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Convergys Delivers Record 2006 Revenue and Earnings Per Share

Convergys announces its financial results for the fourth quarter and full year of 2006. Highlights include:
- Record 2006 revenue of $2.8 billion, up 8 percent;
- Record 2006 earnings of $1.17 per diluted share, up 36 percent;
- Fourth quarter revenue of $720.0 million, up 8 percent;
- Earnings of $0.32 per diluted share in the fourth quarter, up 100 percent;
- Fourth quarter Customer Care revenue up 10 percent; operating income up 14 percent;
- Free cash flow of $97 million in the fourth quarter and $257 million for the full year.

Convergys fourth quarter revenues of $720.0 million were up 8 percent compared to the fourth quarter of 2005 reflecting growth from the Customer Care and Employee Care segments. Fourth quarter net income increased 90 percent to $44.5 million, or $0.32 per diluted share, versus $23.4 million or $0.16 per diluted share in the prior year.

Convergys net income improved $21.1 million in the fourth quarter compared to the same period last year. This improvement in net income was principally due to a $6.4 million increase in Customer Care operating income, a $9.3 million increase in Convergys' cellular partnership equity earnings, and a $19.0 million favorable change in income tax expense (improved international results in the fourth quarter of 2006 and the impact of foreign cash repatriations in the same period last year), offset in part by a $9.6 million decline in Information Management operating income and $5.5 million of additional long-term compensation expense.

Operating Performance by Segment
- Customer Care: Customer Care revenues of $468.1 million were up 10 percent in the fourth quarter compared to the same period last year. Strong growth from several existing clients in each of our verticals: Communication, Technology, Financial Services, and Other, contributed to the revenue growth. Customer Care operating income and operating margin were $53.5 million and 11.4 percent, respectively, compared with $47.1 million and 11.1 percent in the prior year. The operating income improvement reflects both revenue growth and operational efficiencies. Increased costs of approximately $12 million caused by the impact of a weakened U.S. dollar partially offset the improvements.

- Information Management: Information Management revenues of $194.0 million were down one percent in the fourth quarter compared to the same period last year. Strong growth in international operations largely offset the decline in data processing revenue caused by a client migration. Information Management operating income and operating margin were $31.2 million and 16.1 percent, respectively, compared with $40.8 million and 20.7 percent in the prior year. The operating margin for the quarter is consistent with results recorded throughout the first nine months of 2006, but below a strong fourth quarter last year. Operating income for the fourth quarter included a restructuring action taken to better align cost structure to future
business needs.

- Employee Care: Employee Care revenues of $57.9 million were up 20 percent in the fourth quarter compared to $48.2 million in the same period last year. Revenue increased as a result of recent client implementations. Employee Care operating loss increased to $12.0 million compared to an operating loss of $10.1 million in the prior year. A majority of the loss in the fourth quarter was due to a reserve for the resolution of issues relating to the State of Florida contract, restructuring charges, and increased costs related to a client implementation. Improvements resulting from cost reductions and on-going operating efficiencies partially offset these items.

- Other Items:
* Convergys recorded a restructuring charge of $12.5 million in the fourth quarter of 2006 versus $12.3 million in the fourth quarter of 2005. The $12.5 million restructuring charge includes $24.1 million of severance costs, $0.5 million of facility closure costs and the reversal of $12.1 million in abandonment costs for a facility being brought back into service to support consolidation of operations in the United Kingdom. Restructuring actions were taken in each business segment, including $6.5 million in Customer Care, $2.1 million in Employee Care, and $0.8 million in Information Management. The Information Management restructuring charge included severance charges of $12.9 million largely offset by the $12.1 million reversal described above.
* The cellular partnerships contributed pre-tax equity earnings of $4.7 million during the fourth quarter. This compares to a loss of $4.6 million during the same period last year. Equity earnings of $11.8 million for the full year were in line with the $12.4 million in 2005.
* The effective tax rate was 23.7 percent in the fourth quarter. The lower tax rate was due to a benefit from improved international performance, including the reversal of the UK facility costs mentioned above.
* Cash flow from operating activities was $119.2 million in the fourth quarter. Free cash flow was $97.1 million compared to $105.8 million for the same period in the prior year. Free cash flow for the full year 2006 was $256.9 million.
* Days sales outstanding (DSO) declined to 70 days at December 31, 2006. This compares to 73 days at September 30, 2006.
* The increase in deferred charges in the quarter, net of amortization and deferred implementation revenue, was $7.9 million.
* During the fourth quarter, Convergys recorded $10.5 million in non-cash stock based compensation expense. During the fourth quarter of 2005, this amount was $7.0 million.
* During the fourth quarter, Convergys repurchased 2.8 million shares at a cost of $63.2 million and an average price of $22.72 per share. During 2006, Convergys repurchased 6.2 million shares at an average price of $20.56 per share.

Financial Guidance:
- In a departure from previous practice, starting in 2007, Convergys will provide only annual earnings guidance but will provide updates to this annual guidance on a quarterly basis.
- Convergys continues to expect overall revenue and earnings improvement to yield 2007 GAAP EPS of more than $1.20 per share.

Convergys' 2007 expectations include:
- Continued expansion in Customer Care revenue and earnings, with seasonal effects driving relatively stronger performance in the second half of the year.
- Sequential declines in Information Management revenue, operating income, and operating margin due to the Cingular and Sprint migrations.
- Improvement in Employee Care revenue and profitability.



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