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Convergys Corp. (NYSE:CVG)

Q4 FY07 Earnings Call

January 29, 2008, 11:00 AM ET

Executives

David Stein - VP of IR

David F. Dougherty - President and CEO

Earl C. Shanks - CFO

Analysts

Ashwin Shirvaikar - Citigroup

David Koning - Robert W. Baird

Shlomo Rosenbaum - Stifel Nicholas

Matthew Mccormack - Friedman Billings Ramsey

Jason Kupferberg - UBS Investment Research

James Kissane - Bear Stearns

Eric Boyer - Wachovia

Elizabeth Grausam - Goldman Sachs

Operator

Good day ladies and gentlemen, and welcome to the Fourth Quarter 2007 Convergys Corporation Earnings Conference Call. My name is Angelique. I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. [Operator Instructions].

I would now like to turn the presentation over to your host for today's call, Mr. David Stein, please proceed sir.

David Stein - Vice President of Investor Relations

Thank you, Angelique and good morning. I am David Stein, Vice President of Investor Relations. And welcome to Convergys' fourth quarter 2007 earnings call. This call is the property of Convergys.

With me on the call today are Dave Dougherty, our President and Chief Executive Officer, and Earl Shanks, our Chief Financial Officer. Dave will provide a summary of our operational performance, and Earl will follow up with financial results and forward guidance. Then we'll open the call for your questions.

Today's discussion contains a number of forward-looking statements, including future financial results, operating projections, and cost estimates that involve potential risks and uncertainty for Convergys. Future results could differ materially from those discussed. Please refer to Convergys' most recent news release and filings with the SEC for additional information, including risk factors. Currently, we do not intend to revise or update any forward-looking statements made during the call.

Also during the call, we'll discuss non-GAAP financial measures, including free cash flow. Free cash flow should not be construed as being more important than comparable GAAP measures. Convergys' management believes free cash flow provide the users of the financial statements with a more comprehensive understanding of the company's underlying performance. A reconciliation of free cash flow to operating cash flow is available on the Convergys website at www.convergys.com. Please note we now refer to the Customer Care segment as Customer Management and we refer to the Employee Care segment as HR Management.

Now, I'll turn the call over to Dave.

David F. Dougherty - President and Chief Executive Officer

Thank you, David and good morning. What I would like to do this morning is first, touch on how our 2000 results built on a long history of growth. Then, I'll touch on our view of the economy and its challenges and opportunities. Next, cover how we're going to grow revenue and operating income in 2008 and beyond, as well as, specific priorities we're focused on in the near term. And finally, talk about our strategy for long-term growth.

Now, a bit about our history of growth. Our 2007 results built on a decade long record of revenue growth, EPS growth and positive free cash flow. We've now grown revenue in nine of the last 10 years. We've grown EPS in seven of the last 10 years, and consecutively for the last three. And we've generated positive free cash flow every year of our 10-year history. We've also been recognized as a longstanding market leader and industry innovator. This is based on our operational experience, business process expertise and investment in state-of-the-art technology.

Along with our growth and market recognition, strong industry fundamentals are impacting the markets we serve. Total enterprise spending in our three global markets is over $0.5 trillion. The outsource portion is approaching $100 billion. The demand for outsourcing provides the tailwind for growth. These long established trends and the state of the markets we serve give me confidence in our ability to grow revenue, EPS and cash flow in the future.

We said over a year-ago that EPS in 2007 would exceed a $1.20 a share. We delivered $1.23. We said last month that EPS in 2008 would be $1.31 to $1.36. Based on our track record, I'm confident that we can deliver $1.31 to $1.36 in 2008.

I'll now spend a few minutes on the economy and its challenges and opportunities. We recognize the potential for U.S. or perhaps global recession. Slower growth of the overall economy could impact the growth of our business. In a soft economy, clients are under increasing pressure to cut costs and drive efficiencies. This has the potential in our opinion to drive more companies to outsourcing. When clients are under cost pressure, often they look to large, financially secured providers, like Convergys, to deliver excellent service levels at an attractive cost.

Evidence of this is the fact that our pipeline has grown significantly over the last or past several months. In fact, our Customer Management pipeline has grown 16% quarter-over-quarter from the fourth quarter... or in the fourth quarter this year versus the third quarter of this year. However, to be fair, in a few instances, we've been on the wrong side of client consolidation decisions, such as Sprint and AT&T Mobility in our billing business.

We're also seeing some large client decisions being delayed. They're not being lost; they're just slower to convert. Specifically, a number of the large customer management opportunities that we thought would convert in the fourth quarter are now being finalized in the first quarter. Again, these opportunities, these are not lost opportunities, but they are just taking longer to finalize than we anticipated.

To further dimensionalize this, we have seen, for example, in no surprise, an acceleration of demand in financial services. Two large financial institutions have verbally awarded programs, again, contract not finalized that when fully ramped, represent close to 2000 customer care agents.

From a cost perspective, an economic downturn of recession may actually help us in acquiring and retaining our customer service agents. For example, when the economy is strong, we've seen some challenges in hiring staff. In a downturn, labor availability increases, and wage rates are under less pressure. Also, a downturn represents or presents an opportunity to acquire assets and capabilities at attractive valuations with faster accretion.

On balance, we believe the changing economic landscape creates opportunity for Convergys.

Turning to our plans for growth in 2008, our challenge and opportunity in 2008 is to leverage our global platform to drive growth and revenue and operating income. Revenue increases in 2008 are primarily going to come from accelerating growth in customer management. We'll accelerate growth in customer management for three key reasons, specifically, more sales resource, volume and price increases with existing clients and new contract wins and anticipated pipeline conversions.

First, we've added more sales resource throughout 2007. This increased investment in sales staff has strengthened our vertical market expertise, and has resulted in a larger, higher quality pipeline. We've added close to a $1 billion in total contract value, in the last nine months.

We're also increasing our geographic coverage. Earlier this month, we named a Vice President of Canadian Business Development. Canadian revenue can and will help reduce our currency exposure. Our investment and emphasis on sales is producing incremental, attractive deal flow.

Second, we'll grow revenue in 2008 through volume and price increases with existing clients. Based on key client forecasts, we expect to see volume increases on existing programs across the vertical markets we serve. On a number of accounts, we have CPI adjustments or are in the process of negotiating price increases.

Third, we're closing new business across many verticals. Recent wins have been with communications, financial services, technology and healthcare clients. For example, earlier this month, we announced a three-year agreement with one of the largest financial services companies in the world. We will perform debt collections for the firm's credit card business unit. Again, a service offering that could see faster growth in the down economy.

We've also made inroads into the healthcare market, announcing consulting services agreements with two large pharmacy benefit management companies. This could lead to care revenues downstream.

We're winning business, leveraging our leadership position and key strengths. Our large geographically diverse infrastructure allows us to provide blended multi-shore solutions to more than half the Fortune 50. Everyday hundreds of thousands of our client customers are interacting with more than 60,000 of our agents.

We're also focused on growing operating income in 2008. Growth in operating income will come from improvements in Customer Management and HR Management, and will offset the anticipated decline in Information Management.

Our Customer Management plan calls for operating income growth over the course of 2008. Improved profitability will come from increased volume and price increases, general cost reductions and productivity improvements.

I've already discussed the volume and price increases that will contribute to growth in operating income. We're continuing to reduce overhead as we grow by implementing additional controls and cost actions that improve the profitability of all the businesses.

Operating income growth will also be driven by productivity improvements in three key areas, agent training, agent retention and asset utilization.

First, I'll cover agent training. We're leveraging our e-learning assets in HR Management to reduce the amount of time customer management agents spend in training. We find when agents come out of this new training, they're more fully proficient sooner than they would have been otherwise. For example, for a large communications client, we cut training time by 20%. Agent performance is about 15% better in terms of proficiency.

The second area driving improved results is agent retention. We're making greater investments in recruiting and hiring processes in order to get a better profile of agents from the start, which improves retention. We implemented improved agent career paths and compensation plans and transformed the team leaders' role, so they could spend more time coaching and mentoring agents.

Third, we're making the best use of our people and facilities around the globe. Given the weakness of the U.S. dollar, we're closing unprofitable sites and moving work to locations elsewhere in the world. For example, we're shifting some business from Canada to the Philippines.

We've also reduced the size of our new contact centers to help mitigate the risk of stranded capacity. And we're increasing our labor pool without adding additional facilities, by expanding our use of remote at-home agents. Just in the last 12 months, we've doubled the number of remote agents.

Now, I'd like to talk about how we will improve HR Management performance in 2008. To be successful in 2008, we have to successfully complete key implementations and drive additional operating efficiencies. We've been making excellent progress with our client implementations. This includes the large client where we had implementation challenges in 2006 and early 2007. While no two are exactly alike in terms of size and scope we've been able to reduce the time to complete key phases of our most complex global implementations. For example, we have seen more than a two-thirds reduction in time to complete those same key phases for earlier implementations. This shows our ability to leverage key learning from one implementation to realize significant improvements in the next.

When we complete the implementations that we expect to go live in the second half of 2008, we will see a substantial reduction in our operating loss. Beyond 2008, I believe prospects are strong for HR Management to add significantly to earnings in the long term.

My confidence in this business is based on our experience, improving the productivity and profitability of HR contracts over time. For example, with one of our long-term clients, we've been able to reduce staff levels by more than a third and increase employee self-help adoption rates to over 70%.

Contribution margins have expanded from breakeven at go-live to more than 25% today, and we expect to see further margin improvement over the remainder of the contract.

In addition to our progress with implementations in 2008, we'll continue to pursue new clients that fit our transformation model and capacity. A combination of study execution and selective new business will drive significant margin expansion and keep us on track to future profitability.

To achieve overall Convergys operating income growth in 2008, we'll also have to sustain profitability in Information Management. Given the revenue decline and resulting margin pressure this year, we'll bring costs in line with the changing revenue mix to preserve double-digit margins. This means rationalizing data processing, labor and infrastructure expense and focusing R&D and only the highest impact areas.

While this business will continue to see the effects of platform consolidation in North America in 2008, we're seeing increasing opportunities to provide next generation business support system capabilities around the globe.

In terms of near-term priorities, our key opportunities and challenges for the first quarter of 2008 are first, for Customer Management, closing more deals in the pipeline, ramping existing and new clients, and further improving productivity. Priorities for HR Management are meeting implementation timelines to ensure key milestones are reached in the second half of the year, improving margins with clients already in live operation, and selectively pursuing new business.

For Information Management, we're focused on gaining share of client spending on software and services and maintaining tight cost controls. We'll also continue to streamline operations to drive our costs across the business. That sums up our plan for growth in 2008 and our near-term priorities.

We're focused on driving growth in revenue and operating income for the long term as well. In addition to making further progress in the areas I've discussed, we're carving out a leading position in the relationship management market. Let me take a minute to discuss our relationship management approach and how it repositions Convergys for accelerated growth.

In November, we announced creation of a new Relationship Technology Management group. This group will leverage our solid foundation of experience, expertise and technology to support excellent customer experiences for our clients all over the world. Today, companies are challenged, managing their customer interactions. Customers engage our clients via many different information channels. These include phone, IVR, the web, email, games, television, mail. Our relationship management value proposition improves the way clients manage customer interactions.

This creates strategic advantage for our clients by combining analytics, multi-channel contact technologies and self-help. We are able to derive more value from our clients' relationships with their customers and their employees.

We do this by identifying enterprise wide business needs, applying our unique technology and expertise to deliver streamlined global solutions, and then converting customer and HR interaction data into strategic advantage for the client. We use our balance sheet to invest in this effort as appropriate. You'll be hearing more about our relationship management solutions in the coming months.

In summary, we have a leading position serving large and growing markets. We have a strong global platform for growth and a track record of solid operating performance. We delivered the EPS we told you we would deliver in 2007. We are taking decisive action to drive another year of record results, and I am confident we will deliver EPS of $1.31 to $1.36 in 2008.

At this time, I'll turn the call over to Earl. He'll ill review our financial performance and forward guidance.

Earl C. Shanks - Chief Financial Officer

Thank you, Dave and good morning. First, I'll briefly summarize our financial performance. Convergys revenues increased to over $2.8 billion in 2007. Fourth quarter revenue was down slightly to $714 million. Revenue grew in HR Management and Customer Management and as anticipated, declined in Information Management for the quarter and the year. Full year net income was $170 million, or $1.23 per share. Fourth quarter net income was $45 million, or $0.34 per share.

In the quarter, Customer Management revenue increased to $474 million. Growth with several communications clients offset declines in our other vertical. At the end of the fourth quarter, Customer Management had approximately 23,500 employees in Asia. This was an increase from 21, 300 employees in the fourth quarter of 2006. More than a third of Customer Management employees now work in Asia.

Customer Management operating income was $35 million, down 34% in the fourth quarter. This reflects increased labor costs, other costs associated with ramping new business and the impact of the weakened U.S. dollar.

While Information Management software and services revenue outside North America increased, total revenue declined 9% to $176 million in the fourth quarter. This was due to the anticipated data processing revenue decline. Operating income was $33 million at a margin of 18.8%. This excellent operating performance reflects tight cost controls and the continuing mix shift to license software and services.

HR Management revenue was up 11% to $64 million in the quarter. This reflects growth with clients in early-stage operation. The operating loss improved 54% to $6 million. This was largely due to improved employee productivity.

Note that our consolidated amortization expense for the fourth quarter includes a one-time write-off of approximately $6 million for certain acquired intangible assets.

Dave discussed why we believe revenue and segment operating income will grow in 2008 and provide EPS growth. Management of other items, below operating income, can also help drive the EPS growth. Let me highlight four items in this phase, the long-term incentive plan, cellular partnership, capital structure and effective tax rate.

In terms of the incentive plan, we're moving more of our compensation to pay for performance. This is away from some of our time-based aspects we've had in the past. We expect the performance of our cellular partnership to improve over time as our partner manages that business well.

The capital structure, including interest expense and shares outstanding, are also EPS enhancers. With interest expense, we're very attentive to how we manage and utilize cash and its impact on borrowing costs. Regarding stock, we've been aggressive buying shares, which has been accretive to earnings.

Finally, we continue to look the way to reduce our tax burden to improve our earnings. Looking at the quarter just ended, let me review how we did on these items below the segment operating income line.

During the quarter, we incurred $4 million in long-term incentive plan expenses, versus $14 million in the prior year. This decline largely reflects the impact of recent share price performance and Convergys' pay-for-performance policy.

Earnings from the cellular partnership were $7 million in the fourth quarter compared to $5 million in the same period last year. For the full year, cellular partnership earnings were $14 million compared to $12 million in the prior year.

Interest expense declined in the fourth quarter to $4 million, compared to $6 million in the same period last year. This largely reflects the lower level of debt in the current period compared to last year.

The effective tax rate for the fourth quarter was 26%. As anticipated, free cash flow improved sequentially to $75 million in the fourth quarter. This brings the full year free cash flow to $109 million. DSO was 72 days in the quarter, down 5 days compared to the third quarter. Deferred charges net of amortization and implementation revenue, increased $2 million in the fourth quarter. This reflects an increase in client payment of implementation expenses.

Capital expenditures for the quarter were $24 million. For the year, capital expenditures were $101 million, or about 4% of revenue. Net debt decreased $28 million sequentially in the fourth quarter to $130 million. Our debt-to-capital ratio is now 15%. We bought more than 2% of shares outstanding in the fourth quarter. The share buyback program reflects our confidence in the long-term outlook for the company. Our strong balance sheet provides the financial capacity for further stock purchases and M&A activity.

I'll now move to a discussion of our forward financial guidance. As you heard in Dave's remarks, despite the potential for some short-term disruption from a challenging economic environment, we are taking action in many areas that have the ability to drive overall growth in revenue and operating income in 2008. We're leaving our 2008 guidance unchanged. We expect 2008 revenue of 2.85 to $3 billion and EPS of between $1.31 and $1.36. This guidance includes expectations for each business segment.

In Customer Management, for the full year, we expect a year-over-year increase in revenue of about 7 to 12% and operating margin of approximately 10%. On a sequential basis, we expect first quarter revenue and profitability to be about the same as the fourth quarter. Once we've fully ramped new large client programs in the second half of the year, we expect to see strong, sequential and year-over-year quarterly revenue growth.

Regarding expectations for Customer Management operating performance, we'll see a tough comparison in the first quarter due to the 100-basis point margin pickup in the first quarter of 2007, related to a one-time resolution of a prior cost. I also want to point out the full year negative impact of the weakened U.S. dollar on operating income will be much worse than in previous years.

For Information Management, revenues will be up approximately $625 million, and operating margin should exceed 15% for the full year. And for a significant year-over-year decrease in revenue in the first quarter, largely due to a more than $30 million decline from North American platform consolidation, we expect relatively flat Information Management revenue over the course of the year.

In HR Management, full year revenues will be approximately $250 million, and the operating loss will improve to less than $15 million.

Sequentially, revenue will decline slightly in the first quarter due to completion of open enrollment and the rollout of some legacy programs. We expect modest sequential and year-over-year quarterly revenue growth in the second half of the year, as we begin recognizing revenue upon completion of a key implementation phase for large clients.

As Dave said earlier, we'll see a substantial reduction in our operating loss in the second half of the year, because of the large implementation. At the corporate levels, we'll have a charge in the first quarter of 2008 of approximately $3 million, reflecting a payment pursuant to the senior executive retirement plan. For the full year, cash flow from operations should exceed $250 million and free cash flow should be aligned with that income.

Overall, there are significant opportunities to create shareholder value in 2008, by accelerating revenue growth in Customer Management, implementing key programs in HR Management and preserving double-digit profitability in Information Management.

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

Question And Answer

Operator

[Operator Instructions]. Your first question comes from the line of Ashwin Shirvaikar, please proceed sir.

Ashwin Shirvaikar - Citigroup

Good morning guys.

David F. Dougherty - President and Chief Executive Officer

Hey Ashwin.

Ashwin Shirvaikar - Citigroup

My question is about the... I know you don't give specific quarterly guidance any more, but thanks for the commentary. But this looks like it's going to be a back-end loaded EPS year with the usual sort of 40-60 split first half, second half. Could you... can you sort of confirm that?

David F. Dougherty - President and Chief Executive Officer

Ashwin, I certainly agree that this will be a back-end loaded year. We'll have a bit of a slow start, as we talked about in customer care as with the continuation of the performance from the fourth quarter into the first quarter. And we see that ramping. When we look at that business, we see that ramping, beginning to ramp in the second quarter, then ramping pretty significantly in the balance of the year.

Ashwin Shirvaikar - Citigroup

Okay. Are you affected by the recent cuts at Sprint? That wasn't clear. Is that, what is giving you sort of some pause? Is that what you meant by your commentary, your cautious commentary on the project signings?

David F. Dougherty - President and Chief Executive Officer

Ashwin, certainly relative to Information Management, we are impacted by Sprint in the quarter, in the first quarter. And I touched on that in terms of the data processing revenue decline. We're not seeing at this point significant changes on the Customer Management side.

Ashwin Shirvaikar - Citigroup

So what results [ph] in the cautious commentary? I mean, is it sort of the RFP project sort of being kicked up and CEOs and CFOs being, getting involved. Is that what is causing the delay or what's causing the delay?

David F. Dougherty - President and Chief Executive Officer

Yes. I mean we... again this is Dave. We feel very good about the pipeline in total. And you heard us reference several times, the increases that we've been seeing there. But having said that we also talked on the last call about a number of major opportunities that we were close to signing. And quite frankly, we saw those move out a bit and move out of the fourth quarter and move into our expectation is they'll get finalized in the first quarter. Now what that exactly is attributed to obviously varies by client.

What I am confident is this plan is still to go forward on those. So it's a delay, it's not a decision to not go forward. So that's principally the driver behind our cautiousness here in the first part of the year.

Ashwin Shirvaikar - Citigroup

Got it. Thank you.

Operator

Your next question comes from the line of Dave Koning of Robert W. Baird. Please proceed.

David Koning - Robert W. Baird

Yes, good morning guys. And I just wanted to know a little bit more about... in Q4 it looked like the JV income and the tax rate, both beat us quite substantially. Was Q4 operating income roughly in line with where you expected or was it a little bit disappointing?

David F. Dougherty - President and Chief Executive Officer

I think in general, the bits and pieces that came together in the fourth quarter were fairly consistent with what our expectations were when we looked at the quarter... a quarter ago as we talked to you about it. If you look at the... to effect on, we worked hard to bring the tax rate down. Our tax rate is actually up a bit from where it was in fourth quarter of last year. So we were quite able to achieve everything we did last year on that line.

And with respect to the cell partnership I think if you look at the... you almost have to look at that given how it seems to behave on an annual basis. And it's up from about $12 million in income from the cell partnerships for the year last year to $14 million, this year.

Earl C. Shanks - Chief Financial Officer

Yes Dan, it's kind of a pretty consistent improvement in terms of what we would generally expect.

David F. Dougherty - President and Chief Executive Officer

Dave, I agree with everything, the Earl just said I guess just referring it to the quarter in the press release, my view is we can do better. And we need to grow the company faster and more obviously committed to do that so, that's our expectation as we move through 2008.

Earl C. Shanks - Chief Financial Officer

One other thing I highlighted in the quarter in terms of operating income David and you heard my comment and I am sure but that we did take about $6 million of additional amortization in the quarter that fell into operating income, which from the line items you are looking at you might have not noticed that when you thought about it. And that's just related to some intangibles we wrote off in the quarter.

David Koning - Robert W. Baird

Okay, that's great to know it. And then when we look at 08, should we think of the tax rate be in the 32% range, or so and JV income be pretty similar again?

Earl C. Shanks - Chief Financial Officer

I think that's a fair place to start. And obviously we're re going to work hard on trying to drive both of those would be better.

David Koning - Robert W. Baird

And then, one just one final question. Did you... when you said $30 million decline in Sprint, did you mean sequentially from Q4 to Q1, that the data processing line would be down about $30 million?

Earl C. Shanks - Chief Financial Officer

That's year-over-year numbers.

David Koning - Robert W. Baird

Year-over-year. All right, great, thank you.

David F. Dougherty - President and Chief Executive Officer

Thanks Dave.

Operator

Your next question will come from the line of Shlomo Rosenbaum of Stifel Nicholas. Please proceed.

Shlomo Rosenbaum - Stifel Nicholas

Yes, I want to start off just with the longer term question. Given what's going on in the... with the U.S. dollar and the margin in customer care. I mean a little while ago we were talking about 15% long term margin in this business. Can you sort of talk about where you would expect the longer term margin is? Is that sort of in line with the guidance for 2008 at this point in time? We sort of lowered off a bit, then I have a couple of follow up.

David F. Dougherty - President and Chief Executive Officer

Well Shlomo, I'll start rock [ph] in Canada. I mean we remain committed long term to 15% margins in this business. And I think we'll talk in more detail at our upcoming analyst meeting in terms of how we plan to get that. That will be a combination between growth and our live agent business. But as we build out this relationship management technology platform, more and more of our customer contacts will be handled in automated fashion, which will have higher margins.

So, it will be a change in our mix of revenue to achieve the long term margins in the business. But we continue to believe that has... I mean that is a long term potential of the business. In the short term, some of the currency challenges that we face might be, we've got to take some pretty aggressive action to redeploy and move our business to reduce our exposure in some of the key areas where we're being hurt. Most notably we're being hurt today in Canada, and we are taking action to close centers there and move work to other geographies. In addition we are... as I noted in my comments, we've put in place a senior executive there to drive business in Canada which again will help us from a currency exposure standpoint. Earl?

Earl C. Shanks - Chief Financial Officer

And certainly from a 2008 perspective I think you have to look at it and say it's certainly holding margins down in 2008. As I said this will be the biggest year-over-year impact of currency that we have seen on a dollar basis and on margin point basis. So it's pretty significant in the near term, doesn't change our long-term expectations for the business. But it's a lot to deal with now.

Shlomo Rosenbaum - Stifel Nicholas

Okay. And just a question on the tax rate. Tax rate was down a lot. Normally, I expect the mix of business from international which would affect tax rate to be in the contract center business but that margin was down. Does that mean that you would hire sales in the billing business internationally and that's what brought the tax rate down just trying to understand that?

David F. Dougherty - President and Chief Executive Officer

Yes, it was primarily on the billing side. The software and services model which is as you know primarily the model we are driving internationally. We've seen good success with in this quarter. That's what helped the margins in information management and the tax rate change is very much related to that change.

Shlomo Rosenbaum - Stifel Nicholas

And if I get to slip in one more, how much of the revenue would you say slipped to the right from delayed deals? Was there any of that or really it's just a matter of the timing of when you would expect to ramp up those deals? And then if that's moving from the fourth quarter to the first quarter does that imply that it's a little bit tougher for you to hit, let's say the mid to top end of the 2008 guidance? Or how should we think of that?

David F. Dougherty - President and Chief Executive Officer

Well obviously somewhat to the extent that we ramp programs later because we sign them later that's revenue slipping in that process. So there is certainly a shift there. We didn't change our guidance because we still think there is opportunities on the top and bottom end, that have to do what we described. And we can see opportunities to go drive to those numbers in it. If we've seen different overall numbers when we looked at it, then we would have modified the guidance.

Shlomo Rosenbaum - Stifel Nicholas

One last thing. Can you give me the bill... what the ending share count for the quarter? Just to what you ended the quarter with, I am sure kind of after all the buyback.

David F. Dougherty - President and Chief Executive Officer

Shlomo, I don't have that here sitting in front of me. I mean I think our average for the quarter where we ended up is 132.9 or something like that for the full quarter. But I don't have in front of me. David will follow-up with that one.

Shlomo Rosenbaum - Stifel Nicholas

Okay. Thanks a lot.

David F. Dougherty - President and Chief Executive Officer

Thank you. Operator?

Operator

Your next question comes from the line of Matthew Mccormack.

Matthew Mccormack - Friedman Billings Ramsey

Hi, good morning.

David F. Dougherty - President and Chief Executive Officer

Hi Matthew.

Matthew Mccormack - Friedman Billings Ramsey

Hi, how are you?

David F. Dougherty - President and Chief Executive Officer

Good.

Matthew Mccormack - Friedman Billings Ramsey

The first question relates I guess the CapEx you did about $100 or spent about $100 million this year. So what should we think about next year? And in light of that with a strong ramp you are expecting in customer care, are you going to have to continue to add to past years or is it more of increasing the utilization of your existing facilities?

Earl C. Shanks - Chief Financial Officer

Clearly in 2008, we need to do both of those things. Our utilization in 2007 wasn't where we wanted to be, we can make that better in 2008. We expect to... but we see... continue to see a lot of demand in the business. And so yes we will continue to be adding capacity in that process as well because of the demand out there that we see in the very active pipeline and Dave touched on the growth in the pipeline we have seen in the second half of the year.

I think from a capital spending standpoint, I've talked for a while about 4% to 5% revenue is the right number to think about for that one. I continue to believe that's about the right range. Obviously we have done the last two years at about four or little less. And certainly it's something that we are continuing to be attentive to minimize the capital to the extent we are able to but it's some place in that range where I expect it to be.

Matthew Mccormack - Friedman Billings Ramsey

Okay. And you mentioned moving some more from or migrating some more from Canada to Philippines. But you didn't mention India. And you are probably the only BPO provider that's at significant scale on both locations. Could you comment if there is notable changes either for the better or for the worse in those two offshore geographies excluding of course FX?

Earl C. Shanks - Chief Financial Officer

Well, we have seen certainly there is demand for both of those geographies. The growth rate that we have seen in the Philippine has been a bit higher than the growth rate in India for the past probably year or plus. Certainly but we still can continue demand and expect continued demand there in both geographies..

David F. Dougherty - President and Chief Executive Officer

And robust growth in the U.S.

Earl C. Shanks - Chief Financial Officer

Right.

Matthew Mccormack - Friedman Billings Ramsey

Okay and then just last question I guess for Dave. In terms of your comments on the economy, can you talk about I guess the differences or structural changes if you will, with your business now versus the last recession that we had in 2000-2001?

David F. Dougherty - President and Chief Executive Officer

Well I think we have done a very good job of streamlining the company and taking out costs. And I think many folks have given us pretty high marks for that for a good number of years. And so we certainly as we said in the comments we are going to continue to do that and be aggressive about that. But I think our cost structure is better suited for tackling a difficult economy. Having said that, we are also making investments I believe in smart areas. I mean we are spending more in sales for example because we believe the potential of the market is such that that's a good investment. We are seeing that in pipeline growth. So we don't want to be penny wise and pound foolish. So but we are trying to balance to make sure we make the right investments in key areas to our strategy sales, relationship management that I talked about, we think are going to drive an accelerated growth rate as we get through 2008 and beyond.

Earl C. Shanks - Chief Financial Officer

And I think Matt if you look where we are at from a diversification of revenue standpoint, revenue base is more diversified across the company today than it was in the 2000-2001 time period. And as you know even through that time period I think that the slowest growth year so to speak we were flat. There wasn't a year when we saw decline in revenue. So we are obviously recognized the impact, that, that the market economy can have on us but we think that just modifies the growth somewhat.

Matthew Mccormack - Friedman Billings Ramsey

Got you. Okay, thank you.

David F. Dougherty - President and Chief Executive Officer

Thanks.

Operator

Your next question comes from the line of Jason Kupferberg of UBS. Please proceed.

Jason Kupferberg - UBS Investment Research

Thank you good morning guys.

David F. Dougherty - President and Chief Executive Officer

Hey Jason.

Jason Kupferberg - UBS Investment Research

Hi. I want to start with the question on the pipeline. And if you can just talk a little bit about your confidence in terms of the conversion there. It sounded like in the prepared remarks you were talking about on a couple of down select maybe not for words in your mouth but if you can clarify kind of where you stand on, deals that you may have been down selected for or actually have verbal commitments versus those that you are still in the RFP/competitive phases on?

David F. Dougherty - President and Chief Executive Officer

Well I did specifically talk about two financial services opportunities that we have been verbally awarded. I was careful to say our contract has not have been finalized but --

Jason Kupferberg - UBS Investment Research

Right.

David F. Dougherty - President and Chief Executive Officer

Again our expectation was that we were going to get those done in the fourth quarter and now those have moved to the first quarter which again pushes out the ramp and then the eventual revenue from those. But I am confident that we will get those over the finish line and that will get our growth back in the financial services sector. We've continued to see strong growth in communications and a bit of a downturn in financial services. And certainly this will get it back on track and help to those [ph] point continue to diversify our revenues in these other vertical markets.

Jason Kupferberg - UBS Investment Research

Are these two deals alone sufficient to get you largely to where you need to be in terms of your 08 growth guidance for this business? So what can be done for...

David F. Dougherty - President and Chief Executive Officer

No, it's a hopefully an indicator to folks to the kind of activity that we are seeing. And I said it could be... those two opportunities alone are about 2000 agents.

Jason Kupferberg - UBS Investment Research

Right. Okay.

David F. Dougherty - President and Chief Executive Officer

You can start to do the math on it and we... so we need to do more than that but we are very encouraged by the activity. And I referenced even the growth we have seen in the pipeline quarter-over-quarter, the fourth quarter being up 16% and total contract value from what it was in the third quarter.

Jason Kupferberg - UBS Investment Research

And the big telco customers that had cut back, I guess this is around mid 07 when we first learned about that. Has there have been stabilization in that account or can you describe any recent trends there?

David F. Dougherty - President and Chief Executive Officer

I would say stabilization we are starting to see signs that we will see growth with that customer here as they like many of our clients are reducing the number of vendors they work with. And that may be another sign of the tough economy is clients want to work with large financially secured vendors like ourselves. We have seen them cut down in the number of vendors and that means shifting more business our direction. So we'll see some growth with their customers, my expectation here as we go through 2008.

Jason Kupferberg - UBS Investment Research

Okay and last question on the M&A front. You mentioned... as you have been mentioning for the last few quarters that you might incline to deploy the balance sheet along those lines. Obviously equity prices have come down quite a bit over the last few months since your last call. I mean do you see incrementally attractive opportunities out there? Or are you still kind of satisfied with where you were last quarter?

David F. Dougherty - President and Chief Executive Officer

We're focused, very focused on a few key areas where we want to add capability and fill in gaps. And so we remain focused against those and working those and certainly market conditions make it even more interesting for us to feel to make some of those moves.

Jason Kupferberg - UBS Investment Research

Okay, thanks.

Operator

Your next question comes from the line of James Kissane. Please proceed sir.

James Kissane - Bear Stearns

Hi David and Earl. Thanks.

David F. Dougherty - President and Chief Executive Officer

Hey Jim.

James Kissane - Bear Stearns

Earl, I think you mentioned the $6 million bump up and the amortization in the quarter. Can you just give us a little insight in terms of the intangible assets that may have been written down?

Earl C. Shanks - Chief Financial Officer

Yes. There was actually a couple of different ones Jim and they were across the businesses. We did an evaluation of those assets as we normally would. And as we looked in this quarter we concluded we needed to write them down and so we did. Really, not much more complicated than that. You've pretty typically do evaluation of your intangible assets on a regular basis. And that... it was soft... related to some of the software we had acquired in some prior years.

James Kissane - Bear Stearns

Okay. I know you're going to remain aggressive on the cost cutting front, but do you think you're complete with the big cost actions given the current outlook?

Earl C. Shanks - Chief Financial Officer

Jim, that's something that we are continuing to probe at in the business and looking for ways to improve performance across the business. So, in many ways I would say it's something we'll actively do always. And in fact, I think that you see that in most businesses that they actively go after costs. And so it becomes almost a way of life as compared to a one time event.

David F. Dougherty - President and Chief Executive Officer

But Jim just to counter balance, as I said before to one of the other questions, we are going to keep doing as Earl said. At the same time, there are some key areas that we have got to invest in. And we need to be investing in our sales resource to make sure we're continuing to drive revenue growth, and be investing in some of these new areas like relationship management.

James Kissane - Bear Stearns

Okay but specifically in terms of like IMG. Do you think that's right size for the new data processing revenue stream that you see out there?

Earl C. Shanks - Chief Financial Officer

Well, I think what we have said in our guidance Jim is that we expect operating margins in the 15% range in that business this year. And what we have said about that long term is that we expect operating margins close to 20%. So we have got some work to do yet there.

James Kissane - Bear Stearns

Okay and then just last question. Any update on the breakeven levels for employee care, is that still $300 million?

Earl C. Shanks - Chief Financial Officer

Not much change.

James Kissane - Bear Stearns

Okay and that still seems reasonable in 2009, the first half of '09?

Earl C. Shanks - Chief Financial Officer

What we have said is that we expect to be above breakeven in 2009.

James Kissane - Bear Stearns

Okay, I am sorry Earl.

David F. Dougherty - President and Chief Executive Officer

Hopefully you noticed to me the encouraging progress in that business in the fourth quarter or so.

James Kissane - Bear Stearns

But it seemed like you didn't talk about it too much on the call?

David F. Dougherty - President and Chief Executive Officer

Well I did in my remarks. I'll tell you I am very encouraged by the progress we are making on these implementations. And we are in such a different place than where we were a year ago. And that is key to driving the profitability of the business, because we complete the go live, so we get the go live, we then can recognize the revenue and the profit associated with that. And it's acute [ph] for us.

Earl C. Shanks - Chief Financial Officer

And Jim if we didn't talk about it and I'll go back and touch on a couple of things we said just to be clear. Obviously David points the progress in the fourth quarter. We also are seeing pretty steady progress across the implementation on time, on budget. And we expect as a result of that in the second half of the year that we'll see a meaningful further improvement in profitability in that business or reduction or loss in that business. And so we've got pretty clear timelines laid out and strong expectations as to when we're going to get there. So I think we feel very good about our progress in that business for the last six or nine months, in particular. And that's showing up... beginning to show up in some of the numbers and more the costs.

David F. Dougherty - President and Chief Executive Officer

Right. Yes exactly.

James Kissane - Bear Stearns

All right, I heard you this time, thank you.

C: David F. Dougherty: Operator.

Operator

Your next question comes from the line of Eric Boyer. Please proceed.

Eric Boyer - Wachovia

Hi, thanks.

David F. Dougherty - President and Chief Executive Officer

Hey Eric.

Eric Boyer - Wachovia

How are you doing?

David F. Dougherty - President and Chief Executive Officer

Good.

Eric Boyer - Wachovia

Can we talk about the underlying growth dynamics in Information Management business? There I didn't hear too much about that, but if we go into more detail, that'd be great.

David F. Dougherty - President and Chief Executive Officer

Well just in overall terms, again we guided for the year that the revenues will be down for Information Management and largely, that being driven by consolidation in the North American market. We've talked before on what the key drivers there are in terms of that. And then, beyond that, we continue to believe and as we talked about that, there is tremendous opportunity for growth in this business on a global basis. And so we're continuing to work on some significant opportunities around the globe as well as, we're beginning to see a renewed interest in outsourcing in this space, which is encouraging to us.

Eric Boyer - Wachovia

Are you seeing any pause from customers to spend in this area at all, the economic concerns out there?

David F. Dougherty - President and Chief Executive Officer

In certain areas, which again I think billing and rating, some of our key, which is kind of our wheel house customers, as my take is continue to look to invest and spend there. That's key to driving their strategy. And in total, again in the Information Management business, we're seeing a higher pipeline. So that's encouraging to us.

Earl C. Shanks - Chief Financial Officer

And I... just to kind of remind you where the numbers are, when you look at them, certainly we have seen declines in the data processing side. But when we look at the business, the growth trend is driven by the license and maintenance part of that business. And this we've touch on, that's primarily internationally, but our license and their maintenance business for the full year 2007 will be up double digits, from where it was full year 2006. That for obvious, is the key growth trend in the business that gives us confidence in the future.

Eric Boyer - Wachovia

Okay, great. And on the HR BPO pipeline, could you just discuss that? How much TCV [ph] are you comfortable taking on or expect to take on in 2008?

Earl C. Shanks - Chief Financial Officer

Well there is... as we've talked about we manage pretty carefully what we go after. And so we're actively looking at what's out there in terms of opportunities, which opportunities we think we can win, where the clients are focused on the kind of things that will perform well for them. I think we have the ability to take on the types of opportunities we took on in 2007. The challenge for that is it's a very long sale cycle, and you got to go, get those deals closed. So I... given how we are managing the process, I am not per se worried that we have the ability. I think we quite easily can take on what we're going after. And I think directionally that would... certainly we'll be very happy to do in 08, what we did in 07.

Eric Boyer - Wachovia

And finally just, any further detail you can give on share count for '08, how aggressive you may be on the share buyback?

Earl C. Shanks - Chief Financial Officer

Well, I tend not to telegraph in advance what we're re doing from our share buyback standpoint. So I won't do that this time either. Obviously we've been quite aggressive in 2007, because we think the stock represented a great value and great opportunity there. At the moment it continues to represent a great opportunity. There are also other places to deploy assets that provide great returns for our shareholders, and we'll balance pretty carefully.

Eric Boyer - Wachovia

All right thank you.

Earl C. Shanks - Chief Financial Officer

Operator we have time for one more question.

Operator

Okay. Your final question is from the line of Liz Grausam. Please proceed.

Elizabeth Grausam - Goldman Sachs

Thanks a lot. Just wanted to talk a little bit more about the composition of the pipeline and CMG that gives you confidence in the 7% to 12% growth. How much of that pipeline is coming from existing customers that may already have a pre-existing relationships, their decision making processes could be a little bit swift or versus new customers coming to outsourcing potentially even for the first --

David F. Dougherty - President and Chief Executive Officer

Hello.

Operator

I am sorry. Her line must have dropped. I do apologize.

Earl C. Shanks - Chief Financial Officer

We'll respond to the question in any event. I think the... it's fair to say in this business that the growth of the existing customers is always the most important quantitative piece of growth when you look on a quarter-to-quarter basis or a year-over-year basis. That certainly continues to be true today and is true that there is a lot of growth with existing customers built into the pipeline. At the same time, no, as Dave touched on, we have done a good job of adding footprints and adding potential new customers that are outside the existing list which will provide long-term growth in the business. And so we are getting.... continuing to get pretty good mix from both of those when we look at the business. More of it, more than of half of it being from the existing side but a significant portion as well from new customers. So with that we will close the call at this point.

David F. Dougherty - President and Chief Executive Officer

And I would like to add that Earl and I will be available the rest of the day to answer any questions about the fourth quarter results or the guidance that we have discussed on the call. So thanks for your participation today.

Operator

Ladies and gentlemen, we appreciate you attendance at today's conference. This concludes the presentation and you may now disconnect. Have a great day.

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Source: Convergys Corp. Q4 2007 Earnings Call Transcript
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