Convergys Corp. Q2 2008 Earnings Call Transcript

Convergys Corporation (CVG)

Q2 FY08 Earnings Call

July 23, 2008, 9:00 AM ET

Executives

David Stein - IR

David F. Dougherty - President and CEO

Earl C. Shanks - CFO

Analysts

TC Robillard - Banc of America Securities

Karl Keirstead - Kaufman Brothers

Jason Kupferberg - UBS

Peter Jacobson - Brean Murray

David Koning - Robert W. Baird

Shlomo Rosenbaum - Stifel Nicolaus

Scott Sutherland - Wedbush Morgan Securities

Matt McCormack - FBR Capital Markets

Dhruv Chopra - Morgan Stanley

Presentation

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 objection, you may disconnect at this time.

Now, I will turn the meeting over to Mr. David Stein, Vice President of Investor Relations. Sir, you may begin.

David Stein - Investor Relations

Thank you, Amy and good morning. Welcome to Convergys' second quarter 2008 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 results and Earl will follow up with financial performance 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 risk 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 provides the users of the financial statement 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'll turn the call over to Dave.

David F. Dougherty - President and Chief Executive Officer

Thank you, David and good morning. Convergys was able to grow earnings per share in the second quarter in the face of a challenging economic environment. Earnings of $0.32 per diluted share were up 14% from the second quarter a year ago. These results include the impact of strong cellular partnership earnings, lower tax and our aggressive share repurchase program.

While I'm pleased with the performance of Information Management and HR Management in the quarter, our Customer Management results need to be better. I have great confidence in the new Customer Management leadership team. They are focused on the right things, and we expect to see growth in revenue and operating income in this business beginning in the fourth quarter.

I also want to highlight important progress we've made on a number of fronts across the business. Specifically, we were recognized by our largest client, AT&T as one of their key suppliers. We negotiated a contract renewal with one of our largest customer management clients that includes higher pricing in a contract value of more than $400 million over two years.

We delivered very strong license revenues and terrific operating margins in Information Management. HR Management results improved significantly from year ago. Last week, we announced the Intervoice acquisition to enhance our capabilities and leadership in relationship management.

In just this past weekend, we successfully passed a critical milestone on the way to go live in the U.S. and Puerto Rico for a large HR BPO client in August of this year. I want to emphasize this is a significant, significant accomplishment. I am very proud of the Convergys team and their unrelenting determination to make this implementation a success.

As you know, successfully completing these large global HRO implementations is key to driving value creation in this business. As we look ahead, we expect solid performance from Information Management and the cell partnership and a favorable tax rate for the year. The loss in HR Management to be slightly larger than planned. And as I just said, successfully completing the large implementations is a key value driver for this business.

Our biggest challenge and our opportunity right now is Customer Management. Our plan for the year was heavily dependent on significant revenue and margin growth in the second half of 2008. During the second quarter however, we began to see lower call volumes and forecasts for lower volumes from some of our large clients due to the general economic conditions, and from improvements in their operations and service delivery.

Also, despite the sizable pipeline, we've not seen the conversion progress as quickly as we had anticipated. As a result, we now expect our third quarter results in Customer Management to be roughly in line with the second quarter, and meaningful growth in revenue and margin beginning in the fourth quarter. Despite the over performance in other parts of the business, we can't overcome the expected shortfall in Customer Management.

Given this and the uncertain economic environment, we believe it is prudent and appropriate to lower our EPS guidance for the year to $1.15 to $1.20, including the impact of the expected Intervoice acquisition. Revenues are expected to be at the lower end of our previous range.

It is disappointing for us to lower guidance, particularly since we've consistently grown our EPS for the last three years. The Convergys team is committed to achieving our updated guidance, and making sure we're doing the things today required to accelerate growth in the future.

Turning now to each of our business segments, let me begin with Customer Management. First, we're taking decisive action to improve Customer Management revenue growth. During the quarter, we completed several contract renewals and extensions, we announced the expansion of operations in the Philippines, and launched our portfolio of multi-channel automated solutions for in-house customer service operations.

In the quarter, we received AT&T's supplier recognition award for teamwork. We were acknowledged for consistently providing better products, services and solutions to help AT&T deliver outstanding service to their customers. Our goal is to have leading customer satisfaction scores, which are a key component of our value proposition and our ability to build share.

Year-to-date, we have been able to negotiate price increases with a number of our largest clients. These increases are helping to offset higher cost, and they are also a part of our effort to ensure all our client relationships produce acceptable returns.

While Customer Management revenues increased in the second quarter, call volumes for a number of large clients were down versus year ago. Also call forecast through the balance of the year are in some cases less than what we anticipate. There are several reasons for this. With some of our clients, declining volume is directly related to the impact of the economy. For a few clients, initiatives they have undertaken to improve network reliability and to consolidate systems have also impacted call volumes. And finally, some clients are using more automation rather than live agents to deflect, handle or avoid cost.

While we can't control all the factors affecting call volume, we can ensure that our products and services are meeting our clients' needs and in particular, their needs for more automated solutions. Recently... we expect the recently announced Intervoice acquisition to enable Convergys to fully participate in our clients' growing use of automation of their call handling strategies. By meeting this need, we believe we will be rewarded with a larger share of spend and stronger relationships.

Furthermore, as a leader in the industry, we see significant opportunity as clients consolidate vendors to a single source one-stop provider like Convergys. Once the acquisition of Intervoice is complete, we believe our unique blend of automated and live agent solutions and our scale will set us apart in the marketplace.

We expect to accelerate Customer Management revenue growth beginning in the fourth quarter, by expanding our strong relationships to grow share with our existing clients, bringing up large blocks of capacity to serve immediate client needs and extending our operations in the geographies that align with market demand.

We expect our expanded sales force to capitalize on our improving customer satisfaction scores and the available capacity to win new business with existing clients. As a leader in the industry, we also see opportunity for growth as clients move more of their business to larger more financially stable providers like Convergys.

The new Customer Management team has also been working to get more revenue out of existing sites. They have identified by site the available seats and the type of work that can be done for clients depending on the available labor. We're consolidating smaller blocks of available capacity into larger blocks. These larger blocks are more attractive to both current and prospective client as they make it easier for them to grow within the same location. The sales force is focusing on selling this available capacity, which we expect to be sold rapidly and ramped over the next few quarters. This is very profitable revenue, because of the physical infrastructure and management is largely in place.

We are also working to better match available contact center capacity to meet our clients' global demand. For instance, our Philippines capacity coming online next month has already been sold to existing clients, and we now have a solution for Latin America bilingual demand as well.

We are working to improve Customer Management operating margins. In the second quarter, margins were impacted by substantial increase in foreign exchange currency expenses, $10 million for two margin points compared to the first quarter, and continued investments to deliver the anticipated growth. To help improve margins, in the second quarter, we renegotiated client contract pricing in terms and we have been rationalizing Canadian operations, announcing the closure of four centers, three of which have been completed. However, the short term impact of the transition of this work to other geographies has hurt profitability as well.

We expect to improve Customer Management operating margins over the next few quarters through growth with the existing clients and the incremental contribution associated with the increased volume, partnering with our clients to improve contract terms including additional price adjustments to ensure adequate returns and better currency protection, improve management of labor by streamlining and more tightly managing staff to react faster to shifts and demand with direct and indirect labor. I am confident that these actions are the right ones to accelerate revenue growth and improve margins in this business.

Let me now talk about Information Management. During the second quarter, Information Management completed a large license sale with a communications client in North America, announced a new Infinys agreement with India's largest telco, BSNL, went live with services at Australia's largest independent services provider and entered into a partnership with Alcatel-Lucent to sell Infinys globally. The Sprint migration was substantially complete at the end of quarter.

Also during the second quarter, we made two small strategic acquisitions to expand our solution footprint. BMI in China for its web self-care service provisioning and workforce management capabilities and Visage's Subscriber Management Platform for mobile virtual network operators. The team here has done a great job managing profitability in this business year-to-date.

Moving to HR Management, the second quarter was the fourth consecutive quarter of improving HR Management operating performance. There was a substantial improvement in HR Management operating loss during the quarter versus prior year. As I mentioned earlier, just this past weekend, we passed key schedule milestone with a large HR BPO implementation and are moving forward as planned to go live in August.

Let me close by saying, this leadership team has a very good understanding of our challenges and opportunities. We're taking decisive action to accelerate growth and we are committed to achieving the updated guidance. We are fixated on improving productivity, delivering outstanding quality to our customers and making our technology and global footprint a competitive advantage to drive sustainable growth and profitability.

At this time, I'll turn the call over to Earl, who'll provide greater detail on our second quarter financial results and forward guidance.

Earl C. Shanks - Chief Financial Officer

Thank you, Dave and good morning. For the quarter, Convergys revenues were $690 million. Operating income was $48 million; EPS of $0.32 was 14% above last year and was better than expected.

Turning to the segment, Customer Management revenues increased to $469 million. We had strong growth with some communication clients, and healthy growth in other markets as new programs came online. At the same time, call volumes with two large communications clients declined in the quarter. This reflects capital program changes, and increased use of in-house automation. There was also a decline with a large financial services client, due to program completion and softness in the sector.

At the end of the second quarter, Customer Management had approximately 24,500 employees in Asia. This was an increase from 22,000 employees in the second quarter of 2007. We had less than half of our Customer Management employees in the U.S., with about 20% of the Philippines, 15% in India, and 15% in Canada.

Customer Management operating income in the second quarter reflects a substantial increase in cost due to foreign exchange of about $14 million, or 300 basis points negative impact year-over-year. Other key factors impacting operating margins included price increases with several clients and investment in infrastructure, available capacity and additional sales resources.

Moving to Information Management, Information Management revenues of $161 million were down largely due to client migrations in North America. Team worked hard to close two large deals in the quarter, which were originally expected to be closed later in the year. We signed a large license deal with a U.S. communications provider, and the Sprint migration was largely complete at the end of June, which resulted in recognition of additional termination revenues in the quarter. Given the second quarter license revenue acceleration in Information Management, we're likely to see softness in the second half of the year.

Operating income was about the same as last year, with an improved operating margin of 23.5%. We kept R&D expense down by moving development offshore, focusing on only the highest impact areas, and acquiring technology through product partnerships with small acquisitions. Based on specific opportunity, we may increase our R&D investment in future quarters.

Moving to HR Management, HR Management revenues were $59 million, generally consistent with the last few quarters. As you'll recall, our first quarter results included severance revenue. At the end of the second quarter, we discontinued an activity for one of our large HR BPO client that has been generating revenue some pass-through revenues with no margin. This will impact revenues in the second half.

HR Management operating loss improved by $13 million in the quarter compared to the prior year. Recall, last year we expensed $6 million in implementation cost related to a large contract. The improvement also includes the impact of tight management of SG&A expense.

Let me now turn to other item. Earnings from the cellular partnership were $11 million in this quarter, an increase of $8 million over the prior year. The tax rate was 24.9%. DSO increased in the quarter due this timing of payments for project milestones in our international business. Net deferred charges increased $52 million in the second quarter.

As I've said on several occasions having access to capital market is important to us. Our investment grade ratings supports this position and also is valued by clients. The company uses of cash, our priority are to a sure liquidity to invest, to improve and grow the business and share repurchases. I will remind you that we have invested $117 million to repurchase shares year-to-date. This includes $55 million in the second quarter. With the Intervoice acquisition, liquidity and investment in the business become a more significant near term priority.

Free cash flow in the second quarter was negatively impacted by the deferred charges. Free cash flow in the second half will improve significantly due to increase in payments from our clients for the HR implementation, deduction in DSO particularly due to collection of project payments from our international programs and other improvements in our working capital balance.

In the first half of the year, we received $20 million in distributions in the cell partnership, which is not included in free cash flow. For the remainder of the year, we expect distributions from the cell partnership to approximate our share of income.

I will now move to a discussion of our forward financial guidance. As Dave pointed out, the performance of our business on a consolidated basis has been solid year-to-date. Yet, with the continued difficult macro economic environment, we now believe results in the second half will be softer than we previously expected.

Our updated guidance for 2008 included... including the anticipated closing of the Intervoice acquisition in the third quarter is as follows. 2008 revenues at the lower end of the previously provided range from $2.85 billion to $3 billion. GAAP EPS of $1.15 to $1.20. This includes the $7 million to $10 million of cost in 2008 related to the Intervoice acquisition that I referenced on our call last week.

Customer Management revenues of about $2 billion. We expect the Customer Management operating results in the third quarter will be about the same as in the second quarter. We expect to see improvement in Customer Management operating results in the fourth quarter. We expect the impact of seasonality in the second half to be somewhat muted compared to what it has been in the past due to the economic environment. As it is difficult to time a broader recovery in the economy, there is an element of uncertainty to the growth forecast for Customer Management.

Information Management revenues of more than $600 million, with an improved operating margin expectation now in excess of 17% for the year. HR Management revenues remain in the $260 million to $270 million range with an operating loss of about $20 million. This includes higher cost than previously anticipated from a large client that is expected to go live in August.

We will continue to update this as we approach key milestone days in moving to ongoing operations. We expect continued strong contribution from the cell partnership, with performance similar to the second quarter throughout the remainder of the year. We're modeling an effective tax rate of about 25% for the full year. Free cash flow together with cash received from our cellular partnership should approximate net income.

Now, I will turn the call back over to Dave for a few concluding remarks.

David F. Dougherty - President and Chief Executive Officer

Thanks, Earl. We remain very encouraged about the future prospects for the business. We've got a great team that's committed to doing what's in the best interest of our clients, our shareholders and our employees.

The customer care industry fundamentals offer particularly compelling opportunity, despite what we're experiencing in the short term. The 300 billion, the market opportunity is large, and the demand is strong. With our relationship management strategy, we believe we can serve the evolving customer and employee needs of our clients, broaden our addressable market and position Convergys for continued leadership in the future.

We are doing all we can to make sure our Customer Management recovery is swift and complete and continue to be confident in our long-term growth prospects for all our business. At this time operator, please open the line for questions.

Question And Answer

Operator

Thank you. We will now begin the question and answer session. [Operator Instructions]. Our first question comes from TC Robillard with Banc of America Securities. Your line is open.

TC Robillard - Banc of America Securities

Great, thank you. Good morning, guys.

David F. Dougherty - President and Chief Executive Officer

Hi, TC.

TC Robillard - Banc of America Securities

Dave, I just wanted to... you gave some good granularity on what's been happening in CMG and what gives you some confidence as you go into the first quarter. But, if I could just drill down two specific areas; with respect to converting on the pipeline, is there anything specific that you are seeing with respect to slower conversion? I mean, is this simply just a situation whereas economic uncertainty continues to move forward, clients just get a little more cautious about pulling the trigger on any type of investment, even if it's something that saves them money. Or is there a specific couple of clients that you were expecting that pushed out a couple of months. I'm just trying to get a little bit of granularity on how we should be thinking about that pipeline conversion over say, the next kind of three, four, five quarters.

David F. Dougherty - President and Chief Executive Officer

Well TC, I think you largely got it. I mean, we talked about one big opportunity with a financial services provider at the analyst meeting and then on our last call we indicated they decided not to go forward. And so that certainly came out of our pipeline. But generally, what you said is accurate. What we are seeing is that in the current situation and conditions, clients are being pretty cautious. And so, we are getting conversions that are tending to be a bit smaller than what we anticipated. But people are being pretty cautious.

TC Robillard - Banc of America Securities

Alright. And then I guess then that leads me into looking then specifically at the fourth quarter, you clearly reiterated that you've got some confidence, or significant confidence that you'll see the revenue growth improve in the fourth quarter in CMG. What gives you the confidence that your sales people are going to be able to improve penetration with the existing accounts which in turn will help the margin? I am just trying to weigh both of these things where we've seen push outs versus two quarters out you guys are pretty confident that you should see revenues pick up?

David F. Dougherty - President and Chief Executive Officer

Well, and we are. We have converted things in the pipeline. This new business that we are in the process of ramping up. A big chunk of that is offshore. And we've talked about the Philippines.

The second is, I mean we've been in this business a long time, and we get a seasonal bump in the fourth quarter. And so, we kind of know that, as Earl said, we expect it to be a bit muted because I think people are feeling there's going to be a slower shopping season this holiday. But we generally get an uptick in seasonality. So we're pretty confident that we'll see growth in both revenue and earnings... or margins of that business in the fourth quarter.

TC Robillard - Banc of America Securities

Okay. And the just lastly, on to CMG. You mentioned that you expect to get, to negotiate and work with your customers to improve contact terms; I'm assuming that a big chunk of that would be pricing. Is that just a situation where some of that's already been in the process, is already been converted, which gives you confidence for improved margin in the fourth quarter? Or is that... or is there something else that you guys see that gives you the confidence that your customers will be willing to improve what they're paying you guys in this type of an economic environment?

David F. Dougherty - President and Chief Executive Officer

Well as I said in the prepared remarks, I mean we've had success already year-to-date in negotiating price increases with customers, and that's obviously built into our guidance. And we continue to work that aggressively to make sure that we've got pricing and contracts that are not only acceptable to our clients, but also delivering acceptable returns to our shareholders. But what I will tell you too is that, if we are the top performing provider for a client, I mean our clients are willing to pay a premium price to get that value. And so, I mean we're very, very focused on making sure that we're the best of all the providers across our entire customer base. And we believe that it gives us the opportunity to get better pricing and to build share.

TC Robillard - Banc of America Securities

Okay. And then just lastly, I'll jump back in the queue. Earl, on the free cash flow, I'm sorry, I missed this when you're talking about what you are getting from the cellular partnerships, which is not officially in the free cash flow. How much are you expecting for full year 2008 to get in terms of cash flow from that cellular partnership? Is it just... should we just assume the line on P&L or is there a different cash flow impact?

Earl C. Shanks - Chief Financial Officer

No, our expectation for the full year is that cash flow from the cell partnership will broad approximate we'll be getting income from the cell partnership and that's from the first half.

TC Robillard - Banc of America Securities

Okay, great. Thank you.

Operator

Our next question comes from Karl Keirstead with Kaufman Brothers. Your line is open

Karl Keirstead - Kaufman Brothers

Yeah, hi. Question for Earl, just on the liquidity front, with the free cash flow maybe coming in a little late in the first half of '08 and Convergys levering itself up for the Intervoice deal and the cash balance now being down to 55. I just want to... if you could just take a moment and get us comfortable, are there any unusual cash needs in the second half '08 and maybe just give us some comfort that your cash and liquidity will improve in the second half.

Earl C. Shanks - Chief Financial Officer

Sure, Karl. Certainly, the most unusual cash need we've got in the second half is to pay for the Intervoice acquisition. So that's the one we are pretty focused on, which is when my comments are I am much more focused now on what we need to do to invest in the business and liquidity, and a little less focus on share purchase or share buyback when I think about it. I think when you look at the cash flows from the business, we... and I said this I think last quarter, we recognize that some of our receivables are in particular what's coming out of our international operations, our payments that are timed for the second half of the year, given the contract term, but we expect that to be a significant positive.

We also expect as we look at the contract terms in the HRM space that we are going to get a significant amount of cash related to the implementation in the second half of the year. So that will also certainly be positive as compared to our first half expectation. And then when I look across the other working capital line, and there is a variety of items in that space. We also expect as compared to the first half a net positive in that regard. So I expect our second half cash flow to be much stronger than what it was in the first half. And as I said, when we look at the combined free cash flow plus the impact of the cell partnership, we expect to about approximate net income for the full year. Obviously that implies pretty strong cash flow in the second half.

Karl Keirstead - Kaufman Brothers

Okay, got it. And just to be clear, if net income for the full year is going to be above given your guidance, $145 million or so. And $40 million of that is the cash flow from the cellular partnerships. That would suggest that free cash flow in the second half of '08 would have to be about $100 million. Does that sound about right?

Earl C. Shanks - Chief Financial Officer

Yes it does.

Karl Keirstead - Kaufman Brothers

Okay, great. And then one quick follow-up. On the billing unit, your prior guidance was for revenues to exceed 625 and as you are dropping a little bit to 600, could you... you touched on it briefly, but could you just talk a little bit about why that guidance for the billing unit is coming down, given that best unit that appears to have actually put up these numbers in the second quarter?

Earl C. Shanks - Chief Financial Officer

Oh, it's put up great numbers in the second quarter I think. But as we look at where we've got the business coming, where the pipeline is in total and where as an example, the Sprint migration is for the year, we kind of reassessed where we were going to be. I think before, we were at about 625 and we've just moved it down a bit. And obviously, it's the same time what we've taken the revenue guidance down, we've taken the earnings guidance up for the year by... and so the total earnings from the business is actually going up pretty significantly as compared to our previous guidance.

Karl Keirstead - Kaufman Brothers

Okay, thanks very much.

Operator

Our next question comes from Jason Kupferberg with UBS. Your line is open.

Jason Kupferberg - UBS

Thanks. I'm just going to start with a question on the revised outlook and wanted to get a sense really of your visibility on the fourth quarter ramp in Customer Management. You did cover some of that in earlier question, but in a bigger picture sense, I mean do you guys feel like you really significantly de-risk the overall numbers for the year, now being at $1.15 to $1.20 which I am assuming includes about a nickel or so of dilution from Intervoice?

Earl C. Shanks - Chief Financial Officer

I think your Intervoice estimate is about right, Jason. I would have said $0.04 to $0.06, so right in line with where you are at. I think when we think about that full year forecast, we believe that it is serially balanced guidance, but obviously as we get closer to the end of the year, that's by definition is what's risk. Certainly, the seasonal impact is something we've seen and states that earlier pretty consistently and so to say that we are going to see growth in fourth quarter as a result of that is pretty easy to see. And then certainly, we've got some things that are ramping. As is always the case, there are things we have to deliver in the balance of the year, and work that has to be done, and we're going to be working hard to deliver this guidance, and to make this happen.

Jason Kupferberg - UBS

And then on Intervoice on the revenue side, if it closes here on the middle of the quarter, it looks like maybe that's about $75 million or so of '08 revenues, am I on the ballpark there?

Earl C. Shanks - Chief Financial Officer

Yeah, I think directionally. That is maybe a little high, but it's directionally right.

Jason Kupferberg - UBS

Okay. And then lastly, on the HR management business, congrats on hitting this recent milestone and now getting ready for the go live. Obviously, you had the big slug of deferred contract costs there...

David F. Dougherty - President and Chief Executive Officer

Well, that's a terrific accomplishment, Jason. I showed you [ph].

Jason Kupferberg - UBS

Yeah, yeah, no, and deserves congratulations. And obviously, the operating loss is going to be a little higher this year than we thought. Is it still expected that you would breakeven in this business in '09 now that you have hit this big milestone at least on one of the major contracts, I mean what is sort of changed here a little bit? Is this just the timing thing, where you're going to absorb a little bit more operating loss sooner rather than later, or can you walk us through that?

Earl C. Shanks - Chief Financial Officer

Jason, we're pretty focused on executing in the balance of 2008 at the moment. We are in the process of finishing or working on our plans for 2009, haven't shared those plans at this point with the Board, we will do that, and we'll get back to guidance for 2009 after we've done that. We are... we continue to be very confident in the long-term prospects of this business, in fact of all of our businesses. But we're not at a point that we're going to do guidance for 2009 at the moment.

Jason Kupferberg - UBS

Do you still have that target though that you talked about in the past on HR, breakeven target?

Earl C. Shanks - Chief Financial Officer

We are working to get that business to breakeven as quickly as possible, that's the first step, absolutely.

Jason Kupferberg - UBS

Okay. Thanks

Operator

Our next question comes from Peter Jacobson with Brean Murray. Your line is open.

Peter Jacobson - Brean Murray

Thanks. First on the AT&T contract that you cited, can you comment on the trend there, is that $400 million is that kind of steady state or is it whether price increases, price concession anything you can describe on that.

Earl C. Shanks - Chief Financial Officer

Peter, I am confused about your question. I don't recall referencing the name of a client tied to a $400 million contract.

Peter Jacobson - Brean Murray

I am sorry, maybe I missed it.

David F. Dougherty - President and Chief Executive Officer

Peter, we didn't mention the client name. We did talk about AT&T awarding us the supplier of the year award and separately we talked a large client that we signed a significant contract with.

Peter Jacobson - Brean Murray

Okay. And you did mention the $400 million...

David F. Dougherty - President and Chief Executive Officer

yes, and that includes better pricing.

Peter Jacobson - Brean Murray

Okay that will include better pricing and that in terms of overall, is that contract kind of steady state or growing or declining somewhat in revenue?

David F. Dougherty - President and Chief Executive Officer

The expectation is that we would grow with that customer over the next few years and potentially grow quite considerably.

Peter Jacobson - Brean Murray

Okay. And given your description of this go live with an HR BPO customer as being a significant accomplishment, can you give us sense as far as how many roughly of those types of contracts are in the works where you have significant of go live events upcoming or other major milestones like that?

Earl C. Shanks - Chief Financial Officer

There is... Jason or Peter rather, relative to that contract, there are certainly a number of milestones on that particular contract. Dave referenced that this is U.S. and Puerto Rico in his comments. Obviously, over time this is a global contract, so we are going to do the world with this client. And so we've got go live dates on that and they cycle out over time. Similarly, with our other big contracts and one in particular there are whole series of go lives around that, which cycle out in the normal course of business. But the one that Dave referenced is the first is bigger, in that contract...

David F. Dougherty - President and Chief Executive Officer

Because that's what have the biggest play account. So that's additionally why it's a great accomplishment.

Earl C. Shanks - Chief Financial Officer

Yeah, and it's huge, it's very important to have it done.

David F. Dougherty - President and Chief Executive Officer

Yeah.

Peter Jacobson - Brean Murray

Okay. And I know you don't normally care to talk about specifics with specific customers, but the DuPont deal is coming up on its three year anniversary. Can you characterize that generally as far as how far along it is in terms of reaching steady state?

Earl C. Shanks - Chief Financial Officer

Peter, as you say, we really don't generally comment by name about specific customers. There are a couple of very big contracts that we are working on. One of them will go live in August, one of them has a go live date that are not too far into the future that we're also pretty focused on. And with those contracts, we're making very good progress on this schedule that we've laid out and that the client have agreed with us.

Peter Jacobson - Brean Murray

Okay. Thank you very much. That's all I have.

Operator

Our next question comes from Dave Koning with Baird. Your line is open.

David Koning - Robert W. Baird

Yeah. Hey, guys. First, just a couple of questions on Intervoice. The 2 billion of Customer Management revenue for '08 that guidance now includes that Intervoice contribution, is that right?

Earl C. Shanks - Chief Financial Officer

Yes.

David Koning - Robert W. Baird

Okay. And then secondly, the $1.15 to $1.20, that is GAAP EPS guidance?

Earl C. Shanks - Chief Financial Officer

Yes.

David Koning - Robert W. Baird

Okay. And then third, when you lowered EPS guidance by roughly $0.15, the non-recurring portion of Intervoice, the $7 million to $10 million of cost this year, that's then 4 to $0.06. What's the more core Intervoice contribution to '08? I would assume that's mildly dilutive as well given the amortization, but is there sort of a certain cents range from just core Intervoice?

Earl C. Shanks - Chief Financial Officer

I think the impact of Intervoice on the year is gong to be in the $0.04 to $0.06 range, and it's the right way to think about it. That's the full year impact this year on our guidance is $0.04 to $0.06. And as we said for next year with Intervoice when we talked about it last week, we expect it to be accretive on a non-GAAP basis and some impact yet from the additional amortization next year.

David Koning - Robert W. Baird

Okay. So it actually seems like those non-recurring $7 million to 10 million cost this year, that's kind of in line with the $0.04 to $0.06. So it almost seems like it's going to be GAAP neutral excluding those non-recurring charges this year?

Earl C. Shanks - Chief Financial Officer

Yeah, I mean again David, I think the right way to think about it, the total impact is $0.04 to $0.06 and it'd be the right way to think about it.

David Koning - Robert W. Baird

Okay. And then just one final question, IMG margins, the guidance now 17% or so, it implies about 14% margins during the back half of the year. Is that kind of a normalized run rate? Now, is their anything in those numbers that diverges from we should kind of consider normal going forward?

Earl C. Shanks - Chief Financial Officer

I don't think there is any big things that are out there around that business. I think the question with that business is always what happens to the mix of revenue and what's the share of license revenue that comes in, what's the timing of that because that's the thing that will make the business relatively more volatile. Obviously, the professional services piece of the business and the ongoing data processing piece of the business is much more stable, both in terms of the revenue base and in terms of the profitability.

David Koning - Robert W. Baird

Okay, great. Thank you.

Operator

Our next question comes from Shlomo Rosenbaum with Stifel Nicolaus. Your line is open.

Shlomo Rosenbaum - Stifel Nicolaus

Hi, thank you very much for taking my call. Just your answer, one of the question that's being asked before, just hold more directly. What is the intangible amortization you guys are expecting on an annual basis from Intervoice, just what's dollar amount?

Earl C. Shanks - Chief Financial Officer

Shlomo, look, we're in the process with that of doing some of the final accounting of around that. Obviously, we haven't accounted to that transaction yet. We haven't done all the valuations that are required from a GAAP perspective yet, so I will give you that dating point on a later call, but today is probably not the day we do it.

Shlomo Rosenbaum - Stifel Nicolaus

Instead of a final one, just tell us what you are assuming in your guidance?

Earl C. Shanks - Chief Financial Officer

Why don't I wait until I have more fixed estimates with the accounting work being done.

Shlomo Rosenbaum - Stifel Nicolaus

Okay. The other thing, in HR BPO, I understand you hit the milestone that's suppose to be really key issue and this is a really, really big project. Were those all the milestones that you were expecting to hit? In other words, was that the plan you were going to hit this and you'd hit that according to plan with that what had happened?

David F. Dougherty - President and Chief Executive Officer

Generally that we had I think we talked all along about this particular customer going live in the second half of the year. And so it's generally stayed on track with that target. And we are now through what is really the most critical kind of final stage and its all systems got to go live.

Shlomo Rosenbaum - Stifel Nicolaus

So why don't... why aren't we seeing the significant step down in losses that was supposed to happen after that go live?

Earl C. Shanks - Chief Financial Officer

Shlomo, as we've talked about with our HRM contracts, for sometime there is always some volatility around that and while we got to go live dates and we are happy with that, obviously we've got a little more cost than we expected in that process. And so that's impacted our full year guidance as a result of that. We are very pleased with the outcome on an overall basis, but I don't want you to walk away and think that we think that everything went perfectly. You know, this has been a hard process and we've worked for it and we've got into a very good outcome, but not a perfect outcome.

Shlomo Rosenbaum - Stifel Nicolaus

Okay. And then just going back to the contact center business, with the margins deteriorating the way it is, it seems like you... maybe was 50% from the currency and 50% from sort of capacity and execution issues. It seems like the capacity issues have been there for about a year. We've been talking about that there has been small parts of contact centers that are hard to sell on their own. Can you just talk about some of the improvements that have been made over the last year and what's different with the capacity issues today than have in hand [ph]. Is it the fact that you guys are starting to bundle them together in order to try and sell them? Can you talk about that a little bit more?

David F. Dougherty - President and Chief Executive Officer

Sure. Well, I mean really two dimensions. I mean the offshore capacity, we made some big commitments to that. And fortunately, we are, as I've mentioned, we're filling that up and that's largely the Philippines right now. And then the new leadership team in Customer Management has done a terrific job here in the last several months getting our hands around where are the available blocks of capacity. We are also in the process of looking at actually moving some client programs from one center to another to consolidate them, to free up an entire center for example.

So they're doing some creative things and making some tough choices that... and having the tough conversations with some clients when that's required to enable that capacity to get freed up. And then our sales folks are ready and rearing to go to sell that capacity.

Shlomo Rosenbaum - Stifel Nicolaus

Okay, thanks. I'm going to just sneak in one last one and I'll get out of the queue. Just what's going on in each segment of the business that you guys are operating? Seems like there is some decent challenges, to say the least, in each one. Doing a big acquisition at this point in time, do you think that that's really going to distract you guys from fixing the core operations of this business, which is what theoretically should drive the value of the company overall?

David F. Dougherty - President and Chief Executive Officer

Well, I mean we've got great leadership in my view leading each one of those businesses. And they're focused on driving the right outcomes. And we've laid out a strategy, a relationship management strategy and we want to be the leader in live agent and agent assisted automation. And the Intervoice acquisition is a critical part of that.

In my view, we've got to keep aggressively executing our strategy despite some of the short-term challenges. And we have fortunately been able to bring in some new leadership that reports directly to me that will have responsibility for the integration of the Intervoice acquisition. So I feel very, very good about our ability to digest that one and get it in front of our customers very quickly to be able to provide them a stronger solution set.

Earl C. Shanks - Chief Financial Officer

I think, Shlomo, the other thing that helps with the Intervoice acquisition is this is a business that they've made a lot of progress in their own... in that business over the last year or so and comes with a solid management team with it. And so this is not a case where we are bringing this in and have to rebuild that business. It's a great business and we are going to build on what they've got to really drive our competitive differentiation in the future. We think it's a key to where we are going with this.

Shlomo Rosenbaum - Stifel Nicolaus

All right, thank you very much.

Operator

Our next question comes from Scott Sutherland with Wedbush Morgan Securities. Your line is open.

Scott Sutherland - Wedbush Morgan Securities

Great. Thank you. Good morning.

David F. Dougherty - President and Chief Executive Officer

Hey Scott.

Scott Sutherland - Wedbush Morgan Securities

Earl, just a first quick question for you. What was the stock comp in the quarter?

Earl C. Shanks - Chief Financial Officer

$5.7 million.

Scott Sutherland - Wedbush Morgan Securities

Okay. Following up on another... on a question earlier, you guys talked a lot about passing costs on to customers and given the macro environment, can you kind of talk about how those discussions go? Are you giving any concessions to lower volumes or anything else? I mean are they willing to accept paying you guys more revenue given their trends [ph] from their cost on watching the macro environment? I know it's built in your contracts et cetera, but maybe talk a little bit more of how those discussions go.

David F. Dougherty - President and Chief Executive Officer

Well, the starting point and that's where the CM leadership team is very focused is delivering outstanding performance. And where we are doing that, I consistently see across... we are working with the... for the biggest and best companies in the world. And they want to provide high quality customer service, and I see a flight to quality. And they are willing to pay a premium if somebody like ourselves can deliver from a quality standpoint. And I am confident we are doing that across many, many of our customers and that the leadership team there is very focused on continuing to do that, which certainly helps us not... to your point... not only on pricing; it help us build share. And many of the companies we work for were one of many vendors. And if we are at the top of the ranking, that gives you a tremendous opportunity to build share as they deal with their consolidated vendors.

Scott Sutherland - Wedbush Morgan Securities

The HR Management, is that still a profitable business the way you model it at 300 million in revenue?

Earl C. Shanks - Chief Financial Officer

That's certainly where we think the model is that it should be profitable at that level, yeah.

Scott Sutherland - Wedbush Morgan Securities

Last question. From a technology standpoint with Intervoice, how much of their technology have you used in your call centers? How familiar are you with it before you have been doing your due diligence?

David F. Dougherty - President and Chief Executive Officer

We were somewhat familiar with them. But having said that, as we said last week, we've really been in discussions with them for about a year. So we've gotten to know each other very well and we've spent a lot of time with the technology. They've got terrific technology that will significantly add to our capability and to our scale. And so we will not only continue to do what they've been doing, which is great, selling it to customers. We're looking at taking a fair amount of that technology and better integrating it into our operations, our customer management operations where we can. So it's a great team, great team of people that's joining us.

Scott Sutherland - Wedbush Morgan Securities

Yeah, that's what I was more curious with was the hosted services that they offer; it's really small, but how that integrates. And it sounds like you roll that in. Thank a lot.

David F. Dougherty - President and Chief Executive Officer

Yeah, thanks.

Operator

Our next question comes from Matt McCormack with FBR Capital Markets. Your line is open.

Matt McCormack - FBR Capital Markets

Hi, good morning.

David F. Dougherty - President and Chief Executive Officer

Hey Matt.

Matt McCormack - FBR Capital Markets

In terms of your comments on the lower volume due to automation and the communication vertical, is there any way to quantify how much of your CMG revenues is at risk due to automation? And then additionally, if the Intervoice acquisition had been closed, would you have kept that business?

Earl C. Shanks - Chief Financial Officer

Matt, I think when we think about the business in total and we think about our customer management business, obviously, most of what we do today is live agent. Most of that live agent work is front ended by an IVR system. And what has been happening in the business for a while and we think will continue to happen is that the more routine calls will continue to be automated. So that will be a key part of what happens in the process.

At the same time, though, that's a $300 billion global market. And live agent calls will continue to be core to what has to happen for essentially all clients into the future for a very long time. The importance of those live agent calls, the value of those live agents we think will go up over time, but... and the more routine calls will fall off. And what we were seeing specifically this quarter with respect to a particular client was they went through and did more automation. We believe, and part of the reason we did the acquisition, was we believed if we can offer a one stop shop for our clients to do... here is a place you can get live agent and automation and it can be integrated in an intelligent fashion with all the knowledge of both the live agent side and the automation side, that will be a key competitive differentiator for the future and will drive our success for many years to come. Hence, that's why we did the acquisition.

David F. Dougherty - President and Chief Executive Officer

You bet.

Matt McCormack - FBR Capital Markets

Okay. And then could you talk about migration trends or I guess the demand to move offshore? And if that has increased recently and has an effect on your lowered outlook for the CMG business?

David F. Dougherty - President and Chief Executive Officer

Well, actually, we continue to see strong demand both for bi... as I said in the script... bilingual Latin American solution. And we've got a solution now in place for that that we can meet client demand. And in particular, we are seeing strong demand and growth in the Philippines. And we have committed to a fair amount of capacity there. That capacity is getting filled as we are successful in selling that to clients. And so we see those trends as positive and certainly, we've built that into our guidance here for the balance of year.

Earl C. Shanks - Chief Financial Officer

We do continue to see demand, though, for the U.S. marketplace. The one geography that's pretty difficult to sell at the moment in the U.S. is Canada.

David F. Dougherty - President and Chief Executive Officer

And North America is Canada.

Earl C. Shanks - Chief Financial Officer

Yeah.

Matt McCormack - FBR Capital Markets

Okay.

David F. Dougherty - President and Chief Executive Officer

And in North America, as Earl said, I mean we certainly are seeing demand and in some cases kind of a backlash to off shoring. And not only do we, as we talked about, have capacity in a number of our existing sites here in North America, the other thing we are offering and expanding pretty aggressively is our home agent. And using that is another way to build capacity without actually building physical call center facilities

Matt McCormack - FBR Capital Markets

Okay. And then my last question, on the lower volumes in the financial vertical, can you specifically talk about the types of programs? Is it credit cards that's slowing, retail banking? What specifically is slowing down there?

Earl C. Shanks - Chief Financial Officer

The program that I referenced that came to an end was a program we had with a credit card company.

Matt McCormack - FBR Capital Markets

Okay, thank you.

Operator

Our final question comes from Mr. Dhruv Chopra from Morgan Stanley. Your line is open.

Dhruv Chopra - Morgan Stanley

Yeah, good morning. I was... I had a couple of fairly simple housekeeping questions. One is could you provide any insights on wage inflationary pressures that you are seeing and what was the employee attrition levels?

David F. Dougherty - President and Chief Executive Officer

From a wage standpoint, we are not seeing anything terribly unusual. The biggest issue for us, as we have talked about, is currency. We are working hard recognizing the pay for jobs for our agents to try to do everything we can to help them with fuel costs. So we are doing a lot in terms of trying to help facilitate carpooling and things like that that make it easier for folks to get to work. But nothing that I would say is extraordinary from a wage inflation standpoint.

From an attrition standpoint in the business, we actually had an uptick in attrition from March to April. And then each month since then, it actually has come down, which, again to me, may be some sign. That's an area potentially where we benefit from softness in the economy is labor availability is better.

Dhruv Chopra - Morgan Stanley

But any... are you able to provide any level of where attrition is today?

David F. Dougherty - President and Chief Executive Officer

We haven't been specific and disclose that.

Dhruv Chopra - Morgan Stanley

Okay. And then just two quick questions. One is, I know you've provided some commentary around the trends and volumes you are seeing in some commercial and financial services customers. But can you give us some insights on what you're seeing across other verticals as well, and in particular any areas that you are seeing strength?

David F. Dougherty - President and Chief Executive Officer

Well, yeah, I mean there is currently some verticals where we are doing work that our clients have said it's currently impacted by the economy. An example I would use, we do work for one automotive company and the work that we do is directly tied to new car sales. And so we've clearly seen reductions there. As we work with our other customers, since we don't truly have a full enterprise view of everything that's going on in their company, we kind of have a slice of the pie that we laid out three areas that are impacting volumes. And it's a bit hard for us to say, well, this factor attributed exactly this much and this one this much. So it's a bit hard for us to provide that kind of granularity.

Dhruv Chopra - Morgan Stanley

All right. And then just last question on Canada and the comments you made about making it a hard sell. I mean you've made plans to close four, of which three are basically done. How are you thinking about the rest of the capacity up there?

David F. Dougherty - President and Chief Executive Officer

Well what we are working hard, we announced, I guess it was earlier this year, a General Manger for Canada and we've built out a sales organization in Canada. And certainly one way to mitigate the currency challenge is to be doing work for Canadian-based companies. And so the capacity we want to keep there long term is capacity that we would largely use to serve Canadian-based companies.

Dhruv Chopra - Morgan Stanley

All right, thank you.

David Stein - Investor Relations

Operator, I'd like to add that Earl and I will be available the rest of the day to answer any questions about the second quarter results or the forward guidance that we discussed on this call. So with that, thanks for joining and have a good day.

Operator

Thank you for participation. You may disconnect at this time.

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