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Saturday, October 22, 2005
Convergys' earnings up 43% in 3rd quarter
CONVERGYS Corporation, a global leader in providing customer care, human resources, and billing services, has announced its financial results for the third quarter of 2005.
Total revenues increased to US$644.8 million compared to US$639.9 million reported in the third quarter of 2004 reflecting growth from the Information Management Group (IMG). Operating income of US$67.0 million increased
25 percent from US$53.6 million in the prior year, while operating margin increased to 10.4 percent versus 8.4 percent. The increase in operating income reflects a continuation of IMG's strong operating performance resulting from a combination of revenue growth and the fourth quarter 2004 restructuring actions. Improvement in the cost structure of the Customer Management Group (CMG) also contributed to the increase in operating income. Net income of US$42.4 million was up 41 percent versus US$30.1 million in the third quarter of 2004. Earnings per diluted share increased 43 percent to US$0.30 compared to US$0.21 in the third quarter of 2004.
"I am very pleased with our earnings performance this quarter. Our third quarter results put us on track to deliver our earnings guidance in 2005," said Jim Orr, chairman and chief executive officer (CEO) of Convergys. "Previously we made commitments to improve performance at both IMG and CMG. We have delivered at IMG with our third consecutive quarter of revenue growth and strong operating margins. With CMG's strong operating improvement from the second quarter, we have begun to deliver on our commitment at CMG as well. Importantly, we believe there are opportunities for even further improvement," Orr added.
Orr also said "I also want to highlight the important management change Convergys announced this quarter. Dave Dougherty assumed the duties of president and chief operating officer. Dave brings to this new role a strong track record of success at Convergys. In his new role, Dave will focus on driving improved profitability and growth."
Convergys CMG's revenues of US$454.1 million were relatively flat compared to the prior year. In large part, this reflects increased volume from several customer care clients, and additional revenues associated with a price increase negotiated during the quarter with a customer care client, offset by lower spending from Cingular.
Convergys CMG's third quarter 2005 operating income and operating margin were US$38.3 million and 8.4 percent, respectively. This compares to the prior year operating income and operating margin of US$35.7 million and 7.8 percent. The seven percent increase in operating income reflects operational and profit improvements with several customer care and employee care client programs and savings realized through recent restructuring initiatives.
Higher operating expenses caused by the impact of a weakened US versus
Canadian dollar partially offset the items.
Convergys IMG's revenues increased four percent to US$190.7 million in the third quarter of 2005 from US$183.7 million in the same period last year. Professional and consulting revenues of $69.1 million increased 46 percent compared to the prior year. This increase was mainly due to increased spending from IMG's two largest wireless clients. Data processing revenues of US$80.4 million decreased 19 percent from the prior year. This decrease is due in large part to the changing dynamics of the billing relationship with Cingular as it migrates subscribers from outsourced to managed service environments. License and other revenues of US$41.2 million increased nine percent from the third quarter of 2004. The increase reflects revenues associated with a license arrangement with an existing Latin American client.
Convergys IMG's operating income increased 55 percent from the third quarter of 2004 to US$34.5 million. Operating margin increased to 18.1 percent versus 12.1 percent in the prior year. The significant improvement in operating margin reflects both revenue growth for IMG and savings realized through the 2004 restructuring initiatives.
Convergys incurred US$6.4 million in non-cash stock compensation expense during the quarter. This compares to US$4.6 million in the prior year.
The cellular partnerships contributed pre-tax equity earnings of US$7.4 million. This compares to a loss of US$600,000 in the prior year.
Interest expense was US$5.9 million versus US$3.0 million in the prior year resulting from a higher debt balance and higher interest rates.
Cash flow from operations for the third quarter of 2005 was US$39.8 million. Free cash flow of US$58.6 million increased by US$11.8 million from the prior year. Convergys reduced its accounts receivable securitization by US$50 million, which negatively impacted operating cash flow, but had no impact on free cash flow.
Days sales outstanding (DSO) declined to 74 days at Sept. 30, 2005.
This compares to 76 days at June 30, 2005.
During the second quarter, Convergys repurchased 559,000 shares at a cost of US$8.0 million and an average price of US$14.28 per share.
The following forward-looking statements reflect Convergys' expectations as of Oct. 20, 2005. Given the various risk factors discussed below, actual results may differ materially. The company intends to continue its practice of not updating forward-looking statements until its next quarterly results announcement, other than in publicly available statements.
CMG's revenue in the fourth quarter will grow approximately five percent from the third quarter, and operating income will be roughly in-line with the third quarter. Included in this guidance is an expectation that we will incur US$8 million in severance expense. These actions, when completed in early 2006, will save Convergys an additional US$15 million per year.
Convergys is continuing to pursue further improvements to enhance its performance and operations, and streamline its cost structure.
IMG's revenue and operating income in the fourth quarter will be roughly comparable to the previous three quarters.
For 2005, EPS is expected to be approximately US$1.00. This includes US$8.9 million in second quarter severance expense and an expected fourth quarter severance expense of approximately $8 million. It excludes the impact of any potential actions taken related to the American Jobs Creation Act.
Convergys expects it will continue its earnings growth in 2006. For 2006, Convergys is comfortable that it will meet or exceed the mean EPS estimate among analysts according to First Call of US$1.07.
Convergys Corporation (NYSE: CVG) is a global leader in providing customer care, human resources, and billing services. Convergys combines specialized knowledge and expertise with solid execution to deliver outsourced solutions, consulting services, and software support.
Clients in more than 60 countries speaking nearly 30 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. Based in Cincinnati, Ohio, Convergys has more than 62,000 employees in 68 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 (PR/Covergys/Sunnex)
(October 22, 2005 issue)
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