ADP Automatic Data Processing Inc

Automatic Data Processing Inc. (ADP) reported first quarter 2013 earnings from continuing operations of 62 cents per share, which came in line with the Zacks Consensus Estimate. Earnings increased 1.6% year over year due to lesser number of outstanding shares.

Quarter Details

Revenues increased 5.0% year over year to $2.64 billion, which slivered past the Zacks Consensus Estimate of $2.63 billion. Organic growth was 3% in the quarter. The better-than-expected revenue was driven by strong new business sales expansion in the Employer Services and PEO Services segments.

Employer Services revenue increased 6% year over year (5% organically) to $1.82 billion. The number of employees on clients' payrolls in the United States grew 3.3% in the quarter on a same-store-sales basis.

PEO Services revenue expanded 13% year over year to $451.9 million in the reported quarter. Dealer Services revenue increased 9% year over year to $439.8 million.

Interest on funds held for clients declined 12.4% year over year to $106.8 million. The decline was primarily due to a 60 basis points (bps) drop in the average interest yield to 2.7%, which was partially offset by a 6% increase in average client funds balances to $16.1 billion.

Total expenses in the reported quarter increased 5.3% year over year to $2.20 billion, attributable to higher operating expenses (up 6% year over year), selling, general & administrative expense (up 4.2% year over year) and systems development & programming costs (up 5.7% year over year).

The company reported pre-tax earnings of $465.6 million, up 2.2% from the year-ago quarter. However, pre-tax margin decreased 50 bps year over year to 17.7%, due to a 60 bps fall in margins from Employer Services, which offset the 110 bps increase in PEO Services margin and 150 bps increase in Dealer Services margin.

Net income from continuing operations increased 0.7% year over year to $302.5 million. Net margin decreased by 40 bps to 11.5% in the quarter.

ADP exited the quarter with cash and cash equivalents (including short-term marketable securities) of $1.7 billion, compared with $1.58 billion in the previous quarter. Long-term debt decreased to $16.3 million in the quarter from $16.8 million in the prior quarter. ADP purchased 3.7 million shares for $215 million during the reported quarter.

Guidance

For fiscal 2013, ADP expects total revenue to increase in the range of 5.0%-7.0% year over year. Earnings are expected to increase 5.0%-7.0% over the year-ago level of $2.72 per share, excluding gains from the sale of assets.

Employer Services revenue is expected to grow approximately 6%-7% with a pre-tax margin expansion of approximately 50 bps. PEO Services revenue is forecasted to improve 13.0%-14.0%. Pre-tax margin is expected to grow slightly on a year-over-year basis. ADP expects Dealer Services revenue to increase in the 7.0%-9.0% range with a pre-tax margin expansion of at least 100 bps.

The company expects interest on funds held for clients to decline $70 million-$75 million or 14%-15% from prior year to $420 to $425 million.

Our Recommendation

We believe that ADP will continue to outperform the broader market based on strong new business sales, diversified product portfolio, improving customer retention, accretive acquisitions, strong balance sheet and shareholder-friendly programs (aggressive share buybacks, dividend) over the long term. However, increasing competition from Paychex Inc. (PAYX) and a gloomy macroeconomic condition are the major headwinds in the near term.

We have a Neutral recommendation on ADP over the long term. Currently, ADP has a Zacks #3 Rank, which implies a Hold rating on a short-term basis.

 
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