ADP Gets Back to Work As Earnings Growth Defies Lower Revenue

Image: ADP.

The U.S. economic recovery has lifted the prospects for many American businesses and their workers, and that in turn has made it more important than ever for companies to make sure they have the right people working for them and treat their valued employees well. Automatic Data Processing has long billed itself as a provider of human capital management solutions aimed at helping employers manage their responsibilities to their workers efficiently and effectively. Coming into Thursday morning's fiscal third-quarter financial report, ADP investors had mixed feelings about the future, anticipating declines in revenue that would nevertheless result in higher profits. For its part, ADP largely delivered on that front, managing to boost its earnings and keep sales declines in check better than most had expected. Let's take a closer look at how ADP did over the past quarter and what it sees ahead for the future.

ADP makes more from lessAutomatic Data Processing's fiscal third-quarter results reflected some changes that the business has gone through over the past year. Revenue fell to $3.03 billion, down from the $3.32 billion that the company reported last year. But ADP's updated numbers reflect the impact of its spinoff of CDK Global last October, and after taking those sales into consideration, ADP's grew its revenue from continuing operations by more than 7%. Similarly, although net income fell 6% to $489.6 million, adjusted earnings from continuing operations climbed by a sixth to $1.05 per share.

Digging into ADP's numbers more deeply, the company's key Employer Services division saw sales climb 5%, even after incorporating a three percentage point hit from unfavorable currency moves. Client worker counts climbed 3% on a comparable basis, showing the strength of the labor market, and improved productivity and larger scale helped push pre-tax margins up almost two percentage points. PEO services, which includes ADP's employment administration outsourcing, saw sales soar 15%, with a 13% jump in the average number of worksite employees paid through the division compared to a year ago.

CEO Carlos Rodriguez was pleased with ADP's results, noting how the company "continues to help our clients maximize their investments in their people." Rodriguez attributed most of the company's success to its own employee base, with teams around the world helping to promote its overall strategy.

Image: ADP.

What's next for ADP?Looking forward, ADP had mixed views on its future results. The strong dollar will likely continue to hurt ADP's revenue, and according to the company's new forecast, ADP expects sales growth of about 7%, with two percentage points of headwinds from poor currency movements. Yet ADP said that it thinks it will see growth of 14% in earnings per share from continuing operations, pegging toward the high end of its previous 12% to 14% range as the company has made great strides in its goal to expand margins.

One interesting side note that most investors haven't paid much attention to lately is ADP's ability to collect interest on funds held for its clients. Since interest rates have been so low, the contribution of this line item to ADP's overall results has been minimal at best for a long time. Yet as speculation grows that the Federal Reserve might finally move to lift rates, some have looked for an increased contribution from that line item. For its part, though, ADP believes that rates likely won't rise until after its fiscal year ends, and so it is building in only a $5 million increase in interest on those funds for the fiscal year.

ADP shares didn't react dramatically to the news, falling roughly in line with the overall market halfway through the day following the announcement. In the long run, though, ADP should continue to benefit from improving economic conditions, and the essentially free money on interest for client assets could build in future years once rates start working higher. For now, ADP appears to be exactly where it should be to take advantage of a better labor environment going forward.

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