自動資料處理 (ADP) 2003 Q3 法說會逐字稿

Good afternoon everyone and welcome to this ProBusiness Third Quarter 2003 Teleconference.

At this time I would like to turn the conference over to your host, Executive Vice President of Finance and Chief Financial Officer, Mr. Steve Klei.

Please go ahead Sir.

Thank you.

Good afternoon and thanks for joining us for our third quarter earnings conference call.

We reported our results after the market closed today.

Joining me today is Tom Sinton, Chairman and CEO of ProBusiness who will discuss the quarter from the operational perspective and update you on proposed merger with ADP.

I'll follow-up with the financial review.

As was the case last quarter, due to the sensitivity surrounding the proposed merger, we will not engage in Q&A today following our prepared remarks.

Before proceeding, I must tell you that this conference call discusses the business outlook and contains forward-looking statements regarding future events including without limitation, the expectation as the merger will close and expected transaction-related impacts.

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 to the closing of the merger in a timely manner, if at all.

Please refer to our press release or our Annual Report on Form 10-K, our quarterly reports on Form 10-Q, and our other fillings with the SEC for more information on the risk factors that could cause actual results to differ.

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

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

Thanks Steve.

As you all know, in January ProBusiness announced that we agreed to be acquired by ADP for approximately $500m in cash.

The transaction is subject to customary closing conditions, including expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.

Since January, we've been working with counsel and the appropriate regulatory bodies to bring the transaction to a close.

As announced on February 14, 2003, the Department of Justice Antitrust division requested additional information and documentary material in connection with its review of the proposed merger.

On March 25, 2003, ProBusiness stockholders approved the merger at a special stockholders meeting.

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

The process is time consuming and costly, but we continue to believe the transaction is in the best interest of ProBusiness and ADP, that will create a world class organization competitively positioned for success in a rapidly changing environment.

I'll now move to our quarterly results.

I'd like to begin by saying that ProBusiness' third quarter was strong.

If we were continuing as an independent company, we would have reached our profitability target for this quarter.

Obviously the announcement of the proposed merger of ADP and ProBusiness has triggered a series of events and transaction-related costs that negatively impact our financial statements.

And Steve will provide you with more information on this later.

With that said, let me highlight ProBusiness's third quarter results.

We recorded record revenues at $45.4m.

This is seasonally our strongest quarter due to high average daily tax balances and calendar year starts.

On a year-over-year basis, revenue was essentially flat, reflecting growth in fees offset by dramatic declines of interest rates; as well as continued weakness in the employment market and uncertainty in the nation's economic outlook.

Our balance sheet is very strong and I'd like to highlight that we ended the quarter with about $84m of cash and liquid investments, representing over 50% of our annual revenue.

We continue to manage the company with a strong balance sheet, a consideration that is very important to our clients.

During the quarter, we brought on a number of payroll clients including Brentwood Corporation, Columbia House Company, Case New Holland, and Wireless Retail among others.

We also started some oppressive new tax clients including Agere Systems, Mellon Bank, ProSystems and Progress Energy Service.

Importantly, C&A Financial with approximately 13,000 employees became our ninth comprehensive outsourcing client to go live on our systems.

In addition, we now have about 20 clients live on our golden gate platform, some of which were implemented during the quarter.

About a year ago, we set a target of 20 for the end of fiscal year '03, and I'm glad to say that we've reached it a quarter early.

We're continuing to develop and extend our Golden Gate technology with additional tools and enhancement slated for introduction this fall.

The most important introduction will be our integrated health and welfare management system, which we expect will strengthen our comprehensive outsourcing service offering.

We are also making enhancements to our employee and manager self-service offerings, which should increase our value proposition to clients and prospects.

I would like to provide some closing comments and insight into our business, before I turn it over to Steve.

First, recurring revenue is strong.

Our client satisfaction and retention are on plan despite the merger activity.

We are not losing clients to outside our normal expectations.

New sales are slowing down.

As we predicted last quarter, we are experiencing diminishing new sales activity, due in large part to the uncertainty of the pending merger.

While the third quarter's financial results are strong, we do not expect that we will be able achieve these results for the fourth quarter.

Our people are staying put.

Our retention programs are effective and employees are highly motivated to succeed, and therefore there has been little turnover here at ProBusiness, something I think we can all be very proud of.

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

Thanks Tom.

I would like to begin with the quarter results.

Despite the challenges of our changing economic environment and the pending merger, our core business demonstrated really good results this quarter.

And as Tom noted earlier, had we been continuing on as an independent company, we will reach our profitability goal this quarter.

This is something we are certainly proud of and is a reflection of the efforts that we have been making for the last couple of years to deliver on this.

Compared to a year ago, revenue in Q3 grew less than 1%, almost $45.4m and this is a combination of growing fees; both in payroll and comprehensive outsourcing, offset by a decline in interest income.

That decline in interest income was in excess of 25% year-over-year and this was due to the impact of interest rates.

In terms of revenue composition, the payroll services totaled approximately $24.5m and this was up 15% year-over-year.

This quarter payroll represented 54% of total revenue, and this was up from 47% in the same quarter last year.

As a percentage of revenue, payroll continues to increase; this is due in large part to the impact of declining interest rates reflected in our tax revenue.

Our clients employment base, this is assuming a same store sales concept, declined 4% in the March quarter from the December quarter; primarily due to the seasonal hiring by a retail client in the December quarter.

Excluding retail, we would have seen an approximately 2% decline this quarter, and that's measured from the December quarter.

On a year-to-date basis, our clients employment base has declined 2% versus the 5% decline we experienced for the same period last year.

Technology-related clients continue to be impacted but not as much as last year.

And we provide payroll services to over 1.5m employees at this point.

Tax services comprised 33% of our revenues and it was at $15.1m, and this was down 42% from last year's Q3 levels due entirely to interest rates.

The average daily tax balance for the third quarter was about $1.2b, compared with $768m to last quarter and about the same -- $1.2b in the third quarter of last year.

The sequential growth in our average daily balances is entirely seasonal and this relates to the unemployment funds that have their most significant impact in the March quarter.

Average daily balances are certainly challenging to analyze, not as easy as employees; and based upon our research we are attributing the flat year-over-year average daily balances to a combination of factors that include our client's declining employment base, a reduction in [bonds] payments and last a reduction in stock option exercise activity.

Interest rates have falling precipitously since a year ago, as we realized this quarter an effective rate of about 3.5%.

Had the rates remained the same as last year, given this quarter's average daily balance; we would have seen almost $5m more on the revenue line.

This issue of declining rates continues to be a challenge throughout the industry and unfortunately this is a fact that we can't control.

As far as hedging, we were little less than 50%hedged for the quarter.

And as a reminder, our hedges, they are going to continue to roll-off over the next 18-24 months, at which time we are going to reinvest at significantly lower rates.

Comprehensive outsourcing accounted for 13% of revenue or $5.8m and this was up over 19% from the last year's third quarter.

We continue to believe, the shift to more comprehensive outsourcing is a trend that remains strong.

On the cost side, we have been significantly impacted by transaction related expenses, in total, as we pre announced, these costs were in excess of $8m this quarter alone and were comprised primarily of legal and professional fees in employee retention programs.

The employee retention plans have been put into place to help insure that we retain our key employees till the completion of the transaction.

Given the lack of turnover, since the announcement of the transaction, we believe these programs are having an impact.

We will continue to see significant transaction related impacts on expenses until we close.

Gross margin, which we compute as total revenue plus the cost of providing services, was almost 56%.

This is a little less than last year which showed 57%, this reflects the shortfall of interest income and reduced interest rates.

Depreciation and amortization grew only 2% over last year and was only slightly higher than the second quarter.

General and Administrative expenses in Q3 were $9.7m and this is a large increase sequentially and year-over-year, and these results reflect the transaction related activities that I described.

These have the effect of offsetting the cost management programs we put into place over a year-ago.

R&D expense was $6m.

This was about 13% of revenue; this represents an increase in spending this year to maintain competitiveness of our product offerings in our efforts to develop future technologies.

This is critical for us.

As we build our reputation on technological superiority along with customer service, our product strategies have always been central to our leading market positioning.

We will increase our investment in R&D throughout the remainder of this year to ensure we have a competitive offering going forward.

This is especially necessary in the event that the merger should not occur.

We cannot afford to sacrifice our future by not investing in our core, underlying technology.

Client acquisition costs were $9.1m in the third quarter.

This is a 39% year-over-year decline; represents around 20% of revenue compared to 33% last year.

This is an area of our business, where we have made significant progress over the last year or so and a dramatically reduced spending without compromising our ability to implement new clients.

Our net loss for the third quarter before preferred dividends was $4.3m or 15 cents per share.

The per share amount is based upon 28.7m weighted average shares outstanding.

This compares to a loss of 20 cents per share before dividends last year.

As a reminder, the impact of the declining interest rates from last year was about $5m in revenue and profits, and the impact of the transaction mainly on cost was in excess of $8m.

The balance sheet remains strong.

We ended, as Tom said with about $84m of cash, cash equivalents, investments; during the quarter, we increased our cash balances by over $1m from the $83m last quarter, and we generated over $6m from operations despite transaction costs.

I would like to take a minute and expand upon what Tom said about the impact of this transaction going forward.

One thing we can say for sure is that there will be significant additional costs related to transactions that we are going to be incurring.

We expect that these will be similar or even slightly greater in the fourth quarter than those incurred in the third quarter and generally in the same areas.

Additionally we expect that the impact of diminished new sales activity will begin to negatively impact our revenues in the fourth quarter due in part to the uncertainty in the pending merger.

In the larger outsourcing deals we signed, clients are generally looking for more certainty that we can currently provide.

Historically, we have seen a seasonal decline in revenues and interest income in the fourth quarter due to declining average daily tax balances.

However, this fourth quarter, we would expect to see a more than normal seasonal decline due to the impact of -- due to new clients sales and slightly lower interest rates.

We have opted not to provide any more specific forward guidance then what I just stated, simply because there are just too many unknowns facing us.

I would like to conclude my remarks by emphasizing our confidence in our current plan to merge with the ADP, amidst the challenges of a weak economy we are focusing on what we need to do and execute well and complete the transaction.

As I said before, we will not be taking Q&A today.

I would like to thank you for your continued interest and support and have a good evening.

That concludes today's ProBusiness teleconference.

You may now disconnect and have a great day.