自動資料處理 (ADP) 2003 Q1 法說會逐字稿

Good afternoon.

My name is Kay.

I will be your conference facilitator today.

I would like to welcome everyone to the ProBusiness Services first quarter 2003 conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad.

If you would like to withdraw your question, press the pound key.

I would now like to turn the call over to Steve, Executive Vice President of Finance, and Chief Financial Officer.

Thank you.

You may begin your conference.

Good afternoon and thank you for joining us.

This is the first quarter for fiscal year 2003.

That we reported our results after the market closed today.

Joining me today is Thomas Sinton, CEO and Chairman.

He'll discuss first the operational part of the business, and I'll follow up with a financial review and give you some update on guidance and then we'll take your questions.

This conference call discusses the business outlook and contains forward-looking statements regarding the future events and the future financial performance of the company.

These particular forward-looking statements and all other statements that may be made on this call that are not historical facts are subject to a number of risks and uncertainties.

Actual results could differ materially from those projected in these forward-looking statements as a result of risks that the company faces.

Please refer to our press release or recent filings with the SCC for more information on the risk factor that is could cause actual results to differ.

The specific forward forward-looking statements cover expectations for product mix and demand, revenue, gross margins, expenses, client acquisition costs, interest rates and operating profit.

This conference call will be posted on our website and we disclaim any intent or obligation to update the forward-looking statements included in this conference call.

I'd like to now turn it over to Tom.

Thanks, Steve.

I'd like to begin by saying that ProBusiness's first quarter was quite good, even with widespread weakness across the nation's economy.

We met our internal targets and while year over year revenue growth was just about flat, we are very pleased about our progress towards profitability.

Clearly, our focus on profitability has yielded the kind of results we were managing and continue to manage toward.

We significantly reduced our losses pre-dividend to $2.7 million from $9.9 million a year ago, and on a per-share basis to 9 cents from 41 cents.

This is the fifth sequential quarter of bottom line improvement for ProBusiness.

Additionally at the gross margin line, where we track revenue less cost of providing service, we improved performance to 54.5% versus 53.5% last year.

During the quarter we brought on a number of new payroll clients, including Advanced Medical Optics, Cap Gemini, Electronic Arts, Echo Star, General Reinsurance, Poly Com, Tri-point Global Communications and Taylor Made Golf.

We also started some impressive new tax clients, including Genetech, the biotech pioneer, Phizer and Pinkerton, the latter two of which have 33,000 and 120,000 employees respectively.

All these wins were highly competitive.

Our most frequent competitors remain ADP and Ceridian.

I'd like to point out we've seen an increase of new business coming from our competitors.

This has occurred over the last few quarters and the trend is continuing in the current quarter.

Where we have seen approximately 60% of our new business come from the competition, that's moving closer to 75% today.

And I believe this fact underscores that in a weak economy, companies that have in-house administrative operations are focusing on their core business issues rather than thinking about outsourcing and the benefits that can be achieved with that shift.

And those companies that are already outsourcing are comfortable with the decision to switch their outsourcing partner to the service and technology leader, ProBusiness.

As I've done in each of our calls, I'd like to provide some more information around one of our new clients this quarter.

Echo Star, a new payroll client that was with Ceridian.

Quite simply, they told us they had outgrown Ceridian's system.

The company, which offers a direct broadcast satellite subscription service in the U.S., has centralized all administrative processing in Littleton, Colorado, but wanted the ability to print locally in their regional offices.

What we've been retained to provide is an application hosting system which brings them the system stability throughout their network of regional offices throughout the U.S.

Pfizer, a new tax client, came to us as a result of an existing client, Warner Lamburg, which was bought by Pfizer.

Typically this is a deal we would have lost because the acquirer usually converts the acquired company to the current method of processing.

In this case, they were using an in-house application from FLS.

As part of the integration, Pfizer consolidated all payroll in-house on Peoplesoft and chose to outsource their tax processing to ProBusiness instead of continuing to process on FLS.

I'd also like to update you on the progress we're making in comprehensive outsourcing.

This quarter, we're pleased to announce that we begin managing the U.S. payroll operations for Cap Gemini, one of the world's leading consulting and outsourcing organizations.

When cap purchased the consulting arm of Ernst & Young two years ago, they needed to find the best way to deliver payroll services to a group in excess of 7,000 highly mobile professional consultants working across all 50 states.

Many of these consultants work on multiple jobs and multiple states at the same time, incurring complex tax liabilities.

In order to recruit and retain quality consultants, Cap felt it was important to assure that their consultants would not incur extra taxes through this work arrangement.

ProBusiness was able to craft a solution for cap that assures that consultants pay the same amount of state taxes if they work in one state or in many, with Cap picking up any difference.

Cap Gemini's executives noted that "ProBusiness's ability to bring content expertise in a holistic approach through the implementation coupled with flexible, responsive delivery, proved to be a perfect fit in teaming with Cap."

This willingness of ProBusiness to craft a flexible solution for a client which solves a specific business problem is the hallmark of our service, and constitutes the major reason prospects select ProBusiness as a partner.

So we're seeing our managed payroll service continue to grow steadily even in this tough economic environment, and we expect to see growth across comprehensive outsourcing services increase in fiscal 04 as we broaden our service offerings by adding integrated health and welfare administration to our managed payroll service.

We made steady progress on rolling out Golden Gate this past quarter.

We're on track to approximately double the number of active clients on Golden Gate this fiscal year which is what we committed in fiscal 02.

By the end of the fiscal year, we expect to have about 5% of our base processing on Golden Gate in line with our expectations.

This represents good progress for our industry and is in line with or ahead of historical real life by others in the payroll services industry.

We're also on track to deliver additional Golden Gate functionality, including tools to streamline implementations and applications to extend our value proposition.

One of the more significant applications is our web-based integrated health and welfare administration system which I already mentioned, and which is on track for release during calendar 2003.

This position for cross selling a full suite of health and welfare services to our prospects in fiscal 04, including enrollment, processing, COBRA and flexible spending plan administrations.

This represents a significant opportunity to leverage the investments we've made in our integrated platform and to further increase our revenue per employee, which has been going up steadily over the past several years.

We've made good progress in the quarter in a difficult economy.

We're particularly proud of our progress towards profitability.

Year over year, we've made the biggest improvement ever in operating profit and we clearly have put profitability within our grasp this year, a commitment we made to you over two years ago now.

I'm very pleased by our ability to manage effectively in this economic environment without sacrificing our commitment to service and technology.

Our ability to accomplish this while still delivering our commitment to profitability underscores the strength of our business.

As many of you know today, we also announced that the board authorized a plan to buy back up to $20 million of ProBusiness shares over the next 24 months.

Our willingness to authorize this buyback and take advantage of attractive buying opportunities over the period underscores our confidence in the business and our view that we are at or near the end of the period when we will require cash for operation.

With that, I'd like to ask Steve to provide both the financial highlights for the quarter, as well as our new guidance.

Thanks, Tom.

Once again, our financial results were in line with our expectations despite the challenges of the changing economic environment.

Revenue in Q 1 was flat at $40 million, slightly more than our expectations, just about the same as the final quarter of 2002, at the high end of our guidance.

This is the 21st quarter since we came public in 1997, and for 21 consecutive quarters, we've delivered on our commitment.

These results reflect an interest rate of approximately 4.75% for the quarter.

Last year at this time, the rate was 5.98%.

Had interest rates not declined, the 120 basis points difference would have translated to an additional revenue of $2.4 million and revenue growth would have been almost 6% more or 4.4% versus a 1.5% decline.

For the quarter, we saw our employment base contract by a little over one half of 1%.

This decline is less than we have seen over the last year, when our clients shed 6% of their employment base.

In a typical year, we'd expect employment to increase 3 or 4 percentage points and as many of you know, we've actually experienced much higher levels than this in the past.

The new sales environment can best be described as slow and steady.

It remains challenging relative to historical measures, but the key indicators appear relatively stable at this point.

As Tom mentioned earlier, the percentage of new business coming from our competitors has been increasing lately.

In terms of revenue composition, payroll services totaled $21.4 million or 53% of total revenue.

It's about the same as Q1 and Q4 last year.

Our average payroll size remains at 2400 employees and the number of total employees processed is approximately 1.5 million.

Tax services comprise just under 35% of revenue at $14.0 million.

This is down 3% from last year's Q1.

The average daily tax balance for the first quarter was approximately $806 million.

This compares with $975 million last quarter and $704 million in the first quarter last year.

I'd like to emphasize that this represents a 14% growth in average daily balance year over year.

This reflects, again, the fact that we are gaining ground at the expense of our competitors.

This is being lost in our reported results because the lower interest rates are impacting the interest income that you're seeing.

Comprehensive outsourcing accounted for the remaining 12% of revenue or $4.9 million.

This is down slightly from last year.

While we continue to see growth in our front office payroll and managed services as Tom talked about, we're reducing our legacy base of very small and relatively unprofitable FSA and COBRA clients, aligning it more towards the larger clients that we're now selling.

Gross margin, which we compute as total revenue, less the cost of providing services, came in at 54.5%, this is versus 53.5 last year.

This is an improvement over last year's first quarter.

In the core business margin remains strong, as we discussed during our year-end call.

Due to declining interest rates, most notably the effect of our swaps coming off and our exposure to the floating interest rate, we expect gross margins to decline this year from fiscal year 02 levels.

We talked about this on the call.

And this is our guidance for the year.

For the first quarter, we were hedged a little under 60%, and for the remainder of fiscal year 03, we will be about 45 to 50% hedged, and this is a hedge that has a rate of approximately five and a quarter percent.

Over the last year, we have seen an increase in the gross margins for comprehensive outsourcing.

We're now operating at approximately 20% gross margin.

We attribute this improvement to the product mix, as we continue to grow our front office managed services.

General and administrative expenses were $5.8 million, or about 14.5% of revenue, significantly lower than the 16.2% last year, in line with our expectations, and reflective of the expense management programs that we have implemented.

R and D expense was $5 million, or approximately 12.4% of revenue, again lower than last year's 13.2%.

Again, we are seeing the benefits of our cost management effort here.

Depreciation amortization expense is up year over year at 12.8% versus 10.7% last year, and this is primarily due to an increase in the amortization of capitalized software.

The biggest impact of our cost management programs can be seen in client acquisition costs.

We reduced our cost to $9.3 million for the quarter versus $15.9 million last year, and this represents 23% of revenue, as opposed to 39% of revenue last year.

By aligning our costs to anticipated revenues, we have produced a sequential quarterly decline of 27% and a year over year decline of 42%.

We expect to see continued decline on acquisition costs on a year over year basis.

Our net loss before dividends for the first quarter was better than expected at $2.7 million or a loss of 9 cents per share.

This compares to a $9.9 million loss or 41 cents per share last year.

The per-share amount is based upon 28.4 million shares outstanding.

Importantly, this is our first time in our history as a public company that we have recorded a Q4 to Q1 EPS improvement, reflecting the dramatic expense management we have been engaged in during the last few quarters.

The balance sheet remains strong with approximately $87 million of cash and other liquid investments, and a $30 million unused line of credit.

Cash used from operations this past quarter was under $1 million, versus a use of $10 million in the same quarter a year ago.

We now believe we will use less cash than we had projected last quarter, where we projected a use of 5 to $10 million for the year.

We will probably be near the lower end of that range, as our first quarter was better than we expected.

We are focused on managing our cash and intend to maintain a very strong and conservative balance sheet.

Let's move to forward guidance.

This section is particularly subject to the risks that I discussed in the safe harbor disclaimer earlier in the call.

As a reminder, our primary financial target for fiscal 03, which ends in June, is break even before preferred dividends, and we believe that even with the continued weakness in the economy, we remain positioned to accomplish this.

We recognize that the market expects further rate cuts, and we have plans in place to manage in that environment, and while that would certainly impact the amount of interest income we earned, we do not believe it will impact our ability to achieve our break-even results for fiscal year 03.

We continue to expect losses in the first half with profitability in the second half of the year in the achievement of break-even for the full year.

On the cost side for fiscal year 03, we intend to manage to the bottom line guidance by closely managing these expenses.

As we discussed last quarter, falling interest rates will put pressure on our gross margin and we expect to see year over year declines for the rest of the year.

This is not due to pricing or competitive pressures on the recurring revenue, and we remain focused on insuring our new clients hit our target margin.

The only place we are seeing pressure right now is on the one-time setup revenue.

Our competitors are willing to discount this.

We talked a little bit about this over the last quarter or two.

For the second quarter of fiscal 03, this is the December quarter coming up, we expect revenues in the range of $39 to $41 million and a loss per share pre-dividend of between 6 cents and 11 cents per share.

Let me just reiterate a few key take-away points and then we'll open it up for questions.

We're committed to focusing on the bottom line.

We're reiterating our plans to break-even in fiscal 03, even if interest rates go to where the market assumes.

We've seen an increase in the percentage of new business coming from our competitors, gone from 60 to 75%, indicating we remain competitive with our large competitors.

We have our first Q4 to Q1 improvement as a public company.

We reported significant year over year and sequential improvement in client acquisition costs, both in absolute dollars and as a percentage of revenue.

We managed our G&A and R&D cost lower in absolute dollars year over year and as a percentage of revenue.

This was our fifth sequential quarter of bottom line improvement.

In making adjustments for a weak economy, we've preserved the ability to deliver industry-leading service, roll out advanced technology, and sell and implement new clients.

And finally, we used little cash during the quarter.

We expect to generate cash from operations for the full year and will use little cash for the full year.

We think this is a very good plan.

It's a difficult environment, and as the economy improves, we expect to see the benefit of the inherent profitability in our business.

And now we'd be pleased to take your questions.

At this time, I would like to remind everyone in order to ask a question, please press star, then the number 1 on your telephone keypad.

We'll pause for a moment to compile the Q and A roster.

Your first question comes from Randy Mill at Robert W. Baird & Company.

Good afternoon Tom and Steven.

Good job in controlling the costs.

In looking at the client acquisition costs, key production there, I'm wondering how much of that is related to the sales and marketing part versus implementation capacity?

I know most is implementation.

Randy, you're a little hard to hear.

Is the question where did we make the adjustments?

Yeah, broadly, and specifically how much, I guess, was related to implementation capacity versus sales and marketing.

Most of it was implementation, followed by marketing and then sales.

Okay.

Then it seemed like you've had some nice stand alone tax wins over the past couple quarters and I'm wondering, is the environment having an effect on that business in terms of selling that business or is it largely just the payroll clients that you're seeing pushback in terms of getting new outsourcing prospects to listen?

If you could just talk about that.

I don't think, Randy that, you can take anything particularly away from those trends.

I think we see good clients coming in across both areas.

I think one of the things that happens with payroll clients, because the average size is smaller, is you don't recognize the names as readily as you recognize the tax clients.

Right.

And just one last question then related to that.

You'd talked a little bit about the health and welfare business and rollout.

Do you expect to have success in selling those services into the tax-only base?

There's obviously some very large companies that could potentially be very large benefits or comprehensive outsourcing customers.

What are your expectations there?

Our expectations are that this will be primarily marketed to -- not to the tax client, so in general, I would not expect that to happen.

I would expect the average-sized client on that to be somewhere near or closer to the average size of the typical payroll client, maybe a little bit larger than that.

Okay.

Thanks.

Solid job in a very tough environment.

Your next question comes from Michael Baker with Raymond James.

Yes, a follow-up to the health and welfare question.

Could you update us in terms of any enhancements you might have made to your offerings, and give us a sense in terms of RFP activity as to how important the health and welfare component is.

The changes, Michael, that we've made to the technology that we've been using, and as many of you may know, we've been using this technology internally for a while now, we're primarily enhancing the setup functionality of the business, so the ability to handle more complex kinds of benefit plan set-ups that we expect to encounter in this marketplace.

So that's primarily what you would see.

And, you know, as an example of this, these are things like the ability to, you know, handle enrollment by zip codes, things of that nature.

In terms of RFP in health and welfare, right now we haven't been very active in marketing this, and don't expect to become active until we have the fully integrated technology available in the beginning in calendar 2003.

So we have not particularly been responding to RFPs, and I really couldn't tell you, you know, what -- don't keep accurate statistics on the RFPs that we don't actually respond to.

Just a follow-up.

In terms of your enhancements on the set-up side, what's kind of the smallest size client you might be able to handle given the fact that historically, the set-up has been kind of the cost challenge there?

I think there are probably two answers to that, and one is that if we do the -- if we do the -- and I'm not going to give you an absolute size on this because I don't think we know exactly what the size is, but there are two ways to approach this.

One is, if you want a full service center set-up where we take the calls and we actually establish the knowledge base and all that sort of functionality, then you're going to have to be a little bit bigger than you would otherwise be if what you want is just an open enrollment system and you just want the system and we don't do the knowledge base and the call center set-up, then we think actually we believe that any of our payroll clients can use that set of services.

Obviously that will be a smaller dollar amount sale, but still a significant potential source of revenue for us.

Thanks.

And then finally, Steve, I was wondering if you had the deferred revenue balance for us.

Yeah.

It is $25.9 million.

Thank you very much.

Your next question comes from David Ferina with William Blair.

Good afternoon.

When you look at the relatively low number of client churn in terms of base for control, interest rates being $2.4 million hit, we didn't see much growth, admittedly it's a tough environment.

Can you talk a little bit about as you kind of lower client acquisition costs and how you are going to get revenue growth for the level, even if you adjust for these things that would be something that we would expect?

To start with, Dave that, half of 1% is not a year over year comparison.

That's just from quarter to quarter.

So remember last year, we lost 6% during the year.

So you really are talking five or 6% year over year decline in that component.

So when you add that plus the interest rates plus the slow economy, you're in a mid-teens kind of growth rate with the current level of investments, and then you start talking on top of that, two things are going to happen.

One, is a short term phenomenon, which is going to be a rising interest rate environment, and two, the introduction of the new products, and then three, you're going to see to the extent we get a benefit out of channel, that's going to drive it north of the mid-teens.

So we're pretty confident in our ability to generate growth going forward and it's just today hidden by all these factors that are out of our control.

When you say half of 1% decline, I thought you meant year over year.

No.

Back to that point, though, if I remember correctly from last quarter, your guidance for the year was kind of flattish employment numbers in terms of --

That's correct.

Is that a reasonable guidance given the percent of technology you have and the fact that your first quarter was down 5 to 6%, I mean, that --

Yeah, we're not talking -- again, our number, David, not year over year, it's from June 30th, we expected it to be approximately flat for the year from that point.

So first quarter was about a half a percentage point down, and is it still good guidance for the year?

I don't know the answer to that.

We're able to manage in whatever environment that is thrown at us at this point.

We can manage it.

Let me make sure I understand that, that's an important point, maybe it was my mistake.

When you gave guidance at the end of the June year of kind of flat employment, you were talking about from the June level, not on a year over year basis?

Correct.

Oh.

That makes a big difference.

Okay.

Thank you.

Your next question comes from George Sutton with RBC Capital.

Hi, guys.

Two questions.

First on the Golden Gate platform, I was pleased to see that you had doubled the number of folks that were live on that, but when you are going after new business, are you yet able to use Golden Gate as you go after that business?

The answer is we do on some accounts, George.

We have a limited -- this is the way we have historically managed the business.

We have slots that we allocate that allow us to match our implementation capacity to the client, then we have profiles in terms of the complexity of clients that we're willing to put on at every stage, and obviously we are in the process of increasing the complexity levels that we are allowed to manage at this point.

So we are not selling this to every new account, but we have limits that we're -- you know, we're in the process of slowly increasing over time.

Now from our perspective, Golden Gate has some nice things that would be attractive to folks that are currently using in-house solutions.

Is that part of the way that you would expect to market that?

And have you seen any response from the folks that you've shown it to?

Well, I think that --

I refer specifically to the audit products in particular.

I think in general, we have very good response to the product, and really the issues that we face with ramping it up are really the efficiency of the tool set primarily that we need to become efficient in the ramp.

And this is just really, frankly, a matter of time and energy applied to the set of problems.

Okay.

And lastly, you've seen the number of customers coming from competitors up quite a bit, and I'm wondering, is that a damming of the payroll market in general, meaning there's just not people entering the market, or is there something related to your reduction in people out on the street finding opportunities?

Just trying to offset the two.

I think our best estimate is that it is -- it's related to people focusing on their most important business problems first in a challenging economic environment and not wanting to undertake significant new initiatives in the -- until their view of the economy becomes a little clearer.

So I think that that is -- at this point, that's what we think we're seeing, and nothing really more significant than that.

So a year from now, that number might be back to 60%?

It could easily be back to 60%.

Okay.

Thanks.

Your next question comes from George Sutton with Adam Hartness & Hill.

Hi.

Thanks.

You said you're about 45 to 50% hedged for 03.

I'm wondering how that looks in 04.

About 25%.

And you also said you had some strategies to offset the lower interest rates this year.

I was hoping you could elaborate on that.

Well, we're going to be vague on that but I can tell you that we have run all scenarios, including the worst case market forecast comes into play and we feel comfortable that we can manage to the bottom line that we've given guidance to, and we just recognize we've had flexibility, I think we've demonstrated the flexibility and our willingness, determination and ability to manage to the numbers that we've given you and we're committed to doing that.

Okay.

Great.

What rate are you hedged at in 04?

5.25.

We're about 10% in 05 hedged at the same rate.

Okay.

I was hoping you could give the number of new clients in both payroll and tax.

That's not a number we disclose.

We have 600 or 625, I can't remember the exact number, of payroll clients and about 150 or so tax clients.

Okay.

Do you disclose the number of total clients added in the quarter?

No.

Okay.

We talk about retention once a year, and last quarter we talked about that, and it was the sixth consecutive year of 90-plus percent retention rate.

Yep.

All right.

Great.

Thank you.

Your next question comes from Brandt Sakakeeny with Deutsche Bank.

Hi.

Brandt Sakakeeny, Deutsche Bank.

Couple questions for you.

Can you comment again on the share repurchase?

And I apologize.

I was a little late in joining.

Do you plan on starting to buy back shares next quarter?

Is this sort of something that you want just in case the stock gets hit, because I imagine as long as you're in a loss situation, it's actually going to near-term dilative effect.

What we said about this, Brandt, was that we're at or close to the point where we no longer are going to use cash in operations, so that gives us the confidence to actually go ahead and do this.

We're not making any specific commitments.

The board has authorized us to do this, so we're not making any pre-announcements about what we are going to buy and/or when, but clearly we have no intention of putting the balance sheet in jeopardy and we feel like we're in position to execute on this plan over this 24-month time period, and not challenge our balance sheet.

Okay. 'Cause it seems like in a way, obviously the stock down here looks attractive from an accretion standpoint.

The only issue is as long as you're at a loss if you buy back shares, it actually increases your loss, so I'm just curious as to whether or not you factored in these share buybacks into the guidance.

No.

Of course our guidance is that we're actually -- we're to break even this year.

Right, but I mean say next quarter, you're not forecasting break even, right, for the next quarter?

No, but even if you bought back 10 of the whole 20 million, that's only 10% of the outstanding shares, and so 10% of 11 cents is a penny.

Right.

Okay.

So it's really not a -- it should have no impact.

Okay.

But can you talk to employee retention rates, how that's going in terms of obviously the employees that you want to keep versus the ones that you've been sort of letting go to trim the client acquisition costs?

Yeah.

All measures are at all-time highs, and I think that's reflective of the economic environment.

That's one of the benefits, I think, of running a company today.

Okay.

Finally, can you talk to this 25% -- are you comfortable with being hedged 25%?

Do you want that ultimately to go up or are you comfortable just sort of making a bet on rates for 04?

We're not talking about 04 right now.

We're not hedging and we haven't hedged.

The last one we put in place was in April of 02, and at this point, we're comfortable with where we are.

Okay.

Great.

Thank you.

Your next question comes from Bob Stoffer with Stoffer Capital.

I was wondering after such stubbornly high client acquisition costs for so long, how have you been able to get this down so successfully?

Bob, it's really been -- it's challenging from a personnel standpoint because we've had to let a lot of people go.

Really, I think as you look historically, we have been running with a lot of excess capacity.

I don't want to go into all the reasons why we had excess capacity, but we were running with excess capacity, and, therefore, a big chunk of the move didn't diminish our ability to bring on new revenue.

We continue to focus on efficiencies, so as you look at the efficiency of the individuals involved in the implementation, that continues to increase.

So the combination of eliminating excess capacity and efficiency is driving a chunk of that.

Okay.

Nice going.

Thank you.

Your next question comes from Steven Rosten with Glen Capital Management

First of all, nice way to run a business in a very tough environment.

Can you talk a little bit about how you're measuring the productivity of your sales force and implementation force in this environment, what kind of metrics you're using to make sure as you go through these cuts that you're getting the kind of productivity that you need to have?

Well, it's been the same measures that we've always used, so with sales personnel, sales department in general, there's two key metrics.

One is how much productivity per rep are you getting, and you measure that both from a current sales environment and from a number of stars, meaning the new business that actually begins processing, then the second thing we do is look at the total overall expense as a percentage of both of those same measures.

So that's the level and the measure of efficiency there, and in the implementation area, you're looking at similar measures from a cost standpoint, you know, looking at the cost of implementation divided by the amount of new revenue they bring on.

You're looking at the amount of revenue per implementation consultant, and that's actually the utilization just as you would manage in a consulting environment.

So can you help us with any kind of metrics there since it's a little hard to see through some of the changing numbers in terms of what you think the appropriate productivity is in each area?

You know, that's guidance or numbers that we haven't disclosed, Steve, and aren't going to disclose right now, so -- so no, no data is forthcoming.

Okay.

How many sales representatives do you have now?

We have in the mid 20's.

So that's down from 32 or 33?

We have a few -- no, it was down from -- I think we were at high 20 to 30.

And we have a few open positions right now.

Okay.

Thank you.

Your next question comes from Jared Berwin with GEO capital.

Hi.

Congratulations on the quarter.

I wanted to try to see if I could get some more color in regards to your comment with new customers.

You'd said that a lot of companies are just focusing on managing their business and are not making outsourcing decisions.

Could you try to elaborate more?

Are these guys saying that come back and talk to us next year or are these ongoing discussions?

I think that the answer to that, Jared, is that companies are still focusing on key metrics in their business, and so as you look at this, you know, how you manage in this kind of economic environment, which is for, you know, a lot of companies around, is the toughest one that's been around for 30 or 40 years, it's like, you know, do you fix your problems by, you know, changing your payroll system or outsourcing your payroll department, and I think all that is -- you know, they're focusing on the top three or four things they need to do to effectively manage in this environment.

This does not quite hit the radar screen, although those issues are still there.

So we're just -- you know, we're just filling in the -- I would call this the systems and IT spending slowdown period that we've been in now for, you know, really a couple of years.

All right.

Thanks.

Your next question is a follow-up question from Randy Mill with Baird.

Hi.

I wanted to follow up on the hedged portion of the portfolio.

Did you say that it would -- I know 25% for next year.

Did you say 45 to 50% for the remainder of this year?

Yes.

Okay.

And I assume that's an average and can change pretty dramatically from one quarter to the next?

You know, I don't have that sheet in front of me, Randy.

If I remember right, it doesn't change dramatically.

It doesn't go from 20 to 60.

So I would -- if I was to give you any guidance just sort of -- a little off the cuff, 40 to 55%, you know, look at it in those terms.

Because in the second half of the year is when you have a spike in your average daily balance, and so I'm just assuming there's not a big change in the dollar portion of the hedge.

That's not accurate.

Okay.

Yeah, we can -- the hedges are actually varied by month.

So that dollar hedge will go up.

Yeah.

And we know, you know, the funds flow when we enter into these hedges, and so that's the way we manage it.

Okay.

Thank you very much.

I appreciate that.

Your next question is a follow-up question from Brandt Sakakeeny with Deutsche Bank.

Thanks.

Can you guys just comment on the sales cycle and whether or not it has loosened up any in the last quarter, and also whether or not you've seen companies that may have postponed implementation starting to actually to ask you to you start implementing, whether or not that's static or has deteriorated in the last quarter?

Thanks.

Okay.

We have seen relatively stable sales cycles for the lastt year.

Down from historic levels, meaning it's taking longer, more people are dropping out, but it's relatively stable.

That's the answer to the first question.

On the concept of delayed implementation, that's not something that we have.

So we record a sale when they're ready to implement, so if they're not ready, it's not a sale from our perspective, so we have not seen an increase in that issue because we don't record that issue.

Right, but how about, say, from an order versus an implementation?

Sort of a backlog?

Yeah.

We don't disclose the backlog balance, but we manage and track it.

If it's an order, they are scheduled for implementation, in the way we manage the business.

So we don't record an order if they have a potential to delay it, and it drops off the order sheet.

Okay.

At this time, I would like to remind everyone in order to ask a question, please press star, then the number 1 on your telephone keypad.

We'll pause for just a moment to compile the Q and A roster.

Your next question comes from Ron Christiniak with Oakmont Corporation.

Hi.

How are you guys?

Good.

Hi, Ron.

Tom, can you give an update on your personal stock sales?

THOMAS SINTON*: There isn't really any change in the 10 B 5 plan.

There's no change in that.

Okay.

So you're proceeding with 50,000 per quarter?

That's right, that is the plan right now.

Okay.

Secondly, can you offer any further breakdown of the deferred revenues?

What do you -- what would you specifically like to know?

Oh, I guess by major component, tax, payroll, comprehensive.

No, it's probably split between -- majority of it would be payroll, and comprehensive outsourcing, little tax.

Okay.

And then just, I guess, for clarification, earlier in the call, you said that your deferred revenues were $25.9 million?

Correct.

On the balance sheet, it's showing long-term deferred revenues of $19.6 million.

Yes, and we have a short-term as well.

Okay.

So the rest of that is in $9 million --

or $6 million --

correct.

One final one.

At your analysts' meeting, Tom, you said you would be spending the bulk of your time on garnering partnership deals and trying to, I guess, enhance your business by creating, you know, partnerships and so forth.

Can you just update us on that?

Well, we don't have anything to announce on the partnership front, although I will say that we've done a lot of work on these, and we're continuing to work through a number of issues with a number of parties on that, and so, you know, when we actually are ready to announce that, we'll certainly do that when it's appropriate.

Just a follow-up.

Do you have any sense on the timing on that?

Well, you know, it's really hard to -- it's really hard to pin me down on timing because that would be kind of speculative, so I would hope by, you know, the end of the fiscal year to have partnerships in place, the appropriate partnerships in place.

Okay.

Thanks.

Your next question comes from Robert Kahn with Salomon Smith Barney.

Hi.

How are you guys?

Hi, Robert.

Congratulations on pulling out client acquisition costs.

I'm sure you've modeled worst-case scenarios with the economy.

If, on the other hand, the economy improves and you start to get new business, I'm sure you won't turn away new projects.

What sort of negative impact margins would these additional implementation costs associated with that new business cause, do you think?

Have you done sensitivities on that?

Well, we're going to manage that.

We will turn away business.

We're going to manage to improving results and we're not going to let new business come in and be a negative on the results.

What you'd expect to see, I believe, during this time is as the economy improves, it likely is going to correspond with increasing interest rates at the same time.

And as interest rates start to increase, that gives us flexibility at that point to do one of two things.

Either improve the bottom line and grow that faster or grow the top line faster.

And we'll be making those decisions, you know, as we get to that spot.

Just as a follow-up, how many comprehensive outsourcing clients do you have now?

I think it's nine.

Nine or ten.

Okay.

Thank you.

Your next question comes from Glen Cravlin with Glen Hill Capital.

Good evening.

Could you just update us on your expected expenditures this year on software development, and how is the health and welfare projects proceeding, and are launch dates still the same?

Our total capex for the year, which includes capitalized software is going to be in the neighborhood of, you know, 20 to $25 million.

Similar guidance to what we gave at the end of the year.

I think if anything, we might be a little bit lower, lower end of our guidance, and you start to see that in the cash flow even in the first quarter.

And I think in terms of the planning around the health and welfare is exactly the same today as it was really, you know, I think nine months ago.

Tom, is the lack of that product today an impediment in landing business?

I don't know that it's -- it certainly -- we haven't given you guidance that reflects that product being there any earlier than we expect.

I do believe that, you know, obviously the more products you have, the better off you are, so in that sense, I think it makes it easier to win business, but I don't know that I have any real concrete numbers to give you.

Great.

Thank you.

At this time, there are no further questions.

Are there any closing remarks?

Yes.

Thanks, everyone, for joining us this afternoon.

Tom and I will be available for follow-up calls for the remainder of today.

To be alerted by e-mail of any of our upcoming events and conferences which we're going to be attending, visit our website at www.proBusiness.com.

We look forward to meeting with you, and thanks again for your continued interest and support.

Good afternoon.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.