an advantageous position.

However, we expect the company's investments in its new initiatives to weigh on near-term earnings. Moreover, the divestiture of Consumer Health Spending Account (CHSA) and Consolidated Omnibus Reconciliation Act (COBRA) businesses will impact top-line growth in the rest of 2017.

In addition, increasing competition from the likes of Paychex, Equifax EFX , Insperity Inc. NSP and TriNet Group Inc. TNET is a major headwind.

Zacks Rank

Currently, Automatic Data Processing carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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