自動資料處理 (ADP) 2003 Q2 法說會逐字稿

Welcome to the ProBusiness second quarter 2003 teleconference.

At this time, I'd now like to turn the call over to the Executive Vice President of Finance and Chief Financial Officer, Mr. Steve Klei.

Mr. Klei, please go ahead, sir.

Good afternoon.

Thanks for joining us for the ProBusiness Services fiscal 2003 second quarter earnings call.

We reported our results after the market closed today.

Joining me today is Tom Sinton, ProBusiness Chairman and CEO, who will discuss the quarter both from an operational perspective and update you on the proposed merger with ADP, and then I'll follow with a financial review.

Before proceeding, I must tell you that this conference call discusses the business outlook and contains forward-looking statements regarding future events including the expectation that the merger will close, the impact on the announcement of the merger on our financial results, and the expected benefits of the merger envisioned by us.

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 including but not limited to the inability to satisfy all the conditions for the closing of the merger in a timely manner, if at all, and the success of the integration of ProBusiness and ADP's operations after the closing of the merger.

Please refer to our press release or recent filings with the SEC for more information on the risk factors that could cause results to differ.

We disclaim any intent or obligation to update the forward-looking statements included in this conference call.

In connection with the merger, ProBusiness has filed preliminary proxy material and has filed and will file other relevant documents concerning this transaction with the Securities and Exchange Commission.

Stockholders are urged to review the definitive proxy statements and these other materials when they become available because they will contain important information.

Stockholders may obtain a free copy of the definitive proxy statement in these other materials when they become available as well as other materials filed with the SEC concerning ProBusiness at the Securities and Exchange Commission website at www.sec.gov and from ProBusiness.

Information regarding identity of persons who may, under SEC rules, be deemed participants in the solicitation of stockholders in connection with the transaction and their interest in the solicitation is set forth in the preliminary proxy materials that were filed by ProBusiness with the SEC on January 27, 2003.

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

Thanks, Steve.

As you all know, on January 6th we announced that we agreed to be acquired by ADP for $17 per share of common stock or approximately $500m in cash subject to customary closing conditions including shareholder and regulatory approval.

That event is clearly an important focus of the company and may be the subject of many of your questions.

Unfortunately, we cannot make any comments about the pending merger at this time, either from an operational or a legal point of view.

While we hope to provide you with some incremental news about the business today, we will not engage in Q&A at the end of our prepared remarks.

If there's one message I'd like to communicate today, it is that we have every reason to believe that our merger with ADP is in your interest and that it will create a world-class organization that is competitively positioned for success in a rapidly changing environment and that our expectation is that the transaction will go forward according to plan.

Turning to the quarter, I'd like to begin by saying that ProBusiness's second quarter was quite good.

We continued to demonstrate that our plan to reach profitability this year was on track.

This is the fifth consecutive quarter in which ProBusiness has reported a significant bottom-line improvement.

That improvement reflects the company's commitment to delivering on its promises without sacrificing its rollout of technology nor the delivery of our industry-leading service.

We also received a positive sign from the economy in the quarter.

ProBusiness saw our client employee base increase in the December quarter, which is the first increase we've seen in more than a year and may be an early sign that large employers are beginning to hire and grow again.

Due to seasonality factors, the second quarter data is historically more difficult to interpret than other quarters, so I would not call this a trend yet, however, it is certainly a good sign.

We exceeded our revenue projection for the second quarter at $42.5m and achieved almost 6% sequential revenue growth, in part due to some one-time events.

On a year-over-year basis, revenue growth was essentially flat reflecting, of course, the dramatic declines in interest rates as well as uncertainty in the nation's economic outlook.

Nevertheless, in spite of the economy, we continue to manage our costs and improve our bottom line with a net loss for the quarter of $1.9m, or 7 cents a share pre-dividend, which was at the better end of our projected range.

During the quarter we brought on a number of new payroll clients including AT&T Wireless, with over 40,000 employees;

Clarion Corporation;

DSS Group, Limited, operating as Duty-Free Shops;

Integra Bank; and Mitsubishi Motors, among others.

We also started some impressive new tax clients including Cooper Tire and Rubber with 15,000 employees.

Importantly, Cap Gemini, with 8,000 employees, became our latest comprehensive outsourcing client demonstrating our continued leadership in this emerging field.

All of these wins were highly competitive.

Several, including Cap Gemini, reflect the increasing trend of companies that do payroll and tax in-house to move to outsourcing a market segment where the majority of the clients still process in-house.

A note on technology -- we made steady progress on rolling out Golden Gate this past quarter.

We continue to start new clients on Golden Gate.

A number of these began services both this quarter and the next quarter.

We are on track to meet our commitments on Golden Gate starts for the full year.

Right after we closed the December quarter we're reporting today, we announced our merger with ADP.

Consequently, the merger announcement had no impact on the quarter we just reported.

However, we do expect that both the announcement of the merger and the ongoing work on the merger itself will alter financial results in the future prior to the close.

We are still assessing these impacts, but we know that they could include changes in reductions in expected sales and increased expenses associated with the merger.

Steve will talk more about those in a minute.

As far as conditions to close, there are two key conditions -- shareholder approval and regulatory review.

I can tell you that the preliminary proxy has been filed with the SEC, and our initial HSR filing has also been completed.

We cannot, unfortunately, predict the government's action on either filing and whether they will clear us with an initial review or whether they will respond with questions that start a new clock.

What we can say with confidence is that we will be able to respond to the regulatory requirements in a timely manner, and ADP shares our confidence about moving the proposed merger to completion.

Now I'd like to ask Steve to provide both the financial highlights of the quarter as well as our guidance.

Thanks, Tom.

I'd like to begin with the quarter's results.

These actually exceeded our expectations despite the challenges in the economy.

Compared to a year ago, revenue in the quarter grew less than 1 percent to about $42.5m and reflects about a 9% growth in fees but a 24% decline in interest income due to the obvious impact of the declining interest rate, and, as a reminder, this is the 22nd quarter since we became public, and for 22 consecutive quarters, we delivered on the financial commitments that we've made.

In terms of revenue composition, payroll services totaled approximately $24m, or about 56% of revenue, and this is up about 52% from Q2 last year.

This compares favorably to the first quarter of this year when we reported $21.4m, and in that quarter it represented about 53% of revenue.

As Tom mentioned, our overall employee base, excluding those clients who left us, actually grew over 2% in the December quarter from September 30th.

So that's a sequential growth -- a large portion of it related to the seasonal hiring of our retailers that Tom mentioned.

This overall result, though, is better than the trend we've been seeing, and it is better than the trend last year.

One notable item is our technology base, which declined significantly last year during the same period of time.

We're into tax services -- this comprised just over 30% of revenues at $12.8m.

This was down 16% from last year's level.

This is due entirely to interest rates.

Fees actually increased slightly.

The average daily tax balance for the quarter was approximately $768m.

This compares with $806m last quarter and $744m last year in the second quarter.

Interest rates continue their year-over-year decline.

Last year they were 5.83% in our quarter, and they are, this quarter, 4.28%.

Had they remained the same, given this quarter's average daily tax balances, we would have seen about $3m more on the revenue line.

This continues to be a challenge throughout the industry and unfortunately is a factor ProBusiness can't control.

We were about 50% hedged for the quarter.

Comprehensive outsourcing accounted for about 14% of the revenue, or $5.7m.

This is up 16% from last year and a large portion of the increase of revenue that we do not expect to recur.

On the cost side, we're seeing the continued results of our cost-management program that works.

Additionally, included in our cost this quarter was about $300,000 of merger-related cost.

Gross margin, which we compute as the total revenue less the cost of providing services was a little over 55%, and this is a 70-basis-point improvement over last year.

This number continues to highlight the focus on assuring that our clients start off and remain profitable.

Keep in mind that this number improves, even though interest rates decline dramatically.

Depreciation and amortization grew 10% over last year -- was flat against the previous quarter, and this year-over-year increase was mostly due to the increase in software amortization.

G&A expenses were $5.7m.

This was about 13% less than last year on an absolute dollar basis, representing around 13% of revenue this year.

This is 2 percentage points less than last year, and this improvement, I think, really just reflects the management of our costs.

R&D expense was about $5.5m, about 13% of revenue -- a little bit more than last year, as we continue to develop our future technology.

Client acquisition costs were $9.4m in the quarter.

This is a 30% year-over-year decline and represents, this quarter, about 22% of revenue compared to 32% last year.

This was an area of business where we have made significant progress over the last year and dramatically reduced spending.

You've been seeing that quarter-over-quarter.

Our net loss for the quarter was as expected -- $1.9m, 7 cents per share, before preferred dividends.

The per-share amount is based on 28.5 million shares weighted outstanding.

This 7-cents-per-share-loss compares to a loss of 26 cents per share last year, a significant achievement and one that should tell you that we're making the progress that we had planned.

One point, had interest rates just remained the same as last year, we would have reported a profit of over $1m in the quarter.

The balance sheet remains strong -- a little over $83m in cash, cash equivalents, and investment.

This is versus $87m last quarter.

Cash used in operations for the quarter was $2m versus $5m of cash used in the same period last year.

I'd like to reiterate what Tom said about the impact of this transaction, going forward.

It's only been about three weeks since we announced the acquisition, and at this point it's impossible to project accurately the impact on our financials of that decision.

I think we can say for sure that there will be significant additional costs, including those related to the transaction costs that we're going to be incurring.

We'd also expect to generate less new revenue that otherwise would have been the case, had this important opportunity not been presented to us.

Beyond that, we're not clear what impact this announcement will have externally in our client base, on our potential client pipeline, and on the internal decisions we may make in response to the changing landscape.

We have therefore opted not to provide forward guidance simply because there are just too many unknowns facing us.

I'd like to conclude my remarks by emphasizing our confidence in ProBusiness's current plan to merge with ADP.

Amidst the challenges of the weak nationwide economy, we are controlling our destiny and focusing on what we need to do to execute well.

We are taking the necessary steps to align our business in the current economic environment and as the economy improves, to position the "new ADP" and ProBusiness for success.

As I said before, we're not taking Q&A today.

Thank you for your continued interest and support.

Good evening.

This concludes our teleconference.

That concludes today's ProBusiness teleconference.

You may now disconnect and have a good day.