Convergys' Strong Execution Yields Best Quarterly Performance In Three Years
October 25, 2006
(Cincinnati, October 25, 2006) - - - Convergys Corporation (NYSE: CVG), a global leader in providing customer care, human resources, and billing services, announced today its financial results for the third quarter of 2006.
HIGHLIGHTS
- Record Convergys quarterly revenue of $702.7 million, up 9 percent over prior year
- Convergys earnings of $0.32 per diluted share, up from $0.30 in the prior year
- 10 percent revenue growth in Customer Care with operating income up 12 percent
- Information Management revenues increased 3 percent on continued strength of international operations
- Employee Care revenue increased 25 percent with operating loss reduced 18 percent
- 2006 EPS guidance increased to $1.15
Revenues of $702.7 million were up 9 percent compared to the third quarter of 2005 reflecting growth from all three Convergys segments: Customer Care, Information Management, and Employee Care. Operating income increased 4 percent to $69.7 million compared with a strong performance in the prior year of $67.0 million. Revenue growth with existing clients, increased productivity, utilization, and efficiency contributed to the improvement in results. Net income increased 7 percent to $45.2 million, or $0.32 per diluted share, versus $42.4 million or $0.30 per diluted share in the prior year. Non-cash stock based compensation expense in the third quarter was $7.2 million, or $0.03 per diluted share, compared to $6.4 million in the prior year.
"I am pleased that Convergys' continuing strong execution and organic growth have yielded our best quarterly performance in three years," said Jim Orr, Chairman and Chief Executive of Convergys. "Continued revenue growth and operating improvements in Customer Care reflect strong client demand and our more intensive management of performance metrics. We also delivered strong growth in Information Management’s international operations and achieved solid progress in Employee Care. Our strong results combined with a healthy pipeline give us increased confidence in our prospects for continued revenue and earnings growth."
Operating Performance by Segment
Customer Care
Customer Care revenues of $454.8 million were up 10 percent compared to prior year. Strong growth from several existing clients in the Communication, Financial Services, Technology, and Other verticals contributed to the revenue growth. Customer Care operating income and operating margin were $54.5 million and 12.0 percent, respectively, compared with $48.8 million and 11.8 percent in the prior year. The operating income improvement reflects both revenue growth and operational efficiencies. Increased costs of $8.5 million caused by the impact of a weakened U.S. dollar partially offset these items.
Information Management
Information Management revenues of $197.1 million were up 3 percent compared to prior year. Strong growth in international operations more than offset declines in North America. Information Management operating income of $31.3 million was down 9 percent compared to prior year. Operating income margin of 15.9 percent was down 220 basis points from the prior year. The decrease from last year was due to the timing of the recognition of revenue and costs related to several projects, and increased investment in new product development.
Employee Care
Employee Care revenues of $50.8 million were up 25 percent compared to $40.7 million in the same period last year. Revenue increased as a result of recent client implementations. Employee Care operating loss improved 18 percent to $8.6 million compared to an operating loss of $10.5 million in the prior year. Improvements resulted from cost reductions and on-going operating efficiencies.
Other Items
- The cellular partnerships contributed pre-tax equity earnings of $4.2 million during the quarter. This is down from $7.4 million during the same period last year.
- Cash flow from operating activities was $114.0 million. Free cash flow was $89.7 million compared to $58.6 million in the prior year.
- The increase in deferred charges in the quarter, net of amortization and deferred implementation revenue, was $19.0 million.
- During the third quarter, Convergys repurchased 1.2 million shares at a cost of $24.0 million and an average price of $19.29 per share. Total shares repurchased during the first nine months were 3.4 million at an average price of $18.74 per share.
Financial Guidance
- Convergys is increasing full year 2006 guidance and now expects EPS of $1.15 per share.
- Convergys remains comfortable with its previous guidance for 2007 EPS to exceed $1.20. Further updates to this annual guidance will be provided in 2007.
FORWARD-LOOKING STATEMENTS DISCLOSURE AND "SAFE HARBOR" NOTE:
This news release contains forward-looking statements that reflect Convergys' expectations as of October 25, 2006. Actual results of Convergys could differ materially from those discussed herein. Potential risk factors that could cause or contribute to actual results being materially different from those in the forward-looking statements include, but are not limited to, the loss of a significant client or significant business from a client, difficulties in completing a contract or implementing its provisions, difficulties in completing or implementing an acquisition, continued consolidation in the markets we serve, terrorist activities and responses of the United States and other nations to such activities, changes in the legal and regulatory environment in which Convergys and its clients operate, and competitive and other factors disclosed in the Form 10-K for the year ended December 31, 2005, and subsequent filings with the SEC by Convergys Corporation. The company has no current intention of updating any forward-looking statements that may be included herein, other than in publicly available statements.
NON-GAAP FINANCIAL MEASURES:
This news release contains non-GAAP financial measures as defined by the Securities and Exchange Commission Regulation G. Pursuant to the requirements of this regulation, reconciliations of these non-GAAP measures to their comparable GAAP measures are included in the attached financial tables.
Convergys provides non-GAAP free cash flow, revenues excluding Cingular, and earnings excluding non-cash stock-based compensation expense.
Convergys’ management believes that these non-GAAP financial measures provide management and investors with (1) a more comprehensive understanding of the company’s underlying performance, (2) a useful comparison of current results with past and future results, and (3) an enhanced understanding of the company’s prospects for the future. However, Convergys recognizes that there are limitations associated with the use of these non-GAAP financial measures as they do not reflect all of the amounts associated with our results as determined in accordance with GAAP. These non-GAAP measures should be considered supplemental in nature and should not be considered in isolation or be construed as being more important than comparable GAAP measures. The non-GAAP financial information that we provide may be different from that provided by our competitors or other companies.
As described above, Convergys uses the following non-GAAP measures:
Free cash flow -- Management uses free cash flow to assess the financial performance of the company. Convergys’ management believes that free cash flow is useful to investors because it relates the operating cash flow of the company to the capital that is spent to continue and improve business operations, such as investment in the company’s existing businesses. Further, free cash flow facilitates management’s ability to strengthen the company’s balance sheet, to repurchase the company’s stock and to repay the company’s debt obligations. Limitations associated with the use of free cash flow include that it does not represent the residual cash flow available for discretionary expenditures as it does not incorporate certain cash payments including payments made on capital lease obligations or cash payments for business acquisitions. Management compensates for these limitations by using both the non-GAAP measure, free cash flow, and the GAAP measure, cash from operating activities, in its evaluation of performance. There are no material purposes for which we use this non-GAAP measure beyond the purposes described above.
Revenues excluding Cingular -- The company uses revenues excluding Cingular to assess the revenue growth of the business excluding the impact of Cingular’s migration of acquired subscribers off of AT&T Wireless’s billing and customer care systems that was announced in 2004. Before the acquisition of AT&T Wireless by Cingular in 2004, AT&T Wireless was Convergys’ largest client. For the first year after the merger, the company experienced a decline in customer care revenue primarily as a result of business changes instituted by Cingular related to former AT&T Wireless operations. Over the past year, the company has been assisting Cingular with migrating subscribers off the AT&T Wireless billing systems that Convergys supports onto Cingular’s in-house systems, one of which Convergys continues to support. As a result of this migration, data processing revenues from Cingular have declined. Limitations associated with the use of this non-GAAP measure include that this measure does not include all of the amounts associated with our results as determined in accordance with GAAP. Management compensates for these limitations by using both the non-GAAP measure, revenues excluding Cingular, and the GAAP measure, revenues, in its evaluation of performance. There are no material purposes for which we use this non-GAAP measure beyond the purposes described above.
Earnings excluding non-cash stock-based compensation expense -- Management uses earnings excluding non-cash stock-based compensation expense to compare operating results to competitors, without regard to the impact of various long-term incentive plans, including stock option and restricted stock compensation approaches. Management believes the stock-based compensation plans of competitors vary and therefore, comparison of the company’s results to those of its competitors on a GAAP EPS basis alone would not be as useful, particularly during the transition to SFAS 123(R) reporting. Management also believes excluding these expenses facilitates comparison to the company’s historical operating performance. For this latter reason, management does not allocate these expenses to the company’s segment results, and excludes these expenses from internal analysis of business segment results. Limitations associated with the use of this non-GAAP measure include that this measure does not include all of the amounts associated with our results as determined in accordance with GAAP. Management compensates for these limitations by utilizing both the non-GAAP measures, earnings excluding non-cash stock-based compensation expense, and the GAAP measures, income before tax, net income and diluted earnings per share, in its evaluation of performance. There are no material purposes for which we use this non-GAAP measure beyond the purpose described above.
CONFERENCE CALL NOTE:
Convergys will host a conference call on Wednesday, October 25, at 10:00 AM, EDT, to discuss the company's third quarter results. It will feature Jim Orr, Chairman and CEO, and Earl Shanks, CFO. This call will be carried live (with scheduled repeats) on the Internet. A link to the conference call is available at www.convergys.com
Click here to view the third quarter earnings table.
About Convergys
Convergys Corporation (NYSE: CVG) is a global leader in relationship management. We provide solutions that drive more value from the relationships our clients have with their customers. Convergys turns these everyday interactions into a source of profit and strategic advantage for our clients.
For more than 30 years, our unique combination of domain expertise, operational excellence, and innovative technologies has delivered process improvement and actionable business insight to marquee clients all over the world.
Convergys has approximately 65,000 employees in 68 customer contact centers and other facilities in the United States, Canada, Latin America, Europe, the Middle East, and Asia, and our global headquarters in Cincinnati, Ohio. For more information, visit www.convergys.com
(Convergys and the Convergys logo are trademarks of Convergys Corporation.)
Investor Contact:
David Stein, Vice President of Investor Relations
+1 513 723 7768 or investor@convergys.com
Media Contact:
John Pratt, Convergys Corporate Communications
+1 513 723 3333 or john.pratt@convergys.com
