Convergys Beats Zacks Consensus

Convergys Corp. (CVG - Snapshot Report) has reported its third quarter 2009 financial results. Total revenue was $765.4 million, including accelerated recognition of deferred implementation revenue of $106.3 million from one large HR Management contract. 

Quarterly net revenue was $659.1 million, down 2.5% year-over-year. However, net revenue of $659.1 million in the quarter was better than the Zacks Consensus Estimate of $653 million. This was primarily due to higher revenues from Customer Management and HR Management segments. 

GAAP net loss in the quarter was $86 million or 70 cents per share compared to a GAAP net loss of $140 million or 115 cents in the prior-year quarter. However, in the reported quarter, Convergys incurred $131.1 million net special charges ($224.6 million of HR Management related implementation and impairment charges and $12.8 million of restructuring charges less $106.3 million of HR Management related implementation revenue). Adjusted (excluding special items) EPS in the quarter was an income of 27 cents, beating the Zacks Consensus Estimate of 24 cents. 

On a GAAP basis, operating loss in the quarter was $90.3 million compared to an operating loss of $242 million in the prior-year quarter. However, excluding special items, quarterly operating profit was $41 million compared to an operating profit of $31 million in the year-ago quarter. 

During the reported quarter, Convergys generated $10.1 million of cash from operations compared to $26.2 in the prior-year quarter. Free cash flow (cash flow from operation less capital expenditure) was a negative $4.4 million in the quarter compared to a positive free cash flow of $43.7 million in the year-ago quarter. 

At the end of the same quarter, the company had $336.3 million of cash & cash equivalents and $603.9 million of outstanding debt compared to $240 million and $665.9 million, respectively, at the end of the third quarter of the previous year. 

Customer Management Segment 
Quarterly revenue was $491.6 million, up 2% year-over-year. This was mainly due to a $42 million contribution from the newly acquired Intervoice Inc. Excluding restructuring charges, quarterly operating income was $37 million compared to $23 million in the year-ago quarter. Operating margin was 7.5% compared to 4.8% in the prior-year quarter. 

Information Management Segment 
Quarterly revenue was $99.2 million, down 26% year-over-year. This was mainly due to client migrations in North America and international project completions. Excluding restructuring charges, quarterly operating income was $9 million compared to $17 million in the year-ago quarter. Operating margin was 9% compared to 13% in the prior-year quarter. 

HR Management Segment 
Quarterly net revenue (excluding $106.3 million of HR Management related implementation revenue) was $68.3 million, up 15% year-over-year. This was mainly due to a successful renegotiation of the contract with one of the company’s large HR Management clients. Excluding special charges, quarterly operating loss was $3 million compared to an operating loss of $7 million in the year-ago quarter. 

Future Financial Outlook 
Management predicted that the fourth quarter revenue will be within the range of $650 million to $670 million. Non-GAAP EPS has been projected as more than 30 cents. Full fiscal 2009 free cash flow is projected to be $165 million − $185 million.

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