PEO Services Growth Fuels Automatic Data Processing Earnings

Image Source: ADP.com.

Automatic Data Processing (ADP -1.33%) reported 2016 fiscal third-quarter results on April 28. The payroll and human capital management company continues to benefit from the trend toward outsourced HR services.

ADP results: The raw numbers

Data Source: ADP Q3 2016 earnings press release.

What happened with ADP this quarter?

• Revenue grew 7% year over year to $3.2 billion, and 9% when excluding the effects of foreign exchange movements. Worldwide new business bookings rose 13%.

• ADP's adjusted pre-tax earnings increased 9% to $806 million -- and 10% on a constant-dollar basis -- as pre-tax margin improved 40 basis points to 24.8%.

• EPS from continuing operations jumped 14% to $1.17, aided by share buybacks and a lower effective tax rate.

Segment results
Employer services revenue increased 5% (7% on a constant-dollar basis) to $2.6 billion, with the number of employees on ADP clients' payrolls in the U.S. increasing 2.5%. Employer services client revenue retention and segment margin declined 30 and 40 basis points, respectively, compared with the third quarter of fiscal 2015.

PEO [professional employer organization] services revenue jumped 16% to $866 million, with average worksite employees paid increasing 14% to approximately 422,000. In addition, PEO services' segment margin increased by 50 basis points year over year, mostly because of productivity improvements.

What management had to say
"ADP's results in the third quarter were solid and reflect investments we've made to support our clients through the first year of [Affordable Care Act] compliance reporting," said CFO Jan Siegmund in a press release. "On a year-to-date basis, we have made substantial investments in operational resources and additional selling expenses, and have also continued our shareholder friendly actions, returning over $1.7 billion in cash through dividends and share repurchases."

Looking forward
ADP reiterated its guidance for full-year 2016 bookings growth of 12% over $1.6 billion sold in fiscal 2015. The company also continues to expect revenue to increase about 7%, and 9% on a constant-dollar basis.

In addition, ADP narrowed its earnings outlook, with management now anticipating adjusted EPS growth of about 12% (versus its prior forecast of 11% to 13%) and 13% on a constant-dollar basis, compared with its previous range of 12% to 14%. 

"We are seeing continued traction for our technology solutions and our robust service offerings, as a growing number of clients adopt new applications or chose our higher-touch HR outsourcing models," added CEO Carlos Rodriguez. "While sales of additional human capital management modules that assist with the Affordable Care Act, or ACA, compliance continue to boost our performance, we are especially pleased to have seen balanced contributions to growth from across our HCM [human capital management] portfolio."