Convergys Corp. Reports Operating Results (10-Q)

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May 05, 2009
Convergys Corp. (CVG, Financial) filed Quarterly Report for the period ended 2009-03-31.

Convergys Corp. is one of the global leaders in the provision of outsourced integrated billing and customer care services. It focuses on developing long-term strategic relationships with clients in customer-intensive industries including telecommunications cable broadband satellite broadcasting Internet services technology and financial services. The company serves its clients through its two operating units: the Information Management Group; and the Customer Management Group. Convergys Corp. has a market cap of $1.31 billion; its shares were traded at around $10.58 with a P/E ratio of 9.3 and P/S ratio of 0.5. Convergys Corp. had an annual average earning growth of 1.8% over the past 10 years. GuruFocus rated Convergys Corp. the business predictability rank of 2-star.

Highlight of Business Operations:

During the first three months of 2009, Customer Management revenues increased 9% to $516.9 compared to the prior year. Intervoice revenues were $42.7 in the first quarter 2009. Customer Management operating income and operating margin were $40.3 and 7.8%, respectively, compared with $21.9 and 4.6% in the prior year. Year-over-year margin improvement was largely driven by effective contact center workforce management, increased pricing and disciplined cost management. Current year results include approximately $5 of additional expense due to the weakened US dollar and prior year results included $5.4 of restructuring charges to streamline operations and reduce headcount.

License and related support and maintenance fees, which accounted for 32% of Information Management revenues for the first three months of 2009, are earned under perpetual and term license arrangements. The Company invoices its clients for licenses either up-front or monthly based on the number of subscribers, events or units processed using the software. Fees for support and maintenance normally are charged in advance either on an annual, quarterly or monthly basis. Professional and consulting services for installation, implementation, customization, migration, training and managed services accounted for 34% of Information Management revenues for the three months ended March 31, 2009. The professional and consulting fees are either invoiced monthly to the Companys clients based on time and material costs incurred at contractually agreed upon rates or, in some instances, for a fixed fee. Information Management remaining revenues consist of monthly fees for processing client transactions in Information Management data centers and, in some cases, the clients data centers, using Information Managements proprietary software. These data processing revenues are recognized based on the number of invoices, subscribers or events that are processed by Information Management using contractual rates. During the first three months of 2009, Information Management revenue was $107.6, a 34% decline compared to the same period last year largely due to the negative impact of North American client migrations as well as international project completions. Information Managements operating income and operating margin for the first three months of 2009 were $12.5 and 11.6%, respectively, compared with $29.5 and 18.1%, respectively, in the prior year. Results for the first quarter of 2008 also included $6.9 restructuring charges to streamline operations and reduce headcount. The decline in operating income during the first three months of 2009 was primarily due to decline in revenues of approximately $56.

Consolidated revenues for the first quarter of 2009 were $694.7 compared to $716.4 in the prior year. Growth in revenues from Customer Management was offset by revenue declines both at Information Management and HR Management. Customer Management revenues for the first quarter of 2009 include revenue of $42.7 from the Intervoice acquisition that closed on September 3, 2008. Operating income for the first quarter of 2009 was $38.8 and remained flat compared with $38.9 in the prior year. Operating improvements at Customer Management were offset by operating income declines both at Information Management and HR Management. Operating income in the prior year included $21.2 of charges, including: (a) $14.1 restructuring charge taken to better align cost structure to business needs, (b) $4.0 in curtailment costs related to the pension plan freeze, and (c) $3.1 settlement charge pursuant to the senior executive retirement plan. The above charges were partially offset by a $2.9 gain from the sale of assets at HR Management. Operating income for the current year includes $8.6 of HR Management related implementation costs which were expensed rather than capitalized as more fully described under the heading HR Management.

We recorded a restructuring charge of $14.1 during the first quarter of 2008. During the first quarter of 2009, we recorded equity income in the Cellular Partnerships of $10.7 compared to equity income of $6.8 in the prior year. Interest expense of $6.8 increased from $3.8 in the prior year reflecting a higher level of debt due to the Intervoice acquisition. The $4.3 increase in other expense, net, was due to increase in our foreign exchange transaction losses. Our effective tax rate was 24.9% for the three months ended March 31, 2009 compared to 12.0% in the same period last year. The lower tax rate for the first quarter of 2008 was due to an $8.2 favorable impact from resolution of tax audits during the quarter.

As a result of the forgoing, first quarter 2009 net income and earnings per diluted share were $28.0 and $0.23, respectively, compared with $35.9 and $0.28, respectively, in the first quarter of 2008.

Customer Management total costs and expenses were $476.6, a 5% increase from the first quarter of 2008. Customer Management cost of providing services and products sold of $322.1 during the first quarter of 2009 was flat with the prior year. As a percentage of revenues, cost of providing services and products sold were 62.3%, down 540 basis points from 67.7% in the prior year, due to benefits from effective contact center workforce management and increased pricing as well as positive contribution from the Intervoice acquisition. Selling, general and administrative expenses of $130.4 in the first quarter of 2009 increased 18% compared to the prior year. This largely reflects higher sales and marketing costs to service the expanded client base and extensive global channel partnerships obtained through the recent Intervoice acquisition. As a percentage of revenues, selling, general and administrative expenses were 25.2% in the first quarter of 2009 compared to 23.2% in the same period last year. The $4.4 increase in research and development costs reflects our investments in the automated self-care and technology solutions related to the recently acquired Intervoice platforms. Compared to the prior year, the $2.5 and $1.4 increase in depreciation and amortization expense, respectively, largely reflects assets that were added due to the Intervoice acquisition during the third quarter of 2008. We recorded a restructuring charge of $5.4 during the first quarter of 2008 to better align cost structure to future business needs.

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