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Convergys (NYSE:CVG)

Q1 2012 Earnings Call

May 09, 2012 8:30 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

Andrea J. Ayers - President of Customer Management Line of Business and Chief Operating Officer of Customer Management

Earl C. Shanks - Chief Financial Officer

Analysts

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

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

Kevin D. McVeigh - Macquarie Research

Manish Hemrajani - Oppenheimer & Co. Inc., Research Division

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

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

Giridhar Krishnan - Crédit Suisse AG, Research Division

Operator

Welcome to the Convergys First Quarter 2012 Earnings Teleconference. [Operator Instructions] This conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to David Stein, Vice President of Investor Relations. Sir, you may begin.

David Stein

Thank you, Mariane, and good morning. Welcome to the Convergys first quarter 2012 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, 2011, and the 10-Q filed yesterday.

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; Earl Shanks, our Chief Financial Officer; and Andrea Ayers, President and Chief Operating Officer of our Customer Management business. Jeff will provide a summary of our operating results. Andrea will provide some insight into developments in the customer care industry. Earl will cover our financial performance and business outlook, and all will be available for the question-and-answer session.

Now I'll turn the call over to Jeff.

Jeffrey H. Fox

Good morning, everyone. In the next few minutes, we will review company performance and discuss the progress we're making on our strategic transformation. Operationally, both of our businesses continued to show progress in the quarter, and overall, we delivered solid revenue growth and profit improvement. As a result of our agreement to sell our Information Management business, let me focus on our continuing operations.

Our revenue of $498 million represents an increase of 7% compared to total revenue of $465 million in the first quarter last year. Customer Management operating income of $39 million was up 21% compared with last year, and Customer Management EBITDA increased 18%, $58 million compared with $49 million last year. EPS from continuing operations in the first quarter was $0.22 per diluted share on a non-GAAP basis. This represents a 29% increase from $0.17 per share last year. Overall, I'm extremely encouraged by our execution in the first quarter.

Based on the improved operating performance, we are raising our revenue and earnings expectations for the full year. Strategically, we made significant progress as we reached agreement to sell our Information Management business for $449 million. With the anticipated close of this sale later this month, we will successfully complete the strategic repositioning of our company into a well-capitalized, market-leading Customer Management business. Our process to focus, simplify and execute began 2 years ago with the sale of our HR Management business in 2010, followed by the sale of the Cellular Partnerships in 2011.

As we said in the release issued yesterday, we are planning several management changes to align the leadership team with our strategic focus on Customer Management. During the fourth quarter, I will become Executive Chairman and Andrea Ayers will succeed me as President and CEO. Andrea is a talented and proven leader with deep expertise and strong operational experience in the customer care industry. She has held a number of leadership roles at Convergys, including President and Chief Operating Officer of Customer Management, where she currently has full responsibility for profit and loss of the segment. She has also, in her time with Convergys, served as President of Customer Management for 2 years, President of Relationship Technology Management for 2 years, President of Government and New Markets for 3 years, and she has also served in a variety of roles during her 22-year career.

In the third quarter, after our next earnings call, Andre Valentine will take over from Earl Shanks as Convergys' CFO. Andre is a highly talented finance executive with a deep understanding of the Customer Management business. In addition to his experience as Senior Vice President of Finance and Customer Management, he previously served as Senior Vice President and Controller.

Through the efforts of Andrea and Andre and their entire team, we have a leading reputation in the industry. Under their leadership, we are confident that Convergys will continue to deliver outstanding value for our clients and superior returns for our shareholders. Earl and I will work very closely with Andrea and Andre in the coming months to execute a smooth transition.

Now I'd like to turn the call over to Andrea, who will review customer care industry trends in the first quarter.

Andrea J. Ayers

Thanks, Jeff, and good morning, everyone. In the first quarter, overall industry trends were consistent with our experience over the past several quarters. Five trends we are seeing with clients in the marketplace relate to call complexity, contact type, vendor consolidation, offshore demand and the pricing environment.

First, let me address call complexity. Demand for live agent services remains strong, even as consumers are adopting alternate interaction channels to address their simpler transactions. Consumers have ready access to more basic types of information, so the proportion of transactions handled by live agents which are complicated is increasing.

As agent-assisted transactions increase in complexity, the average handle time for consumer calls also increases. This complexity creates a more challenging environment, requiring a more skilled agent. The trend to more complex agent assisted-interactions plays to our strengths. Our quality global delivery and ability to handle a broad set of contact types at scale uniquely qualifies us to win market share.

The second trend we're seeing is client demand for service flexibility across the full life cycle of contact types. For some of our clients, customer acquisition is becoming more focused in the current economic environment. As a result, clients are more focused on retention strategies and generating more revenue from their existing customers.

This plays to our ability to rapidly scale up and scale down services across contact types, given our global scale and breadth and depth of contact handling capabilities, spanning customer acquisition, service, collections, cross-sell and analytics.

The third trend is client consolidation of contacts and our vendors. Managing multiple vendors is complicated. It can be time-consuming and resource-intensive, and clients need help to more efficiently manage expenses as the cost to serve their customers increases. Clients must balance the need to reduce costs with the need to improve the quality of the customer experience. They seek providers with size and scale to deliver solutions on many fronts such as a multi-shore service and sophisticated analytics. As a result, we see clients consolidating a number of outsourced vendors to achieve this balance. The investment we are making in delivery quality and our alignment with clients' business goals through focused account management positions us to benefit from this consolidation.

Fourth, I'd like to discuss the client demand for offshore services. Demand for services provided from other geographies remains strong. This plays to our ability to provide the right contacts and work types in the right geographies to drive a consistent quality and value that our clients demand. As one of the largest private employers in the Philippines with substantial capacity in India and a growing footprint in Latin America, our multi-shore offerings are a really important capability.

And finally, in terms of pricing, it is the nature of this business that clients commonly seek to receive more value at a fair price. Clients pay for quality and understand the relationship between quality and our ability to attract and retain the talent needed to provide the right level of service. We continue to see a stable reasonable pricing environment that is supported by our clients' willingness to invest in their customers' service experience.

Our quality global delivery, breadth and depth of services and revamped account management structure allow us to provide solutions that address these industry trends.

Now I'll turn it back over to Jeff.

Jeffrey H. Fox

Thanks, Andrea. Let's review the progress we've made in our Customer Management business in more detail. In the first quarter, Customer Management continued its strong performance. In terms of live agent services, revenue increased with 14 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 delivering quality service and client account management, which is driving an increase in program retention on a year-over-year basis.

Strong growth with our largest programs absorbed some large blocks of capacity and reduced availability in the quarter for some new program opportunities. Efforts are underway to accelerate available capacity to meet the demand. In terms of new business signings, we signed new live agent business worth $35 million of revenue that we expect to deliver this year. We expect these wins to generate $57 million of revenue next year. 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 are investing to expand capacity in order to provide the right solution at the right price, and our first 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 key geographies. Our expected growth in 2012 reflects the solid demand we are seeing for these geographies, as well as for our work-at-home agents. Our investments in account management are also making a difference as we are seeing improved retention and growth with our existing clients. We treat each of our clients as a market of one and strive to proactively solve their business challenges. Because of our focus on quality delivery and 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 of the world in which we operate. Our global infrastructure and operating model is critical to delivering this consistency. Investments in tools and technology continue to help us be more effective and efficient in the way we hire, train and retain highly skilled agents. The right tools and technologies are key to deliver a high-quality experience to our clients' customers.

In terms of profitability, Customer Management had solid improvement in operating profit year-over-year. Operating income was up 21%, and operating margin increased 90 basis points. This reflects the impact of our excellent revenue growth combined with effective cost controls. Once again, the financial results from our technology and analytics offerings were on plan in the 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. Our analytics capabilities give our clients better insight into why their customers are behaving the way they are, which enables them to deploy more effective retention programs.

We continue to see a number of accounts interested in integrating these capabilities into their unique long-term strategies. I want to thank our Customer Management team for delivering an outstanding quarter of revenue and profitability improvement. We had an excellent start to 2012 and expect strong performance for the full year. As a market leader in customer management, our top priorities are strategic growth and disciplined capital deployment. With our substantial cash balance and financial flexibility, we will pursue a combination of organic and inorganic growth opportunities and return capital to our shareholders.

Sources of inorganic growth could include investment in clients with potential to become material new relationships; expanding current footprint to provide English and Spanish language capabilities; obtaining technology and competencies that complement our infrastructure, brick-and-mortar and onshore/offshore model; and strategic acquisition of businesses that leverage our current investments and/or improve the company's competitive position while simultaneously creating value for our investors.

Regarding our continued focus on returning capital to our shareholders, we're pleased to initiate a quarterly dividend of $0.05 per share in the second quarter. This is based on our financial strength and confidence in the future. We also expect to continue to invest capital to retire substantial portions of our shares outstanding. We currently have approximately 120 million shares outstanding and $160 million in capacity under our current stock purchase authorization.

I would like to thank our clients for their trust in Convergys as we partner to support their customers and 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

Thanks, Jeff, and good morning, everyone. I'll begin with revenue from continuing operations. Revenue in the first quarter was $498 million. This was an increase of $33 million, up 7% compared with last year. This growth was driven by increases with existing and new clients across the verticals, which reflects our increased emphasis on account management. Industry fundamentals remain solid in the first quarter, although the macro environment does cause us to remain cautious.

For the second quarter, we expect to see a normal seasonal pattern with a sequential revenue decline. In terms of our Customer Management footprint, we had more available capacity at the beginning of last year than we had at the beginning of this year. This is largely due to increased program retention and growth with existing clients over the past year. As we look at the next few quarters, this year, we have less available capacity. Because of this, we are also cautious about our overall revenue growth in the year.

At the end of the quarter, 41% of our contact center employees were in the United States, including more than 4,000 work-at-home employees; 37% 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.

Operating income was $39 million. This is up $7 million versus the prior year. Operating margin improved to 7.9%. EBITDA increased $9 million to $58 million. Solid revenue growth in the quarter drove most of the profit improvement. For the second quarter, we expect operating income similar to the same period last year as we invest in capacity to support growth and absorb the impact of holding on to staff in anticipation of client demand in the second half. Also recall that the prior-year period included about 100 basis points of positive impact from a reimbursement related to the flood we experienced in Clarksville during 2010.

Now let's move to Information Management briefly, which also delivered solid operating performance in the quarter. Accounting for the Information Management sale requires reporting its business results as discontinued operations. Information Management revenue reported in discontinued operations was $82 million in the first quarter. Additionally, about $6 million of costs previously reported within the Information Management business were required to be included in continuing operations. Including these costs along with discontinued operations better reflects the real cost of this business as we owned it and as we expect it to operate in the future.

Operating income was $7 million after adding back these Information Management-related costs included in continuing operations. This underlying performance also excludes $5 million of transaction-related expense in the quarter.

Regarding the costs now included in continuing operations, to the extent that we continue to incur costs and perform services for the buyer, we expect revenue from these transition services to largely offset the costs. As the transition services complete, our expectation is that we will eliminate the costs. The length of the transition services agreements vary depending on the type of service.

We expect these costs to have minimal impact on income from continuing operations after the sale closes. The costs and offsetting revenues for transition services provided after the sale are recorded in Corporate and Other within continuing ops. There will likely be a few events related to the completion of our corporate simplification that impact our results during 2012. These are an asset impairment review of Customer Management technology assets impacted by the sale, pension plan impacts and actions to merge our holding company structure into Customer Management.

Regarding the asset impairment test, we are in the process of performing a test for goodwill, intangible and long-lived asset impairment for the customer interaction technology unit impacted by the Information Management sale. We have not yet completed these tests. However, it is possible that the review will result in a reduction in the carrying value of these intangible assets in the second quarter by as much as $46 million.

Regarding the pension impact, a pension settlement charge, if any, is very dependent on the number of employees that leave and request a distribution in a given year. This year, because of the Information Management transaction and restructuring actions, we expect to have an increased number of people requesting distributions from the plan. Therefore, we expect that we will recognize a charge of $5 million to $12 million in the fourth quarter for a portion of the unrecognized pension cost. It is important to note that neither the pension settlement nor any conclusion regarding asset impairment will have an impact on the expected future cash flows of the business.

Regarding restructuring, we are planning to take actions after the sale closes to streamline operations and reduce costs. The details continue to be worked. At this point, we expect these actions to result in restructuring charges of $5 million to $15 million primarily during the second quarter.

Let's move now to Corporate and Other operating results. The $10 million cost in the first quarter includes $6 million Information Management-related costs previously discussed and $4 million for long-term compensation expense. In terms of earnings from continuing operations, adjusted EBITDA increased $7 million to $59 million. This excluded contributions last year from the Cellular Partnerships and the gain in the sale of finance and accounting business. EPS from continuing operations was $0.22 per share on a non-GAAP basis.

Turning now to cash flow. During the first quarter, we reduced some long-term liabilities. This included $14 million paid to the city of Cincinnati and an $11 million pension contribution. We also made a $20 million tax payment associated with prior-year tax planning initiatives. Also during the first quarter, we continued to expand our global delivery capacity.

Turning to the balance sheet, at the end of the first quarter, we had cash and cash equivalents of $411 million and net cash of $289 million. About half 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.

Now I'll discuss our business outlook for 2012. Given the continued improvement in execution and our solid performance, we are raising our guidance for 2012. We expect revenue of $1.975 billion to $2 billion for the full year. In terms of earnings, we expect adjusted EBITDA of $220 million to $230 million for the year, and we expect adjusted EPS up $0.75 to $0.80 per share for the year. Our cash balance should be about $775 million at the end of the year. This includes retiring debt from the Orlando facility of $55 million and excludes any acquisitions or stock repurchase activity.

Now I'll turn the call back to Jeff.

Jeffrey H. Fox

Thanks, Earl. To sum up, we produced another quarter of solid results with strong revenue and profit growth. We are investing in solutions that deliver quality and more value to our clients, strengthen our relationships and allow us to win more business. We are completing the strategic simplification of our company in the second quarter, and we are focused on growing our market-leading Customer Management business. Our improving results and significant cash position give us the flexibility to invest in the business and enhance shareholder value. We are proud to initiate a quarterly dividend of $0.05 per share in the second quarter and expect to purchase our stock at prices we think reflect value for our shareholders. With this excellent start to 2012, we expect to deliver strong operating performance for the full year.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Eric Boyer of Wells Fargo.

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

First, let me congratulate Jeff and the team for the job you guys have done with getting the company back on track and then congratulate Andrea and Andre on their new roles there. So first, Jeff, can you talk a bit about the timing of the management changes? You have a lot of capital to deploy in a pretty uncertain economy. Can you walk us through the decision to make the changes now?

Jeffrey H. Fox

Yes, well, first of all, Eric, thanks for your comments for the team. The thought process here is that we've been working on simplifying this business now since I joined. I mean, I had the luxury to be both a customer before I joined the board and then a board member for a year, and I feel like that Andrea and Andre and the entire operating team have made just great progress in terms of focusing their investments and getting us in a position to invest in and grow organically and inorganically. And so the timing of the management change is really very -- it has been planned. It's been talked about. It's been something we've been working on for a long time. And so now you need to remember that I'm going to be here into Q4, and then I'm going to be Executive Chairman, and frankly, I'm a pretty significant stockholder. So the thought is Andrea and the team are doing a great job for our customers, investing our capital, determining our choices, and I'm going to stay very involved, not only through this year but into next year, on how we deploy and think strategically about the significant capital position we have.

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

And then could you give...

Jeffrey H. Fox

It's going to be a process. It's not a hard cut, and I felt like to finish the simplification, it was really important for Andrea and Andre to be in the position to do the operational movement over the next several quarters.

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

Okay. And could you give us a better sense for the financial criteria you're setting up for future acquisitions?

Jeffrey H. Fox

Yes. I mean, I think we've continued to be very focused on -- first of all, I'm proud to be initiating a quarterly dividend, right? I think that's a real statement to how we think about being shareholder-friendly and, frankly, returning capital that we generate operationally. Our criteria for acquisitions is always going to start with do we add value to the target, and it's going to then go to do we think the price is a reasonable price and always recognizing that we have been and will continue to look at our own stock as a viable alternative for use of capital.

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

Any guidelines as far as the accretion and timing, anything like that?

Jeffrey H. Fox

It's going to be asset by asset, Eric. Again, I feel very strongly Andrea and I and Andre and Earl, I think we all share the same discipline about making sure that when we deploy strategic capital, it's an asset we feel like has high upside and high manageability because we add some value to the target. The price will be a function of what the components and characteristics and opportunity looks like.

Operator

Our next question comes from Matt McCormack of BGB securities.

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

I certainly want to reiterate Eric's comments regarding the team. So first question, on the comments regarding being capacity-constrained, I guess, in the quarter and a few quarters to come, is there any way to quantify the revenue that is being lost, so to speak? And how quickly do you think you can ramp up capacity to take that excess demand?

Earl C. Shanks

So Matt, I think the reality is it's always hard to tell kind of what revenue is there and isn't there. I think what we found is that we have smaller blocks of available capacity today than we would have had a year ago. So when we're looking to sell new business, it's, frankly, sometimes harder to sell the new business because we have smaller blocks. We've been reasonably successful at selling some of that to our existing clients, and so we feel pretty good about that. And as we indicated, we're being reasonably aggressive about adding capacity, particularly offshore, in the business. But that takes a couple to a few quarters to really come online. So that's why we've characterized the year the way we have, and obviously, we would expect that some of that capacity will be online as we come into 2013.

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

Okay. And then clearly, strong growth with your top 3 clients and, as you said, 14 of the top 20. Where are you seeing, I guess, weakness? And would you characterize that as more company-specific, or are there any industries that seem to struggle in this economy?

Jeffrey H. Fox

So we had a pretty good quarter, and so I think Andrea and the team have done a great job in terms of focusing on our churn. And so I think that -- I mean, there are specific clients where there's volume drops. There's always going to be that. There are some programs that are running off, but net-net, that's a pretty darn good quarter and, frankly, a good year last year. Andrea, would you please add?

Andrea J. Ayers

Matt, it's Andrea. I think that Jeff's right. The investments in account management, we're seeing paying off, and we're seeing that in our retention numbers, which we're pleased about. Where we're investing more going forward is the technology vertical, the financial services vertical. We want more there. We want more in healthcare. Frankly, we want more with all of our existing clients and verticals, but we're very focused on technology and financial services and increasing our penetration of those 2 verticals at this point.

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

Okay, okay, great. And then just my last question, now that it is a pure call center BPO provider, I guess what do you think that the long-term sustainable both growth rate and margins of this business should be?

Jeffrey H. Fox

I'm going to ask Earl because Earl has been talking to you guys about that for a long time. I don't think anything has really changed about those expectations.

Earl C. Shanks

Yes. I mean, I think, Matt, we've talked about the business being -- starting with a GDP baseline and then being additive depending on what's happening both with the outsourcing trend and the overall trend and number of calls, et cetera, I think when you get done with it, you end up with normalized numbers that are in the mid-single digits someplace. You know as well as I do, it's very hard to perceive what's actually going on in the broader market because there's really no great data out there. Certainly, we're pretty pleased this quarter about how we think we did in terms of overall growth rates. But in terms of -- as compared to the market, but it's a little hard to tell exactly what the market is doing. We would put it in the category, though, of likely mid-single digits.

Jeffrey H. Fox

Yes. And if I just might add a little bit of color, the way we think about the business, and this is the broad we, we are investing in analytics, home agent, offshore, improvements in our global operating model and account management, so we're investing in things that we think increase the long-term earning power of the business, period. And so at any point in time, we will be either maxing out or not on the actual earning power in place. Right now, we feel like we're in a good investment cycle where we're investing forward for things that continue to allow us to grow our bottom line and top line over the next couple of years. And that's how we're thinking about it. So that's why I used the term invest so much in my written or prepared remarks. We are investing in this business.

Operator

Our next question comes from Kevin McVeigh of Macquarie Group.

Kevin D. McVeigh - Macquarie Research

In terms of -- I just wanted to get a sense, Andrea and Andre and then ultimately, Jeff, where your focus is going to be in terms of out of the gate, Andre. And then Jeff, as you think about -- obviously, almost 3 quarters of $1 billion of cash on the balance sheet. Just thoughts around that and pace of buyback as opposed to targeted acquisitions, things like that. I mean, obviously, the company is at a much different point than it was 18 months ago.

Jeffrey H. Fox

So I'll actually start and, frankly, ask Earl to chime in. I mean, we're going to be very disciplined, just as we have been. I mean, if you look at where we are, the Information Management deal is expected to close this month, and we have looked at a lot of targets in the last 12 months. Again, I want to remind everybody, I started in February of 2010, and frankly, Andre and Andrea and the team in Customer Management have been doing a great job in improving performance over the last couple of years. And as we've gotten to a performance level, we started looking at targets. And so the fact that we haven't acquired anything, I think, should be evidence that we're going to be very disciplined. I'll remind you that last year, we bought about $100 million of our stock when we could in the market and when we felt like the prices were reasonable. And so we're going to continue to strike that balance. And so in the meantime, we're very proud to start our dividend, and I will reiterate, we think that's a real indicator of our focus on rewarding our investors.

Earl C. Shanks

And Kevin, what I'd add in that, as I think we think about, really, 3 ways to reward investors: the dividend, as Jeff mentioned; buying stock back reasonably, actively as the value is appropriate and the opportunities arise; and then also doing kind of acquisition -- inorganic-type things that create value for shareholders. The first 2, I think, are reasonably clearly understood in terms of the patterns we've had over time, and I don't think those will change much. Obviously, the dividend is a big change. And with respect to acquisitions, I think there's a core belief here that you've got to be disciplined on value in terms of what you buy. And then as Jeff said, you've got to be very careful to find things where we add value to what we're buying, and I think that the team fundamentally believes that, and so we're out looking for that. And if that means it takes us a little longer to do an acquisition because we can create more value by being patient, I think there's a sentiment to say that it's okay to be patient.

Kevin D. McVeigh - Macquarie Research

Got it. Any thoughts in terms of -- Jeff, the dividend, should we expect kind of a typical increases year-to-year or just depend upon what the outlook is? And I just wanted to touch on what type of free cash flow we can kind of assume in the base business on a go-forward basis be it a conversion in net income or EBITDA, how you're thinking about that.

Jeffrey H. Fox

So of course, I can't comment about future dividend changes. I've even got Earl smiling at me. But thank you for asking. I think we have set the dividend at a level as a low-ones yield. And if you look at our historical cash flow, it's something that we can cover out of our operations and so, frankly, pretty comfortably. And that's how we're thinking about it. We're just -- it's a big decision to start, and we feel like our view of the future of this business is solid. Our capital structure is in good order. The management team, the operating team is doing a good job, and so it's time to start.

Earl C. Shanks

And relative to cash flow and cash flow opportunities, Kevin, I think the fundamental characteristics of the business, i.e. the cash flow on an annual basis on a normalized basis is going to be net income plus, is the cash flow characteristics of the Customer Management business as we operate it, and we would expect that to continue into the future fairly consistently. And as with this year, and maybe there will be a little bit of modification around that given some specific things that are going on, that's going to be the norm of the business, and so it does provide the baseline to support the dividend, which is why the board got to the conclusion to say now is the time to initiate a dividend.

Kevin D. McVeigh - Macquarie Research

Got it. And if I have time for one more, I mean, obviously, your outperformance relative to the market on the Customer Care is pretty striking. Can you just kind of frame out how much, in round numbers, was, out of 100%, call it, vendor consolidation versus just being in the right projects? And just any sense to kind of help frame the outperformance.

Jeffrey H. Fox

I mean, we really can't put it into those categories. What I would say is that, again, I think it's about us digging in and really focusing on quality over the last several years and having some available capacity. And so those things, I think, came together, and our team across every aspect of the organization in Customer Management just did a great job over the last couple of years getting us back where we want -- where we feel like we're getting closer to the earning power of the platform.

Operator

Our next question comes from Manish Hemrajani of Oppenheimer.

Manish Hemrajani - Oppenheimer & Co. Inc., Research Division

First of all, congratulations to the team and Andrea and Andre on the upcoming positions. You guys had talked about a dividend when your share price got to $20 in the past. So can you talk about the thought process in deciding on a dividend now? And how or does this dividend impacted by that outlook?

Earl C. Shanks

I must admit I don't remember having a lot of conversations about dividends before. I think that as we've simplified the business, it was one of the clear conversations with the management team and the board to actively look at paying a dividend. It's 1 of the 3 ways, as I said, that we think makes sense to provide value to shareholders. And so the conclusion was, particularly given the completion of all the major simplification efforts and our expectation that later this month, we're going to close the IM sale, it was really time to take that step and to be a market leader and to begin to pay a dividend.

Manish Hemrajani - Oppenheimer & Co. Inc., Research Division

Okay. And some of your peers are seeing strength in financial services and healthcare. Can you talk about the demand that you're seeing out there from a vertical standpoint?

Andrea J. Ayers

Sure, this is Andrea. We're seeing pretty good demand across our verticals. As I said before, financial services, we have some roll-off revenue from end-of-life technology products that you're seeing flow through that vertical for us. It's a vertical of focus for us where I think we have a lot of value to deliver to the customers we have in that segment. We're also seeing very strong demand and growth from healthcare. As that industry and market goes through change, they're seeking out more help from providers like us in the marketplace, and our value prop plays strong there. And as I said before, we're very focused on growing our technology vertical with our offerings globally in that space.

Manish Hemrajani - Oppenheimer & Co. Inc., Research Division

Last one for me. Anything in this quarter that [indiscernible] you from doing buybacks, and when should we expect you to be able to do buybacks again?

Earl C. Shanks

Well, obviously, as we look at the first quarter, the Information Management sale had an impact on what we were and were not able to do. As is our custom, we really don't comment on a forward basis in terms of what we may or may not be able to do in the marketplace, and we'll maintain that custom.

Operator

Our next question is from David Koning of Robert W. Baird.

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

And I guess my first question is just Q1 revenue growth, about 7%, and it's really been strong now for 4 quarters in a row. So we're hitting tougher comps it looks like. You guided really for the rest of the year revenue growth to average about 1% or 2% year-over-year growth after the final quarters of the year. Is that slower growth projecting, is that just simply tough comps, especially on the top 3 clients? Or is there something else that you're seeing in the business?

Earl C. Shanks

I think there's a couple of things there that we are expecting. One, certainly, in the second quarter this year, as we said, we're expecting a more normal seasonal pattern this year, and we didn't see that last year given what happened. So when you look at the overall numbers, I think that has an impact. I think the other pretty significant impact that we called it out and the reason we talked about it is the capacity impact. But as we look at what exists, what we can sell and what we have the ability to sell given what the clients want, it's certainly a little harder to get some of that done. And then lastly, I think we continue to be careful as we think about what's going to happen and what our clients are expecting and what's going on in the marketplace. And we've tried to give you numbers and have now tried consistently to give you numbers that we can go and deliver and we have a pretty high degree of confidence in. So I think it's a combination of those factors.

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

Okay. Okay, great. Secondly, your Orlando facility that you've had for a long time, you're now deciding to buy it. How much was rent on that facility? I guess now that you're buying it, I would imagine that there's an ongoing component of rent expense that actually goes away.

Earl C. Shanks

Yes, we'd actually converted that to a pure capital lease, so it's on the books as really an asset now. I think the $55 million is simply repayment of debt, and with the amount of cash that we have on the balance sheet, it seemed the best thing to do to repay that debt this quarter, which will get done here in the next several days.

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

That makes a lot of sense. How much of the $3.6 million interest expense this quarter was that? How much of that was that? I'm just kind of...

Earl C. Shanks

That's relatively low cost. It's in the 3% or 4% range in terms of an annual cost on the $55 million. So it will impact it somewhat, but certainly, the biggest component in our interest cost is the impact of the convertibles.

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

Yes, okay. My final question, you said free cash flow, this year, obviously, right -- I think I understood you right. Free cash flow this year, it's a little tougher to be in line with earnings given the Q1 outflows, so that $45 million of a few different things. Are there other of those kind of nonrecurring large cash outflow-type things that could be coming in the future, or did you kind of try to wipe off all those in Q1 just to clean up, to get everything more normalized on an ongoing basis?

Earl C. Shanks

No, they -- that's a great question. There's a bunch of moving pieces, which is why we gave you the expected year-end cash balance kind of adjusted for everything, and I talked -- we talked about $775 million approximately at year end, excluding the impact of buyback and excluding the impact of any acquisition. And with that, we try to take into account the impact of the sale and all the sale-related cash flows and anything else that could go on during the year. A little hard to have a perfect forecast in that regard, but that's about where we think it'll come out. And that's, frankly, why we gave you that number as compared to trying to focus on any of the other kind of interim numbers that may or may not include every other moving piece that might be there.

Operator

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

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

A couple of questions. One, I wanted to just ask you, Jeff, if you could talk a little bit about how you set up the company to succeed with potential acquisitions vis-à-vis where you believe the company was when you came. What changes have been made that you think that really were necessary for the company to really execute after you make an acquisition?

Jeffrey H. Fox

So keeping it -- I'm going to ask Earl to throw in. Because I've been doing this for so long, sometimes, I forget what I know. The simplification of the company and the focus of the company and the quality of the leadership team, I think those are the things that put you in a position to evaluate a target, understand the pros and cons of the target, understand what you're going to add to it and what your risks are and then to execute an integration plan. And the company, when I got here, was just too complicated operationally in its structure in terms of who owned what decisions and how you got things done. The company, Convergys, for all of its potential quality and capabilities, was just too complicated. So the simplification and the performance of this excellent management team give me confidence that we can pick up targets and understand them, manage them and get returns on them. And I just -- I know that may sound too simple, but that's -- I mean, I've lived it, and we're going to do it, but we're going to do it with discipline and patience, okay? So that is something that Andrea -- Andrea is a very focused, disciplined decision-maker, and frankly, I got to see this as a board member. I've enjoyed being her business partner here, and I think she's going to make these decisions with more background and experience in the customer care industry than anybody in this company or that I could. And so I'm very confident that she and I and Andre and the team will be disciplined and thoughtful about what we buy and how we buy it and then what we do with it. Does that make sense? Shlomo, did I miss another question? I only wrote down one question, sorry.

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

Well, actually, in that, can you just give us some context? I know you've done -- you've integrated a lot of acquisitions in your prior career. Can you just talk about how many you've done in your successor [ph]?

Jeffrey H. Fox

You're fading out. Let me also be clear, right? So the combination of Andrea, Andre and the team, right, and their experience and their ability to understand the target, I believe, and to me, it's motherhood and apple pie, right, when you actually buy an asset that you understand, then you can integrate it. And so I think it's really important for this team to take the experience and the focus that they have, and it's not just Andrea and Andre, it's a team, and evaluate the targets and in the diligence process, have detailed integration plans. And frankly, I don't know that Convergys was doing it quite that way. I don't know how other people do it. I just know that's how it's always worked well for me. And so when your diligence process and your integration plan are the same process, then I think your odds of success and your return on capital goes up. And again, we're setting up to do that. We've test-driven it. We've worked at a number of targets, and I will assure you that, at least, my view is the way this team goes about evaluating these targets looks right and feels right to me as sort of the new guy, the guy who's bringing some perspective on that. That is also why, as Executive Chairman, I'm going to stay pretty engaged, in fact, very engaged because deployment of that capital is important.

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

That's helpful. And then can you talk a little bit about the growth in the technology and analytics business? I mean, how much growth are you seeing there year-over-year, and are the margins now above the live agent business again?

Jeffrey H. Fox

So 2 things. I think we don't break it out specifically. I think we're seeing solid demand is what we've said, and frankly, that's as far as we're going to go. It's not enough of our business to move the top line materially one way or the other. But we are seeing -- again, I want to go back to my prepared remarks, are reflective of what we're seeing out of our account teams and out of our customers, which is they want more help on more complex choices and more complex issues, and that is involving analytics plus technology and the, what I'll call, best practices thinking that a global supplier across multiple industries brings to their particular set of puzzle pieces they're putting together.

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

Okay. And then can you talk a little bit about the competitive environment? Is there any change at all in the last 3 months or over the last year?

Jeffrey H. Fox

I will kick that to Andrea. I will say that at a macro level, we feel like there's demand out there for us to fulfill, and that's the primary way we think about it.

Andrea J. Ayers

And Shlomo, I mentioned a couple of things in my remarks around some vendor consolidation to larger players with more breadth and depth of capabilities out there to handle pretty much any type of transaction anywhere. We're seeing that. We're still seeing a stable pricing environment. Again, we see clients willing to invest in quality, and we see good demand, good strong demand for providers that can operate at scale, deliver the quality that customers are wanting and across that any contact type.

Operator

Our final question comes from Giri Krishnan of Credit Suisse.

Giridhar Krishnan - Crédit Suisse AG, Research Division

I guess a question for Andrea and Jeff. In your prepared comments, you spoke about differentiation in your account management strategy. Curious to get your thoughts, Andrea, on where you believe differentiation exists today and as we look forward over the next year or a couple of years, where might there be pockets of opportunity to refine your account management approach going forward.

Andrea J. Ayers

So I think the investments in account management, and you've heard us say it before on other calls and in other settings, are very important. Partnering with our clients and understanding where their businesses are going, their business needs are critical to being able to make sure we are aligned with that and able to support and service them over the years and over the long haul. So I think it's a very important capability for us to invest in and have. The closer we align by that, I think the other differentiating areas are breadth and depth of service capabilities. Again, we see our clients increasing in the complexity of their environments and the service requirements of their consumers, and so having the ability to handle any kind of transaction for them at scale in a quality way is another key differentiator for us. Also, the ability to handle that in any geography and get the right quality-cost mix for them is important and then surrounding that with technology that is helpful to them in driving efficiency and effectiveness and analytics that help them understand how their consumers are behaving so that we can align all of the model to support them better over time is very important.

Jeffrey H. Fox

So Andrea just described what we call market-of-one operational integration with our customers. We think because of our breadth and depth and investments and the investment we're making in account management, because account management is an investment choice, okay, the way we're doing it, we feel like, over time, we are in a position to be responsive and integrated with our customers in a rapidly changing environment. And we think that not everyone is going to elect to do all of that to the degree we're doing it.

Giridhar Krishnan - Crédit Suisse AG, Research Division

Okay. And you've talked about pricing being stable for a while. Any trends by vertical that you would specifically highlight that would be worth for us to know?

Andrea J. Ayers

No, not really.

Giridhar Krishnan - Crédit Suisse AG, Research Division

Okay. It's fairly consistent across verticals then?

Earl C. Shanks

Yes.

David Stein

Okay, operator, thank you. That's all the time we have today for questions. I'd like to add that Earl and I will be available the rest of the day to answer any additional questions about the results and the business outlook that we've discussed today. And with that, thank you all, and have a good day.

Operator

This does conclude today's conference call. You may disconnect your phones at this time.

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