ADP® (NASDAQ:ADP), a leading global provider of Human Capital Management (HCM) solutions, today announced its first quarter fiscal 2017 financial results, and provided an update to its fiscal 2017 outlook.
Compared to last year’s first quarter, revenues grew 7% to $2.9 billion, 8% on a constant dollar basis. Net earnings from continuing operations grew 9% to $369 million, 8% on a constant dollar basis. Adjusted EBIT grew 21% to $579 million, 20% on a constant dollar basis. Adjusted EBIT margin increased about 230 basis points in the quarter to 19.8% driven by operational efficiencies and a slower growth in our selling expenses. Diluted earnings per share from continuing operations increased to $0.81, representing growth of 13%, 11% on a constant dollar basis and included a $0.03 tax benefit related to the adoption of new stock-based compensation accounting guidance. Adjusted diluted earnings per share from continuing operations increased 26% to $0.86, 26% on a constant dollar basis. Diluted earnings per share growth reflects a lower effective tax rate and fewer shares outstanding compared with last year’s first quarter.
Constant dollar, adjusted EBIT, adjusted EBIT margin and adjusted diluted earnings per share are non-GAAP financial measures. For ADP’s definition of adjusted EBIT, see the paragraph “Non-GAAP Financial Information” at the end of this release. Please refer to the accompanying financial tables for a reconciliation of non-GAAP financial measures to their comparable GAAP measures.
“We are off to a solid start in fiscal 2017, and are pleased with the strategic and operational progress we achieved during the quarter,” said Carlos Rodriguez, president and chief executive officer, ADP. “In particular, we believe efforts to align our service model to our HCM solution strategy and upgrade our clients to our strategic cloud platforms are having a positive impact on our business performance.”
“Our business performed very well in the quarter posting solid revenue growth and better than expected earnings growth,” said Jan Siegmund, chief financial officer, ADP. “New business bookings were in line with expectations and flat against a difficult compare in the first quarter of fiscal 2016 and we continue to expect growth of 4% to 6% for fiscal 2017.”
First Quarter 2017 Segment Results
Employer Services – Employer Services offers a comprehensive range of HCM and human resources outsourcing solutions.
Employer Services revenues increased 6% compared to last year’s first quarter, 6% on a constant dollar basis.
The number of employees on ADP clients’ payrolls in the United States increased 2.7% for the first quarter when measured on a same-store-sales basis for a subset of clients ranging from small to large businesses.
Employer Services client revenue retention declined 100 basis points compared to last year’s first quarter which included a 100 basis point decline related to a single client loss within our CHSA business.
Employer Services segment margin increased approximately 230 basis points compared to last year’s first quarter. This increase was primarily driven by operational efficiencies and a slower growth in our selling expenses.
PEO Services – PEO Services provides comprehensive employment administration outsourcing solutions through a co-employment relationship.
PEO Services revenues increased 13% compared to last year’s first quarter.
PEO Services segment margin increased approximately 90 basis points compared to last year’s first quarter, primarily driven by operational efficiencies.
Average worksite employees paid by PEO Services increased 13% for the quarter to approximately 439,000.
Interest on Funds Held for Clients – The safety, liquidity and diversification of ADP clients’ funds are the foremost objectives of the company’s investment strategy. Client funds are invested in accordance with ADP’s prudent and conservative investment guidelines and the credit quality of the investment portfolio is predominantly AAA/AA.
For the first quarter, interest on funds held for clients increased 2% to $89 million from $88 million a year ago.
Average client funds balances increased 4% in the first quarter to $20.0 billion compared to $19.4 billion a year ago.
The average interest yield on client funds was 1.8% which was flat compared to a year ago.
Notable Subsequent Events
On November 1, 2016, ADP signed an agreement to sell its CHSA and COBRA businesses to WageWorks for $235 million and anticipates an estimated pre-tax gain of approximately $200 million. The results of operations of these businesses were included in the Employer Services segment during the quarter and our fiscal 2017 outlook has been adjusted accordingly. The Company expects the sale to be completed during the second quarter of fiscal 2017, subject to normal and customary closing conditions.
Fiscal 2017 Outlook
Certain components of ADP’s fiscal 2017 outlook and related growth comparisons exclude the impact of the following items and are discussed on an adjusted basis where applicable. Please refer to the accompanying financial tables for a reconciliation of these adjusted amounts to their closest comparable GAAP measure.
Fiscal 2016 first quarter pre-tax gain on sale of the AdvancedMD business of $29 million
Fiscal 2016 second quarter pre-tax gain on sale of a building of $14 million
Fiscal 2016 fourth quarter pre-tax workforce optimization charge of $48 million
Fiscal 2017 pre-tax restructuring charges of approximately $90 million, $40 million of which occurred in the first quarter, with the remaining $50 million expected to occur in the latter part of the fiscal year
Anticipated Fiscal 2017 second quarter pre-tax gain on sale of the CHSA and COBRA businesses of approximately $200 million
Subsequent to the disposition of our CHSA and COBRA businesses, ADP now forecasts full year revenue growth of 7% to 8% compared to our prior forecast of 7% to 9% growth. Foreign currency translation is not expected to have a significant impact on revenue growth in fiscal 2017. This revenue forecast still assumes growth in worldwide new business bookings of 4% to 6% compared to the $1.75 billion sold in fiscal 2016.
Reflecting the tax benefit received in the first quarter, ADP now anticipates an adjusted effective tax rate of 32.7% compared to the prior forecast of 33.3%. Subsequent to the disposition of our CHSA and COBRA businesses and the associated gain on sale, ADP now forecasts full year diluted earnings per share from continuing operations to grow 15% to 17% compared to our prior forecast of 6% to 8% growth and adjusted diluted earnings per share growth of 11% to 13% compared to our prior forecast of 10% to 12% growth. This earnings growth forecast now assumes an adjusted EBIT margin expansion of about 50 basis points compared to our prior forecast of 25 to 50 basis points. This forecast continues to assume fiscal 2017 share repurchases of $1.0 to $1.4 billion funded by existing balance sheet cash.
Reportable Segments Fiscal 2017 Forecast
For the Employer Services segment, ADP still anticipates revenue growth of approximately 4% to 5% with pretax margin expansion of about 50 basis points.
ADP still expects pays per control to increase 2.5% for the year.
For the PEO Services segment, ADP continues to anticipate 14% to 16% revenue growth. ADP now expects PEO Services segment margin expansion of about 75 basis points compared to our prior forecast of 50 to 75 basis points.
Client Funds Extended Investment Strategy Fiscal 2017 Forecast
The interest assumptions in our forecasts are based on Fed Funds futures contracts and forward yield curves as of October 31, 2016. The Fed Funds futures contracts used in the client short and corporate cash interest income forecasts assumes a moderate increase in the Fed Funds near the second half of the fiscal year. The three-and-a-half and five-year U.S. government agency rates based on the forward yield curves as of October 31, 2016 were used to forecast new purchase rates for the client and corporate extended, and client long portfolios, respectively.
Interest on funds held for clients is expected to increase $5 to $10 million, or 2% to 3%, compared to the prior forecast of up to $5 million, or about 2%. This is based on anticipated growth in average client funds balances of 2% to 4% from $22.4 billion in fiscal 2016 and an average yield which is anticipated to be about flat at 1.7% compared to the fiscal 2016 average yield.
The total contribution from the client funds extended investment strategy is now expected to be up $5 million compared to our prior forecast of about flat compared with a year ago.
Investor Webcast Today
ADP will host a conference call for financial analysts today, Wednesday, November 2, 2016 at 8:30 a.m. EDT. The conference call will be webcast live on ADP’s website at investors.adp.com and will be available for replay following the call. A slide presentation will be available shortly before the webcast.
Supplemental financial information including schedules of quarterly and full year reportable segment revenues and earnings for fiscal years 2015 and 2016, as well as details of the first quarter fiscal 2017 results from the client funds extended investment strategy, are posted to ADP’s website at investors.adp.com. ADP news releases, current financial information, SEC filings and Investor Relations presentations are accessible at the same website.
About ADP (NASDAQ:ADP)
Powerful technology plus a human touch. Companies of all types and sizes around the world rely on ADP’s cloud software and expert insights to help unlock the potential of their people. HR. Talent. Benefits. Payroll. Compliance. Working together to build a better workforce. For more information, visit ADP.com.