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ROSELAND, N.J. – Imagine this scenario. Your company is highly regarded. It just reported its fiscal third quarter results and revenues and earnings exceeded Wall Street expectations, like they have in the first two quarters.
What happens? The company’s (ADP) stock drops 1.3% and approaches a ten-month low in premarket trading. So far in 2023, ADP stock has fallen 11.4% while the S&P 500 has risen 6.1%.
President and Chief Executive Officer, Maria Black, could be forgiven if she was puzzled and uncertain. She was not. In a statement the CEO said, “Despite the ongoing macroeconomic uncertainty, we again delivered strong revenue growth, margin expansion, and EPS growth. Our innovative HCM solutions continue to meet and exceed the expectations of our clients and prospects, and we are proud to provide the trusted expertise they need to navigate the changing environment.”
ADP, the human capital management company with offices in Allentown, Scranton and Wayne, Pa., also raised its full year guidance for adjusted earnings per share (EPS) although it forecast revenue growth to remain steady at 8% to 9%.
Given the company’s excellent record year after year, it would appear that its recent difficulties with its stock price are a result of it being overpriced during the 2022 stock run-up.
Third Quarter Fiscal 2023 Consolidated Results
Compared to last year’s third quarter, ADP reported revenues increased 9% to $4.9 billion and 10% on an organic constant currency basis. Following suit, net earnings increased 12% to $1.0 billion, and adjusted net earnings increased 13% to $1.0 billion.
Completing the impressive quarter, diluted EPS increased 14% to $2.51, and adjusted diluted EPS increased 14% to $2.52.
“Our impressive third quarter results are a testament to the overall strength and consistency of our business and the dedication of our associates,” commented Black.
Third Quarter Segment Results
Employer Services – Employer Services is ADP’s largest segment. It offers a comprehensive range of global HCM (Human Capital Management) and Human Resources Outsourcing solutions.
Compared to last year’s third quarter, the company reported Employer Services revenues increased 11% on a reported basis and 12% on an organic constant currency basis. U.S. pays per control increased 4% while the segment margin increased 80 basis points.
PEO Services – Professional Employer Organization Services provides comprehensive employment administration outsourcing solutions.
Compared to last year’s third quarter, ADP reported PEO Services revenues increased 5%. Excluding zero-margin benefits pass-throughs, PEO Services revenues increased 3%. Average worksite employees paid by PEO Services increased 3% to about 710,000. Segment margin increased 140 basis points.
Interest on Funds Held for Clients – According to ADP, the company’s client funds are invested in accordance with ADP’s conservative investment guidelines, and most of the investment portfolio is rated AAA/AA.
Compared to last year’s third quarter, Interest on Funds Held for Clients increased 111% to $249 million. Average client funds balances increased 3% to $39.2 billion. The average interest yield on client funds increased 130 basis points to 2.5%
Fiscal 2023 Outlook
“With continued healthy Employer Services new business bookings, client revenue retention, and U.S. pays per control growth in the third quarter, we are positioned for strong overall fiscal 2023 results,” said Don McGuire, Chief Financial Officer, ADP.
For fiscal 2023, ADP expects revenue growth of 8% to 9%, and adjusted EBIT margin expansion of 125 to 150 basis points. Diluted EPS growth of 16% to 17% is projected with adjusted diluted EPS growth of 16% to 17%.
ADP expects Employer Services revenue growth of about 9% and margin expansion of about 200 basis points. Employer Services new business bookings growth of 6% to 9% s is projected while client revenue retention should decrease 10 to 20 basis points. The Increase in U.S. pays per control is anticipated to be about 4%.
PEO Services revenue growth is projected to be about 8%. PEO Services revenue, excluding zero-margin benefits pass-throughs, is expected to grow 7% to 8% and margin expansion should be 50 to 75 basis points while average worksite employee count growth will be about 6%.
Interest on Funds Held for Clients should be $790 to $800 million. According to ADP, this is based on anticipated growth in client fund balances of 4% to 5% and an average yield of 2.4%. The total contribution from the client funds extended investment strategy is anticipated to be $710 to $720 million.
“As we look ahead,” McGuire noted, “we remain focused on driving profitable growth as we invest in our business to accelerate our progress on our modernization journey and to capitalize on our substantial secular growth opportunity.”
ADP (Nasdaq: ADP) is a global company providing human capital management solutions including cloud-based HCM solutions that unite HR, payroll, talent, time, tax and benefits administration, as well as business outsourcing services, analytics and compliance expertise.
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