Convergys Corporation Q1 2010 Earnings Call Transcript

Convergys Corporation Q1 2010 Earnings Call Transcript
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Convergys Corporation (CVG)

Q1 2010 Earnings Call Transcript

April 27, 2010 10:00 am ET

Executives

David Stein – VP, IR

Jeff Fox – President and CEO

Earl Shanks – CFO

Analysts

T.C. Robillard – Signal Hill Capital

Rogel [ph] – Wedbush Securities

Jason Kupferberg – UBS

Ashwin Shirvaikar – Citi

Matt McCormack – BGB Securities

David Koning – Baird

Karl Keirstead – Kaufman Brothers

Gary [ph] – Credit Suisse

Eric Boyer – Wells Fargo

Shlomo Rosenbaum – Stifel Nicolaus

Presentation

Operator

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Welcome to Convergys’s first quarter 2010 earnings teleconference. At this time, all participants are in a listen-only mode. Today's conference is being recorded. If you have any objections, you may disconnect at this time. After the presentation, we will conduct a question-and-answer session. (Operator Instructions) Now, I will turn the meeting over to Mr. David Stein, Vice President of Investor Relations.

David Stein

Thank you, Julian, and good morning. Welcome to Convergys’ first quarter 2010 earnings call and webcast presentation. This call is the property of Convergys. Please note that slides accompanying today's prepared remarks are available on the Convergys Investor Relations Web site under events and webcast.

Today's call contains forward-looking statements that address our expected future performance and that by their nature address matters that are uncertain. Uncertainties that could adversely or positively affect our future results include the behavior of financial markets; the impact of regulation and regulatory, investigative and legal actions; strategic actions, including acquisitions and disposition; future integration of acquired businesses; future financial performance of major industries we serve; loss of a significant client or significant business from a client; difficulties in completing a contract or implementing its provisions; and, other matters of national, regional, and global scale.

These uncertainties may cause our actual results – future results to be materially different than those expressed in our future forward-looking statements. Please refer to Convergys' most recent filings with the SEC for additional information, including risk factors. We do not undertake to update or – our forward-looking statements as a result of new information or future events or developments.

Also, during the call, we'll discuss non-GAAP financial measures, including free cash flow and results from continuing operations adjusted for impacts related to the sale of the HR management business of litigation reserve reduction and transition costs related to the recent change in the credit and CEO of the company. Non-GAAP measures should not be construed as being more important than comparable GAAP measures.

Convergys' management believes free cash flow and results from continuing operations adjusted for HR management-related impact, litigation reserve reduction, and CEO transition cost provides the users of the financial statements with a more comprehensive understanding of the company's underlying performance. A reconciliation of these non-GAAP measures is available on the Convergys Web site at 

www.convergys.com

.

With me today on the call today are Jeff Fox, our President and Chief Executive Officer; and, Earl Shanks, our Chief Financial Officer. Jeff will provide a summary of our operational results. Earl will cover our financial performance and business outlook. Then we'll open the call for your questions.

Now, I'll turn the call over to Jeff.

Jeff Fox

Good morning, and thank you for joining us. Our overall financial results from continuing operations for the first quarter were generally in line with our operating plans. Revenue from continuing operations was $546 million in the first quarter. Adjusted EBITDA was $71 million. First quarter income from continuing operations was $0.21 per diluted share on a non-GAAP basis.

Free cash flow in the first quarter was $26 million, and the cellular partnerships – partnership continue to contribute an additional $8 million cash distribution in the first quarter. There were three events in the quarter that impacted results, which were excluding – in order to track underlying business performance, Earl will describe those in more detail in a minute. Overall, non-GAAP income in the first quarter, including the discontinued operations, was $0.25 per diluted share.

I’ll now discuss progress made in each of the operating segments during the quarter. In customer management, greater than expected volume declines offset revenue increases with a number of clients from the quarter. We continue to ramp up new business one last year, and we experience strong growth in the Philippines during the quarter. We experienced broad, though not universal, reductions in revenue within a number of our top 20 clients. This was principally caused by our client’s own volume declines in select situation. Additionally, we had some client-program terminations and volume shifts in the quarter. Customer management operating income was beyond in the first quarter due to the revenue decline.

Cost reductions we implemented in the quarter allowed us to maintain the operating margin percentage in this business. As anticipated, there was a sequential improvement in operating margin in the first quarter. Across the vertical markets we serve, the weak economy is pressuring our clients’ ability to stamp. In this environment, we believe our overall customer satisfaction level remains strong across our highly-valued customer base.

We do not believe that the volume weakness is a result of losing share. We also believe this trend is being broadly experienced by our competitors. Also, late in the quarter, we learned of a meaningful change in business expectations from one of our large clients. Selling through this trend is going to take a bit longer than we had planned. As a result, we now expect to see a sequential revenue decline in the second quarter, and we are advising our customer management revenue outlook for the full year. Importantly, we are leaving our earnings and cash guidance unchanged. Again, Earl will provide more detail on our guidance in a moment.

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