Automatic Data Processing, the Boring Side of Software?

The HCM (Human Capital Management) leader is a steady quality compounder

Automatic Data Processing, commonly known as ADP, is a global provider of Human Capital Management (HCM) solutions and business outsourcing services. With a focus on leveraging technology to streamline HR processes and improve workforce efficiency, ADP serves businesses of all sizes across various industries worldwide (even if 9/10 of its revenues are in the US).

The company is also known for the ADP reports on employement. It is able to do it due to their huge market share and the quantity of data it is gathering.

Despite its size, ADP is often overlooked by investors. However its qualities are very interesting. In this article, we will describe the company, its business, its competitors. We will then analyze its metrics, the risks / opportunities and its fair value.

If you are interested to discover 3 companies in the HCM industry at a glance, you can find 3 one pagers (ADP, Paycom and Paychex) here.

Company overview

The company is divided into several activities:

• Employer services (2/3 of the revenue). In this part, we find the software revenue and different kind of services

  • HCM solutions for small businesses (<50 employees) - 15% of the revenue / 750k run clients

  • HCM solutions for major accounts (50 to 1,000 employees) - 15% of the revenue / 75k clients

  • HCM solutions for national accounts (1,000+ employees) - 7% of the revenue / 2.5k clients

  • HCM solutions for internation accounts (incl. the US portion of certain multinational businesses using ADP Global Platform) - 15% of the revenue / 60k clients

  • ES HRO (outsourcing solutions) - 6% of the revenue

  • Complementary solutions (different services from tax filling, wage garnishment, data, employement verification) - 7% of the revenue

• PEO (1/3 of the revenue) - Fully outsourced HR and benefits for U.S. businesses under a coemployment mode

• Client Funds Interest. When clients deposit funds with ADP for payroll or other purposes, ADP typically holds these funds in separate accounts. These accounts may accrue interest over time. It represents around 20% of the net profit margin - depends on the key rate.

Each market segment has its own products but all segments have access to the ADP ecosystem:

• Run and Roll are the two products of the small businesses segment. They are easy to use solutions with simple and intuitive workflows and features

• Workforce Now is the product for midmarket. It offers all the functionalities needed for an HR department in a single solution

• Next Gen HCM is the upmarket product. It focuses on deep functionality and platform flexibility. The average new clients of Next Gen HCM has 7k+ employees

• In the ecosystem, you can find several products for HCM functionalities but also Wisely (a personalized pay and financial wellness experience for workers) or DataCloud (providing dashboard and benchmarks)

50% of new ADP’s customers are sold through partnership (ie not ADP distribution channel). Of course, for each customer size the partners and their importance are different.

Strategy

Nothing extravagant in ADP strategy. They are targeting the following metrics:

• Medium-term 7 to 8% yearly organic growth

• 11 to 13% EPS growth

• 13 to 15% total shareholder return (assuming a 2% dividend yield)

• Retention rate in a stable 90-92% range

They have 4 main development axes:

• Product and technology improvement. Improving the products will be through new UX (as the interface can be improved), add new features (AI, talent insights), develop cloud architecture

• Go-to-market performance. They intend to increase the number of sellers (with a focus where ROI is highest) and develop marketing

• Service development. Adding new services may increase customer satisfaction and revenue

• M&A. They are looking for assets that can enhance their product or their footprint.

They summarize their strategy in 3 words: Simplify / Innovate / Grow.

Competitive landscape

ADP competition comes from similar companies offering HCM software and services. There are also big ERP companies offering HCM modules. ADP estimates its TAM around $150B (including HCM software + services) and estimates that it grows faster than its market.

Let’s take a look at some of the major competitors of ADP:

• ADP, the market leader known for its comprehensive suite of HR and payroll solutions to businesses of all sizes

• Paychex, offers HR, payroll and benefits solutions with a focus on small to mid-sized companies

• Paycom, provides a all-in-one product for employee management of HR and payroll data

• Paylocity, offers cloud-based HR and payroll solutions with a focus on user-friendly interfaces and employee self-service

• Workday, known for its cloud-based HCM platform with integrated finance and analytics functionalities

• SAP, provides a robust HCM suite with integrated talent management, payroll, and analytics capabilities, often used by large enterprise

• Oracle, offers a comprehensive HCM suite with modules for HR, payroll, talent management, and workforce planning

Here is a metrics comparison between the companies. Please note that SAP and Oracle are diversified companies, so HCM is only a small part of their revenues.

ADP soft power: the ADP Research Institute

The ADP Research Institute is a research organization established by ADP. The institute focuses on conducting research and providing insights into critical issues related to employment, workforce trends, and human resources. It produces reports, white papers, and other publications based on its research findings, which are often used by businesses, policymakers, and academics to understand and navigate the complexities of the modern workforce landscape.

The research conducted by the ADP Research Institute often covers topics such as employment trends, wage growth, workforce dynamics, and the impact of technology on the workplace.

If you are curious, the link is here.

Overall, the ADP Research Institute plays a crucial role in supporting ADP's business objectives by generating knowledge, informing strategy, enhancing client relationships, and driving innovation in the field of human capital management.

Market outlooks