Convergys Reports Third Quarter Financial Results

Sat. October 31, 2009; Posted: 11:28 PM

In an October 27 release, Convergys said that revenue was $765 million, including accelerated recognition of deferred implementation revenue of $106 million from one large HR Management contract. Non-GAAP earnings were $0.27 per diluted share and GAAP net loss was $0.70 per diluted share. Third quarter 2009 non-GAAP operating income increased 32 percent to $41 million from the prior year period, and GAAP operating loss reduced 63 percent to $90 million from the prior year period. During the third quarter, Convergys reached agreement with one HR Management client to eliminate future implementation obligations and liability for services not yet operational.

"We made progress during the quarter on multiple fronts to improve the position of the company," said David Dougherty, President and CEO of Convergys. "This included successfully renegotiating the contract with one of our HR Management clients. We have agreed to stop implementation work related to services not yet live. For the other client, implementation remains paused, and we are actively negotiating to change the scope and other terms of the contract. We continue to provide services for more than half the employees of both clients. Over the last few months, we have substantially reduced the risk in the HR Management business."

Third quarter results include charges of $131 million, which consist of net charges of $122 million related to HR Management and restructuring charges of $6 million in Information Management and $3 million in Customer Management. The HR Management-related net charge of $122 million reflects the agreement reached to eliminate future implementation obligations and liability on services not yet operational for one large contract. For this contract, all of the capitalized implementation costs have been written off and a portion of the implementation revenue has been recognized. The HR Management-related net charge of $122 million includes: $106 million reported as revenue representing accelerated recognition of deferred implementation revenues previously received; $148 million reported as cost of providing services and products sold representing previously deferred implementation costs incurred for services not yet operational; $76 million reported as asset impairment primarily related to previously deferred costs pertaining to services already operational that are projected to no longer be profitable; and $4 million of severance costs.

On a non-GAAP basis, third quarter 2009 operating income was $41 million, compared with operating income of $31 million in the same period last year, excluding the third quarter 2009 net charges of $131 million discussed above and charges of $273 million recorded in the same period last year. Third quarter 2009 GAAP operating loss was $90 million, compared with a loss of $242 million in the same period last year.

On a non-GAAP basis, third quarter 2009 net income was $34 million, or $0.27 per diluted share, compared with net income of $36 million, or $0.29 per diluted share, in the same period last year. Third quarter 2009 GAAP net loss was $86 million, or $0.70 per diluted share, compared with net loss of $140 million, or $1.15 per diluted share, in the same period last year.

Convergys said it is adjusting its financial guidance as follows:

- Fourth quarter 2009 revenue projected to be $650 million to $670 million.

- Fourth quarter 2009 non-GAAP earnings projected to be more than $0.30 per diluted share, due in part to an expected favorable tax benefit in the fourth quarter 2009. Not included in this guidance is potential restructuring expense to streamline the businesses.

- Full year 2009 free cash flow projected to be $165 million to $185 million. In addition, full year 2009 cash dividends from the Cellular Partnerships are expected to approximate $40 million.

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