Expanded Pact Gives Exult Shareholders Something to Cheer
By ANDREW SIMONS
Investors hope that Irvine-based Exult Inc.’s expanded deal with International Paper Co. is a strong step toward its year-end profitability target.
Exult, a fast-growing software maker with a market value of about $300 million, said its 10-year deal with the paper products maker was broadened to include its flex staffing management service, which helps companies manage temporary workers.
The contract expansion is worth an additional $90 million for the term of the deal, originally inked for $600 million. “We think it’s a good step forward and could mean more business with International Paper,” said Mike Henn, Exult’s chief financial officer.
Perhaps more importantly, it could presage deals of a similar stripe in the next fourth months, the company said.
The company is forecasting that similar deals from existing clients plus new pacts will boost revenue 30% to 40% next year, Henn said.
“We expect to sign a sufficient number of new contracts,” he said.
That’s good news for investors, which have seen Exult shares pummeled in the past 12 months, down 75% to 3.05 at recent check.
Exult manages human resource operations for large companies through its own software, network and call centers. The company boasts deals with Bank of America Corp., International Paper, BP PLC and Unisys Corp.
The International Paper deal helps address a concern among analysts that Exult is not generating enough so-called “variable” revenue,money made from added services, such as temporary staffing, along with its core business of human resources outsourcing.
Disappointing variable revenue was cited when Exult lowered its September-quarter forecast to the $400 million to $410 million range, down from its previous projection of $430 million to $450 million.
Exult officials made the revision in July, when it announced its June quarter results. The company also pushed back its target for the company’s first profitable quarter to December from September. The profit pushback was particularly disappointing to Exult shareholders, who had been told last year that Exult expected to post its first profit in the June quarter.
But a faltering economy kept Exult’s customers from buying many of its added services, one analyst said.
“As we are painfully aware, hiring is down and training has been squeezed and customers are therefore limiting” the scope of their deals wrote George Sutton, an analyst with RBC Capital Markets.
Sutton maintained his rating on the stock at “outperform” following Exult’s June earnings report, but several other brokerages downgraded it, including Bear Stearns Co., Merrill Lynch & Co., Goldman Sachs Group Inc. and Salomon Smith Barney.
Shares dove 40% on July 29 when it released the report.
The company is working through another issue.
Exult spooked investors in July when it announced it was considering a change from its “as billed” accounting standard to a “percentage of completion” standard. With investors already jittery from accounting scandals at WorldCom Inc. and Enron Corp., the news was greeted with some skepticism.
“There’s been some misunderstanding of the issue,” Henn said. “This was a voluntary move on our part. We just wanted a good housekeeping seal of approval before we made a change.”
Under the percentage of completion standard, a company accounts for sales, expenses and earnings based on a calculation that determines how far the project has moved along. Previously, Exult accounted for sales after the bill for a contract had been paid.
Many different types of companies that service long-term contracts already use the percentage of completion method. It has been a generally accepted accounting method since 1981. “There’s nothing that says we’ll actually change though,” Henn said. The company plans to make a decision by the end of September.
Investors also are watching for new Exult contracts this quarter.
Just securing a new customer comes with high up-front costs for the software maker.
Skeptics note that for each potential client, Exult must devote a great deal of worker time to researching whether the prospect would benefit from Exult’s services,and whether Exult can make money doing it.
Each investigation takes four to six months, allowing the company to process “only a few of these due diligence undertakings at one time,” the company said in a recent filing. And some investigations don’t turn into contracts. In short, much of the money Exult makes goes to due diligence. Exult won’t comment on any specific deals coming.
“We have a strong frontlog,” Henn said.
