ADP Misses On Q4 Earnings, '18 New Bookings View Positive

Automatic Data Processing Inc. (NASDAQ:ADP) reported fourth-quarter fiscal 2017 adjusted earnings from continuing operations of 66 cents per share, which missed the Zacks Consensus Estimate of 67 cents. The figure included tax benefit of a penny related to the adoption of new stock-based compensation accounting guidance.

Earnings declined 4.3% from the year-ago quarter, primarily due to higher expenses related to company’s Service Alignment Initiative. However, revenues of $3.07 billion beat the Zacks Consensus Estimate of $3.05 billion and grew 5.7% on a year-over-year basis.

ADP reported revenues of $12.4 billion in fiscal 2017, which grew 6% over fiscal 2016 and was in line with management’s guidance. Organically, the growth was 7%.

ADP’s stock has gained 3.1% year to date, substantially outperforming the industry it belongs to. The outperformance can be attributed to consistent revenue performance and improving operational efficiency.

Moreover, ADP’s fiscal 2018 guidance forecasts new business bookings to increase 5% to 7% against a 5% decline in fiscal 2017. The Service Alignment will boost results going forward, which will eventually help the stock to maintain its momentum in the long run.

Quarter Details

Employer Services revenues in the quarter increased 2% year over year to $2.34 billion. The number of employees on ADP clients' payrolls in the U.S. increased 2.1% on a same-store-sales basis. Client revenues retention increased 60 basis points (bps) on a year-over-year basis.

PEO Services revenues surged 12% year over year to $891.6 million.

Interest on funds held for clients in the quarter increased 8% to $105 million. The company’s average client funds balance inched up 3% year over year to $23.9 billion in the quarter, while average interest yield of 1.8% was up 10 bps on a year-over-year basis.

Adjusted EBIT margin declined almost 240 bps to 14.3% primarily due to increased investments on product, sales, and service, including dual operation costs related to the company’s Service Alignment Initiative.

Employer Services segment margin decreased approximately 210 bps on a year-over-year basis. Meanwhile, PEO Services segment margin increased approximately 10 bps in the quarter.

Guidance

ADP anticipates fiscal 2018 revenue growth to be in the range of 5–6% over fiscal 2016. Management expects revenue growth at the lower end of the guided range in the first half of fiscal 2018, and at the higher end in the second half of fiscal 2018.

The projection assumes worldwide new business bookings growth of 5% to 7%.

ADP expects adjusted earnings to grow in the range of 2–4%. Adjusted EBIT margin is forecasted to decline 25–50 bps for the fiscal year.

Employer Services segment revenues is expected to grow almost in the range 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 11% to 13% revenue growth and margin expansion of 25 bps to 50 bps.

Interest on funds held for clients is expected to increase $40–$50 million, or about 11%. This is based on anticipated growth in average client funds balances of approximately 2% to 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 $30–$40 million over fiscal 2017.

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 position is in an advantageous position.

However, we expect the company’s investments in new initiatives to weigh on near-term earnings. Additionally, increasing competition from the likes of Paychex (NASDAQ:PAYX) , Equifax (NYSE:EFX), Insperity (NYSE:NSP) and TriNet Group Inc. (NYSE:TNET) is a major headwind.

Currently, ADP carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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