Automatic Data Processing Inc. ADP reported third-quarter fiscal earnings of 2015 $1.04 per share, surpassing the Zacks Consensus Estimate of $1.02. Earnings also increased 16% year over year.
Quarter Details
Revenues of $3 billion came in line with the Zacks Consensus Estimate million but grew 7% year over year backed by strength in the human capital management business.
Employer Services revenues increased 5% year over year to $2,474.7 million based on organic growth.
PEO Services revenues rose 15% year over year to $748.5 million.
In the quarter, combined worldwide new business bookings for the company grew 6% year over year. New business bookings represent annualized recurring revenues expected from new orders.
Interest on funds held for clients grew 1% year over year to $101 million. The growth was primarily due to 4% year-over-year growth in average client funds balances to $26.2 billion offset by a drop in average interest yield to 1.5%.
Total expenses in the reported quarter increased 5.8% year over year to $2.3 billion, attributable to higher selling, general & administrative expense, operating expenses and systems development & programming costs.
Balance Sheet
Automatic Data Processing exited the quarter with cash and cash equivalents of $1.8 billion compared with $3.6 billion as on Jun 30, 2014. Long-term debt was $9.7 million versus $11.5 million as on Jun 30, 2014.
Guidance
For fiscal 2015, the company expects revenues to grow in the range of 7% year over year. Further, the company expects earnings per share to grow 14% from $2.58 per share in fiscal 2014.
This represents 75 basis points (bps) expansion in pre-tax margin from 18.4% in fiscal 2014. Worldwide new business bookings are expected to rise approximately 10% from $1.4 billion sold in fiscal 2014.
Employer Services revenues are expected to grow approximately 5% year over year. This represents a pre-tax margin expansion of approximately 100 bps. The company expects pay per control to increase 3% in the year.
PEO Services revenues are expected to increase 16%. Pre-tax margin is expected to grow 100 bps year over year.
In addition, the company expects interest on funds held for clients to increase $5 million or 1% driven by estimated growth in average client funds balances of 5% to $21.7 billion. However, the growth would be partially offset due to 10 bps decline in average interest yield to 1.7%.
Further, the total contribution from client funds extended investment strategy is estimated to grow $5 million.
Our Take
We believe that the Dealer Services spin-off will help the company focus more on its relatively fast growing human capital management business. 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, a volatile macroeconomic environment and increasing competition from Paychex Inc. PAYX and Equifax Inc. EFX are the near-term headwinds.
Currently, Automatic Data Processing has a Zacks Rank #3 (Hold). A better-ranked stock in this sector is Convergys Corp. CVG, sporting a Zacks Rank #1 (Strong Buy).
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