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Tranformation Initiatives Help Lift Automatic Data Processing Earnings

Automatic Data Processing (NASDAQ: ADP) announced fiscal second-quarter 2019 results on Wednesday, highlighting solid top-line growth and continued margin expansion, thanks to its recent business-transformation initiatives.

Shares of the human-capital-management software specialist have gained nearly 6% since then, so let's dig deeper to see how ADP finished the first half, as well as what investors should be watching in the months ahead.

IMAGE SOURCE: GETTY IMAGES

Automatic Data Processing results: The raw numbers

Metric

Fiscal Q2 2019*

Fiscal Q2 2018

Growth (YOY)

Revenue

$3.506 billion

$3.238 billion

8.3%

GAAP net income

$558.2 million

$670.4 million

(16.7%)

GAAP earnings per share (diluted)

$1.27

$1.51

(15.9%)

DATA SOURCE: AUTOMATIC DATA PROCESSING. *FOR THE QUARTER ENDED DECEMBER 31, 2018. YOY = year over year. GAAP = generally accepted accounting principles.

What happened with ADP this quarter?

  • Adjusted for items like business-transformation costs and a one-time tax benefit related to the Tax Cuts and Jobs Act in last year's fiscal Q2, ADP's (non-GAAP) earnings climbed 29%, to $587 million, and increased 30% on a per-share basis, to $1.34.
  • By comparison, most analysts were modeling adjusted earnings of only $1.18 per share on revenue of $3.44 billion.
  • Employer services segment bookings rose 1%, and segment revenue grew 7% year over year, to $2.45 billion.
  • Professional employer organizations (PEO) services revenue grew 12%, to $1.058 billion.
  • Average worksite employees paid by PEO services increased 9%, to 545,000, up from 528,000 last quarter.
  • Average client funds balances rose 5%, to $23.6 billion, while the interest on funds held for clients climbed 21%, to $129 million.

What management had to say

"Technology and service are the core components to our success, and our focused investments in our strategic platforms are having the desired effect," stated ADP CEO Carlos Rodriguez. "We are especially pleased with the progress of our transformation initiatives, which are supporting our commitment to stay at the forefront of the HCM industry and maximize value for all of our stakeholders."

"The continued strong execution of our strategy had a positive effect on our margins this quarter," added ADP CFO Jan Siegmund. "Through our ongoing transformation initiatives we have been able to better allocate resources where we see the greatest opportunity, while also realizing net efficiencies in our overall cost base."

Looking ahead

Given its relative outperformance through the first half of the year, ADP reaffirmed its prior outlook for full fiscal-year 2019 revenue to increase 6% to 7%, but also increased its outlook for full fiscal-year 2019 adjusted earnings to climb 17% to 19% (up from 15% to 17% previously).

In the end, this was as strong a quarter as any ADP investor could have asked for. And with shares still trading well off their 52-week highs following the broader market's pullback in December, the stock is responding in kind this week.

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Steve Symington has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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