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

Convergys (NYSE:CVG)

Q4 2011 Earnings Call

February 07, 2012 10:00 am ET

Executives

David Stein - Vice President of Investor Relations

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

Earl C. Shanks - Chief Financial Officer

Analysts

Eric J. Boyer - Wells Fargo Securities, LLC, Research Division

Kevin D. McVeigh - Macquarie Research

Matthew J. McCormack - BGB Securities, Inc., Research Division

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

Vincent Lin - Goldman Sachs Group Inc., Research Division

Ashwin Shirvaikar - Citigroup Inc, Research Division

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Giridhar Krishnan - Crédit Suisse AG, Research Division

Robert Benjamin Kirkpatrick - Cardinal Capital Management, L.L.C.

Operator

Welcome to Convergys Fourth Quarter 2011 Earnings Teleconference. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I'd like to go ahead and turn the call over to your host for today to Mr. David Stein, Vice President of Investor Relations. Sir, you may begin.

David Stein

Thank you, José, and good morning. Welcome to the Convergys Fourth 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 today'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 10-K for the year ended December 31, 2010.

Also during the call, we'll discuss non-GAAP financial measures, including free cash flow, adjusted net income from continuing operations and adjusted EBITDA. A reconciliation of these non-GAAP measures is available in the news release and on the Convergys IR 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 H. Fox

Good morning, everyone. I'll begin with a review of overall company performance and discuss the progress we're making executing our plans, then I'll provide an update on each of our segments.

Both of our businesses continued to show operational progress in the quarter, and overall, we delivered solid revenue growth and profit improvement. Our total revenue of $589 million represents an increase of 3% compared to last year. To put our top line growth in perspective, we increased revenue by $16 million despite the reduction in transition services revenue related to the sale of our Human Resources Management business.

Operating income of $50 million was up 5% compared with last year on an adjusted basis, and EBITDA increased 7% to $76 million compared with adjusted EBITDA of $71 million last year. GAAP EPS from continuing operations was $0.40. Adjusted EPS from continuing operations would have been $0.28 in the quarter with a normalized tax rate, which represents an 8% increase from $0.26 per share last year.

Our operations also produced solid free cash flow of $30 million in the fourth quarter. Based on our confidence in the business, we repurchased $58 million of stock during the fourth quarter and ended the year with $422 million of cash on the balance sheet. We still have authorization to repurchase $163 million of stock, which represents about 10% of our shares outstanding at today's stock price.

Overall, I'm encouraged by our execution across each business this quarter and for the full year. In 2011, our operating results and cash position improved significantly, creating flexibility for us to invest in the business and enhance shareholder value. We are continuing to simplify each of our businesses strategically and operationally, and we are taking actions that allow us to capture our share of industry growth by investing in what matters to our clients. As we enter 2012, we expect to see continuing revenue growth and earnings improvement for the full year.

Now let's review the progress we have made in our Customer Management business, which had another excellent quarter of revenue growth and margin improvement. Overall, industry trends in the fourth quarter were consistent with our experience over the last several quarters. Let me take a moment to tell you about what we are seeing with clients in the marketplace in terms of call volumes, vendor consolidation, offshore demand and the pricing environment.

Call volume for live agent services remains strong, even as consumers are adopting alternate interaction channels to address their simple transactions. As agent-assisted transactions increase in complexity, the average handle time for consumer calls increases. This trend plays to our strength as a provider of high-quality operational services through our global and scalable operating model. We continue to see our clients consolidating their contact center vendors, and we believe our investment in delivering quality and alignment with our client's business goals through focused account management positions us to see this as a net positive for our business.

Client demand for offshore services remains strong, and our multishore offerings remain an important capability. In terms of pricing, we continue to see a stable environment that is supported by our client's willingness to invest in their customer's service experience. In the fourth quarter, Customer Management revenue grew to $500 million, up 7% compared with last year.

In terms of live agent services, revenue increased with a dozen of our top 20 clients, and the number of agent calls we handled in the quarter increased faster than the revenue growth rate, reflecting our continued mix shift offshore. Key drivers of revenue growth in the quarter continued to be: consumer demand reflected in call volumes, expansion with existing and new clients and our continued focus on quality delivery and client account management.

We also had another good quarter of new business signings. We signed new live agent business worth $75 million of revenue that we expect to deliver this year. In addition, 9 large clients awarded us new business during the quarter.

We continue to see excellent uptake on our investments in offshore and work-at-home capabilities, consulting, analytics and technology solutions across many of our clients. We continue to invest in capacity in order to provide the right solution at the right price, and the fourth quarter results reflect strong demand for services delivered from our centers in the U.S., Philippines and Latin America. Revenue was up in each of these geographies.

Our expected growth in 2012 reflects the solid demand we are seeing. Our investments in account management are also making a difference as we leverage our unique breadth and depth of customer care solutions, expertise and technology. Because of our unique ability to help our clients grow their revenue, reduce costs and improve customer satisfaction, we are actively pursuing additional opportunities with most of our top 50 clients.

We are investing in our global operating model and tools that help drive operational consistency to continue to deliver quality service to our clients. As a market leader, we are very focused on ensuring that our clients' customers receive the same standard of service regardless of the mode of communication or the region in the world in which we operate. Our global operating model is critical to delivering this consistency.

Gartner, a top industry analyst firm, placed us in its Leaders' quadrant for Worldwide Contact Center Business Process Outsourcing in their December report, which we believe is recognition of the strength of our market position and investment strategy.

In the fourth quarter, Customer Management had solid improvement in operating profit on both a sequential and year-over-year basis. Operating income was up 13% compared to last year on an adjusted basis, while operating margin increased 40 basis points. EBITDA was up 10% compared with the prior year. We delivered this solid profitability even as the number of agents in training remained high as a result of new clients and program ramps.

While the elevated agent training cost is pressuring our gross margin in the short term, we feel confident it will result in long-term gains. The dollar impact of the additional agent training costs in the quarter was more than offset by the growth in our top line, and our operations team executed very well across several program ramps.

SG&A in the quarter increased 2% year-over-year to support the 7% increase in revenue. The financial results from our technology and analytics offerings were on plan in the fourth quarter. As a result of a more complex global economy, our clients are very focused on doing the right work in the right geography with the right supporting technology. We are continuing to invest in technology and analytics expertise because it is complementary to our live agent business and continue to see a number of accounts interested in integrating these capabilities into their unique long-term strategies.

For the Customer Management segment overall, we remain focused on what we can control, which is the quality of delivery to clients and the return on investments of our solutions. I want to thank our Customer Management team for delivering another outstanding quarter of revenue growth and profitability improvement. There is continued room to improve this business, and we expect to see continuing profitable revenue growth in 2012.

Now I will discuss Information Management business. Information Management segment revenue increased 6% sequentially in the fourth quarter. Setting aside the one large project that impacted revenue last year, we would have seen year-over-year revenue growth in the low single-digits.

We completed a key implementation in the U.S. during the quarter, going live with a large U.S. wireless carrier on time and on budget. This is a comprehensive solution delivered through our private cloud computing environment that provides rating, billing, customer service and real-time mediation capabilities. This solution is important because it enables our client to support rapid growth in wholesale and machine-to-machine transactions.

During the quarter, we continued to invest in opportunities with existing clients and new logos. In particular, I want to call out a couple of key events. First, we expanded the scope of our Managed Services agreement with a long-term, high-value client. Second, we signed an exciting agreement for a proven concept project for next-generation services with a very well known global company outside the telecommunications industry. And finally, we signed a contract with a Tier 1 Latin American carrier to support its rollout of 4G.

Regarding Information Management profitability. We had year-over-year and sequential improvement in operating income, with margins moving back into the midteens. Overall, we are pleased with the stabilization of this business in 2011, and we are encouraged by the new business signings and implementation progress in the second half of the year. We are actively engaged with our clients and have a solid pipeline of new prospects. We are encouraged by the market opportunity in several categories, including supporting the complex rating and billing requirements of fourth-generation wireless networks for clients and providing CRM functionality that is seamlessly integrated with rating and billing applications to allow our customers to better serve their customers.

We're investing in our high-value scalable products and high-quality delivery to compete aggressively for these opportunities and believe we will make a return on this investment over time.

For 2012, we are focused on producing revenue growth, and we expect to continue to deliver double-digit operating margins in this segment for the full year. I'm thankful to the Information Management employees for delivering a good quarter.

In summary, we produced another good quarter of solid results with strong revenue and profit growth, and we are executing our operating plans across all of our businesses. We are investing in solutions that deliver value to our clients, strengthen our relationships and allow us to win more new deals. We are making strategic progress simplifying the business. There is still more to be done to get the right returns on the investments that we're making.

Our improving results and significant cash position give us flexibility to invest in the business and enhance shareholder value. We continue to pursue opportunities for capital deployment to support the long-term growth of all of our businesses. We returned capital to our shareholders in the fourth quarter by buying our stock, and we will continue to repurchase shares at prices we think reflect value for our shareholders.

We expect to deliver more performance improvement in each of our businesses in 2012. I would like to thank our clients for their trust in Convergys as we partner to support their customers and to help strengthen and grow their businesses.

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

Earl C. Shanks

Thank you, Jeff, and good morning. I'll begin with a review of consolidated results for the fourth quarter. We experienced solid improvement in revenue and earnings. Consolidated revenue increased $16 million to $589 million, which included less than $1 million for transition services related to the HR Management business.

Operating income increased $3 million to $50 million in the fourth quarter. EBITDA increased $5 million to $76 million, excluding contributions from the Cellular Partnerships, restructuring and pension settlement charges and a reserve reduction, all last year.

In terms of net income, as Jeff described in the fourth quarter, we did better on operating results than expected, and as I'm about to describe, we also did better on tax results than expected. During the quarter, our actual tax results were $0.17 better compared with the results in a normalized tax rate of 28%. $0.12 of this is reflected in continuing operations as a result of the benefit from deployment of effective tax planning outside the U.S., and $0.05 is reflected in discontinued operations related to the HR Management sale last year. On a consolidated basis, this results in GAAP EPS of $0.45 and from continuing operations, GAAP EPS of $0.40.

Now let's move to the segments. I'll begin with Customer Management. Segment revenue in the third quarter was $500 million. This was an increase of $33 million compared with last year. Increases with existing and new clients across the vertical more than offset some weakness in our financial services vertical. Industry fundamentals were solid in the fourth quarter, although the macro environment does cause us to remain cautious. To this point, we have not seen deterioration in client demand or forecast.

In terms of our Customer Management footprint, at the end of the quarter, 40% of our contact center employees were in the United States, including more than 3,000 work-at-home employees. 38% of employees were in the Philippines, India had 14% of the employees, there were 4% in Latin America, 3% were in Canada and 1% of employees were in the U.K.

Customer Management fourth quarter operating income was $41 million. This is up $4 million when adjusted for the charges in the prior year. Income included the impact of $1 million in severance charges in the fourth quarter related to continuing actions to align costs with expected revenue from our technology and analytics offerings.

EBITDA increased $5 million to $59 million. Operating margin improved to 8.3%. Solid revenue growth in the quarter drove most of the profit improvement. This more than offset the investment we made training a large number of agents to ramp and sustain programs.

Let's now move to Information Management. Segment revenue increased $5 million on a sequential basis. This was driven by solutions going live. Revenue declined $10 million year-over-year. In the fourth quarter of last year, we had a bit of a revenue spike that was due to the impact of a low-margin client contract that did not repeat this year.

From an earnings perspective, Information Management operating income was $14 million in the fourth quarter. This included $1 million in severance charges related to further actions taken to align costs with anticipated revenue. Operating margin improved to 15.6%, and EBITDA margin climbed to 20.7%. Both were up substantially on a sequential basis.

Year-over-year, operating performance improved as solutions went live. This more than offset the negative impacts from some additional implementation costs and the continuing shift from data processing to professional services.

Regarding Corporate and Other operating results. The $6 million cost in the fourth quarter primarily reflects long-term compensation expense. Long-term compensation expense was about $17 million for all of 2011. In the last few years, long-term comp expense has been consistently below our normalized historical level of $20 million to $25 million. This is due to high management turnover as we have simplified the structure of the business. In 2012, we expect to run at a normalized level of approximately $6 million per quarter.

Now I'll move to nonoperating items. We no longer receive equity earnings from the Cellular Partnership due to the sale of our interests. As expected, income tax was impacted in the fourth quarter by a benefit from effective tax planning outside the U.S. As a result, we recognized a net tax benefit of $1 million in the fourth quarter. Note that our actual cash taxes are regularly less than our reported book taxes, and cash tax paid for 2011 was significantly less than reported book taxes. For 2012, we expect cash and book taxes to be about the same due to some of our 2011 planning.

Turning now to free cash flow. Free cash flow was $30 million in the fourth quarter. During the quarter, we reduced some long-term liabilities. This included $22 million paid into a deferred compensation plan and an $8 million pension contribution. Also during the fourth quarter, we continued to expand our global delivery capacity. In addition, we invested to enhance the underlying technology in our contact centers, and we invested in an additional business support system functionality to enhance our Information Management solutions.

Turning to the balance sheet. At the end of the fourth quarter, we had cash and cash equivalents of $422 million and net cash of $295 million. About 50% of our cash was outside the United States. In addition to our strong net cash position, we have full availability on $450 million of revolving credit facilities.

At the end of the year, our cash balance was approximately the same as it was at the end of the third quarter, setting aside the impact of the $58 million invested in share repurchases during the fourth quarter. As we've said previously, given the strength of our balance sheet and liquidity position, our current planned uses of cash include growing the company's existing business and returning money to shareholders.

Growing the company's existing business could include investment in the future enhancement of our English, Spanish and technology capabilities and/or strategic acquisition of businesses that improve the company's competitive position. We may invest excess cash to retire substantial portions of our shares outstanding. We will do this as market and business conditions warrant, typically through multiyear stock repurchase programs. We now have about 120 million shares outstanding and about $163 million in capacity under our current stock purchase authorization.

Now I'll discuss our business outlook for 2012. Given continued improvement in execution and our solid performance for the full year, for 2012, we expect to deliver continuing revenue growth and earnings improvement, excluding the contributions and impacts from the asset sales last year.

Let me take a moment to discuss the adjusted 2011 results, excluding the Cell Partnership and F&A. This provides an apples-to-apples baseline to gauge the extent of our anticipated improvements to underlying performance. Adjusted EBITDA for 2011 was $268 million. This excludes $20 million of equity earnings from the Cell Partnerships and $272 million in gains from the asset disposition. Adjusted EPS for 2011 was $0.92. This excludes contribution from the Cell Partnerships and F&A business and reflects a normalized tax rate for the second half of the year.

Moving to our 2012 guidance. For Customer Management, we expect segment revenue to exceed $1.96 billion for the full year. We expect segment operating income to strengthen for the full year. For Information Management, we expect segment revenue growth for the full year, and segment operating income should remain strong for the full year.

In terms of overall earnings, we expect EBITDA of $270 million to $280 million. We expect EPS of $0.95 to $1. For 2012, our tax rate should be about 25%. As I mentioned a moment ago, we expect long-term incentive compensation expense of about $24 million for the year. This compares with $17 million last year, reflecting the anticipated lower rate of cancellations and forfeitures and an improved performance environment. We also expect results in the second half of the year to exceed results in the first half.

Overall, we are pleased with the results in the fourth quarter and feel that we're making progress strategically and operationally in both of our businesses. At this time, operator, please open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question does come from Eric Boyer with Wells Fargo.

Eric J. Boyer - Wells Fargo Securities, LLC, Research Division

You guys have done a great job stabilizing the business. Jeff, I was just wondering if you could think about, as we move forward, how we should think about top line growth structurally for the customer care business?

Jeffrey H. Fox

I mean, I think long term, we're clearly expanding our global capacity, which, as you know, has less top line impact on a per call basis, right, or a per hour basis. So we've given you, I think, a conservative start point for our near-term expectations, so the $1.96 billion.

Eric J. Boyer - Wells Fargo Securities, LLC, Research Division

Okay, great. And then Earl, if I did the math correctly, it doesn't look like a lot of EBITDA margin expansion. I think some of that is from the -- I think you said the increased comp expense. Just wondering what else could drive possible margin expansion going forward?

Earl C. Shanks

Well, I think when we look at the year-over-year, I mean, you're right, we're moving from the $268 million to the $270 million to $280 million numbers that I referenced a minute ago. Embedded in that, there's about $7 million of additional long-term compensation expense. Frankly, we've also got some additional severance in the year embedded in that as we think about the planning for the year. The big driver on EBITDA improvement for the business is continuing to do -- it's going to be revenue growth on a pretty continuous basis, and certainly, that's where our focus is. And as Jeff said, we are trying to provide appropriately cautious guidance for 2012 as we think about what the revenue growth is, and then obviously, that has an impact on what we therefore expect on the profitability improvement.

Jeffrey H. Fox

Yes, but Eric, just to put a fine point on it, I think it's important for you to remember, I said the word "invest" a number of times because our 2012 guidance ranges has us investing and continue to grow the business for the long term. So there is long-term harvesting that investment is what we're responsible to do through our execution.

Eric J. Boyer - Wells Fargo Securities, LLC, Research Division

And then just finally, Jeff, you talked about consumers adopting other customer channels. Can you expand upon that a little bit and talk about how that is playing into your longer-term strategy to drive growth?

Jeffrey H. Fox

Well, I think at a very simple level, we look at each one of our customers as a market of one, and then each one of their programs as a market of one, and which is why we continue to put the emphasis on being flexible and having a breadth and depth of offerings. So the way we think about it is, if we can help one of our customers -- I want to be very clear -- if we can help one of our customers improve the productivity of their cost structure by automating more calls or finding alternate transaction methods, we consider that part of our long-term investment in that relationship. And by having a breadth and depth of offerings and a breath and depth of delivery capabilities -- think right price, right geography, right skill set -- we think long term, our relationship value grows over time as we help those customers find the more important transactions to get to a live agent. More complex are more valuable. That makes sense?

Eric J. Boyer - Wells Fargo Securities, LLC, Research Division

Yes.

Operator

The next question comes from Kevin McVeigh with Macquarie.

Kevin D. McVeigh - Macquarie Research

Earl, just one real quick question. In terms of -- how should we think about free cash flow in 2012 given the preliminary guidance?

Earl C. Shanks

Well, Eric (sic) [Kevin], as I said, I think our expectations around taxes is going to be that we're basically going to pay cash taxes equal to book taxes this year, which would be a bit unusual for us, and I think that's a 2011-only event. I think with that in mind, our cash flow is likely to be closer to net income this year than what I would normally have told you. And so working with something around net income, plus or minus, is probably the right way to think about it.

Kevin D. McVeigh - Macquarie Research

Great. And then in terms of the share count, given the amount of stock you bought in the quarter, I would have thought it was a little lower. Can you give us a sense how you bought the stock in the quarter? And then was there any offsets to that? And just as we think about 2012, is there any buyback embedded in the share count you're using?

Earl C. Shanks

So let me start with the last part of that, Kevin. No, we haven't embedded any buyback into our share count for 2012. Obviously, I mean, you know the rules as well as we do. We couldn't buy stock before the earnings release we had in November, so by definition, we had to buy all that stock after that point in time. So in terms of what happened in the quarter, yes, probably, it was a little less impact than you otherwise might see. I think there's also, whenever you deal with share counts, you deal with the dilution impacts of both the convert and the options that are outstanding and the movement around that over time, so that's certainly having some impact on the margin as the stock prices are moving up.

Kevin D. McVeigh - Macquarie Research

Got it. And then just on -- I don't know if you can even answer this, but is there anything that keep you out of the market as we think about kind of Q1 or just we could expect that you'd be -- should it come at levels you want that you can be buying the stock?

Earl C. Shanks

Oh, Kevin, you know me well enough to know that I'm not going to answer a question as to what we may or may not do in the quarter in terms of stock buyback.

Operator

The next question comes from Matt McCormack with BGB Securities.

Matthew J. McCormack - BGB Securities, Inc., Research Division

You've mentioned, obviously, investing in the business several times. I guess could you talk about the priorities of between the CM segment and the IM segment and how you are allocating those investment dollars?

Jeffrey H. Fox

Yes. I think if you keep it really simple, the -- let's start with our IM business. Our IM business, the way we think about it, I tried to describe that there -- that is -- we have an R&D budget and a go-to-market budget in that business that we feel like matches a number of opportunities in the marketplace where we think our combination of technology and delivery capabilities adds value to emerging and existing transactions. And so the investment methodology for Information Management business is to make sure our value proposition and total cost of ownership strategy is presented in enough places where we see emerging demand to where we capture what we think is a solid share of global opportunities. On the Information -- on the Customer Management side, we think about it fairly similarly with the additional thought process of capacity, global delivery capacity versus an R&D budget. And so we're -- again, on the Customer Management side, we're investing in trying to improve our quality because we think that's a continuous process. We're investing in global footprint so that we can have the right type of capabilities at the right price for our customers. We're investing in account management so that we are deeply operationally involved with and listening to the nuances and needs of our customers. And so those are sort of the buckets we're investing in. And then obviously, we invest to go to market and compete for work within our existing accounts and then new logos.

Earl C. Shanks

And Matt, if I can cycle back, I made a couple of comments in the prepared remarks around what we spent capital on in the quarter, and I just -- it matches what Jeff just said, but I'll just reiterate that to you. We added capacity in the CM business. We added technology capability in the CM business to improve the operations, and we added technology functionality in the IM business. And I called all of those out in the quarter because if you look at our capital spending numbers, they were up a bit in the quarter, and they were all meaningful in that change.

Matthew J. McCormack - BGB Securities, Inc., Research Division

Okay. And just to kind of stay on the IM business for a second, I mean, over the long term, you think that business currently has the scale necessary to remain competitive?

Jeffrey H. Fox

I will answer that strictly with near-term visibility. We feel like that team is doing an increasingly good job within our client base and in picking opportunities in the market where we add a lot of value and have a distinguishable value proposition to the account we're targeting. And so I don't really want to speculate about the long term versus stay really focused on harvesting a return out of the investments we've made and the opportunities we see near term.

Matthew J. McCormack - BGB Securities, Inc., Research Division

Okay. And then just lastly, kind of a sort of a housekeeping question. The interest expense, I imagine some of that has to do with the credit facility. But what should we expect for that line item for '12? And then also, why not just pay off that debt with your cash?

Earl C. Shanks

So Matt, obviously, the convert -- the biggest chunk of the interest expense is related to the convertible that's outstanding. And that's a noncall -- a 10-year noncall, so really don't have the easy ability to pay that off. The balance of it, Matt, is pretty low cost debt, provides us flexibility, and the balance of the cost is either that low-cost debt or is the facility costs that are out there. And our view is providing capital flexibility as an important thing to do over a multiyear period. We think that's what our current balance sheet does. Having said all of that, I think interest will trend down very modestly from 2011 to 2012, but not a lot of movement down there.

Operator

The next question comes from Shlomo Rosenbaum with Stifel, Nicolaus.

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

I just wanted to start a little bit with the CM revenue guidance. Last quarter, you guys talked about a lot of investments in training for ramp ups of contracts. And I'm just trying to figure out what's going on with that in conjunction with the thought that the CM revenue in the first half of 2012 was going to look like a lot like the CM revenue in the first half of 2011. Why aren't we seeing kind of a return of that?

Jeffrey H. Fox

Two things. Number one, there is a little bit of seasonality in our business, so some of the investment was in seasonal ramps in the -- particularly in the third and fourth quarters. I'll defer to Earl because I don't remember him really saying revenue was going to replicate versus last year.

Earl C. Shanks

Yes, Shlomo, I think our expectation is that, generally, the pattern, when you look at the full year, is going to be pretty similar, first half, second half, to the same kind of pattern that you would have seen in 2011. So that doesn't mean that we don't expect that we'll see some growth in the first half on a year-over-year basis. It just means that we're going to have, in our view, pretty similar patterns year-over-year in that business, and as Jeff said, there's a pretty constant seasonal third and fourth quarter are strong, first quarter is generally weaker, second quarter is usually the weakest quarter that we have. And that's the pattern we expect in the business. I think we're seeing -- as we've said to you, we're seeing pretty good demand in the business, and as we sit here today, that provides us some level of confidence. But we are also very attentive to where the global economy is and what's going on in the global economy. And we're very biased to providing you guidance that we can look back at the end of the year and say, "Yes, we did what we told you we would do."

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

Okay, so just to make sure I'm clear. The guidance is tempering what your indicators are out for -- from your clients in order -- so that you guys have a conservative view to the street?

Earl C. Shanks

We're being a little -- we're being cautious in what we're providing to you.

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

Okay. Then just in the CM business, there was a nice stack up sequentially in Other. Was that some kind of seasonal business in one of your small verticals?

Earl C. Shanks

That was, I think, a variety of clients that we saw driving that across the businesses and, yes obviously, it was a variety of verticals. It was certainly retail, which is normally what you'd expect in that segment. Probably the biggest driver was retail-related.

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

Okay. Are you seeing increased demand for your Home Agent business?

Jeffrey H. Fox

Yes.

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

And how is that scaling? You said 3,000 agents. Where were you a year ago, and where do you expect to be at the end of 2012?

Jeffrey H. Fox

We don't specifically guide on that, but we have a very solid pipeline of Home Agent Solution offerings, and hopefully this time next year, we'll report another year of continued significant progress. We're also investing in that to improve some things in and around the ability to significantly scale. And we think that's a great offering, and we're really getting active with it where we think it adds high value.

Earl C. Shanks

There is, though, in that space some seasonality, in the Home Agent in particular, that you should be aware of. So it will move up and down a bit during the year.

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

Okay. And then the margin spike in the IM business, was that for the deliverable for the large contract you were talking about?

Jeffrey H. Fox

No. There is no, if you go back in time, there is some fourth quarter seasonality where people commit to projects and, frankly, buy some software. And so there is -- we have some things that get closed out in Q4, and frankly, we would expect to see that pattern at some level again this year. That's pretty normal for those types of businesses.

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

I mean, what we saw was basically a spike in professional services, with the lowest margin aspect of that business. And so you're saying that there was some other items in there that pushed it up? Just trying to reconcile that.

Jeffrey H. Fox

On a year-over-year -- that's a bit of a mix shift versus last year, right? But if you actually took out the nonrecurring revenue that had very low margin, I think you see a pretty similar revenue and profit pattern year-over-year for that business, if you just took out the nonrecurring low-margin revenue we had in 2010.

Operator

The next question comes from Vincent Lin with Goldman Sachs.

Vincent Lin - Goldman Sachs Group Inc., Research Division

So in the CM business, in terms of verticals, so financial services revenues, we have seen declines for 2 consecutive quarters, obviously because of the macro and industry-specific issues that we're seeing there. What's your expectations as we go into 2012? And maybe for the balance of this year, baked into your guidance, are you assuming some stabilization? Or how should we think about your expectations for that particular vertical?

Jeffrey H. Fox

Well, I hope the account and coverage people are listening. We're expecting -- we feel like we are not getting the traction in some of the accounts that we've targeted in the financial services vertical, and we're working hard at it. We're actually a little frustrated with the result. I would tell you that we feel like, long term, that we will be a significant player in the financial services vertical. I would also just tell you that at a numerical level, we have a few end-of-life platforms where there is a little bit of revenue pressure in that particular vertical line coming out of just some end-of-life software and outsourcing services that are sort of reaching culmination last year and this year. So that's not all live agent-related.

Vincent Lin - Goldman Sachs Group Inc., Research Division

Got it. That's helpful. And then just in terms of margins, you guys talked about making investments and that's part of reasons going down EBITDA and margins in 2012. I'm just wondering, on a year-over-year basis, just so that we can quantify, are you -- like is the pace of the investments accelerating this year versus the kind of investments you made last year? And then so when -- I guess the question is, when should we expect to see some moderation in terms of investments and then hopefully there's going to be some additional revenue leverage, so that we can see some more margin improvement going forward?

Jeffrey H. Fox

So the way we're looking at that is last year, I think we saw the traction strength and strategic interest of the accounts and new logos, and we had a list of things that we felt like we could invest in to satisfy things they're asking for and grow the value of that business. So our thought process is that we are investing in capacity, we're investing in some of the underlying technology, we're investing in process improvement, we're investing in training, so we're investing in a number of areas. We still expect to improve -- assuming we hit our plan, we expect to see some margin improvement in that business as we finish the year. Obviously, to Earl's point, it's more likely to show up in the back half of the year than the front. So we're trying to grow the margin, grow the top line while continuing to plan for and improve, frankly, every aspect of that business in the eyes of our customers.

Earl C. Shanks

The thing I'd remind you of again is that one thing that's creating some confusion is the long-term compensation expense that's built into that. So I think there's actually more underlying improvement there, and the long-term compensation expense is beginning to better mirror what the historical grant rates have been over the past 5 or 8 years or so.

Operator

The next question comes from Ashwin Shirvaikar with Citi.

Ashwin Shirvaikar - Citigroup Inc, Research Division

Earl, you had multiple opportunities here to say the guidance is conservative, but you're very disciplined. I won't go that route. So Jeff, are there further material opportunities to streamline the business, either to take costs out or to improve time-to-market, other factors, just material ones that you're working on actively? Or do you have a good, stable business that you just want to try and grow here?

Jeffrey H. Fox

I mean, I just -- I mean, I want to be repetitive, which is we are trying to -- we're listening very carefully to our customers, and as I said earlier, when you get inside these accounts -- frankly, both of our businesses, they're trying to improve their businesses and asking folks like us to invest in the combination of technology, process, expertise, capacity and then improving our quality and consistency, as well as have account teams that can listen and consult. And so, we are just -- we are investing in a logical way, and we think that long term, there is margin improvement that we can gradually get out of both of our businesses as those investments generate returns. And our thought process is to not necessarily focus only on the margin but on continuous growth and profitability and top line. So we're very growth-focused this year and "get a return on the investment" focused this year. That's our sort of near-term execution view.

Ashwin Shirvaikar - Citigroup Inc, Research Division

Okay. No, that makes sense. Both of you have cited agent training a number of times. It came up last quarter a bit as well. And I'm trying to figure out, do these become revenue generating in 1Q, 2Q? Can you point to specific metrics like utilization that improve over time so we can track progress? Is that a possibility on a quarterly basis?

Earl C. Shanks

Ashwin, I think the best metric out there is do we grow the revenue line? And certainly as you said, we talked a lot about agent training, particularly last quarter, and then I think in the business, we are quite pleased with how we grew the revenue in the fourth quarter. It's reflective of the agent training we were doing in the second, third and fourth quarters of last year. Certainly, we are expecting we'll drive some continued growth out of that business this year as well based on the guidance. And all that gets created by the agent training. So I think we are seeing some of the impacts of that, but I think it's top line and ultimate profitability that's the real measure.

Ashwin Shirvaikar - Citigroup Inc, Research Division

Okay. And in terms of verticals, one that you've not done too much work in the past but that seems to be a lot of forward-looking opportunities is really health care. And it seemed to me that during the last 2, 3 months, you might have stepped up your investment in the health care vertical. Is that sort of more agent-based, more product-based? Is that, first of all, a correct assessment that you want to be bigger in the health care vertical?

Jeffrey H. Fox

Well, we want to be bigger in every vertical, but in particular, we are seeing some momentum pick up there. We had, I think, a pretty good year last year, and we are seeing some real interest across a number of accounts and prospects in our technology in that vertical. And so the answer is obviously, yes, we want to grow our health care vertical. We feel like we can and will and are. But I also don't want to ignore other verticals like financial services where we feel like we should be growing as well.

Ashwin Shirvaikar - Citigroup Inc, Research Division

Great. No, that makes sense. Last question, I promise. You've got a significant portion of the stock's value here in cash on your balance sheet. I mean, is that sfrustrating? Are there alternatives you look at to generate shareholder value here? Anything you can shed light on?

Jeffrey H. Fox

Yes. So I would -- I want to keep this simple. As you know, we've been together a number of times. And we would like to find good valuable options to use capital against. And the -- buying $58 million of stock at $11.95 in Q4 was not a terrible -- was not a bad use of money. Earl might chime in here. You know that the better we execute in both of our businesses, strategically, the more we feel like long term, we can also use capital to grow those businesses because when a business is executing well, the ability to pick up additional assets to put into it is an enhanced shareholder value return capability. And that's how we're thinking about the importance of improved execution quarter-on-quarter in our businesses to complement that capital. Earl?

Earl C. Shanks

I think the only thing I'd add to that, Jeff, is just a reminder -- and we've been talking about this for a while. We're going to be pretty disciplined about valuations and how those valuations relate to the earnings that we can generate off of any assets that we look at. And if that means we're a little cautious in the near term about what we actually close, that's something we are willing to be and -- to make sure that we get the returns that we would expect and that we know our shareholders expect on any investments we make.

Operator

The next question comes from Dave Koning with Baird.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

I guess my first question, just with the revenue pattern that you just discussed, I think I just want to make sure that you mean the revenue dollars kind of the way that they go through the year. Q1's a little sequentially weak, and then through the year, it ramps rather than the growth rate. Is that correct?

Earl C. Shanks

Yes, that's right. The mix of revenue dollars on the year in 2012 is going to look relatively like 2011. There, I'm sure, will be variability on that, but in general, that's our expectation.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

And that would suggest then that the first half growth would probably be a little better than the back half, just given that you start to really anniversary some tougher comps in the back half of kind of your top 3 clients are really strong kind of Q2, Q3, Q4 this year. Is that fair to characterize, too?

Earl C. Shanks

David, I've spent a lot of time -- we've spent a lot of time thinking about full year guidance and making sure that we gave you full year guidance that makes sense. And a couple of years ago, we went away from quarterly guidance, and so I'm going to -- I'm not going back.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Okay. No, that's fair enough. And then the second question, the gross margin pattern, it's kind of interesting. You go back to Q1 of '10, gross margins were 40% in the Customer Management business. And pretty much every quarter sequentially, they've come down since then to about 35% this quarter. So we've had, in the last 7 quarters, 500 basis points of gross margin decline, pretty steady. Are we at a base now there? And maybe you can just discuss kind of the difference between kind of how you look at gross margin going forward versus kind of the operating expense percent?

Jeffrey H. Fox

So we -- I think we've continued to call out the training pressure in the impacts gross margin, but we have -- I also said that we more than made up for it with flow-through in the end out of top line growth. And so we do believe that as we grew rapidly -- we grew pretty rapidly last year. It was very, very significant live agent training costs, really starting pretty early in the year. We would -- obviously, we will make quarterly forecasts, but we would like to see our gross margin stabilize to slightly improve, and then it's a matter of getting some of it to the bottom line. That's the pattern that I think that we're looking for. But the good news would be if we continue to see higher demand beyond some certain amount, then we'll take the lower gross margin short term for the long-term impact of it.

Earl C. Shanks

And David, going all the way back to the first quarter of 2010, my recollection is our training costs at that point would have been quite low given what we were seeing on volumes. And we've been talking about volumes beginning to improve later that year. And so that's when training costs began to turn around. And so I think that's one of the things that you're seeing in the pattern is just where we were in the cycle in terms of growth and agent training.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Yes. Yes, that makes sense because, overall, operating margins are up, so I mean, it really comes down to your investing through the gross margin line and you had the cost cuts that come through the SG&A line in that you're still benefiting on the operating margin line.

Earl C. Shanks

Yes.

Jeffrey H. Fox

And that's -- ultimately, we're trying to strike the balance between the 2.

Operator

The next question comes from Giri Krishnan with Credit Suisse.

Giridhar Krishnan - Crédit Suisse AG, Research Division

Just had a couple of questions. I guess, Jeff, earlier in the call, you spoke about pricing being stable. And I just wanted to get a sense of some of the conversations you're having with clients around it. And do you think that in 2012, there's some room to -- for pricing to get better given what seems to be at least a modestly improving macro environment in the U.S.? And does your guidance imply pricing stay stable or gets a little bit better? Any thoughts on that would be helpful.

Jeffrey H. Fox

I mean, again, I feel like -- those are great questions, and let me just be clear. I mean, it's program by program what the price quality and metrics that matter look like to each one of these clients. We feel like the clients -- we feel like our clients expects stability from us in terms of quality, and there's a cost to provide stable or improving quality and metrics. And we work hard at it program by program with these clients. Our guidance -- and Earl can throw in -- our guidance really assumes no material new environment either way, right? And I say this is a competitive business and we earn every dollar everyday, and are -- we don't expect customers to move us around too much because they know what the work is and what it costs.

Giridhar Krishnan - Crédit Suisse AG, Research Division

Right. And then a clarification on the new business spends in the live agent business. If, on the one hand, you're seeing revenue has trended fairly well, but your live agent business has sort of declined a little bit each quarter, how much of that is because of your mix versus any other reasons that you'd like to shed light on?

Jeffrey H. Fox

I'm sorry, to live agent?

Giridhar Krishnan - Crédit Suisse AG, Research Division

The live agent business wins over the last couple of quarters seem to have trended down a little bit. Just wanted to get a sense, is that a function of timing, mix or are there other reasons?

Earl C. Shanks

So our view on the metric that we put, the wins in the quarter, is that -- is there's a range of what we expect it to be. And if you go back over the last 3 or 3.5 years that we've been publishing that metric, I think it's been in a range from maybe as low as $50.25 million to just below $100 million by my recollection. We consider $75 million in the quarter a pretty stable number, and we're pretty pleased with that number in terms of what we seeing and, frankly, don't look at the precision of that number in any given quarter as telling us much other than, well, which of the deals actually closed. And so as long as we stay in the pattern that is in that kind of a range, we're pretty pleased with the $75 million number. You'll notice that, that's what we basically publish for -- or booked for all of last year and to drive the growth rates that we did in the business. It's just a function of continuing to sell business and then holding onto the business that you have, and we did a really good job of both of those, in our view, last year, particularly holding onto the business that we have.

Operator

We do have time for one last question, and it does come from Rob Kirkpatrick with Cardinal Capital.

Robert Benjamin Kirkpatrick - Cardinal Capital Management, L.L.C.

Can you talk a little bit about why your CMG customers are not necessarily as cautious as you are in their outlooks and forecast for 2012?

Jeffrey H. Fox

We -- that is a great observation. I don't know how to really respond to that, so I'm going to defer to Earl. I think -- I will just tell you, right, we're just really trying to stay execution-focused, and we have a lot of things our customers are asking us to make things happen, and so we're just trying to be cautious to get out the blocks.

Earl C. Shanks

I think what we -- you understand very well the movements in our business. We've got the continuing trend offshore that we talked about, so that's going to moderate our growth rate a bit as compared to our customers, I suspect. We are also just very focused, as Jeff said, on execution and making sure we can deliver on the numbers that are out there. And we're optimistic that we can deliver on these, and we look forward to talking about that as the quarters progress.

Robert Benjamin Kirkpatrick - Cardinal Capital Management, L.L.C.

Okay. And then maybe an easier one for Earl. Earl, was much of the CapEx this year accelerated due to the changing tax loss for accelerated depreciation?

Earl C. Shanks

No, we really have been investing pretty clearly in the opportunities in the business. And in particular, over the last couple of quarters, from a capacity standpoint in CM, we're in a position that we really do need to add capacity offshore. We've probably been a little more aggressive about that. Some of that capacity, frankly, won't come on until very late in 2012 and into 2013, but it's important for us to do it. And then, there were a couple of things that we looked at from a technology standpoint I touched on earlier that were just important additions to the business. The opportunities came up and we took the opportunities to invest in them because we think that we'll get pretty good returns on all of that. So our CapEx is probably -- given where we are on the capacity cycle, our CapEx will probably run a little heavier this year as well as compared to what it did for a few years when we probably had more capacity in the system than we do today.

Robert Benjamin Kirkpatrick - Cardinal Capital Management, L.L.C.

Okay. So should -- you would think be up modestly in '12 versus '11?

Earl C. Shanks

Probably.

Robert Benjamin Kirkpatrick - Cardinal Capital Management, L.L.C.

Okay. And then so how many CMG employees does that then leave you with at the end of the year?

Earl C. Shanks

Our total employee base in CM is close to 73,000.

Robert Benjamin Kirkpatrick - Cardinal Capital Management, L.L.C.

Okay. And then one last one. Stock comp expense for the quarter was in line with previous quarters or substantially different?

Earl C. Shanks

Well, that's what I refer to as the long-term compensation expense. For the full year, we had about $17 million, and I think for 2012, we'll have about $24 million.

David Stein

Well, I'd like to add that Earl and I will be available the rest of the day to answer any questions about these results and our business outlook and anything else that we've discussed on the call today, and thank you all for participating, and have a good day.

Operator

Thank you for your participation in today's conference call. The call has concluded. You may go ahead and 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 Q4 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts