Sean McHugh - Vice President Investor Relations
Russ Fradin - Chairman and CEO
Rob Schriesheim – CFO
Ashwin Shirvaikar – Citi
Jason Kupferberg – UBS
Mark Marcon – R.W. Baird
Shlomo Rosenbaum – Stifel Nicolaus
Paul Ginocchio – Deutsche Bank
Todd Van Fleet – First Analysis
Tien-tsin Huang – JP Morgan
[Joe Altier] – William Blair
Julio Quinteros – Goldman Sachs
Hewitt Associates, Inc. (HEW) F1Q10 Earnings Call February 1, 2010 8:30 AM ET
(Operator Instructions) Welcome to the Hewitt Associates Fiscal 2010 First Quarter Earnings call. I would now like to turn the conference over to your host, Vice President of Investor Relations, Mr. Sean McHugh.
On the call today are Russ Fradin our Chairman and CEO, and Rob Schriesheim our CFO.
During this call when we discuss revenues we are referring to net revenues or revenues before reimbursements, and when we mention underlying revenue, operating income, net income, and earnings per share amounts we are using non-GAAP financial measures that provide a better understanding of our underlying performance after excluding unusual items. Today’s press release provides a reconciliation of US GAAP to these and other measures.
On this call we may make forward looking statements. Forward looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Please refer to our most recent SEC filings for more information on risk factors that could cause actual results to differ. Hewitt disclaims any obligation to update or revise any forward looking statements made on this call.
At the conclusion of the call we will conduct a question and answer session. During the Q&A session we ask that you please limit yourself to one question.
Now I will turn it over to Russ.
Before I start, I’d like to introduce our new CFO, Rob Schriesheim. Rob comes to us from Lawson Software, the world’s third largest publicly traded ERP software provider. We’re very pleased to have a seasoned leader of his caliber join the Hewitt team. Rob recently assumed his CFO duties from John Park as part of the transition we announced in December. I want to thank John for the tremendous contributions he has made over the past four years and wish him continued success.
Moving on to our results, I’m happy to report a record high operating margin of 16.2% this quarter along with solid earnings per share of $0.71. We’re pleased with how each of the businesses performed this quarter. Let me highlight a few of our more noteworthy accomplishments.
First, we are delighted with the $6 million profit in HR BPO. The team is doing a great job with execution as the business continues to improve its cost structure. Even more importantly, our service quality has improved in line with our financial results. I’m pleased to note that we recently renewed contracts with two large existing HR BPO clients. We expanded our relationship one renewal and maintained the scope of services with the other. We look forward to continuing to provide high quality service to both companies.
Second, Benefit Outsourcing delivered solid margins while continuing to grow participant counts in a challenging employment environment. We grew our large market and mid-market businesses but project work was a little soft due to the continuing impact of the weak economy. Margins remained comfortably within our target range even as we continue to invest in growth.
Third, our Consulting business performed reasonable well given the difficult environment for client spending. We saw about what we expected in our fiscal first quarter, a continuation of tight corporate budgets through the end of the calendar year. Recall that we also faced a tough comparison to last year’s first quarter in consulting. In that quarter demand for retirement and financial management services was particularly strong as companies sought more advice in light of the extreme market volatility. Also, the economic downturn had not yet started to meaningfully impact the more discretionary parts of our business.
Fourth, we are making good progress in building for the future to support our growth agenda. In a business with as many long term contracts as Hewitt we always thing of a growth agenda that is centered on client retention and the service experience of our clients employees. We continue to invest in service quality as it reinforces our distinctiveness in the marketplace and supports our retention and growth objectives.
It’s equally important to continually refresh our product lines to remain a leading edge provider. We’re putting resources to work in both outsourcing and consulting to ensure that our offerings remain as relevant and valuable as ever to our clients. We continue to make additions to our sales force. Finally, in addition to these initiatives we will selectively make smaller acquisitions. We continue to manage an active acquisition pipeline. It’s difficult to speculate on the timing of specific opportunities but note that we are in various stages of evaluating many good opportunities that will support both our consulting and outsourcing businesses.
In summary, we delivered a very positive start to our fiscal year and given the performance of our businesses to date we remain comfortable with the overall outlook of the year.
Before I turn the call over to Rob I’ll briefly comment on the partial divestiture of our executive compensation consulting business in North America that we announced this morning. This small spin off was done to better serve the interests of our clients. As you may have followed in the news there’s been increasing public and political scrutiny about perceived conflicts of interest for compensation advisors.
Though we disagree with these views we felt we needed to recognize the reality that some of our Board clients for executive compensation services wanted a complete separation of the business. This spin off does not change our commitment to providing world class executive compensation services to the marketplace including building a full service executive compensation practice around the world.
In the US specifically we will continue to provide services to Board clients that are comfortable with our current arrangements and practices, we will put additional emphasis on further growing our executive compensation practice for management, and we will expand our industry leading data business.
Now here’s Rob with our financial results and detailed comments on guidance.
I’ve been on board for almost a month and have spent a great deal of time getting to know the team and reviewing the business. Now that we are reporting the quarter I look forward to meeting and working with the investment community.
Let me begin by highlighting our consolidated results for the first quarter. Reported net revenues were flat compared to the prior year quarter. Net revenues declined 2% after adjusting for currency translation, acquisitions and divestitures, and third party revenues. Reported operating income grew 11% to $125 million compared to $112 million in last year’s quarter. There were no unusual items in the first quarter of this year so reported and underlying results are the same.
Underlying results for the last year’s first quarter exclude a $7 million revenue contribution from the HR BPO business that we divested in the second quarter 2009. The associated contributions to operating and net income were not material so reported and underlying results were essentially the same for last year’s first quarter. Consolidated underlying operating margin increased by 150 basis points to 16.2% in the first quarter. This was mostly driven by operating improvement in our HR BPO business and lower shared service costs.
Our effective tax rate for the current quarter was 39.6% unchanged from last year’s first quarter. The current quarter’s rate reflects the impact of the mix of income across tax jurisdictions that offset some structural improvements in foreign and state tax rates. We continue to expect a fiscal ’10 full year effective tax rate to be in the range of 37% to 38%.
Reported and underlying net income for the first quarter grew 6% to $68 million or $0.71 per diluted share compared with $65 million or $0.68 per diluted share last year. Cash flow from operations was $38 million compared with $64 million in the prior year. Free cash flow was $22 million compared with $29 million in the prior year. This decline in free cash flow reflects lower collections that were partially offset by lower capital expenditures and pre-paid expenses.
Capital expenditures were $17 million in the first quarter compared with $35 million in the prior year quarter. The decrease reflects reduced spending in real estate and IT hardware and software with the IT spending impacted by timing of purchases this year. For 2010 we expect CapEx in the range of $120 to $130 million.
Regarding our share repurchase authorization, we bought back 323,000 share for a total of $13 million during the first quarter. In the second quarter through January 29th we’ve repurchased another 249,000 shares totaling $10 million. This brings our cumulative repurchase total to $97 million against the overall $300 million authorization.
Our buyback execution reflects our continued interest in acquisition opportunities as a priority in deploying our cash in situations in which we can earn well in excess of our long term cost of capital in support of profitable growth. Looking at the balance of 2010, we intend to continue to focus on acquisition opportunities while at the same time making good progress on our existing authorization.
Let me give you a few first quarter segment highlights. As a reminder, my comments regarding underlying results are adjusted for the HR BPO divestiture that I mentioned a moment ago. Unless otherwise noted, all quarterly comparisons are on a year over basis.
In benefits outsourcing, reported revenues grew 3% in the first quarter. Revenues also grew 3% when adjusting for a small amount of favorable currency translation. The increase reflects growth in all businesses and lower adjustments for client service issues. This growth was partially offset by the impact of lost clients, client renewals at lower price points, and lower project revenues.
Beginning this quarter we have revised how we present our benefits outsourcing and user participant counts. Our measure now includes absence management services in addition to our defined benefit, defined contribution and health and welfare services. Also, as a result of implementing an improved tracking methodology we have made some adjustments to more accurately reflect our participant counts. Prior year results have been revised accordingly and can be found in today’s earnings release.
On a comparable basis and including absence management, first quarter benefits outsourcing participant counts increased 9% year over year to 20.8 million. New large company implementations including meaningful growth in absence management drove the increase over last year. About half of this year over year increase in participants was driven by growth in absence management with the remainder driven by growth in our core services which included good growth in the mid-market.
We’re pleased with our new client and new service participant growth in this challenging environment. This solid momentum in our point solutions business which includes absence management services reflects good progress in our strategy to provide add on, stand along services to complement our core Benefit Outsourcing offerings.
Absence management price points are significantly lower then our blended core service rate. What may appear on the surface to be meaningful price compression principally reflects the change in our business mix. In addition to the absence management mix impact on revenues, we continue to experience some pricing pressure given the economic and competitive environment.
Our benefits outsourcing segment margin declined 40 basis points to 25.7% in the first quarter on both a reported and underlying basis. This was principally due to higher compensation and related expenses associated with the increased staffing for new clients. This more than offset the higher revenues and favorable foreign currency translation.
Our benefits outsourcing pipeline remains solid. We continue to invest in our sales capabilities and remain focused on closing new opportunities and renewing existing contracts to support our growth initiatives.
In HR BPO reported revenue declined 13%. Revenue decreased 11% when adjusting for divestitures, favorable foreign currency translation, and third party revenues. Client terminations and liquidations drove the expected decline. HR BPO earned a profit of $6 million in the first quarter compared to a loss of $5 million in last year’s quarter on both a reported and underlying basis. The improvement was due to lower staffing and overhead cost reduction. In addition, last year’s results included asset impairment charges that did not occur this year. These were partially offset by the decline in revenue.
While we are pleased with this performance, at this point we’re not ready to say this level of profitability is sustainable. The promising results in the first quarter reflect favorable project revenue and the fact that we have not yet added some further staffing and investment resources. Keep in mind that future performance is likely to be lumpy due to the timing of some contractual adjustments and selective investments for growth.
We continue to see good demand for our HR BPO services in the marketplace. As Russ mentioned, we recently renewed our HR BPO work with two large existing clients. I’ll add that the implementation of the new HR BPO when announced on our fourth quarter call is on schedule and on budget. We continue to selectively target three to four new HR BPO contracts per year using a very disciplined framework to drive profitable growth in this segment.
In Consulting, segment revenue grew 1% on a reported basis for the first quarter. Revenues declined 6% when adjusting for the impact of an acquisition and favorable currency translation. On this same adjusted basis our retirement and financial management practice grew less than 1%. Recall that the business faced a difficult prior year comparison of growth in the low teens reflecting strong demand as companies sought more advice in light of the extreme stock market volatility.
Health management grew in the low single digits. We are closely monitoring the healthcare reform agenda and the water is as murky as ever. Talent and organization consulting revenue has declined approximately 20%. Recall that we implemented productivity improvements in this business last year and we remain confident in our capabilities and capacity to serve our clients once corporate spending strengthens.
Communications, our smallest practice, declined approximately 20% sequentially unchanged from the fourth quarter rate. Consulting margins declined by 160 basis points to 12.9% in the first quarter on both a reported and underlying basis. The decline is principally due to lower constant current revenues that were partially offset by lower bad debt expense.
Finally, unallocated shared service costs were 2.5% of net revenues in the first quarter compared with 2.9% of net revenues in last year’s first quarter on both a reported and underlying basis. The improvement reflects the impact of accrual adjustments to incentive compensation in both years.
Now turning to our outlook, here are a few reminders regarding our guidance.
Our plans are not counting on a meaningful recovery in any of our geographies.
Our currency expectations are based on current forward rates.
We are not factoring in the impact of acquisition activity that hasn’t already been announced to date.
Our first quarter results lead us to reaffirm our prior guidance for fiscal 2010 even after absorbing what we expect to be some modest dilution relating to the partial divestiture of the consulting executive compensation business announced today.
Here’s a recap of our view of fiscal 2010. First, we continue to expect consolidated revenue growth in the low to mid single digit range, reflecting positive organic growth as well as the benefit of foreign exchange. This is comprised of solid growth in consulting, roughly flat revenues and benefits outsourcing and a decline in HR BPO.
Second, we continue to expect diluted EPS of $2.85 to $2.95. We expect underlying operating income growth to moderately exceed diluted EPS growth, this reflects some improvement in consulting margins, about a break even performance in HR BPO and a roughly flat contribution from benefits outsourcing. We expect the full year effective tax rate in the range of 37% to 38%. We also expect to make good progress against our share repurchase authorization.
The partial divestiture of the consulting executive compensation business announced today is expected to have a dilutive annualized impact to our earnings of approximately $0.07 to $0.10 per share. Given where we are in the year we expect fiscal 2010 dilution of a few pennies which we can absorb in our guidance. Lastly, we still anticipate fiscal 2010 free cash flow solidly in excess of net income.
Now I’d like to turn the call back to Russ.
Before we start with questions I’ll wrap up our prepared remarks by saying how pleased we are with our overall first quarter performance as we start the new fiscal year. As we move ahead in 2010 we will continue to put our resources to work to support our growth agenda and we won’t lose our focus on operational excellence. We look forward to updating you on our progress.
Operator, we’re ready to take questions now.
(Operator Instructions) Your first question comes from Ashwin Shirvaikar – Citi
Ashwin Shirvaikar – Citi
You guys ended last quarter with record signings in benefits admin, can you talk a little bit about the progress you’re making on implementing those signings and do you still expect a roughly nine to 12 month ramp towards getting there?
I think what we’ve seen it is really a continuation of the trend. I think that a lot of folks given all of what’s going on in the economy, more folks are going out to bid then normal which is good because we’re winning more than our fair share of those bids. From an implementation perspective you’ve got it about right, on the big core services we’re still looking at cycle times somewhere in that nine to 12 month range, not a lot of change there.
I will tell you though two things; one we are seeing more activity in the mid market where the implementation cycles are a little bit faster and I think you’re beginning to see a little bit of that in the participant counts and I would expect that to continue. In what we call the mid market has been very active and we’re doing well there so the cycle times are lower.
Second, we’re doing a bunch of work operationally, not just to improve our margins but also to bring those cycle times down. I don’t think that’ll have a huge impact on the work we already sold in the fourth quarter but I will tell you for the future work going forward I’m a little more optimistic that we’re going to see faster and faster cycle times and we’ll shave anywhere in the order of three months off of those timeframes that you’re quoting. We feel pretty good about how it’s going.
Your next question comes from Jason Kupferberg – UBS
Jason Kupferberg – UBS
Rob, I wanted to ask you a question as you’ve gotten settled in here now in your new role, maybe some initial thoughts that you have broadly speaking regarding capital deployment strategy for the company. I know you’ve talked about continuing to make solid progress around the buyback authorization during the course of fiscal ’10; it sounds like there’s still a piece in M&A pipeline out there as well.
Any other incremental thoughts in terms of you’ve got a nice balance sheet to work with here, is this the kind of company that over time should support a dividend perhaps or do you feel like buybacks and M&A make the most sense? Would love to hear your conceptual thinking on capital deployment given that you’ve obviously only had a few weeks, but what are your initial thoughts?
I appreciate the question and thanks for asking the question. I’ve been here, as you know, just under a month. I’d say that the company’s priorities really haven’t changed that much. I guess from perspective obviously if we feel that our equity is worth more than where it’s currently trading obviously smart corporate finance says to be a buyer and return and capture that discounts and return it to the shareholders. I think you’ve seen the company do a very nice job. As I said in my prepared remarks, I think we’re going to continue to make nice progress against the already announced share repurchase authorization.
Having said that, the company has made tremendous progress over the last several years in growing their cash earnings particularly from a strong focus on the HR BPO business and in turning that business around. I think now the business is very well positioned for investing for growth and we clearly want to pursue a strategic agenda where we identify those opportunities, I know it sounds trite but its true, we identify those opportunities where we can invest our capital, earn well in excess of our long term economic cost of capital, and drive profitable growth in that way.
As a result, I would say that we’re going to focus or continue to focus on looking for those acquisition opportunities that allow us to do exactly that and I think that given the strength of the balance sheet and the solid cash flow that we have that we’re in a position where we can both pursue the strategic agenda and continue to make nice progress on the buyback authorization.
I would comment that strictly from corporate finance math you may see us carrying higher cash balances than what corporate finance math would indicate is the most optimal but I think that that is probably the best long term approach for the business given the fact that we want to drive long term growth.
The other thing that I would add, which is just a little more color commentary on what we said before is that we are seeing good acquisition pipelines. In all candor, some of those are just taking a little bit more in gestation then we had hoped for. Normal sorts of commentary for us about we’re looking at bite sized stuff, we’re not looking at anything that at this point squeeze out the share repurchase agenda.
Its taking a little bit longer in gestation and we want to make sure that diligence is done right and that these are good deals and they really are going to be important builders of shareholder value over the long term. That’s the other thing that’s going on where I think I’d be a little disappointed if you don’t see some announcements from us in the remainder of the year.
Your next question comes from Mark Marcon – R.W. Baird
Mark Marcon – R.W. Baird
I was wondering if you could talk a little bit about what you’re seeing in two areas; one, benefits administration, the pricing there and describe also the progress that you’re making, a little bit more color on the middle market initiative. Secondly, on HR BPO, tremendous progress there, does the guidance basically imply that will be break even for the balance of the year in HR BPO or is it possible that we’re going to continue to see this sort of progress?
On the first question, on the benefits administration market and what we’re seeing out there, what I will tell you is the market remains competitive. I would add my own color commentary and tell you that at times what our competition is doing looks irrational to me, meaning we’ve had some weakened competitors who are going through M&A activities, I think you know the three, ING obviously has made a purchase, HP made a purchase, now Xerox has made a purchase.
I don’t know what the strategy is here where their companies were dressing themselves up for the transaction or not but we are seeing stuff there that we just can’t explain, meaning we look at making sure we return good money to our shareholders and make good return on capital while providing wonderful service to clients. From what we see we’re not going to chase that kind of pricing down.
We’re holding our own even with seeing that out there, we’re still holding our own in terms of wins. Not helpful but clearly that’s going on and I suspect as those transactions settle down that the market will settle down as well and that will be a good thing. We really are focused on making sure that whenever we win a contract in benefits administration that we can provide just superb service, that’s really what we’re after at this point.
In terms of the middle market, interestingly enough, not a lot of new news there. I think if anything we’ve seen a little bit of a pick up of activity in this last quarter and our first quarter where more folks are going out to bid or getting into that cycle where people would normally be out to bid because annual enrollment is when they would be lowest to do implementation.
We’re making good progress there, you see it in the participant counts and as Rob said, our margin structure there is very good but the absolute rates are a little bit lower so you’ll probably see what looks like compression which is actually just a change in mix when you include both absence management and the middle market. That’s what’s going on there.
In terms of the BPO, you just see all along that we really are pleased with how this business has progressed. I can’t compliment that team enough with how well they’ve done. We’re seeing great activity in the marketplace there so frankly part of the reason we’re tempering our remarks is we want to make sure we have the right sales resources and the right products in place to meet the demand we’re seeing because I think the contracts that you’re seeing us sign there are going to be great long term for the company.
When you put that all in the blender and you shake it up, are we going to come out exactly at break even? We’re just trying to give general guidance there. As you can tell, historically its not an area we have wanted to take risk in our guidance because we’ve had surprises there before and we want to make sure we’re over that before we start declaring success and victory there overall. I think in general we want to maintain our normal conservative stance but recognize that we hadn’t added some of those investment resources. That probably made the first quarter look a little bit better.
Your next question comes from Shlomo Rosenbaum – Stifel Nicolaus
Shlomo Rosenbaum – Stifel Nicolaus
I want to focus a little on consulting and given the trends, the macro trends and the trends within the business, I want to ask if you can talk about the expectation that you have, the guidance seems to imply that revenue is going up. Is that primarily just currency or do you see something within the business that’s going to drive the revenue up on a constant currency basis over this year. Also just focusing on that in terms of margins, are you expecting the margins to go up through the year the same way that you’re thinking that the revenue will go up?
I’ll give you a little bit more commentary and ask Rob to add his thoughts, particularly on the margin question. We’re not seeing a change in the demand environment. What I’ve said all along is that from my perspective this quarter we’re in now is going to be more indicative of how the year is going to turn out than our first quarter. We’ve got the situation where our reported first quarter is every large company’s last calendar quarter. Large corporations aren’t going to increase their budget in their last quarter.
Heading into the new year we’re absolutely seeing more positive dialogues, people more focused on leadership issues and more forward looking issues. As I’ve been known to say, and as one of my business leaders says, we don’t get paid on pipeline. What you see here is we’re expecting modest growth largely because of the easier comparisons with last year. Yes, we’re going to see real organic growth and yes that will be compounded by currency growth. We’re looking at both but we’re not looking at anything goofy here, we’re not predicting a big bounce. If we see better than that we’d be thrilled.
On the margin front, the only thing I’ll add before I ask Rob to comment on the margin front is that from my perspective remember we had very heavy severance charges in the back half of last year. On a comparative basis you’re going to see really third and fourth quarter look a lot better from that perspective. Because some of the severance activity unfortunately touched Europe at the end of last year those charges, the compensation go on and so you saw some of that depress the margins, not the severance but the fact that the people are still collecting salary until they roll off the payroll, its still going on that depressed the margins in the first quarter.
I would reiterate Russ’ comments on the margin as it relates to consulting, I understand your question, I appreciate that you thought it through. As Russ said we took about $30 million in severance charges in Q3 and Q4 last year, the majority of which related to consulting and a significant portion of which was in Europe. As you know, working through social issues in Europe people tend to stay on the P&L longer than if you take the same type of action in the US.
We do anticipate the second half of the year to see some margin expansion in consulting. As you think about our overall quarterly phasing of our results I think you ought to think about that as well on the EPS line given the fact that in the latter half of the last fiscal year we took those charges and so you’ll see the benefit in the second half of this year.
The other thing that I guess is worth mentioning more on the demand side to be a little bit more granular is really no big issues in RFM (Retirement Financial Management) that we had is last year we had double digit growth in the first quarter so that’s what we meant about the comparison was particularly tough. The fact that we were pretty close to flat in RFM this quarter we’re not overly worried about that.
Health management was up a bit, the only nervousness there is if anybody can tell us at this point what’s going to happen with healthcare reform we would appreciate the insight. We’re going to continue to speculate on more modest growth there unless Washington does something more spectacular, I think that’s looking less and less likely in all candor. We have pretty modest expectations there.
You really seeing what’s going to happen with the more discretionary TOC and communications practices there frankly it is the comparison with last year and the fact that we’re seeing a little bit of smidgen of an up tick particularly as China and India have clearly recovered themselves. We’ll see, we feel mildly optimistic is that way I would put it.
Your next question comes from Paul Ginocchio – Deutsche Bank
Paul Ginocchio – Deutsche Bank
I want to ask about where you stand on the three to four HR BPO contracts, that’s a goal for this fiscal year right, any maybe how we think would play out?
Obviously we had the contract signing we announced in the fourth quarter of last year. As I mentioned, we will continue to update you from our perspective, we’re so pleased that that remains on time and on budget and the client is delighted with how that’s going. As we look at the pipe for this year that’s why we reiterated the fact that we’re looking for the three or four clients a year, we didn’t have anything special to announce this quarter because we had two large renewals that took a fair amount of time. I will tell you that the pipeline looks very good and we’re reiterating three or four a year as being a reasonable expectation including this year, meaning we expect to have that happen this year.
Your next question comes from Todd Van Fleet – First Analysis
Todd Van Fleet – First Analysis
To go back on the consulting here for second, we saw the revenue tick down maybe $4 plus million on a sequential basis excluding the charges in the September quarter I think we saw the contribution margin decline by about 360 basis points. I know you talked about the drag from European expenditures and the decisions that you made in that market weighing on the bottom line. Could you quantify for us perhaps how much that was in the December quarter?
Secondly, on consulting how should we expect to see the Meridian divestiture play out in terms of the revenue impact, are there any additional metrics that you can give us regarding the contribution that that divestiture made to the top line and/or bottom line? I know you talked about a $0.07 to $0.10 dilutive impact and I’m not sure I picked up whether that was related to Meridian or not?
This is a step we did with full focus on our clients. We had a group of clients that have been good longstanding Hewitt clients that we have enormous respect for who felt that they really needed this separation. We wanted to create a business that in essence is just a portion of our overall executive comp that could serve that group of clients that was feeling pressured. If I were thinking metrics I would say that if our overall consulting revenue is a bit over a billion dollars that think of what we’re divesting as somewhere on the order of about 2% or 3% of revenue as a good way to think about how much revenue you’re losing here as it’s annualized.
Second, Rob’s already given you the quote on the $0.07 to $0.10 being the dilutive impact on an annualized basis. What’s happened is since we’re only doing the divestiture now, four months into the year, and its a two part divestiture, in other words some of the people are going now to take some of the pressure off and the rest of the people will join them in the fall, that its only a few cents dilutive in the current year. As Rob said, we’re just going to suck that up in the guidance and make sure that we stay within the range on the guidance we’ve already given you.
To follow up on Russ’ comment and your first part of your question which I think had to do with consulting trends Q4 ’09 to Q1 ’10. I think one of the things you have to keep in mind is that seasonally our strongest quarter, particularly in consulting, is usually our fourth quarter. The tick down in revenues that you’re seeing and in margin from Q4 to Q1 are fairly consistent with what you’ve seen in prior years. I think that for the most part should give you the color that you’re looking for.
Your next question comes from Tien-tsin Huang – JP Morgan
Tien-tsin Huang – JP Morgan
On BPO, I appreciate the conservatism and the need to invest but can you be a little bit more specific on what you’re expecting in terms of revenue in the coming quarters, is there any reason why we can’t expect sequential revenue growth from here? Also a quick housekeeping item, the outlook for other expense below the operating income line, what’s the driver there, that was a little bit lower then what we had expected, what are you expecting for the year?
I would expect revenue to decline throughout the year and let me explain why. Last year if you remember we had a couple of things happen. We had a couple of client liquidations which gave us revenue throughout the year. If you remember we had Mervyn’s and Circuit City specifically that were clients for what turned out unexpectedly to be the bulk of the year, that have now fully liquidated and so that’s a drag on the top line.
Second, we had a great renewal but there was a scope reduction with another large contract so we’ll have that little drag on revenue. We had a client acquisition that we expect as the year goes on we’re going to lose the revenue from that any many of you know that’s the company out on the West Coast, Sun Microsystems which is being bought by Oracle.
If you look at all those headwinds, what the business has done here is a wonderful job of maintaining and improving the margin structure in light of that downdraft. Then as you look at the new clients coming online from that perspective those implementation cycles are well into the 12 month category. We’ve said all along you’re not going to see significant new revenue. I don’t think you’re going to see revenue growth out of the BPO business until 2011.
You’re going to see that downdraft continue and that’s why we’re being a little bit cautious on the income guidance. That’s why you’re not going to see the sequential because the implementation cycle is for the new clients are going to be pretty darn long and you won’t really see that revenue until next year.
On the housekeeping item I’m going to turn to Rob, this may test his 30 day in skills.
On the housekeeping item I think you asked about the other income. I know our other income for the three month period ended December 31, 2009 was about -$11.6 million. I think it might have been a little bit more than you would have expected as a result of the low interest rate environment that we’re operating in right now. While I don’t think for the full year you can take that number and annualize it, in other words I don’t think its going to be -$11.6 million times four, I think you do have to take into consideration the fact that we’re operating in a lower interest rate environment.
That’s a polite way of saying we’re operating in a no interest rate environment. I think that’s the bulk of the explanation.
Your next question comes from [Joe Altier] – William Blair
[Joe Altier] – William Blair
The unallocated costs, is this a good run rate to use for the year?
No, I think that what you ought to think about for the year is closer to 2.9% to 3% as opposed to the 2.5% you saw in this quarter. There were some accrual adjustments going on this quarter.
Your next question comes from Julio Quinteros – Goldman Sachs
Julio Quinteros – Goldman Sachs
More of a question on the linearity of the segments, if we look at where the benefits outsourcing, consulting and HR BPO business is concerned, it sounds like you’re pretty clear on the HR BPO, I’m just wondering about the linear trends on the other two sides, the benefits outsourcing and the consulting segments as we think about where you finish this quarter and then what your full year expectations are for each of those two segments.
I think we’re expecting, what we’ve reiterated is the HR BPO revenue downdraft, the good news is you get a lot of visibility far in advance of that business and that’s what I said, its great that the business has done so good in managing it cost structure. We’ve talked all along about renegotiating contracts and things like that. You’re seeing the impact of that play through which is terrific.
In terms of the trends in the other businesses that’s why we’re being so modest and cautious and when Rob says when we give our guidance at this point we’re not building into the guidance any big up tick in any of the businesses. We’re really looking at the benefits of administration being pretty flat for the rest of the year and then just some modest growth out of the consulting business.
As Russ said, and as I said in my prepared remarks, I think benefits we’re looking at to be roughly flat year over year. Consulting we are looking for what we characterize as solid growth, a combination of both organic as well as the benefit from foreign currency in consulting since we do have a significant portion of that business that resides outside of the United States.
In HR BPO an expected decline in the revenues as we continue to manage some of those contracts. I think that should give you enough color on the business. As I said in my remarks we are not expecting a meaningful recovery in any of the geographies in which we operate. It also doesn’t reflect any type of acquisition activity. I think what we’re giving is the best color that we think is prudent in this economy which obviously does limit visibility for us and every other company that I know of.
The only other thing that I’d add to the extent its helpful, its related to your question, we’ve gotten away from the practice and we don’t want to get back into the practice of giving quarterly guidance. The comment I would make is that as we look out there, if you look at how the severance last year was back ended in the third and fourth quarter obviously the margin improvements in the businesses and the operating income improvements for business there’s going to be some back end loading there compared to what we see some folks out there might have expected.
That’s a good point in terms of how people are thinking about the quarterly phasing. The fact that we might be a little bit more back end loaded then what people might have anticipated.
Your last question comes from Shlomo Rosenbaum – Stifel Nicolaus
Shlomo Rosenbaum – Stifel Nicolaus
I want to ask a little bit about the focus on two housekeeping things. The below the line items I’m not sure if it was truly clarified, the interest expense was actually in one if you’re modeling where you guys interest rates are. There’s another line that’s just non-operating income that came out as a loss this quarter which I was just wondering what we should expect from that line?
The second housekeeping item is just the DSOs the receivable days ticked up about four days in the quarter, is there anything that we should be reading into that and what kind of trend should we expect for that through the rest of the year?
On the first question, yes there was another issue in other income has to do with, without getting into a lot of granularity, some inter-company settlements and I don’t think you’ll see that going forward. As far as the DSOs, in the first quarter DSOs were at about 49 days, in the same quarter last year they were at 58 days. You have seen an improvement year over year. What you have also seen though is sequentially the fact that the DSOs increased about 3.5 days from 45 days in Q4 to 49 days in Q1.
We know that a part of that DSO increase was actually due to many companies stretching their balance sheets because we got about a day or a little bit more of payments in on January 1st. A portion of that was due to slower collections and another portion was due to some extended payment terms. I think that going forward you’ll see us manage that DSO hopefully over the next, it might take us some time to get there, three or four quarters, but I’d certainly like to see the company maintain the DSOs in the range of about 45 days.
One other comment I’d like to bring up is the tax rate was higher this quarter than had been planned. The company, as Russ said earlier, came in about on plan versus its internal expectations on an operating basis. The tax rate was higher due to the mix of income in certain foreign jurisdictions. As a result, that cost us about two pennies per share I’d say on the tax rate. I think that for the full year we’re still comfortable that the tax rate should be in the range of 37% to 38%.
I want to thank everyone. We’re delighted that you were able to join us early on the Monday morning. I want to thank Team Hewitt for once again delivering such a wonderful quarter. We are thrilled with how the progress is going and we look forward to continued progress as we report the next quarter. Thank you everyone.
That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!