Convergys Management Discusses Q2 2012 Results - Earnings Call Transcript

| About: Convergys Corporation (CVG)

Convergys (NYSE:CVG)

Q2 2012 Earnings Call

August 01, 2012 8:30 am ET

Executives

David Stein - Vice President of Investor Relations

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

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

Andre S. Valentine - Chief Financial Officer of Customer Management

Earl C. Shanks - Chief Financial Officer

Analysts

Kevin D. McVeigh - Macquarie Research

Ashwin Shirvaikar - Citigroup Inc, Research Division

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

Howard Smith - First Analysis Securities Corporation, Research Division

Operator

Good morning, and welcome to Convergys Second Quarter 2012 Earnings Teleconference. [Operator Instructions] I would like to inform participants that today's call is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to turn the call over to your conference host for today, Mr. David Stein, Vice President of Investor Relations. Sir, you may begin.

David Stein

Thank you, Tray, and good morning. Welcome to the Convergys Second Quarter 2012 Earnings Call and Webcast Presentation. This call is the property of Convergys. Please note the slides accompanying today's prepared remarks are available on the Convergys Investor Relations website under Events and Webcasts.

Today's call contains forward-looking statements that address our expected future performance and that by their nature address matters that are uncertain. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements as a result of new information or future events or developments. Please refer to yesterday's earnings release and our most recent filings with the SEC for additional information regarding uncertainties that could adversely or positively affect our future financial results. This includes the risk factors provided in our Form 10-K for the year ended December 31, 2011 and the 10-Q filed yesterday.

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

With me on the call today are Jeff Fox, our President and Chief Executive Officer; Andrea Ayers, President and Chief Operating Officer of Customer Management; Andre Valentine, our new Chief Financial Officer; and Earl Shanks, our departing CFO. Jeff and Andrea will provide a summary of our strategic progress and operating performance and Andre will cover our financial results and business outlook. Then we'll open the call for your questions.

Now I'll turn the call over to Jeff.

Jeffrey H. Fox

Good morning, everyone. In the next few minutes, we will review operating performance and discuss the strategic transformation of our company. Operationally, our Customer Management team continued to show excellent progress by delivering our fifth consecutive quarter of revenue and profit improvement. Our total revenue of $491 million represents an increase of 3% compared to total revenue of $475 million in the second quarter last year. Adjusted operating income of $35 million was up 7% compared with last year and EBITDA increased 9% to $58 million compared with $53 million last year.

EPS from our continuing operations in the second quarter was $0.19 per diluted share on a non-GAAP basis compared with $0.17 per share last year. Based on our current financial strength and confidence in the business, we initiated a quarterly dividend of $0.05 per share which was paid in early July. We repurchased $74 million of our stock at an average price of $13.95 per share and our Board of Directors increased our stock purchase authorization to $250 million.

Overall, the team delivered a very solid first half of the year, and we are reflecting this in our increased earnings guidance for the full year. Strategically, we completed the sale of our Information Management business for $449 million during the second quarter. With this sale, we have successfully completed the repositioning of our company into a well capitalized, market-leading Customer Management business. We are committed to creating long-term value through strategic growth and disciplined deployment of our capital. We ended the second quarter with $757 million of cash on the balance sheet, which provides flexibility to return capital to our shareholders and pursue a combination of organic and inorganic growth opportunities. A key step in the transformation of our company is the smooth transition to a leadership team with deep expertise in the Customer Management business.

As we said on the last call, Andrea Ayers will succeed me as President and CEO in November. Andrea is a talented and proven leader with deep expertise and strong operational experience in the customer care industry. Through her 22-year tenure at Convergys, she has held a number of leadership roles, including her current role as President and COO. Additionally, Andre Valentine has succeeded Earl Shanks as our CFO. Andre is a highly talented Finance Executive with a deep understanding of the Customer Management business. He has been instrumental in our efforts to improve profitability and direct our focused Customer Management investment strategy. Andre has been part of our Customer Management team for 9 years and has also served as Senior Vice President and Controller during his 15 years with Convergys. In my new role as Executive Chairman, which will begin in November, I will continue to work closely with the leadership team on our capital allocation strategy with a clear focus on investing in organic and inorganic growth opportunities. Through the efforts of Andrea and Andre and their entire team, we have a leading reputation in the industry. Under their leadership team, we are confident that Convergys will continue to deliver outstanding value for clients and superior results for our shareholders.

Before turning the call over to Andrea, I'd like to take this opportunity to thank Earl for the great support he has provided through the simplification process. We wish him well. Now I'll turn the call over to Andrea to review our operating performance and how we are investing in capabilities that are important to our clients.

Andrea J. Ayers

Thanks, Jeff, and good morning, everyone. The team worked hard to deliver another quarter of revenue growth and profit improvement. We continued our 2-year trend of delivering consistent positive financial results for our shareholders. Year-over-year, we grew Customer Management revenue 4% to $488 million. The growth was primarily driven by strong call volume and demand for live agent services. Investing in our clients resulted in growth with 8 of our top 10 clients in the quarter as well as a significant year-over-year increase in program retention. The increase in call volume is the result of continued consumer demand across our client base. Specifically, we saw revenue increases in the communication and other markets verticals. We're encouraged by this growth. Combined, these 2 verticals account for 80% of our revenue. With our other markets portfolio, we're especially focused on the value we are able to provide our healthcare clients. Following the Supreme Court decision in June, clients in this industry continue to look for solutions that address the needs of their evolving business model and customer base.

In the financial services and technology verticals, we had some revenue declines principally as a result of expected program completions. We see opportunity for growth in these verticals, both with existing and new clients. As an example, in the second quarter, we signed a new financial services client with a combination of live agent, analytics and technology. We see continued demand from clients for a partner who can deliver the right mix of solutions to meet their unique needs. Our second quarter results also reflect strong demand for services delivered from our centers in the U.S., Philippines, Latin America, as well as through our home agent offering. Revenue was up in each of these areas. In the second quarter, we signed new Live Agent business worth $32 million of revenue that we expect to deliver next year. This is down versus the same quarter last year. We did see improved program retention and growth with existing clients year-over-year.

Because our revenue growth is primarily driven by existing clients, we're focused on our continued investment in account management. In addition to investing to serve our current clients, we continue to pursue and win new logos that have the ability to grow significantly over the long-term and diversify our portfolio. In the second quarter, we delivered solid profit improvement in addition to the revenue growth. Total adjusted operating margin increased 20 basis points and our adjusted EBITDA margin increased 50 basis points compared with last year. This reflects flow-through on the increased revenue and solid labor management by our team. We're pleased with this year-over-year performance, particularly since last year included an insurance reimbursement for the 2010 Clarksville flood.

The financial results from our technology and analytics offerings were on plan in the quarter, setting aside impacts from the goodwill impairment. This impairment charge was triggered by the sale of our Information Management business. Andre will discuss that shortly. Strategically, we continue to invest in technology and analytics expertise because our clients need these value-added capabilities. As an example, analytics provides our clients with data to help them better understand their customers' behavior. We are then able to partner with them to deploy more effective customer acquisition and retention programs. Our ability to provide actionable analytics often increases revenue, decreases costs and improves the customer experience for our clients. This is why clients are interested in integrating these capabilities into their customer service strategies.

As a market leader in Customer Management, we listen to our clients and invest in the capabilities that solve their business challenges. Our clients are clear that the consistent quality delivery is the #1 -- their #1 priority. We continually invest in upgrades to our global operating model to ensure that clients receive cost-effective quality service regardless of channel and location. This includes investments in hiring and retaining highly skilled agents who are able to manage increasingly complex call types, as well as investments in tools and processes that deliver the metrics that matter to our clients. Clients also want to work with partners who can deliver the right solutions from the right geography, leveraging the right supporting technology at scale. As a result, we continue to invest in global capacity and work-at-home capabilities, analytics and technology solutions.

This allows us to handle any kind of automated or live agent contact from the geography best suited for that work. Each of our clients has dynamic and diverse needs based upon their own branding, customer base, technology infrastructure and internal processes. Clients tell us that partners -- that the partners they turn to most are the ones who take the time to understand their unique environment and proactively offer the solutions that match these needs. Our investment in account management ensures close engagement with our clients. The partnerships that develop position us as a trusted advisor, integrated into their businesses. We have worked hard to become a well capitalized global leader in our market. Accordingly, we are in a position to invest in our clients in a way that drives mutual growth.

Our strong capital position allows us to actively pursue growth through acquisitions as well as continue our internal investment strategy. We're focused on investing to add new client relationships with the potential to become material over the long-term, expand our current footprint to provide additional English and Spanish language capabilities and obtain capabilities that complement our global infrastructure, while improving the company's competitive position. We are disciplined about making sure that growth through acquisition is linked to value creation for our clients and our shareholders. We will continue to evaluate businesses where we may be able to leverage our current investments and use strict criteria to determine the appropriate valuation for these businesses.

In summary, we produced another strong quarter of results and are on track to deliver performance improvement for the full year. We're investing in solutions that deliver quality and value to our clients, strengthen our relationships and increase program retention, allow us to win more business and help us grow our market share. Our improving results and significant cash position give us flexibility to invest in the business and enhance client and shareholder value.

I want to thank our team for delivering another consecutive quarter of revenue and profitability improvement. I would also like to thank our clients for their trust in Convergys as we partner to support their customers and to strengthen and grow their businesses.

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

Andre S. Valentine

Thank you, Andrea, and good morning. We were pleased with another quarter of revenue and profit improvement. In the next few minutes, I'll review our strong results from continuing operations and provide more detail on the goodwill impairment and other significant items in the quarter. I'll finish with an update on our guidance for the year.

Total revenue in the second quarter was $491 million, which was up $16 million compared with last year. This growth was driven by improved program retention and increases with existing and new clients. Second quarter total revenue also included $3 million for transition services related to the sale of Information Management. As expected, we saw a normal seasonal pattern with call volumes in the second quarter and expect the rest of the year to follow our traditional pattern as well. In terms of our footprint, at the end of the second quarter, 40% of our contact center employees were in the Philippines, 39% were in the United States. This includes 3,500 full-time agent equivalents in our work-at-home business. 14% were in India, 4% in Latin America, 2% in Canada and 1% in the U.K.

Moving to earnings from continuing operations, Customer Management operating income was $39 million on an adjusted basis. This is up $2 million versus the prior year. Recall that prior year results included a $5 million benefit from the insurance reimbursement in the second quarter. Adjusted Customer Management operating margin improved to 8.1%. Total adjusted EBITDA increased $5 million to $58 million and EBITDA margin improved 50 basis points to 11.7%.

Solid revenue growth in the quarter drove most of the profit improvement. We are very pleased with how the team managed the seasonal sequential dip in revenue. We absorbed the impact of holding onto staff in anticipation of client demand and increased the number of agents in training as a result of new client and program ramps. We expect some pressure in the second half due to training costs as the new programs continue to ramp.

Adjusted EPS from continuing operations was $0.19 per share. The effective tax rate for continuing operations was 29.7% in the second quarter on a non-GAAP basis. Based on our year-to-date tax rate, we are able to affirm our previous view that the tax rate for the full year will be about 25%.

As Earl signaled on the last call, we have recorded charges in the second quarter related to the Information Management sale and the simplification of our structure. We also had a onetime positive tax adjustment reflected in discontinued operations. This resulted from historical tax planning outside of the United States. As a result, GAAP EPS was $0.13.

Turning now to the impairment and other items in the quarter. We recorded a $107 million pretax gain on the Information Management sale in discontinued operations. The after-tax gain was $20 million. The high tax rate is a result of a lower tax basis than book basis. The sale triggered an impairment review of selected technology assets within Customer Management. This was due to the removal of the product sales that have been generated by Information Management clients. As a result, we recorded a $46 million goodwill impairment. We also absorbed $3 million of IM-related costs in the second quarter that were required to be included in continuing operations. We believe including these costs in discontinued operations better reflects the real cost of this business as we owned it and as we expect it to operate in the future. These items were offset by a $3 million retirement plan credit related to the sale.

After completing the sale, we took steps to merge our holding company's structure into Customer Management, resulting in $6 million of restructuring actions. We also recorded a non-cash $43 million real estate impairment. Second quarter free cash flow is $13 million, consistent with our expectations. The lower amount this year is largely attributable to the timing of payroll, changes in accounts receivable and higher capital expenditures as we continue to expand our global delivery capacity.

Turning to the balance sheet. We are now providing guidance on a projected year-end cash number that includes both cash and short-term investments. At the end of the second quarter, we had cash and short-term investments of $757 million. About 25% of this amount was outside the United States. During the quarter, we retired $55 million of debt related to our Orlando facility and a $6 million debt to the state of Ohio. There will be various additional nonoperating cash payments in the third and fourth quarters as a result of tax and simplification payments related to the Information Management sale and severance actions. In addition to our strong balance sheet, we have full availability on $455 million of revolving credit facilities.

Now I'll discuss our business outlook for 2012. Given the solid execution in the quarter, we are raising our earnings guidance for 2012 and confirming revenue expectations. We continue to expect Customer Management revenue of $1.975 billion to $2 billion for the full year. We also expect to receive about $10 million in revenue for transition services related to the Information Management transaction. We expect adjusted EBITDA of $225 million to $232 million for the full year. In terms of EPS, we expect adjusted EPS of $0.80 to $0.85 for the full year. Our cash and short-term investments balance at year end should be about $725 million. This is on track with our previous projection of $775 million, adjusting for the $74 million share buyback plus $20 million in short-term investments that were not previously included in the projection. This guidance excludes any acquisitions or additional stock repurchase activity.

In closing, we are pleased with our strategic progress in the quarter and our focus on delivering our plan for the full year. At this time, Tray, please open the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question does come from Kevin McVeigh of Macquarie.

Kevin D. McVeigh - Macquarie Research

I wonder if you could give a sense, Andrea, of how the program retention has been trending this year relative to last year and just how we should think about that relative to new account wins because you guys are obviously executing really well in obviously what’s still a pretty tough environment and then just kind of thoughts on volumes currently and how that's been trending over the last, call it, 2 to 3 months.

Andrea J. Ayers

Sure, Kevin. Happy to do that and thanks for the complement. We feel very good about the work that the team has done and in terms of customer retention, as I said, those numbers year-over-year are better this year. That, I think, reflects our investment in 2 things. One, the global operating model and making sure that our operations performance is consistent. I meet with our clients all the time on a very regular basis and no question that is what is most important to them. The second is the investment in account management to make sure that we're there as a partner and can really be very aligned around their strategic objective and matching our solutions to that. So I would say that's what's driving right now for us that program retention. As it relates to contact volumes, we saw good volume in the quarter. We have saw the return to the normal seasonal pattern in Q2 that we talked to you about last time. We see good volumes. We get a look at volumes in 30-, 60- to 90-day increments and so we watch it very carefully and watch the changes and fluctuations in it, but at least in Q2, we saw nice volume. And I think -- did I get it all, Kevin?

Kevin D. McVeigh - Macquarie Research

You did. And then just kind of thinking about -- the other thing was any sense of much the training cost or impact? I know it's in the guidance already, but just how much in terms of absolute dollars is in expense in terms of incremental training costs.

Andre S. Valentine

Kevin, this is Andre. We probably won't get that finite on our P&L, but what I would say is that the training costs here in Q2 are fairly consistent with what we saw last year in Q2. We did in our guidance include an expectation that as we ramp some programs in the second half that will have a little bit of an impact on margin. But yes, I think that's all kind of reflected in the guidance.

Kevin D. McVeigh - Macquarie Research

Got it. One more and I'll jump off. In terms of the buyback, obviously, real nice use of capital there. Is there any sense of amount -- any sense of what we're going to return on a quarterly basis or is it more opportunistic?

Jeffrey H. Fox

Well, so this is Jeff. Andre and I’ll both talk about it. I think you saw with our buyback this quarter that we felt like with the capital we generated strategically that our -- we could really benefit our long-term investors by being active in the market and I think that we'll follow that consistent methodology. This business is well capitalized and we're generating cash as we go and so it's really just being long-term oriented and thinking about what's right for our long-term investors.

Andre S. Valentine

And certainly, Kevin, trading at 5x EBITDA, we view our stock as attractive. So that's something we'll always continue to think about as we go forward.

Operator

Our next question does come from Ashwin Shirvaikar from Citibank.

Ashwin Shirvaikar - Citigroup Inc, Research Division

Good results here. And before I forget, Earl, thank you for all your help in the past and all the best in the future. I guess my first question is there any way to quantify, Andre, I think you mentioned 3Q and 4Q cash outlays on simplification in the IM divestiture. Could you provide more color on that?

Andre S. Valentine

Sure, glad to. So I think it's kind of embedded in the guidance so we're sitting on, Ashwin, $757 million of cash and short-term investments at this time. Our guidance is to be at $725 million at year end. So in that, you can assume kind of I would say normal free cash flow from the business and then in reconciling then the $725 million, you get a feel for the tax and other simplification payments.

Ashwin Shirvaikar - Citigroup Inc, Research Division

Okay. And by segment, I mean how should we think of the forward plans? Obviously, you guys have turned in pretty solid performance here in communication and also in the other segment. But do you think with that new signing in financial services, we can turn the corner there and head into positive growth territory? And also on technology, the year-over-year seemed to get worse.

Andrea J. Ayers

Yes, Ashwin, as I said in kind of the prepared remarks, we definitely had some runoff from a technology program and financial services and then some other programs in the technology vertical. We are very focused as a team on those 2 verticals. Our sales team, I'm sure, is listening to this now and they certainly understand that focus. We've made some leadership changes in the verticals, and so we're focused on getting it right there and certainly expect us to do better over time.

Ashwin Shirvaikar - Citigroup Inc, Research Division

Okay. And one last question, if I can sort of squeeze it in, I know you have 14% of the people in India and I know you guys always tend to have backup power generation, your transport here on [ph] people and so on. Having said this, is there any -- still any sort of incremental impact from these rolling power cuts that we hear about in India?

Andrea J. Ayers

Yes, no, Ashwin, our business model has to be one where we're up and running 24/7 and so we build that into our infrastructure and technology platforms as we build globally and that's a global standard for us so no impact to us at all.

Andre S. Valentine

Yes, so we've no impact from the power outages or the impact of -- on the transportation systems. We've been able to keep our operations up and running and get our agents to the production floor.

Operator

Our next question does come from Shlomo Rosenbaum of Stifel, Nicolaus.

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

I just want to echo Ashwin's sentiment, Earl, and to let you, I'm going to miss jerking your chain every quarter.

Earl C. Shanks

Thanks, Shlomo. You've been good at it. Please tell me I don't have to look forward to that, Shlomo.

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

A question I've got is just in terms of the volumes. Andrea, what are you seeing in terms of same-store sales volumes? I know that you guys are doing a good job in taking market share within existing clients and I believe that some of your competitors possibly not doing as good a job; you guys are taking volumes from them. But are you getting a sense that in general, in the industry that the volumes like-for-like are increasing?

Andrea J. Ayers

Shlomo, it varies by client and it varies by vertical market to some degree, but very much so by client. It is the reason that program by program, we're so focused on treating our clients as a market of one and making that investment in account management. So that when we sit down with them, we can really be aligned in terms of their go-to-market activity, their customer service strategies, their contact volumes and so it really varies by client in terms of what their long-term volume looks like.

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

Are there any generalizations you can make that, hey, we're seeing modest improvement or we're just seeing it flat? I mean anything that we can just infer even if you can go by the vertical.

Andrea J. Ayers

Sure, Shlomo. I think I've said it in my remarks. It was part of our Q2 growth. We saw modest improvement. We felt good about the volume and again, to me, it looked like a normal Q2 seasonal pattern for our business.

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

Okay. And then on the home agent side, there's been some M&A in the space. How would you say you guys are positioned there vis-à-vis some of the competitors that have their own home agent offerings in some of the pure plays?

Andrea J. Ayers

Yes, happy to talk about that. As you can imagine, as a well-capitalized market leader, we see a lot of things come across our desk. As it relates to home agents specifically, that's an important space that we began investing in about 8 years ago. We have a wide variety of our clients that use that service today. Andre said in his remarks we've got about 3,500 FTE, Shlomo, that do that work today so that will give you an idea of size and the work is a wide variety of transaction types. Pretty much anything we can do in our brick-and-mortar environment, we can do in that work-at-home environment. It is a really nice model for our clients from a flexibility perspective. And then access to specialty labor talent, we run the model today in the U.S. and the U.K.

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

Okay. And in terms of -- do you guys have any concern that as it catches on more that it might cannibalize some of your premises-based work?

Andrea J. Ayers

Shlomo, not really. I have to tell you, we see this as another capability, similar to having our offshore geography mix, and important for us that we be able to offer our clients kind of an integrated thought and help them think through the right transaction, in the right channel, in the right location or geo to attract the talent. So normally, we find that it's just part of an overall solution that we offer to a customer.

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

And just if I can squeeze in one last one. Just in terms of your operating model, is it purely virtual or is it much more hub-and-spoke around the premises-based business?

Andrea J. Ayers

It's a combination of both, Shlomo. We've got both depending on the needs of the client and what we're trying to accomplish.

Andre S. Valentine

Some clients, Shlomo, actually enjoy the ability to actually see the agents occasionally and have them come in and do some level of training. So that's why we offer both the hub-and-spoke model and purely virtual model.

Operator

Our next question does come from Manish Hemrajani of Oppenheimer.

Unknown Analyst

This is [indiscernible] sitting in for Manish Hemrajani. Just wondering your view on healthcare. It seems it's a growing area in terms of BPO provider. So what exactly is your current exposure to healthcare? And what are your plans to boost the presence in the sector?

Andrea J. Ayers

Sure, happy to talk about healthcare. As I said in the remarks, healthcare is going through a transformation as an industry. Moving from a B2B-centric really service and support model to one that is much more consumer-driven, that plays nicely to our capabilities and our ability to be able to handle complexity in terms of contact types. We feel good about our growth in that sector and feel good about the partnerships we have with our clients in the healthcare vertical. So absolutely an important part of our other markets category and one that we're feeling good about the growth and good about the long-term potential based on their evolving business model.

Unknown Analyst

Okay. And I think in the last quarter during the call, the management had mentioned about the top 40 -- 14 clients from the top 20 were not -- were showing some weakness. So how exactly did they perform in this quarter?

Andrea J. Ayers

So we grew with 8 of our top 10 is the comparative point that I gave in the remarks.

Unknown Analyst

Right, okay. And on the pricing side, are you guys seeing any trend regarding any competition from the pricing or is there anything that would be worth mentioning?

Andre S. Valentine

It continues to be a very competitive market out there. However, our clients do understand what fair pricing is as well. So I would say that we're seeing a competitive environment but a rational environment both in what our clients expect and frankly, what we're seeing from our major competitors.

Operator

[Operator Instructions] The next question does come from Howard Smith of First Analysis.

Howard Smith - First Analysis Securities Corporation, Research Division

And first, let me thank you, Earl, for your efforts and insights over the years.

Earl C. Shanks

Thanks, Howard.

Howard Smith - First Analysis Securities Corporation, Research Division

Last quarter, you talked about some capacity constraints and I wanted to know have you built out to alleviate that and did that in any way affect your ability to do bookings in the quarter, the $32 million you referenced a little lower than we hoped for?

Andre S. Valentine

Howard, I'll take that one. Yes, so during the quarter, we continued to build out capacity in kind of where our clients have demand and that pace quickened a little bit in relation to the issue that we raised on the last call. As a result, I would say that our capacity is certainly still tighter this year than last and we have less large blocks. That said, I would say it's not as tight as we had in the first quarter so we have been able to bring up some capacity to sell into and we're always trying to strike that balance between being relatively tight on capacity and yet having the blocks available to meet demand. So in thinking about impact on margin, Howard, I would say it's not -- the change in utilization from where we were Q1 to Q2 had little, if any, real impact on margin. Building out capacity ahead of demand is always going to be a factor in this business and we'll always have some level of drag on margins going forward. I'd say it's -- our expectation is that will be kind of a normal level over the balance of this year.

Andrea J. Ayers

Hey, Howard, it's Andrea. The other place that home agent plays well in terms is the ability to flex up our capacity, particularly with the model in the U.S. and in the U.K.

Howard Smith - First Analysis Securities Corporation, Research Division

Okay. Just 2 technical questions here. The $10 million guidance for the kind of IMG transition revenue you gave, does that -- is that for the second half of the year or is that the full year including what was in this quarter?

Andre S. Valentine

Howard, that would be for the full year, including what is -- what was recorded in this quarter.

Howard Smith - First Analysis Securities Corporation, Research Division

Okay. And the $250 million share buyback authorization, that is the availability as of today. We don't have to take out any of the stuff you bought so far this quarter from that?

Andre S. Valentine

That is exactly correct. So it's $250 million authorization as of today.

Jeffrey H. Fox

Sorry, that's all the time we have for the call today. I'd like to add that Andre and I will be available the rest of the day to answer any questions about our results and business outlook that we've discussed on the call today. So thank you all and have a great day.

Operator

Thank you. Today's conference has ended. All participants may disconnect at this time.

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