Automatic Data Processing Inc. (ADP) reported first-quarter fiscal 2015 earnings from continuing operations of 62 cents per share, which surpassed the Zacks Consensus Estimate of 60 cents and grew 13% year over year.
Quarter Details
Revenues increased 9% year over year to $2.57 billion but missed the Zacks Consensus Estimate of $2.65 billion. The year-over-year growth was driven by strong results from Employer Services, PEO Services and Dealer Services segments.
Employer Services revenues increased 7% year over year to $2.1 billion based on organic growth. The number of employees on clients’ payrolls in the United States grew 3.1% in the quarter on a same-store-sales basis.
PEO Services revenues rose 18% year over year to $594.9 million in the reported quarter.
In the quarter, combined worldwide new business bookings for Employer Services and PEO Services grew 11% year over year. New business bookings represent annualized recurring revenues expected from new orders.
Interest on funds held for clients grew 1.2% year over year to $90.3 million. The growth was primarily due to 7% year-over-year growth in average client funds balances to $18.7 billion offset by a 10 basis points (bps) drop in average interest yield to 1.9%.
Margins
Total expenses in the reported quarter increased 8.1% year over year to $2.14 billion, attributable to selling, general & administrative expense (up 7.5% year over year), higher operating expenses (up 8.2% year over year) and systems development & programming costs (up 10.1% year over year).
Balance Sheet
ADP exited the quarter with cash and cash equivalents were $4.4 billion compared with $3.6 billion in the previous quarter. Long-term debt was $10.9 million versus $11.5 million in the previous quarter.
Dealer Services Spinoff
On Sep 30, 2014, ADP completed the spinoff of its Dealer Services business into an independent publicly traded company known as CDK Global, Inc. The transaction is expected to provide ADP at least $700.0 million, which it plans to use for buying back shares.
Guidance
ADP expects fiscal 2015 revenues to grow in the range of 7% to 8% on a year-over-year basis. Further, the company expects diluted earnings per share to grow 12% to 14% from diluted earnings per share of $2.58 in fiscal 2014. This represents 5 to 100 bps expansion in pre-tax margin from 18.4% in fiscal 2014. Worldwide new business bookings are expected to rise approximately 8% over $1.4 billion sold in fiscal 2014.
Employer Services revenues are expected to grow approximately 6% to 7% with a pre-tax margin expansion of approximately 100 bps. The company expects pays per control will increase 2% to 3% in the year.
PEO Services revenues are expected be 13% to 15%. Pre-tax margin is expected to grow 50 bps on a year-over-year basis.
In addition, the company expects interest on funds held for clients to increase $5 to $15 million, or 1% to 4% driven by estimated growth in average client funds balances of 5% to 7% to $21.8 to $22.2 billion. However, the growth would be partially offset by decline in average interest yield to 1.7% to 1.8%.
Further, the total contribution from the client funds extended investment strategy is estimated to grow $5 to $15 million.
Going forward, the company expects tax rate of 34.6% in fiscal 2015 compared with 33.9% in fiscal 2014.
Our Take
ADP 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 macroeconomic environment and increasing competition from Paychex Inc. (PAYX) and Equifax Inc. (EFX) are the near-term headwinds.
Currently, ADP has a Zacks Rank #5 (Strong Sell). A better-ranked stock in this sector is TriNet Group, Inc. (TNET), sporting a Zacks Rank #1 (Strong Buy).
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