Executives
David Stein - VP of IR
David F. Dougherty
Analysts
Jason Kupferberg - UBS
Karl Keirstead - Kaufman Brothers
Elizabeth Grausam - Goldman Sachs
Peter Jacobson - Brean Murray Capital
James Kissane - Bear Stearns
Shlomo Rosenbaum - Stifel, Nicolaus & Co.
Ashwin Shirvaikar - Citigroup
TC Robillard - Banc of America Securities
Scott Sutherland - Wedbush Morgan Securities
Eric Boyer - Wachovia
President and Chief Executive Officer
Earl C. Shanks - CFO
Convergys Corp. (CVG) Q1 FY08 Earnings Call April 29, 2008 10:00 AM ET
Operator
Welcome and thank you for standing by. At this time all participants are in a listen only mode. [Operator Instructions]. This conference is being recorded. If you have any objections, you may disconnect at this time. And now I'd like to turn the meeting over to Mr. David Stein, Vice President of Investor Relations. Sir, you may begin.
David Stein - Vice President of Investor Relations
Thanks, Michelle. [Audio Gap] 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 results and Earl will follow-up with financial performance and forward guidance. Then we will 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 involves potential risk and uncertainties for Convergys. Future results could differ material 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 considered being more important than comparable GAAP measures. Convergys' management believes free cash flow provides 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.
Now I will turn the call over to Dave.
David F. Dougherty - President and Chief Executive Officer
Thank you David and good morning to all of you joining us today. As I said in our call in January, our priorities for the first quarter of 2008 were: growing revenues and operating income in Customer Management by closing deals, ramping new programs and improving productivity, preserving Information Management operating margins by maintaining tight cost controls while selling more software and services as this business transitions to new operating model, improving HR management operating loss by delivering implementations on schedule and driving additional efficiencies, enhancing our future opportunity for performance improvement and growth by streamlining operations across the business. All this translated to revenues of $716 million and GAAP EPS of $0.28, which includes a negative $0.03 impact for some items Earl will talk about in a few minutes.
As evident in the reported numbers, we made significant progress on a number of fronts. We remain on a path to deliver record revenues and EPS again here in 2008. Customer Management's revenue growth stabilized in the quarter, yet we have to accelerate revenue growth to deliver our guidance. We are continuing to convert a robust pipeline and build out the organization and facilities to support the anticipated strong growth in the second half. Information Management's strong execution and revenue growth with international clients drove another quarter of excellent margins. HR Management's revenue and operating and loss improved in the quarter. We made good progress on key implementations and remain confident we will remain on schedule for the year.
Embedded in our first quarter results, our restructuring cost to further improve productivity and performance. During the quarter we continued to repurchase shares. We have been aggressive because of our belief that this is a great opportunity to create shareholder value and the return on this investment will outpace any competing opportunity we have.
I will now discuss some of the operating highlights at each of our business segments. Let me begin with Customer Management. In a difficult economic environment, our solution set and value proposition remains an important way for large enterprises to improve quality while lowering their costs. At the end of 2007, we expected first quarter revenue and profitability to be about the same as the fourth quarter. Customer Management revenues were up sequentially in the first quarter. Revenue also increased compared to the same quarter last year. We continue to expect sequential and year-over-year quarterly revenue growth in Customer Management for the rest of 2008, delivering 7% to 12% growth for the year.
As we announced last week, we are seeing the effect of our focus on sales in terms of new business ramps and pipeline conversions. Year-to-date we signed more than a dozen meaningful contracts for Customer Management Services. We continue to earn new business with clients in financial services, communications, healthcare, and other markets. Services we are providing these firms include multi-lingual live agent support for customer service and retention programs as well as back office collections and relationship management solutions.
Customer Management revenues are also being impacted by our transition of business from Canada to other geographies. Because of challenges due principally to currency, we are closing sites in Canada. We are having ramp-downs in Canada and ramp-offs of that production in other geographies. This has negatively impacted our revenue in the current quarter and this will help growth later in the year as these programs become fully operational.
In the quarter we also successfully negotiated price increases with some of our clients served in our Canadian centers. Having said that, we are not happy with the operating margin in the Customer Management business this quarter. Operating margin was impacted by increased labor cost, restructuring charges, ramping down and training cost associated with reducing Canadian footprint and capacity expansion cost incurred to support anticipated future growth. Results for this business must improve; improved operating margins will come from increased volume and price increases, further cost reductions, and productivity improvements. We are managing labor cost, optimizing spend to control and continue to invest to further improve call quality and operational performance.
In the quarter, I also made changes to the organization and simplified the structure. We appointed Andrea Ayers to lead the Customer Management line of business, recognizing her proven track record and experience in this business. With Jim Boyce we now have one executive serving all our North American Customer Information Management clients. Jim's group does the business development. This gives clients a single point of contact, which makes it easier for us to... for clients to do business with us. These actions enhance our opportunity for performance improvement and growth. I am excited about these changes and I'm excited about the momentum we are seeing in our Customer Management business.
Let me now talk about Information Management. Strong execution in Information Management helped us deliver ahead of expectations in the quarter. International revenue for Information Management license and services grew faster than the market overall reflecting the demand in the rest of the world. Earlier this month, we completed the acquisition of Shanghai-based BMI Asia to further enhance our leadership position in the business support systems market. In the phase of the revenue decline, we delivered operating margins better than our largest competitor. We have driven strong profitability despite declining data processing revenues.
The Information Management team continues to do a terrific job aligning our cost structure with the changing revenue mix. And we feel comfortable that we will deliver profit margins in the mid-teens for the full year. More importantly, the business is approaching its trough. We continue to invest in it and as we exit 2008, we expect to return to growth with a solid product portfolio and lean operating structure.
Moving to HR Management, we are making good progress. Key implementations remain on schedule during the quarter. We successfully passed key milestones since our last call and we expect to reach “go live” with a large North American client implementation in the second half of the year. This is an important milestone for this business. We've also made progress with our other remaining clients and we continue to be selective about the opportunities we pursue. Regarding Starbucks, as discussed in our recent Analyst Day, Starbucks made the decision to discontinue its implementation based on changing business needs. This was not a reflection on the quality of our work. The blueprint was delivered in a timely fashion and met the customer requirements. The client was happy with the quality of our blueprint and paid for that effort. This reflects our deep understanding and experience optimizing HR operations and the mutual respect for the decision. Our processes are dramatically improved from a few years ago.
Reiterating what I said at the recent Analyst Day, Convergys is well positioned to accelerate our revenue growth and deliver our earnings guidance for the year. This growth will come from the continuing trend for large enterprises to outsource and offshore customer care services, execution of our new relationship management approach, ramping up and scaling the HR Management business, achieving renewed growth in Information Management and other corporate actions to drive margin expansion. If the economy continues to slow, this could accelerate the rate of outsourcing, which could be a further driver of growth for Convergys.
Given our first quarter performance, progress converting a robust pipeline and strengthened management team and simplified structure, our revenue and EPS guidance remains unchanged. Our relationship management value proposition improves the way clients managed customer interactions and we're leveraging our operational expertise and strong global platform. In delivering relationship management solutions, we are able to deploy the right mix of live agent automation and self-service. This drives more value for our clients' relationships with their customers and employees. We remain on path to deliver higher revenues and EPS in 2008 than the record results we delivered last year.
At this time, I'll turn the call over to Earl to provide greater detail on our first quarter financial results and forward guidance. Earl?
Earl C. Shanks -
Chief Financial Officer
Thank you, Dave and good morning. Let's begin by reviewing overall performance. Convergys' revenues were $716 million in the quarter. Operating income was $39 million. This includes $21 million of charges including $14 million for restructuring with a one-year pay back and $7 million in pension related costs. The savings from the changes made in the pension plan will more than offset the $7 million within the year. Results for the quarter also include $11 million of favorable items, $8 million from a favorable tax settlement as we continue to work to lower our tax expense and $3 million in the period due to an asset sale and recovery of prior period costs. The net negative impact of these items is $0.03. Excluding these items our EPS performance in the first quarter of 2008 was about the same in the prior year period.
Let me discuss the details starting with Customer Management. Customer Management revenues increased to $476 million in the first quarter. This was driven by strong growth with several communications clients. At the end of the first quarter, Customer Management had approximately 23,700 employees in Asia. This was an increase from 22,000 employees in the first quarter of 2007. Approximately one-third of Customer Management employees work in Asia. Customer Management operating income was $22 million in the quarter. Customer Management operating income decline was principally due to higher labor costs, restructuring charges, additional cost per capacity expansion and foreign exchange. Foreign exchange impact was about $5 million. The negative effect of FX in the second quarter of 2008 will be substantially more, approximately $12 million year-over-year. Customer Management share of the restructuring charge in the quarter was $5 million.
Moving now to Information Management. Total Information Management revenue was $163 million in the first quarter. As we communicated the last quarter, we had a significant decrease in revenue in this quarter largely due to decline from North America platform consolidations. This was partially offset by higher international revenues from the implementation of software and services projects. Year-over-year Information Management operating income increased 17%. Operating margin increased about 450 basis points in the quarter. This was due reduced SG&A expanding, continuing shift in R&D to low cost regions and favorable impact of the revenue mix. Results also included absorption of $7 million of severance charge mostly associated with the roll off of North American clients.
Moving to HR management, revenue was up $12 million in the quarter versus the prior year. Revenues from Starbucks, more than offset anticipated seasonal and sequential decline from completion of open enrollment, enrolled off of our legacy programs. HR management operating loss in the first quarter improved 34% compared to the same period last year. Regarding Starbucks, we recovered all the cost incurred on this project. This includes capitalized cost as well as some cost that had previously flowed through the P&L. Again we recovered all of our investment on this contract. HR management's portion of the total restructuring charge was $2 million. HR management operating loss was also reduced due further profits improvements and efficiencies with clients currently in live operation. Our first quarter operating performance is consistent with our objectives to get less than $15 million operating loss for the year.
I said before every line item on the financial statement is important to us. So now, let me turn to some remaining items. Our focus below the segment results is positively impacting EPS. In terms of competition, during the quarter, we curtailed broad merit pay increases and we shifted all senior management’s long-term incentive plan from time-based to performance-based awards. We also froze the US pension program and incurred a payment pursuant to the senior executive retirement plan in aggregate resulting in $7 million charge.
In the quarter we received an $8 million return on a capital investment in our cellular partnership. We are pleased that our investment is doing well and it’s returning cash. Capital structure including interest expense, our GAAP rating and shares outstanding also impact EPS. We invested $62 million to buyback 4.2 million shares or more than 3% of shares outstanding in the first quarter. This demonstrates our confidence in the long-term outlook and our belief in the company. At the end of March, there were 128.2 million shares outstanding. We continued to have an investment grade BBB [inaudible] rated.
Moving to taxes, at same time we are always looking for ways to reduce our tax burden to improve our earnings and to save cash. The effective tax rate for the quarter was 12%. This was due to an $8 million favorable impact from the resolution of tax audits during the quarter. We are glad our cash department continues to work towards tax efficient outcomes. Cash flow from operating activities were $26 million in the first quarter, free cash flow was $7 million. Several expected items impacted the quarter. These include, increased deferred cost for additional HR implementation activities in the quarter, timing of payments for international client project milestones and an executive pension payment. Net deferred charges increased $22 million in the first quarter. Recall that is the cash plus implementations, less amortization and cash received from clients for implementations. We will see more deferred charges this year due to the increase in HR implementation activity. We also expect to recover some of these implementation costs through progress payments in later quarters.
I will now move to discussion of our forward financial guidance. One quarter into the year, we remain on a path to deliver another year record revenue and EPS. Our revenue and EPS guidance is unchanged, revenues of $2.85 billion to $3 billion and earnings per share of $1.31 to $1.36. The second half of 2008 should contribute over 50% of the full year revenue and approximately 60% of the full year EPS results. The drivers of this improvement and imbalance, our increasing use of capacity and improving operations in customer management, reaching a key go live for HR management offset by a smaller revenue stream in information management.
Our full year segment guidance includes Customer Management growth in the second half to achieve revenues of $1.85 billion and $2 billion for 2008 and operating margin of over 10% as head to 2008. For Information Management revenues of about $625 million with operating margins better than 15%. In HR Management revenue is slightly ahead of last year's pace coupled with significant operating improvements in the second half with an operating loss of less than $15 million for the year provided that we achieve the important go live in the second half. With regard to cash flow we continue to expect strong free cash flow about equal to net income for the year. David and I and the management team are very focused on delivering results, consistent with our overall guidance.
At this time operator, please open the line for questions.
Question and Answer
Operator
Thank You. [Operator Instructions]. Our first question comes from Jason Kupferberg with UBS.
Jason Kupferberg - UBS
Hi, good morning guys.
David F. Dougherty - President and Chief Executive Officer
Hi Jason.
Jason Kupferberg - UBS
I just want to start out going through some of these… the non-recurring items, the P&L and the balance sheet and wanted to get a sense of which of these that you guys did versus did not contemplate when you originally gave '08 guidance? Because obviously there is a lot of things moving around above the operating line, below the operating line, or may be you can give us a little bit of a... of a walk through there, just so we have a sense of kind of what is surprised you versus not since the start of the year?
Earl C. Shanks -
Chief Financial Officer
Well, I think Jason, as you focused on the period items that we called out that are there, we had at least conceptually thought about most of those as possibilities as we walked into the year, obviously so we had thought about...no, we didn't know exactly where the amounts were going to come out in terms of what could happen with all of that but in general those were broadly all contemplated inside our guidance.
Jason Kupferberg - UBS
Okay. And in the customer care margins, can you help us kind of do the walk from Q1 to Q4 and help us understand what you think of full year reasonable target is? I mean, it sounds like you won’t be able to do 10% through the full year anymore but you are going to exit the year in north of that level. And if you can give us a sense of order of magnitude, you laid out some of the factors that will drive higher margins later in the year but may be rank orders those in terms of which one should most positively impact margins as we move through 2008?
Earl C. Shanks -
Chief Financial Officer
Sure, I will be happy to do that. Obviously, I think you got the message exactly right Jason in terms of where we are and where we’d hoped to be in that regard. But, as we look at the balance of the year, certainly the key driver for the balance of the year is to ramp on revenue increases over time and that will contribute quite substantially to our improvement in operating performance both the margin percentage and obviously the absolute dollars. There are clearly some opportunities when we look at the business road, also make it more efficient and we talked a bit about labor cost being a bit high in the first quarter, there was an opportunity to reduce our cost and in particular our labor and become more efficient on that as we look at it and then there are some other broader opportunities in terms of efficiency that we are pursuing around training, asset utilization etcetera. Obviously the management changes in quarter are important to driving the outcome and getting to that outcome as well and so we expect that to help in the balance of year also.
David F. Dougherty - President and Chief Executive Officer
Jason, let me include to that list, which I agree with it. The other thing is having a significant impact on us right now is getting through this transition from Canada to other geographies. And that's having a significant impact both from a revenue standpoint and from a margin standpoint and this for perspective what we are doing is, we are closing down centers there, we are moving business and actually if you exclude it, the revenues from Canada and our operating Customer Management results right now, revenues are up 6% year-over-year. Now, we are moving onto that business, to other geographies and again we are in the process of ramping that up. So we will be seeing that business replaced in other geographies but it's having a significant impact on our results, so I would just add that to the list.
Jason Kupferberg - UBS
So should we think of the full year as being more like 8% or 9%, somewhere in that range?
Earl C. Shanks -
Chief Financial Officer
I think we will get to a run rate at the end of year Jason that will be better than 10%.
Jason Kupferberg - UBS
Okay. Last question, the Starbucks termination payment, it sounded like in the wordings from the press release that could have been $10 million or $12 million roughly [inaudible] explain pretty much all of the year-over-year delta in the revenues, was that... how is the accounting work on that, is that all profit?
Earl C. Shanks -
Chief Financial Officer
No, Jason. Obviously we had a fair amount of cost that we put in the balance sheet related to that. So that, that clearly the cost also flowed through the P&L this quarter. So we had to get largely a matching on revenue in cost.
Jason Kupferberg - UBS
Okay.
Earl C. Shanks -
Chief Financial Officer
This quarter. As we indicated there were some prior period costs that we had incurred that we… that flowed through as profit essentially in the quarter but over the whole deal it was… we recovered all our cost and we were quite pleased with that given the contracting.
Jason Kupferberg - UBS
Okay, thanks.
Earl C. Shanks -
Chief Financial Officer
Thank you. Next question, please.
Operator
Thank you. Karl Keirstead from Kaufman Brothers. Your line is open.
Karl Keirstead - Kaufman Brothers
Yeah. Hi. Thank you. Just wanted to go, Earl go back to your comment about full-year '08, roughly 40% of the earnings coming in the first half, 40% was the mid point of your guidance gets us to about $0.53, which would imply about $0.25 EPS guidance for the June quarter. I just wanted to make sure that that passes a [inaudible] on this test in terms of directionally where you are encouraging us to go in terms of our modeling?
Earl C. Shanks -
Chief Financial Officer
I would agree that you've done the mid point of the math, Carl. So hard to argue with that, obviously there is a range on the guidance, then it's approximately 40%. So there is a range on the input as well.
Karl Keirstead - Kaufman Brothers
Okay, great. And just second question, if free cash flow is roughly going to approximate net income for the full-year given that free cash was relatively low this quarter, you need a very significant... roughly $150 million free cash in the next three quarters, I note that you did about $65 million to $70 million free cash in the same period last year. Can you just run through how you are going to get that free cash flow acceleration in the June through December quarters? Thank you.
Earl C. Shanks -
Chief Financial Officer
Sure, I'd be happy to, Carl. If there was... as I highlighted and tried to talk about in the cash flow piece, we did have some one-time cost this period related to the executive pension payment. But we also had a couple of other items which were important, which I believe are going to reverse later in the year and primarily probably in the second half. One of them is some milestone payment on some of our international contracts, which don't come due until the third and the fourth quarter. And so that will significantly help the cash flow I think when those due come through and obviously we are recognizing revenue related to that but we are not recognizing the cash. And then the other one that's important as well is some of the milestone payments on some of the implementations for HR, which will also we think some of those turn around later in the year so that will also be kind of... if you want to call it out of period cash flow in the sense of the how the income statement is working and how that's going through. Certainly, we will have continued work to do to take down receivables broadly and so that's an opportunity. But the fundamentals of the business are really pretty strong and so it tends to generate cash flow pretty naturally with the profitability of both the CM and the IM business. And so that's obviously the biggest driver of all.
Karl Keirstead - Kaufman Brothers
Okay, thank you, very helpful.
Earl C. Shanks -
Chief Financial Officer
Okay.
Operator
Our next question comes from Elizabeth Grausam with Goldman Sachs. Your line is open.
Elizabeth Grausam - Goldman Sachs
Great, thanks. Given how important it will be to reaccelerate revenue growth in CMG in order to make your year, can you describe the pipeline conversion that you've seen over the course of the last three months and you had a little bit of a skid in the back half of last year particularly in financial services and the sales cycle environment that you are seeing right now given economic conditions?
David F. Dougherty - President and Chief Executive Officer
Yeah, Liz, it's Dave. We've talked about the 12 wins externally that we had in our Customer Management business and we're excited about the momentum that we've got going there and those are just the ones that we're issuing press releases and actually if you take the total numbers of wins we have in the business, it is up significantly from a year ago. So I feel very good from a demand standpoint that we've got the pipeline that we need. We are in the process of converting it as evidenced by the press releases that we're announcing and the challenge really... and it's a good challenge to have is we are building out the infrastructure and the organization to support what it is going to be tremendous amount of growth in that business. So again it's not a demand issue. For us we are very focused on getting the infrastructure and the organization in place to support the growth and that's growth across multitude of geographies.
Elizabeth Grausam - Goldman Sachs
Great. And given how your customers have some mounting pressure in their own businesses, can you describe what the pricing environment may look like and also what the business mix in your pipeline looks like if its more tilted towards offshore perhaps given the focus on cost that your customers are going to have going forward?
David F. Dougherty - President and Chief Executive Officer
Well, I mean I'd say our demand remains... I would characterize I guess relatively balanced between customers looking for off shoring certain types of work. We certainly are seeing tremendous amount of demand for Philippine capacity, yet we still see robust demand and continue to add to our infrastructure here in principally in United States as well. So I'd characterize it as pretty balanced.
Elizabeth Grausam - Goldman Sachs
And lastly just in the pipeline within your IMG business particularly in international markets, can you give us any update on where you may see certain geographies heating up in demand or slowing down?
David F. Dougherty - President and Chief Executive Officer
We continue to see robust demand there, Middle East you saw the acquisition we made in China here not long ago. That certainly was done with an eye towards, we see a fair amount of demand in the Asian market. We've recently had an announcement in that business where we've landed our first customer in India. So we've got a value proposition I believe in impetus and the services surrounding it that is very competitive in some of these new markets.
Elizabeth Grausam - Goldman Sachs
Great, thanks a lot guys.
Earl C. Shanks -
Chief Financial Officer
Thanks, Liz.
Operator
Our next question comes from Peter Jacobson, Brean Murray Capital.
Peter Jacobson - Brean Murray Capital
Thanks and good morning. The Canadian sites that are getting closed and ramping up in other geographies which geographies are those?
David F. Dougherty - President and Chief Executive Officer
Principally that work is moving either to the United States or to the Philippines.
Peter Jacobson - Brean Murray Capital
Okay. And Earl, can you comment on the anticipated tax rate over upcoming quarters?
Earl C. Shanks -
Chief Financial Officer
Well, I mean our general guidance on tax rate has been 32% is a reasonable place to start, but we are obviously consistently working to bring it below that. I wouldn't expect that 12% would be a reasonable target for the year, but the team is going to work pretty hard to do 32% or better.
Peter Jacobson - Brean Murray Capital
Okay. Any updates on the State of Florida or State of Texas contracts, are they kind of steady state or growing and then how is the pipeline in the state and local in general for the HR business?
Earl C. Shanks -
Chief Financial Officer
I think the relationships with Florida and Texas continue with no real hiccups, dealing with state is always a different challenge than dealing with corporates. Yeah, our focus most recently in terms of pipeline has been to grow the corporate side of the business. That's been true for a couple of years in terms of where we are putting resources just because of the decision criteria and how those will move along. But we are happy with where we are at with Florida and seeing pretty good performance in Texas as well.
Peter Jacobson - Brean Murray Capital
Okay, thanks. That's all I have. Thank you.
Earl C. Shanks -
Chief Financial Officer
Thank you.
Operator
Our next question comes from James Kissane with Bear Stearns.
James Kissane - Bear Stearns
Thanks. Hi, Dave and Earl.
Earl C. Shanks -
Chief Financial Officer
Hi, Jim.
James Kissane - Bear Stearns
Just wondering what portion of your CMG Canadian business is with actual Canadian customers, Canada-based customers and then may be is there an opportunity to sell more to Canadian-based companies?
David F. Dougherty - President and Chief Executive Officer
Right now it's still relatively small amount, we have some important Canadian customers in the communications and financial services sectors that we think have some tremendous growth potential. We recently made some organization changes and appointed a General Manager for Canada, so further evidence of our belief that there is a big opportunity for us to fill up large amount of capacity in Canada serving Canadian-based companies.
James Kissane - Bear Stearns
Okay. What's the timeframe for that...?
David F. Dougherty - President and Chief Executive Officer
We are doing business with customers today, as I said is still relatively small, but we are in the process of ramping, I know at least one of those customers sold, it's growing, so, its happening in real time.
James Kissane - Bear Stearns
Okay and just a question on IMG, the status of the large client de-conversion, I know you discussed it on your comments, but just when do you think that will be complete?
Earl C. Shanks -
Chief Financial Officer
I think with respect to Sprint that’ll be… there’ll largely be done later this year and, I think, with respect to the conversion at AT&T that they are doing on their care platform that will be a little much longer period of time and I think that’s… originally was planned to be a couple of years and I think that was the kind of timeframe it will be.
James Kissane - Bear Stearns
Okay and got to ask, just an update on the HR business in terms of, is $300 million still the breakeven level and has the timeframe changed at all when you will achieve that?
Earl C. Shanks -
Chief Financial Officer
We continue to expect that we will above the $300 million revenue next year as we have said and we continue to believe that’s the breakeven level for the business.
James Kissane - Bear Stearns
Great, thanks Earl.
David F. Dougherty - President and Chief Executive Officer
Thanks Jim.
Operator
Our next question comes from Shlomo Rosenbaum with Stifel Nicolaus. Your line is open.
Shlomo Rosenbaum - Stifel, Nicolaus & Co.
Hi, thank you. I want to talk [inaudible] a lot deals that you have announced, but can you talk about some of the sales cycles and particularly if you guys have signed the two large financial services contract that you talked about on the Analyst Day and before hand?
David F. Dougherty - President and Chief Executive Officer
Sure, I mean we continue to see as we talked robust demand across number of sectors including the financial services sectors and last week we announced two deals there that I'm very excited about and again just continued evidence that we are making progress there. One of the big deals that I referenced at the Analyst meeting has not been done yet at this point and provided that we come to an agreement that’s mutually attractive than the contract will be signed and it will be incremental to the two wins that we announced here last week. My view is we are only going to sign contracts that are good for our clients and good for our shareholders and this one isn't where it needs to be, but I'm hopeful that we can get it over the finish line. You know, having said that the capacity that we are looking to use for that opportunity I'm confident that we will be able to use that for other client opportunities, because we are again seeing so much demand that I don't think that's going to be a problem.
Shlomo Rosenbaum - Stifel, Nicolaus & Co.
There is a change... you made a change in personnel on the head of the contact center business. Can you just describe what you expecting to change with the change in management?
David F. Dougherty - President and Chief Executive Officer
Sure, sure. I want to be clear, as we have been talking, it’s not a demand issue, we got a very robust pipeline and we are making tremendous progress there. The challenge we have and it's a good problem to have is we have tremendous amount of work to build out the infrastructure in the organization to support that growth and Andrea Ayers, who I appointed to lead that business, she grew up in the customer management business. She was part of the leadership team, when I led the customer management business from 1995 to 2000 we grew that business from $226 million to $1.4 billion. Andrea was a part of that leadership team and she knows and has experience in how to manage a high growth customer management organization and so, I am excited and really believe she is going to do a terrific job helping us build out the organization and the infrastructure to support where we're going with this business.
Shlomo Rosenbaum - Stifel, Nicolaus & Co.
Okay. And lastly I’ll just ask about IMG, are you still expecting the margin? Why you still expecting the margin to go down it seems to, you guys have been doing a really good job and that... the margin in that business seems to do better than expected every quarter for the last say, three or four quarters, and you are still expecting it to go down to just to around the mid-teams or really is that sort of a buffer room for the rest of the business?
Earl C. Shanks -
Chief Financial Officer
The reality Shlomo is that we have set the guidance at beginning of the year and I try not to make lots of adjustments to it as I work through the year. Certainly, we are pleased with the first quarter. One quarter doesn't make the full year for us and we will continue to invest in the business there are...will be opportunities to do that, that we think will be important and so, when we look at the year end total, we think it’s fair to say that we will do better than 15% but at this point we think that’s the appropriate level of guidance for that business when we look at all the investment opportunities that are there.
Shlomo Rosenbaum - Stifel, Nicolaus & Co.
Okay, thanks a lot.
Operator
Our next question comes from Ashwin Shirvaikar with Citi. Your line is open.
Ashwin Shirvaikar - Citigroup
Thank you. The question I have is again going back to the keeping guidance unchanged question. Did you actually have in there, sort of what looks like a $0.06 benefit in the quarter from the lower tax rate first quarter and the impact of continuing buybacks and so on, did you have that in there already?
Earl C. Shanks -
Chief Financial Officer
As I think, as I said to Jason, he asked me early on we had conceptually, I think all of the events that happened in the first quarter, or almost all the events that happened in the first quarter that had a meaningful impact on results were things that we had contemplated when we gave guidance has potential events, so it was part of our overall prospective certainly that taxes, I do have some forward visibility there in terms of the opportunities so that's the good example of understanding what the pluses and minuses are. I think when we look at it and we try to lay this out in the press release and on the script, we think the net impact of the pluses and minuses of the period items was about $0.03 a share. You haven't to pick a negative basis about $0.03, you happen to pick up the one big positive that was there obviously there was between the severance and the pension there was more than $0.10 a share going the other way.
Ashwin Shirvaikar - Citigroup
Okay. And I know you look at all the lines, so let me ask it maybe this way, in terms of operating profit growth that you expect year-over-year. Can you comment on what the operating profit growth is and then the... and what you expect from the non-operating side of things has gone out?
Earl C. Shanks -
Chief Financial Officer
I thinks it is pretty clear by the tweak we made to our Customer Management guidance that our performance in Customer Management from a margin standpoint was less than we expected in the first quarter that's why we tweaked that and when we look at in total, we said yeah that's going to have an impact, but it was within the range of all of the variables as we look at them that we through were reasonable at the beginning of the year to allow us to put out the $1.31 to $1.36 EPS guidance several months ago and to continue support that today based on what we see in the business.
Ashwin Shirvaikar - Citigroup
Okay and my last question is on timing of some of the cash flow items you mentioned specifically the higher deferred cost that hurt cash flow this quarter associated with HR implementations. Can you break out how much was the higher deferred cost and over what period of time will that be recovered, it is normal to recover it over the life of those contracts like seven years or so?
Earl C. Shanks -
Chief Financial Officer
No, I'm sorry. Ashwin, if I wasn’t clear on my comments earlier we had about $22 million of net deferred cost in the period higher than what we saw last year first quarter and of... part of that $22 million will be recovered later in the year as we hit key implementation milestone and generally with the clients some of the new contracts we dealt with, the clients or paying for part of the implementation. But generally they don’t necessarily pay for that simultaneously when we incur the cost. They sometimes pay for it based on milestones that are baked into the implementation and as we look at those milestones, there are more of them that we're going to hit later in the year. So, If I look at the $22 million we are going to recover that, part of that, later in the year, certainly part of it consistent with how we contract it will be recovered over the life of the contract.
Ashwin Shirvaikar - Citigroup
Okay and later in the year would be third quarter or is it very late in the year that it could fall into the next year?
Earl C. Shanks -
Chief Financial Officer
Honestly, Ashwin I don't remember that milestone dates and there is a series of them, it's, get $1 million here, get $1 million there. I couldn't remember them all at the moment I think it's generally spread through the year.
Ashwin Shirvaikar - Citigroup
Okay, thank you.
Operator
Our next question comes from Tom Roderick with Tom Weisel Partners. Your line is open.
Unidentified Analyst
Hi guys, this is actually Chris Cowen [ph] for Tom Roderick. Good morning guys.
David F. Dougherty - President and Chief Executive Officer
Hi, Chris.
Unidentified Analyst
Hi, how are you doing?
David F. Dougherty - President and Chief Executive Officer
Fine.
Unidentified Analyst
Good. I just wanted to follow up... I just want to make sure, I heard correctly Earl, I think you had mentioned CMG revenues for the year $1.85 to $2 million, did I miss hear that, because I believe you guys maintained to $2 million to $2.1 million for the year for CMG, revenue was?
Earl C. Shanks -
Chief Financial Officer
You are... you didn't miss hear it and I miss spoke.
Unidentified Analyst
Okay. So, we are at $2 million to $2.1 million for the year on CMG, correct?
Earl C. Shanks -
Chief Financial Officer
We are, sorry about that, Chris.
Unidentified Analyst
Excellent. I just wanted to make sure. It's good to check, and then the other thing is on the IMG segment you had mentioned earlier that you guys expect to return to growth by the end of the year. Should I take that to mean, do you mean by that like revenue growth from Q4 to Q1 in '09 and what do you think are going to be the primary factors driving that return to growth?
David F. Dougherty - President and Chief Executive Officer
Chris, what we said at the Analyst Day and what we intended to reiterate now is that we expect 2009 revenue growth over 2008 when we look at the full year. So the comment I made today was just a reference factor the same comment that we made on the Analyst Day. There are certainly as always a variety of drivers that are important international growth continues to be important in that business, continued success with the Internet is important to you make that all work. It's really growth in the license in the professional services side of the business.
Unidentified Analyst
Great thanks. And then one last one if I may, on I was wondering if you could drill down on the COGS win a little bit more, do you have any other cable type things that are in competitive situations and what were the factors that went into the extension of the agreement there?
Earl C. Shanks -
Chief Financial Officer
Well, I won’t comment it, I think specifics in terms of the cable, but we do see tremendous opportunity in cable and it's not only North America we have had a number of wins over the last couple of years with the cable customers principally in Europe as well. We're excited about the COX agreement, it's a one where we will transaction over time from the ICOMS platform into Infinys and provide them the solution that they need to run their business going forward as their business changed just like virtually everybody else's and they are trying to sell more products and services than what they traditionally have and our system is spot on would been able to help them execute their strategy.
Unidentified Analyst
Great. Thanks guys.
Operator
Our next question comes from TC Robillard with Banc of America Securities.
TC Robillard - Banc of America Securities
Hi good morning guys.
David F. Dougherty - President and Chief Executive Officer
Hi, TC.
TC Robillard - Banc of America Securities
Just want to get just couple of housekeeping items. Earl specifically in terms of... where on the P&L did the $7 million retirement, the pension charge and the $2.9 million, the $3 million gain, where did those fall [ph], was that SG&A?
Earl C. Shanks -
Chief Financial Officer
The pension charge would have been spread between SG&A and gross margin. And it was also broken down as you look at it part of it was in the segment and about $3 million of it was at corporate. And so we didn't allocate that back. And I am sorry the other piece you asked about?
TC Robillard - Banc of America Securities
The $2.9 million gain on the sale of asset you had, which related to the HR Management segment, was that above the operating line or below?
Earl C. Shanks -
Chief Financial Officer
It was the operating line. It was included in the operating income.
TC Robillard - Banc of America Securities
Okay. And so was that an SG&A impact?
Earl C. Shanks -
Chief Financial Officer
Would have largely hit the gross margin.
TC Robillard - Banc of America Securities
Gross margin. Okay, perfect. And in terms of the pension charges, can we expect any of those going forward, or was this just a one lump sum type of an impact?
Earl C. Shanks -
Chief Financial Officer
There were two causes for the pension charge this quarter, one cause was the freezing of our pension plan, a decision we made in the quarter and as a result of that we took a charge in the quarter. And the other one is the impact of the executive retirement payment and there is a gain loss calculation that happened at the day that payment also happened in the quarter. So, a one-time event.
TC Robillard - Banc of America Securities
Okay. And so going forward, we shouldn't expect to see any other related charges with that?
Earl C. Shanks -
Chief Financial Officer
No, we should not.
TC Robillard - Banc of America Securities
Okay. And was that all... how much of that was cash charge versus just a kind of an accounting charge?
Earl C. Shanks -
Chief Financial Officer
The pension piece of it is not cash in the period and we will continue to fund the pension plan on a go-forward basis, last year I think we put slightly less than $20 million in the pension plan, this year we will put something like $13 million in the pension plan. With respect to the retirement payment for the executive that was cash in the period.
TC Robillard - Banc of America Securities
Okay, perfect. And then just wanted to revisit in terms of you asked couple of times in terms of converting the pipeline in terms of sales cycles and things like that within CMG, can you give us a sense obviously a lot of wins that you guys have announced it sounds like other wins that you've had but weren't announced, can you give us a sense as to how the sales cycle has been running over the last say 6 to 12 months. Have you seen a material stretch in that sales cycle, have you seen a material contraction, I am just trying to get a sense as to how the overall environment is impacting your customers, because it would seem like it should accelerate your ability to convert?
Earl C. Shanks -
Chief Financial Officer
Well, again our total wins would support that. And again we invested a lot of money in the last half of last year to dramatically increase our sales capacity. And so we got a lot more folks get those into lot more deals and that certainly is driving up the total number of wins and then I would say we… it’s more on kind of one-off basis you are run into some challenges that are particular to a client and the big financial services deal that I talked about at the Analyst Day is going to struggle to get that one over the finish line and we know we continued to work it but that client is a bit slower on their decisioning process than some of the others.
TC Robillard - Banc of America Securities
Okay. And then just lastly in terms of the transitioned business from Canada to other geographies, are you going to lose any business from that transition? I mean I understand that there was some lost revenue in the quarter because you are transitioned but are any clients going to break on their contract because the business is getting shifted to either the US or offshore?
Earl C. Shanks -
Chief Financial Officer
I am not aware of it either, there may be a price difference as we move some of that revenue from Canada to the Philippines but I am not aware of any material client loses in the process what we are doing.
TC Robillard - Banc of America Securities
Okay, great. Thanks guys.
Operator
Our next question comes from Scott Sutherland with Wedbush Morgan Securities.
Scott Sutherland - Wedbush Morgan Securities
Yes, great. Thank you and good morning.
Earl C. Shanks -
Chief Financial Officer
Hi Scott.
Scott Sutherland - Wedbush Morgan Securities
Earl, one just quick question on the other items in the quarter, just as I think you have answered most everything except for the cellular partnership, you expected to stay at these kind of levels or moderate back?
Earl C. Shanks -
Chief Financial Officer
Well, Scott as you know my ability to forecast that is less than perfect. Certainly, the trend lines in the business have been pretty good in terms of what we have seen but, this was on the high end of the range what I would normally have expected from the cellular partnerships, so as we think about it I think it's reasonable to presume it might moderate a bit from where it is at today.
Scott Sutherland - Wedbush Morgan Securities
In the HR Management, I think in your… prepared comments and when the question asked Starbucks might have been all the revenue growth sequentially and it might come in 0% operating margin, is that a fair assessment there?
Earl C. Shanks -
Chief Financial Officer
I think as we reported in the quarter, I think it had some impact among other things I referenced in some of the prior period cost etcetera but, if you take into account all of the kind of one-time things that we did, it didn't have much impact, it wasn't one of the key drivers.
Scott Sutherland - Wedbush Morgan Securities
On the revenue side ex-Starbucks sequentially was the revenue kind of flat in HR, did it grow a little bit other customers like Starbucks?
Earl C. Shanks -
Chief Financial Officer
No, the implication and what I intended to say with the Starbucks was all the revenue growth.
Scott Sutherland - Wedbush Morgan Securities
Okay, last question I had, you had a nice reduction in R&D, I know you are doing some off-shoring, anything else going in there, is mostly off-shoring cost, are you cutting back there, finish some product cycles?
Earl C. Shanks -
Chief Financial Officer
What we are doing is we… it's really, we are on a path we have been on for several years that were more and more focusing our R&D investment on the single product, which is Infinys and that certainly is driving and it is well as driving that development to offshore locations.
Scott Sutherland - Wedbush Morgan Securities
Okay, great. Thank you.
David Stein - Vice President of Investor Relations
Operator there is time for just one more question.
Operator
Our last question comes from Eric Boyer with Wachovia.
Eric Boyer - Wachovia
Great, thanks. Are you considering to add sales people in 2008 for customer care and could you just comment on a relative basis that amount compared to 2007?
Earl C. Shanks -
Chief Financial Officer
I don't think, Eric we've specified, I’d say it's up dramatically, certainly from where we were and the early part of 2007, we kind of continued to build throughout the year and my expectation is that we will continue to add to sales resource as necessary as we see demand in different geographies.
Eric Boyer - Wachovia
Are you starting to build out, I mean are you continuing to build out the other verticals that you are trying to build?
Earl C. Shanks -
Chief Financial Officer
We did and actually that's a lot of the work we did last year is building out folks to service the other verticals and that I made reference to we got to win in the building business in India, we are growing business in Canada and so all those regions are going to need sales resource as we continue to take advantage of those opportunities in those markets.
Eric Boyer - Wachovia
As you added sales people in your customer care business segment in '07 in areas such as government health care. Are you starting to see the conversion times from pipeline to backlog improve in those areas?
Earl C. Shanks -
Chief Financial Officer
I think so. Again we are... the folks that we're bringing into the organization are largely very, very experienced from companies that have been active in those markets and so those folks are able to help us move the opportunities through the pipeline quite quickly.
Eric Boyer - Wachovia
Okay, thanks.
Earl C. Shanks -
Chief Financial Officer
Sure.
David F. Dougherty - President and Chief Executive Officer
I also like to add that Earl and I will be available the rest of the day to answer any questions about the first quarter results or the forward guidance that we discussed on the call and I want to thank you all for participating today.
Operator
This concludes today's conference. You may disconnect at this time. Thank you.
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