Convergys Corporation (NYSE: CVG), a global leader in providing customer care, human resources, and billing services, announced today its financial results for the second quarter of 2006.
Highlights
– Convergys total revenue up 10 percent; operating income up 65 percent
– Customer Care operating income jumped 146 percent; revenue up 14 percent
– Strong international growth in Information Management
– Employee Care revenue up 32 percent; operating losses reduced by 34 percent
– 2006 GAAP EPS guidance increased to at least $1.11 per share
Revenues of $691.8 million were up 10 percent compared to the second quarter of 2005 reflecting growth in both Customer Care and Employee Care. Operating income increased 65 percent to $62.8 million compared with $38.0 million in the prior year. Second quarter 2005 results included a restructuring charge of $8.9 million. Revenue growth and cost savings from 2005 initiatives at both Customer Care and Employee Care contributed to the improvement in results. Net income increased 55 percent to $39.8 million versus $25.6 million in the prior year. EPS increased 56 percent to $0.28 per diluted share versus $0.18 per diluted share in the prior year. Non-cash stock-based compensation expense in the second quarter was $7.4 million, or $0.04 per diluted share, compared to $6.5 million in the prior year.
“We delivered strong operating results in the second quarter and continue to see healthy demand for our solutions,” said Jim Orr, Chairman and CEO of Convergys. “Our Customer Care business generated strong organic revenue growth and significantly improved operating performance. Information Management international operations achieved very strong revenue growth and Employee Care continued to make good progress. We are on track for revenue growth and earnings improvement for the remainder of 2006 and 2007.”
Operating Performance by Segment
Customer Care
Customer Care revenues of $446.2 million were up 14 percent compared to prior year. Revenues increased in each Customer Care industry vertical Communications, Financial, Technology and Other. Customer Care’s operating income and operating margin were $48.2 million and 10.8 percent, respectively, compared with $19.6 and 5.0 percent in the prior year. Second quarter 2005 results included an $8.3 million restructuring charge. The operating income improvement reflects both revenue growth and operational efficiencies. Increased costs caused by the impact of a weakened U.S. versus Canadian dollar partially offset these items.
Information Management
Information Management revenues were down to $195.4 million from $200.7 million in the same period last year. Strong growth in international operations largely offset declines in North America. Information Management operating income of $30.5 million was down 16 percent compared to prior year. Operating income margin of 15.6 percent was down 250 basis points from the prior year. The majority of the decrease from last year was due to changes in the revenue mix from data processing to license and professional services, partially offset by operational improvements.
Employee Care
Employee Care revenues of $50.2 million were up 32 percent compared to $38.0 million in the same period last year. Revenues increased from two recent client implementations. Employee Care operating loss improved 34 percent to $8.2 million compared to an operating loss of $12.5 million in the prior year. Improvements resulted from cost reductions initiated in 2005 and on-going operating efficiencies.
Other Items
– The cellular partnerships contributed pre-tax equity earnings of $1.5 million during the quarter. This compares to $5.8 million during the same period last year.
– The effective tax rate declined from 36.7 percent in the first quarter to 32.9 percent in the second quarter due to declines in taxes paid outside the United States and changes in certain state income tax laws. The effective tax rate for the full year is expected to be approximately 35 percent.
– Cash from operating activities was $63.3 million. Free cash flow was $36.4 million compared to $4.9 million in the prior year.
– Net increase in deferred charges in the quarter was $22.7 million.
– Net capital expenditures for the quarter were $26.9 million.
– During the second quarter, Convergys repurchased 1.7 million shares at a cost of $31.7 million and an average price of $18.82 per share. Total shares repurchased during the first six months were 2.1 million at an average price of $18.44 per share.
Financial Guidance
– Convergys is increasing full year 2006 guidance and now expects GAAP EPS of at least $1.11 per share, including non-cash stock-based compensation expense of approximately $29 million, or $0.13 per share.
– For the third quarter 2006, Convergys expects GAAP EPS to be $0.27 to $0.28, including non-cash stock-based compensation expense of approximately $7.5 million, or $0.03 per share.
– Convergys expects 2007 GAAP EPS to exceed $1.20.
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 utilizing 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. Prior to 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 of 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 utilizing 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 Thursday, July 27 at 10:00 AM, EDT, to discuss the company’s second 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 http://www.convergys.com
About Convergys
Convergys Corporation (NYSE: CVG) is a global leader in providing customercare, human resources, and billing services. Convergys combinesspecialized knowledge and expertise with solid execution to deliveroutsourced solutions, consulting services, and software support. Clientsin more than 70 countries speaking nearly 35 languages depend on Convergys to manage the increasing complexity and cost of caring for customers and employees. Convergys serves the world’s leading companies in many industries including communications, financial services, technology, and consumer products.
Convergys is a member of the S&P 500 and a Fortune Most Admired Company. Headquartered in Cincinnati, Ohio, Convergys has more than 65,000 employees in 74 customer contact centers, three data centers, and other facilities in the United States, Canada, Latin America, Europe, the Middle East, and Asia. For more information visit www.convergys.com
Convergys and the Convergys logo are registered trademarks of Convergys Corporation.