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ADP stock jumps after positive fiscal '21 1st quarter results

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ROSELAND, N.J. – The success of ADP, with offices in Allentown, Scranton and Wayne, Pa., is closely tied to the size of the workforce. The more people working, the greater the opportunity for ADP to sell its suite of products, and vice-versa.

You would think that COVID-19, which has caused massive unemployment around the world, would also devastate ADP’s results.

So, when the company reported that fiscal 2021 first quarter sales were barely down, earnings were up, and it was increasing its guidance for the remainder of fiscal 2021, Wall Street took notice and ADP’s stock rose 8.65% in early Wednesday trading.

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ADP's president and chief executive officer explained: “ADP’s strong performance at the start of the 2021 fiscal year reflected the strength of our company’s unmatched scale and diversification, even as the COVID-19 pandemic remains a source of worldwide economic uncertainty.

“We are encouraged by the gradual improvement made by the global economy as seen in higher employment levels and increased business activity, and we will continue to focus on our strategic investments and position ourselves to gain additional momentum as we emerge from the current environment.”

Compared to last year’s fiscal first quarter, revenues decreased 1% to $3.5 billion. Net earnings increased 3% to $602 million, and adjusted net earnings increased 4% to $605 million. Adjusted EBIT (Earnings Before Interest and Taxes) increased 5% to $781 million, representing an adjusted EBIT margin increase to 22.5%, driven by transformation initiatives and expense management.

Diluted EPS (Earnings Per Share) increased 4% to $1.40, and adjusted diluted EPS increased 5% to $1.41.

“Our first quarter results significantly exceeded our expectations across the board, which was a result of outstanding execution through a period where employment levels among our clients still showed high single-digit declines compared to last year,” said Kathleen Winters, ADP's chief financial officer.

“We are encouraged by the strong start to the year for our new business bookings, and continue to manage costs prudently. While we still expect to face headwinds over the course of the year, we will continue to look for ways to drive strong performance in both the near and long-term.”

First Quarter Segment Results

Employer Services is the largest business segment and offers a range of global HCM (Human Capital Management) and Human Resources Outsourcing solutions. Compared to last year's first quarter, Employer Services revenues decreased 3% on a reported basis and 3% on an organic constant currency basis.

PEO Services provides employment administration outsourcing solutions. Compared to fiscal 2020’s first quarter, PEO Services revenues increased 4%. Average Worksite Employees paid by PEO Services decreased 3% to about 547,000.

Interest on Funds Held for Clients’ foremost objectives are the safety, liquidity and diversification of ADP clients’ funds. Client funds are invested in accordance with prudent and conservative investment guidelines, and most of the investment portfolio is rated AAA/AA.

Compared to last year's first quarter, interest on funds held for clients decreased 20% to $106 million while average client funds balances decreased 7% to $22.0 billion. The average interest yield on client funds declined 30 basis points to 1.9%

Fiscal 2021 Outlook

On a consolidated basis, in fiscal 2021 ADP projects a revenue of between -1% and +1%, and adjusted EBIT margin decline of 150 to 100 basis points with an adjusted effective tax rate of 23.1%. Diluted EPS should expect a decline of 4% to flat, and adjusted diluted EPS should see a decline of 7% to 3%.

The company expects an Employer Services revenue decline of 2% to flat and a margin decline of 150 to 100 basis points, and new business bookings project growth of 10% to 20%. Employer Services client revenue retention expects a decline of 50 basis points to flat and a decrease in pays per control of 4% to 3%.

PEO Services project revenue to be flat to up 3%, and revenue, excluding zero-margin benefits, of between -1% and +1%. PEO Services Average Worksite Employee count expects between -1% and +1% change.

Interest on funds held for clients is expected to be in the range of $400 to $410 million based on an anticipated decline in client funds balances of about 3% to 1% from balances of $26.0 billion in fiscal 2020, and an average yield which is anticipated to decrease about 50 basis points to 1.6% as compared to 2.1% in fiscal 2020. Total contribution from the client funds extended investment strategy is projected to be $435 to $445 million.

ADP (Nasdaq: ADP) provides human capital management solutions including cloud-based human capital management (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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