(Cincinnati; January 24, 2006) - - - Convergys Corporation (NYSE: CVG), a global leader in providing customer care, human resources, and billing services, announced today its financial results for the fourth quarter of 2005.
Revenues of $669.6 million were relatively flat compared to the fourth quarter of 2004. Revenues were up 7 percent due to growth in both CMG and IMG, excluding the impact of lower revenues from Cingular. GAAP operating income more than doubled to $66.7 million compared with $30.8 million in the prior year. Excluding restructuring charges in both years, operating income increased 29 percent to $79.0 million versus $61.2 million in the fourth quarter of 2004. The improvement resulted from successful implementation of restructuring initiatives in both IMG and CMG.
Net income increased 16 percent to $23.4 million or $0.16 per diluted share versus $20.2 million or $0.14 per diluted share in the prior year. In addition to the improvement in core operating performance from both segments, the increase was driven by the impact of lower year-over-year restructuring expenses. Convergys recorded a pre-tax restructuring charge of $12.3 million ($7.8 million after tax or $0.05 per diluted share) in the fourth quarter of 2005 versus $30.4 million ($21.0 million after tax or $0.14 per diluted share) in the fourth quarter of 2004.
The operating improvements were partially offset by higher year-over-year income taxes. Income taxes included $11.4 million in additional tax expense ($0.08 per diluted share) resulting from the repatriation of foreign cash, inclusive of dividends distributed under the American Jobs Creation Act of 2004. Also impacting earnings was a pre-tax equity loss of $4.5 from Convergys´ investments in the cellular partnerships versus pre-tax equity earnings of $1.0 million in the prior year.
"Despite Sprint Nextel´s decision last week to migrate its subscribers from the legacy Precedent 2000 [r] billing system, we have confidence that we can deliver continued revenue and earnings growth across Convergys," said Jim Orr, Chairman and CEO of Convergys. "I am encouraged by our improved operating performance and the continuing diversification of our revenue sources. We anticipate strengthening margins as we begin to realize the annual effect of organizational changes made during 2005. Additionally, we have built a strong backlog, including the important wins we announced in the fourth quarter, which positions Convergys well for continued growth."
For the full year 2005, Convergys´ revenues of $2,582.1 million were up 4 percent. Growth was balanced between both IMG and CMG. Operating income in 2005 was up 21 percent. Excluding restructuring charges in both years, operating income was up 13 percent. IMG delivered strong operating performance. CMG´s operating performance improved in the second half of 2005 as both Customer Care and Employee Care results improved. On a GAAP basis, diluted EPS for the year was up 12 percent to $0.86.
Operating Performance by Segment
Customer Management Group (CMG) - Customer Care and Employee Care
CMG's revenues of $472.7 million were relatively flat compared to prior year. Reduced revenue from Cingular was offset by growth from several existing clients and revenues generated from recently implemented customer care and employee care client programs including the State of Texas.
CMG´s fourth quarter 2005 GAAP operating income and operating margin were $37.0 million and 7.8 percent, respectively, compared with $34.5 and 7.3 percent in the prior year. Excluding restructuring charges, CMG´s operating income increased 30 percent to $43.8 million versus $33.6 million in the prior year, while operating margin increased to 9.3 percent from 7.1 percent in the prior year. This reflects operational improvements with several client programs and savings realized through restructuring initiatives. Higher operating expenses caused by the impact of a weakened U.S. versus Canadian dollar partially offset these improvements.
Information Management Group (IMG)
IMG's revenues were relatively flat at $196.9 million in the fourth quarter of 2005 versus $197.9 million in the same period last year. Professional and consulting revenues of $65.3 million increased 20 percent compared to the prior year. Increased spending by IMG´s largest wireless client as well as a large Latin American client largely drove this increase. Data processing revenues of $85.7 million decreased 12 percent from the prior year, primarily reflecting the changing billing relationship with Cingular as it migrates subscribers from outsourced to managed service environments. License and other revenues of $45.9 million were in line with prior year.
IMG´s GAAP fourth quarter 2005 operating income was $40.8 million versus $5.3 million in the prior year. Excluding the $25.8 million restructuring charge recorded in the fourth quarter of 2004, operating income increased 31 percent from the prior year, while operating margin increased to 20.7 percent from 15.7 percent in the prior year. This reflects savings realized through the restructuring initiatives as well as other operational improvements.
Other Items
- Interest expense was $5.6 million versus $3.6 million in the prior year resulting from a higher debt balance and higher interest rates.
* Convergys recorded $7.0 million in non-cash stock compensation expense during the quarter. This includes $1.3 million incurred with the fourth quarter 2005 restructuring. During the fourth quarter of 2004, these amounts were $7.8 million and $3.3 million, respectively.
- Cash flow from operations for the fourth quarter of 2005 was $155 million. Free cash flow of $110 million in the fourth quarter increased by $57 million from the prior year. For the full year 2005, cash flow from operations was $237 million. Free cash flow for 2005 of $211 million increased by 85 percent from 2004. This is the eighth consecutive year Convergys has generated positive free cash flow.
- Days sales outstanding (DSO) declined to 72 days at December 31, 2005. This compares to 74 days at September 30, 2005.
- During the fourth quarter, Convergys repurchased 391,000 shares at a cost of $6.3 million and an average price of $16.06 per share. During 2005, Convergys repurchased a total of 3,643,000 shares at an average price of $13.59.
Financial Guidance
- For 2006, GAAP EPS is expected to be at least $1.07 per share. Excluding non-cash stock compensation expense, EPS is expected to be at least $1.20.
- For the first quarter 2006, Convergys´ CMG revenue is expected to be up over 5 percent and operating margin will be up from the prior year levels.
- For the first quarter 2006, Convergys´ IMG revenue will be relatively flat and operating margin will be down from the prior year levels.
- For the first quarter 2006, GAAP EPS is expected to be $0.24 to $0.25, up 10 to 15 percent from the prior year level. Excluding non-cash stock compensation expense, EPS is expected to be $0.27 to $0.28.
FORWARD-LOOKING STATEMENTS DISCLOSURE AND "SAFE HARBOR" NOTE:
This news release contains forward-looking statements that reflect Convergys' expectations as of January 24, 2006. Actual results of Convergys could differ materially from those discussed herein. Potential risk factors that could cause or contribute to actual results being materially different from those in the forward-looking statements include, but are not limited to, the loss of a significant client or significant business from a client, difficulties in completing a contract or implementing its provisions, difficulties in completing or implementing an acquisition, terrorist activities and the United States' response, changes in the legal and regulatory environment in which Convergys and its clients operate, and competitive and other factors disclosed in the Form 10-K for the year ended December 31, 2004, and subsequent filings with the SEC by Convergys Corporation. The company has no current intention of updating any forward-looking statements that may be included herein, other than in publicly available statements.
NON-GAAP FINANCIAL MEASURES:
This news release contains non-GAAP financial measures including free cash flow and other pro forma financial results that are not prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the comparable GAAP measures is included in the attached financial tables.
These non-GAAP financial measures should not be construed as being more important than comparable GAAP measures. They are presented because Convergys´ management uses this information when evaluating current results of operations and cash flow, and believes that this information provides the users of the financial statements with an additional and useful comparison of Convergys´ current results of operations and cash flows with past and future periods.
CONFERENCE CALL NOTE:
Convergys will host a conference call on Tuesday, January 24, at 10:00 AM, EST, to discuss the company's fourth quarter results. It will feature Jim Orr, Chairman and CEO, and Earl Shanks, CFO. This call will be carried live (with scheduled repeats) on the Internet. A link to the conference call is available at www.convergys.com
Convergys Corporation (NYSE: CVG) is a global leader in providing customer care, human resources, and billing services. Convergys combines specialized knowledge and expertise with solid execution to deliver outsourced solutions, consulting services, and software support. Clients in more than 60 countries speaking nearly 30 languages depend on Convergys to manage the increasing complexity and cost of caring for customers and employees. Convergys serves the world's leading companies in many industries including communications, financial services, technology, and consumer products.
Convergys is a member of the S&P 500 and a Fortune Most Admired Company. Headquartered in Cincinnati, Ohio, Convergys has more than 62,000 employees in 68 customer contact centers, three data centers, and other facilities in the United States, Canada, Latin America, Europe, the Middle East, and Asia. For more information visit www.convergys.com
Convergys, Precedent 2000, and the Convergys logo are registered trademarks of Convergys Corporation.
Jeanne Achille
The Devon Group
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