Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Convergys (NYSE:CVG)

Q1 2011 Earnings Call

May 04, 2011 8:30 am ET

Executives

Earl Shanks - Chief Financial Officer

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

David Stein - Vice President of Investor Relations

Analysts

Giridhar Krishnan - Credit Suisse

Vincent Lin - Goldman Sachs Group Inc.

Scott Sutherland - Wedbush Securities Inc.

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

Matthew McCormack - BGB Securities, Inc.

Ashwin Shirvaikar - Citigroup Inc

Timothy Wojs

Kevin McVeigh - Macquarie Research

Operator

Welcome to the First Quarter 2011 Earnings Teleconference. [Operator Instructions] Today's conference is being recorded. [Operator Instructions] At this time, I will turn the call over to Mr. David Stein, Vice President of Investor Relations. Sir, you may begin.

David Stein

Thank you, Katherine, and good morning. Welcome to Convergys' First Quarter 2011 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. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements as a result of new information or future events or developments. Please refer to yesterday's earnings release and our most recent filings with the SEC for additional information regarding uncertainties that could adversely or positively affect our future financial results. This includes the risk factors provided in our Form 10-K for the year ended December 31, 2010.

Also during the call, we'll discuss non-GAAP financial measures, including free cash flow and EBITDA. 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. I'll begin with a review of overall company performance and discuss the progress we're making in executing our plan. Then I'll provide an update on operations in each of our segments.

We had a solid quarter, with operating performance consistent with the prior year. Revenue of $545 million was flat compared with last year. We're pleased with the continued stabilization across each of our businesses. As we told you on the last call, we sold the Finance and Accounting business in the first quarter. To help investors compare our underlying performance to last year, we're excluding the $7 million gain on the sale of the F&A business. This field result is reflected in adjusted EBITDA and non-GAAP EPS.

First quarter adjusted EBITDA was $71 million, and adjusted EBITDA margin was stable at 13%. EPS was $0.24 per share after adjusting for the gain on the F&A sale. During the quarter, we also generated solid free cash flow of $17 million.

Our balance sheet continued to strengthen in the quarter. We reduced net debt to $17 million at quarter end. We did this while also purchasing $19 million worth of stock during the first quarter. As you'll note in our 10-Q, we also purchased an additional $4 million worth of shares in April. Given our progress in the first quarter, we expect the operating performance to improve in the second half of the year, and we are reaffirming our full year guidance.

Note that as we said on our last call, the impact of the sale of the F&A business is reflected in our full year guidance. Impacts include a $10 million loss of revenue, $2 million loss of profit and $7 million nonoperating gain on the sale of the F&A business. Overall, I'm encouraged by the progress in the quarter.

We are focusing on what matters to our clients. We continue to simplify each of our businesses and we are executing our plans and building momentum by investing in capabilities that add value to each of our respective sets of clients.

I'll now review our first quarter results for each segment beginning with Customer Management. One quarter into the year, Customer Management is on track to achieve growth in 2011. We are encouraged by the solid new business signings with existing and new clients. More than a dozen large clients awarded new business to us during the quarter. This is a strong testament to our operating team's quality service delivery and our increasing focus on proactive strategies with our clients. Delivery sells, and I would like to thank the teams for converting the delivery of quality service into solid new business signings.

During the quarter, we signed new Live Agent business worth $84 million of revenue that we expect to deliver in 2011. In terms of Live Agent operations, call volumes and revenue increased during the quarter. Agent calls handled increased 3% from last year. Revenue increased with over half of our top 20 clients. Live Agent revenue followed the expected seasonal pattern for the first quarter. These first quarter results reflect stabilization of our U.S. business, with reductions in Canada and continued growth offshore.

This is consistent with the pattern we saw in the back half of last year. We are very fortunate to have relationships with numerous well-receptive U.S. companies with great brands. We are seeing excellent uptake on our investments offshore with many of these clients. Revenue was up over 20% in the Philippines. We have sold a significant amount of the offshore capacity brought online over the last 18 months, and we are in the process of completing further ramps to meet existing client demand.

In February, we announced our expansion into Colombia. And based upon new client commitments, we're adding more seats in Bogotá this year. We are pleased to have added this new country to our global footprint. We are also investing in seat expansion in the Philippines this year, and we feel good about the continued growth potential in this geography. I want to thank our teams in Colombia and the Philippines for helping us to build out our new capability in Bogotá and handle another very strong quarter of growth in the Philippines.

We continue to put capacity where our clients need it in order to give them the right solution at the right price. Our global operating model allows us to deliver consistent service, and our clients receive the same standard of service regardless of the mode of communication or the region of the world in which we operate. We are doing quality work and continue to invest in geographic footprint, R&D and account management to deliver value to our clients and win more business.

The increasing returns on our investments offshore combined with stabilization in the U.S. leads us to believe that we will have growth in the second half of the year.

In terms of profitability, Customer Management margins were negatively impacted by the substantial increase in the number of agents being trained this quarter compared with last year. Increased training cost is the result of new programs ramping during the quarter and stabilization of existing programs, which require training for normal attrition. We expect to see additional agent training cost pressure in the second quarter of this year as we position for top line growth in the second half.

Gross margin was also pressured by client bankruptcy this quarter.

Overall, we worked hard on our SG&A last year, and we're continuing to simplify the business. We reduced SG&A by 11% in the first quarter compared to last year. The key for us is growing our top line and holding SG&A tight for margin expansion.

Regarding our Relationship Technology Management unit. As I discussed on the last call, we are focused on connecting our research and development efforts to client needs. Our continued investment in technology and expertise is complementary to our Live Agent business. Revenue for this unit stabilized sequentially though total Customer Management revenue was negatively impacted year-over-year by decline in technology licensings. We are now focused on meeting the increasing demand for hosted solutions.

Overall, we are pleased with the progress the technology team made in achieving our internal plan for the quarter. Technology remains a key element of the value we deliver to a number of our clients. Many of our top 50 Live Agent clients benefit from our technology solutions combined with our call center technology expertise. So web clients are seeking solutions that blend our live agents, our technology and our analytics capabilities to drive operating efficiencies, make interactions more personalized and provide an integrated customer experience across multiple points of interaction.

Now I'll discuss our operating results for Information Management. The Information Management business has stabilized over the past year, and we're focused on getting back to a growth trajectory. Revenue and profit in the quarter was consistent with the prior year. We made substantial progress on several key projects during the first quarter. We also expect a number of critical project completions in the second quarter.

In April, we completed 2 important projects. For the larger of the 2 clients, we migrated their entire customer base, over 5.5 million subscribers, from a legacy platform to our next-generation solution. Additionally, for a small satellite provider, we completed their migration to our latest version of our revenue management solution. We accomplished these conversions on schedule and are proud to have 2 new clients on our Smart Suite platform.

Three additional projects are on track to begin serving our clients customers during the second quarter. Our Smart Suite Solutions are flexible, scalable and interoperable. This combination offers our clients deep functionality and a low total cost of ownership. These solutions help our clients build customer loyalty, reduce churn and lower operating cost while also trying to grow their revenue.

We continue to invest in R&D and sales to deliver state-of-the-art features and functionality that meet our clients' needs. Demand is growing from communications providers for new capabilities to support fourth-generation services, machine-to-machine transactions and customer relationship management applications. We are also investing in smart meter billing capabilities to support the utilities industry. Given the key projects currently being implemented in our active pipeline, we continue to expect operating improvement in the second half of the year.

In summary, we produced solid revenue, earnings and cash flow in the quarter. Through investments in our global footprint, R&D and account management, we are making progress delivering value to our clients and winning more business. We continue to anticipate operating improvements in the second half of the year, and we are confirming our full year guidance.

We are excited about the progress across all of our businesses. I would like to thank our dedicated team of employees for all the effort they're making to deliver more value to our clients and improve returns for our shareholders.

Now I'll turn the call over to Earl to provide more detail on our financial results.

Earl Shanks

Thank you, Jeff, and good morning. Overall, we had a solid quarter. Revenue in the first quarter was stable at $545 million. This included HR Management transition services revenue of $6 million. We expect this transition service revenue to wind down over the next few quarters.

EBITDA was $71 million, excluding the $7 million gain on the sale of the Finance and Accounting unit that we told you about on the last call. Operating income increased to $37 million year-over-year. Last year, we had a couple of charges that didn't repeat this year. These related to the sale of the HR Management business and to the change of CEO. Adjusting for these discrete items, EPS from continuing operations increased to $0.24 in the first quarter compared with $0.21 last year. GAAP EPS from continuing operations was $0.28 in the first quarter compared with $0.20 last year.

Moving to the segments, I'll begin with Customer Management. First quarter revenue was $459 million. Year-over-year, we had several new program ramps and expansions with existing and new clients. This was more than offset by lower revenue in the Relationship Technology unit. A significant portion of the decline in technology was due to a large license we sold in the first quarter of 2010 that did not repeat in 2011.

For the remainder of the year, we expect a normal seasonal pattern in the second quarter. Recall, we had U.S. Census work last year, $15 million in the second quarter, $10 million in the third quarter that will not repeat this year. Overall, we continue to anticipate growth in the second half of the year, and we expect this to come from new program ramps and expansion, pipeline conversions and positive seasonal impacts.

Customer Management earnings in the first quarter included operating income of $32 million, a 7% operating margin and EBITDA margin of 10.7%. On the positive side, we were able to deliver substantial reductions in general and administrative expense compared with last year. This reflects the steps we took to simplify the business last year. This was more than offset by a combination of specific cost items in the quarter. These include costs we incurred ramping new programs, year-over-year currency headwinds due to changes in the Canadian dollar and the Harry & David bankruptcy. Overall, we have a world-class client list with high credit quality. As a result, the Harry & David bankruptcy was an unusual event. The negative impact was the largest accounts receivable bankruptcy write-off that we've had in the last 10 years.

In terms of our expectations for the remainder of the year, let me point out the second quarter is historically a seasonally weak quarter and we expect this pattern to hold in 2011. In addition to the seasonal impact, we will not see the U.S. Census work that we had last year.

We also expect to continue ramping new programs during the second quarter. This investment will drive margin improvement in the second half. And additionally, we are taking further steps to improve the performance of our Relationship Technology business.

I'll now move to Information Management. Information Management revenue was $80 million in the first quarter. Revenue was consistent year-over-year. For the remainder of the year, we anticipate growth in the second half versus the first. This is expected to come from successful implementation of several key projects as well as additional pipeline conversions.

Let's move now to Information Management earnings. Information Management operating income was $7 million in the first quarter. Operating margin was 9%, and EBITDA margin was 13.5%. These results are consistent with the first quarter of 2010. We expect Information Management margins to improve as we see flow-through from increased revenue in the second half of the year.

Turning to Corporate and Other items. Corporate and Other operating loss was $2 million in the first quarter. The strong year-over-year comparison is largely due to 2010 HR Management and CEO charges that did not repeat this year. Going forward, we continue to expect long-term compensation expense to be about $5 million per quarter.

Moving to nonoperating items. The Cellular Partnerships contributed $10 million in earnings in the first quarter. This was down slightly due to investment in subscriber equipment. Let me point out that the other income line includes, for 2010, a $13 million reduction in a previously established nonoperating reserve and for 2011, the $7 million gain from the Finance and Accounting sale.

Turning to free cash flow. Free cash flow for the quarter was $17 million. Cash from operating activities was down in the first quarter. This reflects the impact of key project implementations that we have underway. We received $10 million in cash from the Cellular Partnerships in the first quarter. For the full year, we continue to expect free cash flow to exceed net income.

Moving to the balance sheet. At the end of the first quarter, we had $166 million in cash, and net debt improved to $17 million. As Jeff mentioned, we purchased 1.4 million shares at an average price of $13.80 in the first quarter plus we bought an additional 300,000 shares in April. At the end of April, 2.9 million shares remained authorized for repurchase.

We also renegotiated our credit facility during the quarter and extended the maturity to March of 2015. This gives us financial flexibility as we implement our multiyear capital allocation strategy.

Let's move to our business outlook. As Jeff said a moment ago, we are confirming our 2011 guidance. As discussed last quarter, our full year guidance includes a reduction of revenue and EBITDA from the sale of the F&A business as well as the related gain on sale. Full year EPS includes first quarter 2011 GAAP EPS of $0.28, and full year EBITDA includes the $7 million gain on the F&A sale for a total first quarter 2011 EBITDA of $78 million. As I also indicated on our last call, we expect second quarter earnings to improve modestly over the prior year and to be in line with the historical seasonal pattern.

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

Question-and-Answer Session

Operator

[Operator Instructions] At this time, we do have a question from Kevin McVeigh from Macquarie.

Kevin McVeigh - Macquarie Research

Earl, I know you mentioned this a couple of times. I just want to make sure I'm clear. Pardon me. The guidance includes the gain on the sale? So the $1 to $1.15 includes the $0.05 gain from the sale or $0.04 rather?

Earl Shanks

Yes, it does. Kevin as we said to you last quarter, we intended to give you all-in guidance for the year last quarter, and this is one of the things certainly we knew about when we did it and so would be included in this.

Kevin McVeigh - Macquarie Research

Okay, but it's not in the $0.24 adjusted number for the first quarter, right?

Earl Shanks

That's exactly right. It's not in the $0.24 adjusted number. It's not in the $71 million of EBITDA. It is in the $78 million of EBITDA.

Kevin McVeigh - Macquarie Research

Super. And then just Earl, switching gears for a minute, it sounds like the Harry bankruptcy, can you give us a sense of how much that impacted earnings in the quarter?

Earl Shanks

Sure. There was actually 3 things, Kevin, that I called out that had an impact on the quarter. We had some incremental training costs. We had the currency impact and the Harry & David impact, and they each had a bit more than 50 basis points impact on gross margins in the CM business.

Kevin McVeigh - Macquarie Research

Super. And then just one more and I'll get back in the queue. You kind of alluded to a multiyear capital allocation strategy. Is it still too early to kind of start quantifying that or just give us a sense of how that plays out directionally?

Earl Shanks

Yes, it's a little early to finish that, but we are pleased certainly to have the flexibility of the credit facility refinance. And obviously, that gives us a fair amount of flexibility with the $300 million facility largely undrawn.

Operator

Our next question comes from Ashwin Shirvaikar from Citi.

Ashwin Shirvaikar - Citigroup Inc

So my question is, Jeff, on the simplification process that you've been sort of undergoing since last year, what inning are we in as far as that is concerned? And should we expect more actions like the F&A sale? And a follow-on to that is how many such actions are already contemplated in your guidance?

Jeffrey Fox

Two things. I have to be pretty careful. At an operating level, Ashwin, I feel very good about our line of sight accountability on the specific things needed to execute our operating plans across each of our businesses. And so at an operating level, we'll be more focused on are we getting value out of the investments we're making consciously with accountability. So that's the place we've come to on the operating side. On the strategic side, we really can't comment on that, Ashwin, for obvious reasons. Our guidance for the rest of the year doesn't contemplate any more onetime gains or losses added at a material level. I think that would be a fair way to characterize it.

Ashwin Shirvaikar - Citigroup Inc

Okay, and then in the -- I guess the CMG business, when you talk about agent training and things like that, is there a way to maybe quantify in terms of basis points or number of agents what we're talking about relative to the base?

Earl Shanks

Ashwin, I think what I tried to do a minute ago and maybe I wasn't clear is when we look at the first quarter and the incremental training impact we had in the first quarter, it probably had a bit more than 50 basis points of impact on margin in CMG in the business. And it is because our agent population and our agents in training population is up quite a bit. Now that couple of factors that are driving that, certainly, the new program ramps is one of the positives that is out there and it's certainly one we actively want to see continue and expect to continue in the second quarter. The other thing that's frankly impacted it is also as we've seen more stability in the business, we're doing more backfilling on the existing programs than we would've been doing same time last year. And that's also good news, but it drives some incremental cost. That's kind of all embedded in the number that I quoted to you.

Ashwin Shirvaikar - Citigroup Inc

Right, and for the last question, for 2Q seasonality. As I look at some of the factors that you've outlined, obviously, I understand the sequentially down revenues. But is there at least a partial impact from these people that are being trained starting to get billable?

Jeffrey Fox

Yes, there should be, and let me reiterate. I mean we're talking about this investment to some degree because Q1 transition to Q2, there was a lot going on not only with us but, frankly, a lot of our peers, and so we're giving you the visibility. If those investment dollars in training and attrition backfill are the highest return dollars we can get, and that's good money, it pressures gross margin, but it translates into growth and whole dollar gross profit. So that's how we look at it and think about it. We do feel like it is a good incremental sign as we transition through a normally weaker Q2.

Ashwin Shirvaikar - Citigroup Inc

I agree. Good progress. Good job, guys.

Operator

Our next question is from Tim Wojs with Robert W. Baird.

Timothy Wojs

I wanted to touch a little bit on existing volumes in the Customer Care business. I guess can you provide some color on maybe how your client forecasts look going into the quarter and how maybe those forecasts and actual volumes kind of came in relative to the forecast and how much confidence your clients have in some of the forecast they've given you for the next 3 to 6 months.

Jeffrey Fox

A couple of things. We felt reasonably good about the execution of Q1 against what we thought we were going to do going in. There's moves and some changes across every program. But in the end, it nets out to reasonable. It's still an unusual economy. And if you go client by client, there's differences in calls delivered versus forecast across all of them. So net-net, we're remaining cautiously optimistic about solidification of the volume flow-through, and we need that actually to translate into revenue growth in the back half of the year. We need continued stabilization to where we get a return on the growth ramps we're doing. If that helps you at all.

Timothy Wojs

That is helpful. And then, Earl, just I guess 2 quick questions, 2 more housekeeping-type questions. I guess on the license revenue from last year and the tech business in CM, how big of a year-over-year decline is that? And can you give us some color on maybe how big the license revenue was last year?

Earl Shanks

Well, as I said, that's the largest single impact that's out there in terms of impacted the decline. But for the change in the technology revenue, we would have seen growth in the CM segment this quarter, and that really goes to the point that Jeff made around what we're seeing in terms of call volumes and billable hours with agents and the like. So we're generally pretty encouraged about it but recognizing that the nonrecurring license was an issue around the year-over-year comparison.

Timothy Wojs

Okay, great. And then just on tax rate, I think it was a little higher this quarter, and it might have been because of the gain. Should that fall back to kind of maybe 27%, 28% for the remainder the year?

Earl Shanks

We've guided a little bit up on the tax rate. We've got a bit of a change year-over-year in terms of what's going on with some of our Indian incentives that are out there, and the tax rate in India is up a bit. So that'll have some negative impact on the earnings but some positive impact on the tax rate in terms of pushing it up. So that's why I think we've got it to something a little closer to 30% over time is where it looks like it's going.

Timothy Wojs

Okay, good quarter.

Operator

Our next question comes from Matt McCormack, BGB Securities.

Matthew McCormack - BGB Securities, Inc.

Yes, my first question relates to Harry & David. That was a deal that I believe that was signed in August. And so philosophically, like how are you approaching risk management as you balance trying to grow the business and then additionally making sure that you're signing healthy clients?

Jeffrey Fox

Yes, this is Jeff. I mean I think that, that was a pretty unusual situation, in terms of the heavy seasonality of their business and the exposure that created from a timing of work versus when they were late on paying. So Earl and I have both looked back. And I think as Earl said on the call, we really don't have a history of big issues like this. We've determined that it was just a very unusual situation, and we don't take credit risk for a living. That's really not what we do. They were a levered company with a high seasonal business that had a really disastrous and quick end operationally, sitting with a pretty levered balance sheet with a PE [private equity] partner. And so we could have not done the business, but there wasn't really -- we've looked back. There was no evidence they were going to wipe out and get where they got to.

Matthew McCormack - BGB Securities, Inc.

Okay, so as you sit right now, you wouldn't expect any similar type of bankruptcy to occur with any of your existing portfolio?

Jeffrey Fox

Earl?

Earl Shanks

Matt, no. As I said on the call, this was the largest loss that we've had, on AR charge in 10 years. So no, we don't -- with our client list, with the quality of our client list, this is a really pretty unusual event.

Matthew McCormack - BGB Securities, Inc.

Okay, and in terms of your guidance, I mean you reiterated your guidance. But I mean how much revenue is going away from that specific client?

Jeffrey Fox

We already knew that we were going to either have very low or no revenue from that client when we made the revenue guidance.

Matthew McCormack - BGB Securities, Inc.

Okay. In terms of the relationship management part of customer management, you talked about innovating technology, Live Agent and data analytics. Is that something that you would say is a competitive differentiator of Convergys or is that something that clients have just come to expect as a new normal?

Jeffrey Fox

It's client by client. But in a number of situations, I think it is a differentiator. It depends on what the client is trying to accomplish and what their state of process evolution and infrastructure is, but we have situations where it is a clear differentiator.

Matthew McCormack - BGB Securities, Inc.

And then lastly, on Colombia, could you talk about -- I mean was that location client driven or was that an area that you decided to go into?

Jeffrey Fox

The way we pick any geography is really fundamentally based on where we think our clients will value the price-to-delivery value. And so Colombia was picked by our capacity and strategy team a long time ago, and we've just executed on the investment and frankly the uptake very well. So we're very thoughtful and clear about what geographies we can price at what level and who we think the targeted audience would be when we make an investment like Colombia.

Operator

Our next question comes from Shlomo Rosenbaum, of Stifel, Nicolaus.

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

I know you guys are building up more capacity in the Philippines and offshore. And I just want to know given what's going on with the currencies and the U.S. dollar, are you guys able to push through any of the increased costs to your clients, either the new clients or the renewals that are coming in?

Jeffrey Fox

So without being too short, it's obviously situation by situation. But the price value of the Philippines is still very, very much in demand not only for our U.S. clients but frankly as we go out and sell worldwide. We do have some non-US clients as you may know. So the Philippines is still a geography where we feel very good about the return characteristics and the demand characteristics. And yes, we watch the currencies closely, but we still see very high value proposition there for all of our client base.

Earl Shanks

And Shlomo, I guess the thing that I'd add to that is we do, as you know, actively hedge in order to buy time to be able to address that. So while I'm not happy about where the currencies moved recently certainly and we look at that and we recognize that as an issue, if you look at our 10-Q, you'll see that we've got a fair bit of hedging coverage around that. So it's not a problem for us in the short term, but it's more a problem of how do we manage over a longer period of time.

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

Well, that's actually the question is that if the currency stays where it is or goes down a little bit more, is there going to be a structural issue that you're going to seed margin and you're just not going to be able to get your margin targets in Customer Management because of what's going on?

Earl Shanks

I think with the hedging we have in place, we will have time to address that issue with the clients. And as Jeff said, the clients pretty clearly recognize the value they're going to get in the offshore locations. And even with the current pricing in spot, the clients are getting a very attractive value at this point doing business in the Philippines.

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

Okay, and a couple of housekeeping questions. First, what was the postretirement benefit curtailment that added $1.5 million to margin?

Earl Shanks

Just a reduction of one of our accruals as a result in some changes in head count. And so just the accounting rule, you've got to record it in the period as you go through the change in senior head count.

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

Okay. And then lastly, just in terms of IM, I'm surprised to see that the data processing revenue just continues to go down. I mean should we just assume that this business runs down to 0? Or is there in terms of your planning, is there any plans for this business to really start to turn around, at least an aspect of it?

Jeffrey Fox

Yes. So specifically, the data processing, if you look at what happened there, the reductions in the quarter are actually a reflection of transitioning legacy work to new processing work on our Smart Suite platform. And so no, we expect as we complete some of the implementations to stabilize our processing revenue although it's obviously at a materially lower level than it was several years back. So no, you should not assume our processing is going to 0. There were 2 transitions of 2 different clients that are very specific to them moving from older contracts of legacy technology to our new technology and new deals. That's embedded in that run rate change.

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

So are they going to host it themselves as opposed to you guys doing it as a data processing? Is that what's going on?

Jeffrey Fox

They're both different. One of them is -- they're both different deals and with different implementation timelines and different configurations. Again, we were hosting legacy technology and more modern technology has lower underlying cost curves. So the revenue number has a number of different things pressuring the transition.

Operator

Our next question comes from Scott Sutherland with Wedbush Securities.

Scott Sutherland - Wedbush Securities Inc.

So first, I want to normalize kind of your earnings guidance here. And you're taking that $0.04 benefit from the Financial and Accounting sale. What was the contribution in that business if you still had it to EPS this year? Was it a couple of pennies you would've made if you still had it?

Earl Shanks

Yes, probably it was $0.01 for the year is what we generally expected, maybe a shade more than that. But directionally, that's right. But Scott, as we said, we've contemplated all of that in the guidance we provided to you last quarter when we laid it out. We said this was kind of all-inclusive guidance of the things we knew. So some good and bad things. Obviously, that's an example of a good thing that happened in terms of the quarter. We had anticipated that we had some problem with Harry & David at the point in time we provided that guidance, so that was a bad thing on the downside. And in total, we probably dropped about $10 million in revenue out of the year or something in that range from that business by selling it in the year. So a variety of puts and takes when you look at it, but all of that was embedded in the guidance we gave you a quarter ago.

Scott Sutherland - Wedbush Securities Inc.

Okay, great. Yes, that data is definitely incremental and helpful. When you look at AT&T and T-Mobile deal going on here, can you talk about what you view the net impact to you guys would be on that?

Jeffrey Fox

We really don't comment on specific customer situations. And frankly, on that one, it would be way too early to know.

Scott Sutherland - Wedbush Securities Inc.

Okay. Lastly, when you look at the Customer Management segment and things get maybe to a more normal basis, do you have any sort of long-term margin goals or revenue growth goals? I mean your call volume I think you said is up 3%. Do you think it can grow faster than that in a more normalized environment?

Jeffrey Fox

What we're trying to do right now is get to where we're growing top line and EBITDA NOI in that business. With our footprint configuration and still a very, very large U.S. business, we're making those choices and thinking through that long-term growth rate as we speak. I think that near term what you will see from us is real focus on execution of this year's plan, which has really good uptake of our offshore investments and frankly a lot of effort to continue to stabilize, if not incrementally grow at least our U.S. delivery footprint and revenue.

Operator

Our next question comes from Giri Krishnan from Credit Suisse.

Giridhar Krishnan - Credit Suisse

Earl or Jeff, I guess I wanted to sort of address the Smart Grid opportunity. I wasn't sure if there were any contracts won this quarter. And could you maybe update us on the new business activity there?

Jeffrey Fox

Yes, so a couple of things. We continue to work through -- we have an investment in that activity in terms of enabling channel partners, getting channel partners, investing in the technology and frankly, completing a couple of proof of concepts and trying to transition from proof of concept into implementations. All of that's going on. I will continue to remind you what Earl has said, which is near term, it's still not a major impact on our revenue and cash flow. It's probably with the investment we're making in the neutral range to slightly negative as an investment this year.

Giridhar Krishnan - Credit Suisse

Okay, and then within IM, could you give us some broad thoughts around the pricing environment?

Earl Shanks

Yes, from a pricing environment standpoint in IM, we have always had a pretty good position in the marketplace. And so because of the nature of our product, we provide our customers very good value because they can leverage off the R&D spend that we've done. Jeff's talked about in this call, as an example, the number of customers who are upgrading their existing solutions to new solutions. And again, it's an example that we can demonstrate across the client set, where we see our clients upgrade on the platforms in that space. It's just reflective of the strength of the product, and all of that is reflective in a very good total profit ownership for our clients. And so we don't see that as particularly a price-driven challenge in that business when we think about it. Obviously, cost is always relevant when clients look at it. But having a very competitive total cost of ownership solution puts us in a very good position in terms of what we're doing with our clients.

Giridhar Krishnan - Credit Suisse

Oh, actually, I was referring to the CM business, not IM. Sorry.

Earl Shanks

I'm sorry about that. So in the IM space -- in the CM space rather, we've constantly got clients that say, "Hey, we should be able to have this for less money." And then you remind them that it's a largely labor-based business, and we have the same cost structure in terms of the labor costs as our competitors do. So that provides a pretty solid base in terms of how pricing has to operate in that business. As a couple of other questions touched on, their longer-term, we recognize in the clients recognize that with both labor inflation and with currency changes that there will be, need to be upward pricing changes on that business. And so that's, I think, the longer-term trend that we see and expect in that business. Near term, I think the business has been stable in terms of overall pricing from our perspective for a while as the kind of net outcome in terms of where we've gotten to.

Operator

Our next question comes from Vincent Lin with Goldman Sachs.

Vincent Lin - Goldman Sachs Group Inc.

Great. My first question is in terms of the CM kind of revenue profile. You mentioned that call volume was up 3% yet revenue should decline about 1% on a year-over-year basis. When would you expect kind of the gap between kind of volume growth and revenue growth to close? I understand that there's a bit of a mixed shift impact here, but assuming that gap is going to continue as you continue your offshore expansion efforts, does that mean that in order to get to positive revenue growth for the second half of the year, the assumption will be call volume will actually be up even mid- to even high single digits to get to that level?

Earl Shanks

The short answer is that assumption would be roughly right.

Vincent Lin - Goldman Sachs Group Inc.

Okay, great. And then on the margin side, Earl, I appreciate all the color on the gross margin impact. But even if I add back the roughly 150 basis points, it looks like gross margin would still be down on a year-over-year basis. Could you remind us, was there anything unusual going on a year ago quarter that actually skewed the kind of a comparison either way?

Jeffrey Fox

Yes, I'll tell you. This is Jeff. I mean I think Earl did reference large license fee that flowed through in Q1 that frankly made our Relationship Technology revenue and profit contribution very solid. And then number two, the lack of attrition training because volume forecasts were dropping pretty rapidly, that what we would hope to be more normalized training and growth investment in that business wasn't occurring. And then currency. I think Earl has already mentioned the currency year-over-year comparative pressure. So when you add all that up, our year-to-year comparison, at least on the gross profit level, was pretty challenged as the quarter played out. When you then add the bankruptcy in on top of that, we feel pretty good about the operational execution under the hood in Q1 in CM.

Vincent Lin - Goldman Sachs Group Inc.

And then and just last question, does your guidance assume any further share buyback post what you have done through April?

Earl Shanks

No, we never forecast share buyback in advance.

Operator

At this time, I'm showing no questions.

David Stein

Okay, operator. Thank you. 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 all for participating today. That ends the call.

Jeffrey Fox

Thank you.

Operator

Today's call is concluded. All parties 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: transcripts@seekingalpha.com. Thank you!

Source: Convergys' CEO Discusses Q1 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts