ADP Earnings Fail to Impress, but Strong New Business Bookings Bode Well for Future Growth

By Markets Fool.com

Continue Reading Below

Source: ADP.

Automatic Data Processing reported fiscal fourth-quarter results today. The payroll and human resources company delivered revenue and earnings that fell short of Wall Street's expectations. Shares closed down nearly 3% on the news.

Fourth-quarter revenue from continuing operations rose 5% year over year, to $2.69 billion, and increased 8% when excluding the negative impact of foreign exchange-rate fluctuations. However, that was below the $2.74 billion in revenue Wall Street was expecting.

Pretax earnings grew 7%, to $382 million, and 9% on a constant-currency basis, as pre-tax margin improved 30 basis points, to 14.2%.

Earnings per share from continuing operations, boosted by share buybacks and a lower effective tax rate, increased 15%, to $0.55. That came in below analysts' estimates for $0.59 in EPS.

Continue Reading Below

However, management stated lower earnings were mostly a result of higher-than-anticipated selling expenses resulting from new business bookings that exceeded its expectations. In fact, worldwide new business bookings, which represent annualized recurring revenues expected from new sales orders, grew an impressive 18% in the fourth quarter.

Operating segment results
ADP's employer services segment, which offers a range of human capital management and business outsourcing solutions, saw revenue grow 2% in the fourth quarter, including a four percentage point negative impact from foreign exchange. Helping to drive this growth was a 2.9% increase in the number of employees on ADP clients' payrolls in the U.S. And although client revenue retention declined about 30 basis points compared to last year's fourth quarter, it remained at a record level of 91.4% for fiscal year 2015.

Employer Services pre-tax margin also fell, decreasing 80 basis points compared to Q4 2014, mostly due to the previously mentioned higher selling expenses from better-than-anticipated new business bookings. On a full-year basis, pre-tax margin increased approximately 70 basis points, primarily due to improved operating efficiencies.

ADP's PEO services segment, which provides employment administration outsourcing solutions, increased revenues 16% in the fourth quarter, while average worksite employees paid by PEO services rose 13%, to approximately 384,000. Segment profitability also improved, with PEO pre-tax margin expanding approximately 80 basis points due to increased sales productivity and operating efficiencies.

Guidance
ADP is forecasting full-year fiscal 2016 revenue growth of 7% to 9%, with anticipated revenue growth in the Employer and PEO segments of 5% to 6% and 15% to 17%, respectively. Management believes ADP's pre-tax margin will expand 50 basis points from 18.9% in fiscal 2015, including Employer Services pre-tax margin expansion of 100 basis points, and PEO Services pre-tax margin improvement of 50 basis points.

All told, that increased profitability is expected to help drive earnings per share from continuing operations higher by 12% to 14% compared with $2.89 per share in fiscal 2015.

"ADP had another successful year, demonstrating that our strategy to drive sustainable growth is working," said CEO Carlos Rodriguez in a press release. "Our strong new business bookings growth across the ADP portfolio exceeded our expectations. This outperformance reflects the high demand for additional HCM solutions, including products that assist businesses in complying with the Affordable Care Act, and positions ADP well for long-term growth."

The article ADP Earnings Fail to Impress, but Strong New Business Bookings Bode Well for Future Growth originally appeared on Fool.com.

Joe Tenebruso has no position in any stocks mentioned. The Motley Fool recommends Automatic Data Processing. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.