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Automatic Data Processing Inc. (ADP - Analyst Report) reported third quarter 2013 earnings from continuing operations of 99 cents per share, beating the Zacks Consensus Estimate by a penny. Reported earnings per share increased 8.8% from the year-ago quarter.

Quarter Details

Revenues increased 7% year over year to $3.11 billion and came in line with the Zacks Consensus Estimate. Organic growth was 6% in the quarter. The year-over-year revenue growth was driven by strong performance of the Employer Services, PEO Services and Dealer Services segments.

Employer Services revenues increased 7% year over year (6% organically) to $2.21 billion. The number of employees on clients’ payrolls in the United States grew 2.7% in the quarter on a same-store-sales basis.

PEO Services revenue increased 10% year over year to $565.5 million in the reported quarter. Dealer Services revenue increased 8% on a year over year basis to $460.5 million.

Interest on funds held for clients declined 16% year over year to $112.0 million. The decline was primarily due to a 50 basis points (bps) drop in the average interest yield to 1.9%, which was partially offset by a 7% increase in average client funds balances to $23.2 billion.

Total expenses in the reported quarter increased 7.2% year over year to $2.40 billion, attributable to higher operating expenses (up 7.7% year over year), selling, general & administrative expense (up 5.6% year over year) and systems development & programming costs (up 14.3% year over year).

The company reported pre-tax earnings from continuing operations of $724.8 million, up 6% from the year-ago quarter. Net earnings from continuing operations increased 7% from the year-ago quarter to $482.7 million.

The company exited the quarter with cash and cash equivalents (including short-term marketable securities) of $1.68 billion compared with $1.43 billion in the previous quarter. Long-term debt was $15.3 million.

Guidance

For fiscal 2013, ADP revised its revenue growth outlook from 5.0%-7.0% to 6%-7% on a year-over-year basis. Earnings growth estimates were also revised from a range of 5.0%-7.0% to 6%-7%.

Employer Services revenues are expected to grow approximately 7% with a pre-tax margin expansion of approximately 50 bps. PEO Services revenue is forecast to improve 12.0%. Pre-tax margin is expected to grow slightly on a year-over-year basis. The company expects Dealer Services revenue to increase in the 8.0%-9.0% range with a pre-tax margin expansion in excess of 100 bps.

The company expects interest on funds held for clients to decline 15% year over year to approximately $420 million.

Recommendation

The company reported better-than-expected results on the back of improved execution and higher client retention. However, volatile macro economic environment and increasing competition from Paychex Inc. (PAYX - Snapshot Report), Insperity Inc. (NSP - Snapshot Report) and Equifax Inc (EFX - Analyst Report) are the near-term headwinds.

Currently, ADP has a Zacks Rank #2 (Buy).

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