Convergys Corporation Q4 2008 Earnings Call Transcript

Convergys Corporation (CVG)

Q4 2008 Earnings Call Transcript

January 27, 2009 10:00 am ET

Executives

David Stein – VP, IR

Dave Dougherty – President & CEO

Earl Shanks – CFO

Analysts

Ashwin Shirvaikar – Citigroup

Dhruv Chopra – Morgan Stanley

Jason Kupferberg – UBS

Kevin McVeigh – Credit Suisse

David Koning – Robert Baird

Karl Keirstead – Kaufman Brothers

Shlomo Rosenbaum – Stifel Nicolaus

Robert Patrick [ph] – Corner Capital [ph]

Shaul Eyal – Oppenheimer

Scott Sutherland – Wedbush Morgan Securities

Eric Boyer – Wachovia

Presentation

Operator

Welcome to the Convergys fourth-quarter earnings teleconference. At this time all participants are in a listen-only mode. During the questing-and-answer session please press star one on your touchtone phone. Today’s conference is being recorded, if you have any objections you may disconnect at this moment you may disconnect at this time. Now I would like to turn call over to Mr. David Stein, Vice President of Investor Relations. Sir you may begin.

David Stein

Thank you, Christina, and good morning. Welcome to Convergys’ fourth quarter 2008 earnings call. This call is a property of Convergys. Please note that slides accompanying today's prepared remarks are available on the Convergys Investor Relations website under events and web cast. Today's call contains forward-looking statements that address our expected future performance and as by their nature address matters that are uncertain.

Uncertainties that could adversely or positively effect our future results include the behavior of financial markets, the impact of regulation, and regulatory investigated and legal actions, strategic actions including acquisitions and dispositions, future integrations 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 provision and other matters of national regional and global scale.

These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. Please refer to Convergys most recent news releases and filings with the SEC for additional information, including some risk factors.

We do not undertake to update our forward-looking statements as a result of new information or future events or developments. Also during the call, we will discuss non-GAAP financial measures including free cash flow. Non-GAAP measures should not be construed as being more important than comparable GAAP measures. Convergys’ management believes free cash flow 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 website at www.convergys.com. With me on the call today are Dave Dougherty our President and Chief Executive Officer, and Earl Shanks our Chief Financial Officer. Dave will provide a summary of our operational results and Earl will follow up with financial performance and business outlook, then we will open the call for your questions. Now I will turn the call over to Dave.

Dave Dougherty

Thank you David and good morning. In the fourth quarter, Convergys revenues of $704 million were up 4% sequentially from the third quarter and down 1% from year ago. The sequential growth reflects lower than expected information management revenue offset by being the Intervoice acquisition in the customer management segment and slightly higher HR Management revenues.

During the quarter and as discussed previously, we concluded the goodwill impairment analysis of the HR Management business. This resulted in a $61 million non-cash charge. Excluding the goodwill impairment charge and HR Management and the restructuring charge of $20 million adjusted earning per share was $0.30. This is what we told you in the third quarter, we were a bit short on and in line with operating and pre-tax income.

Using a tax rate consistent with our guidance, our EPS was $0.23, a little better than was expected in a challenging environment. We also made progress in the fourth quarter toward improving our liquidity and balance sheet. Free cash flow in the quarter was $99 million. This was driven by solid cash generation from information management and customer management including a nine-day reduction in days sales outstanding. Convergys has a history of strong free cash flow generation.

The past two years the company’s free cash flow has been less than historic amounts principally because of our investments in the implementation of two large HR BPO contracts. With the announcement earlier this month of the Fortune 50 companies go-live, we now believe the majority of the implementation expense of both these large contracts is behind us.

We expect a significant reduction in cash usage in HR Management in 2009. Convergys also benefits from the majority of our revenues coming from clients that are Fortune 500 companies. These companies have strong cash flows and balance sheets. As you would expect in this environment, we are being very disciplined and are contracting in payment terms for any new business we sign.

Our cash balance at the end of the year was $240 million, up $104 million in the third quarter. Our strength in cash balance combined with the expected 2009 free cash flow is sufficient to invest in the business and pay off a $250 million bond due in December. Before I discuss the operating results of each business segment I want to take a minute to level set on our relationship management strategy in growth plans for the company.

We set out in 2007 to being transforming Convergys to focus on relationship management. Our goal is to be the undisputed leader in this space and have more capability than any company to help our clients manage the customer experience. Our relationship management solution improves the quality of the service experience while lowering the cost for our clients. The three critical components of our relationship management solution are number one, approximately 60,000 customer management employees who provide agent assistant services everyday on behalf of our clients.

Number two, our suite of relationship technologies recently enhanced by the acquisition of Intervoice. And three, our consulting capability to help identify improvement opportunities in client operations intelligently match customer transactions to the best channel and aid the sale of technology in outsourcing. All of these relationship management capabilities are reported together externally for investors in our customer management segment.

This segment is the focal point of our relationship management strategy and the principal driver of our revenue and earnings growth. In the context of the strategy and focus I just laid out I would now like to discuss the performance of each of our business segments in the quarter. Let me begin most importantly with customer management our largest segment. During the quarter our live-agent operations continued to improve. Intervoice contributed positively, and demand remained steady for both live-agent and automated solutions.

Customer management revenues of $527 million were up 9% from the third quarter and 11% from year ago. Excluding the Intervoice acquisition, revenues were up slightly on both the sequential and both year-over-year basis. Operating income margin of 5.3% was up 50 basis points sequentially and down 220 basis points from year ago. Importantly, our fourth quarter results included $8.6 million restructure charge to streamline operations and reduce headcount.

Excluding this charge, the operating margin was 7% up 220 basis points sequentially and down 50 BP from year ago. This includes a 180 basis point foreign exchange impact versus a year ago. Within the customer management segment I want to discuss both our live-agent contract center business run by Andrea Ayers and her team and our relationship technologies business run by Mike Betzer and his team. Mike joined us this past year from Oracle.

The turn-around of the live-agent contract center business that began in the third quarter continued in the fourth quarter. Revenues were up slightly versus the third quarter because our total available hours to clients were up. Not surprisingly, the communications vertical performed the best in the quarter. Revenues from communications companies, which account for about 60% our live-agent revenue grew year-over-year. Conversely, the financial services vertical, which accounts for 11% of revenue was down modestly versus a year ago.

Consistent with the third quarter, we continue to make improvement in our live-agent operations. Excluding the restructuring charge and reserves for a couple of recent client bankruptcies, live-agent margins are above year ago for the first time in several quarters. This improvement was driven by a number of factors including lower turn over and absenteeism, improved utilization, lower bonus expense, and higher pricing. Andrea and her team are focused first and foremost on continuing to improve the quality of our service delivery.

We know from experience this is critical to increasing our share of our clients outsourcing spend overtime and in an environment of lower coal volumes like we potentially face in 2009, clients will tend to shift work to firms who are performing the best. During the fourth quarter, we continue to see improvement client SL. As key operating metrics, examples include reducing average handle time, increasing first call resolution, and increasing sales conversion rates. And most important, despite the challenging environment we saw broad based improvement in our client satisfaction scores in the second half of 2008 relative to the first half.

We are also focused on managing our service delivery capability and capacity to meet client needs. We continue our build-out in the Philippines adding almost 4,700 new seats by the middle of 2009. We are pleased that 80% plus of this capacity is already sold. Total capacity in the Philippines will approach 12,000 seats and expect revenues to exceed 300 million in 2009. In the fourth quarter, we also signed an LOI with a partner to access Latin American capacity. This approach lowers our risk and reduces our capital outlay.

As the contract center site is no longer salable to a client or profitable, we take actions to close these locations. In 2008, we closed four sites with approximately 1,800 seats in Canada. We continue to invest in our home agent platform. Convergys now has one of the most robust reliable and secure platforms in the industry. Today, we have over 1,500 full-time home-based working in 22 states. This number could more than double in 2009. This enables us to continue to access high-quality workforce while avoiding an estimated a $30 million to $40 million in capital expenditures.

Despite the fact our live-agent business continues to improve and demand is holding up pretty well. I am concerned about the unpredictability of coal volumes in 2009. As a result and as you will hear from Earl, we are being cautious in our outlook for the year. I now like to turn to our Relationship Technology Business that’s being lead by Mike Betzer and his team. This organization has responsibility for successfully integrating the recent Intervoice acquisition.

The Intervoice acquisition continues to go well. This business is realizing the acquisition cost synergies and is contributing incremental revenue and operating income to the company. Our strategy is to develop a comprehensive suite of highly differentiated relationship technologies. Clients will be able to purchase this suite in total or purchase individual modules. Depending on the clients preference, we sell our licenses or services or deliver a hosted solution. These standalone technology sales have higher gross margins in our traditional live-agent business. So over time this will help us drive further and margin improvement in customer management.

The second part of our strategy is to take the technologies we have developed or acquired and deploy them into our existing live agent operations. This helps us drive better performance and sustainable competitive advantage. In addition these technologies can help lower cost and provider greater entanglement with the client. Demand continued in the fourth quarter for both live-agent and automated solutions.

The demand for live-agents speaks to the compelling economic benefits of outsourcing in the current environment and the quality of our solution. The total value of our pipeline has remained relatively constant over the past two quarters as has our win rate. We signed contracts with an estimated 2009 revenue value of $78 million in the fourth quarter, down only slightly from the $85 million signed in the third quarter.

Demand for automated care solutions have speech and IVR also continued to hold up. Because these technologies drive out sizable amounts of cost, some of this interest maybe tied to the economy. In addition the number of larger deals in this space has been increasing. For example a leading wireless carrier who is an existing client of Intervoice signed an agreement to expand their IVR solution during the quarter.

The total value of this deal and license fees and professional services is over $11 million in total contract value. Another leading wireless carrier signed an agreement to expand the usage of our dynamic decisioning solution. This deal will approach $10 million when professional services are included. Our pipeline now contains dozens of new cross-sell opportunities. This is where legacy Intervoice clients want to buy a Convergys solution or vice versa. While still early, the progress being made with our relationship technology business including Intervoice is encouraging and appears to be well aligned with the needs of our clients in this challenging environment.

Let me now talk about Information Management. Revenues were down from the third quarter and below our expectations. This was attributed to reduce spending by communications carriers. Of all our businesses Information Management faces the most challenging external environment. Carriers across the globe are reducing significantly both capital spending and investment in new IT projects.

Despite the tough environment Information Management client satisfaction scores have improved significantly in 2008 and have never been higher. This is an important platform for future growth. We continue investment in our world-class Infinys end-to-end business platform. Infinys is a modular product based solution that can be deployed quickly and for relatively low cost.

Over a 100 communications companies around the world run our software. Earlier this month, we were pleased as we’ve announced they have chosen Convergys. As the lead CIO said “The new state of the art Convergys billing system will help address the scalability needs of our business.” This is an important win for us in the North American market.

The Infinys platform has been winning consistently in markets outside North America, which has been a key driver of why our international business is now almost 40% of total revenue. We are delighted to have this new high growth customer in North America. This deal is also important because it is managed services with an ongoing revenue and profit stream. Just to clarify, we’ve taken over the running of the Verizon billing operations.

The plan is to migrate leap to the Infinys platform and for us to run this billing operation as well. We did not use capital to acquire the Verizon billing asset. Bob Lento and his team continue to find ways to take out cost out of this business to preserve profitability. Given the reduced investment by the communications industry and turmoil and capital markets, we are not in a position to separate this business at this time. However, we will continue to evaluate this option and we will update you on our plans as the year progresses.

Moving to HR management, as we said in our October call, we are taking a series of actions to reduce the implementation risk and improve the earnings and cash flow of the business. Specifically for the two largest Fortune 50 clients we have achieved key go-live milestones and completed the key portions of the implementations.

We are also exploring alternatives for future implementation phases that include partners or changes and timing into the scope of these two contracts. We are driving further efficiency in cost savings through the use of additional automation, standardization, and leveraging of off-shore assets. And last as we said on the third quarter call, we will not sign any new client HR outsourcing contract with significant implementation risk. Through the combination of the implementation go-lives, lower implementation expense, and aggressive cost cutting, our expectation is that we will see significant cash flow improvement in this business in 2009.

Let me provide some additional prospective and how we are thinking 2009 before I turn the call over to Earl. There is no question we face a difficult and challenging economic environment. However, across the business we are being appropriately cautious in our 2009 planning. In my opinion, we need to be particularly cautious with our revenue assumptions.

The key thing we can control is cost and we continue to attack it aggressively, let me give you some examples. No bonuses will be paid to management for 2008 performance. Officers of the company will not receive a salary increase again in 2009. Our pension plan was frozen last year and our contributions this year will be less than last year. Travel expenses will reduce significantly in the second half of 2008 and we expect to continue this in 2009. Hiring has been frozen except for Clark Handy, our Senior Vice President of HR or I have proven exception. In the second half of 2008, we took action in both HR management and Information Management to eliminate contractors and reduce salary headcount.

We were also taking a $20 million restructuring charge in the fourth quarter that will reduce our salary employee headcount by an additional 5% over the course of 2009. The payback on this investment is expected to be less than one year. Over the last two years we have closed or sold nearly 30 facilities including the four contract centers I mentioned earlier and in 2009 we will do more. The same time, we are building our capacity to support our customer management business were necessary as I discussed. And last were ever possible we will avoid or reduce capital spending like the example I used earlier with our home-based agent solution.

In Summary, there is no question we faced a difficult economic environment in 2009. We have been cautious particularly in the area of revenue planning for the year. We have a strong cash position and expect significant additional free cash flow in 2009. We expect to have more than sufficient liquidity to meet our debt obligations. We continue to make progress against executing our relationship management strategy evidenced by the continued momentum in customer management business.

We are taking appropriate steps to carefully manage growth and maximize cash flow in the information management and HR management business. We are making the investments needed to support our clients while driving earnings and cash flow for shareholders. In all areas of the business we continue to be aggressive in terms of cost reduction. So, with conservative revenue assumptions, we can still deliver operating income improvement. At this time I will turn the call over to Earl.

Earl Shanks

Thank you Dave and good morning. We are pleased with several positive financial outcomes in the fourth quarter, including particularly the strong cash flow, the improving operating margins in customer management, the cost reduction plan we are executing, that we went live with key milestones in HR Management and that we delivered operating performance consistent with our guidance in a tabular environment.

I will discuss some of these in more detail in a moment, but first let me start with a couple of results that were disappointing. First, the goodwill impairment charge. As we said in October, we determined the fair value of the HR Management business was less than its book value. This resulted in what is called the step one failure of the goodwill impairment test. The second step test involving valuation of assets and liabilities was required to determine the degree of goodwill impairment.

In the fourth quarter, we completed the second step test and determined the $61 million of the approximately $130 million goodwill and HR management is impaired. We also had $20 million of restructuring cost in the fourth quarter. This includes about $9 million in HR management, about $9 million in customer management and $3 million in information management. The substantial reduction in restructuring cost taken in the quarter will allow us to merge from this down turn even stronger. We expect to pay back on these charges to be less than a year.

Let me now turn to a review of fourth quarter financial results. For the quarter, consolidated Convergys revenues were $704 million, up 4% sequentially. 75% of revenue came from customer management. Operating income in the fourth quarter included an $81 million impact from goodwill impairment and restructuring charges. Excluding the charges operating income was $46 million with an operating margin of 6.5%.

Fourth quarter operating margin includes about 50 BP impact from the recent bankruptcies of three of our smaller clients. The good news is the majority of our clients are large companies with strong cash flow and balance sheet. These are companies that should be well-positioned to weather the economic downturn.

Net income excluding impairment and restructuring charges was $36 million from [ph] $0.30. Turning to the segments, in the fourth quarter Customer Management revenues were up 11% year-over-year to $527 million, sequentially revenues were up 9%. Fourth quarter results include organic growth of $49 million [ph] of revenue from Intervoice. As Dave mentioned billable hours are up and we are doing a higher percentage of business in the Philippines. As we shift our revenue mix from North America to the Philippines revenues are negatively impacted, but margins improve.

Customer Management operating income and margin increased sequentially in the fourth quarter to $28 million and 5.3% respectively. Excluding the restructuring charge operating income was up 57% and operating margin improved by 220 basis points. This was due to contributions from Intervoice, program ramps, and increased efficiencies in live agents, and the impact of (inaudible).

On a year-over-year basis operating income includes about a $9 million or a 180 basis point adverse impact from changes in foreign exchange. During the quarter, we continue to invest in technology infrastructure, additional sales resources, and consulting to strengthen our leadership position in relationship management.

Moving to Information Management, revenues of a $114 million in the fourth quarter were less than we expected. This was due to the slow down in the industry including delayed project acceptance, lower subscriber growth, delayed spending, and reductions in client budget. Information Management operating income was $12 million in the fourth quarter. This reflects the expected revenue declines with North America service clients as well as the underperformance outside of North America.

Excluding the restructuring charge operating margin was 12.7%. For the full-year Information Management GAAP operating margin was about 17%. Moving to HR Management, HR Management revenues were $64 million in the fourth quarter. The increased revenue due to August go-live was partially offset by the impact from the elimination at the end of the second quarter of pass through revenues from the different contract. HR Management operating results included charges of $70 million for the goodwill impairment and restructuring. Excluding the charges operating results improved $5 million compared to the prior year.

Let me now turn to the other items, non-operating income was up $5 million in the quarter compared with the prior year, but down $4 million sequentially. Earnings from the cellular partnerships were $10 million in the quarter. We received $6 million in cash from the partnership in the fourth quarter. For the full-year the partnership contributed $36 million in pre-tax earnings and $39 million in cash.

We had the unusual combination of a pre-tax loss in income tax expense in the fourth quarter, this is due to the fact of a large portion of the $61 million goodwill impairment is not tax deductible. Said in other way, while the impairment charge caused a pre-tax loss in our GAAP books on our tax reserves, we will actually have taxable income in the quarter. This taxable income will of course get taxed. That’s how we end up with the tax expense and pre-tax book loss in the quarter.

Free cash flow in the quarter was $99 million. This was driven by the solid cash flow characteristics of our Customer Management and Information Management business. We were also very successful in the quarter in collecting receivables and so we are very pleased about that. The strong cash flow in the quarter included the impact of $47 million reduction receivable, $36 million of income before impairment and restructuring charges, $18 million of other working capital driven primarily by payables offset by an increase of $19 million in differed charges.

At the end of the quarter we had cash of $240 million on the balance sheet. We expect this cash combined with cash flow from Information Management and Customer Management and significant reduction in cash usage in HR Management will provide sufficient liquidity to retire the debt maturing in December while providing adequate room to run the business in 2009 and beyond.

I will now move to discussion of our forward financial guidance. As Dave mentioned, we and our clients are facing a challenging economic environment and forecasting is difficult. Going into 2009, we are seeing lower forecast from some existing clients. We are taking this into account in our volume planning guidance. For planning purposes, we assume these adverse conditions will generally continue throughout 2009.

Actual economic conditions could positively or negatively impact our performance for the year. Given these planning assumptions, I’ll now discuss our outlook for 2009. We expect overall revenue to grow slightly in 2009. Growth will come from modest increase in Customer Management including Intervoice and increase in HR Management, partially offset by decline in Information Management.

We also expect overall slight improvement in operating income. This includes the modest increase in Customer Management operating income, improvement in HR Management operating loss and some decline in Information Management.

The overall operating improvement will be more than offset by higher interest expense as our plan includes assumptions regarding the cost of potential refinancing our $250 million bond.

The tax rate will be lumpy in 2009 with an expected rate in the range of about 30% for the full year, although beginning the year a bit higher. Given the uncertain environment, we expect earnings per share of between $0.90 and $1.10. This range reflects the difficulty of predicting the impacts of the current environment on client businesses.

Of course, the upside depends on the speed and timing of an economic recovery. Confirming our previous guidance, free cash flow should be about $200 million in 2009. This will be driven by continued contributions from Information Management and Customer Management and reductions in cash usage in HR Management.

As we’ve done our planning for 2009 and develop the guidance range that we’ve provided today, we have considered a variety of scenarios. There are some scenarios which could occur that are above and below the range we have provided. However, based on what we see today, we believe the likely outcomes are fairly representative by this range.

At this time Christina [ph], please open the line for questions. Operator?

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session (Operator instructions). Our first question comes from Ashwin Shirvaikar from Citi.

Ashwin Shirvaikar – Citigroup

Thank you. Congratulations on the margin and cash performance in the quarter, quite good.

Dave Dougherty

Thank you, Ashwin.

Ashwin Shirvaikar – Citigroup

In the past you’ve indicated a 40/60 split between the first half and second half EPS. Do you expect the same for 2009? And also cash flow has started even more backend loaded. Do you expect this to continue also?

Earl Shanks

Sure. Thanks for the question, Ashwin. I think relative to the earnings, certainly we expect the year to improve as we progress through the year. So, we’ll start a little softer than we think we’ll finish. There’s a variety of factors driving that in terms of improvement opportunities we see across the business. So, I think that pattern will continue. On cash flow, we think it will start a little soft at the beginning of this year but I certainly do not expect anything this year like the back ended nature that we had last year in terms of cash flow. I think it will be much more balanced. And I actually think that’s more of a history we’ve had as a company if you look beyond – before 2008. It’s a much – relatively more stable cash flow picture and that is what I’m expecting in 2009.

Ashwin Shirvaikar – Citigroup

So, with cash flow typically you also said that free cash flow in line with net income, but the 2009 guidance implies of course that will be significantly not in line with net income. Obviously, given important this is to the pay down of the upcoming debt. Can you clarify what’s in the free cash flow expectation? How much is from may be lower CapEx and so on?

Earl Shanks

Sure. I would be happy to, Ashwin. I think at a high level, the way to think about it is if you start to think about what your net income assumption is, I don’t expect to pay much in the way of taxes, cash taxes during 2009. So, that’s certainly going to help cash flow. There will be as there is historically a pretty consistent gap between our depreciation and amortization in CapEx that will certainly help cash flow as well. And what we will find in the year is that the cash we are putting out for the HRM business will decline dramatically, so our deferred charges will be much, much smaller than they have been in the past. And then obviously on a net basis, you saw a decline in that one in the fourth quarter as well. So, it begins that pattern. So, I think that combination of those things, we will be able to drive free cash flow that’s quite a bit above net income in 2009. So, that’s really what our expectations are.

Ashwin Shirvaikar – Citigroup

And what level are you targeting for DSOs?

Earl Shanks

At this point, I was very pleased with our DSO performance in the quarter. I wasn’t willing to forecast that level of performance at the beginning of the quarter, although obviously that’s what the team was targeting. I think that is something though that we’ve got the systems in place and the team in place to continue deliver at the kind of level that we had that we ended the year in 2009. So, that’s – 2008.

Dave Dougherty

That’s what I want to emphasize. We are very focused on that and we are going to continue to try to improve it. But we are certainly very pleased with the improvement we made in the fourth quarter.

Earl Shanks

But that’s – and that’s not fundamentally driving the cash flow in 2009 as it did in the fourth quarter of 2008.

Ashwin Shirvaikar – Citigroup

Okay. Thank you guys and all the best.

Earl Shanks

Thank you.

Operator

Next question comes from Dhruv Chopra from Morgan Stanley.

Dhruv Chopra – Morgan Stanley

Yes. Good morning. Nice work on the cash flow side. I had a couple of quick questions, one is given the stronger cash flow generation performance, has that changed any of the strategic thinking around disposing of any of the other non-core assets outside the volume?

Dave Dougherty

No, I – as we said on the call, we are continuing to want to keep the Information Management option open to us. We certainly don’t think it’s doable in the current environment. And as I on the call, the third quarter call, we are certainly open minded when somebody came along with an offer for the cell partnership or the HR Management business. We certainly we have to look at it. But as it – the HR Management business, we had laid out a strategy, we are executing against that strategy and as you get a sense as we get these contracts implemented, the free cash flow from this business improves dramatically and it’s certainly going to be a much different business than it was for the last couple of years. So, we feel good about that and we feel about the long term prospects for that business.

Dhruv Chopra – Morgan Stanley

Got it. But there is no sort of developments to either one of those?

Earl Shanks

Not that. We have to update you.

Dhruv Chopra – Morgan Stanley

And then last question, Earl, if you could may be just discuss some of those scenarios that you mentioned in your prepared remarks, what could lead to something above and below the ranges that you have communicated to the Street?

Earl Shanks

There is a whole series of things we have taken into account. But let me give you an example on each side of that. If you think on the upside what we are seeing in terms of the revenue that we are closing in Customer Management, and we talked about $85 million in Q3 of 2009 revenue. We talked about $78 million in Q4 of 2009 revenue. And yet our revenue guidance I think when you parse it, we would suggest that we are not expecting nearly the growth those kinds of captures imply. If we end up continuing to capture at that pace and obviously we are pleased with the last two quarters in that regard, and we don’t see the declines from clients that we are baking in at the moment in terms of what’s happened in their underlying volume. That could obviously help the volumes quite a lot in Customer Management and therefore allow us to overrun the top end of the guidance range. That’s probably the most dramatic one out there and the one that’s – I think that most times we talked about the pieces and you can certainly see where our guidance is on the other side. And if you look around on the other side, if clients do something that we don’t see in the current marketplace, if for example, we have a major client go bankrupt, that would probably put us outside the range just in terms of both the AR risk around it and then the subsequent volume risk. At this point it’s pretty difficult for us to see that there’s a client out there that will go bankrupt but it’s certainly one that we are worried about and have been attentive to.

Dhruv Chopra – Morgan Stanley

Got it. Thank you.

Operator

Next question comes from Jason Kupferberg from UBS.

Jason Kupferberg – UBS

Hi, good morning guys.

Dave Dougherty

Hi, Jason.

Jason Kupferberg – UBS

Another question on cash flow specifically in the HR business, understanding that is the key driver of improvement we have in ’09. Can you help us quantify the year-over-year delta in free cash flow for HRM specifically? Is it still – is it still a negative territory here and just a lot less negative? Just any feel for the magnitude of improvement which offer the visibility on this $200 million overall target for ’09 with the (inaudible)?

Earl Shanks

Jason, obviously we are driving to try to get that business to both breakeven and cash flow and earnings, and that is our overall objective as we think about it. But from a planning standpoint I think it will be relatively modestly negative for 2009 as compared to what we saw in 2008. But the 2008, obviously cash flow was very large. So, there’s a big improvement opportunity there and we’ve got pretty good visibility that we see the way to get that improvement. So, I’m pretty encouraged by it.

Jason Kupferberg – UBS

Okay. And just a follow up on the HRM business, can we take a quick step back there and may be give us an update on how many total active contracts you have in the portfolio there and how many of those are currently generating positive EBIT?

Earl Shanks

There is – I don’t remember the number exactly, Jason. It’s about 25 contracts in that business – in that range. There is 23 of those 25 that are at this point fully implemented and there is two of them where we are still working on the implementations. The 23 are in general all contributing positively to the performance and that two that we are working on are obviously there is some cost and we are filing them pretty regularly.

Jason Kupferberg – UBS

Right. Okay. And just last question. In the ’09 EPS guidance, are there any more headcount reductions or restructuring charges contemplated beyond what you already announced for Q4?

Earl Shanks

No.

Jason Kupferberg – UBS

Okay. Thank you, guys.

Operator

Our next question comes from Kevin McVeigh from Credit Suisse.

Kevin McVeigh – Credit Suisse

Thank you. Nice cash flow in the quarter. Quick question, can you talk about the targeted $200 million of free cash flow, what is (inaudible) range or what type of earning do you need to target within the $0.90 to $1.10 to generate $200 million of free cash flow?

Earl Shanks

Something roughly in the middle of the range.

Kevin McVeigh – Credit Suisse

Okay. And then in your CapEx funds in ’09, have you given any range on that, yet?

Earl Shanks

I haven’t given any specific range on that one, no.

Kevin McVeigh – Credit Suisse

Can you share with us?

Earl Shanks

I think the history is we’ve been spending CapEx at numbers below – at or below $100 million for the last couple of years. And I’m sure we are going to continue to hold CapEx pretty tightly, so that I would expect it to be similar in that regard.

Kevin McVeigh – Credit Suisse

It sounds like you are still expecting [ph] some price increases. Can you talk about the pricing environment relative to the current macro environment?

Dave Dougherty

We certainly did a very, very good job in 2008. I think we ended up negotiating with seven of our top eight customers and as we did new business, our bidding – our margins that are attractive to us. So, in terms of the pricing environment, we continue to navigate that quite well, quite successfully. Again the price that we offer to our customers, we obviously make a good return on is still a very attractive value proposition for them whether it’s outsourcing here in North America or off-shoring in places like the Philippines.

Kevin McVeigh – Credit Suisse

Great. And then, Earl, if – can you reiterate (inaudible) contemplated on some higher incremental interest rate expense from potentially refinancing the debt. What would be the refinance the $250 million due?

Earl Shanks

Certainly, our base plan is to pay down the $250 million that are due. When we look at our interest expense on year-over-year basis, we are obviously in the fourth quarter running at a much higher rate than the aggregate rate we saw in 2008, we got to take that into account. And then from a flexibility standpoint if the markets were to open up, it would be something that we do consider depending on the cost of debt to do and do that. There’s – there are attractive investment opportunities out there and we are sitting in a position given – devoting the cash flow to pay down the bond at the moment. If that makes a full strain in making investments in some of those opportunities. So, that’s the other side of the point balance.

Kevin McVeigh – Credit Suisse

Great. Thank you very much.

Operator

Our next question comes from Eric Boyer from Wachovia.

Earl Shanks

Hello, Eric.

Operator

Our next question comes from David Koning from Robert Baird.

David Koning – Robert Baird

Yes. Hi, guys. Thanks for all these details on Information Management over the last several quarters and outlining in the 10Q. It’s about the different moving parts. And it looks like this year you had some decline obviously from the Sprint transition. But on an organic basis separate from that it seems like there was also declines from the external environment. And what I’m wondering is as we look into ’09, and certainly some of hat AT&T revenue goes away, I think you said $40 million or so, but it sounds like the external environment is also causing some of the declines. And I’m wondering if you can piece these all together and we think of $113 million that was in Q4, should we expect the bottom somewhere on the $100 million? How are you looking at where the bottom of quarterly refs [ph] might be?

Earl Shanks

I think, David, the one thing we still have in front of us that we talked about is the AT&T transition. We also – and so we quantified that in 10Q is $40 million or $50 million, I don’t remember the numbers exactly. So, that we quantify that in front of us in 2009 in terms of the fourth quarter, the Sprint transition is behind us and into that number. So, we quantified that as well in the Q is not implemental. I think the – on the good new side we got the deal that we closed and certainly that’s the positive for the business and we are pleased about that. Although, obviously what happened in the fourth quarter, we were pretty disappointed with the outcome in the quarter. And at the beginning of the quarter what we saw was pretty good visibility to considerably more revenue in this business. Most of that revenue in some form or another was – a lot of it was the way it end in 2009. So, hopefully that will help 2009 as we work through it. But clients are also pretty clearly cutting back on budget. And so, the most difficult of our three businesses is frankly to forecast the revenue in that business at this point. We think we are going to participate in what’s going on in the industry broadly and plus we’ll have the deal with the customer migration that’s out there like the AT&T migration.

Dave Dougherty

David we are being very cautious in our planning where we feel very good, as Earl mentioned about the – win that contributes significant incremental revenue in profit in ’09. So, we are encouraged by that. And quite frankly we are quite encouraged by our Solution needs challenging times – looking for quick payback investments and the beauty of the Infinys platform is it is module, you can buy it in pieces. You can deploy it quickly and you can deploy it for a significantly lower cost relative to options that are out there. So, like a hand that we got despite a challenging environment. And having said all that, we try to be very cautious in our planning for 2009 and built those areas of assumptions into the guidance for ’09.

David Koning – Robert Baird

Okay. Great. And then just on the margin front in that segment, do you expect margins to stay in the double digit range or has that AT&T which I would imagine is somewhat high margin, is that ranched [ph] and goes away. Could that take margins a little bit below the double digit range?

Dave Dougherty

Yes, we expect margins to stay in the double digit range.

David Koning – Robert Baird

Okay. Great. And then on the Customer Management side, the FX has been hurting for probably four years now or so. But it seems that we may have turned the corner in Canada and even in the Philippines now as you are building out there seems the rates are moving in your favor. Is that something that could actually start to be a benefit over the next few quarters?

David Dougherty

Yes. As we walk into 2009 as compared to 2008 in aggregate I think FX will be about neutral from an impact standpoint as we see it from rates today. But within that framework I think the first couple of quarters we probably, we’ll still have some level of it and we should pick up some benefit in the second half of 2009 based on what we are seeing. And then I think it’s beyond 2009, I think it is a likely positive given more rates than today and we are –

Earl Shanks

You made a reference to Canada. Canada continues to be a (inaudible) on us and in fact the margins like in the Asian [ph] businesses in the quarter – if you put Canada aside, the remaining part of the business like 130 basis points above a year ago. And so, it’s still impacting us negatively.

David Koning – Robert Baird

Great. And just one final question, the other income line I think was $6.6 million in the quarter. That was quite a bit above what we have expected. I’m wondering if you could just discuss that a little bit and may be how we should think about that line item going forward.

Earl Shanks

Yes. That’s largely gains that we picked up off the balance sheet, currency related gains that we picked up off the balance sheet. From a planning perspective I’m expecting that to be something in over time near zero, is directionally where we would expect it to be.

David Koning – Robert Baird

Great. Thanks so much.

Operator

Our next question comes from Karl Keirstead from Kaufman Brothers.

Karl Keirstead – Kaufman Brothers

Hi, good morning, couple of questions. First, just a follow up on the IMG business. Could you be a little bit more descriptive as to where the budgeting pressure came in the fourth quarter? Did you see new projects and discretionary projects get cut and deferred? Or did you also see some pull back in spending on your existing or longer term or recurring projects that might be helpful? Thanks.

Dave Dougherty

Thanks Karl. Two of the projects that significant impact in the quarter were existing projects and both those projects were outside of North America (inaudible) and so I would say we are seeing more softness there and obviously as I talked about we are pleased with some of the progress we are seeing in the North American market with the leap wins and other things we are working.

Karl Keirstead – Kaufman Brothers

Okay. And then secondly, a question on the HR business. I might be over interpreting one word in your press release where in ’09 you call for a modest increase in revenues in operating margins in that unit. But with these two very large HR contracts now going live, one would think that the increase in revenues and the improvement in earnings in ’09 would be more than modest. Could you add a little color or perhaps some offsets we should be thinking about?

Dave Dougherty

I think Karl as it relates to Convergys in total, the increases will be modest. And they will be probably relatively larger if you simply think of them as compared to HR Management on the revenue line. And certainly we expect – thinking only of HR Management, I expect more than modest improvements and profitability in that business. So, it’s – you may be reading a little too much into that word, quite that way.

Karl Keirstead – Kaufman Brothers

Okay. Great. Thank you.

Operator

Our next question comes from Shlomo Rosenbaum from Stifel Nicolaus.

Shlomo Rosenbaum – Stifel Nicolaus

Hi, thank you very much for taking my call. My questions, just two questions, number one, Sprint announced about a month ago, a month and a half ago that it was going to be cutting back on the (inaudible) on the volumes that its outsourcing or that its sending to its outsourcers. Is that one of the primary factors that’s offsetting a lot of the contract wins that you guys have talked about in the last two quarters in Customer Management?

Dave Dougherty

Just a couple of comments on – I personally would say we continue to perform extremely well for Sprint, and our revenues in the fourth quarter were still pretty good. Now having said that just with Sprint like we have with several clients, we’ve taken into account potentially some pretty significant volume declines as we built the guidance for 2009. So, that’s certainly is built into the range of scenarios that we laid out in our guidance. And certainly their announcement, I guess it was yesterday or so was a bit more encouraging in terms of their mindset, in terms of outsourcing and looking at potentially head cuts in other parts of their organization. But we’ll see. We’ll obviously try to be cautious in our planning and built that into our range.

Shlomo Rosenbaum – Stifel, Nicolaus

Okay. Just in HR business, you seem to have made a lot of progress besides in the cash flow if you exclude the one time charges, you take your near breakeven. Now I wanted to know what is expected to do with some of the moving parts that moved in up and down over the year because it sounds like you are still expecting losses over there, but potentially you are working it down. What’s going to make things in an operating basis produce more losses than they did this last quarter?

Dave Dougherty

There’s a bit of a seasonal aspect in that business, Shlom, if you go back in time in history, you are going to see that the fourth quarter is typically the strongest quarter and then it’s – we step back in the first quarter there is a little difference in volume in terms of the workload and how well that plays out. So, it’s not indicative of any pattern that I would say it’s going to be that way going forward exactly. But that’s probably the biggest driver when I think about what will happen and just where we are and exactly the implementations where we are exactly some of the ramp ups on those we probably have some incremental operating costs from the goal that we had in January. So, that will have some impact as well and we will work through as the year progresses.

Earl Shanks

And we are again we are also trying to be very cautious in number of the clients we serve in this space have announced significant headcount reductions. So, again we try to take that into account and plan (inaudible) means there is fewer to serve.

Shlomo Rosenbaum – Stifel, Nicolaus

You added a bit of color. Do you guys feel comfortable at this point and time making some kind of prediction as to when you really think you would get it to breakeven or you know what’s going on the macro environment, you don’t want to venture there right now?

Dave Dougherty

I think the macro environment is pretty hard at the moment.

Shlomo Rosenbaum – Stifel, Nicolaus

Okay. Fair enough. Thank you very much and a good job on the cash flow guys.

Dave Dougherty

Thank you.

Operator

Our next question comes from Robert Patrick [ph] from Corner Capital [ph].

Robert Patrick – Corner Capital

Good morning. You mentioned that you signed $78 million worth of business in Customer Care during Q4. What was that number for the year?

Earl Shanks

We just started talking about it beginning in the third quarter at $85 million. So, those are only two quarters that we’ve disclosed and certainly we are very encouraged by the size of the pipeline and the ability to convert it. And obviously can do the math at average $80 million a quarter. That gets to a growth rate in the business of 15% but (inaudible) the underlying base of business and that’s where we are trying to be very cautious in terms of the forecast we get from our clients in their own degree and we are making sure we are being cautious to what reflects in the environment.

Robert Patrick – Corner Capital

And then, Earl, the cost of the revolver currently in term of spread over LIBOR or whatever base rate of your bank?

Earl Shanks

The rate we are paying now is just a little under 5 and I don’t remember the number on top of my head Rob, in the 4.5 range.

Corner Patrick – Corner Capital

Okay. And the non-cash stock expense during the quarter?

Earl Shanks

Was about $5 million.

Corner Patrick – Corner Capital

And then finally, I just want to make sure you took about $3.5 million charge for reserves for the three small companies that had declared bankruptcy. Is that correct?

Earl Shanks

Yes, that’s about right. About 50 basis points.

Corner Patrick – Corner Capital

Thank you so much.

Earl Shanks

Thank you.

Operator

Our next question is from Shaul Eyal from Oppenheimer.

Shaul Eyal – Oppenheimer

Thank you. Good morning guys good work on the cash flow side. Few quick questions on mines [ph]. On the IMG front and kind of trying to spinning out, where there any external interest in the IMG in the past few months.

Dave Dougherty

I don’t have any update on that in terms of external interest in the IM business. We’ve got our strategy, we are executing it and as I said that we are certainly not in a position to make a move and separate that business right now, but we want to certainly keep that option open and should something come along as I said earlier, that instrument makes an offer something, obviously the board will have to carefully consider that.

Shaul Eyal – Oppenheimer

Fair enough. Part of the IMG you probably see on the cable front, was it part of the overall weakness that you guys have seen in IMG or maybe the cable is performing slightly better? I’m just trying to understand.

Dave Dougherty

No. As I said earlier the cable really is – part of the business performed reasonably well in the quarter. The issue in some of the clients that where we saw significant softness we are in the international business and I would categorize those as telecommunication companies.

Shaul Eyal – Oppenheimer

Fair enough. Alright thank you very much, good luck.

Operator

Scott Sutherland form Wedbush Morgan Securities.

Scott Sutherland – Wedbush Morgan Securities

Great thank you and good morning.

Dave Dougherty

Hi Scott.

Scott Sutherland – Wedbush Morgan Securities

To follow-up on the HR segment, you have in the past around $300 million revenue you will be breakeven, but you are almost here at these levels, do you still think on a run rate of 300 million of breakeven or you think where your cost structure is now that you bought that a little bit lower?

Earl Shanks

I think 300 is probably still roughly the right number Scott. I think they were in the midst of these couple of major implementations in transitions. So, I think there is probably a little more near-term volatility around that, but as we think about the business longer-term I think that’s a fair place to think about the breakeven to be.

Scott Sutherland – Wedbush Morgan Securities

Also in HR, the last few implementations, would you say you are 50%, 25% or 75%, could you quantify how far you can get through the implementation stage to where the cost risks are out of the business model?

Dave Dougherty

We said majority and we haven’t since quantified that exactly, but as I said in the script that we see it in big part behind us.

Scott Sutherland – Wedbush Morgan Securities

Lastly in your Customer Management group, in the financial service sector as well, you know coal volumes are down, I know you mentioned just a week before they are already in your financial numbers and that there might be a few companies out of business, how much is it being impacted by financial services vertical by companies running on business versus just lower coal volumes in that vertical?

Dave Dougherty

I think the impact that we are seeing is largely lower coal volumes and we are not seeing – bankruptcies actually were spread across the industries and as I recall none of them were financial services. So, it is all – what we are doing from a planning standpoint is we are planning for some lower coal volumes than what we would certainly like to see in the business that is reflective of where the general economy seems to be.

Earl Shanks

As I said, we got to careful in terms of the business we go after and make sure we win it on the right financial terms, but there is certainly from my perspective significant amount of interest and outsourcing by a number of those firms in degrees of magnitude that I have seen before.

Scott Sutherland – Wedbush Morgan Securities

Great thank you. Good job on the cash flow. I think you definitely addressed that and that’s a concern there.

Dave Dougherty

Christina there is time for just one more question.

Operator

Eric Boyer from Wachovia.

Eric Boyer – Wachovia

Thanks. Sorry if you had answered this already, I got cut off there, but you mentioned some client bankruptcies and I was just wondering how your allowances for doubtful accounts compares to maybe a level during the last recession that you guys saw?

Dave Dougherty

Well we as a company we’ve had a history of very collections and so therefore not much requirement for doubtful accounts. We’ve got what I think is an adequate reserve in that regard, but you can again the cost of the three client bankruptcies we saw in the quarter. The history for Convergys for a long time is very few bad accounts, very few write-offs on receivables. In fact last quarter may have been among the worst that we have seen in history in that regard.

Eric Boyer – Wachovia

Okay. And when you talk about modest operating income improvement and customer care for ’09, is that backing restructuring charges?

Dave Dougherty

Yes.

Eric Boyer – Wachovia

Do you expect to see difficulties now, the decrease in margin in Q1, the kind of go through ’09?

Dave Dougherty

I do expect difficulties when I enter business this year.

Eric Boyer – Wachovia

Okay and just finally, I think last call you are forecasting $200 million of revenue from Intervoice, it looks like you hit the run rate this quarter, are you still anticipating that amount in your ’09 revenue forecast?

Dave Dougherty

Yes broadly that is our expectation.

Eric Boyer – Wachovia

Okay great, great cash flow quarter.

Dave Dougherty

Thanks. I like to add that Earl and I will be available the rest of the day to answer any question about our fourth quarter results or the business outlook that we’ve discussed during this call. So thank you all for participating today.

Operator

This concludes the conference call, you may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!