WRONG NUMBERS : Struggling Pay-Fone Systems Seeks Its Profits From Other Firms’ Payrolls

Guy Lundberg, president of Pay-Fone Systems, was chatting with a visitor recently when an air horn suddenly blared outside his office, followed by the clapping of several Pay-Fone employees.

The ruckus? That day Pay-Fone’s telemarketing team had found 10 businesses that might, repeat might, consider buying Pay-Fone’s service. Pay-Fone’s computers process small companies’ payroll accounts and print their employees’ paychecks, ostensibly saving the firms time, labor and money.

Each day, as soon as Pay-Fone’s sales team finds 10 prospects, the horn sounds at the company’s Van Nuys headquarters.

“One of the small adjustments we made,” Lundberg said as the clapping abated. “My predecessor told me that telemarketing didn’t work.”

His predecessor was Lewis Greenwood, who founded the company in 1955. But Greenwood quit last year after narrowly winning a proxy fight waged by Lundberg, Chicago psychiatrist Dr. Allen Kahn and other dissident Pay-Fone stockholders, who were unhappy about Pay-Fone’s lackluster performance and sagging stock price.

Greenwood then sold his Pay-Fone stock to the new group, and Lundberg was installed by Kahn and others to run the company.

Now, 15 months after taking Pay-Fone’s helm, Lundberg has made several adjustments to turn things around, but success isn’t coming quickly. Just finding a prospective customer isn’t the same as selling that customer on buying Pay-Fone’s services.

Lundberg has stemmed a two-year slide in Pay-Fone’s revenue and moved the company back to profitability, but the earnings have been meager, and Pay-Fone’s stock remains somnolent.

“It’s a slow process,” conceded the lanky, 6-foot-4 Lundberg, son of the late Dan Lundberg, who published the celebrated Lundberg Letter, an oil industry newsletter. “Has progress been made? Yes. Is is taking longer than I wished, is it taking longer than I anticipated? Yes.”

In its fiscal year ended June 30, Pay-Fone earned $95,653 on $6.1 million in sales. That works out to less than half of the $222,179 it earned in fiscal 1983 and $25,000 shy of Lundberg’s salary of $120,000 a year. Pay-Fone notes, however, that the profit would have been higher but for $200,000 in expenses related to the proxy fight and higher marketing costs.

In Greenwood’s last year at the helm, in fiscal 1987, Pay-Fone lost $57,021 on revenue of $6.7 million, but that loss also stemmed from proxy-fight costs. Pay-Fone’s best earnings year came in fiscal 1981, when profit totaled $558,436.

Lack of Progress

The stock market certainly is impatient with Pay-Fone’s lack of progress. The company’s cash and the value of its headquarters building--built last year at a cost of $3 million--total more than $3 per share of stock, which is the neighborhood where the stock is trading. In other words, investors value Pay-Fone’s ongoing business at nothing.

The name Pay-Fone stems from the company’s traditional method of taking payroll data--the number of hours employees worked, their wage scale, tax information and so forth--over the telephone. Pay-Fone’s computers then process the data and print out the client’s paychecks. Pay-Fone’s clients mostly are small- and mid-sized companies, with an average of 25 employees, whose managers don’t want to bother issuing payroll checks or hiring an accountant to keep bookkeeping records.

Pay-Fone’s 3,500 customers can either call Pay-Fone or send the data via calculators attached to phones. And now they can use personal computers, which Pay-Fone will lease at little cost, to transmit the information.

But Pay-Fone’s major competitors are powerful rivals. Industry leader Automatic Data Processing, based in Roseland, N.J., has $1.5 billion in revenue and 175,000 customers. Paychex, in Rochester, N.Y., which also focuses on small- to mid-size firms, was started 16 years after Pay-Fone, and today has 95,000 clients and $79 million in annual sales.

Marketing Push

Pay-Fone, in an attempt to draw more business its way, has increased advertising, strengthened its sales force, used telemarketing and taken other steps to bolster its marketing thrust, Lundberg said.

Although those steps are a temporary drag on profits, drumming up new business is crucial to Pay-Fone. Because many small firms typically go broke in just a few years, there’s a natural erosion of Pay-Fone’s customer base.

Lundberg said the payroll business “is like a swimming pool with a leak,” and new customers are like hoses supplying fresh water to the pool. Pay-Fone needs “hoses running continuously” so that the “pool would start to rise,” he said.

Pay-Fone executives say previous marketing efforts during Greenwood’s reign were inconsistent, so that Pay-Fone at times didn’t spend enough to build its clientele or spent so much money that the costs outstripped the revenues that were gained.

Greenwood, who said he planned to sell his stake and leave Pay-Fone long before the proxy fight began, conceded in a telephone interview that marketing costs at times “were rather high.” But overall, “I had the company on the upswing, it was going in the right direction,” he said.

As for Pay-Fone’s stock, which closed Monday at $3.50 on the American Stock Exchange, it trades well below the $6.50 a share investors paid for Pay-Fone’s last stock offering seven years ago.

Pay-Fone’s management knows this only too well. When Greenwood left, Lundberg and a Santa Monica company, Allied Contractors, paid $6.25 a share to buy Greenwood’s 30% stake in Pay-Fone. Allied is headed by brothers Richard and David Kelton, who are now chairman and vice president of Pay-Fone, respectively. Allied bought most of the stock and now owns 29% of Pay-Fone; Lundberg owns 5.3% and Kahn, a Pay-Fone director, has 9.5%.

Early Interest

Lundberg’s interest in data processing began in the 1960s, when he helped his father gather data for his energy newsletter. But after a falling out with his father, Lundberg in 1970 went out on his own, and for the next 14 years ran his own firm called Lundberg Data. More recently, he was a computer and business-planning consultant.

Kahn said that before Lundberg took over Pay-Fone, “there was no hope” for an improvement in its stock price. “Today, there is hope and I am very optimistic,” he said.

And Pay-Fone, in one of its Securities and Exchange Commission filings, appeared to offer a carrot to investors by saying that, profits permitting, it will begin paying dividends for the first time.

Lundberg is also trying to cut operating costs. Pay-Fone’s Burbank branch office was moved into the company’s headquarters, and another, in Atlanta, was closed, leaving nine branches. And Pay-Fone’s 38,000-square-foot headquarters building near the Van Nuys airport has more space than the company needs, so Lundberg plans to raise extra cash by leasing space there.

But most of all, Lundberg is focusing on finding new customers. He estimates that 3 million small businesses nationwide still do their payroll in-house and by hand, and thus are candidates for his service.

Training Salespeople

To try to find those customers, Pay-Fone is training more salespeople (it now has 33) and recently unveiled a new campaign for radio, print and billboard advertising. The company now calls its service Precision Payroll because it fears too many potential customers get Pay-Fone confused with a telephone company.

Will all the changes add up? Greenwood wonders. “If in fact they are making a strong marketing effort, and that’s the reason for the lower profit, why isn’t that effort making their revenue higher?” he asked.

Kahn countered that “one has to give it at least a couple of years” to see if the changes pay off. But he also said Pay-Fone’s sales must start climbing by at least 10% a year. “Our Achilles’ heel is the issue of revenue enhancement,” he said, “and that’s got to be addressed.”