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ADP's 3Q Earnings Beat By a Penny

Zacks Equity Research

Automatic Data Processing Inc. (ADP) reported third quarter 2013 earnings from continuing operations of 99 cents per share, beating the Zacks Consensus Estimate by a penny. Reported earnings per share increased 8.8% from the year-ago quarter.

Quarter Details

Revenues increased 7% year over year to $3.11 billion and came in line with the Zacks Consensus Estimate. Organic growth was 6% in the quarter. The year-over-year revenue growth was driven by strong performance of the Employer Services, PEO Services and Dealer Services segments.

Employer Services revenues increased 7% year over year (6% organically) to $2.21 billion. The number of employees on clients’ payrolls in the United States grew 2.7% in the quarter on a same-store-sales basis.

PEO Services revenue increased 10% year over year to $565.5 million in the reported quarter. Dealer Services revenue increased 8% on a year over year basis to $460.5 million.

Interest on funds held for clients declined 16% year over year to $112.0 million. The decline was primarily due to a 50 basis points (bps) drop in the average interest yield to 1.9%, which was partially offset by a 7% increase in average client funds balances to $23.2 billion.

Total expenses in the reported quarter increased 7.2% year over year to $2.40 billion, attributable to higher operating expenses (up 7.7% year over year), selling, general & administrative expense (up 5.6% year over year) and systems development & programming costs (up 14.3% year over year).

The company reported pre-tax earnings from continuing operations of $724.8 million, up 6% from the year-ago quarter. Net earnings from continuing operations increased 7% from the year-ago quarter to $482.7 million.

The company exited the quarter with cash and cash equivalents (including short-term marketable securities) of $1.68 billion compared with $1.43 billion in the previous quarter. Long-term debt was $15.3 million.


For fiscal 2013, ADP revised its revenue growth outlook from 5.0%-7.0% to 6%-7% on a year-over-year basis. Earnings growth estimates were also revised from a range of 5.0%-7.0% to 6%-7%.

Employer Services revenues are expected to grow approximately 7% with a pre-tax margin expansion of approximately 50 bps. PEO Services revenue is forecast to improve 12.0%. Pre-tax margin is expected to grow slightly on a year-over-year basis. The company expects Dealer Services revenue to increase in the 8.0%-9.0% range with a pre-tax margin expansion in excess of 100 bps.

The company expects interest on funds held for clients to decline 15% year over year to approximately $420 million.


The company reported better-than-expected results on the back of improved execution and higher client retention. However, volatile macro economic environment and increasing competition from Paychex Inc. (PAYX), Insperity Inc. (NSP) and Equifax Inc (EFX) are the near-term headwinds.

Currently, ADP has a Zacks Rank #2 (Buy).

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