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Towers Watson Reports Mixed 3Q Results

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By on Consumer Staples, Technology & Software

Tuesday morning Towers Watson reported mixed fiscal third-quarter results, which drove the stock down by 9% today. On the positive side, we viewed management’s commentary about the consulting business and exchange business as positive. As it relates to the consulting business, management said that its technology and administrations solutions (TAS) segment has had strong new client wins lately and the retirement consulting practice is seeing a growing backlog of lump-sum project work (which helped drive a surge in growth for that practice in late calendar 2012).

Management also is optimistic that their investment this year in building a health benefits brokerage business in 30 new countries and developing a de-risking product for medical retiree benefits will contribute nicely to growth in fiscal 2015. We believe that the discretionary spending environment in Europe also should gradually improve over the next year or two and the comparisons for the investment consulting business get easier during the next few quarters. Lastly, management noted that the performance of its benefits segment (which is where most of the shortfall relative to our estimates occurred) improved as the fiscal third quarter progressed, some of which might have reflected the impact of weather on consultants’ travel plans in January.

We expect all of those factors to contribute to an improving growth rate in the company’s core consulting business in fiscal 2015. We also viewed the commentary about the exchange business as positive. After announcing last quarter that it had signed up its first active off-cycle enrollment client, management said that it expects to add 3 times as many off-cycle retirees this year (probably helped by the win of Northrup Grumman [NOC $119.62] as a client).

We would note that profit margins for the exchange segment came in better than expected, despite the company expecting a bigger off-cycle enrollment cycle, which is an encouraging sign long term about profit margins for this business. Management also said that Liazon has thus far kept all of its channel partners (and has even added some new ones) and the company’s channel partners have commitments at this point to enroll twice as many lives as last year. While management continued to express some uncertainty about predicting what enrollment will look like at the end of this calendar year, they did endorse a five-year target of 7.5 million-8.0 million lives for their active employee exchange, which we think compares well to expectations (we had assumed 7 million lives in five years). We thus remain bullish about the long-term prospects of the exchange business.

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