A stronger economy spurs ADP growth
Declining unemployment provides a tailwind to the firms operating in the payroll processing industry.
ADP operates in an industry whose growth is negatively correlated with the unemployment level. Unemployment in the United States has gone down from 7.9% in January 2013 to 7.6% in March, and has provided a steady tailwind to the firms operating in the payroll processing industry.
ADP's total revenues in the third quarter stood at $3.11 billion compared to $2.91 billion during the same period last year. Net earnings also grew by 7% to $482.7 million for the three months ended March 31, 2013, as margins increased across business segments.
Payroll processing leads, HR and dealer services support top line
ADP's payroll processing revenues grew by 7% to $2.2 billion as the company acquired new clients and increased prices for its existing clients. The company improved its client retention rate by 40 basis points year-on-year, while the number of employees on the clients' payroll also inched higher by 2.7%, contributing to the overall revenue growth. As per our estimates, payroll processing contributes about 80% to the overall ADP's stock price estimate.
HR services revenues reported stellar growth, rising 10% to $565 million. This is a result of the 7% growth in the average number of worksite employees as a number of new clients were acquired and the requirements of existing clients increased.
Dealer services added $460 million to the top line, rising 8% year-on-year as the company added new clients, improved existing clients' retention ratio and introduced new services.
As we discussed earlier, ADP has launched a completely electronic end-to-end, dealer to lender financing process solution, which is a first of its kind in the industry. The users of ADP's digital marketing solutions, Drive and PFW IntelliDealer dealer management systems (DMS) solutions, as well as hosted IP telephony and data services have grown tremendously during the third quarter.
Rising yields on Treasurys drive interest income
The company generated $112 million in interest from the funds held for clients during the third quarter. Although the interest on clients' funds is lower by about 15% year-on-year, the trend is moving upwards as the average yield on 10-year treasuries have improved to 1.95% during this quarter, as opposed to 1.71% last quarter. Average client funds balance has also improved by 7% to $23.2 billion, partially mitigating the decline in interest income. We estimate the interest income to rise steadily as the yields improve over the next few quarters.
We have updated our price estimate for ADP to $65 from $61 to incorporate the latest earnings release.
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John Stumpf acknowledges that growth has been slow, but he says he's still optimistic.
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