ADP Earnings: Healthy Bookings and Interest Income Upside Offset by Soft Hiring

Wide-moat ADP ADP posted a reasonable start to fiscal 2024, with healthy new business bookings led by demand for the professional employer organization, or PEO; and small business and compliance solutions; robust retention despite normalizing attrition; and marginal profitability uplift. Employment growth continues to decelerate as expected. However, the PEO saw a more rapid deceleration due to a skew to professional services and technology sectors that curbed hiring faster than the overall base. While we expect healthy new client demand and improving retention to support a stronger second half for the PEO, we’ve marginally trimmed our longer-term forecasts for the segment, resulting in a cut to our fair value estimate to $240, from $244. Despite a sharp selloff post-result, ADP shares screen as fairly valued.

We have tempered our outlook for the PEO segment following recent weakness—including a sequential decline of worksite employees during the quarter—and downgraded near-term guidance. However, we continue to view outsourced HR offerings as a primary long-term growth driver for ADP. Our thesis is supported by attractive industry tailwinds, including rising regulatory complexity, an increasingly dispersed workforce, and fierce competition for talent driving demand for compliance support and competitive employee benefits. As such, we forecast high-single-digit average annual revenue growth in the PEO segment over the coming decade, ahead of the mid-single-digit growth expected for the core employer services segment.

Top-line growth of 7% year on year during the first quarter was in line with our expectations, supported by new client wins, a sticky client base, and moderate employment growth. This top-line growth and continued uplift from ultra-high-margin interest income revenue supported a modest 10 basis points of adjusted operating margin expansion to 24.2%, offset by sales headcount investment and a less favorable PEO workers compensation reserve adjustment.