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Convergys Reports Second Quarter Results

Convergys Corporation has announced its financial results for the second quarter of 2008.

Second Quarter Summary:
- Consolidated revenues of $689.5 million; operating income of $47.4 million;
- Net income of $40.5 million, or $0.32 per diluted share, compared to $38.8 million and $0.28, respectively, in the prior year;
- Customer Management revenues of $469.0 million; operating income of $19.4 million
Continued strong execution resulted in higher operating margins of 23 percent in Information Management;
- HR Management reduced operating loss to $4.2 million;
- Strong cellular partnerships equity earnings of $11.3 million.

Second Quarter Performance

On a consolidated basis, Convergys reported second quarter diluted earnings per share 14 percent above last year. Strong contribution from the cellular partnerships, a lower tax rate, and an aggressive share repurchase program helped offset largely anticipated operating challenges. While Customer Management revenues were up slightly in the second quarter, call volumes with certain large clients began to reflect the weaker macroeconomic environment. Increased costs due to foreign exchange of approximately $14 million significantly impacted Customer Management operating income in the second quarter.

Revenues
Revenues were $689.5 million in the second quarter of 2008 compared with $707.0 million in the same period last year. The revenue decline was mostly due to expected client revenue declines in Information Management.

Operating Income
Operating income in the second quarter of 2008 was $47.4 million compared to $58.1 million in the same period a year ago. The $13 million improvement in HR Management operating loss was more than offset by a decline in Customer Management primarily due to the negative impact from the weakened US dollar as well as increased investment to support anticipated future growth.

Net Income
Net income was $40.5 million, or $0.32 per diluted share, compared to $38.8 million, or $0.28 per diluted share, in the same period a year ago. This includes a $7.7 million year-over-year increase in cellular partnerships equity earnings and a lower effective tax rate of 24.9 percent reflecting profitability improvements in international operations.

Cash Flow
Cash flow from operating activities was $16.6 million in the second quarter. Free cash flow in the quarter was negative $5.9 million reflecting the impact from a $52.3 million increase in deferred charges, net of implementation revenue received and amortization, primarily related to HR Management projects.

Share Repurchase
During the second quarter, Convergys purchased 3.5 million shares at a cost of $54.8 million. At June 30, 2008, 7.1 million shares remain authorized for repurchase.

Customer Management
Customer Management revenues increased to $469.0 million compared to $460.6 million in the same period last year. Price and volume increases with clients in the communications and other markets more than offset a revenue decline with financial services clients. Customer Management operating income was $19.4 million compared to $44.7 million in the same period last year. Operating margin was 4.1 percent in the quarter compared to 9.7 percent in the same period last year primarily due to the approximately 300 basis points negative impact of the weakened US dollar and continued investment to support anticipated future growth.

Information Management
Information Management revenues were $161.1 million compared to $183.4 million in the same period last year largely due to client migrations in North America. Operating income was $37.9 million compared to $38.4 million in the same period last year. Operating margin improved to 23.5 percent in the quarter from 20.9 percent in the same period last year. This improvement in operating results was due to continued cost management, including more focused investment in new product capabilities, and growth in license revenue.

HR Management
HR Management revenues were $59.4 million compared to $63.0 million in the same period last year, largely due to timing of project completions. The HR Management operating loss was $4.2 million compared to $17.1 million in the same period last year. The operating loss reduction in the quarter was driven by a reduction in SG&A expenses. Last year's results included expensing $6.1 million of implementation costs related to a large contract.

Forward Financial Guidance

The company believes that results in the second half of the year will be softer than previously expected due to the effects of adverse economic conditions including a slowdown in call volumes. Convergys' expectations for 2008, including the anticipated acquisition closing in the third quarter, are as follows:
- Full-year consolidated revenues at the lower end of the previously provided range of $2.85 billion to $3.0 billion;
- 2008 GAAP earnings of $1.15 to $1.20 per diluted share, including the dilutive impact of the Intervoice acquisition;
- Customer Management revenues of approximately $2.0 billion, with operating income and margin improving in the fourth quarter;
- Information Management revenues above $600 million with an operating margin in excess of 17 percent;
- HR Management revenues of $260 million to $270 million and an operating loss of approximately $20 million;
- Continued strong contribution from the cellular partnerships and an effective tax rate of approximately 25 percent for the year.



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