In its first quarter of fiscal 2020, human capital management giant Automatic Data Processing (NASDAQ:ADP) endured a slightly higher-than-expected impact from foreign currency, while still managing to meet organic revenue growth goals. The company also reaffirmed its initial outlook for the full fiscal year in results released on Wednesday. As we review the quarter below, note that all comparative numbers refer to those of the prior-year quarter.

ADP: The essential numbers

Metric Q1 2020 Q1 2019 Change
Revenue $3.50 billion $3.31 billion 5.7%
Net income $582.4 million $505.4 million 15.2%
Diluted earnings per share $1.34 $1.15 16.5%

Data source: Automatic Data Processing. 

Highlights from the last three months

  • Quarterly reported revenue of 5.7% fell below ADP's favored 2020 pace of 6% to 7% year-over-year growth. Management attributed this to a "slightly greater amount of foreign-exchange unfavorability" than was previously anticipated. Organic revenue expansion of 6%, however, met the company's core growth expectation. 
  • Employer services revenue improved by 4% on a reported basis and by 5% in constant currency terms, while new bookings rose by 5%. "Pays per control," which measures employees on ADP's client's payrolls on a same-store basis, increased by 2.4%.
  • PEO (Professional Employer Organization) services revenue expanded by a healthy 8%, or 7% when adjusting for zero-margin benefits pass-through revenue. The PEO segment also saw growth in its customer base, as average worksite employees paid by ADP's PEO increased by 7%, to roughly 563,000.
  • Average client funds balances expanded by 7% to $23.7 billion, while the average interest yield ADP enjoyed on these balances crept up by 10 basis points to 2.3%. As a result of the larger base and higher yield, ADP's interest on funds held for clients jumped by 13% to $134 million.
  • Adjusted EBIT (Earnings Before Interest and Taxes) improved by 8% to $745 million, as EBIT margin (EBIT as a percent of revenue) rose by 60 basis points to 21.3%. Management attributed the higher profitability to the execution of ongoing transformation initiatives, which I discussed last quarter, and higher operational efficiency.
  • The organization repurchased approximately $310 million of its common stock in the first quarter.
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Image source: Getty Images.

Management's comments on product innovation

During ADP's earnings conference call, CEO Carlos Rodriguez continued to highlight for investors the company's efforts to push product and services innovation in order to retain and grow its client base. In the following excerpt, Rodriguez discusses data insights ADP is able to provide to help customers optimize their businesses, as well as improvements in its core payroll processing technology:

Customers are using our compensation and HR benchmark data to make substantial changes to their business. For example, one of our clients was able to leverage our turnover benchmark data to identify opportunities for improvement, and ultimately to reduce their turnover by 20%, while another saw its front-line managers use our executive and Manager Insights mobile solution to help reduce its overtime cost by 6%. These equate to real multimillion-dollar operational savings that are being enabled by ADP's data and products.

Also, to enhance the efficiency of our implementation organization, we are designing our Next Gen payroll engine to automatically recognize, convert, and classify different formats and inputs from prior payrolls into payroll policies. We believe that this will give us an advantage when we onboard new clients, since it will enable the automation of various elements of the implementation process and allow us to share best practices with our clients.

Fiscal 2020 outlook 

Automatic Data left the major components of its fiscal 2020 earnings outlook unchanged on Wednesday. The company still expects full-year reported growth of 6% to 7% over last year's $16.75 billion in revenue, despite anticipated foreign currency volatility. Management also continues to anticipate an expansion of 100 to 125 basis points in full-year EBIT margin, versus last year's margin of 22.3%. Finally, investors should expect diluted earnings per share (EPS) growth of 12% to 14% against the $5.45 in diluted EPS that ADP booked last year. Investors in this human resources stock should note that the EPS projection includes roughly $30 million in estimated pre-tax charges for the company's ongoing transformation initiatives; this number may shift higher or lower as the year progresses.