Human resource outsourcing service firm Hewitt Associates (NYSE:HEW) reported Tuesday that top-line trends in its businesses remain difficult. Until the sales picture improves, the company remains focused on cost controls. Similarly, its end clients remain cost conscious and should increasingly turn to outsourcing key human resource functions to companies like Hewitt.
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Quarterly Results
HEW's total revenues fell 6.1% to $774 million, but only 4% organically when stripping out the effects of currency fluctuations as well as acquisition and divestiture activity. The core benefits outsourcing business accounted for half of quarterly revenue and posted 1% organic growth, while the human resources business process outsourcing (BPO) segment (15% of revenue) struggled with a top-line decline of 10%. Consulting, the third and final segment, fell 9% to account for almost 35% of the quarterly total.
Profit growth mirrored the revenue trends with benefits-outsourcing logging an impressive 30.9% boost in operating to $87.2 million. HR BPO continued in the red while consulting saw a double-digit decline in profits to $43.7 million. Total operating income improved to $105.8 million, a reported 95% increase from last year's quarter. Stripping out unusual items, underlying operating income grew an impressive 23% as earnings came in at 68 cents per diluted share to beat analyst expectations. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)
Full-Year Results
Full-year revenues declined 4.8% to $3.1 billion as the flagship segment posted flat sales and the smaller units posted high single-digit to low-teen decreases. Profit growth was more muted in benefits outsourcing, but still rose 6% to boast an operating margin of 25%. HR BPO stayed in the red but reduced its losses by almost 94%. Consulting eked out a 0.4% profit increase to post decent 14.2% operating margins. Diluted earnings per share came in at $2.78. Stripping out special charges and underlying earnings improved nearly 35%.
Trends and Competition
Trends indicate that Hewitt is holding its own during a global economic slowdown. Top-line trends remain anemic, but management stated during the earnings conference call that it remains "focused on high quality service delivery and our client satisfaction scores improved." Competition is intense, with giant rivals such as IBM (NYSE:IBM), Marsh & McLennan (NYSE:MMC), and even payroll specialists ADP (NYSE:ADP) and Paychex (Nasdaq:PAYX) offering competing human resources, BPO and consulting services.
The Bottom Line
Hewitt's free cash flow for fiscal 2009 came in at $305.1 million, or approximately $3.20 per diluted share. Free cash has exceeded reported net income for at least the past four years. For the coming year, management expects diluted earnings between $2.85 and $2.95 per share while total net revenues should grow in the mid single digits, at best. Despite a stock price that is bumping against its highs over the past 12 months, trailing free cash flow and forward earnings multiples are still quite reasonable in the low teens. Despite the intense competition, Hewitt remains a recognized leader in its industry, and long-term trends continue to indicate that companies will outsource key human resource functions to cut costs.
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