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Convergys Reports Q3 2006 Financial Results

Convergys has announced 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.

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.



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