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Executives

David Stein - Chief Operating Officer

Jeffrey Fox - Chief Executive Officer, President, Director and Member of Executive Committee

Earl Shanks - Chief Financial Officer

Analysts

Vincent Lin - Goldman Sachs Group Inc.

T.C. Robillard - Banc of America Securities

Scott Sutherland - Wedbush Securities Inc.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc.

David Koning - Robert W. Baird & Co. Incorporated

Matthew McCormack - BGB Securities, Inc.

Ashwin Shirvaikar - Citigroup Inc

Kevin McVeigh - Macquarie Research

Convergys (CVG) Q4 2010 Earnings Call February 2, 2011 10:00 AM ET

Operator

Good morning, and welcome to the Convergys Fourth Quarter 2010 Earnings Teleconference. [Operator Instructions] The speaker for today is Mr. David Stein, the Vice President of Investor Relations. Sir, you may begin.

David Stein

Thank you, Valerie, and good morning. Welcome to Convergys' fourth 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 website under Events and Webcasts.

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 dispositions; 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 future results to be materially different than those expressed in our 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 our forward-looking statements as a result of the new information or future events or developments.

Also on the call, we'll discuss non-GAAP financial measures, including free cash flow, EBITDA and results from continuing operations adjusted for the impact of impairment and other charges. Non-GAAP measures should not be construed as being more important than comparable GAAP measures. Convergys' management believes free cash flow, EBITDA and results from continuing operations adjusted for the impact of impairment and other charges, provide the users of financial statements with a more comprehensive understanding of the company's underlying performance. A reconciliation of these non-GAAP measures is available in the news release and on the Convergys Investor Relations website.

With me 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 operating 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.

Jeffrey Fox

Good morning, everyone. First, I'll review overall company performance and how we're doing executing on our plans, then I'll discuss the results for each of our business segments.

Overall, we had a solid revenue performance in the fourth quarter. Revenue was up 3% sequentially, and we are pleased with the stabilization across our businesses after a tough start to 2010. From an earnings perspective, EBITDA was $81 million in the quarter, up 14% year-over-year, and EPS was $0.31 per share on a non-GAAP basis. This does exclude a couple of significant impairment and restructuring charges taken in the quarter that Earl will discuss in a moment. We generated $17 million of free cash flow in the quarter, and we ended the quarter with net debt of approximately $24 million.

In 2011, we are focused on delivering quality service to our clients and investing in the capabilities that our clients value. We are also very focused on getting an increased return on investments we've already made. During 2010, we made solid progress simplifying the business and improving operating performance in both Customer Management and Information Management.

As the charges in the quarter indicate, we took additional actions to streamline operations. This includes a number of facility closings and approximately a 7% reduction in our professional staff once fully implemented. During the quarter, we continued executing on our operating plans. We are enhancing our capabilities to meet client needs and to distribute more of our solutions into the vertical markets we serve. We expect this investment to create more opportunity, accelerate the pace of signings and continue to position us for long-term growth. As we enter 2011, our focus is on growing revenue and earnings. We expect to report higher revenue, EBITDA and earnings in 2011 versus 2010.

Now let's review our fourth quarter results in each segment. In Customer Management, Live Agent call volume strengthened, and adjusted EBITDA margin improved by 200 basis points compared to the prior year. During the quarter, we continued to expand our global presence. For the year, we added over 2,500 seats in the Philippines and approximately 700 seats in Latin America. In total, our global capacity increased 16% during 2010. This expansion is helping us deliver to our clients the quality service they need in the right geographies and at a competitive price.

Revenue in the fourth quarter was comparable to revenue in the third quarter. We saw a more normal seasonal pattern with several of our core clients growing year-over-year, and the revenue we deliver offshore continues to grow as a percentage of our total.

Customer Management operating income increased 33%, and EBITDA increased 18% on an adjusted basis compared to last year. In the fourth quarter, we continued to see a solid new business trend. We signed a new Live Agent business worth approximately $60 million of revenue that we expect to deliver in 2011.

As we've increased our focus on account management, we've also seen increasing client engagement. Our comprehensive set of capabilities is generating interest from large clients, as well as new logos. Some evidence was apparent in the quarter when we were able to sign a new logo, Dun & Bradstreet, to a combined technology and Live Agent deal across multiple geographies.

On the technology front, we took an impairment charge in the quarter that Earl will elaborate on shortly. Despite the impairment charge, I do want to make sure that we're clear that we did make progress improving our Technology business during the fourth quarter. We did see our revenue stream stabilize when compared with the second and third quarter, and we had solid bookings reflecting continued good demand for hosted technology solutions.

We also made changes to streamline the operation with a focus on increasing margins. We are successfully implementing intelligent interaction technologies, which allow our clients to offer personalized and segmented service, and our technology solutions are complementary to our Live Agent capabilities for a number of our clients.

We closed several deals in the quarter, combining self-service, assisted-service and proactive-service offerings. Bookings improved in the fourth quarter compared with the prior year. This part of the business is now focused on improving the return on our sales, marketing and R&D investments across the portfolio. As a result of these actions, we expect this technology unit to deliver moderate profit growth in 2011.

For 2011, we expect our Customer Management segment, which includes the technology operations, to grow revenue with some improvement in overall margin.

Now I'll move to the results for our Information Management business. We had a solid quarter in Information Management. Our focus is on positioning this business for growth. Revenue was up sequentially as we anticipated. We did come in slightly below our revenue target for the year, but we had an excellent quarter and we did see a 12% increase in revenue during the second half of the year over the first half. Please recall that we did have large client migrations, which are now substantially behind us.

In terms of profitability, operating income was 13.9% in the fourth quarter, and the team delivered 12.1% operating margins for the year on an adjusted basis. Our investment in R&D, sales and marketing is generating client interest. We're very proud of our Smart Suite Solutions and continue to win business from new and existing clients. We believe our combination of low total cost of ownership, scalability and deep functionality provides more value to our clients.

In the fourth quarter, we also signed our second utilities deal. This is a smart grid proof of concept for a large European provider, which we believe has significant upside long term. We are working hard to win more business with Tier 1 clients in both utilities and the communications industries, and our goal for this business in 2011 is to maintain stability and grow our client base.

In summary, we are focusing on our clients, simplifying their business and executing on our operating plans. Our businesses have stabilized and are positioned to grow. At the end of the day, we firmly believe that delivery sells. I want to thank all of our employees for their dedication and commitment to improving our operating performance in 2010. I specifically want to call out our Philippine team, which had significant ramps and growth during the year and has put us in a position to continue to grow in 2011.

Through delivering great quality service, we earned the right to win more business with our clients, and we are competing aggressively to win new business opportunities in all of the markets we serve. We have strong operating teams executing every day, and we are very excited to be adding value to a number of our clients. For the full year 2011, we expect to report higher revenue, EBITDA and EPS.

At this time, I'll turn the call over to Earl to provide more detail on our financial results.

Earl Shanks

Thank you, Jeff, and good morning. I'll now discuss our financial results and our business outlook for the year in a moment, but first, I'd like to review the charges we reported in the fourth quarter. These include the impairment related to the Relationship Technology Management unit and Customer Management, restructuring actions to further streamline operations and simplify the business and a pension settlement.

Regarding the impairment. As mentioned on the last call, although we've taken more costs out of the Relationship Technology business than originally projected, we have been disappointed by sales that have been lower than expected in this business. During the quarter, we determined that the fair value of this unit was less than its carrying value. As a result, we reduced its carrying value by $181 million. This included a $166 million goodwill impairment and a $15 million impairment of facilities. As Jeff mentioned a moment ago, the Relationship Technology unit had solid bookings in the quarter, and we continue to see opportunities with existing and new clients.

We also took actions in the quarter to further streamline operations across the company. This resulted in restructuring costs of $19 million. The payback period on the severance expense should be less than a year.

Regarding the pension settlement, as we discussed before, pension accounting requires us to take a charge when a significant portion of a liability is settled in a given year. We had a 20% reduction of active participants during the year because of the HR Management transaction and restructuring actions. As a result, we paid out 8% of the fund and recognized a net charge of $6 million. Today, about 8,000 current employees are active participants in the plan. The asset impairment and the pension settlement are not expected to have an impact on the future cash flows of the company.

Now I'll discuss results from continuing operations. Overall, in the fourth quarter, we had sequential improvement in revenue, adjusted EBITDA and EPS. Revenue from continuing operations increased to $573 million. This included HR Management Transition Services revenue of $9 million. On an adjusted basis, operating income from continuing operations increased 20% year-over-year and 31% sequentially to $47 million in the fourth quarter. Adjusted EBITDA increased 14% year-over-year and 7% sequentially to $81 million. Adjusted income from continuing operations increased 45% year-over-year and 8% sequentially to $39 million or $0.31 per share. Tables are provided in the news release and on our website that reconcile GAAP to non-GAAP for all these measures.

Now I'll review financial results by segment. In Customer Management, fourth quarter revenue was $467 million. Compared to the prior year, we were pleased to see volume increases with several of our existing clients. At the same time, as we told you earlier in the year, we had one of our large clients experience significant volume reductions, which impacted the fourth quarter. We also saw a continuing shift offshore.

On a sequential basis, revenue increased slightly. Volumes increased with several of our core clients that experienced a surge in seasonal demand, and we also saw the positive effect of new program ramps.

As a reminder, the U.S. Census program ended in the third quarter, so obviously, we didn't have revenue from that large program in the fourth quarter. Given the Census impact, we are pleased to see the sequential revenue growth.

In the fourth quarter, our largest vertical market remained communications, which accounted for 58% of revenue. 13% of revenue came from financial services clients, 8% from technology firms, and the remaining 21% was from our other verticals such as government, retail and manufacturing. The proportion of the Customer Management workforce by region of the world now includes 38% in the United States, 38% in the Philippines and 16% in India.

Moving to Customer Management earnings. Adjusted operating income increased 33% year-over-year and 18% sequentially to $37 million, and operating margin increased to 7.9% as we continued to simplify processes across all of our operations. Adjusted EBITDA increased 18% year-over-year and 8% sequentially to $54 million, with a margin of 11.5%.

Since the end of the fourth quarter, we took additional action to simplify the Customer Management business. In January, we sold our small Financial and Accounting Outsourcing business. We acquired the business for about $5 million in 2005, and the business was profitable each year we owned it. While we were pleased with the performance and the value we delivered to this small set of clients, there was no overlap with the rest of our Customer Management business. We thought the best thing we could do for the clients, the employees and the shareholders was to sell the business. As a result, in the first quarter of 2011, we will book a $4 million gain from the sale of the F&A business.

Moving now to Information Management results. Fourth quarter Information Management revenue was $98 million, up 19% on a sequential basis. As anticipated, we had a large project in the quarter with a large quantity of third-party software, somewhat more than half of the revenue improvement related to this one project. We had some additional software licenses, and there were some expected project completions in the quarter as well. We're also pleased to report signing our second utilities contract during the quarter.

Turning to Information Management earnings. The team continued to do a good job of executing on controlling costs. We knew that the one large project in the quarter was pretty low margin, so we didn't see the uplift we might normally expect from that kind of boost in revenue.

Overall, Information Management had a solid quarter. Operating income increased 20% sequentially to $14 million in the fourth quarter, and operating and EBITDA margins were 13.9% and 17.7%, respectively, excluding the restructuring charges, which were mostly related to facility consolidation.

Moving to corporate and other items. The $13 million impact to income in the fourth quarter reported in Corporate and Other included the pension settlement, corporate level restructuring charges and long-term executive incentive compensation.

Non-operating items in the fourth quarter included earnings of $10 million from the Cellular Partnerships. The effective tax rate would be about 26% on a normalized basis. For 2011, we expect a slightly higher tax rate, though less than 30%, due to the expiration of the India tax holiday.

Moving to cash flow. Free cash flow was $17 million in the fourth quarter. This brings the full year to $164 million, which was a bit lower than we had expected. Free cash flow came in below our expectations due to a shortfall of working capital. This was due to lower progress payments received for Information Management implementations, a one-day increase in day sales outstanding and the timing of some payables.

Regarding the Cellular Partnerships, as we mentioned last quarter, there has been a recent increase in capital spending in the Cell Partnerships related to investment in their network. As a result, fourth quarter cash flow of $5 million from the partnerships was short of the recent quarterly pattern.

Turning to the balance sheet. At the end of the fourth quarter, we had $186 million in cash, and net debt improved to $24 million.

I'll now discuss our business outlook for 2011. Overall, we expect modest revenue growth and margin expansion for the company. In terms of revenue for the segments, we expect Customer Management revenue to exceed $1.84 billion. For Information Management, we expect revenue to exceed $340 million.

On a consolidated basis, EBITDA is expected to be $295 million to $325 million for the year. We expect total company earnings per share to be in the range of $1 to $1.15 for 2011. Compared with prior year, we expect to see a gradual year-over-year improvement in quarterly performance. This includes first quarter 2011 results similar to the adjusted results in the same period last year.

This guidance takes into account all of the opportunities and risks we've identified at this point, including the loss of revenue and earnings and the non-operational gain in the sale of the F&A business, and our expectation that we will continue to take out costs as appropriate during the course of the year.

At this time, Valerie, please open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] David Koning from Baird, you may ask your question.

David Koning - Robert W. Baird & Co. Incorporated

I guess first of all, just on the margins in the Customer Management business, that's really the key to longer-term EPS growth, just getting that back at more normalized and improving levels. And I guess I'm wondering, it seems like a few of the factors that really can help the margins grow the next couple of years, just that increase in offshore capacity, if some of the tech deals keep coming through with higher margins. And I guess one thing just to look at from last year, Q2 was a pretty low margin. So I'm just wondering maybe you can talk about some of those things and why 2010 margins can be better and maybe quite a bit better than 2009.

Earl Shanks

David, I think you've hit on a couple of the key things that we're looking for, and we do think we've got some opportunity, obviously, with the continued growth offshore. You're right about that, that, that will be helpful. We are expecting, as we said, some help from the margins out of the technology business, as well as some modest improvement and profitability there as well. So those are important key things that are going on. Obviously, the other one is -- and we've been a little cautious on how we talk about revenue but to the extent that we drive revenue growth, I think that will incrementally, as we've said to you before, improve margins as well. Those are, obviously, each of them three pretty big levers. We are continuing and will continue throughout the year to squeeze costs. And as we noted in the charge we took in the fourth quarter, we've done some things to rationalize capacity, and we're continuing to obviously take a lot of costs out of the staff organizations and trying to continue to squeeze that so I think those are all opportunities. So all of those factors I think are pretty encouraging. I will note for you that there are some offsetting things that you deal with in that process as well. General wage inflation being pretty constant in the industry, and so we're always working to stay ahead of that. There's some opportunities, I think, with some of our clients to see some pricing increases that'll offset part of that, but certainly, as an organization, we know we've got to be pretty attentive to all of that. And then one of the things that we want to make sure we do is to get the capacity filled up as much as we can. You know, David, over the last couple of years, we've probably not been quite as optimized in that regard as we'd like to be. At this point, I will tell you that we're not being terribly optimistic that we'll see huge improvements there but we know that is one of the leverage points that to the extent that, that volume comes back faster than it might have otherwise over the past couple of years, that, that's a pretty good leverage point overall. So plenty of leveraged points on the upside, I think, on the summary, although there are some pretty key pressure points on the downside as well that we're trying to moderate, and we try to take into account when we provided the overall guidance to you.

David Koning - Robert W. Baird & Co. Incorporated

And then just two quick ones, one being the buyback. Would you expect with the strong cash flow to finish the buyback this year? And then the other is just the Cell Partnerships, is there any risk with Verizon taking some of the iPhone business coming up potentially here? Is there some risk to that line?

Jeffrey Fox

Yes, this is Jeff. I'll take the Cell Partnership and then let Earl give you some color on the buyback since he's been talking about that for multiple quarters. On the Cell Partnership, if you follow the wireless industry, you know that Verizon is now launching the iPhone, and that both Verizon and AT&T are rapidly deploying fourth-generation technology, which is a pretty big network investment. And so we're very pleased with the long-term value of that partnership. And again, I think we can't disclose a lot of details there, but we believe that the investment that's going on in the network that's caused our dividend to, at least near term, not be as much as it was is all good strategic thinking, and we're excited about the long-term value of that partnership as AT&T and Verizon both compete on the fourth-generation network over the next several years.

Earl Shanks

And David, when we think about the buyback, as you know, we tend to think about our capital structure on a multiyear basis, and that continues to be how we're thinking about it, trying to assess what we'll need capital for both this year and what we might need capital for over a couple of years and really take that into account. You know that I don't generally get ahead of myself in terms of talking to the market about when we're going to buy back until after we have. And so I'll maintain that pattern on this call this morning, but you certainly -- that's one of the things that we are actively having a dialogue about, both as a management team and with the board, to make sure that we're deploying the capital appropriately in a way that will provide our shareholders with an appropriate return.

Operator

Julio Quinteros from Goldman Sachs, you may ask your question.

Vincent Lin - Goldman Sachs Group Inc.

It's Vincent Lin from Goldman Sachs. I guess the first question, Jeff, you mentioned that Convergys increased global capacity about 16% for Customer Management in 2010, and yet I think revenue guidance is still somewhat flattish in 2011. I guess we are trying to reconcile the difference, meaning, if you can bridge the gap for us in terms of the difference between capacity expansion and revenue growth, what are its pricing, deflationary pressure, volume, anything along those lines and utilization rates, if you can just bridge the gap for us and maybe provide some perspective in terms of when we should see those gap to close.

Jeffrey Fox

Well, so I'll give you just a little bit of color. Earl elaborated on where we have people. And I think that if you do the math, you'll see we still have a large North American business, and our North American footprint is still incrementally very large. And frankly, we're proud of the work our team is doing there. We think we're doing good work for a number of great brands and clients. So net-net, our growth objective for the year is to beat the $1,840,000,000, right? And so we are projecting growth. But when work is moving among all the geos, we want to be cautious on our revenue growth forecast. We are seeing really good demand for the capacity we're putting in LATAM [Latin America] and in the Philippines. But at the same time, we have to be cautious about a net movement within our overall portfolio, including North America. And that's why Earl and I and the team are cautious about projecting significant growth, but we are committed to growing the revenue.

Earl Shanks

Then one thing I'd just add to that in terms of numbers, if I look back at 2010 and think about the relative geographic mix that we saw as an organization, we probably saw something like a 3% or so revenue headwind due to the geographic mix shift from North America to the low-cost geographies. A little hard to be completely precise on that because it's really not a one-for-one swap on any given basis. But just as a framework, there is certainly a mix shift that would be something in that range. We've seen that kind of pattern over the last few years, and Jeff touched on the fact that we've got a large North American footprint. We'd love to not see that pattern continue but the history would tell us we should expect that it will.

Vincent Lin - Goldman Sachs Group Inc.

And then on the margin side, the expectations for margin expansion for '11, is the expectation still for most of the expansion coming from the CM [Customer Management] side versus Information Management?

Jeffrey Fox

Yes. You've got it exactly right.

Vincent Lin - Goldman Sachs Group Inc.

So the 10% target is still the target that you're thinking about?

Jeffrey Fox

Well, yes. And again, you can see that we've simplified the business. And if you look at the segment financials, I think you'll see as we grow our revenue, we are planning to bring incremental money to the bottom line, but there's a lot that goes on in the ramp phase and in the shifting of geographies that we're targeting growing those margins but we're trying to not be too aggressive on forecasting it because we don't know when it occurs, though we are long-term getting better every day in our CM business and our CM Technology business.

Vincent Lin - Goldman Sachs Group Inc.

And then maybe lastly, a couple of housekeeping items. What are your expectations in terms of tax rate and capital expenditure for 2011?

Earl Shanks

Like I said on the earlier comments, we were at about 26% on a normalized basis in the fourth quarter, and we'd expect it to be slightly higher than that but still below 30% for the year. And in terms of capital spending, I think for the year, we were about $66 million or so in total capital spending in 2010. That's a pretty tight capital spending in my view, so might be a bit up from that but we've managed that, as you know, you look back in history, pretty tightly over the last several years. I used to give guidance around that one at 4% or 4% to 5% of revenue, and we've been pretty consistently under that. So we'll continue to be pretty tight on capital spending this year as well.

Operator

Kevin McVeigh from Macquarie, you may ask your question.

Kevin McVeigh - Macquarie Research

I wanted to -- Earl, if you could just help us understand your thoughts on capital structure. Obviously, there's some debt maturing in the near term, and given the strength of the free cash flow, how you're thinking about the capital structure going forward?

Earl Shanks

I think the debts that's maturing in the next year or so, Kevin, is largely all what I think of as working capital debt, so it's really not something I'm particularly focused on. I do have my line of credit, which comes due pretty low borrowings or zero borrowings, I think, at the end of the quarter on that, which we're in the process of refinancing. So we'll extend that out. I very much believe in the importance of having liquidity and the availability on a committed basis out there, and so that's why we'll extend that facility. I think as I said a few minutes ago on our broad perspective on capital structure, we certainly want to make sure that we have availability and capacity for the things that we may need to invest in as we look at the business over two- or three-year horizon. And as we look out over the business at a two- or three-year horizon with both the Customer Management and the Information Management business, we recognize there may be opportunities in the marketplace which can create pretty significant shareholder value, which may require capacity or availability of capital. And so we're really trying to think through how that works, as I said, in a pretty active dialogue with the management team and the board to really work through it. And so we're kind of in the midst of that. I think we are, as I've said before to the investment community, I think we're probably on the fairly low end of where our debt is at the moment in terms of the range of acceptable performance but I think it is a range, and I think it's something you don't exactly manage quarter-to-quarter, you manage over multiple years.

Kevin McVeigh - Macquarie Research

And Earl, can you just talk about longer-term kind of as you think about the targeted margins in the Customer Management versus Information Management businesses overall.

Earl Shanks

Well, I think, Kevin, we touched on this a little bit, and Jeff just touched on it a minute ago. We're still working towards the 10% longer-term target in CM, but we're cautious of what it's going to take to get there. And while there's a lot of details to be driven to make that happen and a lot of puts and takes around it, we're not looking at it and saying, "Hey, it's going to happen quickly and overnight." I think one of the things that is required is to see a more constant stream of revenue growth to help that happen. With Information Management, I think our perspective on margins really hasn't changed all that much. I think with the business that is about the size it is, I think, they had pretty good year in terms of margins in 2010. And if you see revenue growth in that business, obviously, there's more leverage on the revenue growth in that business as we think about it, but that would drive it but I don't think when I look at the margins in that business, if I pause it just for the sake of analysis, flat revenue in that business, I don't think it's reasonable to expect that business to do a lot better on margins than what it's doing at the moment. I think at that size and scale and those margins, we were pretty pleased with the performance in 2010.

Operator

Scott Sutherland from Wedbush Securities, you may ask your question.

Scott Sutherland - Wedbush Securities Inc.

First of all, when you look at 2011, your baseline guidance just was flat or better. What are the risks you think that might lead to more of a flat year than modest revenue growth for your guidance?

Jeffrey Fox

So I mean, the variable is whether or not our revenue and revenue acquisition capabilities continue to produce better results through the year in all of our businesses. We are investing in capabilities. We need buy orders on the technology side of both of our IM [Information Management] and our CM business. And then frankly, we just need to continue to do great work for clients in our CM business so that they're wanting to give us more footprint within their operation. And so the new logos we're pursuing actually see the value of doing business with Convergys. It's not a really complicated formula for us in 2011. We're trying to keep things really simple and execute.

Earl Shanks

And Scott, I think as it's pretty clear from the comments we made, the signs we see at the moment around revenue have generally been encouraging. But we are trying to be cautious when we look at the full year. So kind of good current signs but a year's a long time, and we'll see how the market develops over that time period.

Scott Sutherland - Wedbush Securities Inc.

When you look at the call center business, we're hearing a lot more in the Home Agent side. Can you talk about your strategy in the Home Agent and any kind of impact it's having on the model?

Jeffrey Fox

We have some good customers using our Home Agent capacity. It's not affecting our capital ratios or margins because of its relative size versus the rest of what we do. And I would tell you that our posture is, is through our organization, we're putting it in front of people as an option when we think it's a real good value versus something else they're doing. So we're very value delivery-oriented. We're not pushing Home Agent just to push it. We're pushing it when we think it's really the right solution, whether it's the work hours, the split shifts or whatever.

Earl Shanks

But directionally, Scott, it's probably something in the range of 5% of our total workforce, so it's relevant, but it doesn't drive it.

Scott Sutherland - Wedbush Securities Inc.

And then lastly, on the Information Management side of your business, you mentioned you had a lot of pass-through revenue in the quarter. Can you talk about what kind of impact you've had in the margins? You gave a revenue impact but what kind of margin impact did you have and what could it have been?

Jeffrey Fox

I mean, just keeping it really simple, when you net out the flow-through, there was margin on the deal as well, and I think that the margin came in roughly in good relation to our overall business margin in that segment so it didn't cause it to skew one way or the other in our view.

Operator

Matt McCormack from BGB Securities, you may ask your question.

Matthew McCormack - BGB Securities, Inc.

The first question, I just want to stick with guidance. You did give a range in the low end but it was open-ended on the top end. So if you don't grow in '11, can you still do a $1.15?

Earl Shanks

I think, Matt, to be fair, we probably need some growth to make that happen, and we factored in some expectations around growth. What I think we said on the top end is that we expect to do better in revenue in 2011 than we reported in 2010. And so obviously, kind of by definition, that means we're expecting some revenue growth.

Matthew McCormack - BGB Securities, Inc.

And then in terms of revenue, I mean, you did talk about the migration also being a pressure to at least top line growth. But are you also reviewing your -- continue to review your client portfolio and possibly culling some certain customers, certain contracts that don't hit a certain margin level and just kind of letting them expire, not resigning?

Jeffrey Fox

I think that, that's a great question. We try to develop profitable, mutually beneficial relationships. I would tell you we don't have a lot of situations where we're doing good work for a client and not making some level of profit. And so I would not say that, that is something we're doing actively right now.

Matthew McCormack - BGB Securities, Inc.

And then, Jeff, you mentioned the Dun & Bradstreet win. I mean, that was from an incumbent, I believe it was IBM, was in there for several years. And I think you won it as the sole source deal, which in of itself seems pretty significant. Can you kind of talk about why Convergys won that deal? And could Convergys had won that deal two years ago?

Jeffrey Fox

So again, we mentioned that because they filed an 8-K, I think we've historically not talked about new relationships. I really don't think that that's really the right thing to do, but it was public and I felt like we should call it out. A couple of years ago, Convergys -- so I've been here a year, I was on the board for a year and I knew Convergys for many years. Convergys is a very good company with a core value of delivering good service to its customers so Convergys could have competed for that business anytime. The exact reason why they're changing now versus at some other time, I think, is partly to do with the overall technology capabilities we can bring to bear in a value-based construct to where we're really a partner across a significant set of things that they're trying to drive. So in that particular instance, I feel like our overall capabilities, combined with our history of being a good committed business partner for multiple years, helped them be comfortable making that decision with us. I think that I've seen all the value proposition, I've seen all the materials, and we need to do great work for that new customer to earn more business from them over time.

Matthew McCormack - BGB Securities, Inc.

And just my last question. I mean, the severance of, I guess, roughly $12 million in the quarter, how is this -- I mean, how do you look at that and ensure that your service quality doesn't suffer? I mean, what were those people doing? Were those middle management people so you're kind of flattening the hierarchy? How can you remove that many people and still maintain a certain service level?

Jeffrey Fox

So a number of things. I used the term simplify a lot last year, and I think that underneath the hood, I think we're just simplifying some of the things we do. And net-net, when you look at the changes we're making, we did make clear that those are being phased in. They are not -- it wasn't a one-day it's done. And so there's an execution process where across the board, we're simplifying some processes, we're leveraging some technology in some instances. And net-net, through some leadership change, I think we're driving some decisions and actions closer to our customers in the aggregate. When you add all that up, we feel like we would not put service quality at risk ever. Again, you have to remember, that is what we have. And so the changes we're making are things that should not touch customers, and in most instances, our support functions and things that the customer doesn't see. And so that's how we think through the ability to continue to simplify what we're doing, but still continue to drive our delivery and be in a position where our customers feel great about the quality of service we're providing.

Operator

Shlomo Rosenbaum from Stifel, Nicolaus, you may ask your question.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc.

Earl, first off, does the EPS guidance include the $4 million gain on sale from the F&A business?

Earl Shanks

Yes. The guidance we've provided, Shlomo, includes everything that we know about today and what we anticipate in terms of what will happen, including the things we'll continue to do to take costs out of the organization. So the $1 to $1.15 is intended as all-inclusive guidance. It also includes obviously, on the F&A side, that business was profitable, and so we will not have that profit after January. So it included the other side of that equation as well, similar, obviously, in terms of what will happen on a revenue basis.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc.

So can you just repeat how much revenue of headwind that is, and then how much of a profitability headwind? In other words, is the gain -- normally, when you look at a gain, you're like, okay, you have something one-time that I should exclude but it also looks like there were some profitability that you were getting also.

Earl Shanks

The gain is a bit larger than what we would've had in annual profit. We haven't really quantified the size of the revenue. It's in the $10-or-so million range, but that's not probably something we're going to quantify specifically in any level of detail.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc.

Then moving on to the IM business. Do you have a base number for 2010 revenue excluding all the migrations? In other words, if you're looking flat year-over-year in 2011, which you had migrations out of there, if you kind of exclude that, it must imply a certain amount of growth.

Earl Shanks

I think the migrations, and Jeff will talk about this in a minute, but I think the migrations largely were out of the 2010 numbers. In fact, it was the comparison '09 to '10 that was the issue there. I think we've got -- as we said, we're encouraged about where the business is going. Certainly to say that it’s -- we have implied that there will be some growth next year.

Jeffrey Fox

And just to give you a little bit of color, there were always -- there's always projects coming on and off. The way we're looking at that business is we have some really important client deliveries that were put under contract this year and last year. And we also have an investment in sales and R&D that has to generate some in-year revenue, as well as some momentum in 2012. We are expecting to grow the revenue in that business unit this year. So we have to sign some new business and also get some project work and upgrades and that type of thing from our incumbent base to achieve that objective.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc.

And can you just comment a little bit on bookings. $60 million in bookings for a company your size does not seem particularly good. Was there anything that got signed after the quarter? Or is it just kind of you're feeling more momentum because the tone of the call is a lot more positive than -- the $60 million just doesn't seem...

Jeffrey Fox

So, put in context, I think the $60 million was just what we booked as it translates through 2011 delivery value. It wasn't total contract value.

Earl Shanks

And I think that's right. I know that's right, when you -- about what it was. But the way we think about it, it's certainly in the range of the signings that we've had on a quarterly basis, and if you go back in history, it's probably a little lower than what we would have had in the average quarter over the last three years. But it's still a pretty solid performance in our perspective. We're also pretty encouraged when we think about what we see with existing client volumes and where we are today and our expectations for existing client volumes in 2011 as compared to where we sat at the beginning of 2010 in existing client volumes. And obviously, those two interplay a bit in terms of what the expectations are for us in total. Probably, the most important factor last year would've been kind of what was going on with existing client volumes, which caused it -- we came out a little lower than we had ended up expecting for last year because of the negatives there. We're seeing a bit more positive trends now in existing client volumes, which is probably doing more to describe why we are talking about the business the way we are today as compared to just that one data point, the $60 million.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc.

And lastly, I just wanted to ask about some of the wage inflation in India, the upper single digits. And how are you guys managing that right now?

Earl Shanks

Well certainly, wage inflation and I touched on this in, I think, my response to David's questions earlier. Certainly, wage inflation in the business is an ongoing issue and something we are attentive to in India. It's something we are attentive to in the Philippines in particular. That is one of the things that we will, in the process, jump over or have to jump over on the year, which has impacted how we've thought about guidance and what we've talked about for guidance. That's also one of the reasons that we will go back to our clients and remind them that they have to -- that pricing is also related to wages in local countries, and that we'll have to adjust pricing because of that. And so it's kind of dual-edged for how we think about it.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc.

Do you have any progress on the two multiyear IM contracts that you announced in the middle of last year? Is there any comment that you're going to give on that?

Earl Shanks

We have made progress on the one that will be installed in 2011, so we're making good progress on that one. The other one, it hasn't gone exactly the way we expected it to, and so I'm not currently expecting the '12 contract to implement.

Operator

Ashwin Shirvaikar from Citigroup, you may ask your question.

Ashwin Shirvaikar - Citigroup Inc

So Jeff, my question is as you compare yourself to other organizations your size, do you view yourself as having good opportunity to keep streamlining your operations?

Jeffrey Fox

I'm not going to hit that question exactly the way you've asked it. I think we have a good opportunity to grow this business by getting return out of some of the investments we have and continuing to simplify the way we do things. And so I'm not going to address the word streamline. I've used simplify more than streamline this year because we do great things for a lot of customers. We need to continue to make it simpler and clearer to our customers how to do things with us and more things with us. And I think that's the area of focus that I'm really on right now. It's getting the right revenue and the right geo, we're on the right capability set out of our organization, easier and simpler with our clients.

Ashwin Shirvaikar - Citigroup Inc

So if that process orientation, it might be a good way to say, leads to better productivity and hence better margins, that's the way you'd prefer it as opposed to just cost cutting, obviously.

Jeffrey Fox

And I prefer it to show up in revenue, and that's why if you look at our guidance, we feel like there's more work to be done with the clients we have and some clients we're competing for across all of our capabilities. And so rather than use the word streamline, we're trying to just continue to simplify and execute and get the revenue at a reasonable margin growing again across this business. That's really where we're focused right now.

Ashwin Shirvaikar - Citigroup Inc

And what would make you say 12 months from now that you had a good year with revenues? I mean, certainly it's not, at least, I hope it's not, flat or 1%. Hopefully, better than 3% and maybe 4% and 5% but what would make you say that you had a good year?

Jeffrey Fox

Earl is smiling across the table in case you can't see it. I think, I mean, this business has a lot to execute to meet the guidance. Meeting the guidance is the first step to a good year. Having the ability to grow this business again in 2012 on the top line and the bottom line, having that kind of successful continued progress to me is what -- that's what we intend to do this year. We just have to go do it.

Ashwin Shirvaikar - Citigroup Inc

And last question. This one is on margins and cash flow. Can you see a scenario where I would say, if you got low-single digit revenue growth, it would not translate to a decent level of margin improvement, given you have excess capacity in the system and you kind of -- you're simplifying how you run the business and so on.

Jeffrey Fox

The flow-through -- there are differences in terms of what type of work people buy, where they buy it, how you ramp, whether it's a kick over, an incumbent versus take work from in-house, add to a platform or a program you're already working. So there are differences. Every dollar revenue is different. And so you've asked the question, is it possible you could grow revenue and not have it help your overall profitability or margin. Is that the question you asked?

Ashwin Shirvaikar - Citigroup Inc

Well, yes. What I'm trying to get to is, I mean, presumably, you're not adding revenues just for the sake of adding revenues. So my question was more to the question of scale and capacity utilization getting better and things like that. And that should result in an appropriate level of margin improvement. And yet that does not necessarily seem to be. Look like they're certainly in the lower end of your EPS range.

Earl Shanks

I think, Ashwin, when we think about it, our general perspective on the CM business really hasn't changed, that incremental revenue dollars as a starting point and when fully implemented ought to generate 20%, 25% incremental margin on the revenue dollars. So none of that's really changed. I think we are just a bit cautious as we sit here in early February to say, "Well, what's the revenue actually going to end up going to be for the year? And what's the geo mix that it will actually end up being?" And to Jeff's earlier point, and what's really the mix of the kind of work we're going to do. Certainly, our expectations is that growth in revenue helps growth in margins. That is connected from how we think about it. I think we've provided you a pretty clear range on the EBITDA and EPS lines in terms of what we think the range of likely outcomes are for the year. And to some extent that as we said, that's a bit driven by revenue. So we need to get some revenue growth for the high end of that to make that work. But that's really how we're thinking about it and how the pieces fit together.

Ashwin Shirvaikar - Citigroup Inc

And just to add on the cash flow, when you said cash flow back in the net income, you were talking about which definition of net income?

Earl Shanks

Given that my $1 to $1.15 I've described to you as all-inclusive definition of net income because I think it includes, as I said, everything we know about, everything we anticipate. It's that definition of net income.

Operator

T.C. Robillard from Signal Hill Capital, you may ask your question.

T.C. Robillard - Banc of America Securities

Earl and Jeff, not to belabor this point here. I'm just trying to get a little bit better understanding, as I reconcile your conservative stance on the revenue outlook with signs of improving volume in your business, both with existing clients and with new logos. And I'm just trying to get a sense as to where the conservative stance is coming from. Is it a function that volumes aren't picking up at a pace that you would expect at this stage of the recovery? Is it a function of some of the new logos, ramps maybe extending out a little bit? If there's any help you can give us there as to what's drawing. And I understand the geographic mix that you guys talked about in the revenue mix. I'm just wondering if there's anything else that is driving that conservative stance that you can help shine a light on.

Earl Shanks

T.C., we've talked before about the fact that we've got pretty good visibility over the next couple or few months in terms of what's going to happen with revenue. But that when you get out further than that, there's a lot more variables. And quite frankly, having done this for several years at Convergys, we've struggled to get the revenue expectations consistent with where it comes out. To actually grow revenue in both of these businesses in 2011 will be a significant shift from some of the patterns we've seen over the last few years. And so we believe that's what's going to happen. We feel pretty good about that but that's caused us to be cautious about exactly what we're going to forecast around it as we think about it.

T.C. Robillard - Banc of America Securities

I mean, is this any discussions you're having with clients? Or is this just a function to your point there? Or this is experience kicking in?

Jeffrey Fox

I think it's -- we've come through a really complex short-term set of economic conditions, and with what's happening in the world, people can predict it's all going to be growth in a good consumer economy again. But we're not going to go there. We are really -- we need to get additional client business signed, and we are investing in things we think add value to get those signings. But making that happen and having it flow through to the margins is the process we're working on delivering or executing, as I like to say, in 2011. And so no, we're not off what you're wanting us to be saying. We're not being told a bunch of bad things are going to happen. We're just trying to be thoughtful about the move from stabilization to growth is something we have to complete. We have to complete that process. And that is a process asset-by-asset, customer-by-customer, and we're working at it. It's an execution plan.

David Stein

Okay, I'd like to add that Earl and I will be available the rest of the day to answer any questions about the results or the business outlook that we've talked about, and I want to thank you all, for participating today. Have a good day.

Jeffrey Fox

Have a great day.

Operator

This concludes your conference call. You may now disconnect.

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