PEO Services Growth Propels Automatic Data Processing Earnings Higher

Image source: ADP.com

Automatic Data Processing (ADP 0.21%) delivered a solid increase in first-quarter sales and profits as the payroll and human resources titan continues to enjoy strong adoption of its co-employment services.

ADP results: The raw numbers

Data source: ADP Q1 2017 earnings press release. YOY = year over year.

What happened with ADP this quarter?

Revenue rose 7% year over year to $2.9 billion, and 8% on a constant dollar basis, while worldwide new business bookings grew 6%.

Employer Services, which includes ADP's human resources and outsourcing business segments, saw revenue increase 6% to $2.3 billion, with the number of employees on ADP clients' payrolls in the U.S. increasing 2.7%. Employer Services client revenue retention, adjusted to exclude the loss of a client in a-soon-to-be-sold business, was flat year over year. And segment margin increased 230 basis points compared to Q1 2016, to 29%, mostly thanks to improved operational efficiencies.

PEO Services, which is ADP's co-employment division, saw revenue rise 13% to $795 million, with average worksite employees paid increasing 13% to approximately 439,000. Additionally, PEO Services' segment margin improved by 90 basis points year over year to 13.5%.

All told, ADP's adjusted pre-tax earnings leaped 21% year over year to $579 million as pre-tax margin improved 230 basis points to 19.8%. And adjusted earnings per share from continuing operations -- boosted by share buybacks and a lower effective tax rate compared to Q1 2016 -- surged 26% to $0.86. 

CEO Carlos Rodriguez explained in a press release:

We are off to a solid start in fiscal 2017, and are pleased with the strategic and operational progress we achieved during the quarter. In particular, we believe efforts to align our service model to our HCM solution strategy and upgrade our clients to our strategic cloud platforms are having a positive impact on our business performance.

Looking forward

ADP reached a deal to sell its Consumer Health Spending Account (CHSA) and COBRA businesses to WageWorks for $235 million on Nov. 1, with the sale expected to close during the second quarter of fiscal 2017. In turn, ADP adjusted its fiscal 2017 sales and profit outlook to reflect the sale of these businesses, including:

• Full-year revenue growth of 7% to 8%, down from its prior guidance of 7% to 9%, compared to fiscal 2016 revenue of $11.7 billion 
• Growth in adjusted EPS from continuing operations of 11% to 13%, up from previous estimates of 10% to 12%, compared with $3.26 per share in fiscal 2016.

ADP also reiterated its forecast for worldwide new business bookings growth as well as its plans to repurchase $1 to $1.4 billion of its shares in fiscal 2017.

"Our business performed very well in the quarter, posting solid revenue growth and better than expected earnings growth," added CFO Jan Siegmund. "New business bookings were in line with expectations and flat against a difficult compare in the first quarter of fiscal 2016, and we continue to expect growth of 4% to 6% for fiscal 2017."